Otto Energy
Annual Report 2015

Plain-text annual report

O T T O E N E R G Y 2 0 1 5 A N N U A L R E P O R T A N N U A L R E P O R T 2015 ottoenergy.com BACK COVER FRONT COVER HIGH IMPACT PLAYS TARGETED OTTO ACQUIRES ONSHORE ALASKAN INTEREST PHILIPPINES PROJECT + SC55 OFFSHORE PALAWAN + TANZANIA PROJECTS + KILOSA – KILOMBERO + PANGANI + AUSTRALIA HEAD OFFICE INSIDE FRONT COVER INSIDE BACK COVER CONTENTS 02 04 08 10 1 1 14 18 2 1 22 23 24 25 42 43 44 45 46 47 8 1 82 84 Chairman’s Report Managing Director’s Report Company Highlights Asset Overview Philippines Tanzania Alaska Reserves and Contingent Resources Summary of Assets Financial Report 2015 Corporate Directory 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 Consolidated Financial Statements Directors’ Declaration Independent Audit Report to the Members of Otto Energy Limited ASX Additional Information OTTO ENERGY | ANNUAL REPORT 2015 1 CHAIRMAN’S REPORT 2 OTTO ENERGY | ANNUAL REPORT 2015 DEAR SHAREHOLDERS It is my pleasure to present the 11th Annual Report to shareholders at the close of a year that has seen a significant transition in the Company. The most significant outcome delivered this year was the sale of the 33% working interest in the Galoc oil field for a headline number of US$108 million as of 1 July 2014, and the subsequent distribution of 6.4 cents per share to shareholders. I am proud of this major achievement by Otto Energy’s management, who have delivered on our strategy to create value for shareholders. The sale of Galoc was a timely transaction given the subsequent decline in oil price and the proceeds from the sale have positioned Otto Energy in an enviable position of financial strength among our peers. The completion by Otto to divest the 33% interest in the Galoc Oil field maximised and monetised the inherent value of the Galoc Interest after the successful completion of the Galoc Phase II expansion. The transaction demonstrates Otto’s commitment to creating shareholder value, through monetising a key asset and delivering a significant return to shareholders, whilst simultaneously funding a highly prospective exploration program. The Company has also maintained its commitment to longer term growth through exploration and during the year our technical team remained focussed on this objective. Significant achievements included executing the drilling of the Hawkeye-1 well offshore Philippines, acquiring new seismic and preparing for drilling in Tanzania and obtaining entry into the prospective North Slope in Alaska. We look forward to the coming financial year, during which Otto Energy plans to maintain its current high level of activity. Highlights for the coming period include: • Preparation for the first ever onshore exploration wells to be drilled in Tanzania in 2016; • Seismic acquisition and drilling in the prospective North Slope acreage in Alaska; • Completing assessment of Hawkeye-1 hydrocarbon discovery and seeking to secure partners to drill follow-up prospects in SC55 offshore the Philippines; and • Assessing further business development opportunities. The ability to monetise the Galoc asset at such a fortuitous time augers well for Otto Energy’s capacity to capture opportunities for FY2016 and beyond – the early identification of such opportunities has already commenced in FY2016. The core goal of the Board and Management continues to be the creation of sustainable, long term value for all shareholders. I thank you, our shareholders, for your continued support through this past year and as we move forward. I also thank my fellow Directors, Management team and staff in Perth and overseas for their continued commitment. Rick Crabb Chairman OTTO ENERGY | ANNUAL REPORT 2015 3 MANAGING DIRECTOR’S REPORT 4 OTTO ENERGY | ANNUAL REPORT 2015DEAR SHAREHOLDERS Welcome to Otto Energy’s Annual Report for FY2015. This year has been one of significant transition for the Company following the sale of our interest in the producing Galoc oil field, which along with preparation for the drilling of the Hawkeye-1 exploration well, consumed a large proportion of our focus. The support of Otto’s shareholders, staff and my fellow directors throughout this challenging and rewarding transition period has been greatly appreciated. Otto Energy’s primary objective is to grow shareholder value, through: • Sound financial management; • • The application of technical and commercial rigour in the building of a focussed pipeline of exploration and appraisal projects selected for their prospectivity and favourable fiscal regimes; and Making considered commercial decisions via an understanding of the oil and gas asset life cycle and external market influences. The Company delivered several key achievements during FY2015 across each of these elements. Galoc Oil Field Divestment and Distribution of funds to Shareholders In February 2015, Otto completed the divestment of its 33% interest in the Galoc oil field located offshore Philippines, to Nido Petroleum Ltd for a headline value of US$108 million with an effective date of 1 July 2014. Following completion of the sale, a distribution to shareholders of A$0.064 per share was made in June 2015. Consistent with our focus on delivering value to our shareholders, the divestment on such favourable terms at the peak of the oil price cycle and the subsequent distribution to shareholders was an excellent result. Exploration Exploration is critical to the growth of any oil & gas company, and Otto has continued to progress opportunities in its Philippines and Tanzanian exploration assets. More recently, the Company acquired an interest in acreage located on the highly prospective Alaska North Slope, which has the potential for high impact exploration and appraisal success. In Service Contract 55 in the Philippines, Otto Energy successfully executed a farm-out strategy via the participation of Red Emperor Resources NL and Pryce Gases Inc in the drilling campaign of Hawkeye-1. Hawkeye-1 was drilled in August 2015, safely and significantly under budget. The successful farm-outs along with funding contributions from BHPB, saw Otto fully carried on the well. The hydrocarbons discovered at Hawkeye were at the low end of expectation and will be uneconomic to develop. However, the drilling results proved up a new petroleum system and will now be incorporated into our understanding of the remaining leads and prospects in the permit. In Tanzania, Otto and its joint venture partner, acquired a further 600km of 2D seismic to better understand the geology of the basins and firm up structures ahead of drilling in 2016. The Kilombero Basin ‘Kito’ prospect is drill ready with un-risked net prospective resource 60.4 MMbbl to Otto. With a large working interest Otto will consider farm-outs to reduce cost exposure and risk during drilling. OTTO HAS CONTINUED TO PROGRESS OPPORTUNITIES IN ITS PHILIPPINES AND TANZANIA EXPLORATION ASSETS. 5 OTTO ENERGY | ANNUAL REPORT 2015Throughout the year, Otto actively assessed a great many new venture and business development opportunities. As a result of this process, in August 2015, Otto made an initial entry into the prospective Alaskan North Slope to earn between 8 to 10.8% working interest in a large (558,195 acre) position operated by Great Bear Petroleum. The acreage has extensive 3D seismic coverage, existing well control and is close to the all-weather Dalton Highway and Trans-Alaska Pipeline System. The upcoming northern winter operating season will expose Otto to 3D seismic acquisition and drilling. The Alaskan North Slope is one of the world’s most prolific oil and gas exploration and production areas. This acquisition positions Otto with significant exposure to this highly prospective area, through the ability to participate in multiple appraisal and exploration wells in the coming year. Corporate Otto’s balance sheet has remained strong with a closing cash position of US$41.2 million and no debt at year end. Otto’s cash position and the free carry on Hawkeye-1 means Otto is well placed to fund the high impact forward exploration programs. Thank you once again for your ongoing support of Otto Energy and I look forward to reporting upon a similarly very successful year in FY2016. Matthew Allen Managing Director & Chief Executive Officer 6 OTTO ENERGY | ANNUAL REPORT 2015 OTTO ENERGY | ANNUAL REPORT 2015 7 COMPANY HIGHLIGHTS 2015 Successful sale of 33% working interest in Galoc oil field for a headline value of US$108 million. Return of funds of AUD 6.4 cents per share to Shareholders. Further acquisition of seismic for Pangani and Kilosa-Kilombero PSA’s in Tanzania ahead of drilling in 2016. Preparation for Hawkeye-1 exploration well in SC55 offshore Philippines (‘SC55’) and successful farm out campaign. 8 OTTO ENERGY | ANNUAL REPORT 2015 Post the sale of the Galoc oil field, Otto Energy Ltd (‘Otto’ or the ‘Company’) has focussed on the transition to becoming a company with a balanced portfolio of high quality exploration and appraisal type assets. Post the period, Otto drilled the Hawkeye-1 exploration well in SC55. These operations were completed safely and well below budget expectations. In addition, the Company acquired an interest in an exploration/appraisal asset on the Alaskan North Slope via the acquisition of Borealis Petroleum Pty Ltd. OTTO ENERGY | ANNUAL REPORT 2015 9 ASSET OVERVIEW 10 OTTO ENERGY | ANNUAL REPORT 2015PHILIPPINES Service Contract 55 Ownership: Otto Energy 78.18%, and Operator Status: Exploration Location: Offshore - Palawan Basin, Philippines Area: 9,880km2 • Otto free-carried on Hawkeye-1 exploration well through: • • Farm out of 15% working interest Red Emperor Resources NL (‘Red Emperor’) Farm in option executed with Pryce Gases Inc (‘Pryce Gases’) for 10% working interest • Funding up to US$24.5m from BHPB to be paid to Otto for the Hawkeye well • Hawkeye exploration well drilled in August 2015 with new petroleum system discovered • Hawkeye well results to be incorporated into understanding of remaining prospects in SC55. Service Contract 55 (‘SC55’) is located in the southwest Palawan Basin and covers an area of 9,880km2 and was awarded to Otto Energy Investments Ltd (formerly NorAsian Energy Ltd) in 2005. It is a deep-water block in the middle of a proven regional oil and gas fairway that extends from the productive offshore Borneo region in the southwest to the offshore Philippine production assets northwest of Palawan. SC55 contains a number of distinct exploration play types including the material Cinco carbonate gas/condensate prospect, as well as a number of follow-up leads. The permit provides material opportunity and a series of possible drill targets which will be reviewed in light of the results of the Hawkeye-1 well. Hawkeye-1 Exploration Well In August 2015, the Hawkeye well was drilled to 2,920 metres. Hydrocarbons were logged between 2,710 and 2,737 metres in reservoir of variable quality. Cuttings returns provided indications of fluorescence – usually an indicator of liquid hydrocarbons. The Hawkeye well has proven a petroleum system exists in the south west Palawan area and the existence of a source kitchen has reduced the geological risk of remaining prospects, including Cinco. Whilst the volume of hydrocarbons discovered at Hawkeye was sub-economic, other prospects on trend are likely to be hydrocarbon bearing and require re-estimation of potential resources. The well was drilled in 19.5 days. Final well cost is expected to be less than US$25 million; as a result of funding contributions from BHPB, Red Emperor and Pryce Gases, Otto was fully carried on the cost of drilling. 11 OTTO ENERGY | ANNUAL REPORT 2015 PHILIPPINES Cinco Prospect The Cinco gas/carbonate prospect was identified as part of a 1,800km2 3D seismic program undertaken by BHPB in 2010 that focused on a trend of carbonate prospects and leads, with Cinco being analogous to the Malampaya producing gas/condensate field in the Philippines. Cinco contains a ‘Best Estimate’ GIIP of 2.4 Tcf with a ‘Best Estimate’ Net Prospective Resource of 1.1 Tcf of gas and 38 MMbbls of associated condensate (Condensate Gas Ratio 35 bbls/ MMscf). The Net Prospective Resources reflect working interest for Otto of 78.18% and net of Government Share of profit oil. In addition to Cinco, several other large carbonate prospects have been identified on 3D seismic and will be subject of further evaluation by Otto. Success at Cinco would high grade many of these adjacent large analogue structures in SC55, which, in combination, would have the potential to unlock a large new gas province. 12 OTTO ENERGY | ANNUAL REPORT 2015PHILIPPINES Name Percentage OEL (through 100% subsidiaries Otto Energy Investments Ltd and Otto Energy Philippines Inc.) 78.18%* (Operator) Century Red Pte Ltd (subsidiary of Red Emperor Resources NL) Palawan 55 Exploration and Production Corporation (formerly Trans-Asia Oil & Energy Development Corporation) 15% 6.8% * A farm in option was executed with Pryce Gases Inc in July 2015 for a 10% working interest. Sub-Phase Date Commitment 4 5 Aug 11 – Dec 15 1 Deepwater Well COMPLETED AUGUST 2015 Dec 15 – Dec 16 1 Deepwater Well Extension Period Further 1 year allowed SC55 Prospective Resources: The arithmetically aggregated gas/condensate prospect and lead inventory including Cinco, contains a ‘Best Estimate’ GIIP of ~17 Tscf with a ‘Best Estimate’ Net Prospective Resource of ~8 Tscf of gas and 268 MMbbls of condensate. SC55 Portfolio - Gas. Arithmetric Aggregation (Bscf) GIIP Gross Prospective Resource Net Prospective Resource P90 2,325 1,545 366 P50 P10 17,141 71,064 11,527 48,207 2,729 11,414 Significant Regional Projects: • Malampaya gas and condensate project, operated by Shell, offshore Palawan, Philippines • Offshore gas and condensate project commissioned in 2001, produces approximately 2,700 megawatts of power for the main island of the Philippines, Luzon • Kebabangan cluster of gas and condensate fields, operated by Kebabangan Petroleum Operating Company (Petronas, Shell and ConocoPhillips), offshore Sabah, Malaysia • Large gas aggregation offshore Sabah with export to the Bintulu LNG plant 13 OTTO ENERGY | ANNUAL REPORT 2015 TANZANIA Key Highlights Ownership: Otto Energy 50% of the Pangani and Kilosa-Kilombero Production Sharing Agreements. Status: Exploration Location: Onshore, Tanzania Area: ~34,000km2 • Tata Petroleum has farmed in for a 25% interest in both licences, reducing Swala Energy’s (ASX:SWE) equity interest to 25% • Planning for the drilling of an exploration well in each licence in 2016 has commenced – these will be the first wells drilled in each permit Overview The Production Sharing Agreements (PSA) were awarded by the Government of the United Republic of Tanzania on 20 February 2012, with the overall Kilosa-Kilombero and Pangani licence areas covering a gross area of almost 34,000km2. Overview of Exploration Activities Following the award of the licences in 2012, the joint venture partners conducted analysis of legacy gravity and magnetic data as well as the acquisition of new airborne gravity and magnetic data. Analysis of both data sets confirmed the presence of a significant sedimentary basin at Kilosa-Kilombero and identified a possible significant sedimentary basin at Pangani. Exploration success and Otto acreage 14 OTTO ENERGY | ANNUAL REPORT 2015 TANZANIA In 2013, the joint venture undertook a 2D seismic program over both exploration licence areas, which yielded positive results indicating Neogene aged basins in both Pangani and Kilosa- Kilombero. The latter appeared analogous to large discovery areas in Kenya and Uganda. In February 2014, the joint venture partners agreed to enter into Years 3 and 4 of the licences. Additional seismic data was acquired to allow optimal well positioning for commitment wells in each licence area. In August 2015, a 1 year extension was received for the current exploration period which will see one exploration well drilled in each licence area before February 2017. KILOSA-KILOMBERO PSA Ownership: Otto Energy 50% Status: Exploration Location: Onshore East Africa Area: 17,675km2 Work undertaken by the joint venture has confirmed the presence of three basins, each of about 2,000km² in area. The northern two basins at Kilosa and Kidatu are estimated to contain 6,000m to 7,000m of sediment. Some of the sediment is likely to be of Karoo age but there is potential for some Neogene fill. The southern Kilombero basin is believed to be predominantly Neogene in age. Neogene aged rift basins similar to that observed in the license area have reservoired billions of barrels of oil as evidenced in both Uganda and Kenya. During the second year of the contract the joint venture acquired 110km 2D seismic over the Kilosa-Kilombero basin, with results indicating large scale structures and sediments similar to the oil basins of Lokichar (Kenya) and Lake Albert (Uganda) where Africa Oil and Tullow Oil have had significant success. The results of this seismic program identified the Kito prospect, which indicated a prospective resource of between 19.2 MMbbls and 169.6 MMbbls net to Otto, with a best estimate of 60.4 MMbbls. A 2014 program to acquire 430 km of additional 2D seismic data across the Kilombero basin was undertaken during Q4 2014. The focus of the program was to: 1. Provide additional lines across the ‘Kito’ prospect, in order to assist its development into a drillable target. 2. Cover other portions of the basin which according to the initial 2013 seismic data and earlier remote sensing data have the potential to contain additional leads and prospects. The new 2D data has been processed and detailed technical evaluation has been completed during Q3 2015 ahead of drill planning to prepare for an exploration well in 2016. 15 OTTO ENERGY | ANNUAL REPORT 2015 TANZANIA Kilombero 2014 Seismic Program PANGANI PSA Ownership: Otto Energy 50% Status: Exploration Location: Onshore East Africa Area: 17,156km2 During 2013 a total of 200km of 2D seismic data was acquired over the Pangani licence, specifically focused on the Mvungwe and Moshi basins originally recognised from regional gravity and magnetics data. The results from the seismic survey show that the Moshi basin, in the north of the licence area, appears to be a deep basin with sedimentary fill of probable Neogene age. Additionally, the data suggests the basin is fault-bounded, 25km wide and with basin fill between 2,000m and 3,000m depth. 16 OTTO ENERGY | ANNUAL REPORT 2015TANZANIA Results also indicate that the Mvungwe basin, located in the south of the licence area, is less than 1,000m deep and contains sediments of probably Neogene age. During Q3 2014, a further 200km of 2D seismic data were acquired across the Moshi basin area. The focus of the survey was to better understand the geometry of the basin and firm up structures for drilling. Processing of new data has been completed and technical analysis was completed during Q2 2015. Several leads have been identified which required further review before they can be elevated to prospect status. Pangani 2014 Seismic Program Kilosa-Kilombero and Pangani Block Participants Otto Energy (Tanzania) Pty Ltd (100% subsidiary of Otto) 50% Swala Oil and Gas (Tanzania) Plc Tata Petrodyne Limited 25% (Operator) 25% 17 OTTO ENERGY | ANNUAL REPORT 2015ALASKA Ownership: Otto Energy 8-10.8% Status: Exploration Location: Onshore North Slope Alaska Area: 2,259km2 In August 2015, Otto acquired the right to earn an interest, through staged capital injections, in a substantial acreage position on the highly prospective, oil prone, onshore Alaskan North Slope held by Great Bear Petroleum Operating LLC (‘Great Bear’). Through its agreements with Great Bear, Otto has the right to acquire an 8% and 10.8% working interest (equivalent to 58,334 net acres) in two areas of Alaskan North Slope exploration acreage held by Great Bear. About the Alaskan North Slope Alaska contains some of the largest conventional oil fields in North America and has produced more than 17 billion barrels of oil and 13 trillion cubic feet of natural gas. The US Geological Society (USGS) estimates that the Alaskan North Slope has the potential to hold 40 billion barrels of conventional oil and over 200 trillion cubic feet of conventional gas. Whilst Otto and its partners’ focus will be on conventional oil, the unconventional oil plays located in this acreage also contain significant potential and Otto will have access to its proportionate share of any resource through its deal with Great Bear. The size and potential of the opportunities on the Alaskan North Slope see it as home to super majors such as Conoco, Shell, ExxonMobil, Repsol, ENI, Statoil and BP. Recent exploration drilling by Repsol in adjacent acreage has yielded a significant conventional oil discovery in the Kuparuk play sands; similar opportunities at this play level have already been identified in the Great Bear North Slope acreage. The Repsol well discovered several distinct oil accumulations and encountered a 650 foot oil column and 150 feet of net pay and is likely a multi-hundred million barrel oil discovery. This discovery was made after Repsol had farmed in to a 350,000 net acre position in 2011 in a deal valued at US$760 million. Further, financial incentives provided by the Alaskan Government to attract investment in the North Slope provides Alaska with the most attractive fiscal regime in North America and one that ranks very highly on a global scale. These incentives include: • 75% to 85% exploration and development cash rebates; • Flat rate production tax of 35% (previously taxes varied between 25-75% depending on profitability criteria); • 12.5% state royalty; and • Various production tax exemptions for new oil production. Oil production can be transported through the Trans Alaska Pipeline System (‘TAPS’), which runs through the Great Bear acreage. TAPS provides regulated open access to domestic and international markets and presently has around 1.0 mmbopd spare capacity. Alaska is the only US state able to export oil under current regulations. Alaska’s geographical location provides safe and effective shipping routes for crude exports into the Asian markets, allowing Alaskan projects to provide a strategic long-term petroleum reserve for the Asian region. 18 OTTO ENERGY | ANNUAL REPORT 2015ALASKA About the Great Bear Acreage Great Bear is a private exploration company focused on exploring and developing conventional and unconventional resources on the North Slope of Alaska. Great Bear is the largest exploration leaseholder on the North Slope, having taken a position in a major play fairway south of the Prudhoe Bay and Kuparuk fields. Great Bear is the dominant exploration acreage holder in this highly prospective basin; holding 558,195 gross acres. Great Bear has undertaken significant exploration work on the acreage since 2011 with a cumulative spend in excess of US$150 million. This work includes: • Acquisition and processing of approximately 1800km2 of 3D seismic data. • Drilling of 2 unconventional stratigraphic test wells which cored 3 primary unconventional targets. Results from these wells indicate that the majority of the Great Bear acreage is expected to be liquids rich. These wells also encountered light oil in various conventional formations. • Drilling of a conventional exploration well (Alkaid-1) which specifically targeted a 3D defined Brookian reservoir. The Alkaid well results are under evaluation. The extensive, modern 3D seismic coverage, existing well control and proximity to the all- weather Dalton Highway and TAPS means that the Great Bear joint venture is well positioned to test numerous prospects during the 2015-6 and 2016-7 northern winter drilling seasons. 19 OTTO ENERGY | ANNUAL REPORT 2015ALASKA The Great Bear acreage lies in the established conventional play fairways of the Ivishak, Kuparuk and Brookian sand reservoir systems in a region demonstrating oil maturity. • • • The Brookian turbidite fans are productive at offset Tarn, Meltwater and Tabasco Fields (field sizes of around 100mmbo to 300mmbo in place). The Ivishak formation is the primary producing reservoir at the Prudhoe Bay Field (25 billion barrels of oil in place). The Kuparuk sand play is regionally productive with the Kuparuk Field holding 5.9 billion barrels of oil in place and was also the target of the recent substantial oil discovery made by Repsol. The play types exhibited in the prospects so far identified by Great Bear have been the basis for other significant conventional oil discoveries in and around the Alaskan North Slope with discovered recoverable volumes being in the hundreds of millions of barrels. The size of these other discoveries within these plays provides an indication of the potential of Great Bear acreage in the success case. In terms of unconventional potential, the North Slope is rated by the USGS as being potentially one of the last remaining material oil shale plays in the US. The North Slope contains three world class source rocks - Shublik, Kingak and Hue/HRZ shales. All three of these source rocks are in existence within the Great Bear acreage. This substantial unconventional play will be the subject of a longer term evaluation program with the immediate focus of the joint venture being on the conventional oil potential. Multinational oil and gas services company, Halliburton farmed into a portion of the Great Bear acreage in 2011. Halliburton currently holds a 25% working interest in 126,186 gross acres. Halliburton’s interest ensures the joint venture exposure to leading edge experience and technology in developing unconventional plays and will ensure that this aspect of the exploration potential continues to be progressed in conjunction with the planned 2015 and 2016 conventional exploration work program. 20 OTTO ENERGY | ANNUAL REPORT 2015ALASKA Map showing Great Bear acreage highlighted in red and proximity to other fields. Great Bear Alaska North Slope Participants Otto (through 100% owned subsidiary, Borealis Alaska LLC) Great Bear Petroleum Operating LLC and affiliated companies Halliburton Energy Services, Inc 8-10.8% 67-89.2% (Operator) 0-25% Reserves and Contingent Resources Governance The reserve and contingent resource information in this report is based on information compiled by Mr Paul Senycia BSc (Hons) (Mining Engineering), MAppSc (Exploration Geophysics), who has consented to the inclusion of such information in this report in the form and context in which it appears. Mr Senycia is a full time employee of the Company, with more than 30 years relevant experience in the petroleum industry and is a member of The Society of Petroleum Engineers (SPE). Reserves and contingent resources have been estimated using both probabilistic and deterministic methods. Otto is not aware of any new information or data that materially affects the assumptions and technical parameters underpinning the estimates of reserves and contingent resources and the relevant market announcements referenced continue to apply and have not materially changed. The estimated quantities of petroleum that may potentially be recovered by the application of future development projects 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. 21 OTTO ENERGY | ANNUAL REPORT 2015Summary of Assets Asset The Philippines SC55 Exploration block, Southwest Palawan Basin OEL Working Internet Joint Venture Partners Notes 78.18% (Operator) Palawan 55 Exploration and Production 6.82% Otto carrying Filipino partner through drilling of two wells. Century Red Pte Ltd 15% SC73 Offshore Mindoro-Cuyo Block 100% (Operator) - - There is 1% Gross Overriding Royalty to RGA on Otto share. Trans-Asia also has a right to acquire an additional 5% equity from Otto. Farm in option executed with Pryce Gases Inc in July 2015 for a 10% working interest. Otto gave notice of relinquishment in July 2015. Tanzania Kilosa-Kilombero PSA 50% Swala Oil and Gas (Tanzania) 25% Permit acquired in February 2012 Tata Petrodyne Limited 25% Current exploration period extended to February 2017 Pangani PSA 50% Swala Oil and Gas (Tanzania) 25% Permit acquired in February 2012 Tata Petrodyne Limited 25% Current exploration period extended to February 2017 Alaska Alaskan North Slope 8-10.8% Great Bear Petroleum Operating LLC 67%- 89.2% 154 leases covering 2,259km2 make up the Great Bear Alaskan North Slope Acreage Halliburton Energy Services, Inc 0-25% Otto entry made in August 2015 22 OTTO ENERGY | ANNUAL REPORT 2015 FINANCIAL REPORT 2015 Contents Corporate Directory 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 Consolidated Financial Statements Director’s Declaration Independent Audit Report to the Members of Otto Energy Limited ASX Additional Information 24 25 42 43 44 45 46 47 81 82 84 OTTO ENERGY | ANNUAL REPORT 2015 23 CORPORATE DIRECTORY For The Year Ending 30 June 2015 CORPORATE DIRECTORY For the year ending 30 June 2015 Directors Company Secretary Key Management Personnel Principal registered office in Australia Share Register Auditors Stock Exchange Listings Banks Website address ABN Mr Rick Crabb – Non-Executive Chairman Mr Matthew Allen – Managing Director and Chief Executive Officer Mr Rufino Bomasang – Non-Executive Director Mr John Jetter – Non-Executive Director Mr Ian Macliver – Non-Executive Director Mr Ian Boserio – Non-Executive Director Mr Neil Hackett (appointed 1 April 2015) Mr Scott Blenkinsop (resigned 1 April 2015) Mr Matthew Allen – Managing Director and Chief Executive Officer Mr Paul Senycia – Vice President Exploration and New Ventures Mr Craig Hasson – Chief Financial Officer Mr Matthew Worner – Commercial Manager (appointed 9 March 2015) 32 Delhi Street West Perth WA 6005 Tel: + 61 8 6467 8800 Fax: + 61 8 6467 8801 Link Market Services Limited 178 St Georges Terrace Perth WA 6000 Tel: + 61 8 9211 6670 Fax: + 61 2 9287 0303 BDO Audit (WA) Pty Ltd 38 Station Street Subiaco WA 6008 Tel: + 61 8 6382 4600 Fax: + 61 8 6382 4601 Australian Securities Exchange Level 8, Exchange Plaza 2 The Esplanade Perth WA 6000 ASX Code: OEL Westpac Banking Corporation Level 17, 109 St Georges Terrace Perth WA 6000 Tel: + 61 8 9426 2580 Fax: + 61 8 9426 2288 www.ottoenergy.com 56 107 555 046 24 OTTO ENERGY | ANNUAL REPORT 2015 27 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  DIRECTORS’ REPORT For The Year Ending 30 June 2015 Your  Directors  present  their  report  on  the  consolidated  entity  (referred  to  hereafter  as  the  “consolidated  entity”  or  the  “Group”) consisting of Otto Energy Limited and the entities it controlled at the end of, or during, the year ended 30 June  2015.  Directors  The Directors in office at any time during the financial year or since the end of the financial year are:  Mr Rick Crabb  Mr Matthew Allen (appointed 24 June 2015)  Mr Rufino Bomasang  Mr John Jetter   Mr Ian Macliver  Mr Ian Boserio  Directors have been in office from 1 July 2014 until the date of this report unless otherwise stated.  Company Secretary  Neil Hackett (appointed 1 April 2015)  Principal Activities  The  principal  activity  of  the  consolidated  entity  continued  to  be  investment  in  oil and  gas  exploration,  development  and  production in the Philippines and East Africa.   Dividends – Otto Energy Limited  During  the  financial  year,  Shareholders  approved  a  capital  return  to  shareholders  of  AUD$0.0564  per  share,  on  26  June  2015. The Board of Directors also resolved to pay an unfranked dividend of AUD$0.0076 per share, to be paid on 26 June  2015.  The  record  date  for  entitlement  to  this  dividend  was  16  June  2015.  The  financial  impact  of  this  capital  return  and  dividend amounting to AUD$74.52m has been recognised in the Financial Statements for the year ended 30 June 2015. No  dividends were paid or declared by the Group during the previous financial year.  Review of Operations  A review of the operations of the consolidated entity during the financial year and the results of those operations are set  out in the review of operations, refer to pages 8 to 22.  Financial Summary   The consolidated entity recognised a loss after income tax for the year from continuing operations, of $6.79m (2014: loss of  $30.20m),  as  a  result  of  the  discontinuation  and  divestment  of  the  Group’s  remaining  producing  investment,  Galoc  Production Company WLL (GPC) on 17 February 2015.   The  net  profit  after  discontinued  operations  for  the  financial  year  ending  30  June  2015  was  $26.00m  (2014:  net  loss  of  $0.09m), which was due to the sale of GPC and profit from GPC operations totalling $32.79m.   Significant changes in state of affairs  Significant changes in the state of affairs of the consolidated entity during the financial year were as follows:   On 20 January 2015 shareholder approval was received for Otto to divest 100% of the shares in the GPC, the holder of  Otto's  33%  interest  in  the  Galoc  oil  field  located  in  Service  Contract  14C  (Galoc  Interest),  to  Nido  Petroleum  Ltd.  Completion of the transaction was achieved on 17 February 2015.   Otto entered into a farm‐in agreement with Red Emperor Resources NL for a 15% working interest in SC55.   Otto commenced preparation for Hawkeye‐1 exploration well.  25 OTTO ENERGY | ANNUAL REPORT 2015 25 OTTO ENERGY | ANNUAL REPORT 2015  DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  Matters subsequent to the end of the Financial Year   On  21  July  2015  the  Company  acquired  100%  of  the  issued  capital  of  Borealis  Petroleum  Pty  Ltd,  to  earn  an  interest,  through  staged  capital  injections,  in  a  substantial  acreage  position  in  onshore  Alaskan  North  Slope,  held  by  Great  Bear  Petroleum Operation LLC.  Borealis Petroleum Pty Ltd was acquired through the issue of 17,518,250 shares in the Company.  On 27 July 2015 Red Emperor Resources received approval from the Department of Energy in Philippines for the farm‐in of  a 15% working interest into SC55.  On  30  July  2015  Pryce  Gases  Inc  agreed  to  a  farm‐in  option  for  a  10%  working  interest  in  the  drilling  of  the  Hawkeye‐1  exploration well.  Hawkeye‐1  drilling  was  completed  to  a  depth  of  2,920  metres  in  August  2015  with  uneconomical  quantities  of  hydrocarbons discovered.  Hawkeye‐1 was plugged and abandoned, and is currently undergoing analysis to incorporate into  the Company’s understanding of its other SC55 prospects, including Cinco.  Likely developments and expected results of Operations   Likely  developments  in  the  operations  of  the  consolidated  entity  constituted  by  Otto  Energy  Limited  and  the  entities  it  controls from time to time that were not finalised at the date of this report included:     Complete staged entry into Alaska and participate in upcoming 3D seismic and drilling program.  Commence drilling planning in Tanzania.  Incorporate Hawkeye‐1 drilling results into understanding of remaining SC55 leads and prospects.  Additional  comments  on  expected  results  of  certain  operations  of  the  group  are  included  in  the  review  of  operations  on  pages 8 to 22.  In accordance with its objectives, the consolidated entity intends to participate  in a number of exploration and appraisal  wells  and  will  consider  growing  its  exploration  effort  by  farm‐in,  permit  application  and/or  acquisition  within  its  existing  operational  focus  areas  and  in  other  suitable  countries  or  regions.  Further  information  on  likely  developments  in  the  operations of the consolidated entity and the expected results of operations have not been included in this annual financial  report because the Directors believe it would be likely to result in unreasonable prejudice to the consolidated entity.   Environmental Regulation  So far as the Directors are aware, there have been no breaches of environmental conditions of the Group’s exploration or  production licences. Procedures are adopted for each exploration program to ensure that environmental conditions of the  Group’s tenements are met.  26 OTTO ENERGY | ANNUAL REPORT 2015 26  OTTO ENERGY | ANNUAL REPORT 2015        DIRECTORS’ REPORT  For the year ending 30 June 2015  DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 Information on Directors and Key Management Personnel   Mr Rick Crabb BJuris (Hons), LLB, MBA, FAICD. Chairman (Independent Non‐Executive)  Date appointed  19 November 2004  Experience and expertise  Other current directorships  Mr Rick Crabb holds degrees in law and business administration from the University of Western  Australia.  Mr  Crabb  practised  as  a  solicitor  from  1980  to  2004,  specialising  in  resources,  corporate and commercial, with considerable offshore experience. Mr Crabb now focuses on  his public company directorships and investments.  Chairman,  Non‐Executive  Director  of  Golden  Rim  Resources  Limited  from  22  August  2001,  Platypus Minerals Limited (formerly Ashburton Minerals Limited) from 1 September 1999 and  Paladin Energy Limited from 8 February 1994.  Former directorships in last 3 years  None  Special responsibilities  Audit and Compliance  Remuneration and Nomination Committee   Interest in shares and options  17,795,052 ordinary shares of Otto Energy Limited.  Mr Matthew Allen BBus, FCA, F Fin, GAICD. Managing Director and Chief Executive Officer  Date appointed  24 June 2015  Experience and expertise  Interest in shares and options  Mr Matthew Allen was appointed Managing Director in June 2015 and Chief Executive Officer  in February 2014 after joining Otto in 2009 as Chief Financial Officer.  Mr Allen has played an  integral role in implementing Otto’s strategy. Mr Allen’s experience lies in the operation and  management  of  oil  and  gas  companies  with  particular  focus  on  strategic,  commercial  and  financial  aspects  of  the  business.  Mr  Allen  previously  spent  8  years  with  Woodside  Energy  working  with  many  of  Woodside’s  assets  and  has  had  global  upstream  oil  and  gas  industry  experience in Asia, Africa, Australia and the Middle East.   3,643,000 ordinary shares in Otto Energy Limited and performance rights of 4,700,000. Mr John Jetter BLaw, BEcon, INSEAD. Director (Independent Non‐Executive)  Date appointed  10 December 2007  Experience and expertise  Mr  John  Jetter  is  the  former  Managing  Director,  CEO  and  head  of  investment  banking  of  JP  Morgan in Germany and Austria, and a member of the European Advisory Council, JP Morgan  London. Mr Jetter has held senior positions with JP Morgan throughout Europe, focusing his  attention  on  major  corporate  clients  advising  on  some  of  Europe’s  largest  corporate  transactions. Formerly Chairman of the Board of Rodenstock AG, Germany, Deputy Chairman of  the Board of European Business School and Chairman of the Finance Facility, Oestrich‐Winkel,  Germany.  Other current directorships  Non‐Executive Director of Venture Minerals Limited since 8 June 2010 and Non‐Executive  Director of Peak Resources Limited since 1 April 2015.  Former directorships in last 3 years  None  Special responsibilities  Remuneration and Nomination Committee  Interest in shares and options  16,089,175 ordinary shares of Otto Energy Limited.  Mr Ian Macliver BCom, FCA, SF Fin, FAICD. Director (Independent Non‐Executive)  Date appointed  7 January 2004  Experience and expertise  Mr  Ian  Macliver  is  Managing  Director  of  Grange  Consulting  Group  Pty  Ltd,  which  provides  specialist  corporate  advisory  services  to  listed  and  unlisted  companies.  Mr  Macliver  has  held   senior Executive and Director roles of both resource and industrial companies, specifically  responsible for capital raising and other corporate initiatives.   Other current directorships  Non‐Executive  Chairman  of  Western  Areas  Limited  since  November  2013  (Non‐Executive  Director since October 2011).  Former directorships in last 3 years  Non‐Executive  Director  of  Rent.com.au  Limited  (formerly  Select  Exploration  Limited)  from  September 2010 to June 2015. Non‐Executive Director of Range Resources Limited from June  to August 2014, Non‐Executive Director of JCurve Solutions Limited (formerly Stratatel Limited)  from July 2000 to October 2013.  Special responsibilities  Audit and Compliance  Remuneration and Nomination Committee  Interest in shares and options   4,549,721 ordinary shares of Otto Energy Limited.  27 OTTO ENERGY | ANNUAL REPORT 2015 27  OTTO ENERGY | ANNUAL REPORT 2015        DIRECTORS’ REPORT (continued) DIRECTORS’ REPORT  For The Year Ending 30 June 2015 For the year ending 30 June 2015  Mr Ian Boserio BSc Hons First Class (Geophysics), BSc  (Geology). Director (Independent Non‐Executive)  Date appointed  2 September 2010  Experience and expertise  Mr Ian Boserio brings to the Otto Board more than 33 years international experience in the  oil  and  gas  business,  focused  predominantly  on  exploration  and  management.  Mr  Boserio  spent  26  years  with  Shell.  In  his  last  role  leading  Australia  and  NZ  Exploration  and  New  Business,  Mr  Boserio  and  his  team  doubled  Shell's  LNG  portfolio,  enabling  several  LNG  projects  and  adding  a  total  resource  base  of  approximately  15  Tcf.  Previous  international  postings with Shell included Australia, North Sea, the Middle East, India and Indonesia, plus a  five year secondment into Woodside as the Australia Exploration Manager. He is currently co‐ owner and Technical Director of private oil and gas company Pathfinder Energy.   Other current directorships  Technical Director, Pathfinder Energy   Former directorships in last 3 years  Non‐Executive Director of Nexus Energy Limited November 2009 to October 2012  Special responsibilities  Audit and Compliance  Interest in shares and options   None  Mr Rufino Bomasang BSc (Min Eng), Master in Business Economics (Phil). Director (Independent Non‐Executive)  Date appointed  18 August 2006  Experience and expertise  Mr  Rufino  Bomasang,  formerly  a  mining  engineer,  having  worked  in  recent  years  as  an  International  Energy  and  Mining  Consultant,  focused  on  the  development  of  untapped  indigenous energy resources in the Philippines. From 1996 to 2004 Mr Bomasang was President  and CEO of Philippine National Oil Company Exploration Corporation. Mr Bomasang previously  worked with the United States Agency for International Development as an Energy Consultant,  providing technical assistance to the Philippine Department of Energy.  Other current directorships  Non‐Executive Chairman of Otto Energy Investments Limited and Otto Energy Philippines Inc.,  subsidiaries of Otto Energy Limited.  Former directorships in last 3 years  Special responsibilities  Interest in shares and options   None  None  None  Mr Paul Senycia BSc (Hons) MAppSc (Geophysics) Vice President Exploration and New Ventures  Date appointed  12 April 2010  Experience and expertise  Mr  Paul  Senycia  has  more  than  30  years  of  international  oil  and  gas  business  experience  in  Australia,  North  and  West  Africa,  North  America,  Europe  and  Asia.  Mr  Senycia  also  has  significant experience in all facets of the upstream oil and gas exploration business including:  executing  seismic  and  drilling  programs;  capturing  new  venture  opportunities;  joint  venture  relationship; and farm in/out management. Mr Senycia has spent the majority of his career with  Woodside Energy and Shell International with roles in Australia, Europe and the Middle East. He  was  Head  of  Evaluation  at  Woodside  and  subsequently  Exploration  Manager  at  Oilex  before  joining Otto Energy in April 2010.  Interest in shares and options  3,000,000 ordinary shares in Otto Energy Limited and performance rights of 4,700,000.  Mr Craig Hasson BCom, CA, AGIA. Chief Financial Officer    Date appointed  26 February 2014  Experience and expertise  Mr Craig Hasson joined Otto as Group Financial Controller in November 2012 and was appointed  Chief Financial Officer in February 2014. Mr Hasson is a Chartered Accountant with over 13 years  of resource related financial experience in Australia, Europe, Africa and Asia.  Interest in shares and options  112,500 ordinary shares in Otto Energy Limited and performance rights of 2,900,000.   Mr Matthew Worner LLB. B.Bus. Commercial Manager   Date appointed  9 March 2015  Experience and expertise  Mr Matthew Worner joined Otto as Commercial Manager in March 2015. Mr Worner is a former  corporate  lawyer  with  specialist  experience  in  IPO’s  and  capital  raisings  and  having  advised  listed companies on these matters in both Australia and overseas. Over the last 10 years Mr  Worner’s  focus  has  been  on  the  oil  and  gas  sector,  having  worked  in  various  in‐house  legal,  company  secretarial,  commercial  and  business  development  roles  throughout  Australia,  Europe, Africa and Asia.  Interest in shares and options  1,400,000 performance rights.  28 OTTO ENERGY | ANNUAL REPORT 2015 28  OTTO ENERGY | ANNUAL REPORT 2015              DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 Mr Neil Hackett BEc F Fin, GAICD. Company Secretary Date appointed 1 April 2015 Experience and expertise Mr Hackett has over 20 years director, company secretarial, compliance and corporate governance experience including 7 years ASX200 listed company secretary experience with diversified industrial and financial services entities. Mr Hackett holds a Bachelor of Economics and is a Fellow of Finsia, GAICD (Merit) and Affiliate of Corporate Governance Institute. Interest in shares and options None Meetings of Directors The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2015, and the numbers of meetings attended by each Director were: Director Mr R Crabb Mr M Allen Mr R Bomasang Mr J Jetter Mr I Macliver Mr I Boserio Full meetings of Directors Meetings of Audit Committee Remuneration and Nomination Committee Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Number attended 14 - 14 14 14 14 14 - 12 14 14 14 2 - - - 2 - 2 - - - 2 - 1 - - 1 1 - 1 - - 1 1 - Remuneration Report (Audited) The Directors of the Company have prepared this remuneration report to outline the overall remuneration strategy, policies and practices, which were adopted by the consolidated entity in 2015 and which utilises the share rights and option plans approved by the shareholders in 2013. The report has been prepared in accordance with Section 300A of the Corporations Act 2001 and its regulations. Otto Energy’s remuneration policy is designed to ensure that the level and form of compensation achieves certain objectives, including: a) attraction and retention of employees and management to pursue the consolidated entity’s strategy and goals; b) delivery of value-adding outcomes for the consolidated entity; c) fair and reasonable reward for past individual and consolidated entity performance; and d) incentive to deliver future individual and consolidated entity performance. Remuneration consists of base salary, superannuation, short term incentives (STI) and long term incentives (LTI). Remuneration is determined by reference to market conditions and performance. Performance is evaluated at an individual level as well as the performance of the consolidated entity as a whole. The remuneration policies and structure in 2015 were generally the same as for 2014. OTTO ENERGY | ANNUAL REPORT 2015 32 29 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT (continued) DIRECTORS’ REPORT For The Year Ending 30 June 2015 For the year ending 30 June 2015 Directors and Key Management Personnel disclosed in this report: Directors Mr Rick Crabb Mr Matthew Allen Mr Rufino Bomasang Mr John Jetter Mr Ian Macliver Mr Ian Boserio Non-Executive Chairman Managing Director and Chief Executive Officer Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Key Management Personnel Mr Paul Senycia Mr Craig Hasson Mr Matthew Worner Mr Scott Blenkinsop Vice President Exploration and New Ventures Chief Financial Officer Commercial Manager (appointed 9 March 2015) Chief Legal Counsel (resigned 6 March 2015) and Company Secretary (resigned 1 April 2015) Remuneration Governance Role of the Remuneration and Nomination Committee The Remuneration and Nomination Committee’s role is to review and recommend remuneration for Key Management Personnel, review remuneration policies and practices, Company incentive schemes and superannuation arrangements. The Committee considers independent advice where circumstances require, on the appropriateness of remuneration to ensure the consolidated entity attracts, motivates and retains high quality people. The ASX Listing Rules require that the maximum aggregate amount of remuneration to be allocated among the Non-Executive Directors be approved by shareholders in a general meeting. In proposing the maximum amount for consideration by shareholders and in determining the allocation, the Remuneration and Nomination Committee takes account of the time demands made on Directors and such factors as fees paid to Non-Executive Directors in comparable Australian companies. The Remuneration and Nomination Committee comprises of three Non-Executive Directors. Remuneration arrangements for Directors and Executives are reviewed by the Remuneration and Nomination Committee and recommended to the Board for approval. The Remuneration and Nomination Committee considers external data and information, where appropriate, and may engage independent advisors where appropriate to establish market benchmarks. Remuneration arrangements are determined in conjunction with the annual review of the performance of Directors, Executives and employees of the consolidated entity. Performance of the Directors and the CEO of the consolidated entity is evaluated by the Board, assisted by the Remuneration and Nomination Committee. The CEO reviews the performance of Executives with the Remuneration and Nomination Committee. These evaluations take into account criteria such as the achievement toward the consolidated entity’s performance benchmarks and the achievement of individual performance objectives. Non-Executive Director Remuneration Policy Non-Executive Directors of the consolidated entity are remunerated by way of fees, statutory superannuation, and LTI’s where applicable. Fees are set to reflect current market levels based on the time, responsibilities and commitments associated with the proper discharge of their duties as members of the Board. The current base fees were last reviewed in June 2015. Non-Executive Directors’ fees are determined within an aggregate Non-Executive Directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum currently stands at A$500,000 per annum and was approved by shareholders at the Annual General Meeting in January 2008. 30 OTTO ENERGY | ANNUAL REPORT 2015 33 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 Directors’ Fees The following fees have applied: Base fees Chair Other Non-Executive Directors Other Non-Executive Directors (Philippines based) Additional fees Audit Committee Director of Otto Energy Investments Limited Director of Otto Energy Philippines Inc. Retirement allowances for Non-Executive Directors DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 From 1 July 2014 to 30 June 2015 From 1 July 2013 to 30 June 2014 A$ 125,000 A$ 75,000-90,000 US$ 72,000 A$ 10,000 US $24,000 US $24,000 A$ 125,000 A$ 75,000-90,000 US$ 72,000 A$ 10,000 US $24,000 US $24,000 In line with ASX Corporate Governance Council Non-Executive Directors’ remuneration does not include retirement allowances. Superannuation contributions required under the Australian superannuation guarantee legislation continue to be made and are deducted from the Directors’ overall fee entitlements. Appointment The term of appointment is determined in accordance with the Company’s Constitution and is subject to the provisions of the Constitution dealing with retirement, re-election and removal of Directors of the Company. The Constitution provides that all Directors of the Company, other than the Managing Director, are subject to re-election by shareholders by rotation every three years during the term of their appointment. Directors and Executive Remuneration Policy and Framework The remuneration arrangement for Directors and Executives of the consolidated entity for the year ended 30 June 2015 is summarised below. The remuneration structure in place for 2014/2015 applies to all employees including Key Management Personnel and staff members of the consolidated entity. The consolidated entity’s remuneration structure has three elements: a) Fixed annual remuneration or base salary (FAR) (including superannuation); b) Short term incentive (STI) award which provides a reward for performance in the past year; and c) Long term incentive (LTI) award which provides an incentive to deliver future Company performance. Executive Remuneration Mix In accordance with the consolidated entity’s objective to ensure that Executive remuneration is aligned to consolidated entity’s performance, a significant portion of the Executives’ target pay is “at risk”. a) Fixed Annual Remuneration (FAR) or base salary (including superannuation) To attract and retain talented, qualified and effective employees, the consolidated entity pays competitive base salaries which have been benchmarked to the market in which the consolidated entity operates. The consolidated entity compiles competitive salary information on companies of comparable size in the oil and gas industry from several sources. Where appropriate, information is obtained from surveys conducted by independent consultants and national and international publications. In the past the Board had engaged independent advisors to review the remuneration levels paid to the consolidated entity’s Key Management Personnel. An advisor was not retained for the 2015 review. FAR will be paid in cash and is not at risk other than by termination. Individual FAR is set each year based on job description, competitive salary information sourced by the consolidated entity and overall competence in fulfilling the requirements of the particular role. There is no guaranteed base pay increases included in any Executives’ contracts. Retirement benefits are delivered under the employees’ superannuation fund. OTTO ENERGY | ANNUAL REPORT 2015 34 31 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 b) Short-term incentives Executives have the opportunity to earn an annual short-term incentive (STI) if predefined targets are achieved. The CEO has a target STI opportunity of 20% of FAR and other members of the Executive team have an STI opportunity of approximately 20% of FAR. The targets are reviewed annually. STI awards for the Executive team in the 2015 financial year were based on the scorecard measures and weightings as disclosed below. These targets were set by the Board and the Remuneration and Nomination Committee and are aligned to the Company’s strategic and business objectives. Performance category Health, safety & environment Total shareholder return Asset specific New business development Leadership Weighting 10% 25% 30% 25% 10% The Board and Remuneration and Nomination Committee are responsible for assessing whether the KPIs are met. To assist in this assessment, the Committee receives detailed reports on performance from management. The Committee has the discretion to adjust short-term incentives downwards in light of unexpected or unintended circumstances. c) Long-term incentives The consolidated entity believes that encouraging its employees to become shareholders is the best way of aligning their interests with those of its shareholders. Long-term incentives are provided to certain employees via the Otto Energy Limited Employee Performance Rights and Option Plan which was approved by shareholders at the 2013 Annual General Meeting. The Otto Energy Limited Employee Performance Rights and Option Plan is designed to provide long-term incentives for employees to deliver long-term shareholder returns. Under the plan, participants are granted performance rights or options which only vest if certain performance conditions are met and the employees are still employed by the consolidated entity at the end of the vesting period. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. Vesting of the performance rights are either time based or subject to Otto Energy Limited’s total shareholder return (TSR), including share price growth, dividends and capital returns, over a three-year period. Once vested, the performance rights are automatically converted into shares. Performance rights are granted under the plan for no consideration. Four maximum LTI organisational benchmarks have been established as a percentage of individual FARs. These four levels reflect the increased involvements of each level in pursuing and achieving the Company’s goals. These benchmarks are set out in the following table. Organisational Level CEO Management Professional, Technical & Support Support Staff LTI Organisational Benchmarks 50% 40% 30% 10% The total number of performance rights granted is subject to being reduced proportionately so that the total number for performance rights is within: i) The Board’s determined cap on the total number of performance rights which are issued as LTI awards in a given year; and ii) Any discretionary cap on the total number of rights on issue at any given time. The Board has established an initial guideline that the total number of performance rights to be issued in a single year will be capped at 1.7% of the fully paid issued capital of the Company as at the end of the prior year. In the event that the potential total number of performance rights exceeds the cap then all awardees receive a pro-rated reduced number of performance rights. This cap is at the discretion of the Board and may be altered depending on the prevailing context. 32 OTTO ENERGY | ANNUAL REPORT 2015 35 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 Share Trading Policy The trading of shares issued to participants under any of the Company’s employee equity plans is subject to, and conditional upon, compliance with the Company’s employee share trading policy. Executives are prohibited from entering into any hedging arrangements over unvested rights or options under the Company’s employee option plan. The Company would consider a breach of this policy as gross misconduct which may lead to disciplinary action and potentially dismissal. Voting and comments made at the consolidated entity’s 2014 Annual General Meeting Otto Energy Limited received more than 81% of “yes” votes on its remuneration report for the 2014 financial year. The Company did not receive any specific feedback at the Annual General Meeting or throughout the year on its remuneration practices. Performance of Otto Energy Limited The graph below illustrate two of the key links between Key Management Personnel remuneration and Otto Energy Limited’s performance. The graph illustrates the link between Otto Energy Limited’s profit before tax and payments made under the STI plan. Profit before tax $m 25,000 20,000 15,000 10,000 5,000 - (5,000) (10,000) (15,000) (20,000) STI as % of target Profit/(loss) before tax * AUD STI as % of target ** 65% 60% 55% 50% 45% 40% 35% 30% 2011 2012 2013 2014 2015 * Profit/(loss) before tax is profit from continuing operations before income tax expense. ** STI % of target reflects the percentage of the target STI pool that was paid out to Executives. OTTO ENERGY | ANNUAL REPORT 2015 36 33 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  Details of Remuneration  The following tables show details of the remuneration received by the Directors and the Key Management Personnel of the  consolidated entity for the current and previous financial year.  Remuneration and other terms of employment for the Managing Director & Chief Executive Officer and Key Management  Personnel are formalised in service agreements. Each of these agreements provides for performance related conditions and  agreements relating to remuneration are set out below.  2015  Short‐term Employee  Benefits  Post  Employment  Share‐Based Payments  Total  Salary &  Fees  A$  Cash Bonus  A$  Superannuation  A$  Termination  Benefits  A$  Options  A$  Performance  Rights(i)  A$  A$  Directors of Otto Energy Limited  Mr R Crabb  Mr M Allen  Mr I Macliver  Mr I Boserio  Mr J Jetter  Mr R Bomasang  114,155  445,000  77,626  68,493  90,000  138,517  933,791  ‐  100,000  ‐  ‐  ‐  ‐  10,845  30,000  7,374  6,507  ‐  ‐  100,000  54,726  Key Management Personnel  Mr P Senycia  Mr C Hasson  Mr M Worner(ii)  Mr S Blenkinsop(iii)  441,249  271,597  100,513  242,756  ‐  53,000  ‐  80,662  35,000  30,000  9,549  38,781  1,056,115  133,662  113,330  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  102,395  102,395  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  79,157  ‐  ‐  ‐  ‐  125,000  654,157  85,000  75,000  90,000  138,517  79,157  1,167,674  79,157  37,216  ‐  ‐  555,406  391,813  110,062  464,594  116,373  1,521,875  1,989,906  2,689,549  (i)  Performance  rights  have  been  valued  using  a  hybrid  Monte  Carlo  and  Hull‐White  model.  Further  details  of  the  share  rights  plan  is  contained in the Remuneration Report pages 36 to 38 and Note 23.  (ii) Mr M Worner was appointed as Commercial Manager on 9 March 2015.  (iii) Mr S Blenkinsop resigned as Company Secretary on 1 April 2015.  233,662  102,395  168,056  195,530  ‐  34 OTTO ENERGY | ANNUAL REPORT 2015 34  OTTO ENERGY | ANNUAL REPORT 2015                DIRECTORS’ REPORT  For the year ending 30 June 2015  DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 2014  Short‐term Employee  Benefits  Post  Employment  Share‐Based Payments  Total  Salary &  Fees  A$  Cash Bonus  A$  Superannuation  A$  Termination  Benefits  A$  Options(i)  A$  Performance  Rights(ii)  A$  A$  Directors of Otto Energy Limited  Mr R Crabb  Mr I Macliver  Mr I Boserio  Mr J Jetter  Mr R Bomasang  114,416  77,803  68,650  90,000  131,207  482,076  ‐  ‐  ‐  ‐  ‐  ‐  Key Management Personnel  Mr M Allen  Mr P Senycia  Mr C Hasson(iii)  Mr S Blenkinsop(iv)  Mr G McNab(v)  413,585  444,691  81,090  172,757  352,425  1,464,548  91,514  82,844  ‐  ‐  107,803  282,161  10,584  7,197  6,350  ‐  ‐  24,131  25,000  25,000  7,501  15,980  25,000  98,481  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  587,822  587,822  ‐  ‐  123,000  123,000  82,000  328,000  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  59,590  59,590  ‐  ‐  (163,483)  125,000  85,000  198,000  213,000  213,207  834,207  589,689  612,125  88,591  188,737  909,567  (44,303)  2,388,709  122,612  282,161  1,946,624  (i) The options have been valued using the Black‐Scholes model.  (ii)  Performance  rights  have  been  valued  using  a  hybrid  Monte  Carlo  and  Hull‐White  model.  Further  details  of  the  share  rights  plan  is  contained in the Remuneration Report pages 36 to 38 and Note 23.  (iii) Mr C Hasson was appointed as CFO on 26 February 2014.  (iv)  Mr  S  Blenkinsop  was  appointed  Chief  Legal  Counsel  on  6  January  2014  and  in  addition  was  appointed  as  Company  Secretary  on  26  February 2014.  (v) Mr G McNab resigned as CEO on 24 February 2014.  3,222,916  (44,303)  587,822  328,000  The relative proportions of remuneration that are linked to performance and those that are fixed are as follows:  Name  Directors of Otto Energy Limited  Mr R Crabb  Mr M Allen  Mr I Macliver  Mr I Boserio  Mr J Jetter  Mr R Bomasang  Key Management Personnel of the consolidated entity  Mr P Senycia  Mr C Hasson  Mr M Worner  86%  77%  100%  Fixed remuneration  At risk – STI  %  At risk – LTI (i)  %  2015  2014  2015  2014  2015  2014  100%  73%  100%  100%  100%  100%  100%  74%  100%  38%  42%  62%  77%  100%  ‐  ‐  15%  ‐  ‐  ‐  ‐  ‐  14%  ‐  ‐  16%  ‐  ‐  ‐  ‐  14%  ‐  ‐  ‐  12%  ‐  ‐  ‐  ‐  14%  9%  ‐  ‐  10%  ‐  62%  58%  38%  9%  ‐  ‐  Mr S Blenkinsop (ii) (iii)  ‐  (i)  Since  long‐term  incentives  are  provided  exclusively  by  way  of  performance  rights  or  options,  the  percentages  disclosed  also  reflect  the  value of remuneration consisting of performance rights and options, based on the value of performance rights or options expensed during  the year.   (ii) Mr S Blenkinsop resigned as Company Secretary on 1 April 2015.  (iii) Total remuneration includes termination expenses for the relevant period.   100%  61%  17%  ‐  ‐  Service Agreements  On appointment to the Board, all Non‐Executive Directors enter into a service agreement with the Company in the form of  a letter of appointment. The letter summarises the Board policies and terms, including remuneration, relevant to the office  of Director.  35 OTTO ENERGY | ANNUAL REPORT 2015 35 OTTO ENERGY | ANNUAL REPORT 2015            DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 Remuneration and other terms of employment for the Managing Director and Chief Executive Officer, Chief Financial Officer and the Key Management Personnel are also formalised in service agreements. Each of these agreements provide for the provision of performance related cash bonuses, and participation, when eligible, in the Otto Energy Limited Employee Performance Rights or Option Plan. Other major provisions of the agreements relating to remuneration are set out below. All contracts with Executives may be terminated early by either party with notice, per individual agreement, subject to termination payments as detailed below. Name Mr Matthew Allen Managing Director and Chief Executive Officer Mr Paul Senycia Vice President Exploration Manager and New Ventures Mr Craig Hasson Chief Financial Officer Mr Matthew Worner Commercial Manager Commencement of Contract Base salary including superannuation (i) $A Termination benefit(ii) 24 June 2015 $475,000 6 months base salary 12 April 2010 $476,250 3 months base salary 26 February 2014 $290,175 3 months base salary 9 March 2015 $350,400 1 months base salary (i) Base salaries quoted are for the year ended 30 June 2015; they are reviewed annually by the Board and the Remuneration and Nomination Committee. (ii) Termination benefits are payable on early termination by the Company, other than for gross misconduct. Share-Based Compensation Otto Energy Limited has two forms of share based compensation for Key Management Personnel. They are performance rights and options. Performance Rights over Equity Instruments Granted Performance rights granted to the Key Management Personnel were granted as remuneration unless otherwise noted. The rights granted have no exercise price and are exercisable from the date of vesting and details of vesting periods are set out at Note 23. All rights expire on the earlier of their expiry date or termination of individual’s employment. Performance rights granted carry no dividend or voting rights. The value of rights included in remuneration for the year is calculated in accordance with Australian Accounting Standards. The assessed fair value at grant date of the performance rights is allocated equally over the period from grant date to vesting date and the amount is included in the remuneration tables. Where rights vest fully in the year, the full value of the rights is recognised in remuneration for that year. The value of performance rights at the grant date is calculated as the fair value of the rights at grant date, using a hybrid Monte Carlo and Hull-White model, multiplied by the number of rights granted. No adjustment is made to the value included in remuneration or the financial results where the right ultimately has a lesser or greater value than as at the date of grant. The inputs into the fair value calculation of the rights granted and outstanding as of 30 June 2015 are set out in the following table. 36 OTTO ENERGY | ANNUAL REPORT 2015 39 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  Year ended 30 June 2015 – TSR based performance rights:  Measurement date  1 February  2017  1 February  2018  1 February  2019  1 February  2016  1 February  2017  1 February  2018  Grant date  23 April 2015  23 April 2015  23 April 2015  3 October  2014  3 October  2014  3 October  2014  Expiry date  31 December  2019  31 December  2019  31 December  2019  31 December  2018  31 December  2018  31 December  2018  Number of rights  2,000,001  2,000,001  1,999,998  2,600,000  2,600,000  2,600,000  Share price at grant date – A$  Expected volatility  Expected dividend yield  Risk free rate  Fair value ‐ $A   0.11  47.7%  Nil  1.95%  0.06  0.11  51.2%  Nil  1.90%  0.07  0.11  51.2%  Nil  1.90%  0.07  0.09  51.3%  Nil  2.60%  0.05  0.09  52.4%  Nil  2.60%  0.05  0.09  53.2%  Nil  2.60%  0.06  Year ended 30 June 2014 – TSR based performance rights  Grant date  Expiry date  Share price at grant date – A$  Expected volatility  Expected dividend yield  Risk free rate  Fair value ‐ $A   3 October  2011  31 December  2014  0.08  50.0%  Nil  3.66%  0.02  1 February  2013  1 April 2016  0.10  52.6%  Nil  2.75%  0.01  The expected price volatility is based upon the historic volatility (based on the remaining life of the options), adjusted for any  expected changes to future volatility due to publicly available information.  No cash benefit is received by Key Management Personnel of the consolidated entity, until the sale of the resultant shares,  which cannot be done unless and until the rights have vested and the shares issued.   The number of performance rights over ordinary shares held, granted to, vested and/or lapsed/expired by Directors of Otto  Energy Limited and Key Management Personnel as part of compensation during the year ended 30 June 2015 is set out  below.   Balance at  Start of Year  Granted as  Compensation  Vested  and  Exercisable  Lapsed/  Expired  Balance at  End of Year  2015  Directors of Otto Energy Limited  Mr R Crabb  Mr M Allen  Mr I Macliver  Mr I Boserio  Mr J Jetter  Mr R Bomasang  ‐  ‐  ‐  5,500,000  4,700,000  (5,500,000)  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  5,500,000  4,700,000  (5,500,000)  Key Management Personnel of the consolidated entity  Mr P Senycia  Mr C Hasson  Mr M Worner(i)  Mr S Blenkinsop(ii)  5,500,000  ‐  ‐  ‐  4,700,000  2,900,000  ‐  1,500,000  (5,500,000)  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (1,500,000)  ‐  4,700,000  ‐  ‐  ‐  ‐  4,700,000  4,700,000  2,900,000  ‐  ‐  9,100,000   (i) Mr M Worner was appointed as Commercial Manager on 9 March 2015.  (ii) Mr S Blenkinsop resigned as Company Secretary on 1 April 2015.  5,500,000  (5,500,000)  (1,500,000)  7,600,000  37 OTTO ENERGY | ANNUAL REPORT 2015 37  OTTO ENERGY | ANNUAL REPORT 2015      DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT For the year ending 30 June 2015 The value of performance rights over ordinary shares vested and/or lapsed/expired by Directors of Otto Energy Limited and Key Management Personnel as part of compensation during the year ended 30 June 2015 is set out in the following table. 2015 Mr M Allen Mr P Senycia Mr S Blenkinsop Number of performance rights vested Value of performance rights vested during the year (A$) 5,500,000 5,500,000 - 140,950 140,950 - 11,000,000 281,900 Number of rights lapsed/cancelled during the year Number of ordinary shares issued as a result of vesting - - (1,500,000) (1,500,000) 5,500,000 5,500,000 - 11,000,000 Options over Equity Instruments Granted Options granted to the Directors and Key Management Personnel were granted as remuneration unless otherwise noted. Options are issued under the Option Plan. The following table summarises the number and value of options, related to Directors and Key Management Personnel that have been granted, vested or lapsed during the financial year. No cash benefit is received by the Directors or Key Management Personnel of the Company until the sale of the options or the sale of the resultant share which cannot be done unless and until the options have been exercised and the shares issued. Options granted carry no dividend or voting rights. 2015 Balance at Start of Year Granted as Compensation Directors of Otto Energy Limited Mr R Crabb Mr M Allen Mr I Macliver Mr I Boserio Mr J Jetter Mr R Bomasang - - - 3,000,000 3,000,000 2,000,000 8,000,000 Key Management Personnel of the consolidated entity Mr P Senycia Mr C Hasson Mr M Worner(i) Mr S Blenkinsop(ii) - - - - - - - - - - - - - - - - - Value of options granted A$ Other changes(iii) Balance at End of Year Vested and Exercisable - - - - - - - - - - - - - - - (3,000,000) (3,000,000) (2,000,000) (8,000,000) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (i) Mr M Worner was appointed as Commercial Manager on 9 March 2015. (ii) Mr S Blenkinsop resigned as Company Secretary on 1 April 2015. (iii) Options were sold to 3rd parties during the year ended 30 June 2015. 38 OTTO ENERGY | ANNUAL REPORT 2015 41 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 Additional Disclosure relating to Key Management Personnel   Shareholding  The number of shares in the company held during the financial year by each director and other members of key management  personnel of the consolidated entity, including their personally related parties, is set out below:  2015  Balance at Start  of Year  Granted During  the year  Directors of Otto Energy Limited  Mr R Crabb  Mr M Allen  Mr J Jetter  Mr I Macliver  Mr I Boserio  Mr R Bomasang  17,495,052  4,000,000  19,089,175  4,549,721  330,000  ‐  45,463,948  Key Management Personnel of the consolidated entity  Mr P Senycia  Mr C Hasson  Mr M Worner(i)  Mr S Blenkinsop(ii)  3,100,000  37,500  ‐  650,000  3,787,500  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  Received  through  conversion of  performance  rights during the  Year  Other Changes  During Year  Balance at End  of Year  ‐  5,500,000  ‐  ‐  ‐  ‐  300,000  (6,000,000)  (3,000,000)  ‐  (330,000)  ‐  17,795,052  3,500,000  16,089,175  4,549,721  ‐  ‐  5,500,000  (9,030,000)  41,933,948  5,500,000  (5,600,000)  ‐  ‐  ‐  75,000  ‐  (650,000)  3,000,000  112,500  ‐  ‐  5,500,000  (6,175,000)  3,112,500  (i) Mr M Worner was appointed as Commercial Manager on 9 March 2015.  (ii) Mr S Blenkinsop resigned as Company Secretary on 1 April 2015.  Outstanding Balances arising from Sales/Purchases of Goods and Services   There  are  no  balances  outstanding  at  the  end  of  the  reporting  period  in  relation  to  transactions  with  key  management  personnel and their related parties (2014: nil).  End of Audited Remuneration Report  Diversity  Proportion of women employees in Otto Energy Limited   Whole organisation  Senior Executive positions  Board   Number  6/14  0/4  0/6  Proportion  43%  0%  0%  39 OTTO ENERGY | ANNUAL REPORT 2015 39  OTTO ENERGY | ANNUAL REPORT 2015                          DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  Shares under Option  Unissued ordinary shares of Otto Energy Limited under option and performance rights at the date of this report are as  follows:  Date of Granted  Date of Expiry  Exercise price of performance  rights or options  A$  Number  Options  2‐Dec‐13  Performance Rights  3‐Oct‐14  3‐Oct‐14  3‐Oct‐14  23‐Apr‐15  23‐Apr‐15  23‐Apr‐15  2‐Dec‐16  31‐Dec‐18  31‐Dec‐18  31‐Dec‐18  31‐Dec‐19  31‐Dec‐19  31‐Dec‐19  0.0549  ‐  ‐  ‐  ‐  ‐  ‐  8,000,000  8,000,000  2,433,340  2,433,330  2,433,330  2,158,336  2,158,334  2,158,330  13,775,000  No option holder has any right under the options to participate in any other share issue of the Company or any other entity.  Included  in  these  performance  rights  or  options  were  performance  rights  or  options  granted  as  remuneration  to  the  Directors  and  Key  Management  Personnel  during  the  year.  Details  of  performance  rights  and  options  granted  to  Key  Management Personnel are disclosed on pages 36 to 38.   Insurance of Officers and Indemnity of Auditors  During the financial year, the Company paid a premium of US$58,603 to insure the Directors and officers of the Company  and its Australian‐based controlled entities, and the managers of each of the divisions of the consolidated entity.   The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought  against the officers in their capacity as officers of entities in the consolidated entity, and any other payments arising from  liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from  conduct  involving  a  wilful  breach  of  duty  by  the  officers  or  the  improper  use  by  the  officers  of  their  position  or  of  information  to  gain  advantage  for  them  or  someone  else  or  to  cause  detriment  to  the  Company.  It  is  not  possible  to  apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities.  Proceedings on Behalf of Company  No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf  of  the  Company,  or  to  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 part of those proceedings.  No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of  the Corporations Act 2001.  40 OTTO ENERGY | ANNUAL REPORT 2015 40  OTTO ENERGY | ANNUAL REPORT 2015                DIRECTORS’ REPORT (continued) For The Year Ending 30 June 2015 DIRECTORS’ REPORT  For the year ending 30 June 2015  Non‐Audit Services  The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s  expertise and experience with the Company and/or the consolidated entity are important. Details of the amounts paid or  payable to the auditor (BDO Australia) for non‐audit services provided during the year are set out below.  The Board of Directors has considered the position and, in accordance with advice received from the Audit Committee, is  satisfied that the provision of the non‐audit services is compatible with the general standard of independence for auditors  imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non‐audit services by the auditor, as  set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following  reasons:    all non‐audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and  objectivity of the auditor; and  none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of  Ethics for Professional Accountants.  During the year the following fees were paid or payable for non‐audit services provided by the auditor of the parent entity,  its related practices and non‐related audit firms:  BDO Australian firm:  Other assurance services   Total remuneration for other assurance services   Tax compliance services  Tax advice services  Total remuneration for taxation services  Total remuneration for non‐audit services   Auditor’s Independence Declaration  2015  US$  2014  US$  ‐  ‐  29,431  105,332  134,763  134,763  7,432  7,432  52,802  67,412  120,214  127,646  A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on  page 42.  Auditor  BDO continues in office in accordance with section 327 of the Corporations Act 2001.    This report is made in accordance with a resolution of Directors.  Mr I Macliver  DIRECTOR  24 September 2015  41 OTTO ENERGY | ANNUAL REPORT 2015 41  OTTO ENERGY | ANNUAL REPORT 2015                  AUDITOR’S INDEPENDENCE DECLARATION For The Year Ending 30 June 2015 Tel: +61 8 6382 4600 Fax: +61 8 6382 4601 www.bdo.com.au 38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia DECLARATION OF INDEPENDENCE BY JARRAD PRUE TO THE DIRECTORS OF OTTO ENERGY LIMITED As lead auditor of Otto Energy Limited for the year ended 30 June 2015, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Otto Energy Limited and the entities it controlled during the period. Jarrad Prue Director BDO Audit (WA) Pty Ltd Perth, 24 September 2015 BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 42 OTTO ENERGY | ANNUAL REPORT 2015CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For The Year Ending 30 June 2015 For the year ending 30 June 2015 Revenue and other income (Loss)/profit on disposal of property, plant and equipment Other expenses from ordinary activities Employee benefit expense Depreciation & amortisation Finance expenses Impairment of exploration and evaluation assets Other expenses Foreign currency losses Loss before income tax Income tax benefit Net loss after income tax for the year from continuing operations Profit after tax for the year from discontinued operations Net profit/(loss) for the year Other comprehensive income Other comprehensive income for the year net of tax Total comprehensive profit/(loss) for the year attributable to ordinary equity holders of Otto Energy Limited Loss per share for loss from continuing operations attributable to the ordinary equity holders of the Company: Basic loss per share Diluted loss per share Earnings/(loss) per share for profit/(loss) attributable to the ordinary equity holders of the Company: Basic earnings/(loss) per share Diluted earnings/(loss) per share Note 2015 2014 (Restated) US$’000 US$’000 4 13 5 5 5 14 5 6 7 1,357 (112) (4,008) (235) - (685) (2,209) (901) (6,793) - 8,197 1 (8,452) (498) (1,487) (23,792) (4,078) (87) (30,196) 1 (6,793) (30,195) 32,793 26,000 30,102 (93) - - - - 26,000 (93) Note 2015 2014 (Restated) US cents US cents 19 19 19 19 (0.59) (0.59) (2.63) (2.63) 2.24 2.23 (0.01) (0.01) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. OTTO ENERGY | ANNUAL REPORT 2015 46 43 OTTO ENERGY | ANNUAL REPORT 2015 CONSOLIDATED STATEMENT OF FINANCIAL  CONSOLIDATED STATEMENT OF FINANCIAL POSITION POSITION  For The Year Ending 30 June 2015 Current Assets  Cash and cash equivalents  Trade and other receivables  Other current assets  Inventories  Total Current Assets  Non‐Current Assets  Other assets   Property, plant and equipment  Exploration and evaluation assets  Oil and gas properties  Total Non‐Current Assets  Total Assets  Current Liabilities  Trade and other payables  Provisions  Provision for income tax payable  Total Current Liabilities  Non‐Current Liabilities  Deferred tax liabilities  Provisions  Total Non‐Current Liabilities  Total Liabilities  NET ASSETS  Equity  Contributed equity  Reserves  Accumulated losses  Total Equity  Note  2015  2014  US$’000  US$’000  9  10  11  12  11  13  14  14  15  16  6  16  17  18  41,206  ‐  701  2,422  44,329  6  151  18,645  ‐  18,802  63,131  2,800  98  ‐  2,898  ‐  68  68  2,966  60,165  7,735  18  1,758  2,941  12,452  7,955  496  9,049  91,460  108,960  121,412  4,755  196  2,442  7,393  13,935  8,910  22,845  30,238  91,174  81,104  13,410  (34,349)  60,165  131,577  13,145  (53,548)  91,174  The above consolidated statement of financial position should be read in conjunction with the accompanying notes.  OTTO ENERGY | ANNUAL REPORT 2015 44  44 OTTO ENERGY | ANNUAL REPORT 2015                                                                                                CONSOLIDATED STATEMENT OF CHANGES IN  EQUITY  CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For The Year Ending 30 June 2015 Balance as at 1 July 2013  Total comprehensive loss for the year  Loss for the year  Total comprehensive loss for the year  Transactions with owners in their capacity as owners  Issued options during the year  Balance as at 30 June 2014  Total comprehensive loss for the year  Profit for the year  Total comprehensive income for the year  Transactions with owners in their capacity as owners  Issued performance rights during the year  Share capital return (Note 17)  Cash dividends (Note 8)  Balance as at 30 June 2015  Attributable to owners of Otto Energy Limited  Contributed  Equity  US$’000  Accumulated  Losses  US$’000  Other  Reserves  US$’000  Total Equity  US$’000  131,577  (53,455)  12,873  90,995    ‐  ‐  ‐  (93)  (93)  ‐  131,577  (53,548)    ‐  ‐  (93)  (93)  272  13,145  272  91,174    ‐  ‐  ‐  (50,473)  ‐  81,104  26,000  26,000    ‐  ‐  26,000  26,000  ‐  ‐  (6,801)  (34,349)  265  ‐  ‐  13,410  265  (50,473)  (6,801)  60,165  The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.  OTTO ENERGY | ANNUAL REPORT 2015 45 45 OTTO ENERGY | ANNUAL REPORT 2015                                           CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CASH FLOWS For The Year Ending 30 June 2015 For the year ending 30 June 2015 Note 2015 2014 US$’000 US$’000 Cash flows from operating activities Receipts from customers Payment to suppliers and employees Interest received Interest and financing costs paid Income taxes paid Net cash inflow from operating activities 25 45,217 (19,352) 503 - (6,354) 20,014 (13) 10 (9,590) - 165 - 80,400 70,972 73,693 (25,093) 22 (5,699) (770) 42,153 (102) 3 (10,404) (39,138) (165) 425 - (49,381) - - 19,084 (35,923) (6,832) (50,703) (57,535) 33,451 7,735 20 41,206 - - (16,839) (24,067) 31,854 (52) 7,735 8 17 9 Cash flows from investing activities Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payments for exploration and evaluation Payment for oil and gas properties Loan to other entities Proceeds from other investments Net proceeds from sale of controlled entities (net of cash disposed) Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from loan drawdown Repayment of borrowings Dividends paid Return of capital Net cash outflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash Cash and cash equivalents at end of year The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 46 OTTO ENERGY | ANNUAL REPORT 2015 49 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  1. Statement of Significant Accounting Policies  The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.  These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements  are for the consolidated entity consisting of Otto Energy Limited and its subsidiaries.  a) Basis of preparation  These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and  interpretations issued by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001, as appropriate  for for‐profit‐oriented entities. Otto Energy Limited is a for‐profit entity for the purpose of preparing the financial statements.  The Consolidated financial statements were approved for issue by the Board of Directors on 24 September 2015.   i) Compliance with IFRS   The consolidated financial statements of the Otto Energy Limited Group also comply with International Financial Reporting  Standards (IFRS) as issued by the International Accounting Standards Board (IASB).  ii) New, revised or amended Accounting Standards and Interpretations adopted by the consolidated entity  The consolidated entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by  the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period.   Any new, revised and amending Accounting Standards or Interpretations that are not yet mandatory have not been early  adopted.   Any significant impact on the accounting policies of the consolidated entity from the adoption of these Accounting Standards  and Interpretations are disclosed below. The adoption of these Accounting Standards and Interpretations did not have any  significant impact on the financial performance or position of the consolidated entity.   The following Accounting Standards and Interpretations are most relevant to the consolidated entity:  Amendments to Australian Accounting Standards ‐ Offsetting Financial Assets and Financial Liabilities  AASB 2012‐3 adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified  in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of "currently has a legally enforceable  right of set‐off" and that some gross settlement systems may be considered equivalent to net settlement. This change in  accounting policy had no material impact on the Group.  Amendments to AASB 136 – Recoverable Amount Disclosures for Non‐Financial Assets   AASB  2013‐3  amends  the  disclosure  requirements  in  AASB  136  Impairment  of  Assets.  The  amendments  include  the  requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired  assets is based on fair value less costs of disposal.  The application of AASB 136 did not impact the Group’s accounting for its impairment of non‐financial assets.   Interpretation 21 Levies   This Interpretation confirms that a liability to pay a levy is only recognised when the activity that triggers the payment occurs.  Applying the going concern assumption does not create a constructive obligation.   For  a  levy  that  is  triggered  upon  reaching  a  minimum  threshold,  the  interpretation  clarifies  that  no  liability  should  be  anticipated before the specified minimum threshold is reached. The adoption of Interpretation 21 had no material impact on  the Group.  iii) Standards issued but not yet effective  The Accounting Standards and Interpretations that are issued but not yet effective up to the date of issuance of the Group’s  financial statements are disclosed below. The Group intends to adopt these standards and interpretations, if applicable, when  they become effective.   OTTO ENERGY | ANNUAL REPORT 2015 47  47 OTTO ENERGY | ANNUAL REPORT 2015    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 Application date of standard Annual reporting periods commencing on or after 1 January 2018 Impact on Otto Energy Ltd financial statements When this standard is first adopted from 1 July 2018, there will be no impact on transactions and balances recognised in the financial statements. Reference and Title AASB 9 - Financial Instruments Summary AASB 9 (December 2014) is a new Principal standard which replaces AASB 139. This new Principal version supersedes AASB 9 issued in December 2009 (as amended) and AASB 9 (issued in December 2010) and includes a model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting. AASB 9 is effective for annual periods beginning on or after 1 January 2018. However, the Standard is available for early application. The own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The final version of AASB 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. Amendments to AASB 9 (December 2009 & 2010 editions) (AASB 2013-9) issued in December 2013 included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures. AASB 9 includes requirements for a simpler approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are described below. a) b) c) d) 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. Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. 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. Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows:  The change attributable to changes in credit risk are presented in other comprehensive income (OCI) The remaining change is presented in profit or loss  AASB 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognised in profit or loss. Consequential amendments were also made to other standards as a result of AASB 9, introduced by AASB 2009-11 and superseded by AASB 2010-7, AASB 2010-10 and AASB 2014-1 – Part E. AASB 2014-7 incorporates the consequential amendments arising from the issuance of AASB 9 in Dec 2014. AASB 2014-8 limits the application of the existing versions of AASB 9 (AASB 9 (December 2009) and AASB 9 (December 2010)) from 1 February 2015 and applies to annual reporting periods beginning on after 1 January 2015. AASB 15 – Revenue from Contracts with Customers An entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This means that revenue will be recognised when control of goods or services is transferred, rather than on transfer of risks and rewards as is currently the case under IAS 18 Revenue. Annual reporting periods beginning on or after 1 January 2017 Due to the recent release of this standard, the entity has not yet made a detailed assessment of the this standard impact of 48 OTTO ENERGY | ANNUAL REPORT 2015 51 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012- 2014 Cycle AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 The subjects of the principal amendments to the Standards are set out below: AASB 119 Employee Benefits Discount rate: regional market issue – clarifies that the high quality corporate bonds used to estimate the discount rate for post-employment benefit obligations should be denominated in the same currency as the liability. Further it clarifies that the depth of the market for high quality corporate bonds should be assessed at the currency level. Annual reporting periods commencing on or after 1 January 2016 the There will be no impact on financial statements when these first amendments are they adopted because to apply prospectively payment share-based transactions for which the grant date is on or after 1 January 2016. The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. The amendments are designed to further encourage companies to apply professional judgement in determining what information to disclose in the financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. The amendments also clarify that companies should use professional judgement in determining where and in what order information is present in the financial disclosures. Annual reporting periods commencing on or after 1 January 2016 There will be no impact on the financial statements when these amendments are first adopted because this is a disclosure standard only. iv) Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the consolidated entity’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2. b) Principles of consolidation i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Otto Energy Limited (‘Company’ or ‘parent entity’) as at 30 June 2015 and the results of all subsidiaries for the year then ended. Otto Energy Limited and its subsidiaries together are referred to in this financial report as the consolidated entity. Subsidiaries are all entities (including special purpose entities) over which the consolidated entity has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the consolidated entity controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the consolidated entity. They are de- consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between consolidated entity companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity. The acquisition method of accounting is used to account for business combinations by the consolidated entity (refer to Note 1(h)). A change in ownership interest, 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 equity attributable to the parent. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss and other comprehensive income, statement of changes in equity and statement of financial position respectively. OTTO ENERGY | ANNUAL REPORT 2015 52 49 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 ii) Joint arrangements Jointly controlled assets The consolidated entity’s share of the assets, liabilities, revenues and expenses of joint arrangement operations have been incorporated into the financial statements in the appropriate items of the consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position. Details of joint arrangements are set out in Note 21. iii) Changes in ownership interests The consolidated entity treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the consolidated entity. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Otto Energy Limited. When the consolidated entity ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the consolidated entity had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in a jointly-controlled entity or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. Management has determined that based on the report reviewed by the Board and used to make strategic decisions, that the consolidated entity has four reportable segments. d) Foreign currency translation i) Functional and presentation currency Items included in the financial statements of each of the consolidated entity’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in United States dollars, which is Otto Energy Limited’s functional and presentation currency. ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. iii) Consolidated entity companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:   assets and liabilities for each statement of financial position account presented are translated at the closing rate at the date of that statement of financial position income and expenses for each statement of profit or loss and other comprehensive income account are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and 50 OTTO ENERGY | ANNUAL REPORT 2015 53 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015  all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable to the extent that it is probable that economic benefits will flow to the consolidated entity and the revenue can be reliably measured. i) Sale of oil Revenue from the sale of oil is recognised when the consolidated entity has transferred to the buyer the significant risks and rewards of ownership of the goods. ii) Interest revenue Interest income is recognised on a time proportionate basis that takes into account the effective yield on the financial asset. iii) Dividends Dividends are recognised as revenue when the right to receive payment is established. f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. g) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the consolidated entity as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. OTTO ENERGY | ANNUAL REPORT 2015 54 51 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 h) Business combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value. Any directly attributable costs of acquisition are expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the consolidated entity’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the consolidated entity's share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognised directly in the statement of profit or loss, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. i) Impairment of assets Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value in use. 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). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period. j) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, 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. k) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 30 days. They are presented as current assets unless collection is not expected for more than 12 months after the reporting date. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in profit or loss within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss. 52 OTTO ENERGY | ANNUAL REPORT 2015 55 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 l) Inventories Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on weighted average. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. m) Discontinued operations A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the profit or loss. n) Other financial assets Other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. The fair values of quoted investments are based on current bid prices. For unlisted investments, the consolidated entity establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership. Impairment of financial assets The consolidated entity assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. The amount of the impairment allowance for financial assets carried at cost is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for similar financial assets. o) Property, plant and equipment Property, plant and equipment other than Oil and Gas Properties are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated using the straight-line method to allocate their cost over their estimated useful lives to estimate residual value. The following estimated useful lives are used in the calculation of depreciation: Plant and equipment Furniture and equipment 5 years 3 - 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is consolidated entity policy to transfer any amounts included in other reserves in respect of those assets to retained earnings. OTTO ENERGY | ANNUAL REPORT 2015 56 53 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 p) Oil and gas properties i) Exploration and evaluation expenditure Expenditure on exploration and evaluation is accounted for in accordance with the area of interest method. This approach is strongly linked to the Company’s oil and gas reserves determination and reporting process and is considered to most fairly reflect the results of the Company’s exploration and evaluation activity because only assets with demonstrable value are carried on the statement of financial position. Upon the production of commercial quantities of oil and gas, capitalised exploration and evaluation costs are transferred to Oil and Gas Properties – Producing Projects and amortisation commences. This method allows the costs associated with the acquisition, exploration and evaluation of a prospect to be aggregated on the Consolidated Statement of Financial Position and matched against the benefits derived from commercial production once this commences. ii) Costs Exploration lease acquisition costs relating to oil and gas exploration provinces are expensed as incurred while the costs incurred in relation to established or recognised oil and gas provinces are initially capitalised and then amortised over the shorter term of the lease or the expected life of the project. All other exploration and evaluation costs, including general permit activity, geological and geophysical costs and new venture activity costs are charged as expenses as incurred except where:  the expenditure relates to an exploration discovery that, at the reporting date, had not been recognised as an area of interest as the assessment of the existence or otherwise of economically recoverable reserves has not yet been completed; or  where there exists an economically recoverable reserve, and it is expected that the capitalised expenditure will be recouped through exploitation of the area of interest, or alternatively, by its sale. Areas of interest are recognised at field level. Subsequent to the recognition of an area of interest, all further costs relating to the area of interest are initially capitalised. Each area of interest is reviewed at least bi-annually to determine whether economic quantities of reserves exist or whether further exploration and evaluation work is required to support the continued carry forward of capitalised costs. To the extent it is considered that the relevant expenditure will not be recovered, it is written off. The costs of drilling exploration and evaluation wells are initially capitalised pending the results of the well. Costs are expensed where the well does not result in the discovery of economically recoverable hydrocarbons. To the extent that it is considered that the relevant expenditure will not be recovered, it is immediately expensed. In the statement of cash flows, those cash flows associated with the capitalised exploration and evaluation expenditure are classified as cash flows used in investing activities. Exploration and evaluation expenditure expensed is classified as cash flows used in operating activities. iii) Prepaid drilling and completion costs Where the Company has a non-operator interest in an oil or gas property, it may periodically be required to make a cash contribution for its share of the Operator’s estimated drilling and/or completion costs, in advance of these operations taking place. Where these contributions relate to a prepayment for exploratory or early stage drilling activity, prior to a decision on the commerciality of a well having been made, the costs are capitalised as prepaid drilling costs within Exploration and Evaluation and/or Development Projects. Where these contributions relate to a prepayment for well completion, these costs are capitalised as prepaid completion costs within Exploration and Evaluation. As the Operator notifies the Company as to how funds have been expended, the costs are reclassified from prepaid costs to the appropriate expenditure category. Where the Company has Operator interest in an oil or gas property, it will periodically call for the contribution of the non- operator’s share of the estimated drilling and/or completion costs, in advance of these operations taking place. 54 OTTO ENERGY | ANNUAL REPORT 2015 57 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 iv) Transfer of capitalised exploration and evaluation expenditure to producing projects (oil and gas properties) When a well demonstrates commercial feasibility or comes into commercial production, accumulated exploration and evaluation expenditure for the relevant area of interest is transferred to producing projects and amortised on a units of production basis. v) Development assets When the technical and commercial feasibility of an undeveloped oil or gas field has been demonstrated the field enters its development phase. The costs of oil and gas assets are transferred from exploration and evaluation expenditure and reclassified into oil and gas properties and include past exploration and evaluation costs. vi) Producing assets Producing projects are stated at cost less accumulated amortisation and impairment charges. Producing projects include construction, installation or completion of production and infrastructure facilities such as pipelines, transferred exploration and evaluation assets, development wells and the provision for restoration. vii) Amortisation and depreciation of producing projects The consolidated entity uses the “units of production” (“UOP”) approach when amortising and depreciating field-specific assets. Using this method of amortisation and depreciation requires the consolidated entity to compare the actual volume of production to the reserves and then to apply this determined rate of depletion to the carrying value of the depreciable asset. Capitalised producing projects costs relating to commercially producing wells are depreciated/amortised using the UOP basis once commercial quantities are being produced within an area of interest. The reserves used in these calculations are the Proved plus Probable reserves and are reviewed at least annually. viii) Future restoration costs The consolidated entity’s aim is to avoid or minimise environmental impact resulting from its operations. Provision is made in the statement of financial position for the estimated cost of legal and constructive obligations to restore operating locations in the period in which the obligation arises. The estimated costs are capitalised as part of the cost of the related project where recognition occurs upon acquisition of an interest in the operating locations. The carrying amount capitalised is amortised on a unit of production basis during the production phase of the project. Work scope and cost estimates for restoration are reviewed annually and adjusted to reflect the expected cost of restoration. Restoration costs are based on the latest estimated future costs, determined on a discounted basis, which are re-assessed regularly and exclude any allowance for potential changes in technology or material changes in legislative requirements. Provisions for future restoration are made where there is a present obligation as a result of development or production activity, and is capitalised as a component of the cost of those activities. The consolidated entity accounts for changes in cost estimates on a prospective basis. q) Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. OTTO ENERGY | ANNUAL REPORT 2015 58 55 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 r) Provisions Provisions are recognised when the consolidated entity has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. s) i) Employee benefits Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short- term employee benefit obligations are presented as payables. ii) Other long-term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. iii) Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. t) Share based payments The consolidated entity has provided benefits to its employees and Key Management Personnel in the form of share-based payments, whereby services were rendered partly or wholly in exchange for shares or rights over shares. The Board has also approved the grant of options or performance rights as incentives to attract employees and to maintain their long term commitment to the Company. These benefits were awarded at the discretion of the Board, or following approval by shareholders (equity-settled transactions). The costs of these equity-settled transactions are measured by reference to the fair value of the equity instruments at the date on which they are granted. The fair value of performance rights granted is determined using a hybrid Monte Carlo and Hull-White model, further details of which are disclosed in Note 23. The fair value of options granted is determined by using a Black-Scholes option pricing technique. The costs of these equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and / or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the equity instrument (vesting date). At each subsequent reporting date until vesting, the cumulative charge to the Consolidated Statement of Profit or Loss and Other Comprehensive Income is the product of (i) the fair value at grant date of the award; (ii) the current best estimate of the number of equity instruments that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met and (iii) the expired portion of the vesting period. The charge to the Statement of Profit or Loss for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding credit to equity. 56 OTTO ENERGY | ANNUAL REPORT 2015 59 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 Until an equity instrument has vested, any amounts recorded are contingent and will be adjusted if more or fewer equity instruments vest than were originally anticipated to do so. Any equity instrument subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share based payment arrangement, or is otherwise beneficial to the recipient of the award, as measured at the date of modification. If an equity-settled transaction is cancelled (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied), it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new equity instrument is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new equity instrument are treated as if they were a modification of the original award, as described in the preceding paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see Note 19). u) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company’s equity instruments, for example as the result of a share buy-back or a share-based payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Otto Energy Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, and is included in equity attributable to the owners of Otto Energy Limited. v) Earnings per share i) Basic earnings per share Basic earnings per share are calculated by dividing:   the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares (Note 19). ii) Diluted earnings per share Diluted earnings per share adjust the figures used in the determination of basic earnings per share to take into account:   the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. w) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. OTTO ENERGY | ANNUAL REPORT 2015 60 57 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 x) Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 2. Critical Accounting Estimates The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Critical accounting estimates and assumptions 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 at which they are granted. The fair value is determined by using either a hybrid Monte Carlo and Hull-White model or the 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. Income taxes The consolidated entity is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the worldwide provision for income taxes. There are certain transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The consolidated entity estimates its tax liabilities based on the consolidated entity’s understanding of the tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. In addition, the consolidated entity has recognised deferred tax assets relating to carried forward tax losses to the extent there are sufficient taxable temporary differences (deferred tax liabilities) relating to the same taxation jurisdiction and the same subsidiary against which the unused tax losses can be utilised. However, utilisation of the tax losses also depends on the ability of the entity to satisfy certain tests at the time the losses are recouped. 3. Segment Information a) Description of segments Management has determined the operating segments based on reports reviewed by the executive management committee for making strategic decision. The executive leadership team comprises the Chief Executive Officer, Chief Financial Officer and divisional managers. Management monitors the business based on geographic factors and has identified four reportable segments. 58 OTTO ENERGY | ANNUAL REPORT 2015 61 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  b) Segment information provided to the Board  The segment information provided to the Board for the reportable segments for the year ended 30 June 2015 is as follows:  2015  Other revenue  (Loss)/profit on disposal of property, plant and  equipment  Employee benefit expense  Depreciation and amortisation  Impairment of assets  Other expenses  Foreign currency losses  Net (loss)/profit before income tax and discontinued  operations  Income tax expense  Net loss for the year from continuing operations  Profit after tax for the year from discontinued  operations  Profit/(loss) for the year  Total Segment Assets  Total Segment Liabilities  Australia  Philippines  Tanzania  Other  Consolidated  US$’000  US$’000  US$’000  US$’000  US$’000  1,184  10  (3,845)  (211)  ‐  (2,068)  (899)  (5,829)  ‐  (5,829)  173  (122)  (163)  (24)  (685)  (96)  (2)  (919)  ‐  (919)  ‐  32,793  ‐  ‐  ‐  ‐  ‐  (15)  ‐  (15)  ‐  (15)  ‐  (5,829)  44,081  283  31,874  5,476  2,814  (15)  13,573  (132)  ‐  ‐  ‐  ‐  ‐  (30)  ‐  (30)  ‐  (30)  ‐  (30)  1  1  1,357  (112)  (4,008)  (235)  (685)  (2,209)  (901)  (6,793)  ‐  (6,793)  32,793  26,000  63,131  2,966  The segment information provided to the Board for the reportable segments for the year ended 30 June 2014 is as follows:  2014  Australia  Philippines  Tanzania  Other  Consolidated  US$’000  US$’000  US$’000  US$’000  US$’000  Other revenue  Profit on disposal of asset  Employee benefit expense  Depreciation and amortisation  Finance expenses  Loss on derivative through profit or loss  Impairment of assets  Other expenses  Foreign currency losses  Net loss before income tax and discontinued  operations  4,174  1  (7,196)  (454)  (1,487)   ‐  4,023  ‐  (1,256)  (44)  ‐  ‐  (589)  (23,203)  (3,661)  (84)  (369)  (3)  (9,296)  (20,852)  Income tax expense  ‐  1  Net loss for the year from continuing operations  (9,296)  (20,851)  Profit after tax for the year from discontinued  operations  Profit/(loss) for the year  Total Segment Assets  Total Segment Liabilities  ‐  30,102  (9,296)  7,331  777  9,251  107,008  29,457  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  7,072  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (48)  ‐  (48)  ‐  (48)  ‐  (48)  1  4  8,197  1  (8,452)  (498)  (1,487)  ‐  (23,792)  (4,078)  (87)  (30,196)  1  (30,195)  30,102  (93)  121,412  30,238  OTTO ENERGY | ANNUAL REPORT 2015 59 59 OTTO ENERGY | ANNUAL REPORT 2015            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  4. Revenue and Other Income  Interest revenue  Other income  Revenue from continuing operations  5.  Expenses  Employee benefits expenses     Defined contribution superannuation expense     Share based payment expense     Other employee benefits expenses  Total employee benefits expenses  Depreciation & Amortisation     Property, plant and equipment  Total depreciation & amortisation  Finance expenses       Finance charges paid/payable   Total finance costs   Other expenses     Business development     Corporate and other costs  Total other expenses  2015  US$’000  2014  US$’000  503  854  1,357  15  8,182  8,197  2015  US$’000  2014  US$’000  218  265  3,525  4,008  235  235  ‐  ‐  486  1,723  2,209  398  272  7,782  8,452  498  498  1,487  1,487  52  4,026  4,078  60 OTTO ENERGY | ANNUAL REPORT 2015 60  OTTO ENERGY | ANNUAL REPORT 2015                                                    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  6. Income Tax Expense  1) The components of tax expense comprise:  – Current tax  – Deferred tax – origination and reversal of temporary differences  2) Reconciliation of income tax expense to prima facie tax payable:  – Loss before income tax  – Prima facie income tax at 30%  – Tax effect of amounts not deductible in calculating taxable income  – Benefit of deferred tax assets not brought to account  – Income tax expense  3) Deferred tax assets  – Unrealised foreign exchange  – Share issue costs through equity  – Other temporary differences  – Temporary differences ‐ foreign  – Tax losses ‐ revenue   – Tax losses ‐ foreign  – Offset against deferred tax liabilities recognised  – Deferred tax assets not brought to account  – Deferred tax assets brought to account  4) Deferred tax liabilities  – Unrealised foreign exchange  – Accrued income  – Temporary differences ‐ foreign  – Temporary differences ‐ development asset  – Offset by deferred tax assets recognised  – Deferred tax liabilities brought to account  2015  US$’000  2014  US$’000  (Restated)  ‐  ‐  ‐  (6,793)  (2,038)  1,012  1,026  ‐  27  ‐  74  ‐  101  5,387  12,491  17,979  ‐  ‐  1  1  (30,196)  (9,059)  (2,492)  11,552  1  32  ‐  125  ‐  157  6,937  22,963  30,057  (50)  (17,979)  (30,007)  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  2  13,983  ‐  (50)  13,935  OTTO ENERGY | ANNUAL REPORT 2015 61 61 OTTO ENERGY | ANNUAL REPORT 2015                                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  7. Discontinued Operations  On 22 September 2014, Otto announced it had executed a sale and purchase agreement (SPA) to divest 100% of the shares  in Galoc Production Company W.L.L (GPC), a wholly owned subsidiary of the Otto Group, to Risco Energy Investments Pte  Ltd (“Risco”) for US$101.4 million as at 1 July 2014. The operations of GPC were classified as a discontinued operation held  for sale asset from September 2014.   On  12  December  2014,  Otto  announced  it  had  executed  a  superior  sale  and  purchase  agreement  with  Nido  Petroleum  Limited to divest GPC for US$108 million on the same terms and conditions as the Risco SPA. Nido assumed all production  rights and liabilities associated with GPC Interest with effect from 1 July 2014.   Shareholder approval for the sale of Galoc Production Company was received on 20 January 2015. On 17 February 2015,  the  sale  of  Galoc  Production  Company  W.L.L  to  Nido  Petroleum  Ltd  was  completed.  The  sale  consideration  was  US$108  million, based on the effective date of 1 July 2014 and before leakages up until closing date.  The results of Galoc Production Company W.L.L. for the period until sale are presented below:  Revenue   Cost of Sale  Gross Profit    Other Expenses  Profit before Tax from a Discontinued Operation  Income Tax (Expense)/Benefit  Net Profit after Income Tax from a Discontinued Operations  Gain on sale of the subsidiary after income tax  Profit from discontinued operation  17‐Feb‐2015  US$’000  2014  US$’000  45,217  (14,826)  30,391  (2,107)  28,284  (5,830)  22,454  10,339  32,793  73,693  (29,701)  43,992  (13,968)  30,024  78  30,102  ‐  30,102  The major classes of assets and liabilities of Galoc Production Company W.L.L. which were divested are as follows:  Assets  Cash and cash equivalents  Trade and other receivables  Other assets  Inventories  Oil and gas properties  Liabilities  Trade and other payables  Provision for income tax payable  Deferred tax liabilities  Provisions  Net assets  62 OTTO ENERGY | ANNUAL REPORT 2015 62  17‐Feb‐2015  US$’000  6,206  1,126  11,537  3,100  87,668  109,637  8,630  1,760  13,962  9,018  33,370  76,267  OTTO ENERGY | ANNUAL REPORT 2015                                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 The net cash flows incurred by Galoc Production Company W.L.L. are as follows: Operating Investing Financing Net cash inflow/(outflow) Details of the sale of the subsidiary: Consideration received or receivable: Final price received on settlement Less transactions costs Net disposal consideration Carrying amount of net assets sold Gain on sale after income tax 8. Dividends Paid 17-Feb-2015 US$’000 26,595 165 - 26,760 17-Feb-2015 US$’000 87,423 (817) 86,606 (76,267) 10,339 Dividends paid during the financial year: Current year unfranked special dividend AUD$0.0076, paid 26 June 2015 (2014: nil) 9. Cash and Cash Equivalents Cash at bank and in hand Risk exposure 2015 US$’000 2014 US$’000 6,801 6,801 - - 2015 US$’000 2014 US$’000 41,206 41,206 7,735 7,735 The consolidated entity’s exposure to interest rate risk is discussed in Note 22. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. OTTO ENERGY | ANNUAL REPORT 2015 66 63 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 10. Trade and Other Receivables Current Other receivables 2015 US$’000 2014 US$’000 - - 18 18 No consolidated entity trade receivables are past due or impaired at 30 June 2015 (30 June 2014: nil) and there is no indication that amounts recognised as trade and other receivables will not be recovered in the normal course of business. Refer credit risk, Note 22(a). 11. Other Assets Current Prepayments Other assets Non-Current Other assets Decommissioning fund 12. Inventories Raw materials Oil (held in storage) Fuel Drilling and other inventory 2015 US$’000 2014 US$’000 169 532 701 6 - 6 196 1,562 1,758 1,355 6,600 7,955 2015 US$’000 2014 US$’000 - - 2,422 2,422 2,150 141 650 2,941 64 OTTO ENERGY | ANNUAL REPORT 2015 67 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  13. Property Plant and Equipment  Plant &  Equipment  US$’000  Furniture &  Fixtures  US$’000  Total  US$’000  Year ended 30 June 2014  Balance at the beginning of year  Additions  Disposals  Depreciation expense  Closing net book amount  At 30 June 2014  Cost or fair value  Accumulated depreciation  Net book value  Year ended 30 June 2015  Balance at the beginning of year  Additions  Disposals  Depreciation expense  Closing net book amount  At 30 June 2015  Cost or fair value  Accumulated depreciation  Net book value  696  93  (2)  (449)  338  2,015  (1,677)  338  338  7  (24)  (200)  121  1,723  (1,602)  121  198  9  ‐  (49)  158  293  (135)  158  158  10  (103)  (35)  30  106  (76)  30  894  102  (2)  (498)  496  2,308  (1,812)  496  496  17  (127)  (235)  151  1,829  (1,678)  151  As  part  of  the  sale  of  GPC,  Otto  Energy  Philippines,  Inc.’s  associated  property,  plant  and  equipment  was  disposed  of,  recognising a loss on disposal of $0.12m for the year ended 30 June 2015.  Otto Energy Ltd disposed of minor plant and  equipment, realising a $0.01m gain on disposal for the year ended 30 June 2015.  14. Exploration and Evaluation Assets and Oil and Gas Properties  Exploration and Evaluation Assets  At Cost  As at 1 July  Additions  Impairment  Net carrying value  2015  US$’000  2014  US$’000  9,049  10,281  (685)  18,645  22,437  10,404  (23,792)  9,049  On 13 July 2015, the consolidated entity decided to relinquish its 100% stage in Service Contract 73.  The decision to exit  comes  after  reprocessing  of  existing  seismic  data  was  completed.   A   total  of  US$0.69m  was  impaired  as  a  result  of  the  withdrawal.    OTTO ENERGY | ANNUAL REPORT 2015 65 65 OTTO ENERGY | ANNUAL REPORT 2015                                          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 All capitalised exploration and evaluation costs and inventory as at 30 June 2015 relating to Service Contract 55, including $5.03m in capitalised exploration and evaluation and $2.42m in inventory costs, are fully recovered through the farm-in of Red Emperor Resources NL (“Red Emperor”) and through BHPB’s reimbursement. Red Emperor will reimburse 15% of costs following approval by the Philippines Department of Energy, and BHPB will refund up to $24.5m of the costs incurred in drilling Hawkeye-1 upon completion of the drilling campaign. The impairment expense recognised in the prior year relates to the withdrawal from Service Contract 51 and Service Contract 69, which had previously capitalised $17.4m and $6.4m respectively. The consolidated entity has interests in the following wholly-owned and non-wholly owned oil and gas explorations assets: Asset Country Principal Activity Service Contract 55 Service Contract 73 Philippines Philippines Offshore Palawan Offshore Mindoro-Cuyo 2015 93.18%(i) 100% Kilosa-Kilombero Tanzania Pangani Tanzania Tanzania Kilosa-Kilombero 50% Tanzania Pangani 50% 2014 93.18% 100% 50% 50% Percentage Interest (i)On 28 February 2015 Red Emperor signed a farmout agreement for a 15% working interest in Service Contract 55, and as at 30 June 2015 was awaiting approval from the Philippines Department of Energy. Oil and Gas Properties Movements in oil and gas properties for the year included: At Cost Oil and Gas properties - at cost Net book value As at 1 July Additions Amortisation Disposals Net carrying value 15. Trade and Other Payables Current Liabilities(i) Trade payables Other payables 2015 US$’000 2014 US$’000 - - 91,460 - (3,792) (87,668) - 91,460 91,460 69,405 38,071 (16,016) 91,460 2015 US$’000 2014 US$’000 2,800 - 1,247 3,508 4,755 (i)Trade and other payables are expected to be settled with 12 months. Refer to Note 22 for further information on financial instruments. 2,800 66 OTTO ENERGY | ANNUAL REPORT 2015 69 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 16. Provisions Current Liability Provisions – employee benefits Non-Current Provision (i) Provisions – employee benefits Decommissioning Fund(ii) 2015 US$’000 2014 US$’000 98 98 68 - 68 196 196 132 8,778 8,910 (i) Amounts not expected to be settled within the next 12 months: The non-current provision for employee benefits also includes all entitlements where employees have completed the required period of service that are not expected to be settled within 12 months. (ii) Decommissioning fund was derecognised as part of the divestment of Galoc Production Company W.L.L. on 17 February 2015. 17. Contributed Equity a) Share Capital 2015 No. 2014 No. 2015 US$’000 2014 US$’000 At the beginning of year 1,151,790,071 1,140,290,071 131,577 131,577 Return of capital during the year at AUD$0.0564 - - (50,473) Shares issued during year on exercise of performance rights 12,500,000 11,500,000 - - - 1,164,290,071 1,151,790,071 81,104 131,577 Following the sale of Galoc Production Company W.L.L., Otto paid $0.0564 per share return of capital to shareholders on 26 June 2015. b) Ordinary Shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number and amount paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. The ordinary shares have no par value and the Company does not have a limited amount of authorised capital. c) Options Information relating to the Otto Energy Employee Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the reporting period, is set out in Note 23. d) Performance Rights Information relating to the Otto Energy Employee Performance Rights Plan, including details of performance rights issued, exercised and lapsed during the financial year and performance rights outstanding at the end of the reporting period, is set out in Note 23. OTTO ENERGY | ANNUAL REPORT 2015 70 67 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 18. Other Reserves Reserves Foreign currency translation reserve Share based payment reserve Foreign Currency Translation Reserve(i) Balance at beginning of year As at end of year Share Based Payment Reserve(ii) Balance at beginning of year Share based payment expense As at end of year 2015 US$’000 2014 US$’000 4,188 9,222 13,410 4,188 4,188 8,957 265 9,222 4,188 8,957 13,145 4,188 4,188 8,685 272 8,957 (i) Foreign Currency Translation Reserve Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in Note 1(d) and accumulated in a separate reserve within equity. (ii) Share Based Payment Reserve The share-based payments reserve is used to recognise the value of share-based payments provided to employees (including key management personnel) as part of their remuneration; and share options and performance rights issued as part of consideration for acquisitions. Refer to Note 23 for further details of these plans. 19. Earnings per Share a) Earnings per share attributable to the ordinary equity holders of the Company Basic loss per share from continuing operations Basic earnings per share from discontinued operations Total basic earnings/(loss) per share attributable to the ordinary equity holders of the Company Diluted loss per share from continuing operations Diluted earnings per share from discontinued operations Total diluted earnings/(loss) per share attributable to the ordinary equity holders of the Company b) Earnings used in calculation of basic / diluted earnings per share Net loss after tax from continuing operations Net profit after tax from discontinued operations 2015 US cents 2014 (Restated) US cents (0.59) 2.83 2.24 (0.59) 2.82 2.23 (2.63) 2.62 (0.01) (2.63) 2.62 (0.01) 2015 US$’000 2014 (Restated) US$’000 (6,793) 32,793 (30,195) 30,102 68 OTTO ENERGY | ANNUAL REPORT 2015 71 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 c) Weighted average number of ordinary shares used as a denominator in calculating Basic earnings per share Diluted earnings per share Options and share rights 2015 2014 Number of Shares Number of Shares 1,156,832,537 1,146,503,770 1,164,132,537 1,146,503,770 The options and share rights have not been considered in the determination of basic EPS. Details relating to options and share rights are set out in Note 23. Performance share rights are only included in determining diluted EPS to the extent that they are dilutive. The exercise prices of all options are included in Note 23. In determining diluted EPS, options with an exercise price greater than the average Otto Energy Limited’s share price over the year have not been included, as these are not considered dilutive. 20. Subsidiaries Significant investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in Note 1(b): Subsidiaries of Otto Energy Limited Country of Incorporation Class of shares Otto Energy (Tanzania) Pty Limited Otto Energy Investments Limited Otto Energy Philippines Inc Colag (BVI) Limited Otto Energy (Galoc Investment 1) Aps Otto Energy (Galoc Investment 2) Aps GPC Investments SA Galoc Production Company W.L.L Australia Bermuda Philippines British Virgin Islands Denmark Denmark Switzerland Bahrain Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary (i) The proportion of ownership interest is equal to the proportion of voting power held. Equity holding (i) 2015 (%) 2014 (%) 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 21. Interest in Joint Operations a) Joint operations The consolidated entity’s interest in joint arrangement assets as at 30 June 2015 is detailed below. Exploration is the principal activity performed across these assets. Service Contract 55 Philippines Kilosa-Kilombero Tanzania Pangani Tanzania Group Interest (%) Group Interest (%) 2015 2014 93.18 50 50 93.18 50 50 OTTO ENERGY | ANNUAL REPORT 2015 72 69 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  b) Commitments through joint operations  The aggregate of the consolidated entity’s commitments through jointly controlled assets is as follows:  2015  US$’000  2014  US$’000  Exploration and other capital expenditure commitments  9,000  9,500  22. Financial Risk Management  The consolidated entity’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and  interest rate risk), credit risk and liquidity risk. The consolidated entity’s overall risk management program focuses on the  unpredictability  of financial markets and seeks to minimise potential adverse effects on the financial performance of the  consolidated  entity.  The  consolidated  entity  uses  different  methods  to  measure  different  types  of  risk  to  which  it  is  exposed.   Otto’s  Board  of  Directors  (“Board”)  is  responsible  for  approving  Otto’s  policies  on  risk  oversight  and  management  and  ensuring management has developed and implemented effective risk management and internal control. Risk management  is  carried  out  by  the  senior  finance  executives  under  these  policies  which  have  been  approved  by  the  Board.  Finance  identifies,  evaluates  and,  if  necessary,  hedges  financial  risks  within  the  consolidated  entity’s  operating  units.  The  Board  then receives reports as required from the Chief Financial Officer in which they review the effectiveness of the processes  implemented and appropriateness of policies it sets.  Currently, the Group does not apply any form of hedge accounting.  These disclosures are not, nor are they intended to be, an exhaustive list of risks to which Otto is exposed.   a) Market Risk  Market risk arises from Otto’s exposure to the use of interest bearing and foreign currency financial instruments. It is a risk  that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates  (currency risk) and interest rates (interest rate risk).  Foreign Exchange Risk   i) The consolidated entity’s source currency for the majority of revenue and costs is in US dollars. Given the location of the  group offices there is a small exposure to foreign exchange risk arising from the fluctuations in the US dollar and Australian  dollar, and US dollar and Philippine peso on cash balances.  Foreign  exchange  risk  arises  from  future  commercial  transactions  and  recognised  assets  and  liabilities  denominated  in  a  currency  that  is  not  the  entity’s  functional  currency.  The  exposure  to  risk  is  measured  using  sensitivity  analysis  and  cash  flow forecasting.  The Board has formed the view that it would not be beneficial for the consolidated entity to purchase forward contracts or  other derivative financial instruments to hedge this foreign exchange risk.  Factors which the Board considered in arriving at  this position included the expense of purchasing such instruments and the inherent difficulties associated with forecasting  the  timing  and  quantum  of  cash  inflows  and  outflows  compared  to  the  relatively  low  volume  and  value  of  commercial  transactions and recognised assets and liabilities denominated in a currency which is not US dollars.   30 June 2015  US$  US$'000  A$  US$'000  PHP  US$'000  Total  US$'000  40,630  40,630  2,546  2,546  516  516  141  141  60  60  113  113  41,206  41,206  2,800  2,800  Financial Assets  Cash and Cash equivalents  Total Financial Assets  Financial Liabilities  Trade and Other payables  Total Financial Liabilities  70 OTTO ENERGY | ANNUAL REPORT 2015 70  OTTO ENERGY | ANNUAL REPORT 2015                                    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ending 30 June 2015 Financial Assets Cash and Cash equivalents Trade and other receivables Total Financial Assets Financial Liabilities Trade and Other payables Total Financial Liabilities 30 June 2014 US$ US$'000 A$ US$'000 PHP US$'000 Total US$'000 7,467 8 7,475 4,186 4,186 70 1 71 476 476 198 9 207 93 93 7,735 18 7,753 4,755 4,755 A hypothetical change of 10% in the Australian dollar and Philippine Peso exchange rate was used to calculate the consolidated entity's sensitivity to foreign exchange rates movements as this is management’s estimate of possible rate movements over the coming year taking into account current market conditions and past volatility (30 June 2014: 10%). At 30 June 2015, management has assessed that the entity’s exposure to foreign exchange movements is found to be immaterial (2014: Immaterial exposure) therefore no further analysis provided. ii) Interest Rate Risk The consolidated entity is exposed to interest rate risk through liquid funds on deposit. The consolidated entity’s policy is to maximise the return on cash held through the use of high interest deposit accounts and term deposits where possible. Currently, the Group does not have any interest-bearing liabilities. Financial assets Cash assets Floating rate(i) 41,206 7,735 (i)Weighted average effective interest rate of funds on deposit is Nil (2014: Nil) 2015 US$’000 2014 US$’000 Sensitivity analysis – change in interest rates A 25 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rate. At reporting date, if interest rates had been 25 basis points higher or lower and all other variables were held constant, the consolidated entity’s profit or loss and equity for the year is found to be immaterial (2014: immaterial) therefore no further analysis provided. iii) Credit Risk Credit risk arises from cash and cash equivalents and long term deposits with financial institutions. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised below, none of which are impaired or past due. Cash and cash equivalents Long-term deposits and other assets 2015 US$’000 2014 US$’000 41,206 - 41,206 7,735 7,404 15,139 To manage credit risk from cash and cash equivalents financial assets, it is the consolidated entity’s policy to only deposit with banks maintaining a minimum independent rating of ‘AA’. Due to the operating environments in the Philippines, it is not currently possible for all the deposit cash with financial institutions that have an ‘AA’ rating. OTTO ENERGY | ANNUAL REPORT 2015 74 71 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 AA Rated BBB Rated Unrated Cash at bank and short term deposits Other Assets 2015 US $‘000 2014 US$‘000 2015 US $‘000 2014 US$‘000 41,151 55 - 41,206 7,529 203 3 7,735 - - - - 804 6,600 - 7,404 The consolidated entity trades only with recognised, trustworthy third parties. It is the consolidated entity’s policy to perform credit verification procedures in relation to any customers wishing to trade on credit terms with the consolidated entity. These include taking into account the customers’ financial position and any past experience to set individual risk limits as determined by the Board. b) Liquidity Risk Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, availability of funding and access to capital markets. It is the policy of the Board to ensure that the consolidated entity is able to meet its financial obligations and maintain the flexibility to pursue attractive investment opportunities through ensuring the consolidated entity has sufficient working capital and preserving the 15% share issue limit available to the Company under the ASX Listing Rules. The consolidated entity manages liquidity risk by continuously monitoring forecast and actual cash flows. As at reporting date the consolidated entity had sufficient cash reserves to meet its current requirements. The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments: Contractual maturities financial liabilities Less than 1 year US$’000 Between 1-2 years US$’000 Between 2-5 years US$’000 Total contractual cash flows US$’000 Carrying amount (assets) / liabilities US$’000 Trade payables and other payables - - 2015 2014 c) Capital Risk Management 2,800 4,755 - - - - 2,800 4,755 2,800 4,755 The consolidated entity manages its capital to ensure that entities in the consolidated entity will be able to continue as a going concern while maximising the potential return to shareholders through the optimisation of debt and equity balance. The capital structure of the consolidated entity is entirely equity (2014: 100% equity). In determining the funding mix of debt and equity (total borrowings/total equity), consideration is given to the relative impact of gearing ratio on the ability of the consolidated entity to service loan interest and repayment schedules, credit facility covenants and also to generate adequate free cash available for corporate and oil and gas exploration, development and production activities. The debt to equity rate is 0% as at 30 June 2015 (2014: 0%). The consolidated entity would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current company's share price at the time of the investment. 23. Share-Based Payments a) Employee Share Option Plan The establishment of the Employee Share Option Plan was approved by shareholders at the 2013 Annual General Meeting. The Employee Option Plan is designed to provide long term incentives for senior managers and employees to deliver long term shareholder returns. Under the plan, participants are granted options at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. 72 OTTO ENERGY | ANNUAL REPORT 2015 75 OTTO ENERGY | ANNUAL REPORT 2015 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  Options granted under the plan carry no dividend or voting rights.  The  exercise  price  of  options  is  based  on  the  weighted  average  price  at  which  the  Company’s  shares  are  traded  on  the  Australian Securities Exchange (ASX) during the week up to and including the date of the grant.  Set out below are summaries of share options granted under the Employee Share Option Plan:  2015  Exercise  Price  Balance at  start of  the year  Granted  during the  year  Exercised  during the  year  Expired /  Forfeited  during the  year  Balance at  end of the  year  Vested and  exercisable  at end of  the year  Grant Date  Expiry Date  A$  Number  Number  Number  Number  Number  Number  13 Oct 2011  13 Oct 2014  5 Jan 2012  5 Jan 2015  0.12  0.12  750,000  500,000  2 Dec 2013  2 Dec 2016  0.0549  8,000,000  Total  Weighted average exercise price – A$  9,250,000  0.12  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐ ‐ ‐  (750,000)  (500,000)  ‐  ‐  ‐  ‐  ‐  8,000,000  8,000,000  (1,250,000)  8,000,000  8,000,000  0.12  0.05  0.05  2014  Exercise  Price  Balance at  start of  the year  Granted  during the  year  Exercised  during the  year  Expired /  Forfeited  during the  year  Balance at  end of the  year  Vested and  exercisable  at end of  the year  Grant Date  Expiry Date  A$  Number  Number  Number  Number  Number  Number  11 Aug 2010  11 Aug 2013  26 Nov 2010  26 Nov 2013  30 Nov 2010  30 Nov 2013  13 Oct 2011  13 Oct 2014  5 Jan 2012  5 Jan 2015  0.12  0.12  0.13  0.12  0.12  3,000,000  9,000,000  6,000,000  1,250,000  2,500,000  ‐  ‐  ‐  ‐  ‐  2 Dec 2013  2 Dec 2016  0.1113  ‐  8,000,000  Total  21,750,000  8,000,000  Weighted average exercise price – A$  0.12  0.11  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (3,000,000)  (9,000,000)  (6,000,000)  ‐    ‐  ‐  ‐  ‐  ‐  (500,000)  750,000  (2,000,000)  500,000  750,000  500,000  ‐  8,000,000  8,000,000  (20,500,000)  9,250,000  9,250,000  0.12  0.12  0.12  An option may only be exercised after that option has vested and any other conditions imposed by the Board on exercise  are satisfied. Options are granted under the plan for no consideration. Options granted under the plan carry no dividend or  voting rights.  When exercisable, shares allotted pursuant to the exercise of options will be allotted following receipt of all the relevant  documents and payments and will rank equally with all other shares. The exercise price of options is based on the weighted  average price at which the Company’s shares are traded on the Australian Securities Exchange during the five trading days  immediately before the options are granted.  There  were  1,250,000  options  that  expired  during  the  year  ended  30  June  2015.  The  weighted  average  remaining  contractual life of share options outstanding at the end of the year is 1.43 years (2014: 0.74 years).  The above amounts representing options granted as part of remuneration are calculated in accordance with AASB 2 Share  Based Payments.  AASB 2 requires that the expense associated with a share based payment is calculated at grant date and  then subsequently amortised over the option vesting period.    During  the  year  ended  30  June  2015  the  consolidated  entity  issued  no  options  under  the  Employee  Share  Plan  (2014:  8,000,000 options).  OTTO ENERGY | ANNUAL REPORT 2015 73 73 OTTO ENERGY | ANNUAL REPORT 2015            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  The assessed fair values at grant date of options granted to employees are detailed below:  Grant date  Exercise price – A$  Expiry date  Share price at grant date – A$  Expected volatility  Expected dividend yield  Risk free rate  Fair value – A$  5 December 2013  0.1113  2 December 2016  0.08  90%  Nil  3.02%  0.04  The expected price volatility is based upon the historic volatility (based on the remaining life of the options), adjusted for  any expected changes to future volatility due to publicly available information.  As  a  result  of  the  AUD$0.0564  per  share  return  of  capital  which  occurred  on  26  June  2015,  the  exercise  price  of  the  remaining options was adjusted down by the capital return amount per share to A$0.0549.  b) Performance Rights Plan   The Performance Rights Plan was approved by shareholders at the 2013 Annual General Meeting.  The Performance Rights  Plan  is  designed  to  provide  long  term  incentives  for  senior  managers  and  employees  to  deliver  long  term  shareholder  returns. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the  plan or to receive any guaranteed benefits.  The  amount  of  performance  rights  that  will  vest  depends  on  vesting  period  and/or  Otto  Energy  Limited’s  TSR,  including  share  price  growth,  dividends,  and  capital  returns.  Once  vested,  the  performance  rights  are  automatically  converted  to  shares. Performance rights are granted under the plan for no consideration.   Rights granted under the plan carry no dividend or voting rights.   Set out below are summaries of rights granted under the Performance Rights Plan:  Date of Issue  Balance at  Start of Year  Rights  Issued  During the  Year  Fair Value on  Date of Issue  A$  1 Oct 2011  1 Feb 2013  3 Oct 2014  3 Oct 2014  3 Oct 2014  3 Oct 2014  3 Oct 2014  3 Oct 2014  23 Apr 2015  23 Apr 2015  23 Apr 2015  23 Apr 2015  23 Apr 2015  23 Apr 2015  4,000,000  8,500,000  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  2,766,670  2,766,665  2,766,665  166,670  166,665  166,665  2,079,170  2,079,167  2,079,163  79,166  79,167  79,167  0.02  0.02  0.05  0.05  0.06  0.07  0.06  0.05  0.06  0.07  0.07  0.09  0.08  0.07  Exercised  Lapsed/  Expired  Balance at  End of Year  Expiry Date  (4,000,000)  (8,500,000)  ‐  ‐  ‐  ‐  31 Dec 2014  1 Apr 2016  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  (500,000)  2,266,670  31 Dec 2018  (500,000)  2,266,665  31 Dec 2018  (500,000)  2,266,665  31 Dec 2018  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  ‐  166,670  31 Dec 2018  166,665  31 Dec 2018  166,665  31 Dec 2018  2,079,170  31 Dec 2019  2,079,167  31 Dec 2019  2,079,163  31 Dec 2019  79,166  31 Dec 2019  79,167  31 Dec 2019  79,167  31 Dec 2019  Total   12,500,000  15,275,000  0.04  (12,500,000)  (1,500,000)  13,775,000   WAEP – A$  0.02  0.06  0.02  0.05  0.06  74 OTTO ENERGY | ANNUAL REPORT 2015 74  OTTO ENERGY | ANNUAL REPORT 2015              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  Date of Issue  Balance at  Start of Year  1 Oct 2011  10,000,000  1 Nov 2011  1 Nov 2011  1 Nov 2011  1 Feb 2013  Total   5,000,000  5,000,000  5,000,000  15,700,000  40,700,000  Rights  Issued  During the  Year  Fair Value on  Date of Issue  US$  Exercised  Lapsed/  Expired  Balance at  End of Year  Expiry Date  ‐  ‐  ‐  ‐  ‐  ‐  0.02  0.02  0.02  0.02  0.02  (6,000,000)  ‐  4,000,000  31 Dec 2014  (500,000)  (4,500,000)  (5,000,000)  (5,000,000)  ‐  ‐  ‐  1 Apr 2014  1 Nov 2014  1 Apr 2015  (7,200,000)  8,500,000  1 Apr 2016  (11,500,000)  (16,700,000)  12,500,000  On 3 October 2014, the Group issued 8,800,000 Performance Rights to employees.  On 23 April 2015, the Group issued a  further 6,475,000 Performance Rights to employees.  The assessed fair values at grant date of rights granted to employees,  including key management personnel, are detailed below:  Total Return on Shareholders (“TSR”) based performance rights:  Measurement date  1 February  2017  1 February  2018  1 February  2019  1 February  2016  1 February  2017  1 February  2018  Grant date  23 April 2015  23 April 2015  23 April 2015  3 October  2014  3 October  2014  3 October  2014  Expiry date  31 December  2019  31 December  2019  31 December  2019  31 December  2018  31 December  2018  31 December  2018  Number of rights  2,079,170  2,079,167  2,079,163  2,766,670  2,766,665  2,766,665  Share price at grant date – A$  Expected volatility  Expected dividend yield  Risk free rate  Fair value ‐ $A   0.11  47.7%  Nil  1.95%  0.06  Time based performance rights:  0.11  51.2%  Nil  1.90%  0.07  0.11  51.2%  Nil  1.90%  0.07  0.09  51.3%  Nil  2.60%  0.05  0.09  52.4%  Nil  2.60%  0.05  0.09  53.2%  Nil  2.60%  0.06  Measurement date  1 February  2017  1 February  2018  1 February  2019  1 February  2016  1 February  2017  1 February  2018  Grant date  23 April 2015  23 April 2015  23 April 2015  3 October  2014  3 October  2014  3 October  2014  Expiry date  No. of rights  31 December  2019  31 December  2019  31 December  2019  31 December  2018  31 December  2018  31 December  2018  79,166  79,167  79,167  166,670  166,665  166,665  Share price at grant date – A$  Fair value ‐ $A   0.11  0.09  0.11  0.08  0.11  0.07  0.09  0.07  0.09  0.06  0.09  0.05  The expected price volatility is based upon the historic volatility (based on the remaining life of the rights), adjusted for any  expected changes to future volatility due to publically available information.  For the year ended 30 June 2015, the Group has recognised $265,000 of share‐based payment transactions expense in the  Consolidated Statement of Profit or Loss and Other Comprehensive Income (30 June 2014: $272,000).  c) Expenses arising from share based payment transactions  Options  Performance rights   Share‐based payments expensed  2015  US$’000  2014  US$’000  ‐  265  265  293  (21)  272  OTTO ENERGY | ANNUAL REPORT 2015 75 75 OTTO ENERGY | ANNUAL REPORT 2015              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  24. Related Party Transactions  a) Key Management Personnel Compensation  Short ‐term employee benefits  Post‐employment benefits  Termination Benefits  Share‐based payments  2015  US$’000  2014  US$’000  1,864  141  86  161  2,252  2,045  113  540  252  2,950  Detailed remuneration disclosures are provided in the remuneration report on pages 29 to 39.  25. Reconciliation of (loss)/profit after income tax to net cash inflow from operating  activities  Cash flows from operating activities  Loss before tax from continuing operations  Profit before tax from discontinued operations  Non‐cash items  Depreciation and amortisation  Impairment of exploration assets  Non‐cash employee benefits expense – share‐based payments  Unwinding of borrowing costs  Loss on derivative through profit or loss  Profit from discontinued operations  Other non‐cash expenses  Change in operating assets and liabilities, net of effects from  Decrease/(Increase) in trade other receivables  Decrease/(Increase) in other operating assets  Decrease/(Increase) in inventories  Decrease/(Increase) in deferred tax assets  (Decrease)/Increase in trade and other payables  (Decrease)/Increase in provision for income taxes payable  (Decrease)/Increase in provisions  (Decrease)/Increase in deferred tax liabilities  Net cash inflow from operating activities  Note  2015  2014  US$’000  US$’000  (6,793)  32,793  (30,195)  30,102  4,028  685  265  ‐  ‐  (10,339)  378  27  30  (2,422)  ‐  1,515  13  (166)  ‐  20,014  16,514  23,792  272  2,705  1,916  ‐  801  2,729  (816)  (808)  1  (4,011)  1,791  (116)  (2,524)  42,153  76 OTTO ENERGY | ANNUAL REPORT 2015 76  OTTO ENERGY | ANNUAL REPORT 2015                                                                      NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  26. Auditors’ Remuneration  During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related  practices and non‐related audit firms:  2015  US$  2014  US$  1) BDO Australia  a) Audit and Other Assurance services:  i) Audit and review of financial statements  ii) Other assurance services  Total remuneration for audit and other assurance services   b)  Taxation services:  i) Tax compliance services  ii) Tax consulting and tax advice   Total remuneration for taxation services  Total remuneration of BDO Australia  2) Network firms of BDO Australia  a) Audit and Other Assurance services:  i) Audit and review of financial statements  ii) Other assurance services  Total remuneration for audit and other assurance services   b) Taxation services:  i) Tax compliance services  ii) International tax consulting  Total remuneration for taxation services  107,971  ‐  107,971  29,431  105,332  134,763  242,734  11,852  ‐  11,852  ‐  346  346  113,803  7,432  121,235  52,802  67,412  120,214  241,449  24,894  ‐  24,894  ‐  ‐  ‐  Total remuneration of network firms of BDO Australia  12,198  24,894  3) Non‐BDO   a)  Audit and Other Assurance services:  i) Audit and review of financial statements  ii) Other assurance services   Total remuneration for audit and other assurance services   b) Taxation services:  i) Tax compliance services  ii) International tax consulting and tax advice  Total remuneration for taxation services  Total remuneration of non‐BDO audit firms  Total auditors’ remuneration  ‐  ‐  ‐  ‐  21,637  21,637  21,637  276,569  62,117  1,149  63,266  1,986  23,394  25,380  88,646  354,898  It is the consolidated entity’s policy to employ BDO on assignments additional to their statutory audit duties where BDO’s  expertise and experience with the consolidated entity are important. These assignments are principally tax advice and due  diligence  reporting  on  acquisitions,  or  where  BDO  is  awarded  assignments  on  a  competitive  basis.  It  is  the  consolidated  entity’s policy to seek competitive tenders for all major consulting projects.  OTTO ENERGY | ANNUAL REPORT 2015 77 77 OTTO ENERGY | ANNUAL REPORT 2015                                    NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL  For The Year Ending 30 June 2015 STATEMENTS  For the year ending 30 June 2015  27. Contingent Liabilities and Contingent Assets  Contingent Consideration Payable (Middle East Petroleum Services)  In  2008  the  Company’s  shareholders  approved  an  arrangement  to  buy  back  a  5%  gross  overriding  royalty  over  the  production revenues generated from its petroleum interests in SC55 in the Philippines from Middle East Petroleum Services  (“MEPS”). MEPS are a privately‐held company that originally negotiated the farm in deal for Otto Energy in the Philippines  acreage  in  2005.  As  part  of  the  farm‐in  agreement  MEPS  retained  a  5%  gross  overriding  royalty  over  Otto  Energy  Investment’s share of the assets.  Under  the  buyback  agreement  referred  to  above,  there  is  a  contingent  consideration  component  whereby  Otto  will  also  pay  MEPS  a  production  bonus  of  US$1.5m,  should  the  block  produce  1.5m  barrels  of  oil  equivalent  during  the  term  of  Otto’s license.     Contingent Asset (Red Emperor)  On 28 February 2015 Red Emperor signed a farm‐in agreement with Otto Energy Philippines Inc. for a 15% working interest  in Service Contract 55.  The application was awaiting approval by the DOE as at 30 June 2015.  Red Emperor will reimburse  the Group for 15% of the Hawkeye‐1 well costs incurred to 30 June 2015 following final approval by the DOE.  28. Commitments  a) Capital Commitments  Capital and exploration expenditure contracted for at the reporting date but not recognised as liabilities are as follows:  Committed capital and exploration expenditure commitments.  No longer than 1 year  Longer than 1 year and no longer than 5 years  More than 5 years  2015  US$’000  2014  US$’000  9,000  ‐  ‐  9,000  7,016  6,066  116  13,198  b) Lease Commitments: Group as Lessee  The consolidated entity leases corporate offices under non‐cancellable operating leases.  The leases have varying terms,  escalation terms and renewal rights.  On renewal, the terms of the leases may be renegotiated.  Non‐cancellable operating leases  Commitments for minimum lease payments in relation to non‑cancellable operating leases are payable as follows:  No longer than 1 year  Longer than 1 year and no longer than 5 years  2015  US$’000  2014  US$’000  325  551  876  495  1,333  1,828  78 OTTO ENERGY | ANNUAL REPORT 2015 78  OTTO ENERGY | ANNUAL REPORT 2015                        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For The Year Ending 30 June 2015 NOTES TO THE CONSOLIDATED FINANCIAL  STATEMENTS  For the year ending 30 June 2015  29. Events Occurring after the Reporting Period  On  21  July  2015  the  Company  acquired  100%  of  the  issued  capital  of  Borealis  Petroleum  Pty  Ltd,  to  earn  an  interest,  through  staged  capital  injections,  in  a  substantial  acreage  position  in  onshore  Alaskan  North  Slope,  held  by  Great  Bear  Petroleum Operation LLC.  Borealis Petroleum Pty Ltd was acquired through the issue of 17,518,250 shares in the Company.  On 27 July 2015 Red Emperor Resources received approval from the Department of Energy in Philippines for the farm‐in of  a 15% working interest into SC55.  On  30  July  2015  Pryce  Gases  Inc  agreed  to  a  farm‐in  option  for  a  10%  working  interest  in  the  drilling  of  the  Hawkeye‐1  exploration well.  Hawkeye‐1  drilling  was  completed  to  a  depth  of  2,920  metres  in  August  2015  with  uneconomical  quantities  of  hydrocarbons discovered.  Hawkeye‐1 was plugged and abandoned, and is currently undergoing analysis to incorporate into  the Company’s understanding of its other SC55 prospects, including Cinco.  30. Parent Entity Disclosures  As at, and throughout the financial year ended 30 June 2015, the  parent Company of the consolidated entity was Otto Energy Limited.  Summarised Statement Of Profit or Loss and Other Comprehensive Income  Parent Entity  2015  US$’000  2014  US$’000  Profit/(loss) for the year after tax  Total comprehensive profit/(loss) for the year  Summarised Statement of Financial Position   Current Assets  Non Current Assets  Total Assets  Current Liabilities  Non Current Liabilities  Total Liabilities  Net Assets  Total equity of the parent entity comprising:  Share Capital  Share based payments reserves  Foreign currency translation reserve  Accumulated Losses  Total Equity  73,463  73,463  44,068  1,926  45,994  219  10,071  10,290  35,706  81,104  9,221  118  (54,737)  35,706  (25,579)  (25,579)  8,870  12,164  21,034  1,724  58  1,782  19,252  131,577  8,956  118  (121,399)  19,252  Guarantees entered into by the parent in relation to the debts of its subsidiaries  The  parent  entity  had  no guarantees  as at  30 June  2015.  As  at  30 June  2014,  the  parent  entity  had  guaranteed  financial  payment obligations of its subsidiary, Galoc Production Company W.L.L., with its supplier, Rubicon Offshore International  Pte Ltd, for up to US$862,500.  Contingent Liabilities  The parent entity had no contingent liabilities as at 30 June 2015 and 30 June 2014.   OTTO ENERGY | ANNUAL REPORT 2015 79 79 OTTO ENERGY | ANNUAL REPORT 2015                  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL For The Year Ending 30 June 2015 STATEMENTS For the year ending 30 June 2015 Commitments The parent entity had no capital commitments for property plant and equipment as at 30 June 2015 and 30 June 2014. The parent entity has a non-cancellable operating lease payable as follows: No longer than 1 year Longer than 1 year and no longer than 5 years Significant Accounting Policies 2015 US$’000 2014 US$’000 325 551 876 376 1,333 1,709 The accounting policies of the parent entity are consistent with those of the consolidated entity as disclosed in Note 1 and Note 2, except for the following; investments in subsidiaries are accounted for at cost, less any impairment in the parent entity. 80 OTTO ENERGY | ANNUAL REPORT 2015 83 OTTO ENERGY | ANNUAL REPORT 2015 DIRECTORS’ DECLARATION  DIRECTOR’S DECLARATION For The Year Ending 30 June 2015 For the year ending 30 June 2015  In the Directors’ opinion:  a) The financial statements and accompanying notes are in accordance with the Corporations Act 2001, including:  i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional  reporting requirements  ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance  for the year ended on that date  b) The financial statements and notes comply with International Financial Reporting Standards as disclosed in note 1.  c) 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.  This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on behalf of the  Directors by:  Mr I Macliver  Director  24 September 2015 OTTO ENERGY | ANNUAL REPORT 2015 81  81 OTTO ENERGY | ANNUAL REPORT 2015      INDEPENDENT AUDIT REPORT TO THE MEMBERS OF OTTO ENERGY LIMITED For The Year Ending 30 June 2015 Tel: +61 8 6382 4600 Fax: +61 8 6382 4601 www.bdo.com.au 38 Station Street Subiaco, WA 6008 PO Box 700 West Perth WA 6872 Australia INDEPENDENT AUDITOR’S REPORT To the members of Otto Energy Limited Report on the Financial Report We have audited the accompanying financial report of Otto Energy Limited, which comprises the consolidated statement of financial position as at 30 June 2015, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO Audit (WA) Pty Ltd ABN 79 112 284 787 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit (WA) Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. 82 OTTO ENERGY | ANNUAL REPORT 2015INDEPENDENT AUDIT REPORT TO THE MEMBERS OF OTTO ENERGY LIMITED For The Year Ending 30 June 2015 Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Otto Energy Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of Otto Energy Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2015. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Otto Energy Limited for the year ended 30 June 2015 complies with section 300A of the Corporations Act 2001. BDO Audit (WA) Pty Ltd Jarrad Prue Director Perth, 24 September 2015 83 OTTO ENERGY | ANNUAL REPORT 2015ASX ADDITIONAL INFORMATION ASX ADDITIONAL INFORMATION  For The Year Ending 30 June 2015 For the year ending 30 June 2015  The shareholder information set out below was applicable as at 31 August 2015 unless otherwise stated  a) Distribution of Equity Securities  The issued capital of the Company at 31 August 2015 is 1,181,808,321 ordinary fully paid shares. All ordinary shares carry  one vote per share. There are no listed options.  Ordinary Shares  100,001 and over  10,001 – 100,000  5,001 – 10,000  1,001 – 5,000  1 – 1,000  Number holding less than a marketable parcel size of 16,667 shares at A$0.03 per share  Shareholders by Location  Australian holders  Overseas holders  b) Equity Security Holders  Twenty largest quoted equity security holders  The names of the twenty largest holders of quoted equity securities are listed below:  No. of Holders  No. of Shares  683  2,073  712  315  120  3,903  1,539  108,9852,190  85,010,386  5,860,432  1,061,947  23,366  1,181,808,321  12,065,804  No. of Holders  No. of Shares  3,649  254  3,903  868,897,084  312,911,237  1,181,808,321  Name   SANTO HOLDING AG   MOLTON HOLDINGS LIMITED   ACORN CAPITAL LIMITED  CITICORP NOMINEES PTY LIMITED   JP MORGAN NOMINEES AUSTRALIA LIMITED   ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD    RICK CRABB (CONSOLIDATED RELEVANT INTEREST)  JOHN JETTER (CONSOLIDATED RELEVANT INTEREST)  DBS VICKERS SECURITIES (SINGAPORE) PTE LTD    HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED    HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED   FORSYTH BARR CUSTODIANS LTD    SPHINX HOLDINGS LTD   PAN PACIFIC PETROLEUM NL   UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD   IAN MACLIVER (CONSOLIDATED RELEVANT INTEREST)  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  MR TIMOTHY FRANCIS CLIVE MCDONNELL & MRS MILA MCDONNELL   20  WENDY MARY CHAN    Ordinary Shares  Number Held  % of issued  shares   241,910,757    241,910,757    69,559,640    50,048,571    32,454,257    26,782,875    17,795,052    16,089,175    14,020,833    11,214,626    8,150,000    7,930,357    7,373,659    7,295,071    6,639,085    6,080,340    5,534,424    4,549,721    4,514,100    4,267,541   20.47%  20.47%  5.89%  4.23%  2.75%  2.27%  1.51%  1.36%  1.19%  0.95%  0.69%  0.67%  0.62%  0.62%  0.56%  0.51%  0.47%  0.38%  0.38%  0.36%   784,120,841   66.35%  84 OTTO ENERGY | ANNUAL REPORT 2015 84  OTTO ENERGY | ANNUAL REPORT 2015              ASX ADDITIONAL INFORMATION  ASX ADDITIONAL INFORMATION For The Year Ending 30 June 2015 For the year ending 30 June 2015  c) Substantial Shareholders  1  2  3  Santo Holding AG  Molton Holdings Limited   Acorn Capital Limited  d) Unquoted Securities  No. of Shares  Held  % Held   241,910,757    241,910,757    69,559,640   20.47%  20.47%  5.89%  The unlisted securities of the Company as at 18 September 2015 are 14,775,000 performance rights and 8,000,000 options.  The performance rights and options do not carry a right to vote at a general meeting of shareholders.  Unlisted Options  Vesting Date  Expiry Date  Exercise Price  No. of Options  No. of Holders  2 December 2013  2 December 2016  A$0.0549  Unlisted Performance Rights*  Issue Date  Expiry Date  Exercise Price  3 October 2014  23 April 2015  14 August 2015  31 December 2018  31 December 2019  31 December 2019  A$0.00  A$0.00  A$0.00  * Subject to meeting certain share price and service hurdles  e) Voting Rights  8,000,000  8,000,000  No. Of  Performance  Rights  6,900,000  6,475,000  1,400,000  14,775,000  No. of Holders  3  8  8  1  In accordance with the Company’s Constitution, on a show of hands every shareholder present in person or by proxy,  attorney or representative of a shareholder has one vote and on a poll every shareholder present in person or by proxy,  attorney or representative of a shareholder has in respect of fully paid shares, one vote for every share held. No class of  option holder has a right to vote, however the shares issued upon exercise of options will rank pari passu with the then  existing issued fully paid ordinary shares.     31. OTTO ENERGY | ANNUAL REPORT 2015 85 85 OTTO ENERGY | ANNUAL REPORT 2015                        O T T O E N E R G Y 2 0 1 5 A N N U A L R E P O R T A N N U A L R E P O R T 2015 ottoenergy.com BACK COVER FRONT COVER 

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