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Australian Office
32 Delhi Street
West Perth WA 6005
Australia
PO BOX 1414
West Perth WA 6872
Australia
T: + 61 8 6467 8800
F: + 61 8 6467 8801
Houston Office
Suite #1080
Two Allen Center
1200 Smith Street
Houston
Texas 77002
T: +1 713-893-8894
Email: info@ottoenergy.com
ASX Code: OEL
ABN: 56 107 555 046
ottoenergy.com
OTTO ENERGY LIMITED
2018
Annual Report
OTTO ENERGY
CONTENTS
2
Chairman’s Report
4 Managing Director’s Report
6
8
Strategy
Asset Overview
22 Summary of Assets
23 Reserves & Prospective Resources
29 Financial Report 2018
ANNUAL REPORT
2018
ANNUAL REPORT
OTTO ENERGY
1
ANNUAL REPORT2018 OTTO ENERGY
CHAIRMAN’S REPORT
Dear Shareholders
It is my pleasure to present the 14th Annual Report to shareholders as Otto Energy
continues to build its North American oil and gas business.
The last 12 months have been an exciting and successful period of transition for the company moving from
a pure exploration play to a producer with the commissioning of SM 71, publication of a significant reserves
upgrade which will underpin a stable cash flow for years to come, successful restructuring of our joint venture
in Alaska thereby “unfreezing” the drilling potential in that acreage, and last but not least the successful
execution of a new joint venture with Hilcorp, one of the most respected operators in the Gulf of Mexico, for
an eight well drilling program. Few people would have thought at this time last year that we would make this
much progress so quickly.
That having been said, we are determined not to become complacent. We know from experience that the oil and
gas business is volatile and risky, and we will maintain our analytical discipline and only invest in relatively low
risk projects with a 40% minimum probability of success, as well as bottom quartile production costs.
Our CEO, Matthew Allen, has completed his relocation to Houston and has been building our Houston team with
local technical and commercial expertise.
Looking forward we are excited by the investment opportunities we see, particularly in the Gulf of Mexico,
which will allow us to grow Otto Energy into a profitable mid-size oil and gas company whilst remaining strictly
focused on what we know best, ie building a portfolio of profitable conventional oil and gas projects.
I thank you the shareholders for your continued support, the directors for their guidance, and the management
and staff for their commitment.
2
John Jetter
Chairman
ANNUAL REPORT2018 OTTO ENERGY
CHAIRMAN’S REPORT
“we are excited
by the investment
opportunities we see,
particularly in the
Gulf of Mexico”
3
ANNUAL REPORT OTTO ENERGY
MANAGING DIRECTOR’S REPORT
Dear Shareholders
It is my pleasure to present Otto Energy’s 2018 Annual Report. The year has seen
Otto return to the ranks of producing oil companies with the commencement of
production at the flagship South Marsh Island 71 development occurring in March
2018. This achievement will underpin Otto’s future activities within the core focus
area of the Gulf of Mexico.
The energy sector globally continues to evolve and respond to changing dynamics at the macro level. A stall
in the growth in supply from North American shale projects and challenges within OPEC have seen oil prices
steadily climb in 2018. The timing of first production at SM 71 has occurred at the highest point in recent oil
prices and has significantly strengthened Otto’s financial position.
Otto has positioned itself in a counter-cyclical manner in the Gulf of Mexico by building a business that is
robust for the energy business model of the future. Capturing the Gulf Coast drilling package with Hilcorp
and assembling the drilling consortium for the Alaska Western Blocks prospect are examples of how Otto has
positioned itself with high impact drilling opportunities.
The attraction of the Gulf of Mexico lies in the mature nature of the infrastructure and the technical understanding
of the petroleum system. The use of new technology in seismic processing has enabled overlooked opportunities
to be unlocked. The investment boom in shale oil projects has depleted capital available for exploration and
development in conventional fields, despite the economics of conventional oil being as or more robust. There
is opportunity for a company such as Otto to grow a business with key partnerships in the Gulf of Mexico whilst
the focus is currently elsewhere.
The first phase of this strategy is to build a business delivering approximately 5,000 barrels of oil per day net
to Otto in order to establish a cashflow generating base from which to enable growth. Otto’s flagship SM 71
development is the first successful step in creating this ongoing business. We have made further major steps
this year setting up the next round of exploration drilling activities.
Otto has already announced that it will participate in ten exploration wells to be drilled before the end of 2019.
This is a very significant drilling program for a company of Otto’s size and has the potential to create significant
shareholder value and deliver upon our initial strategic goal.
4
ANNUAL REPORT2018 At the request of the board, I have recently relocated to Houston in order to set-up our US office and look forward
to being actively involved in this large drilling program. Our office and team are in place and we are already
actively engaged in execution of this program as well as keeping an eye towards the next set of opportunities
once we deliver our initial strategic goals.
The support of Otto’s shareholders has been consistently positive in our business build phase during the last
two years. I would like to thank all of Otto’s shareholders for this vote of confidence in our business model.
The backing of Otto’s shareholders, staff and my fellow directors throughout this period has been greatly
appreciated. Thank you once again for your ongoing endorsement of Otto Energy and I look forward to reporting
upon the results of our very active upcoming drilling program.
Matthew Allen
Managing Director
“Otto will
participate in ten
exploration wells to
be drilled before the
end of 2019. ”
5
ANNUAL REPORT2018 OTTO ENERGY
STRATEGY
THE COMPANY’S CORE STRATEGIC GOAL IS TO GROW
PRODUCTION IN THE GULF OF MEXICO TO 5,000
BOEPD BY THE END OF 2020.
As at the date of this report the status of execution of this strategy is as
follows:
• Building a portfolio of US conventional production assets with a Gulf of Mexico focus and the capability to
transition to an operator;
• Growth strategy underpinned by strong production and cash flow from our flagship Gulf of Mexico SM 71
asset;
• Exciting pipeline of ten high-impact exploration opportunities taking place over the next 15 months; and
• An experienced team with a track record of successfully growing, operating and divesting oil and gas
assets globally who understand risk and capital management.
6
ANNUAL REPORT2018 OTTO ENERGY
STRATEGY
US GULF OF MEXICO STRATEGY
The Company’s strategy is currently focused on
In order to deliver on the strategy, the Company’s
growth in the Gulf of Mexico for the following reasons:
business development focus over the past year in
• Proven prolific hydrocarbon province where
technologies such as RTM seismic processing
continue to create new opportunities;
the Gulf of Mexico has been on pursuing prospects
with the following characteristics:
• Miocene/Pliocene/Oligocene geology which are
• Low sovereign risk;
amplitude supported;
• High margin oil with breakeven economics
•
Investing capital into drilling, not seismic;
around US$20/barrel;
• Short cycle time from discovery to
development of 8-18 months;
• Seeking early cashflow/ROI – Approximately
12-18 months from exploration to production;
• Shallow water (‹300 feet) – keeping capex
• Low cost drilling and development;
manageable; and
• Relatively low risk exploration;
• High liquids yields to increase margins.
• Deal flow is liquid and a full spectrum of
opportunity size is available;
• Otto has area expertise and well-developed
business relationships; and
• Otto has production in the area.
7
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
NORTH AMERICA
GULF OF MEXICO
In December 2015, Otto entered into an agreement with Byron Energy giving it
rights to elect to participate in up to four drilling opportunities in the Louisiana
onshore and shallow water offshore continental shelf area. To date, two of these
opportunities have been drilled, leading to a discovery and the booking of reserves.
The Gulf of Mexico (GOM) region is one of the most
Today, about half of the USA’s fossil fuel refining and
prolific oil and gas producing regions on earth.
processing capacity is along the GOM. The high density
Commercial extraction of petroleum resources
and availability of production platforms development
dates from the early decades of the 1900s, with first
of primary reservoirs contributes to low production
offshore production commencing in 1938. Today,
costs in this region, making projects viable even in
the federally-administered GOM Outer Continental
a sustained, low oil price environment. Louisiana
Shelf alone accounts for about a fifth of all crude oil
and the nearby shelf region are characterised by a
produced in the USA.
ready market and low sovereign risk. These factors,
Geologically there exists a key combination of a thick
layer of evaporites (salt), rich biological deposits
(which, when subjected to the right conditions, forms
light producible oil and gas), and thick sand layers.
in combination with the low-risk drilling updip of
previously productive sand intervals, have led Otto to
make the northern Gulf of Mexico region the focus of
its forward strategy.
Near the northern gulf margin in particular, a delta
In late July 2018 Otto signed an agreement with
created by the Mississippi River has been building for
Hilcorp which will see it participate in the drilling
tens of millions of years. These deltaic sand grains
of eight gulf coast exploration wells during the next
are well sorted and round in shape, forming the ideal
18 months. This deal aligns perfectly with Otto’s
high-porosity rock for a petroleum reservoir. The
principle strategy of building a business of scale in
buoyancy and flowing effect of the underlying salt
the US Gulf of Mexico.
creates the structures and traps necessary for the
natural collection of oil.
8
ANNUAL REPORT2018 9
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
PRODUCTION - SOUTH MARSH ISLAND 71 (SM 71)
Location: Louisiana - Offshore Gulf of Mexico
Area: 12.16 km2
Otto’s Working Interest: 50.00% with Byron Energy Ltd (Operator)
Otto owns a 50% Working Interest (WI) and a 40.625% Net Revenue Interest (NRI) in the South Marsh Island
block 71 (SM 71), with Byron Energy Limited the Operator, holding an equivalent WI and NRI. Water depth in
the area is approximately 137 feet.
Production operations at the SM 71 F platform began on 23 March 2018 when the SM 71 F1 well, completed in
the D5 reservoir, was brought on line. The SM 71 F2 well, completed in the B65 Sand, was opened to the system
on 25 March 2018. On 6 April 2018 production from the SM 71 F3 well was initiated. The F3 well is completed
in the D5 Sand reservoir.
In the reserves report effective as of 30 June 2018, Collarini estimated an increase in 2P reserves of 4.3 MMboe
net to Otto (excluding production to 30 June 2018) a near tripling of the 2017 2P reserves estimate in what is
the first independent reserve report for the SM 71 project since production began in March 2018. The reserves
data is set out on page 23.
The significant increase in all key reserve categories is directly due to the success of the appraisal and
development drilling program in 2017/18. Both the thicker than expected net oil zones and exceptional well
performance to date from the D5 producing sands in both the F1 and F3 wells are contributing factors to
the positive additions and revisions to the Company’s reserves. Further details on the material changes to
reserves is set out on page 25.
The SM 71 F2 well, which is completed in the secondary B65 Sand, has been experiencing reservoir pressure
depletion. To date 32,466 barrels of oil and 60.9 million cubic feet of gas have been recovered, without any
water, from the B65 Sand in the SM 71 F2 well. This data, along with pressure data, indicates an estimated trap
size of three acres, whereas the targeted seismic anomaly size is 175 acres. This provides strong evidence that
the B65 Sand intersected by the F2 well is isolated from the main B65 Sand target area. In late June the F2 well
was shut in to analyse the pressure build-up of the well. After flowing for approximately eight hours, the F2 well
ceased production of hydrocarbons and has been shut in ever since.
10
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
As at 19 September 2018, cumulative gross production from the SM 71 field was approximately 641,737 barrels
of oil and 556 million cubic feet of gas, on a gross basis with no produced formation water. The current field
sales rate as of 19 September 2018, was approximately 3,600 bopd and 6.0 mmcfgpd, on a gross basis after
shrinkage at the sales meter.
Recompletion of
the F2 well
from
the B65 Sand
to
the
B55 Sand is underway at the time of this report.
11
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
EXPLORATION - HILCORP GULF COAST PACKAGE
Location:
Inshore/Onshore Texas and Louisiana - Gulf of Mexico
Otto’s Working Interest: 37.5% - Earning via staged farm-in with Hilcorp Energy (Operator)
THE DEAL
In late July 2018 Otto announced that it had entered
into a joint venture with Hilcorp Energy which will
currently produces approximately 325,000 boepd. To
put this into context, Australia’s largest oil and gas
company, Woodside, produces ~230,000 boepd.
see it earn a 37.5% working interest in an eight well
Hilcorp has nearly 2,000 employees and has been
portfolio of prospects in the Onshore/Near Shore USA
consistently recognised for
its strong culture,
Gulf Coast (Gulf of Mexico). The wells will be drilled
values and ethics both within the firm and in the
by Hilcorp, a highly-experienced, privately-owned
communities in which it operates.
operator based in Houston, over the next 18 months.
Otto is very pleased to be partnering with a Gulf Coast
Otto will earn the 37.5% working interest by paying
operator with proven capability to take exploration
50.0% of the costs of drilling and either setting
prospects into production.
casing or plugging and abandoning the well plus
lease acquisition costs at each of the eight prospects.
The estimated cost of the commitment to Otto is
US$37.5 million.
Additional Upside
IMPACT ON STRATEGY
Otto’s target area for new opportunities lies within
the Pliocene, Miocene and Oligocene reservoir
systems of the US Gulf of Mexico shelf and Gulf
Coast where capital costs are manageable and the
Should either the Tarpon or Mustang prospects be
availability of infrastructure means the time from
successful then Otto has ground floor rights (ie pays
discovery to production is short. Otto is deploying
only its working interest) to participate in the nearby
its experienced technical team to find attractive, low
Damsel and Corsair/Hellcat opportunities. These
-risk drill opportunities in this area to provide high-
wells are in addition to the eight wells.
margin oil and gas production growth.
Under the agreement Otto has a right of first offer to
The Hilcorp eight well portfolio is a significant step
a subsequent Gulf Coast program, if Hilcorp elect to
toward Otto’s initial strategic goal of 5,000 boepd by
offer such a program to third parties.
ABOUT HILCORP ENERGY
Founded in 1989, Hilcorp is one of the largest
privately-held oil and natural gas companies in North
America. Hilcorp specialises in reinvigorating legacy
oil and gas fields across North America; including
in the US Gulf Coast, Alaska and the Rockies and
2020 strategy and puts Otto into a partnership with
a large and well-respected operator in the region.
In addition it offers further potential through follow-
up drilling and a right of offer on further Hilcorp Gulf
Coast farmouts.
Refer to the ASX release of 31 July 2018 for further
details on the Hilcorp transaction.
12
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
DETAILS OF THE DRILLING PROGRAM
Information regarding the eight wells is set out below.
Prospect
Name
Planned
Spud
Date
Target
Depth
(TVD), ft
Rig
Type
Working
Interest
(WI) %
Big Tex
Sep-18
13,500
Barge
Lighting
Nov-18
Don Julio 2
Dec-18
Mustang
Jan-19
14,500
11,500
17,500
Land
Land
Land
Beluga
Oil Lake
Tarpon
Mallard
May-19
13,000
Barge
Jul-19
Jul-19
Nov-19
14,500
14,000
11,000
Land
Barge
Barge
37.50
37.50
37.50
37.50
37.50
37.50
37.50
37.50
Net
Revenue
Interest
(NRI) %
29.51
28.50
28.50
30.00
28.50
29.06
29.06
29.63
Stratigraphic
Interval
Country/
Parish
Location
Tex
Plaquemines
Louisiana
Frio Tex Miss
Matagorda
Oligocene
Chambers
Oligocene
Chambers
Oligocene
Galveston Bay
Texas
Texas
Texas
Texas
Frio
Cameron
Louisiana
Oligocene
Galveston Bay
Texas
Mid Miocene
Assumption
Louisiana
PROSPECTIVE RESOURCES
The range of prospective resources for each prospect is set out below.
Prospect
Name
Working
Interest
%
Net
Revenue
Interest
%
Probability
of Success
%
Big Tex
Lighting
Don Julio 2
Mustang
Beluga
Oil Lake
Tarpon
Mallard
37.50
37.50
37.50
37.50
37.50
37.50
37.50
37.50
29.51
28.50
28.50
30.00
28.50
29.06
29.06
29.63
54
45
44
56
45
45
34
64
Prospective Resources MMboe
100%
Otto Net Revenue Interest
P90
P50 Mean
P10
P90
P50 Mean
P10
0.5
0.9
0.7
2.9
0.8
1.2
7.7
0.2
3.3
3.2
2.5
6.7
2.9
3.3
6.8
4.4
4.0
8.5
4.7
4.4
24.0
0.9
35.6
3.3
16.9
10.1
9.6
16.8
11.2
9.3
81.0
4.5
0.1
0.3
0.2
0.8
0.2
0.3
2.2
0.1
1.0
0.9
0.7
1.9
0.9
1.0
7.0
0.3
2.0
1.3
1.1
2.6
1.3
1.3
5.0
2.9
2.7
4.8
3.4
2.7
10.3
1.0
23.5
1.3
Prospective Resources Cautionary Statement
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 appraisal and evaluation is required to determine the existence of a significant
quantity of potentially moveable hydrocarbons.
On the next page is a graphical representation showing how this portfolio fits with Otto’s existing assets.
13
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
Comparison of SM 71 Reserve Base with Gulf Coast Package Prospective Resources
%
s
s
e
c
c
u
S
f
o
y
t
i
l
i
b
a
b
o
r
P
120
100
80
60
40
20
0
SM 71
P10
P50
P90
Big Tex
Mustang
Mallard
Lightning
Oil Lake
Don Julio 2
Beluga
Tarpon
Bivouac Peak
For the Gulf Coast Package prospects, the size of bubble is proportional to the P90-P50-P10 Net Revenue Interest Prospective Resource (MMboe).
For SM 71, the size of bubble is proportional to 30 June 2018. Net Revenue Interest 2P reserves (MMboe).
For Bivouac Peak, the size of bubble is proportional to best estimate Net Revenue Interest Prospective Resource (MMboe).
Anticipated Drilling Sequence
RISKED SUMMARY DATA - 8 WELL PORTFOLIO, GROSS (8/8THS)
Portfolio-level risked information for the eight well portfolio is set out below. These are probabilistic additions
of each prospect’s expectation curve, using a monte carlo approach. Refer to the ASX release of 31 July 2018
for further information on these calculations.
Metri
Volumes, MMBOE
Peak Production Rate, BOE/d
% Hydrocarbon Liquids per BOE
Finding cost, US$/BOE
Finding & Development cost, US$/BOE
Big Tex Spud
P90
4.63
3,270
13%
$13.62
$16.40
P50
19.86
9,990
28%
$3.18
$5.51
P10
64.59
31,300
56%
$0.98
$2.56
On 30 August 2018 Otto announced that the initial exploration well, SL 192 PP 031, on the Big Tex prospect had
commenced drilling from a bargemounted rig.
The well will be drilled to 13,175 ft MD/12,700 ft TVD and is expected to take 55 days to reach total depth. Otto will earn
a 37.5% working interest by paying 50% of the costs of drilling and either setting casing or plugging and abandoning
the well, after which point Otto will pay 37.5% of all future costs. The well is expected to cost the Company US$4.23
million (50% paying interest). The exploration well on the Big Tex prospect is targeting the Tex W 16 Sand and
Tex W 18 Sand that are Middle Miocene in age. This is a prolific section, having produced from the east in Hilcorp’s East
Bay Field, and from the west from the massive West Delta 30 Field, which has produced 562 MMBO and 934 BCF to date.
14
ANNUAL REPORT2018
OTTO ENERGY
ASSET OVERVIEW
EXPLORATION - BIVOUAC PEAK
Location:
Inshore Louisiana - Gulf of Mexico
Area: 11.4 km2
Otto’s Working Interest: 40.00% - Earning via farm-in with Byron Energy Ltd (Operator)
The Bivouac Peak leases cover 2,821 acres of highly
al. No. 1 (Weiss-Adler#1), on the Bivouac Peak East
prospective acreage in the transitional zone inshore
prospect. The well commenced on 25 August 2018.
southern Louisiana. The Operator has
identified
The Parker Drilling Company Rig #77-B Deep Drilling
multiple prospects at both the Middle and Lower
3000 HP Posted Barge Rig will drill to a depth of 18,294
Miocene levels demonstrating stacked amplitude
ft Measured Depth (MD)/18,000 ft True Vertical Depth
and AVO (amplitude versus offset) support. Follow-
(TVD). The well is expected to take approximately 75
up drilling options have been identified at the Lower
days to reach total depth.
Miocene level that could increase the scale of the
overall opportunity.
With nearby production infrastructure already in place,
any successful well at Bivouac Peak would be capable
Significant production exists in the adjacent Miocene
of being brought into production within 8-10 months of
sequence at the Little Bay field (greater than 45 Bcf gas
discovery at a development cost in the range of US$9-
and 5 MMbbl condensate) and the Atchafalaya Bay field
11 million (100%).
(greater than 100 Bcf gas and 0.6 MMbbl condensate).
Should a commercial discovery be made at Bivouac
On 9 July 2018 Otto announced that it had elected to
Peak East, additional potential at the Deep prospect
participate in the initial test well, Weiss-Adler et.
will be followed up in due course.
Bivouac Peak Regional Map - LA Transition Zone
Bivouac Peak Regional Map - LA Transition Zone
Copyright 2018, Byron Energy Limited
La Posada/La Cantera
& Thunder Bayou
>600 BCFE EUR
(Cris R)
Shell
Island
BIVOUAC PEAK
Dutch/Mary Rose:
430 Bcf + 7.5 MMbo Cum Prod
850 BCFE EUR
(Cib Op-Rob L)
>15,000-16,500’
Eagles Nest
Mt Moran N & S
Atchafalaya Bay Deep:
>100 Bcf +0.6 MMbo Cum Prod
(Cib Op)
>17,000-19,000’
Little Bay Field:
45 Bcf +5 MMbo Cum Prod
(Cris I-Cib Op)
>16,000-18,000’ (4 wells=90%)
3
15
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
EXPLORATION - VERMILLION BLOCK 232 (VR 232)
Location: Offshore Gulf of Mexico
Area: 18.31 km2
Otto’s Working Interest: 50.00% - Byron Energy Inc (Operator)
As reported on 19 June 2018, Byron Energy Inc, a
Pursuant to the terms of a Participation Agreement,
wholly owned subsidiary of Byron Energy Limited, was
effective 1 December 2015, between Byron and Otto,
advised by the Bureau of Ocean Energy Management
Otto has elected to participate in VR 232 at a fifty
(BOEM) that
its bid for VR 232 was deemed
percent (50%) working interest.
acceptable by the BOEM and the lease was awarded
to Byron. The lease is subject to a 12.5% Federal
Government royalty.
Under that agreement, Otto must pay an amount
equal to a gross one hundred thirty-three percent
(133%) of Otto’s fifty percent (50%) interest share of
VR 232 is adjacent to Otto’s 50% owned SM 71 oil field
lease acquisition costs and the initial test well (dry
and adds drilling opportunities which increase Otto’s
hole costs) plus a gross fifty percent (50%) of other
potential upside around the SM 71 facilities.
past costs paid by Byron.
The Operator, Byron, has mapped a gas and gas
Under Byron’s bid of US$1.101 million for VR 232,
condensate prospect on the block with in-house
Otto’s share is US$734,000.
Having now elected to participate in the drilling of
the East prospect at Bivouac Peak and participate
in VR 232 at a 50% working interest, Otto’s right to
participate in new assets or projects under the
December 2015 Participation Agreement has been
fulfilled.
calculated gross prospective resource potential of 11
Bcf and 170,000 barrels. This prospect could be tested
from Otto’s SM 71 F platform. There are currently no
plans to drill in VR 232 until production levels at the
platform would allow a successful VR 232 well to be
produced efficiently. The Operator has also identified
two other prospects in VR 232 which require further
geophysical evaluation before a drilling decision is
made.
Byron evaluated this block with the same high-
quality Reverse Time Migrated 3D seismic data and
proprietary Inversion processed seismic data used in
the discovery of oil and gas at SM 71 in 2016. Upon
transfer, Otto’s working interest will be 50% and net
revenue interest will be 43.75%.
16
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
EXPLORATION - ALASKA WESTERN BLOCKS
Location: Onshore North Slope Alaska
Area: 91.9 km2
Otto’s Working Interest: 25% (before back-in) – 88 Energy Limited (Operator)
WESTERN BLOCKS - OVERVIEW
On 30 July 2018 Otto Energy Limited advised that, via its wholly owned subsidiary Borealis Alaska LLC, it had
executed definitive agreements with Great Bear Petroleum, along with the Consortium Partners, 88 Energy
(Captivate Energy Alaska, Inc) and Red Emperor, that will see Otto participate in the drilling of Winx-1, a
highly prospective Nanushuk oil trend exploration well within its Western Blocks on the Alaska North Slope,
in early 2019.
Winx-1 will test a 3D seismic defined oil prospect in the successful Nanushuk play fairway with a gross best
estimate prospective resource volume of 400 MMbbls and a geological chance of success in the range of 25-30%.
17
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
NANUSHUK TOPSET OIL TREND#
Otto holds a working interest in four leases totalling over 22,710 acres located in the heart of the prolific Nanushuk
oil fairway. The Horseshoe-1 well, which discovered oil in 2017, is located less than one mile to the west of Otto’s
Western Blocks. Horseshoe-1 extended the Nanushuk play fairway by well over 20 miles to the south of previous
drilling. Repsol reports that since 2011 the Company has drilled multiple consecutive discoveries on the North
Slope along with partner Armstrong.
Industry sources have indicated contingent recoverable resources discovered to date in the trend could contain
over 1.2 billion barrels of oil*. This places the trend as one of the most significant emerging plays on the Alaska
North Slope. With ongoing drilling in 2018 it is expected that additional discoveries will be made in this emerging
play trend.
The Horseshoe-1 discovery well was drilled by the Repsol-led joint venture in 2017 to a total depth of 6,000
ft. (1,828 meters) and encountered more than 150 ft. of net oil pay in several reservoir zones in the Nanushuk
section. The deviated Horseshoe-1A sidetrack was drilled to a total depth of 8,215 ft. and encountered more than
100 ft. of net oil pay in the Nanushuk interval as well.
*Repsol and Oil Search (1 November 2017). Refer to Otto’s ASX release of 25 June 2018.
18
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
WESTERN BLOCKS PROSPECT – WINX-1
Recent in-house technical work conducted by Otto on its Alaska acreage in the Western Blocks has resulted in
the identification of an oil prospect with a gross best estimate prospective resource volume of 400 MMbbls and
a geological chance of success in the range of 25-30%. The prospective resource calculation was based on a
consideration of offset well information (Itkillik River-1 well completion information), seismic expression and a
recovery factor of 30%. Otto’s 18.75% net revenue interest (before Great Bear 10% back in) in the prospect would
be 75 MMbbls.
The prospect, identified on modern 3D seismic data obtained through the Alaska Department of Natural
Resources, Division of Oil and Gas, is illustrated above in the context of the four graticular leases that comprise
the Western Blocks in which Otto holds an interest.
On the above-mentioned seismic data the prospect shares many of the positive attributes seen at the
Horseshoe-1 discovery which found light oil reservoired in more than 150ft of net oil sand of the Nanushuk
delta sequence.
The discovery at Horseshoe-1 has extended the known accumulation of Nanushuk oil some 20 miles south of
earlier discoveries such as those at Qugruk 8 and Qugruk 301 which flowed 30 degree gravity crude at rates as
much as 2,160 and 4,600 bbls/d respectively (Repsol press release 2 June 2015).
The Horseshoe-1 discovery has signalled the presence of an extensive previously overlooked hydrocarbon province
which is in now attracting major development capital including the recent acquisition by Oil Search Limited
of operatorship of the Pikka Unit and a number of oil exploration assets on the Alaska North Slope.
19
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
Exploration success in the Nanushuk play-fairway
been moved further south to intersect a better
is now being driven by the understanding that when
reservoir quality and more continuous sand interval.
reservoir quality top set sands are present anomalously
This higher quality sand interval is the key target for
high amplitudes are seen on seismic data.
the proposed Otto well.
This type of positive amplitude response has also
been seen on seismic over the Western Blocks as
OFFTAKE OPTIONS
illustrated above. Otto presently calculates a best
With the Oil Search operated Pikka unit development
estimate gross prospective resource of 400 MMbbls
activities occurring to the west and the Conoco-
in the prospect area mainly on the basis of this
Phillips Meltwater unit facility some 10 miles to the
amplitude work.
As can be seen, some of the block area to the south is
not covered by 3D data and as yet uncalculated upside
potential is likely to exist in this area as well.
east, any oil found within the Western Blocks will
find a cost effective, commercially attractive route to
market. Project economics will be further enhanced
by the shallow nature of the oil pool.
Further encouragement that the prospect will be
DRILLING PLANNING
found oil bearing is provided by the presence of
88 Energy Ltd will manage the drilling of the initial
oil shows seen in the adjacent Itkillik River-1 well
test well in the Western Blocks on behalf of the joint
drilled in 1978 (from publicly available well data at the
venture and consortium partners. Since year end a
Alaska DNR). Here oil was observed during drilling at
rig contract has been signed. Given that the location
multiple levels within fine grained sediments.
If 3D data had been available at the time Itkillik
River-1 had been drilled, the well would likely have
is only accessible through an ice road, drilling will be
undertaken during the winter operational months
once the Alaska North Slope is opened for operations.
20
ANNUAL REPORT2018 OTTO ENERGY
ASSET OVERVIEW
EXPLORATION - ALASKA CENTRAL BLOCKS
Location: Onshore North Slope Alaska
Area: 1,163 km2
Otto’s Working Interest: 8%-10.8% – Great Bear Petroleum Operating (Operator)
Through its agreements with Great Bear Petroleum Operating (Great Bear) in 2015, Otto has between an 8% and
10.8% working interest in 90 leases (covering 287,425 gross acres) held by Great Bear on the Alaskan North Slope
(Central Blocks).
Great Bear is a private exploration company focused exclusively on exploring and developing conventional and
unconventional resources in this highly prospective basin. The leases are in a major play fairway south of the
Prudhoe Bay and Kuparuk giant oil fields.
Great Bear has undertaken significant exploration work on the acreage since 2011 including:
• Acquisition and processing of approximately 2,970 km2 of 3D seismic data (1,170 km2 in 2016);
• Drilling of two unconventional stratigraphic test wells which cored three primary unconventional targets; and
• 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 Trans-Alaskan Pipeline System (TAPS), means the acreage is well positioned for exploration.
Existing 3D seismic has allowed development of an extensive prospect portfolio which
includes at least four well locations.
Otto’s exposure on the first two wells is limited to US$2.6m/well.
21
ANNUAL REPORT2018 OTTO ENERGY
SUMMARY OF ASSETS
AS AT 30 JUNE 2018
Asset
Otto working
interest
Otto net
revenue
interest
Joint venture
partners
Notes
Louisiana/Gulf of Mexico ***
South Marsh Island
71 (SM 71), Outer
Continental Shelf
50%
40.625%
Vermillion 232
(VR 232)
50%*
43.75%
Byron Energy
(Operator)
Byron Energy
(Operator)
50% WI
Producing field
50% WI
Block adjacent to SM 71
Bivouac Peak,
Louisiana
Near-shore
45% Earning
via staged
farm-in
with Byron
Energy Ltd
(Operator)**
33.525%
Alaska North Slope
(Western Blocks)
22.5%
18.75%
Alaska North Slope
(Central Blocks)
8 – 10.8%
6.67 – 9.45%
Byron Energy
(Operator)
40% WI
Metgasco
10% WI
Private US Company
5% WI
Alaska
88 Energy (Drilling
Management)
36.0% WI
Red Emperor
31.5% WI
Great Bear Petroleum
Ventures II LLC
(Operator)
Great Bear Petroleum
Ventures I/II LLC
(Operator)
10% WI
67.0%
-89.2% WI
Initial well commenced on 25
August 2018
4 leases covering
91.9 km2 make up the
Alaskan North Slope
Western Blocks Acreage
90 leases covering
1,163.1 km2 make up
the Alaskan North Slope
Central Blocks Acreage
Haliburton Energy
Services, Inc
0.0% -
25.0% WI
Capped contribution to two wells
Notes:
* Otto has elected to acquire a 50% working interest/43.75% net revenue interest for an amount equal to a gross one hundred and
thirty-three percent (133%) of Otto’s fifty percent (50%) interest share of certain acquisition costs, including the Dry Hole Costs of
an Initial Test Well (as defined in the Participation Agreement between Byron and Otto) incurred by Byron plus an amount equal to
a gross fifty percent (50%) of certain other acquisition expenses (as defined in the Participation Agreement) incurred and paid by
Byron. Refer to page 16.
** On 6 July 2018 Otto elected to participate in the initial test well at 40% working interest (29.8% net revenue interest).
*** On 31 July 2018 Otto farmed into an 8 well Gulf Coast package with Hilcorp. These assets are not reflected in the above table
as they were subsequent to 30 June 2018.
22
ANNUAL REPORT2018 OTTO ENERGY
RESERVES &
PROSPECTIVE RESOURCES
AS AT 30 JUNE 2018
RESERVES AND PROSPECTIVE RESOURCES AS AT 30 JUNE 2017
Otto Energy Working Interest (WI) %
Otto Energy Net Revenue Interest (NRI) %
Reserves
SM 71, WI (50%)
Oil
(Mbbls)
Gas
(Mmscf)
Mboe
(6:1)
Reserves
Oil
(Mbbls)
Gas
(Mmscf)
Mboe
(6:1)
SM 71, NRI (40.625%)
Proved Producing
1,733
1,065
1,910
Proved Producing
Proved Behind Pipe
Proved Undeveloped
Proved (1P)
Probable Reserves
Proved and Probable
(2P)
305
702
2,740
4,514
7,254
191
433
1,689
3,487
337
774
3,021
5,096
5,175
8,117
Proved Behind Pipe
Proved Undeveloped
Proved (1P)
Probable Reserves
Proved and Probable
(2P)
1,408
248
570
2,226
3,668
865
155
352
1,372
2,833
1,552
274
629
2,455
4,140
5,894
4,205
6,595
Possible Reserves
2,326
1,985
2,657
Possible Reserves
1,890
1,613
2,159
Proved, Probabale
and Possible (3P)
Prospective Resource
(Best Estimate,
Unrisked)***
9,580
7,161
10,774
Oil
(Mbbls)
Gas
(MMscf)
Mboe
(6:1)
Proved, Probabale and
Possible (3P)
Prospective Resource
(Best Estimate,
Unrisked)***
7,784
5,818
8,754
Oil
(Mbbls)
Gas
(MMscf)
Mboe
(6:1)
SM 71, WI (50%)
476
23,844
4,450
SM 71, NRI (40.625%)
387
19,373
3,616
Alaska (Western
Blocks) WI (22.5%)
Alaska (Central
Blocks) WI (10.8%)
Bivouac Peak WI
(45%) **
90,000
70,000
0
0
90,000
70,000
Alaska (Western Blocks)
NRI (18.75%)
75,000
Alaska (Central Blocks)
NRI (9-9.45%)*
58,333 -
61,250
0
0
75,000
58,333 -
61,250
7,196
79,950
20,520
Bivouac Peak NRI
(33.525%) **
5,361
59,562
15,288
* Precise weighted average royalty split unknown, volumetric range provided based on 12.5 to 16.67% royalty range
** On 6 July 2018 Otto elected to participate in the initial test well at 40% working interest (29.8% net revenue interest).
*** On 31 July 2018 Otto farmed into an 8 well Gulf Coast package with Hilcorp. These assets are not reflected in the above table
as they were subsequent to 30 June 2018.
23
ANNUAL REPORT2018
OTTO ENERGY
RESERVES & PROSPECTIVE RESOURCES
RESERVES RECONCILIATION
The following table shows a spilt of Otto’s remaining reserves, as at 30 June 2018, into developed and
undeveloped categories by project and by product. All reserves relate to SM 71 which is in the shallow water
Gulf of Mexico, USA.
SM 71
Proven (1P)
Probable
Proven Plus Probable (2P)
Possible
Proven Plus Probable Plus Possible (3P)
Developed
Undeveloped
Total
Oil
(Mbbl)
1,656
2,605
4,261
-
4,261
Gas (MMscf)
1,020
1,726
2,746
-
2,746
Oil
(Mbbl)
570
1,064
1,634
1,890
3,524
Gas (MMscf)
MBoe
352
1,107
1,459
1,613
3,072
2,455
4,141
6,596
2,159
8,755
The following table reconciles the movement in Otto’s SM 71 reserves between 30 June 2017 and 30 June 2018.The numbers below
are based on Otto’s Working Interest of 50% and Net Revenue Interest (NRI) of 40.625%.
Otto Energy Working Interest (WI) %
RESERVES
OIL (MBBL)
GAS (MMSCF)
SM 71
Otto (50% WI)
30 June
2018
Proved (1P)
Probable Reserves
Proved and Probable (2P)
Possible Reserves
Proved, Probable and Possible (3P)
2,740
4,514
7,254
2,326
9,580
n
o
i
t
c
u
d
o
r
P
(175)
-
(175)
-
(175)
n
i
-
m
r
a
F
-
-
-
-
-
s
n
o
i
s
i
v
e
R
1,850
2,736
4,586
1,666
6,252
30 June
2017
30 June
2018
715
1,778
2,494
660
3,153
1,689
3,487
5,175
1,985
7,161
n
o
i
t
c
u
d
o
r
P
(148)
-
(148)
-
(148)
n
i
-
m
r
a
F
-
-
-
-
-
s
n
o
i
s
i
v
e
R
1,045
2,185
3,230
1,530
4,759
30 June
2017
496
1,302
1,798
455
2,254
Otto Energy Net Revenue Interest (NRI) %
RESERVES
OIL (MBBL)
GAS (MMSCF)
SM 71
Otto (40.625%)
30 June
2018
Proved (1P)
Probable Reserves
Proved and Probable (2P)
Possible Reserves
Proved, Probable and Possible (3P)
2,226
3,668
5,894
1,890
7,784
n
o
i
t
c
u
d
o
r
P
(142)
-
(142)
-
(142)
n
i
-
m
r
a
F
-
-
-
-
-
s
n
o
i
s
i
v
e
R
1,503
2,223
3,726
1,354
5,080
30 June
2017
30 June
2018
581
1,445
2,026
536
2,562
1,372
2,833
4,205
1,613
5,818
n
o
i
t
c
u
d
o
r
P
(120)
-
(120)
-
(120)
n
i
-
m
r
a
F
-
-
-
-
-
s
n
o
i
s
i
v
e
R
849
1,775
2,624
1,243
3,867
30 June
2017
403
1,058
1,461
370
1,831
24
ANNUAL REPORT2018 OTTO ENERGY
RESERVES & PROSPECTIVE RESOURCES
MATERIAL CHANGES TO RESERVES
Proved and Probable Reserves - Net of Actual Production
The increase in proved and probable reserves is due to the successful SM 71 F2 (“F2”) appraisal well drilled in
December 2017 and the SM 71 F3 (“F3”) development well drilled in January 2018. Significantly thicker than
predicted oil bearing sands were logged in the drilling of the SM 71 F2 and F3 wells in the D5 Sand which has
resulted in reserve additions and upgrades. Additionally, flow rates from the F1 and F3 wells have continued
to exceed pre-start-up predictions resulting in positive revisions to expected recoveries.
Drilling of the B65 Sand in the SM 71 F2 well resulted in a positive reclassification of a portion of Prospective
Resources to the Proved and Probable Reserves categories. Although the SM 71 F2 well has experienced
premature pressure depletion, suggesting the well is in an isolated compartment, the reservoir is mapped well
beyond the small drainage area of the SM 71 F2 well.
72% of the remaining proved and probable reserves are classified as developed or behind pipe with the balance
classified as undeveloped.
Possible Reserves
The increase in possible reserves at SM 71 is mainly due to: -
(a) Potential upside recoveries and drainage areas from the producing D5 reserves
(b) The reclassification to possible reserves of a material proportion of the prospective resource previously
attributed to the B65 Sand, and
(c)
the addition of the possible reserves attributed to the B65, J1 and D5 sands as result of the development
drilling in 2017/18.
25
ANNUAL REPORT2018 OTTO ENERGY
RESERVES & PROSPECTIVE RESOURCES
NOTES TO RESERVES AND RESOURCES STATEMENT
Reserves and Resources Governance
Otto’s reserves estimates are compiled annually. The operator of SM 71, Byron Energy, engages Collarini and
Associates, a qualified external petroleum engineering consultant, to conduct an independent assessment
of the SM 71 reserves on behalf of the joint venture. Collarini and Associates is an independent petroleum
engineering consulting firm that has been providing petroleum consulting services in the USA for more than
fifteen years. Collarini and Associates does not have any financial interest or own any shares in the Company.
The fees paid to Collarini and Associates are not contingent on the reserves outcome of the reserves report.
Competent Persons Statement
The information in this report that relates to oil and gas reserves and resources for SM 71 and Bivouac Peak was
compiled by technical employees of independent consultants Collarini and Associates, under the supervision of
Mr Mitch Reece BSc PE. Mr Reece is the President of Collarini and Associates and is a registered professional
engineer in the State of Texas and a member of the Society of Petroleum Evaluation Engineers (SPEE), Society
of Petroleum Engineers (SPE), and American Petroleum Institute (API). The reserves and resources included in
this report have been prepared using definitions and guidelines consistent with the 2007 Society of Petroleum
Engineers (SPE)/World Petroleum Council (WPC)/American Association of Petroleum Geologists (AAPG)/
Society of Petroleum Evaluation Engineers (SPEE) Petroleum Resources Management System (PRMS). The
reserves and resources information reported in this Statement are based on, and fairly represents, information
and supporting documentation prepared by, or under the supervision of, Mr Reece. Mr Reece is qualified in
accordance with the requirements of ASX Listing Rule 5.41 and consents to the inclusion of the information in
this report of the matters based on this information in the form and context in which it appears.
The information in this report that relates to oil and gas resources in relation to the Alaska Western Blocks
was 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.
The information in this report that relates to oil and gas resources in relation to Alaska Central Blocks was
compiled by technical employees of Great Bear Petroleum, the Operator of the Alaska acreage, and subsequently
reviewed 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 an 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). The resources included in this
report have been prepared using definitions and guidelines consistent with the 2007 Society of Petroleum
Engineers (SPE)/World Petroleum Council (WPC)/ American Association of Petroleum Geologists (AAPG)/
Society of Petroleum Evaluation Engineers (SPEE) Petroleum Resources Management System (PRMS). The
resources information included in this report are based on, and fairly represents, information and supporting
documentation reviewed by Mr Senycia. Mr Senycia is qualified in accordance with the requirements of ASX
Listing Rule 5.41 and consents to the inclusion of the information in this report of the matters based on this
information in the form and context in which it appears.
26
ANNUAL REPORT2018 OTTO ENERGY
RESERVES & PROSPECTIVE RESOURCES
Reserves Cautionary Statement
Oil and gas reserves and resource estimates are expressions of judgment based on knowledge, experience
and industry practice. Estimates that were valid when originally calculated may alter significantly when new
information or techniques become available. Additionally, by their very nature, reserve and resource estimates
are imprecise and depend to some extent on interpretations, which may prove to be inaccurate. As further
information becomes available through additional drilling and analysis, the estimates are likely to change.
This may result in alterations to development and production plans which may, in turn, adversely impact the
Company’s operations. Reserves estimates and estimates of future net revenues are, by nature, forward looking
statements and subject to the same risks as other forward looking statements.
Prospective Resources Cautionary Statement
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 appraisal and evaluation is required to determine the existence of a significant
quantity of potentially moveable hydrocarbons.
ASX Reserves and Resources Reporting Notes
(i) The reserves and prospective resources information in this document is effective as at 30 June, 2018
(Listing Rule (LR) 5.25.1)
(ii) The reserves and prospective resources information in this document has been estimated and is classified
in accordance with SPE-PRMS (Society of Petroleum Engineers - Petroleum Resources Management
System) (LR 5.25.2)
(iii) The reserves and prospective resources information in this document is reported according to the
Company’s economic interest in each of the reserves and prospective resource net of royalties (LR 5.25.5)
(iv) The reserves and prospective resources information in this document has been estimated and prepared
using the deterministic method (LR 5.25.6)
(v) The reserves and prospective resources information in this document has been estimated using a ratio of
6,000 cubic feet of natural gas to one barrel of oil. This conversion ratio is based on an energy equivalency
conversion method and does not represent value equivalency (LR 5.25.7)
(vi) The reserves and prospective resources information in this document has been estimated on the basis that
products are sold on the spot market with delivery at the sales point on the production facilities (LR 5.26.5)
(vii) The method of aggregation used in calculating estimated reserves was the arithmetic summation by
category of reserves. As a result of the arithmetic aggregation of the field totals, the aggregate 1P may be
a very conservative estimate and the aggregate 3P may be a very optimistic estimate due to the portfolio
effects of arithmetic summation (LR 5.26.7 & 5.26.8)
(viii) Prospective resources are reported on a best estimate basis (LR 5.28.1)
27
ANNUAL REPORT2018 OTTO ENERGY
RESERVES & PROSPECTIVE RESOURCES
(ix) The reserve numbers assume some investment over the life of the field which goes out to 2037. Proved
(1P) reserves assume no wells but some re-completions and a sidetrack. Proved and Probable (2P)
reserves assume some re-completions and two sidetracks Proved, Probable and possible (3P) reserves
assume a new well in addition to some recompletions and sidetracks.
(x) Otto has controls in place to provide assurance for reserves estimation and reporting, including staff
competency, staff accreditation and external reserves evaluations (LR 5.39.5).
(xi) Reserves are as originally announced to the ASX on 6 August 2018, and Otto is not aware of any new
information or data that materially affects the information included in the referred market announcement
and all the material assumptions and technical parameters underpinning the estimates in the relevant
market announcement continue to apply and have not materially changed (LR 5.43.2).
(xii) All of Otto’s reserves and prospective resources (except for those prospective resources designated as
Alaska) are located in the Gulf Coast or shallow water of the Gulf of Mexico, offshore Louisiana, USA.
GLOSSARY
Bbl = barrels
bcf = billion cubic feet
boe = barrels of oil equivalent
Bopd = barrels of oil per day
Btu = British Thermal Units
Mcfg = thousand cubic of gas
Mcfgpd = thousand cubic feet of gas per day
MMcf = million cubic feet
Mbbl = thousand barrels of oil
MMbbl = million barrels of oil
Mboe = thousand barrels of oil equivalent
MMboe = million barrels of oil equivalent
Mcf = thousand cubic feet
MMcf = million cubic feet
mmbtu = million British Thermal Units
28
ANNUAL REPORT2018 OTTO ENERGY
FINANCIAL REPORT 2018
FINANCIAL REPORT 2018
OTTO ENERGY
FINANCIAL REPORT
2018 CONTENTS
FINANCIAL REPORT 2018
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 the Consolidated Financial Statements
Directors’ Declaration
Independent Audit Report to the Members of Otto Energy Limited
Additional ASX Information
31
32
60
61
62
63
64
65
107
108
112
Annual General Meeting
The Annual General Meeting of Otto Energy Limited will be held on 15 November 2018.
30
ANNUAL REPORT2018
OTTO ENERGY
CORPORATE DIRECTORY
CORPORATE DIRECTORY
Directors
Mr John Jetter – Non-Executive Chairman
Mr Matthew Allen – Managing Director and Chief Executive Officer
Mr Ian Macliver – Non-Executive Director
Mr Ian Boserio – Non-Executive Director
Mr Paul Senycia – Executive Director
Company Secretary
Mr David Rich
Key Executives
Mr Matthew Allen – Managing Director and Chief Executive Officer
Mr Paul Senycia – Vice President Exploration and New Ventures
Mr David Rich – Chief Financial Officer and Company Secretary
Principal registered office
in Australia
Share Registry
Auditors
32 Delhi Street
West Perth WA 6005
Tel: + 61 8 6467 8800
Fax: + 61 8 6467 8801
Link Market Services Limited
Level 12 QV1 Building
250 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
Securities Exchange Listing
Australian Securities Exchange
ASX Code: OEL
Website address
www.ottoenergy.com
ABN
56 107 555 046
1
31
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The Directors present their report together with the consolidated financial statements of the Group
comprising Otto Energy Limited (referred to as ‘Otto’ or the ‘Company’) and its subsidiaries for the financial
year ended 30 June 2018 and the auditors’ report thereon.
Directors
The Directors in office at any time during the financial year and until the date of this report are set out below.
All Directors were in office for the entire period except for Mr Paul Senycia who was appointed on 24 April
2018.
Mr John Jetter BLaw, BEcon, INSEAD
Chairman (Independent Non-Executive)
Appointed Non-Executive Director 10 December 2007, Non-Executive Chairman 25 November 2015
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. Mr Jetter has been a non-executive Director of
Venture Minerals Limited since June 2010 and Peak Resources Limited since April 2015 and is a member of
the Remuneration and Nomination Committee.
Mr Matthew Allen BBus, FCA, F Fin, GAICD
Managing Director and Chief Executive Officer
Appointed 24 June 2015
Mr Matthew Allen was appointed Chief Executive Officer in February 2014 and Managing Director in June
2015. Mr Allen joined Otto Energy in 2009 as Chief Financial Officer and has played an integral role in
implementing Otto’s strategy since joining Otto. Prior to joining Otto, Mr Allen worked for Woodside Energy
for over 8 years in leadership roles in a number of Woodside business units, including within Woodside’s
overseas businesses in Africa.
Mr Allen’s experience lies in the operation and management of oil & gas companies with particular focus on
strategic, commercial and financial aspects of the business. Mr Allen has global upstream experience in the
USA, Asia, Africa, Australia and the Middle East. He is a Fellow of Chartered Accountants Australia and New
Zealand, Fellow of the Financial Services Institute of Australasia and Graduate Member of the Australian
Institute of Company Directors.
Mr Ian Macliver BCom, FCA, SF Fin, FAICD
Director (Independent Non-Executive)
Appointed 7 January 2004
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 in both resource and industrial companies, specifically responsible for capital raising and
other corporate initiatives. Mr Macliver has been the non-executive Chairman of Western Areas Limited since
November 2013, and non-executive Director since October 2011. Mr Macliver was a non-executive Director
of Rent.com.au Limited (formerly Select Exploration Limited) from September 2010 to June 2015 and a non-
executive Director of Range Resources Limited from June to August 2014. Mr Macliver is a member of the
Audit and Risk Management Committee and the Remuneration and Nomination Committee.
Mr Ian Boserio BSc Hons First Class (Geophysics), BSc (Geology)
Director (Independent Non-Executive)
Appointed 2 September 2010
Mr Ian Boserio brings to the Otto Board more than 30 years international experience in the oil and gas
business, focused predominantly on exploration and management. Mr Boserio was formerly at Shell as the
Australian New Business Manager, prior to that he led the Shell Australia and New Zealand exploration team
developing its gas portfolio for LNG development. Mr Boserio also worked with Shell internationally,
including roles in Australia, North Sea, Middle East, India and Indonesia, including a five year secondment
into Woodside. He is currently co-owner and technical director of private oil and gas company Pathfinder
Energy Pty Ltd. Mr Boserio is a member of the Audit and Risk Management Committee.
32
2
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Mr Paul Senycia BSc (Hons), MAppSc
Director (Executive)
Appointed 24 April 2018
Mr Paul Senycia is an exploration geoscientist with over 35 years of international oil and gas experience in
both commercial and technical aspects of the business. Mr Senycia has held senior roles in large and small
companies worldwide including Shell, Woodside and Beach Petroleum. Over the last twenty years Paul has
accumulated substantial Gulf of Mexico expertise both on the shelf and in the deep water. This has included
deal capture, asset management and project divestment activities. Outside the Gulf of Mexico, Paul has
worked in Europe, Asia, Africa and Australasia both on and offshore.
Company Secretary
Mr David Rich BCom, FCA, GAICD, AGIA, Grad.Dip.CSP
Appointed 31 January 2017
Mr Rich is an experienced public company CFO and Company Secretary with over 15 years as CFO of ASX
listed upstream oil and gas companies with international interests including Australia, Europe, Asia, Africa
and the USA.
Director’s interests
As at the date of this report, the interests of the Directors in the shares and rights of Otto Energy Limited
were:
Director
Mr J Jetter
Mr M Allen
Mr I Macliver
Mr I Boserio
Mr P Senycia
Principal activities
Number of
ordinary shares
21,607,020
7,666,667
6,007,627
2,803,968
3,661,468
Number of
convertible notes
200,000
-
-
-
-
Number of
rights
1,033,000
6,227,000
703,000
620,000
5,450,000
The principal activity of the Group is oil and gas exploration, development, production and sales in North
America.
Dividends
No dividend has been declared for the year ended 30 June 2018.
Strategy
The Company’s core strategic goal is to grow production in the Gulf of Mexico to 5,000 boepd by the end of
2020.
As at the date of this report the status of execution of this strategy is as follows:
•
•
•
•
Building a portfolio of US conventional production assets with a Gulf of Mexico focus and the capability
to transition to an operator;
Growth strategy underpinned by strong production and cash flow from flagship Gulf of Mexico SM 71
asset;
Exciting pipeline of ten high-impact exploration opportunities taking place over the next 15 months; and
An experienced team with a track record of successfully growing, operating and divesting oil and gas
assets globally who understand risk and capital management.
3
33
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Gulf of Mexico
The Company’s strategy is currently focused on growth in the Gulf of Mexico for the following reasons:
•
•
•
•
•
•
•
•
•
Proven prolific hydrocarbon province where technologies such as RTM seismic processing continue to
create new opportunities;
Low sovereign risk;
High margin oil with breakeven economics around US$20/barrel;
Short cycle time from discovery to development of 8-18 months;
Low cost drilling and development;
Relatively low risk exploration;
Deal flow is liquid and a full spectrum of opportunity size is available;
Otto has area expertise and well developed business relationships; and
Otto has production in the area.
In order to deliver on the strategy, the Company’s business development focus over the past year in the Gulf
of Mexico has been on pursuing prospects with the following characteristics:
• Miocene/Pliocene/Oligocene geology which are amplitude supported;
•
•
•
•
Investing capital into drilling, not seismic;
Seeking early cashflow/ROI – Approximately 12-18 months from exploration to production;
Shallow water (<300 feet) – keeping capex manageable; and
High liquids yields to increase margins.
Review of operations
A review of the operations of the Group during the financial year and the results of those operations are set
out below.
South Marsh Island 71 (SM 71)
Through the drilling of the SM 71 #1 discovery well (“SM 71 F1”) in April-May 2016, Otto earned a 50%
participating interest (equal to a 40.625% net revenue interest) in the SM 71 licence. Byron Energy Inc, a
wholly owned subsidiary of Byron Energy Limited (“Byron”) (ASX: BYE) is the operator, holding an equivalent
participating and net revenue interest. Water depth in the area is approximately 137 feet.
Facilities
The platform jacket and deck modifications were completed at Laredo’s onshore facility in Galveston, Texas
and all major decks stacked by October 2017 in preparation for load out to the SM 71 location.
In late November 2017 the Tetra Hedron derrick barge was de-mobilised off location after successfully
placing the jacket and decks over the SM 71 F1 well and securing the structure with pilings. The installation
of the jacket and decks comprising the SM 71 F Platform was completed without any safety or operational
issues.
Operations to lay the 500 foot 4-inch oil and 7,000 foot 6-inch gas pipelines were completed during October
2017. Each pipeline was initially laid and buried to within tie-in distance of the SM 71 F platform location and
their respective sales lines. Final tie-in work at the platform and sales lines was completed in December
2017 by dive crews soon after the jacket and decks were installed at the platform location in SM 71.
Development Drilling
In early December 2017 the Ensco 68 jack-up rig spudded the first development well, the OCS G-34266 #F-
2 well (“SM 71 F2”), on SM 71.
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4
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
On 27 December 2017 Otto reported that the SM 71 F2 appraisal well encountered four discrete hydrocarbon
bearing sands, including the B65 and D5, with an estimated combined net oil pay of true vertical thickness
of 190 feet (58 metres). The drill pipe became stuck approximately 214 feet below the bottom of the D5 sand.
Attempts were made to free the stuck drill pipe whilst evaluating various alternatives including the
optimization of the F2 wellbore and the drilling of a future F3 well. Consequently, it was decided to case the
F2 well to a depth of 7,700 feet measured depth (“MD”), 130 feet MD below the base of the B65 sand. By
doing so, the B65 sand logged in the well was preserved as a take point in that reservoir. The F2 well can
also be used to produce the J1 sand and B55 sand.
Real time “log-while drilling” porosity data indicated the porosity of both the B65 and D5 Sands to be
consistent with other wells in the area with porosities ranging up to 31% with a high net to gross sand ratio
in each zone.
Given the high quality and thickness of the D5 sand encountered in the F2 well and the fact that the joint
venture had a one-time option to drill a second well under the existing Ensco drilling contract, it was decided
to drill OCS G-34266 #F-3 well (“SM 71 F3”) well immediately following the casing of the SM 71 F2 well using
the Ensco 68 rig, rather than releasing it.
The F3 well spudded on 9 January 2018 USA Central Standard time and reached a final total depth of 7,717
feet MD on 26 January 2018. Logs indicated 211 measured depth feet of oil pay (175 feet TVT net oil pay) in
the D5 Sand and exhibited excellent rock properties with porosities in the 32% range. With the base of the
D5 Sand in the F3 well 150 feet below the base of D5 Sand in the F2 well, the D5 Sand oil column has been
further extended downdip.
Because of the northerly well bore trajectory of the F3 well, the very updip portions of the three other oil
sands were penetrated. The J1, B55 and B65 Sands each logged approximately 5 feet TVT net oil pay in the
F3 well, consistent with pre-drill expectations. The data points of these three sands will serve to help
delineate the size of each reservoir for future reserve determinations.
In addition to the J1, B55 and B65 zones, the F3 well also intersected 12 feet TVT net oil pay in the C10 which
is productive in other parts of the dome but, to date, not productive at SM 71. Pre-drill mapping did indicate
that the F3 would be at the very updip edge of the C10 in this well bore and this result sets up a further
opportunity to be exploited in future well bores or in the F3 wellbore.
Following drilling of the F3 well, the Ensco 68 drilling rig was repositioned over the SM 71 F1 well and
operations to complete the wells for production commenced. On 22 February 2018 Otto reported that the F1
well was completed for production in the D5 sand. On 5 March 2018 Otto reported that the F2 well was
completed for production in the B65 sand. On 3 April 2018 the F3 well was completed for production in the
D5 sand after delays due to downhole issues.
Production
Production operations at the SM 71 F platform began on 23 March when the SM 71 F1 well was brought on
line. The F1 well is completed in the D5 Sand. The SM 71 F2 well, completed in the B65 Sand, was opened to
the system on 25 March. On 6 April 2018 production from the SM 71 F3 well was initiated. The F3 well is
completed in the D5 Sand reservoir.
The SM 71 F1 and F3 wells continue to produce strongly and are being managed to ensure maximum recovery
from the field’s primary D5 Sand reservoir.
After initial high flow rates, the F2 well which is completed in the secondary B65 Sand experienced premature
pressure depletion, suggesting the well is in an isolated compartment, the reservoir is mapped well beyond
the small drainage area of the SM 71 F2 well.
The Operator has confirmed that the B65 Sand is one of many focus areas to be targeted by the seismic
processing project Byron is undertaking with Schlumberger’s subsidiary WesternGeco, These data will help
determine the placement of any sidetrack and future wells noting the significant remaining potential in the
B65 Sand as evidenced by the reserves upgrade at 30 June 2018.
5
35
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
On 6 August 2018 Otto released the updated independent reserves numbers as at 30 June 2018. These
include production data and the development drilling results. The report confirmed gross (100%) 2P reserves
have increased by 10.6 MMboe, nearly threefold, to 16.2 MMboe since 30 June 2017. Otto’s NRI share of 2P
reserves is 6.6 MMboe and 1P is 2.5 MMboe as at 30 June 2018. Refer to the subsequent events section below
for details on the independent reserves report.
Production and revenue details to 30 June 2018 are set out below:
SM 71 Production Volumes
Gross (100%)
SM 71 – Oil (bbls)
SM 71 – Oil (bopd)
SM 71 – Gas (Mscf)
Otto WI Share (50%)
SM 71 – Oil (bbls)
SM 71 – Oil (bopd)
SM 71 – Gas (Mscf)
Otto NRI Share (40.625%)
SM 71 – Oil (bbls)
SM 71 – Oil (bopd)
SM 71 – Gas (Mscf)
To 30 June
2018
348,581
3,486
240,438
174,291
1,743
120,219
141,611
1,416
97,678
SM 71 Sales Revenue – Otto 50% WI share
(before royalties)
To 30 June
2018
SM 71 – Oil - US$’million
SM 71 – Oil - US$ per bbl
SM 71 – Gas - US$’000
SM 71 – Gas – US$ per MMbtu
Notes
11.31
64.91
432
$3.68
1. Otto sells its high quality Louisiana Light Sweet crude (“LLS”) produced at SM 71 at premium to West
Texas Intermediate (“WTI”) based on current LLS versus WTI price differentials. Deductions are then
applied for transportation, oil shrinkage, basic sediment & water (BS&W), and other applicable
adjustments.
2. Gas revenues include NGLs. 1 Mscf = 1.09 MMbtu in June for SM 71 production. The thermal content of
SM 71 gas may vary over time.
South Timbalier 224 (ST 224)
In July 2017 Otto farmed-in to the ST 224 licence in the Gulf of Mexico shelf area. The block contained a large
amplitude supported, high condensate to gas ratio (CGR) gas condensate prospect delineated by 3D seismic.
Several existing production platforms fell within tie-back distance of the proposed well, making development
of any discovered hydrocarbons both quick and cost effective.
The well, operated by respected and experienced operator, W&T Offshore Inc,.commenced on 19 October
2017 and was drilled to a total measured depth of 10,900 feet (3,322 metres). The targeted BN sand interval
was intersected close to prognosis at 10,330 feet (3,149 metres) measured depth, however based on log
observations the sand was considered to be water bearing. The well was plugged and abandoned in
December 2017.
The joint venture, through Houston Energy, had also bid and won ST 235 which is the lease adjoining with
and immediately south of ST 224. ST 235 was relinquished on 21 May 2018.
36
6
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Bivouac Peak
The Bivouac Peak leases cover 2,821 acres of highly prospective acreage in the transitional zone inshore
southern Louisiana. The Operator has identified multiple prospects at both the Middle and Lower Miocene
levels demonstrating stacked amplitude and AVO (amplitude versus offset) support. Follow-up drilling
options have been identified at the Lower Miocene level that could increase the scale of the overall
opportunity.
Significant production exists in the adjacent Miocene sequence at the Little Bay field (greater than 45 Bcf gas
and 5 MMbbl condensate) and the Atchafalaya Bay field (greater than 100 Bcf gas and 0.6 MMbbl condensate).
During the year the operator, Byron, negotiated the extension of the term of the original Bivouac Peak lease
with the private landowners through 1 September 2019, to facilitate likely permit approval and anticipated
drilling activity.
Permitting and well planning activities on Bivouac Peak continued including site specific survey work, pre-
application geologic review, and the submission of the joint application coastal use permit to the Louisiana
Coastal Management and the US Army Corps of Engineers for review.
On 6 July 2018 Otto elected to participate in the initial test well, Weiss Adler et al No. 1, on the Bivouac Peak
East prospect. The well commenced on 25 August 2018. Refer to the subsequent events section below for
further details.
With nearby production infrastructure already in place, any successful well at Bivouac Peak would be capable
of being brought into production within 8-10 months of discovery at a development cost in the range of US$9-
11 million (100%).
Should a commercial discovery be made at Bivouac Peak East additional potential at the Deep prospect will
be followed up in due course.
Vermillion 232 (VR 232)
VR 232 is adjacent to Otto’s 50% owned SM 71 oil field and adds drilling opportunities which increase Otto’s
potential upside around the SM 71 facilities.
In June 2018 Byron Energy Inc, a wholly owned subsidiary of Byron Energy Limited was advised by the Bureau
of Ocean Energy Management (“BOEM”) that its bid for VR 232 was deemed acceptable by the BOEM and the
lease was awarded to Byron. The lease is subject to a 12.5% Federal Government royalty.
The Operator, Byron, has mapped a gas and gas condensate prospect on the block with in-house calculated
gross prospective resource potential of 11 Bcf and 170,000 barrels. This prospect could be tested from Otto’s
SM 71 F platform. There are currently no plans to drill VR 232 until production levels at the platform would
allow a successful VR 232 well to be produced efficiently. The Operator has also identified two other
prospects in VR 232 which require further geophysical evaluation before a drilling decision is made.
Byron evaluated this block with the same high-quality Reverse Time Migrated 3D seismic data and
proprietary Inversion processed seismic data used in the discovery of oil and gas at SM 71 in 2016. Upon
transfer, Otto’s working interest will be 50% and net revenue interest will be 43.75%.
Pursuant to the terms of a Participation Agreement, effective 1 December 2015, between Byron and Otto,
Otto has elected to participate in VR 232 at a fifty percent (50%) working interest.
Under that agreement, Otto must pay an amount equal to a gross one hundred thirty-three percent (133%)
of Otto’s fifty percent (50%) interest share of lease acquisition costs and the initial test well (dry hole costs)
plus a gross fifty percent (50%) of other past costs paid by Byron.
Under Byron’s bid of US$1.101 million for VR 232, Otto’s share was US$734,000.
Having now elected to participate in the drilling of the East prospect at Bivouac Peak and participate in VR
232 at a 50% working interest, Otto’s right to participate in new assets or projects under the December 2015
Participation Agreement with Byron has been fulfilled.
7
37
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Alaska Western Blocks
On 25 June 2018 Otto, along with 88 Energy Limited (ASX:88E) and Red Emperor Resources NL (ASX:RMP)
(collectively the “Consortium Partners”), announced they had executed a binding term sheet agreement with
Great Bear Petroleum Ventures II LLC (“Great Bear”) to acquire the majority of Great Bear’s working interest
in four leases comprising the “Western Blocks” (ADL#s 391718, 391719, 319720 and 391721). Refer to the
ASX release of 25 June 2018 for the full details.
In consideration for acquiring the leases, the consortium partners agreed to undertake the following:
• Provide a performance bond of US$3.0 million to the State of Alaska by 31 July 2018 (Otto’s share is
US$750,000); and
• Drill an exploration well in the Western Blocks by 31 May 2019.
The consortium partners agreed to provide the following consideration to Great Bear:
• Free carry Great Bear for a 10% working interest in the leases for the drilling, completion and production
testing of an initial test well, including all associated costs such as permitting, ice road access and test
production disposition;
• Pay US$500,000 upon execution of the definitive agreements;
• Pay US$500,000 upon receipt of final permits necessary to drill the initial test well, in any case by no later
than 31 December 2018; and
• Provide an option for Great Bear to acquire a further 10% working interest prior to the spud of the initial
test well by paying its pro-rata share of all costs of the initial test well or if exercised within 6 months of
completing the initial test well, by paying 200% of its pro-rata share of all costs of the initial test well.
The relevant interests in the Western Blocks following the commercial agreements are as follows (subject
to regulatory approval by the State of Alaska):
Working
Interest
(before back-in)
Paying Interest
(before back-in)
Net Revenue
Interest*
(before back-in)
Otto Energy
88 Energy (Drilling
Management)
Red Emperor
22.5%
36.0%
31.5%
Great Bear Petroleum**
10.0%
State of Alaska
-
25.0%
40.0%
35.0%
-
-
18.75%
30.00%
26.25%
8.33%
16.67%
100.0%
*Government royalty of 16.67%. **Currently Operator of record on leases.
100%
100%
Working Interest
(after back-in)
20.0%
32.0%
28.0%
20.0%
100%
The initial test well will satisfy Otto’s first participation obligation under Otto’s Purchase and Development
Agreement with Great Bear dated 29 May 2015. Refer to the Otto announcement of 1 October 2015.
Otto holds a working interest in four leases totalling over 22,710 acres located in the heart of the prolific
Nanushuk oil fairway. The Horseshoe-1 well, which discovered oil in 2017, is located less than one mile to
the west of Otto’s Western Blocks. Horseshoe-1 extended the Nanushuk play fairway by well over 20 miles
to the south of previous drilling. Repsol reports that since 2011 the Company has drilled multiple consecutive
discoveries on the North Slope along with partner Armstrong.
Industry sources have indicated contingent recoverable resources discovered to date in the trend could
contain over 1.2 billion barrels of oil. This places the trend as one of the most significant emerging plays on
the Alaska North Slope. With ongoing drilling in 2018 it is expected that additional discoveries will be made
in this emerging play trend.
The Horseshoe-1 discovery well was drilled by the Repsol-led joint venture in 2017 to a total depth of 6,000
ft. (1,828 meters) and encountered more than 150 ft. of net oil pay in several reservoir zones in the Nanushuk
section. The deviated Horseshoe-1A sidetrack was drilled to a total depth of 8,215 ft. and encountered more
than 100 ft. of net oil pay in the Nanushuk interval as well.
38
8
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Western Blocks Prospect
Recent in-house technical work conducted by Otto on its Alaska acreage in the Western Blocks has resulted
in the identification of an oil prospect with a gross best estimate prospective resource volume of 400 MMbbls
and a geological chance of success in the range of 25-30%. The prospective resource calculation was based
on a consideration of offset well information (Itkillik River-1 well completion information), seismic
expression and a recovery factor of 30%. Otto’s 18.75% net revenue interest (before Great Bear 10% back in
– refer table above) in the prospect would be 75 MMbbls. The prospective resource information was first
released to ASX on 25 June 2018.
The prospect was identified on modern 3D seismic data obtained through the Alaska Department of Natural
Resources, Division of Oil and Gas. On this seismic data the prospect shares many of the positive attributes
seen at the Horseshoe-1 discovery which found light oil reservoired in more than 150ft of net oil sand of the
Nanushuk delta sequence.
The discovery at Horseshoe-1 has extended the known accumulation of Nanushuk oil some 20 miles south
of earlier discoveries such as those at Qugruk 8 and Qugruk 301 which flowed 30 degree gravity crude at
rates as much as 2,160 and 4,600 bbls/d respectively.
The Horseshoe-1 discovery has signalled the presence of an extensive previously overlooked hydrocarbon
province which is in now attracting major development capital including the recent acquisition by Oil Search
Limited (ASX: OSH) of operatorship of the Pikka Unit and a number of oil exploration assets on the Alaska
North Slope.
Exploration success in the Nanushuk play-fairway is now being driven by the understanding that when
reservoir quality top set sands are present anomalously high amplitudes are seen on seismic data.
This type of positive amplitude response has also been seen on seismic over the Western Blocks. Otto
presently calculates a best estimate gross prospective resource of 400 MMbbls in the prospect area mainly
on the basis of this amplitude work.
Some of the block area to the south is not covered by 3D data and as yet uncalculated upside potential is
likely to exist in this area as well.
Further encouragement that the prospect will be found oil bearing is provided by the presence of oil shows
seen in the adjacent Itkillik River-1 well drilled in 1978 (from publicly available well data at the Alaska DNR).
Here oil was observed during drilling at multiple levels within fine grained sediments.
If 3D data had been available at the time Itkillik River-1 had been drilled, the well would likely have been
moved further south to intersect a better reservoir quality and more continuous sand interval. This higher
quality sand interval is the key target for the proposed Otto well.
Offtake Options
With the Oil Search operated Pikka unit development activities occurring to the west and the Conoco-Phillips
Meltwater unit facility some 10 miles to the east, any oil found within the Western Blocks will find a cost
effective, commercially attractive route to market. Project economics will be further enhanced by the shallow
nature of the oil pool.
Drilling Planning
88 Energy Ltd will manage the drilling of the initial test well in the Western Blocks on behalf of the joint
venture and consortium partners. Since year end a rig contract has been signed. Given that the location is
only accessible through an ice road, drilling will be undertaken during the winter operational months once
the Alaska North Slope is opened for operations.
Lease Terms
The four North Slope leases comprising the Western Blocks have recently been extended by three years with
the term now expiring on 30 April 2021. During this period the joint venture is required to post a US$3.0
million performance bond and undertake the drilling and testing of an initial test well by no later than 31 May
2019. This bond has been posted subsequent to year end. The leases have an annual rental of US$10.00 per
acre or fraction thereof.
9
39
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Alaska Central Blocks
Through its agreements with Great Bear Petroleum Operating ("Great Bear") in 2015, Otto has between an
8% and 10.8% working interest in 90 leases (covering 287,425 gross acres) held by Great Bear on the Alaskan
North Slope (“Central Blocks”).
Great Bear is a private exploration company focused exclusively on exploring and developing conventional
and unconventional resources in this highly prospective basin. The leases are in a major play fairway south
of the Prudhoe Bay and Kuparuk giant oil fields.
Great Bear has undertaken significant exploration work on the acreage since 2011 including:
• Acquisition and processing of approximately 2,970 km2 of 3D seismic data (1,170 km2 in 2016);
• Drilling of two unconventional stratigraphic test wells which cored three primary unconventional targets;
and
• 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 Trans-Alaskan Pipeline System (TAPS) means the acreage is well positioned for exploration.
Existing 3D seismic has allowed development of an extensive prospect portfolio which includes at least 4
well locations.
Otto’s exposure on the first two wells is limited to US$2.6m/well.
During the year 54 leases expired or were relinquished. The key prospects have been retained in the 90
leases held after this review and relinquishment process.
Houston Office
To support the pursuit of Otto’s strategic goal of 5,000 boepd in the US, the Company is in the process of
moving its operational office to Houston, Texas. Managing Director, Mr Matthew Allen, has relocated to
Houston since year-end.
In addition, Otto has recruited an exploration team led by Will Armstrong, who has more than 30 years of
experience across the Gulf of Mexico. Full background information on the team can be found in the ASX
release dated 16 July 2018.
Otto has opened its office located at Two Allen Center in Houston Downtown.
Financial summary
The Group recognised a loss after income tax for the year of $5.2 million (2017: loss $5.2 million). Net
revenue from SM 71 production was US$9.5 million generating a gross profit of US$7.9 million noting
production only commenced on 23 March 2018 (2017: Nil). Costs of production included US$877,000 for
amortization of oil and gas properties (2017: Nil). The net loss for the financial year ended 30 June 2018
included exploration expenses of US$4.8 million (2017: US$0.9 million) which was predominantly for the ST
224 well (US$3.6 million).
Administration costs were US$4.0 million, down from US$4.4 million in 2017. This includes business
development costs of US$0.5 million (2017: US$0.5 million) and the costs of establishing the office in
Houston.
Finance costs totaled US$4.4 million (2017: Nil) which included non-cash items of accretion of effective
interest on convertible notes (US$0.3 million), fair value adjustment on embedded derivative element of
convertible note US$2.4 million) and amortisation of borrowing costs (US$0.2 million). The other components
of finance costs were success fee accrual (US$0.2 million) and interest on convertible note (US$1.2 million).
40
10
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Significant changes in the state of affairs
Significant changes in the state of affairs of the Group during the financial year were as follows:
•
•
•
On 23 March 2018 production commenced from the Company’s 50% owned SM 71 oil field in the Gulf of
Mexico. As at 30 June 2018 Otto had generated revenue from the SM 71 field of US$11.7 million before
royalties from 174,291 bbls of oil and 120 MMscf of gas (Otto’ share). This equates to net revenue of
US$9.5 million after federal royalties.
On 2 August 2017, following shareholder approval at a general meeting, the Company raised $8.2 million
via an issue of secured convertible notes to Molton Holdings Limited, a major Otto shareholder ($8
million), and Mr John Jetter, Otto’s Chairman ($0.2 million). Key terms of the convertible notes are set
out in the notice of meeting released to the ASX on 23 June 2017. Funds raised via the issue were used
to develop Otto’s SM 71 oil project.
On 25 October 2017 the Company announced that it has successfully raised A$8.5 million through a
placement at A$0.035 per share, attracting strong interest from new and existing institutional and
sophisticated investors. The heavily oversubscribed placement was strongly supported by the
Company’s larger shareholders, including all of the company’s directors, as well as several new
professional and sophisticated investors.
The first tranche of the Placement, comprising 236.8 million shares (A$8.3 million) was issued utilising
Otto’s available placement capacity under ASX Listing Rules 7.1 and 7.1A respectively on 1 November
2017. The second tranche of the Placement, comprising 6.1 million shares(A$0.2 million) was issued to
Otto directors (or their nominees) on 1 December 2017 following shareholder approval at the Company’s
Annual General Meeting held on 29 November 2017.
The Company also announced on 25 October 2017 it was undertaking a Share Purchase Plan to its
existing eligible shareholders, providing them with the opportunity to subscribe for up to a maximum of
$15,000 worth of shares at the placement price of $0.035 per share. The Company was aiming to raise
up to $1 million with the ability to determine to raise a higher amount or scale back applications at its
discretion. The SPP opened on Monday 30 October 2017 and closed at 5.00pm (AWST) on Friday 17
November 2017.
The SPP closed with applications of A$6.2 million, well in excess of the A$1 million Directors had been
aiming to raise from the SPP. As a result of the significant oversubscription, the Board approved an
increase in the total amount to be accepted to A$3.5 million of the A$6.2 million SPP applications
received. The balance of A$2.7 million was refunded and 100 million shares were issued on 27
November 2017.
Significant events after the balance date
No matters or circumstances have arisen since 30 June 2018 that have significantly affected, or may
significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in
future financial years apart from those listed below:
Appointment of US technical team
The Company has completed the establishment of its Houston office and appointment of a US-based
technical team. Managing Director Matthew Allen has relocated to Houston to lead the team. In addition,
Otto is pleased to announce the following technical appointments in Houston:
Will Armstrong – Vice President, Exploration and New Ventures
Philip Trajanovich – Senior Commercial Manager
Mark Sunwall – Senior Exploration Consultant
Kevin Small – Senior Exploration Consultant
The exploration team will be led by Will Armstrong, who has more than 30 years of experience across the
Gulf of Mexico. Will’s exploration work has seen the drilling of 162 prospects across his career at a
commercial success rate in excess of 66%.
11
41
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The exploration team have been engaged as consultants inside the Otto business since early 2018. This has
involved the screening of a number of prospects and investment opportunities including the Hilcorp Gulf
Coast package. As a result of this consulting work, and past experience, the exploration team are very
familiar with the Company’s current portfolio, screening criteria and focus area for potential prospects.
In addition, Otto has opened its office located at Two Allen Center in Houston Downtown. Refer to the ASX
release of 16 July 2018 for further details.
Alaska Western Blocks
On 30 July 2018 Otto advised that, via its wholly owned subsidiary Borealis Alaska LLC, it had executed
definitive agreements with Great Bear Petroleum Operating LLC, along with the Consortium Partners, 88
Energy Limited (Captivate Energy Alaska, Inc) and Red Emperor Resources NL, to acquire the majority of
Great Bear’s working interest in exchange for drilling a commitment well on the Western Blocks prior to 30
May 2019. Refer to the operational update above and Otto’s ASX release of 25 June 2018 for the details of the
agreement and Western Blocks opportunity.
On 29 August 2018 the Company announced that the operator Captivate Energy Alaska, Inc, (a 100% owned
subsidiary of 88 Energy Limited) had executed a rig contract for the drilling of the Winx Prospect, located on
the Western Blocks, North Slope of Alaska.
The Winx Prospect is a 3D seismic defined oil prospect in the successful Nanushuk play fairway with a gross
mean unrisked prospective resource of 400MMbbls (75MMbbls net to Otto) and a geological chance of
success in the range of 25-30%.
Hilcorp eight well farmin
On 31 July 2018 Otto advised that it had entered into a joint venture with Hilcorp Energy which will see it earn
a 37.5% working interest in an eight well portfolio of prospects in the Onshore/Near Shore USA Gulf Coast
(Gulf of Mexico). The wells will be drilled by Hilcorp, a highly experienced, privately-owned operator based
in Houston, over the next 15 months
Details of the Agreement
Under a Joint Exploration and Development Agreement (JEDA) with Hilcorp Energy Otto has committed to
an eight well drilling program with an estimated cost of US$75 million (100%).
Otto will earn a 37.5% working interest by paying 50.0% of the costs of drilling and either setting casing or
plugging and abandoning the well plus lease acquisition costs at each of the eight prospects. The estimated
cost of the commitment to Otto is US$37.5 million. US$4 million was paid immediately to cover initial land
and other costs.
Well Cap - Otto has the option to discontinue participation in each prospect well if actual costs exceed the
approved expenditure budget by 20%. If Otto elects to not continue, it will forfeit rights to that prospect. If
Otto proceeds, costs from then on will be at working interest percentages.
Program Cap - Once Otto has incurred a total amount relating to the initial eight wells of US$42.5m, it will
have the option to elect (but not the obligation) to participate in the remaining undrilled prospects in the
initial eight well program at working interest percentages. If Otto elects to not participate in any undrilled
prospects, it will forfeit rights in those prospects.
Minimum Commitment – Should Otto not participate in one or more of the eight wells, it shall be liable for
liquidated damages in the sum of US$1 million per prospect.
Additional Upside
Should either the Tarpon or Mustang prospects be successful then Otto has ground floor rights (ie pays only
its working interest) to participate in the nearby Damsel and Corsair/Hellcat opportunities. These wells are
in addition to the eight wells.
Under the JEDA Otto has a right of first offer to a subsequent Gulf Coast program, if Hilcorp elect to offer
such a program to third parties.
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ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
43
ANNUAL REPORT2018DIRECTORS’ REPORT For the Year Ended 30 June 2018 13 About Hilcorp Energy Founded in 1989, Hilcorp is one of the largest privately held oil and natural gas companies in North America. Hilcorp specializes in reinvigorating legacy oil and gas fields across North America; including in the US Gulf Coast, Alaska and the Rockies and currently produces approximately 325,000 boepd. To put this into context, Australia’s largest oil and gas company, Woodside, produces ~230,000 boepd. Hilcorp has nearly 2,000 employees and has been consistently recognized for its strong culture, values and ethics both within the firm and in the communities in which it operates. Otto is very pleased to be partnering with a Gulf Coast operator with proven capability to take exploration prospects into production. Impact on Strategy Otto has a clear strategy to grow production in the Gulf of Mexico to 5,000 boepd by the end of 2020. More specifically Otto’s target area for new opportunities lies within the Pliocene, Miocene and Oligocene reservoir systems of the US Gulf of Mexico shelf and Gulf Coast where capital costs are manageable for Otto and the availability of infrastructure means the time from discovery to production is short. Otto is deploying its experienced technical team to find attractive, low risk drill opportunities in this area to provide high-margin oil and gas production growth. This growth strategy is underpinned by the strong production and cashflow from Otto’s 50% owned SM 71 oil field in the Gulf of Mexico shelf. The Hilcorp eight well portfolio is a significant step toward the 5,000 boepd and puts Otto into partnership a large and well-respected operator in the region. In addition it offers further potential through follow-up drilling and a right of offer on further Hilcorp Gulf Coast farmouts. Details of the Drilling Program Information regarding the eight wells is set out in the table below. Note that on 30 August 2018 Otto announced that the Big Tex well commenced drilling. Further details are set out later in this subsequent events note. OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
44
ANNUAL REPORT2018DIRECTORS’ REPORT For the Year Ended 30 June 2018 14 Prospective Resources The range of prospective resources for each prospect is set out below. Equity raising On 31 July 2018 the Company announced it was undertaking a capital raising of approximately A$20 million via an institutional Placement and a fully-underwritten, accelerated non-renounceable Entitlement Offer to fund its US$37.5 million share of the drilling program. Refer above and to the ASX release of 31 July 2018 for details on the Gulf Coast Package of eight wells with Hilcorp. The offer price of A$0.059 represented a: •7.8% discount to the last close of A$0.064 on Monday 30 July 2018; •9.5% discount to the 30 day VWAP; and •6.5% discount to TERP. Placement The Placement raised a total of A$10m through the issue of approximately 169.5 million shares at A$0.059 per share. Institutional Entitlement Offer The Institutional Entitlement Offer raised a total of A$3m through the issue of approximately 51.6 million shares at A$0.059 per share The Institutional Entitlement Offer shortfall was strongly oversubscribed by institutional shareholders. Shares issued under the placement and Institutional Entitlement Offer were allotted on Friday 10 August 2018. OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Retail Entitlement Offer
The retail component of the Entitlement Offer (Retail Entitlement Offer) provided eligible retail
shareholders in Otto the opportunity to acquire 1 new share for every 9 shares held at the record date
of 7.00pm (AEST) on 2 August 2018.
A$5.5 million (78%) of Entitlements were taken up leaving a Shortfall of A$1.5 million. A further A$6.0
million in subscriptions were received for Additional New Shares which was A$4.5 million in excess of
the Shortfall of A$1.5 million, hence the A$4.5 million was refunded. The scale back was determined
based on the pro-rata of the Additional New Shares applied for to the shareholder’s entitlement as at
the Record Date. Accordingly, given the Retail Entitlement Offer was oversubscribed, there was no
allocation to underwriters.
A total of A$7 million was raised from the Retail Entitlement Offer through the issue of 118.5 million
shares at A$0.059 per share.
New shares issued under the Retail Entitlement Offer were allotted on 29 August 2018.
As a result of the entitlement offer, the conversion price for the convertible notes reduced from A$0.055
to A$0.05484.
Bivouac Peak
On 9 July 2018 Otto announced that it had elected to participate in the initial test well, Weiss-Adler et.
al. No. 1 (“Weiss-Adler#1”), on the Bivouac Peak East prospect.
The estimated cost for the 18,294 ft MD/18,000 ft TVD well is US$10.8 million (100% dry hole cost). Otto
will earn a 40% working interest by paying 53.33% of the costs of the well to reach the earning depth or
up to a cap of US$5.33 million, whichever occurs first, after which Otto will revert back to paying 40%
of all future costs.
The Bivouac Peak project area comprises two prospects, the East Prospect and the Deep Prospect. The
total mapped gross 8/8ths prospective resources for the two combined prospects at Bivouac Peak are
estimated at 16.0 million barrels of oil (“Mmbo”) and 177.7 billion cubic feet of gas (“Bcf “), or 45.6
million barrels oil equivalent (“Mmboe”)1 .
The Weiss-Adler #1 well is designed to test the Bivouac Peak East Prospect, targeting the regionally
productive Miocene Cib Op section, with a mapped gross 8/8ths prospective resource of 11.3 MMbbls
and 125.6 Bcf, or a combined 32.2MMboe. Although the East and the Deep prospects are independent,
success at the East Prospect would provide positive seismic calibration, potentially reducing risk at the
Deep Prospect as well.
On 27 August 2018 Otto announced that the Weiss-Adler #1 exploration well had commenced. The
Parker Drilling Company Rig #77-B Deep Drilling 3000 HP Posted Barge Rig will drill to a depth of
18,294 ft Measured Depth (“MD”)/18,000 ft True Vertical Depth (“TVD”). The well is expected to take
approximately 75 days to reach total depth.
In case of success, completion and development costs to first production are currently estimated in the
range of US$9.0-11.0 million (gross). Should the well be productive, it is currently estimated that this
well would commence production within 8-10 months following drilling of the initial test well.
Big Tex spud
On 30 August 2018 Otto announced that the initial exploration well, SL 192 PP 031, on the Big Tex
prospect had commenced drilling from a bargemounted rig.
The well will be drilled to 13,175 ft MD/12,700 ft TVD and is expected to take 55 days to reach total depth.
Otto will earn a 37.5% working interest by paying 50% of the costs of drilling and either setting casing
or plugging and abandoning the well, after which point Otto will pay 37.5% of all future costs. The well
is expected to cost the Company US$4.23 million (50% paying interest). The exploration well on the Big
Tex prospect is targeting the Tex W 16 Sand and Tex W 18 Sand that are Middle Miocene in age. This is
a prolific section, having produced from the east in Hilcorp’s East Bay Field, and from the west from
the massive West Delta 30 Field, which has produced 562 MMBO and 934 BCF to date.
15
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ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The success case development concept will be a flowline tieback to an existing platform. The prospect
has been assessed as having a probability of success of 54%.
Nearly threefold reserve increase at SM 71
On 6 Aug 2018 Otto provided an update on the Company’s reserves and resources position for its 50%
owned South Marsh Island Block 71 (“SM 71”) oil producing project, in the shallow waters of the Gulf of
Mexico as independently assessed by Collarini Associates (“Collarini”).
The SM 71 reserves and resources as at 30 June 2018 are as follows:
The Collarini report is effective as of 30 June 2018 and is the first independent reserve report for the
SM 71 project since production began in March 2018. All reserves quoted below are remaining reserves,
excluding production of approximately 349,000 barrels of oil and 240 MMcf of gas (gross) through 30
June 2018.
Collarini has estimated an increase in 2P reserves of 4.3 MMboe net to Otto (excluding production to 30
June 2018) a near tripling of the 2017 2P reserves estimate.
The significant increase in all key reserve categories is directly due to the success of the appraisal and
development drilling program in 2017/18. Both the thicker than expected net oil zones and exceptional
well performance to date from the D5 producing sands in both the F1 and F3 wells are contributing
factors to the positive additions and revisions to the Company’s reserves. Further details on the
material changes to reserves is set out below.
Proved and Probable Reserves - Net of Actual Production
The increase in proved and probable reserves is due to the successful SM 71 F2 (“F2”) appraisal well
drilled in December 2017 and the SM 71 F3 (“F3”) development well drilled in January 2018.
Significantly thicker than predicted oil bearing sands were logged in the drilling of the SM 71 F2 and F3
wells in the D5 Sand which has resulted in reserve additions and upgrades. Additionally, flow rates
from the F1 and F3 wells have continued to exceed pre-start-up predictions resulting in positive
revisions to expected recoveries.
Drilling of the B65 Sand in the SM 71 F2 well resulted in a positive reclassification of a portion of
Prospective Resources to the Proved and Probable Reserves categories. Although the SM 71 F2 well
has experienced premature pressure depletion, suggesting the well is in an isolated compartment, the
reservoir is mapped well beyond the small drainage area of the SM 71 F2 well.
72% of the remaining proved and probable reserves are classified as developed or behind pipe with the
balance classified as undeveloped.
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ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Possible Reserves
The increase in possible reserves at SM 71 is mainly due to:
a) Potential upside recoveries and drainage areas from the producing D5 reserves
b) The reclassification to possible reserves of a material proportion of the prospective resource
previously attributed to the B65 Sand, and
c) the addition of the possible reserves attributed to the B65, J-1 and D5 sands as result of the
development drilling in 2017/18.
Material Changes to Prospective Resources
The decrease in prospective resources is due to reclassification of all of the 2017 B65 Sand prospective
resource into proved, probable and possible reserves in 2018 following successful discovery, appraisal
and development drilling and some production.
SM 71 status
As at 19 September 2018, cumulative gross production was approximately 641,737 barrels of oil and
556 million cubic feet of gas, on a gross basis with no produced formation water. The current field sales
rate as of 19 September 2018, was approximately 3,600 bopd and 6.0 mmcfgpd, on a gross basis after
shrinkage at the sales meter. Recompletion of the F2 well from the B65 Sand to the B55 Sand is
expected to commence during the last week of September 2018.
Likely developments and expected results
Likely developments in the operations of the Group that were not finalised at the date of this report
included:
• Drilling results for the Bivouac Peak and Big Tex wells currently drilling;
•
•
Participate in the drilling of another seven wells on the Gulf Coast with Hilcorp; and
Participate in the drilling of a well in Alaska in early 2019.
Additional comments on expected results of certain operations of the Group are included in the Review
of Operations above.
In accordance with its objectives, the Group intends to participate in a number of exploration
and appraisal wells and will consider growing its exploration effort by farmin, permit application
and/or acquisition within its existing operational focus area of North America with a specific target of
the Gulf of Mexico. Further information on likely developments in the operations of the Group 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 Group.
Environmental regulation and performance
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.
17
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ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Directors’ meetings
The number of meetings of Directors (including meetings of committees of Directors) held during the
year and the numbers of meetings attended by each Director were as follows:
Board meetings
Audit and risk management
committee
Director
Mr J Jetter
Mr M Allen
Mr I Macliver
Mr I Boserio
Mr P Senycia
Number
eligible to
attend
9
9
9
9
2
Number
attended
9
9
9
9
2
Number
eligible to
attend
-
-
2
2
-
Number
attended
-
-
2
2
-
Number
attended
Remuneration and
nomination committee
Number
eligible to
attend
3
-
3
-
-
3
-
3
-
-
Indemnification and insurance of Directors and officers
During the financial year, the Company paid a premium of $80,713 to insure the Directors and officers
of the Company and its controlled entities, and the managers of each of the divisions of the Group.
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 Group, 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.
Rounding of amounts
The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports)
Instrument 2016/191, and in accordance with that instrument, amounts in the consolidated financial
statements and Directors’ Report have been rounded off to the nearest thousand dollars, unless
otherwise indicated.
Non-audit services
The following non-audit services were provided by the entity's auditor, BDO Australia. The Directors
are satisfied that the provision of non-audit services is compatible with the general standard of
independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of
non-audit service provided means that auditor independence was not compromised.
48
18
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
BDO Australia received or are due to receive the following amounts for the provision of non-audit
services:
Tax compliance services
Tax consulting and tax advice
2018
US$
2017
US$
3,751
1,056
4,807
28,687
18,970
47,657
Auditor’s independence declaration
The auditor’s independence declaration is included on page 60 of this report.
Remuneration report (audited)
The Directors of the Company have prepared this remuneration report to outline the overall
remuneration strategy, policies and practices which were in place during 2018. This structure includes
the share rights and option plans approved by the shareholders at the Company’s Annual General
Meeting on 16 November 2016. 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 Group’s strategy and goals;
b) delivery of value-adding outcomes for the Group;
c)
d)
fair and reasonable reward for past individual and Group performance; and
incentive to deliver future individual and Group 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 Group as a whole.
The remuneration policies and structure in 2018 were generally the same as for 2017.
Key management personnel disclosed in this report are:
Directors
Mr John Jetter
Mr Matthew Allen
Mr Ian Macliver
Mr Ian Boserio
Mr Paul Senycia
Executives
Mr David Rich
Mr Matthew Worner
Mr Craig Hasson
Non-Executive Chairman
Managing Director and Chief Executive Officer
Non-Executive Director
Non-Executive Director
Executive Director and Vice President Exploration and New Ventures,
commenced 4 April 2018
Chief Financial Officer and Company Secretary, commenced 28 February
2017 and 31 January 2017 respectively
Commercial Manager, ceased 1 July 2017
Chief Financial Officer, ceased 28 February 2017
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 and review remuneration policies and practices including Company
incentive schemes and superannuation arrangements.
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ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The Committee considers independent advice, where circumstances require, on the appropriateness
of remuneration to ensure the Group attracts, motivates and retains high quality people. An advisor
was not retained for the 2017 calendar year review.
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 two 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 Group. Performance of the Directors and the CEO of the
Group 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 Group’s performance
benchmarks and the achievement of individual performance objectives.
Non-executive director remuneration policy
Non-executive Directors of the Group 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 reviewed in June 2018. Prior to this there had been no increase in non-
executive director fees since 2012. 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.
Non-executive Directors received a grant of performance rights on 29 November 2017 following
approval by shareholders at the Company’s Annual General Meeting. The grant was based on 33% of
FAR. The Board believes that the issue constituted reasonable remuneration having considered the
peer group comparisons, the recent history of the Company, the experience of each of the Directors
and the responsibilities involved in that office.
Directors’ fees
The following fees have applied:
Base fees
Chair
Non-executive Directors
From 1 July
2018
From 1 July
2017 to
30 June 2018
From 1 July
2016 to
30 June 2017
A$150,000
A$90,000
A$ 125,000
A$ 75,000
A$ 125,000
A$ 75,000
Additional fees
Audit and Risk Management Committee Chair
A$10,000
A$ 10,000
A$ 10,000
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ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Retirement allowances for non-executive Directors
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 Group for the year ended 30 June
2018 is summarised below.
The remuneration structure in place for the year ended 30 June 2018 applies to all employees including
key management personnel and staff members of the Group. The Group‘s remuneration structure has
three elements:
fixed annual remuneration (FAR) or base salary (including superannuation);
a)
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 Group’s objective to ensure that executive remuneration is aligned to Group’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 Group pays competitive base
salaries which have been benchmarked to the market in which the Group operates. The Group 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 has engaged independent
advisors to review the remuneration levels paid to the Group’s key management personnel. An advisor
was not retained for the 2017 calendar year review.
FAR is 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 Group and overall competence in
fulfilling the requirements of the particular role.
There is no guaranteed base pay increases included in any executives’ contracts.
Superannuation contributions required under the Australian superannuation guarantee legislation
continue to be made and are deducted from the executives overall FAR entitlements.
b) Short-term incentives
Executives have the opportunity to earn an annual short-term incentive (STI) if predefined targets are
achieved. The CEO and other members of the executive team have an STI opportunity of approximately
20% of FAR. The targets are reviewed annually.
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51
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
STI awards for the executive team in the 2018 financial year were based on the scorecard measures
and weightings as disclosed below. Objectives and measures aligned to the Company’s strategic and
business objectives were set and monitored by the Board. These included the following general
categories:
• Health, safety & environment
•
Total shareholder return
•
Asset specific
• New business development
•
Leadership
The Board and Remuneration and Nomination Committee are responsible for assessing whether the
predefined targets are met. The Committee review in February 2018 concluded that no STI would be
awarded to the Managing Director and Vice President Exploration and New Ventures and a partial STI
of 10% of FAR would be awarded to other staff for the 2017 calendar year. The only KMP to receive a
bonus was the Chief Financial Officer who received A$30,000 being 10% of FAR. The primary basis for
the Committee’s conclusion was that the partial STI provided the newer staff, who had not received any
grant of performance rights, was some reward for the successful progress of the SM 71 development
(wells had been drilled and production was imminent at the time) and cost and capital management
during 2017.
c) Long-term incentives
The Group 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 Performance Rights and Employee Share Option Plans which were
approved by shareholders at the 2013 Annual General Meeting and again at the 2016 Annual General
Meeting.
The Otto Energy Limited Performance Rights and Employee Share Option Plans are designed to provide
long-term incentives for employees to deliver long-term shareholder returns. Under the plans,
participants are granted performance rights or options which only vest if certain performance
conditions are met and the employees are still employed by the Group at the end of the vesting period.
Participation in, and administration of, 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 the vesting period and/or Otto Energy
Limited’s total shareholder return (‘TSR’), including share price growth, dividends, and capital returns.
For the rights on issue during, and at the end of the year, vesting of the rights for directors, the CEO
and other members of the executive team were based on TSR performance only. Other employees’
rights were based 50% on time and 50% on TSR. The TSR performance required for all rights on issue
is 10% per annum, compounding from the date of grant to the measurement date. If the TSR vesting
condition is not met on a measurement date, no rights vest and those performance rights continue to
exist as unvested performance rights to be retested at the next measurement date or expiry date,
whichever is later.
On the measurement date of 1 February 2018 1,600,000 performance rights held by key management
personnel vested based on TSR, as the TSR from the grant date of 3 October 2014 to 1 February 2018
was 99.9% (using a grant date share price of A$0.0285 after adjustment for the 2015 dividend and capital
return) which is above the required 10% p.a. compounded rate of 37.41%. A total of 3,066,668 rights
granted to key management personnel on 23 April 2015 did not vest as the TSR hurdle was not met and
hence continue to exist to be tested at the next measurement date.
Once vested, the performance rights are automatically converted into shares. Performance rights are
granted under the plan for no consideration.
52
22
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Generally LTI awards have been based on four maximum LTI organisational benchmarks 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
MD/CEO
Management
LTI Organisational
Benchmarks
50%
40%
Professional
and technical
30%
Support staff
10%
For the award on 29 November 2017 to key management personnel, a flat rate of 33% of FAR was used
to calculate the number of rights awarded.
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.
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 Securities Trading Policy. Executives
are prohibited from entering into any hedging arrangements over unvested rights. While the Employee
Share Option Plan does not specifically prohibit holders from entering into hedging arrangements over
options, the Board would include such restrictions in any offer under the 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 Group’s 2017 Annual General Meeting
Otto Energy Limited received more than 98.9% of “yes” votes on its remuneration report for the 2017
financial year. The Company did not received any specific feedback at the Annual General Meeting or
throughout the year on its remuneration practices apart from some comments regarding the
determination of the 10% TSR vesting hurdle rate versus the number of rights issued (percentage of
FAR).
Performance of Otto Energy Limited
The Corporations Act requires disclosure of the Company’s remuneration policy to contain a discussion
of the Company’s earnings and performance and the effect of the Company’s performance on
shareholder wealth in the reporting period and the four previous financial years. The table below
provides a five year financial summary.
30 June
2014
30 June
2015
30 June
2016
30 June
2017
30 June
2018
0.047*
16,404
13,295
(20,086)
Net profit/(loss) after
tax (US$’000)
Share price at year end
(AUD)
Basic earnings/(loss)
(US cents per share)
Return of capital
(AU cents per share)
Total dividends
(AU cents per share)
* After deducting the $0.0564 per share return of capital to shareholders on 26 June 2015
(5,247)
(0.44)
(1.70)
0.044
0.069
0.025
1.16
0.76
1.42
5.64
-
-
-
-
-
-
(5,194)
0.064
(0.37)
-
-
23
53
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Details of remuneration
The following table shows details of the remuneration received by Directors and executives of the Group
for the current and previous financial year.
Remuneration and other terms of employment for the Managing Director & Chief Executive Officer and
other executives are formalised in service agreements. Each of these service agreements provides for
performance related conditions and details relating to remuneration are set out below.
Fixed remuneration
Variable remuneration
Total
Year
Salary
and fees
Super-
annuation
Other
benefits
(ii)
Termination
benefits
Cash
bonus
Performance
rights (i)
A$
A$
A$
A$
A$
A$
Annual
and long
service
leave
A$
-
-
8,327
A$
125,000
125,000
450,000
445,000
14,512
77,626
77,626
68,493
51,447
356,000
346,000
1,077,119
1,045,073
-
-
-
-
25,983
31,820
34,310
46,332
304,309
12,288
101,887
3,061
-
-
185,500
(17,025)
-
(3,424)
320,000
304,309
607,387
6,710
8,864
(7,253)
Directors
Mr J Jetter
Mr M Allen
Mr I MacIiver
Mr I Boserio
Mr P Senycia(iii)
Total Director
remuneration
Executives
Mr D Rich (iv)
Mr C Hasson (v)
Mr M Worner (vi)
Total executive
remuneration
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
-
-
25,000
30,000
7,374
7,374
6,507
23,553
25,000
35,000
63,881
95,928
24,949
9,679
-
24,231
2,533
30,400
27,482
64,310
-
-
1,191
1,429
-
-
-
-
1,011
1,020
2,202
2,449
1,633
907
-
1,441
404
1,754
2,037
4,102
4,239
6,551
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
132,370
(22,525)
86,115
(22,525)
218,485
(22,525)
218,485
-
-
-
-
-
-
-
-
-
-
-
-
8,238
133,238
-
125,000
65,450
73,316
5,606
-
4,944
-
59,254
73,316
549,968
564,257
90,606
85,000
79,944
75,000
467,248
487,156
143,492
1,321,004
146,633
849,257
30,000
19,777
392,956
-
-
-
-
-
-
-
115,534
-
(54,298)
272,219
(42,970)
(65,982)
19,822
464,801
30,000
(23,193)
326,974
-
(34,476)
852,556
30,000
120,299
1,647,978
-
112,156
2,188,967
Total
2018
2017
1,381,428
1,652,460
43,174
39,078
91,363
160,237
(i)
Performance rights have been valued using a Hoadley hybrid single share price model. Further
details of the Performance Rights Plan is contained in this Remuneration Report on pages 56 to 58
and Note 21.
(ii) Car parking provided by the Company.
(iii) Mr P Senycia was appointed executive director on 24 April 2018.
(iv) Mr D Rich appointed as Chief Financial Officer and Company Secretary on 28 February 2017 and
31 January 2017 respectively.
(v) Mr C Hasson ceased as Chief Financial Officer on 28 February 2017. Share-based payment expense
is negative due to reversal on cessation of employment.
(vi) Mr M Worner ceased as Commercial Manager on 1 July 2017. Share-based payment expense and
long service leave is negative due to reversal on cessation of employment. Termination benefits in
2018 are negative due to reversal of 30 June 2017 accrual.
54
24
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The relative proportions of remuneration that are linked to performance and those that are not are as
follows:
Fixed and other
2017
2018
At risk – STI
At risk – LTI (i)
2018
2017
2018
2017
Directors
Mr J Jetter
Mr P Senycia(iv)
Mr M Allen
Mr I Macliver
Mr I Boserio
Executives
Mr D Rich (ii)
Mr C Hasson (iii)
Mr M Worner (v)
94%
87%
88%
94%
94%
87%
-
-
100%
85%
87%
100%
100%
100%
120%
95%
-
-
-
-
-
8%
-
-
-
-
-
-
-
-
-
-
6%
13%
12%
6%
6%
-
15%
13%
-
-
5%
-
-
-
(20%)
5%
(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 D Rich was appointed as Chief Financial Officer and Company Secretary on 28 February 2017 and
31 January 2017 respectively.
(iii) Mr C Hasson ceased as Chief Financial Officer on 28 February 2017. At risk - LTI is negative due to
reversal of share-based payments on cessation of employment.
(iv) Mr P Senycia was appointed executive director on 24 April 2018
(v) Mr M Worner ceased as Commercial Manager on 1 July 2017.
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.
Remuneration and other terms of employment for the Managing Director and Chief Executive Officer,
Chief Financial Officer and other executives (including executive Directors) are also formalised in
service agreements. Each of these service agreements provide for the provision of performance related
cash bonuses, and participation, when eligible, in the Otto Energy Limited Performance Rights and
Employee Share Option Plans. 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
Executive Director & Vice
President Exploration and
New Ventures
Mr David Rich
Chief Financial Officer and
Company Secretary
Commencement of
contract
24 June 2015
Base salary including
superannuation(i)
$A
$475,000
1 January 2016
$381,000
9 January 2017
$350,000
Termination
benefit(ii)
6 months base
salary
3 months base
salary
3 months base
salary
25
55
ANNUAL REPORT2018
OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
(i) Base salaries quoted are as at 30 June 2018; 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 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.
Details of vesting periods are set out at Note 21. 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 of grant, 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 Hoadley hybrid single share price 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 at 30 June 2018 are set out in the following table.
As set out below, 11,913,000 performance rights were granted to key management personnel in the
year to 30 June 2018 (nil in 2017) (14,187,000 performance rights in total were granted across the
Company).
The number of performance rights that will vest depends on the vesting period and/or Otto Energy
Limited’s Total Shareholder Return (“TSR”), including share price growth, dividends, and capital
returns. Once vested, the performance rights are automatically converted to shares. If the vesting
condition is not met on a measurement date (no rights vest), the performance rights will not lapse and
will continue to exist as unvested performance rights to be retested at the next measurement date or
expiry date, whichever is later. Performance rights are granted under the plan for no consideration. All
the rights on issue to KMP at 30 June 2018 require a compound TSR of 10% per annum from the grant
date to the measurement date in order to vest.
56
26
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
Year ended 30 June 2018 – TSR based performance rights
Measurement date
Grant date
Expiry date
KMP rights on issue at year
end:
Mr M Allen
Mr J Jetter
Mr I Macliver
Mr I Boserio
Mr D Rich
Mr P Senycia
KMP total rights on issue at
year end
Share price at grant date – A$
Expected volatility
Expected dividend yield
Risk free rate
Fair value – A$
Total value – A$
29 November
2018
29 November
2017
29 November
2022
29 November
2019
29 November
2017
29 November
2022
29 November
2020
29 November
2017
29 November
2022
1 February
2017 (i)
23 April
2015
31 December
2019
1 February
2018
23 April
2015
31 December
2019
1 February
2019
23 April
2015
31 December
2019
1,309,000
1,309,000
1,309,000
766,667
766,667
766,666
344,333
234,333
206,667
826,667
344,333
234,333
206,667
826,667
344,334
234,334
206,666
826,666
-
-
-
-
-
-
-
-
-
-
-
-
1,050,000
1,050,000
1,050,000
766,667
766,667
766,666
3,971,000
3,971,000
3,971,000
1,533,334
1,533,334
1,533,332
0.04
20%
Nil
2.09%
0.026
103,246
0.04
20%
Nil
2.09%
0.020
79,420
0.04
20%
Nil
2.09%
0.015
59,565
0.11
47.7%
Nil
1.95%
0.060
92,000
0.11
51.2%
Nil
1.90%
0.070
0.11
51.2%
Nil
1.90%
0.070
107,333
107,333
Year ended 30 June 2017 – TSR based performance rights
Measurement date
Grant date
Expiry date
Rights on issue at year end:
Mr M Allen
Mr P Senycia
Mr M Worner
Total rights on issue at year
end
Share price at grant date – A$
Expected volatility
Expected dividend yield
Risk free rate
Fair value – A$
Total value – A$
1 February
2017 (i)
14 August
2015
31
December
2017 (ii)
1 February
2018
14 August
2015
31
December
2017 (ii)
1 February
2019
14 August
2015
31
December
2017 (ii)
1 February
2017 (i)
23 April
2015
31
December
2019
1 February
2018
23 April
2015
31
December
2019
1 February
2019
23 April
2015
31
December
2019
1 February
2018
3 October
2014
31
December
2018
-
-
-
-
-
-
766,667
766,667
466,667
466,667
466,666
-
766,667
766,667
-
766,666
800,000
766,666
800,000
-
-
466,667
466,667
466,666
1,533,334
1,533,334
1,533,332
1,600,000
0.06
65.2%
Nil
1.96%
0.04
18,667
0.06
60.4%
Nil
1.96%
0.04
18,667
0.06
57.8%
Nil
1.96%
0.04
18,667
0.11
47.7%
Nil
1.95%
0.06
92,000
0.11
51.2%
Nil
1.90%
0.07
0.11
51.2%
Nil
1.90%
0.07
0.09
53.2%
Nil
2.60%
0.06
107,333
107,333
96,000
(i) The measurement date was rolled forward to 1 February 2018 for the rights on issue at 30 June 2017 except for those held
by Mr M Worner that were tested and lapsed at expiry on 31 December 2017 being six months following cessation of
employment.
(ii) Expiry date of rights granted to Mr M Worner amended following his resignation on 1 July 2017.
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 publicly available information.
No cash benefit is received by key management personnel of the Group, until the sale of the resultant
shares, which cannot be done unless and until the rights have vested and the shares issued.
27
57
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
DIRECTORS’ REPORT
For the Year Ended 30 June 2018
The number of performance rights over ordinary shares held, granted to, vested and/or lapsed/expired
by Directors and executives of Otto Energy Limited as part of compensation during the year ended 30
June 2018 is set out below.
Key Management
Personnel
Directors
Mr J Jetter
Mr M Allen
Mr P Senycia
Mr I MacIiver
Mr I Boserio
Executives
Mr D Rich
Mr M Worner
Balance at
start of year
Granted as
compensation
Vested and
exercised
Lapsed/
expired
Balance at
end of year
-
3,100,000
3,100,000
-
-
6,200,000
1,033,000
3,927,000
3,150,000
703,000
620,000
9,433,000
-
(800,000)
(800,000)
-
-
(1,600,000)
-
-
-
-
-
-
1,033,000
6,227,000
5,450,000
703,000
620,000
14,033,000
-
1,400,000
7,600,000
2,480,000
-
11,913,000
-
-
(1,600,000)
-
(1,400,000)
(1,400,000)
2,480,000
-
16,513,000
Options over equity instruments granted
Options granted to the Directors and executives are granted as remuneration unless otherwise noted.
Options are issued under the Employee Option Plan. There were no options issued during the financial
year.
Shareholding
The number of shares in the Company held during the financial year by key management personnel of
the Group, including their personally related parties, is set out below:
Key Management
Personnel
Balance at
start of year
Granted/
purchased
during the
year
Received
through
conversion of
performance
rights during
the year
Sold
during
the year
Balance at
end of year
Directors
Mr J Jetter
Mr M Allen
Mr P Senycia
Mr I MacIiver
Mr I Boserio
Executives
Mr D Rich
16,589,175
5,243,000
1,600,000
4,549,721
-
27,981,896
2,857,143
1,000,000
1,274,287
857,143
2,073,571
8,062,144
-
800,000
800,000
-
-
1,600,000
-
(143,000)
(374,129)
-
-
(517,129)
19,446,318
6,900,000
3,300,158
5,406,864
2,073,571
37,126,911
-
27,981,896
795,252
8,857,396
-
1,600,000
-
(517,129)
795,252
37,922,163
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 (2017: nil).
58
28
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ REPORT
FOR THE YEAR ENDED 30 JUNE 2018
59
ANNUAL REPORT2018DIRECTORS’ REPORT For the Year Ended 30 June 2018 29 Diversity Proportion of women employees at 30 June 2018: Number Proportion Whole organisation* 2/11 18% Senior executive positions 0/3 0% Board 0/5 0% *Includes three non-executive DirectorsPerformance rights on issue at 30 June 2018 Date granted Date of expiry Number 23 April 2015 31 December 2019 4,640,000 29 November 2017 29 November 2022 14,187,000 18,827,000 No performance right holder has any right under the performance rights to participate in any other share issue of the Company or any other entity. There were no options on issue at 30 June 2018. No options were granted as remuneration to key management personnel during the year. Details of performance rights and options granted to key management personnel are disclosed on pages 56 to 58. This report is made in accordance with a resolution of Directors. Mr I Macliver Director 21 September 2018 OTTO ENERGY
AUDITOR’S INDEPENDENCE DECLARATION
FOR THE YEAR ENDED 30 JUNE 2018
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 2018, 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, 21 September 2018
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
30
60
ANNUAL REPORT2018 OTTO ENERGY
CONSOLIDATED STATEMENT
OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 2018
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
For the year ended 30 June 2018
Note
2018
US$’000
2017
US$’000
Operating Revenue (Net)
Cost of sales
Gross profit
Other income
Profit on disposal of property, plant and equipment
Exploration expenditure
Finance costs
Administration and other expenses
Loss before income tax
Income tax expense
Loss after income tax for the year
Other comprehensive income that may be recycled to
profit or loss
Total other comprehensive income
Total comprehensive loss for the year
Earnings per share
Basic loss per share (US cents)
Diluted loss per share (US cents)
2
3
2
4
5
5
7
6
6
9,551
(1,622)
7,929
213
2
(4,827)
(4,436)
(4,072)
(5,191)
(3)
(5,194)
-
-
-
139
2
(905)
(48)
(4,374)
(5,186)
(61)
(5,247)
-
(5,194)
-
(5,247)
(0.37)
(0.37)
(0.44)
(0.44)
The above consolidated statement of profit or loss and other comprehensive income should be read in
conjunction with the accompanying notes.
61
31
ANNUAL REPORT2018 OTTO ENERGY
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
AS AT 30 JUNE 2018
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
For the year ended 30 June 2018
Current assets
Cash and cash equivalents
Trade and other receivables
Other assets
Total current assets
Non-current assets
Oil and gas properties
Property, plant and equipment
Other assets
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Provisions
Convertible note
Convertible note derivative
Total current liabilities
Non-current liabilities
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Accumulated losses
Total equity
Note
2018
US$’000
2017
US$’000
8
10
11
12
10
13
15
14
14
15
16
17
5,945
4,028
287
10,260
27,151
82
355
27,588
37,848
4,763
202
7,542
3,183
15,690
1,128
1,128
16,818
21,030
12,199
116
384
12,699
6,272
28
475
6,775
19,474
1,611
317
-
-
1,928
241
241
2,169
17,305
90,704
13,847
(83,521)
21,030
81,895
13,737
(78,327)
17,305
The above consolidated statement of financial position should be read in conjunction with the
accompanying notes.
62
32
ANNUAL REPORT2018 OTTO ENERGY
CONSOLIDATED STATEMENT OF
CHANGES IN EQUITY
FOR THE YEAR ENDED 30 JUNE 2018
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2018
Contributed
equity
US$’000
Share-
based
payments
reserve
US$’000
Foreign
currency
translation
reserve
US$’000
Balance at 1 July 2016
Loss for the period
Other comprehensive income
Total comprehensive loss for the year
Transactions with owners in their
capacity as owners:
Equity benefits issued to employees
Balance at 30 June 2017
Balance at 1 July 2017
Loss for the period
Other comprehensive income
Total comprehensive loss for the year
Transactions with owners in their
capacity as owners:
Issue of shares (net of costs)
Equity benefits issued to employees
Balance at 30 June 2018
81,895
-
-
-
-
81,895
81,895
-
-
-
8,809
-
90,704
9,474
-
-
-
75
9,549
9,549
-
-
-
-
110
9,659
4,188
-
-
-
-
4,188
4,188
-
-
-
-
-
4,188
Accumulated
losses
Total
US$’000
US$’000
(73,080)
(5,247)
-
(5,247)
22,477
(5,247)
-
(5,247)
-
(78,327)
(78,327)
(5,194)
-
(5,194)
75
17,305
17,305
(5,194)
-
(5,194)
-
-
(83,521)
8,809
110
21,030
The above consolidated statement of changes in equity should be read in conjunction with the
accompanying notes.
63
33
ANNUAL REPORT2018
OTTO ENERGY
CONSOLIDATED STATEMENT
OF CASH FLOWS
AS AT 30 JUNE 2018
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 June 2018
Note
2018
US$’000
2017
US$’000
9
Cash flows from operating activities
Oil and Gas Sales (net)
Other income
Payments to suppliers and employees
Payments for exploration and evaluation
Interest received
Income tax paid
Net cash outflow from operating activities
Cash flows from investing activities
Payments for property, plant and equipment
Proceeds from sale of property, plant and equipment
Payments for development and evaluation
Bond for development asset
Net cash outflow from investing activities
Cash flows from financing activities
Proceeds from issue of convertible notes
Transaction costs relating to convertible notes issue
Proceeds from issue of shares
Transaction costs - shares
Net cash inflow/(outflow) from financing activities
Net 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 the end of the financial
year
8
6,300
54
(4,688)
(3,949)
159
(2)
(2,126)
(91)
2
(20,587)
(150)
(20,826)
8,200
(311)
9,166
(356)
16,699
(6,253)
12,199
(1)
-
24
(4,232)
(659)
113
(61)
(4,815)
(4)
2
(2,896)
(175)
(3,073)
-
-
-
(225)
(225)
(8,113)
20,309
3
5,945
12,199
The above consolidated statement of cash flows should be read in conjunction with the accompanying
notes.
64
34
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
ABOUT THIS REPORT
Otto Energy Limited (referred to as ‘Otto’ or the ‘Company’) is a for-profit entity limited by shares,
incorporated and domiciled in Australia. Its shares are publicly traded on the Australian Securities
Exchange. The nature of operations and principal activities of Otto and its subsidiaries (referred to as
the ‘Group’) are described in the Directors’ Report.
The consolidated general purpose financial report of the Group was authorised for issue in accordance
with a resolution of the Directors on 21 September 2018.
Basis of preparation
The financial report is a general purpose financial report which:
•
•
•
•
has been prepared in accordance with the requirements of the Corporations Act 2001,
Australian Accounting Standards and other authoritative pronouncements of the Australian
Accounting Standards Board (AASB) and International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB);
has been prepared on a historical cost basis, except for certain financial instruments which
have been measured at fair value;
presents reclassified comparative information where required for consistency with the current
year’s presentation; and
adopts all new and amended Accounting Standards and Interpretations issued by the AASB that
are relevant to the Group and effective for reporting periods beginning on or before 1 July 2017.
Refer to note 28 for further details.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Group. A list of
controlled entities (subsidiaries) is contained in note 19.
Subsidiaries are consolidated from the date on which control is obtained by the Group and cease to be
consolidated from the date that control ceases. In preparing the consolidated financial statements, all
intercompany balances and transactions, income and expenses and profits or losses resulting from
intra-group transactions have been eliminated.
Currency
Items included in the financial statements of each of the Group’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.
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.
Rounding of amounts
The amounts contained in these financial statements have been rounded to the nearest thousand
dollars ($’000) unless otherwise stated, in accordance with ASIC Instrument 2016/191.
65
35
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
ABOUT THIS REPORT (continued)
Other accounting policies
Significant and other accounting policies that summarise the measurement basis used and are relevant
to an understanding of the financial statements are provided throughout the notes to the consolidated
financial statements.
Going concern
The Group as at 30 June 2018 has recorded a deficiency in working capital amounting to $5.43 million
(2017: surplus of $10.771 million), although the Group has commenced production from the SM 71 oil
development asset in the Gulf of Mexico and recognised $9.551 million in oil and gas sales net of
royalties for the year. Notwithstanding the Group’s aforementioned deficiency in working capital, the
Group’s financial report has been prepared on a going concern basis. The Directors believe the going
concern basis to be appropriate due to the following: 1) the future growth strategy underpinned by
strong production and cash flow from the SM 71 oil development asset; 2) a successful equity raising
approximating A$20 million in August 2018; and 3) the convertible note, which accounts for $10.725
million of the current liabilities, has a conversion price of A$0.055, which is reduced to A$0.05484 post
year end as a result of the entitlement offer (refer note 26) and the Company’s share price at the date
of this report is A$0.068 making conversion, and not redemption, more likely.
Key estimates and judgements
In applying the Group’s accounting policies, management has made a number of judgements and
applied estimates of future events. Judgements and estimates which are material to the financial
report are found in the following notes:
• Note 7
• Note 12
• Note 14
• Note 15
• Note 21
Income tax
Oil and gas properties
Convertible note
Provisions
Share-based payments
66
36
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
Financial performance
1. Segment information
2. Revenue and other income
3. Cost of sales
4. Exploration expenditure
5. Other expenses
6. Earnings per share
7.
8. Cash and cash equivalents
9. Reconciliation of loss after income tax to net cash outflow
Income tax
from operating activities
Operating assets and liabilities
10. Trade and other receivables
11. Other assets
12. Oil and gas properties
13. Trade and other payables
14. Convertible note
15. Provisions
Capital structure, financial instruments and risk
16. Contributed equity
17. Reserves
18. Financial instruments
Other disclosures
19. Subsidiaries
20. Interest in joint operations
21. Share-based payments
22. Related parties
23. Auditor’s remuneration
24. Contingent liabilities
25. Commitments
26. Events after the reporting period
27. Parent entity disclosures
28. New accounting standards and interpretations
68
69
69
70
70
71
71
73
74
75
75
76
78
79
81
83
84
84
89
89
90
95
96
96
97
98
104
105
37
67
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
FINANCIAL PERFORMANCE
1. Segment information
The Group has identified its operating segments based on the internal management reports that are
reviewed and used by the executive management team in assessing performance and in determining
the allocation of resources. The operating segments identified by management are based on the
geographical locations of the business which are as follows: Gulf of Mexico (USA), Alaska (USA) and
Other. Discrete financial information about each of these operating segments is reported to the
executive management team on at least a monthly basis.
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 Australia is no longer included as a reportable segment and is instead included in
‘Other’. The Group had 3 reportable segments during 2018. The prior year comparatives have been
restated to reflect the June 2018 reportable segments.
The segment information for the reportable segments for the year ended 30 June 2018 is as follows:
2018
Operating Revenue
Cost of Production
Gross Profit
Other income
Profit on disposal of property,
plant and equipment
Exploration expenditure
Finance costs
Administration and other
expenses
Profit (Loss) before income tax
Income tax expense
Profit (Loss) after income tax
for the year
Total non-current assets
Total assets
Total liabilities
Gulf of
Mexico
(USA)
US$’000
9,551
(1,622)
7,929
11
Alaska
(USA)
US$’000
-
-
-
-
Other
Consolidated
US$’000
-
-
-
202
2
78
(4,412)
(2,734)
(6,864)
(3)
(6,867)
-
(222)
-
(27)
(249)
-
(249)
-
-
7
7
1,983
12,658
US$’000
9,551
(1,622)
7,929
213
2
(4,827)
(4,436)
(4,072)
(5,191)
(3)
(5,194)
27,588
37,848
16,818
-
(4,683)
(24)
(1,311)
1,922
-
1,922
27,581
35,865
4,153
Gross oil revenue of $11.312 million from Gulf of Mexico production was all sold to a single customer.
Gross gas revenue of $0.432 million from Gulf of Mexico production was all sold to a different single
customer.
68
38
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
1. Segment information (continued)
The segment information for the reportable segments for the year ended 30 June 2017 is as follows:
Gulf of
Mexico
(USA)
US$’000
-
Alaska
(USA)
Other
Consolidated
US$’000
-
US$’000
139
US$’000
139
-
(366)
(8)
(964)
(1,338)
-
(1,338)
6,447
6,447
1,225
-
(267)
-
(31)
(298)
-
(298)
2
(272)
(40)
(3,379)
(3,550)
(61)
(3,611)
-
7
10
328
13,020
934
2
(905)
(48)
(4,374)
(5,186)
(61)
(5,247)
6,775
19,474
2,169
2017
Revenue and other income
Profit on disposal of property,
plant and equipment
Exploration expenditure
Finance costs
Administration and other
expenses
Loss before income tax
Income tax expense
Loss after income tax for the
year
Total non-current assets
Total assets
Total liabilities
2. Revenue and other income
Oil Sales
Gas Sales
Total Sales
Less: Royalties(i)
Operating Revenue (Net)
Interest income(ii)
Other income
(i) Operating Revenue is shown net of royalty payments payable to the
(USA) Office of Natural Resources Revenue. Royalty payments are
18.75% of revenue under the terms of the SM 71 lease.
(ii)
Interest income is recognised using the effective interest rate method.
3. Cost of sales
Gathering and Production charges
Depreciation of capitalised developments
Total Cost of Sales
Recognition and measurement
Revenue is measured at the fair value of the consideration received or receivable. Revenue is
recognised when it can be reliably measured and when it is probable that economic benefits will flow
to the Group.
39
69
2018
US$’000
11,312
432
11,744
(2,193)
9,551
159
54
213
745
877
1,622
2017
US$’000
-
-
-
-
-
113
26
139
-
-
-
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
4. Exploration expenditure
Exploration expenditure – Gulf of Mexico - Louisiana
Exploration expenditure – Alaska North Slope
Exploration expenditure – Other
2018
US$’000
2017
US$’000
4,683
222
(78)
4,827
366
267
272
905
Recognition and measurement
Costs incurred in the exploration stages of specific areas of interest are expensed against the profit or
loss as incurred. All exploration expenditure, including general permit activity, geological and
geophysical costs, new venture activity costs and drilling exploration wells, is expensed as incurred.
The costs of acquiring interests in new exploration licences is expensed. Once an exploration discovery
has been determined, evaluation and development expenditure is capitalised to the Consolidated
Statement of Financial Position as oil and gas properties.
5. Other expenses
2018
US$’000
2017
US$’000
i) Finance costs
Interest on convertible note – refer Note 14
Accretion of effective interest on convertible note – refer Note 14
Fair value adjustment on embedded derivative element of
convertible note – refer Note 14
Amortisation of borrowing costs
Success Fee – refer Note 14
Accretion of decommissioning fund
Total finance costs
ii) Administration and other expenses
Employee benefits expense
Defined contribution superannuation expense
Share-based payment expense
Other employee benefits expenses
Depreciation expense
Depreciation expense – furniture and equipment
Other expenses
Corporate and other costs (net of recharges)
Business development
Foreign currency losses
1,225
347
2,436
241
163
24
4,436
108
110
1,780
1,998
26
26
1,508
539
1
2,048
-
-
-
40
-
8
48
178
75
2,108
2,361
48
48
1,417
498
50
1,965
Total administration and other expenses
4,072
4,374
70
40
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
5. Other expenses (continued)
iii) Depreciation
Depreciation charges are included above in Note 3 Cost of sales and Note 5(ii) other expenses. Total
depreciation for the Consolidated Entity is $0.9 million (2017: $0.05 million)
6. Earnings per share
Basic earnings per share is calculated by dividing the profit or loss attributable to owners of the
Company, excluding any costs of servicing equity (other than dividends), by the weighted average
number of ordinary shares, adjusted for the bonus element.
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to
take into account the after income tax effect of interest and other financing costs associated with
dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that
would have been outstanding assuming the conversion of all dilutive potential ordinary shares.
The following table reflects the income and share data used in the basic and diluted EPS calculations:
2018
2017
Loss attributable to owners of the Company (US$’000)
Weighted average number of ordinary shares on issue for basic
and diluted loss per share (number)
Basic and diluted loss per share (US cents)
(5,194)
(5,247)
1,403,062,899
1,183,556,077
(0.37)
(0.44)
Due to the Company reporting a loss for the 2018 and 2017 financial years, the impact of potential
shares are not included in calculating diluted EPS because they are anti-dilutive.
7.
Income tax
The components of tax expense comprise:
Current tax
Deferred tax – origination and reversal of temporary differences
Prior period under provision
Reconciliation of income tax expense to prima facie tax payable:
Loss before income tax
Prima facie income tax at 27.5%
Difference in overseas tax rates
Non-assessable income
Tax effect of amounts not deductible in calculating taxable income
Benefit of deferred tax assets not brought to account
Prior period under/(over) provision
Income tax expense
2018
US$’000
2017
US$’000
3
-
-
3
(5,191)
(1,427)
(3)
-
479
954
-
3
7
-
54
61
(5,186)
(1,556)
2,041
(1,980)
585
917
54
61
41
71
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
7.
Income tax (continued)
Deferred tax assets
Temporary differences
– provisions and other corporate costs
– exploration and evaluation costs
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
Deferred tax liabilities
Temporary differences – Oil and gas properties
Offset by deferred tax assets recognised
Deferred tax liabilities brought to account
2018
US$’000
2017
US$’000
131
-
131
6,259
6,809
13,199
(6,838)
(6,361)
-
6,838
(6,838)
-
161
5,891
6,052
903
4,708
11,663
(1,446)
(10,217)
-
1,446
(1,446)
-
Recognition and measurement
The income tax expense 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.
Included in the foreign tax losses of US$6.81 million is tax losses of US$6.20 million that can be offset
against future US profits from US Gulf of Mexico operations.
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.
42
72
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
7. Income tax (continued)
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.
Key estimates and judgements
The Group 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 Group estimates its tax liabilities based on the Group’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 Group recognises 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 depends on the ability of the entity to satisfy certain tests at the time the
losses are recouped.
8. Cash and cash equivalents
Cash at bank and on hand
2018
US$’000
2017
US$’000
5,945
5,945
12,199
12,199
Recognition and measurement
Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and
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.
Cash at bank earns interest at floating rates based on daily bank deposit rates.
Under the terms of the convertible notes, 50% of net proceeds from SM 71 (after all costs) are only to
be used for SM 71 until the total equals the value of the convertible notes and interest outstanding. As
at 30 June 2018 the accumulated amount usable only for SM 71 purposes or repayment of amounts in
relation to the convertible notes was US$2.7 million of the US$5.9 million cash on hand.
43
73
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
9. Reconciliation of loss after income tax to net cash
outflow from operating activities
2018
US$’000
2017
US$’000
Loss after income tax
Non-cash items:
Depreciation expense – furniture and equipment
Share-based payments
Finance costs – see note 5(i)
Amortisation of deferred costs
Other non-cash items
Change in assets and liabilities:
Increase in trade and other receivables
Decrease in other assets
Increase in trade and other payables
Increase in provisions
Net cash outflow from operating activities
Changes in financing liabilities arising from cash flow and
non-cash flow items
Convertible note
Balance at the start of the year
Proceeds from convertible notes
Convertible note transaction costs
Non cash item - interest accretion
Balance at the end of the year
Refer to note 14 for further details on the convertible note.
(5,194)
(5,247)
26
110
4,436
877
(1)
(3,165)
109
630
46
(2,126)
-
8,200
(311)
(347)
7,542
48
75
48
-
(5)
(9)
30
271
(26)
(4,815)
-
-
-
-
-
74
44
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
OPERATING ASSETS AND LIABILITIES
10. Trade and other receivables
Trade receivables(i)
Other receivables
Allowance for doubtful debts (ii)
2018
US$’000
2017
US$’000
3,997
831
(800)
4,028
-
916
(800)
116
Recognition and measurement
Other receivables are initially recognised at fair value and subsequently measured at amortised cost
less an allowance for uncollectible amounts.
Collectability of trade and other receivables is reviewed on an ongoing basis. Debts that are known to
be uncollectible are written off when identified. An allowance for doubtful debts is raised when there
is objective evidence that the Group will not be able to collect the debt. Financial difficulties of the
debtor, default payments or debts more than 60 days overdue are considered objective evidence of
impairment.
(i)
(ii)
Trade receivable relates to June 2018 oil and gas sales (before deduction of royalties).
Included in other receivables in 2017 and 18 is $0.8 million receivable from Swala Oil and Gas
(Tanzania) Plc relating to settlement of the various claims and disputes concerning the Pangani
licence. This amount has been fully provided for.
11. Other assets
Current
Prepayments
Other assets
Non-current
Convertible note transaction costs (i)
Bonds(ii)
2018
US$’000
2017
US$’000
239
48
287
-
355
355
73
311
384
300
175
475
(i)
Represents transaction costs incurred before year end in relation to $8.2 million of secured
convertible notes issued subsequent to year end. This amount was offset against the convertible
note liability upon issue of the note.
(ii) Development bond for SM 71 (USD325,000) and Security Bond for Houston Office leased premises
(USD30,000)
Recognition and measurement
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 Group 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.
45
75
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
11. Other assets (continued)
Financial assets are derecognised when the rights to receive cash flows from the financial assets have
expired or have been transferred and the Group has transferred substantially all the risks and rewards
of ownership.
Impairment of financial assets
The Group 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.
12. Oil and gas properties
Producing and development assets
At cost
Balance at beginning of year
Expenditure for the year
Amortisation of assets
Balance at end of year
2018
US$’000
2017
US$’000
6,272
21,756
(877)
27,151
2,717
3,555
-
6,272
All capitalised development and evaluation costs as at 30 June 2018 relate to the SM 71 oil development
in the Gulf of Mexico (including provision for decommissioning).
Producing and development assets
Recognition and measurement
i)
Producing projects are stated at cost less accumulated amortisation and impairment charges.
Development assets include evaluation, construction, installation or completion of production and
infrastructure facilities such as platforms and pipelines, development wells, acquired development or
producing assets, capitalised borrowing costs and the estimated costs of decommissioning,
dismantling and restoration. Evaluation is deemed to be activities undertaken from the beginning of the
definitive feasibility study or testing conducted to assess the technical commercial viability of extracting
a resource before moving into the development phase.
Once an exploration discovery has been determined, subsequent evaluation and development
expenditure is capitalised to the Consolidated Statement of Financial Position as oil and gas properties
as it is probable that future economic benefits associated with the item will flow to the Group. Once
such costs are capitalised as oil and gas properties, they will be tested for impairment and assessed
for impairment indicators for periods thereafter.
The carrying value of oil and gas properties is reviewed annually by directors to ensure it is not in excess
of the recoverable amount. This assessment is based on key estimates, the most significant of which
are estimated hydrocarbon reserves, future production profiles, commodity prices, operating costs and
any future development costs necessary to produce the reserves.
46
76
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
12. Oil and gas properties (continued)
ii) Prepaid drilling and completion costs
Where the Company has a non-operated 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 expensed in profit or loss
when the cash call is paid. The Operator notifies the Company as to how funds have been expended and
any relevant costs are reclassified from exploration expense and capitalised to deferred oil and gas
properties.
Where these contributions relate to a prepayment for well completion, these costs are capitalised as
prepaid completion costs within oil and gas properties.
iii) Commencement of production
When a well demonstrates commercial feasibility or comes into commercial production, accumulated
development and evaluation expenditure for the relevant area of interest is amortised on a units of
production basis.
iv) Amortisation and depreciation of producing projects
The Group uses the units of production (UOP) approach when amortising and depreciating field-specific
assets. Using this method of amortisation and depreciation requires the Group 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 project
fields 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 (2P)
and are reviewed at least annually.
commercially producing
relating
costs
to
Key estimates and judgements
Carrying value of oil and gas assets
Judgement is required to determine when an exploration activity ceases and an evaluation or
development activity commences. Evaluation is deemed to be activities undertaken from the beginning
of the definitive feasibility study or testing conducted to assess the technical commercial viability of
extracting a resource before moving into the development phase. Development assets include
evaluation, construction, installation or completion of production and infrastructure facilities such as
platforms and pipelines, development wells, acquired development or producing assets, capitalised
borrowing costs and the estimated costs of decommissioning, dismantling and restoration.
Circumstances vary for each area of interest and where exploration, evaluation and development
activities are conducted within a continual timeframe as part of the same project or drilling campaign
with common service providers, a degree of estimation is required in determining the amount of costs
capitalised as evaluation and development assets under oil and gas properties.
Assessment of costs associated with non-operated interests is also influenced by notification from the
Operator as to how funds have been expended.
47
77
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
12. Oil and gas properties (continued)
Impairment
Assets are tested for impairment in line with the accounting policies disclosed in Note 12(i) 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).
At 30 June 2018, the Group has assessed the SM 71 cash-generating unit and determined that no
impairment indicators existed.
Amortisation
Estimation of amortisation of oil and gas assets is based on the updated 2P reserves estimate and
estimated future development costs as at 30 June 2018.
Property, plant and equipment
Recognition and measurement
Property, plant and equipment 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, net of their residual
values, over their estimated useful lives. 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.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These
are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts
included in other reserves in respect of those assets to retained earnings.
13. Trade and other payables
Trade payables
Success Fee – convertible note see note 14
Interest payable – convertible note see note 14
Other Accrued expenses
2018
US$’000
2017
US$’000
2,141
163
1,225
1,234
4,763
1,611
-
-
-
1,611
Recognition and measurement
Trade payables are initially recognised at their fair value and subsequently measured at amortised cost.
They represent liabilities for goods and services provided to the Group prior to the end of the financial
year that are unpaid and arise when the Group becomes obliged to make future payments in respect of
the purchase of these goods and services. The amounts are unsecured and generally paid within 30
days of recognition.
48
78
ANNUAL REPORT2018
-
-
-
-
-
-
-
-
-
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
14. Convertible Note
Convertible note
Balance at the beginning of the year
Convertible note debt host liability – at cost
Add: interest accretion
Less: Convertible note transaction costs – at cost
Balance at the end of the year
2018
US$’000
2017
US$’000
-
7,453
347
(258)
7,542
Convertible note derivative
Balance at the beginning of the year
Convertible note embedded derivative – at initial fair value through
statement of profit or loss
Convertible note embedded derivative – at 30 June 2018 fair value
through statement of profit or loss
Balance at the end of the year
-
747
2,436
3,183
On 2 August 2017 the Company issued $8.2 million secured convertible notes (the ‘Notes’) to Molton
Holdings Limited, a major Otto shareholder ($8.0 million) and Mr John Jetter, Otto’s Chairman ($0.2
million). No convertible notes have been converted therefore 8.2 million convertible notes remained
on issue as at 30 June 2018.
Principal and Interest
As at 30 June 2018 the principle and interest payable (but not yet due) under the terms of the convertible
notes, assuming no conversion, was:
Convertible note principal
Interest payable – convertible note see below
The key terms of the Notes are as follows:
US$’000
8,200
1,225
9,425
Issue amount: 8.2 million convertible notes.
Face value: US$1 per convertible note.
Conversion price: A$0.055 per share .
Interest rate: 14% per annum compounded monthly and paid semi-annually.
Interest payments: Interest accrues until interest payments commence on the date 60 days after
First Oil, at which time any accrued interest will be payable in two equal instalments on the first
and second interest payment dates. First Oil is the date on which there has been 30 continuous days
of steady state production of hydrocarbons from the SM 71 project into the sales export pipeline.
Maturity date: 30 June 2019.
Security: The convertible notes are secured via a share pledge covering the shares in Otto’s
subsidiaries which hold its Gulf of Mexico interests including the SM 71 project.
49
79
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
14. Convertible Note (continued)
•
•
•
•
Conversion: A noteholder may elect to convert convertible notes on: a) any 30 June, 30 September,
31 December and 31 March after the first anniversary of the issue date; b) receipt of a redemption
notice; and c) the maturity date, in accordance with the following conversion ratio:
Number of convertible notes to be
converted
Bid exchange rate
= Australian dollar equivalent
where the bid exchange rate means the US Dollar exchange rate published by the Reserve Bank of
Australia, and
Australian dollar equivalent
Conversion price
= Number of conversion shares to be issued
As at 30 June 2018, $8.2million convertible notes at bid exchange rate AUD/USD 0.7391 is
equivalent to AUD11,094,574. At the conversion price of A$0.055 per share, the number of
conversion shares equated to 201,474,201 shares.
Redemption: The Company may elect to redeem convertible notes on: a) any 30 June, 30
September, 31 December and 31 March after the first anniversary of the issue date; b) the maturity
date; and c) receipt of a takeover offer (including by scheme of arrangement).
Success fee: Paid 30 days after the maturity date, subject to Cumulative Oil Production (defined as
the number of barrels of oil produced from SM 71 as reported to the Bureau of Ocean Energy Management)
to the maturity date (inclusive) and calculated as per the table below. If a convertible note is
redeemed or converted prior to the maturity date, the success fee payable in respect of the
convertible note will be paid pro rata to the number of days the noteholder held it. An accrual for
$163k was made in the accounts at 30 June 2018 based on forecast production to maturity.
Cumulative Oil
Production (100%
field) to 30 June 2019
from SM 71 (bbls)
Less than
1,400,000
Greater
than
1,399,999
and less
than
1,500,000
Greater
than
1,499,999
and less
than
1,600,000
Greater
than
1,599,999
and less
than
1,700,000
Greater
than
1,699,999
and less
than
1,800,000
Greater
than
1,799,999
Total Success Fee
amount payable per
convertible note (US$)
-
0.025
0.05
0.075
0.10
0.125
•
•
•
Transferability: A noteholder may transfer the convertible notes subject to notice and other
conditions including in relation to transfers to direct competitors of the Company.
Adjustments: The convertible notes are subject to customary adjustments for alterations to the
capital of the Company.
Default and termination rights: The convertible notes are subject to customary default and
termination rights.
• Not quoted: The convertible notes will not be listed on ASX or any other securities exchange.
Key estimates and judgements
For accounting purposes, the Notes have two elements: a debt host liability component and an
embedded derivative component. On initial recognition, the fair value of the embedded derivative
component is calculated first and the residual value is assigned to the debt host component. No gain
or loss is recognised on inception.
80
50
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
14. Convertible Note (continued)
The debt host liability component is subsequently carried at amortised cost whereby the initial carrying
value of the liability is accreted to the principal amount over the life of the Note. The accretion is
recognised as a finance cost together with the interest expense (refer note 5).
The fair value of the embedded derivative is determined each balance date using the Black Scholes
model and any changes in fair value are recorded in profit or loss. On the date of issue of the Notes,
the fair value of the embedded derivative liability was determined to be $0.747 million using a Black
Scholes valuation based on the time to expiry, the Company’s current share price of A$0.028, risk free
interest rate of 1.8% and assuming 68% volatility. The fair value of the embedded derivative liability at
30 June 2018 was determined to be $3.183 million using a Black Scholes valuation based on the time
to expiry, the Company’s 30 June 2018 share price of A$0.065 (note this is above the conversion price
of A$0.055), risk free interest rate of 2.0% and assuming 65% volatility. The change in fair value of
$2.436 million has been recognized as a finance cost (refer note 5).
15. Provisions
Current
Employee benefits
Tax
Decommissioning fund (ii)
Non-current
Employee benefits (i)
Decommissioning fund (ii)
2018
US$’000
2017
US$’000
201
1
-
202
6
1,122
1,128
197
-
120
317
3
238
241
(i)
(ii)
The non-current provision for employee benefits includes amounts not expected to be settled
within the next 12 months.
The total present value of the estimated expenditure required to decommission the wells for the
permit SM 71. The expenditure is expected to be settled at the end of the field life for the 2P
production profile for SM 71.
Recognition and measurement
Employee benefits
A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual
leave and long service leave when it is probable that settlement will be required and they are capable
of being measured reliably.
Liabilities recognised in respect of employee benefits expected to be settled within 12 months are
measured at their nominal values using the remuneration rate expected to apply at the time of
settlement.
Liabilities recognised in respect of employee benefits which are not expected to be settled within 12
months are measured as the present value of the estimated future cash outflows to be made by the
Group in respect of services provided by employees up to reporting date.
Contributions to superannuation plans are expensed when incurred.
51
81
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
15. Provisions (continued)
Decommissioning fund
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result
of past events, it is probable that the Group will be required to settle the obligation and the amount of
the provision can be measured reliably.
The amount recognised as a provision is the best estimate of the consideration required to settle the
present obligation at the reporting date, taking into account the risks and uncertainties surrounding
the obligation. Where a provision is measured using the cash flows estimated to settle the present
obligation, its carrying amount is the present value of those cash flows. The unwinding of the discount
is expensed as incurred and recognised in the Consolidated Statement of Profit or Loss and Other
Comprehensive Income as a finance cost.
Provision is made 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. The Group accounts for changes in cost estimates on a prospective basis.
Key estimates and judgements
Decommissioning costs will be incurred by the Group at the end of the operating life of some of the
Group’s facilities and properties. The Group assesses its decommissioning provision at each reporting
date. The ultimate decommissioning costs are uncertain and cost estimates can vary in response to
many factors, including changes to relevant legal requirements, the emergence of new restoration
techniques or experience at other production sites. The expected timing, extent and amount of expense
can also change. Therefore, significant estimates and assumptions are made in determining the
provision for decommissioning. As a result, there could be significant adjustments to the provisions
established which would affect future financial results. The provision at reporting date represents
management’s best estimate of the present value of the future decommissioning costs required.
82
52
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
CAPITAL STRUCTURE, FINANCIAL INSTRUMENTS AND RISK
16. Contributed equity
a) Share capital
Balance at beginning of year
Shares issued – placement (i)
Shares issued – share purchase
plan(ii)
Shares issued - directors(iii)
Shares issued on exercise of
performance rights(iv)
Balance at end of year
2017
Number
2018
US$’000
2017
US$’000
2018
Number
1,186,298,324
236,857,143
100,000,166
6,142,857
1,181,908,323
-
-
-
1,630,000
1,530,928,490
4,390,001
1,186,298,324
81,895
5,986
2,660
163
-
90,704
81,895
-
-
-
-
81,895
(i) Share placement (Tranche 1) October 2017 at AUD0.035 per share, converted to USD at the
exchange rate on the transaction date of 0.7652. Net of share issue costs.
(ii) Shares issued under Share Purchase Plan November 2017 at AUD0.035 per share, converted
to USD at the exchange rate on the transaction date of 0.7599.
(iii) Share placement (Tranche 2) issued to directors following shareholder approval at the AGM in
November 2017 at AUD0.035 per share.
(iv) Shares issued on exercise of performance rights February 2018
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 21.
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 21.
Recognition and measurement
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.
53
83
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
17. Reserves
Share-based payments reserve
Foreign currency translation reserve
Share-based payments reserve
Balance at beginning of year
Share-based payment expense
Balance at end of year
Foreign currency translation reserve
Balance at beginning of year
Balance at end of year
2018
US$’000
2017
US$’000
9,659
4,188
13,847
9,549
110
9,659
4,188
4,188
9,549
4,188
13,737
9,474
75
9,549
4,188
4,188
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 21 for further
details of these plans.
The foreign currency translation reserve is used to record currency differences arising from the
translation of the financial statements of foreign operations.
18. Financial instruments
The Group is exposed to market risk, credit risk and liquidity risk. The Group’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 Group. The Group 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 controls. Risk management is carried out by the senior executives under these policies
which have been approved by the Board. Management identifies, evaluates and, if necessary, hedges
financial risks within the Group’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. At all times during the year, and to the date of this report, the Group
had no hedges in place and does not apply any form of hedge accounting.
a) Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market prices. Market risk for the Group comprises three types of risk: currency
risk, interest rate risk and commodity price risk.
84
54
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
18. Financial instruments (continued)
a) Market risk (continued)
i) Currency risk
The Group’s source currency for the majority of revenue and costs is in US dollars. Given the location
of the group’s offices and operations there is a small exposure to foreign exchange risk arising from
the fluctuations in the US dollar and Australian dollar on cash balances and monetary items at year
end.
Currency risk arises where the value of a financial instrument or monetary item fluctuates due to
changes in foreign currency. The exposure to currency risk is measured using sensitivity analysis and
cash flow forecasting.
The Board has formed the view that it would not be beneficial for the Group to purchase forward
contracts or other derivative financial instruments to hedge this currency 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 monetary items
denominated in a currency which is not US dollars.
A hypothetical change of 10% (2017: 10%) in the Australian dollar exchange rate was used to calculate
the Group’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. At 30 June 2018, management has assessed that the entity’s exposure to foreign exchange
movements is immaterial and therefore no further analysis is provided.
ii)
Interest rate risk
Interest rate risk is the risk that the Group’s financial position will fluctuate due to changes in market
interest rates. The Group’s exposure to the risk of changes in the market interest rates relates to cash
and cash equivalents held with financial institutions. The convertible notes facility that the Group has
entered into has a fixed interest rate so is not exposed to interest rate risk. Refer note 14.
The financial instruments exposed to movements in variable interest rates are as follows:
Cash and cash equivalents
2018
US$’000
2017
US$’000
5,945
5,945
12,199
12,199
The following sensitivity analysis is based on the interest rate risk exposures in existence at the
reporting date. The 1.0% sensitivity is based on reasonably possible changes, over a financial year,
using an observed range of historical short term deposit rate movements over the last 3 years.
Judgements of reasonably possible movements
Increase 100 basis points
Decrease 100 basis points
Effect on post tax losses
Increase/(decrease)
2017
2018
US$’000
US$’000
59
(59)
122
(122)
55
85
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
18. Financial instruments (continued)
iii) Commodity price risk
Production commenced from the Group’s SM 71 oil development in the Gulf of Mexico, USA on 23 March
2018. Prior to that date, as the Group was not generating revenue from oil and gas production it was
not directly exposed to commodity price risk. Since 23 March 2018 the Group has generated revenue
from its SM 71 production and hence is exposed to oil price fluctuations.
Exposure to oil price risk is measured by monitoring and stress testing the Group’s forecast financial
position against sustained periods of low oil prices. This analysis is regularly performed on the Group’s
portfolio and, as required, for discrete projects and acquisitions.
Commodity hedging may be undertaken where the Board of Directors determines that a hedging
strategy is appropriate to mitigate potential periods of adverse movements in commodity price. This
will be balanced against the desire to expose shareholders to oil price upside and the reliability of
production forecast. Commodity hedging may also be undertaken when there is a hedging requirement
under a lending facility.
b) Credit risk
Credit risk is the risk that a contracting entity will not complete its obligation under a financial
instrument that will result in a financial loss to the Group. Credit risk arises from the financial assets
of the Group, which comprise trade and other receivables and deposits with banks and financial
institutions.
To manage credit risk from cash and cash equivalents, it is the Group’s policy to only deposit with banks
maintaining a minimum independent rating of ‘AA’, ‘A+’ or ‘A-‘. Contracts for the sale of production
from SM 71, which commenced on 23 March 2018, are with creditworthy customers and counterparties.
Receivables balances are monitored on an ongoing basis with the result that the Group’s exposure to
bad debts in the ordinary course of business is not significant. At reporting date no receivables were
overdue apart from those already provided for.
The maximum exposure to credit risk at reporting date was as follows:
Cash and cash equivalents
Trade and other receivables
c) Liquidity risk
2018
US$’000
2017
US$’000
5,945
4,028
9,973
12,199
116
12,315
Liquidity risk is the risk that Group will encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or another financial asset.
It is the policy of the Board to ensure that the Group is able to meet its financial obligations and maintain
the flexibility to pursue attractive investment opportunities through the Group maintaining sufficient
working capital and access to further funding when required through debt, equity or other means.
The Group manages liquidity risk by continuously monitoring forecast and actual cash flows with
scenario analysis. As at reporting date the Group had sufficient cash reserves to meet its current
requirements and no receivables were overdue apart from those already provided for.
56
86
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
18. Financial instruments (continued)
c) Liquidity risk (continued)
The contractual maturity analysis of payables at the reporting date was as follows:
Carrying
Value
US$’000
Total
US$’000
Less than
1 year
US$’000
Between
1-2 years
US$’000
Between
2-5 years
US$’000
Trade and other payables
2018
2017
4,763
1,611
4,763
1,611
4,763
1,611
Convertible Notes – refer note 14
2018
2017
7,542
-
7,542
-
7,542
-
-
-
-
-
-
-
-
-
Capital risk management
The Group manages its capital to ensure that it will be able to continue as a going concern while
maximising the potential return to shareholders through the optimisation of the debt and equity
balance.
The capital structure of the Group at year end includes convertible notes and equity (2017: 100% equity).
Refer to note 14 for details on the convertible note. In determining the funding mix of debt and equity
(total borrowings/total equity), consideration is given to the relative impact of the gearing ratio on the
ability of the Group to service 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 ratio is 51% based on the accounting carrying value of the
convertible note as at 30 June 2018 (2017: 0%).
The Group may consider raising capital when an opportunity to invest in a business or company was
seen as value adding relative to the company's current share price at the time of the investment.
d) Equity price risk
The Group is exposed to equity price risk on its financial liabilities. The liability fluctuates with the
Group’s underlying share price until either the convertible note is repaid by the Group or the note
holders convert. The Group has no policy for mitigating potential adversities associated with its own
equity price risk given its dependence on market fluctuations.
In relation to the convertible note derivative, the Group have used an equity price change of 65% (2017:
not applicable) upper and lower representing a reasonable possible change based upon the Group’s
historic share price volatility over the last three years of trading. At reporting date, should the Group’s
share price be reduced by 65% the value of the derivative would have been affected and the loss
decreased by $3.0 million (2017: not applicable). An equal and opposite increase in share price would
have increased losses by $5.3 million (2017: not applicable).
57
87
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
18. Financial instruments (continued)
e) Fair values
The following table shows the carrying amounts and fair values of financials liabilities, including their
levels in the fair value hierarchy. It does not include fair value information for financial liabilities not
measured at fair value if the carrying value is a reasonable approximation of fair value. The different
valuation methods are called hierarchies and they are described below:
Level
Carrying Amount
2017
2018
US$’000
US$’000
Fair Value
2018
US$’000
2017
US$’000
Financial liabilities
measured at fair value
Convertible note derivative
Financial liabilities not
measured at fair value
Convertible note liability
Level 2
Level 2
3,183
3,183
7,542
7,542
-
-
-
-
3,183
3,183
7,542
7,542
-
-
-
-
Fair value hierarchy
Level 1 – the instrument has quoted prices (unadjusted) in active markets for identical assets or
liabilities;
Level 2 – the fair values are measured using inputs (other than quoted prices) that are observable for
the asset or liability either directly or indirectly; or
Level 3 – the fair values are measured using inputs for the assets or liability that are not based on
observable market data.
Cash and cash equivalents, trade and other receivables, trade creditors, other creditors and accruals
have been excluded from the above analysis as their fair values are equal to the carrying values.
The fair value of convertible note derivatives is determined using a Black-Scholes model based on the
time to expiry. The key drivers of this value include the Group’s own share price and the foreign
exchange rate. Sensitivities considering reasonably possible movements in these assumptions are
included above at note 18(d).
88
58
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
OTHER DISCLOSURES
19. Subsidiaries
Significant investments in subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following
principal subsidiaries:
Subsidiaries of Otto Energy Limited
Country of
incorporation
Functiona
l currency
Class of
shares
Otto Energy (Tanzania) Pty Limited
Otto Energy Investments Limited
Otto Energy Philippines Inc
Otto Energy (Galoc Investment 1) Aps
Otto Energy (Galoc Investment 2) Aps
GPC Investments SA
Borealis Petroleum Pty Ltd
Borealis Alaska LLC
Otto Energy (USA) Inc
Otto Energy (Louisiana) LLC
Otto Energy (Gulf One) LLC (ii)
Otto Energy (Gulf Two) LLC (ii)
Otto Operating LLC(iii)
Australia
Bermuda
Philippines
Denmark
Denmark
Switzerland
Australia
USA
USA
USA
USA
USA
USA
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ownership
Interest (i)
2018
(%)
100
100
100
100
100
100
100
100
100
100
100
100
100
2017
(%)
100
100
100
100
100
100
100
100
100
100
100
100
-
(i) The proportion of ownership interest is equal to the proportion of voting power held.
(ii) Otto Energy (Gulf One) LLC and Otto Energy (Gulf Two) LLC were incorporated on 26 April 2017.
(iii) Otto Operating LLC was incorporated on 9th April 2018.
20. Interest in joint operations
a) Joint operations
The Group’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.
The Group’s interest in joint arrangement assets is detailed below. Oil and Gas exploration and
production is the principal activity performed across these assets.
Asset
South Marsh Island 71
South Marsh Island 70 (iii)
Bivouac Peak (i)
VR 232 (iv)
Onshore Alaska North Slope – Western Blocks (v)
Onshore Alaska North Slope – Central Blocks
Service Contract 55 (ii)
Country
USA
USA
USA
USA
USA
USA
Philippines
2018
Group interest
50%
-
45%
50%
22.5%
8 – 10.8%
-
2017
Group interest
50%
50%
45%
-
8 – 10.8%
8 – 10.8%
68.18%
59
89
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
20.
Interest in joint operations (continued)
(i) At 30 June 2017 and 2018 Otto had the right to earn a 45% working interest in the Bivouac Peak
lease by drilling 1 exploration well. On 9 July 2018 Otto elected to participate in the initial
exploration well at a 40% working interest.
(ii) As at 30 June 2017, an agreement had been signed to transfer the permit to existing joint venture
partners but this had not yet been approved by the DOE. The interest transfer was approved by the
DOE effective 26 March 2018.
(iii) SM 70 expired on 31 July 2017.
(iv) Otto has the right to participate for a 50% working interest in VR 232.
(v) A binding terms sheet was executed on 25 June 2018 taking Otto’s working interest to 22.5%.
Definitive agreements were executed on 30 July 2018.
b) Commitments through joint operations
The aggregate of the Group’s commitments through jointly controlled assets is as follows:
Exploration expenditure commitments – not later than 1 year
Capital expenditure commitments – not later than 1 year
2018
US$’000
2017
US$’000
750
-
750
2,600
2,956
5,556
Operating lease arrangements
Operating lease arrangements relate to the lease of a compressor on the SM 71 F platform. The term
is for a minimum 36 months with a 30 day notice period option to discontinue the arrangement beyond
the 3 year period. These obligations are not provided for in the financial statements and the Group
doesn’t have a purchase option.
(a) Payments recognised as an expense
Net minimum lease payments recognised as an expense
(b) Minimum net future lease payments
Not longer than 1 year
Between 1 and 5 years
21. Share-based payments
a) Employee share option plan
2018
US$’000
2017
US$’000
25,665
54,206
64,860
119,066
-
-
-
-
The establishment of the Employee Share Option Plan was approved by shareholders at the 2013
Annual General Meeting and again at the 2016 Annual General Meeting. The Employee Share Option
Plan is designed to provide long term incentives for employees and key management personnel (KMP)
to deliver long term shareholder returns. Under the plan, participants are granted options at the
Board’s discretion and no individual has a contractual right to participate in the plan or to receive any
guaranteed benefits. Options granted under the plan carry no dividend or voting rights.
The exercise price of options is based on the weighted average price at which the Company’s shares
are traded on the Australian Securities Exchange (ASX) during the week up to and including the date of
the grant. An option may only be exercised after that option has vested and any other conditions
imposed by the Board on exercise are satisfied. Options are granted under the plan for no consideration.
60
90
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
21. Share-based payments (continued)
Set out below are summaries of share options granted under the Employee Share Option Plan and on
issue during the year ended 30 June 2017. There were no options on issue during the 2018 financial
year.
The Company did not grant any options during the 2018 or 2017 financial years. During the year ended
30 June 2018, nil (2017: 8,000,000) options expired.
Exercise
price
Balance
at start
of the
year
Granted
during
the year
Exercised
during the
year
Expired/
forfeited
during the
year
Balance
at end
of the
year
Vested and
exercisable
at end of
the year
A$
Number Number
Number
Number
Number
Number
0.0549
8,000,000
-
-
(8,000,000)
-
-
Grant
date
Expiry
date
2017
2 Dec 2013 2 Dec 2016
Weighted average exercise price – A$
0.055
b) Performance rights
The Performance Rights Plan was approved by shareholders at the 2013 Annual General Meeting and
again at the 2016 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. If the vesting condition is not met on a measurement date (no
rights vest), the performance rights will not lapse and will continue to exist as unvested performance
rights to be retested at the next measurement date or expiry date, whichever is later. Performance
rights are granted under the plan for no consideration.
Rights granted under the plan carry no dividend or voting rights.
61
91
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
21. Share-based payments (continued)
Set out below are summaries of rights granted under the Performance Rights Plan:
Fair value
on date of
issue
Balance at
start of
the year
Expiry date
A$
Number
Rights
issued
during
the year
Number
Exercised/
vested
Lapsed/
expired
Balance at
end of the
year
Number
Number
Number
2018
Grant
date
3 Oct 2014
31 Dec 2018
3 Oct 2014
31 Dec 2018
23 Apr 2015 31 Dec 2019
23 Apr 2015 31 Dec 2019
23 Apr 2015 31 Dec 2019
14 Aug 2015 31 Dec 2017 (i)
29 Nov 2017 29 Nov 2022
29 Nov 2017 29 Nov 2022
29 Nov 2017 29 Nov 2022
Total
0.05
0.06
0.06
0.07
0.08
0.04
0.05
0.04
0.04
10,000
1,610,000
1,543,334
3,096,666
10,000
1,400,000
-
-
-
-
-
-
-
-
-
4,729,000
4,729,000
4,729,000
(10,000)
(1,610,000)
-
-
(10,000)
-
-
-
-
-
-
-
-
-
(1,400,000)
-
-
-
-
-
1,543,334
3,096,666
-
-
4,729,000
4,729,000
4,729,000
7,670,000
14,187,000
(1,630,000)
(1,400,000)
18,827,000
Weighted average exercise price – A$
0.06
0.05
0.06
0.04
0.05
(i)
2017
Fair value
on date of
issue
Balance at
start of
the year
Rights
issued
during
the year
Exercised/
vested
Lapsed/
expired
Balance at
end of the
year
Grant
date
3 Oct 2014
Expiry date
31 Dec 2018
3 Oct 2014
31 Dec 2018
23 Apr 2015 31 Dec 2019
23 Apr 2015 31 Dec 2019
23 Apr 2015 31 Dec 2019
23 Apr 2015 31 Dec 2019
14 Aug 2015 31 Dec 2017 (i)
Total
A$
0.05
0.06
0.06
0.07
0.08
0.09
0.04
Weighted average exercise price – A$
Number
Number
Number
Number
Number
4,500,000
2,299,998
2,079,170
4,237,497
79,167
79,166
1,400,000
14,674,998
0.06
-
-
-
-
-
-
-
-
-
(4,286,667)
(43,333)
-
-
-
(60,001)
-
(203,333)
(646,665)
(535,836)
(1,140,831)
(69,167)
(19,165)
-
(4,390,001)
(2,614,997)
0.05
0.06
10,000
1,610,000
1,543,334
3,096,666
10,000
-
1,400,000
7,670,000
0.06
(ii) Expiry date of rights granted to M.Worner amended per the plan rules following cessation of his
employment on 1 July 2017.
92
62
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
21. Share-based payments (continued)
Set out below is the share based payment expense:
Performance rights issued in financial year 2015
Performance rights issues in financial year 2018
Total
2018
US$’000
2017
US$’000
24
86
110
75
-
75
The fair value of the performance rights granted under the Plan is estimated at the date of grant using
Hoadley hybrid ESOS – single share price target valuation model. The following table lists inputs to the
models used for grants made during the year ended 30 June 2018.
Total Return on Shareholders (‘TSR’) based performance rights
2018
Measurement date
Grant date
Expiry date
Share price at grant date – A$
Expected volatility
Expected dividend yield
Risk free rate
Fair value – A$
Tranche 1
29 Nov 2018
29 Nov 2017
29 Nov 2022
Tranche 3
Tranche 2
29 Nov 2019 29 Nov 2020
29 Nov 2017 29 Nov 2017
29 Nov 2022 29 Nov 2022
0.04
20%
Nil
2.09%
0.03
0.04
20%
Nil
2.09%
0.02
0.04
20%
Nil
2.09%
0.02
The expected price volatility of 20% was based on the 30 day volume weighted average price (VWAP)
which is the applicable volatility measure for the rights given vesting is determined by a 30 day VWAP.
Note this differs from the volatility used for the Convertible Note valuation which does not rely on a 30
day VWAP.
The Company did not grant any performance rights during the 2017 financial year.
The weighted average remaining contractual life of performance rights outstanding at 30 June 2018
was 3.7 years (2017: 1.9 years).
The expected price volatility is based on the historic volatility (based on the remaining life of the rights),
adjusted for any expected changes to future volatility due to publicly available information.
For the year ended 30 June 2018, the Group recognised share-based payments expense of $109,556 in
the Consolidated Statement of Profit or Loss and Other Comprehensive Income (2017: $75,351).
Recognition and measurement
The Group 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).
63
93
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
21. Share-based payments (continued)
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 Hoadley hybrid single share price model. 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 any non-market performance conditions being met and (iii) the expired portion of the vesting period.
The charge to the Consolidated Statement of Profit or Loss and Other Comprehensive Income 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.
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.
Key estimates and judgements
The Group 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 Hoadley hybrid single share price 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.
94
64
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
22. Related parties
Key management personnel compensation
Short-term employee benefits
Post-employment benefits
Other benefits
Termination benefits(i)
Share-based payments
Total USD
Total AUD equivalent
2018
US$
2017
US$
1,125,219
70,914
3,264
(17,553)
95,100
1,276,944
1,647,979
1,277,350
120,903
4,914
167,893
91,861
1,662,921
2,188,967
(i)
Reversal of over-accrual of annual leave entitlement on termination at 30 June 2017
Detailed remuneration disclosures are provided in the remuneration report on pages 49 to 59.
Transactions with key management personnel
On 15th April 2018 the Company modified the sub-lease agreement with Pathfinder Energy Pty Ltd, a
company of which Mr Ian Boserio is a Director. The sub-lease is on a month to month basis and is in
relation to office premises at 32 Delhi Street, West Perth. A fee of A$1,000 per month is payable. There
were no amounts outstanding at balance date.
On 2 August 2017 the Company issued $8.2 million secured convertible notes to Molton Holdings
Limited, a major Otto shareholder ($8.0 million) and Mr John Jetter, Otto’s Chairman ($0.2 million). No
convertible notes have been converted therefore 8.2 million convertible notes remained on issue as at
30 June 2018. The note issue was approved by shareholders at a general meeting on 25 July 2017.
Refer to note 14 for information on the convertible notes.
65
95
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
23. Auditor’s remuneration
During the year the following fees were paid or payable for services provided by the auditor of the parent
entity, its related practices and non-related audit firms:
BDO Australia
Audit and review of financial statements
Tax compliance services
Tax consulting and tax advice
Total remuneration of BDO Australia
Network firms of BDO Australia
Audit and review of financial statements
Tax compliance services
International tax consulting
Total remuneration of network firms of BDO Australia
Non-BDO
Audit and review of financial statements
Tax compliance services
Total remuneration of non-BDO audit firms
Total auditors’ remuneration
2018
US$
2017
US$
34,419
3,751
1,056
39,226
7,681
14,001
12,265
33,947
36,941
28,687
18,970
84,598
35,580
18,000
4,211
57,791
6,021
1,764
7,785
80,958
6,556
4,950
11,506
153,895
It is the Group’s policy to employ BDO on assignments additional to their statutory audit duties where
BDO’s expertise and experience with the Group are important. These assignments are principally tax
advice where BDO is awarded assignments on a competitive basis. It is the Group’s policy to seek
competitive tenders for all major consulting projects.
24. Contingent liabilities
Convertible note success fee
There is a success fee payable in respect of the convertible note based on cumulative SM 71 oil
production to 30 June 2019 (refer Note 14). Production at SM 71 commenced in March 2018. The
maximum amount of success fee payable is $1,025,000. As at 30 June 2018 US$163,000 has been
accrued.
96
66
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
25. Commitments
a) Exploration expenditure commitments
Exploration expenditure contracted for at the reporting date but not recognised as liabilities are as
follows:
Not later than 1 year
2018
US$’000
2017
US$’000
750
750
2,600
2,600
b) Capital expenditure commitments
Capital expenditure committed to at reporting date but not recognised as liabilities are as follows:
Not later than 1 year
c) Lease commitments
2018
US$’000
-
-
2017
US$’000
2,956
2,956
The Group has entered into non-cancellable operating leases for corporate offices, a photocopier and
a compressor (in JV with Byron Energy Ltd for the SM 71 Development). The leases have varying terms,
including escalation and renewal rights.
Commitments for minimum lease payments in relation to non‑cancellable operating leases are
payable as follows:
Not later than 1 year
Later than 1 year but not later than 5 years
2018
US$’000
2017
US$’000
170
389
559
268
-
268
Recognition and measurement
Leases in which a significant portion of the risks and rewards of ownership are not transferred to the
Group 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.
Commitments are disclosed net of the amount of GST recoverable from, or payable to, the tax authority.
Lease rentals due on the Group’s exploration leases can be cancelled and the leases relinquished.
Therefore the lease rentals are not non-cancellable and hence are not included in the above.
67
97
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period
No matters or circumstances have arisen since 30 June 2018 that have significantly affected, or may
significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs
in future financial years apart from those listed below:
Appointment of US technical team
The Company has completed the establishment of its Houston office and appointment of a US-based
technical team. Managing Director Matthew Allen has relocated to Houston to lead the team. In
addition, Otto is pleased to announce the following technical appointments in Houston:
Will Armstrong – Vice President, Exploration and New Ventures
Philip Trajanovich – Senior Commercial Manager
Mark Sunwall – Senior Exploration Consultant
Kevin Small – Senior Exploration Consultant
The exploration team will be led by Will Armstrong, who has more than 30 years of experience across
the Gulf of Mexico. Will’s exploration work has seen the drilling of 162 prospects across his career at a
commercial success rate in excess of 66%.
The exploration team have been engaged as consultants inside the Otto business since early 2018. This
has involved the screening of a number of prospects and investment opportunities including the Hilcorp
Gulf Coast package. As a result of this consulting work, and past experience, the exploration team are
very familiar with the Company’s current portfolio, screening criteria and focus area for potential
prospects.
In addition, Otto has opened its office located at Two Allen Center in Houston Downtown. Refer to the
ASX release of 16 July 2018 for further details.
Alaska Western Blocks
On 30 July 2018 Otto advised that, via its wholly owned subsidiary Borealis Alaska LLC, it had executed
definitive agreements with Great Bear Petroleum Operating LLC, along with the Consortium Partners,
88 Energy Limited (Captivate Energy Alaska, Inc) and Red Emperor Resources NL, to acquire the
majority of Great Bear’s working interest in exchange for drilling a commitment well on the Western
Blocks prior to 30 May 2019. Refer to the operational update above and Otto’s ASX release of 25 June
2018 for the details of the agreement and Western Blocks opportunity.
On 29 August 2018 the Company announced that the operator Captivate Energy Alaska, Inc, (a 100%
owned subsidiary of 88 Energy Limited) had executed a rig contract for the drilling of the Winx Prospect,
located on the Western Blocks, North Slope of Alaska.
The Winx Prospect is a 3D seismic defined oil prospect in the successful Nanushuk play fairway with a
gross mean unrisked prospective resource of 400MMbbls (75MMbbls net to Otto) and a geological
chance of success in the range of 25-30%.
Hilcorp eight well farmin
On 31 July 2018 Otto advised that it had entered into a joint venture with Hilcorp Energy which will see
it earn a 37.5% working interest in an eight well portfolio of prospects in the Onshore/Near Shore USA
Gulf Coast (Gulf of Mexico). The wells will be drilled by Hilcorp, a highly experienced, privately-owned
operator based in Houston, over the next 15 months
98
68
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period (continued)
Details of the Agreement
Under a Joint Exploration and Development Agreement (JEDA) with Hilcorp Energy Otto has committed
to an eight well drilling program with an estimated cost of US$75 million (100%).
Otto will earn a 37.5% working interest by paying 50.0% of the costs of drilling and either setting casing
or plugging and abandoning the well plus lease acquisition costs at each of the eight prospects. The
estimated cost of the commitment to Otto is US$37.5 million. US$4 million was paid immediately to
cover initial land and other costs.
Well Cap - Otto has the option to discontinue participation in each prospect well if actual costs exceed
the approved expenditure budget by 20%. If Otto elects to not continue, it will forfeit rights to that
prospect. If Otto proceeds, costs from then on will be at working interest percentages.
Program Cap - Once Otto has incurred a total amount relating to the initial eight wells of US$42.5m, it
will have the option to elect (but not the obligation) to participate in the remaining undrilled prospects
in the initial eight well program at working interest percentages. If Otto elects to not participate in any
undrilled prospects, it will forfeit rights in those prospects.
Minimum Commitment – Should Otto not participate in one or more of the eight wells, it shall be liable
for liquidated damages in the sum of US$1 million per prospect.
Additional Upside
Should either the Tarpon or Mustang prospects be successful then Otto has ground floor rights (ie pays
only its working interest) to participate in the nearby Damsel and Corsair/Hellcat opportunities. These
wells are in addition to the eight wells.
Under the JEDA Otto has a right of first offer to a subsequent Gulf Coast program, if Hilcorp elect to
offer such a program to third parties.
About Hilcorp Energy
Founded in 1989, Hilcorp is one of the largest privately held oil and natural gas companies in North
America. Hilcorp specializes in reinvigorating legacy oil and gas fields across North America; including
in the US Gulf Coast, Alaska and the Rockies and currently produces approximately 325,000 boepd. To
put this into context, Australia’s largest oil and gas company, Woodside, produces ~230,000 boepd.
Hilcorp has nearly 2,000 employees and has been consistently recognized for its strong culture, values
and ethics both within the firm and in the communities in which it operates.
Otto is very pleased to be partnering with a Gulf Coast operator with proven capability to take
exploration prospects into production.
Impact on Strategy
Otto has a clear strategy to grow production in the Gulf of Mexico to 5,000 boepd by the end of 2020.
More specifically Otto’s target area for new opportunities lies within the Pliocene, Miocene and
Oligocene reservoir systems of the US Gulf of Mexico shelf and Gulf Coast where capital costs are
manageable for Otto and the availability of infrastructure means the time from discovery to production
is short. Otto is deploying its experienced technical team to find attractive, low risk drill opportunities
in this area to provide high-margin oil and gas production growth.
This growth strategy is underpinned by the strong production and cashflow from Otto’s 50% owned SM
71 oil field in the Gulf of Mexico shelf.
69
99
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
100
ANNUAL REPORT2018NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2018 70 26.Events after the reporting period (continued)The Hilcorp eight well portfolio is a significant step toward the 5,000 boepd and puts Otto into partnership a large and well-respected operator in the region. In addition it offers further potential through follow-up drilling and a right of offer on further Hilcorp Gulf Coast farmouts. Details of the Drilling Program Information regarding the eight wells is set out in the table below. Note that on 30 August 2018 Otto announced that the Big Tex well commenced drilling. Further details are set out later in this subsequent events note. Prospective Resources The range of prospective resources for each prospect is set out below. OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period (continued)
Equity raising
On 31 July 2018 the Company announced it was undertaking a capital raising of approximately A$20
million via an institutional Placement and a fully-underwritten, accelerated non-renounceable
Entitlement Offer to fund its US$37.5 million share of the drilling program. Refer above and to the ASX
release of 31 July 2018 for details on the Gulf Coast Package of eight wells with Hilcorp.
The offer price of A$0.059 represented a:
•
•
•
7.8% discount to the last close of A$0.064 on Monday 30 July 2018;
9.5% discount to the 30 day VWAP; and
6.5% discount to TERP.
Placement
The Placement raised a total of A$10m through the issue of approximately 169.5 million shares at
A$0.059 per share.
Institutional Entitlement Offer
The Institutional Entitlement Offer raised a total of A$3m through the issue of approximately 51.6
million shares at A$0.059 per share
The Institutional Entitlement Offer shortfall was strongly oversubscribed by institutional shareholders.
Shares issued under the placement and Institutional Entitlement Offer were allotted on Friday 10
August 2018.
Retail Entitlement Offer
The retail component of the Entitlement Offer (Retail Entitlement Offer) provided eligible retail
shareholders in Otto the opportunity to acquire 1 new share for every 9 shares held at the record date
of 7.00pm (AEST) on 2 August 2018.
A$5.5 million (78%) of Entitlements were taken up leaving a Shortfall of A$1.5 million. A further A$6.0
million in subscriptions were received for Additional New Shares which was A$4.5 million in excess of
the Shortfall of A$1.5 million, hence the A$4.5 million was refunded. The scale back was determined
based on the pro-rata of the Additional New Shares applied for to the shareholder’s entitlement as at
the Record Date. Accordingly, given the Retail Entitlement Offer was oversubscribed, there was no
allocation to underwriters.
A total of A$7 million was raised from the Retail Entitlement Offer through the issue of 118.5 million
shares at A$0.059 per share.
New shares issued under the Retail Entitlement Offer were allotted on 29 August 2018.
As a result of the entitlement offer, the conversion price for the convertible notes reduced from A$0.055
to A$0.05484.
Bivouac Peak
On 9 July 2018 Otto announced that it had elected to participate in the initial test well, Weiss-Adler et.
al. No. 1 (“Weiss-Adler#1”), on the Bivouac Peak East prospect.
The estimated cost for the 18,294 ft MD/18,000 ft TVD well is US$10.8 million (100% dry hole cost). Otto
will earn a 40% working interest by paying 53.33% of the costs of the well to reach the earning depth or
up to a cap of US$5.33 million, whichever occurs first, after which Otto will revert back to paying 40%
of all future costs.
71
101
ANNUAL REPORT2018
OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period (continued)
The Bivouac Peak project area comprises two prospects, the East Prospect and the Deep Prospect. The
total mapped gross 8/8ths prospective resources for the two combined prospects at Bivouac Peak are
estimated at 16.0 million barrels of oil (“Mmbo”) and 177.7 billion cubic feet of gas (“Bcf “), or 45.6
million barrels oil equivalent (“Mmboe”)1 .
The Weiss-Adler #1 well is designed to test the Bivouac Peak East Prospect, targeting the regionally
productive Miocene Cib Op section, with a mapped gross 8/8ths prospective resource of 11.3 MMbbls
and 125.6 Bcf, or a combined 32.2MMboe. Although the East and the Deep prospects are independent,
success at the East Prospect would provide positive seismic calibration, potentially reducing risk at the
Deep Prospect as well.
On 27 August 2018 Otto announced that the Weiss-Adler #1 exploration well had commenced. The
Parker Drilling Company Rig #77-B Deep Drilling 3000 HP Posted Barge Rig will drill to a depth of
18,294 ft Measured Depth (“MD”)/18,000 ft True Vertical Depth (“TVD”). The well is expected to take
approximately 75 days to reach total depth.
In case of success, completion and development costs to first production are currently estimated in the
range of US$9.0-11.0 million (gross). Should the well be productive, it is currently estimated that this
well would commence production within 8-10 months following drilling of the initial test well.
Big Tex spud
On 30 August 2018 Otto announced that the initial exploration well, SL 192 PP 031, on the Big Tex
prospect had commenced drilling from a bargemounted rig.
The well will be drilled to 13,175 ft MD/12,700 ft TVD and is expected to take 55 days to reach total depth.
Otto will earn a 37.5% working interest by paying 50% of the costs of drilling and either setting casing
or plugging and abandoning the well, after which point Otto will pay 37.5% of all future costs. The well
is expected to cost the Company US$4.23 million (50% paying interest). The exploration well on the Big
Tex prospect is targeting the Tex W 16 Sand and Tex W 18 Sand that are Middle Miocene in age. This is
a prolific section, having produced from the east in Hilcorp’s East Bay Field, and from the west from
the massive West Delta 30 Field, which has produced 562 MMBO and 934 BCF to date.
The success case development concept will be a flowline tieback to an existing platform. The prospect
has been assessed as having a probability of success of 54%.
Nearly threefold reserve increase at SM 71
On 6 Aug 2018 Otto provided an update on the Company’s reserves and resources position for its 50%
owned South Marsh Island Block 71 (“SM 71”) oil producing project, in the shallow waters of the Gulf of
Mexico as independently assessed by Collarini Associates (“Collarini”).
102
72
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period (continued)
The SM 71 reserves and resources as at 30 June 2018 are as follows:
The Collarini report is effective as of 30 June 2018 and is the first independent reserve report for the
SM 71 project since production began in March 2018. All reserves quoted below are remaining reserves,
excluding production of approximately 349,000 barrels of oil and 240 MMcf of gas (gross) through 30
June 2018.
Collarini has estimated an increase in 2P reserves of 4.3 MMboe net to Otto (excluding production to 30
June 2018) a near tripling of the 2017 2P reserves estimate.
The significant increase in all key reserve categories is directly due to the success of the appraisal and
development drilling program in 2017/18. Both the thicker than expected net oil zones and exceptional
well performance to date from the D5 producing sands in both the F1 and F3 wells are contributing
factors to the positive additions and revisions to the Company’s reserves. Further details on the
material changes to reserves is set out below.
Proved and Probable Reserves - Net of Actual Production
The increase in proved and probable reserves is due to the successful SM 71 F2 (“F2”) appraisal well
drilled in December 2017 and the SM 71 F3 (“F3”) development well drilled in January 2018.
Significantly thicker than predicted oil bearing sands were logged in the drilling of the SM 71 F2 and F3
wells in the D5 Sand which has resulted in reserve additions and upgrades. Additionally, flow rates
from the F1 and F3 wells have continued to exceed pre-start-up predictions resulting in positive
revisions to expected recoveries.
Drilling of the B65 Sand in the SM 71 F2 well resulted in a positive reclassification of a portion of
Prospective Resources to the Proved and Probable Reserves categories. Although the SM 71 F2 well
has experienced premature pressure depletion, suggesting the well is in an isolated compartment, the
reservoir is mapped well beyond the small drainage area of the SM 71 F2 well.
72% of the remaining proved and probable reserves are classified as developed or behind pipe with the
balance classified as undeveloped.
73
103
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
26. Events after the reporting period (continued)
Possible Reserves
The increase in possible reserves at SM 71 is mainly due to:
a) Potential upside recoveries and drainage areas from the producing D5 reserves
b) The reclassification to possible reserves of a material proportion of the prospective resource
previously attributed to the B65 Sand, and
c) the addition of the possible reserves attributed to the B65, J-1 and D5 sands as result of the
development drilling in 2017/18.
Material Changes to Prospective Resources
The decrease in prospective resources is due to reclassification of all of the 2017 B65 Sand
prospective resource into proved, probable and possible reserves in 2018 following successful
discovery, appraisal and development drilling and some production.
SM 71 status
As at 19 September 2018, cumulative gross production was approximately 641,737 barrels of oil and
556 million cubic feet of gas, on a gross basis with no produced formation water. The current field sales
rate as of 19 September 2018, was approximately 3,600 bopd and 6.0 mmcfgpd, on a gross basis after
shrinkage at the sales meter. Recompletion of the F2 well from the B65 Sand to the B55 Sand is
expected to commence during the last week of September 2018.
27. Parent entity disclosures
As at, and throughout the financial year ended 30 June 2018, the parent company of the Group was Otto
Energy Limited.
Summarised statement of profit or loss and other
comprehensive income
Loss for the year after tax
Total comprehensive 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 comprises:
Share capital
Share based payments reserves
Foreign currency translation reserve
Accumulated losses
Total equity
104
Parent entity
2018
US$’000
2017
US$’000
(5,486)
(5,486)
(3,419)
(3,419)
1,936
51,185
53,121
12,471
6
12,477
12,519
25,367
37,886
672
3
675
40,644
37,211
90,704
9,658
118
(59,836)
40,644
81,895
9,549
118
(54,351)
37,211
74
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
27. Parent entity disclosures (continued)
Guarantees entered into by the parent in relation to the debts of its subsidiaries
Parent company guarantees are extended on a case by case basis. Otto Energy Limited has provided
a number of performance guarantees for subsidiaries under the terms of joint operations operating
agreements, participation agreements and agreements with Governments pertaining to oil & gas
exploration.
Otto Energy Limited has a guarantee in place to Byron Energy Inc, for the performance of Otto Energy
(Louisiana) LLC’s obligations in relation to SM 71 and Bivouac Peak.
Contingent liabilities
The parent entity had no contingent liabilities as at 30 June 2018 and 30 June 2017 beyond those listed
in Note 24
Commitments
The parent entity had no capital commitments as at 30 June 2018 and 30 June 2017. The parent entity
has an operating lease on office premises on a month to month basis.
Not later than 1 year
Later than 1 year but not later than 5 years
Significant accounting policies
2018
US$’000
2017
US$’000
3
-
3
268
-
268
The accounting policies of the parent entity are consistent with those of the Group, except for the
following: Investments in subsidiaries are accounted for at cost, less any impairment in the parent
entity.
28. New accounting standards and interpretations
New, revised or amended Accounting Standards and Interpretations adopted by the Group
A number of new or amended standards became applicable for the current reporting period. The
adoption of these Accounting standards however, did not have any significant impact on the financial
performance or position of the Group. Any new, revised and amending Accounting Standards or
Interpretations that are not yet mandatory have not been early adopted.
Standards issued but not yet effective
A number of new standards, amendment of standards and interpretations have recently been issued
but are not yet effective and have not been adopted by the Group as at the financial reporting date.
The Group has reviewed these standards and interpretations, and with the exception of the items listed
below for which the final impact is yet to be determined, none of the new or amended standards will
significantly affect the Group’s accounting policies, financial position or performance.
75
105
ANNUAL REPORT2018 OTTO ENERGY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 30 June 2018
28. New accounting standards and interpretations (continued)
Application date
of standard *
1 January 2018
Application date
for Group *
1 July 2018
Application date
of standard *
1 January 2018
Application date
for Group *
1 July 2018
1 January 2019
1 July 2019
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.
Based on an initial impact assessment,
the new standard is not expected to
significantly impact the financial
statements.
Standards issued but not yet effective (continued)
Reference
and title
AASB 15
Revenue from
Contracts with
Customers
AASB 16
Leases
Summary
AASB 15 provides a single, principles-
based five-step model to be applied to all
contracts with customers. Guidance is
provided on topics such as the point at
which revenue is recognised, accounting
for variable consideration, costs of
fulfilling and obtaining a contract and
various related matters. New disclosures
regarding revenue are also introduced.
Based on an initial impact assessment,
the new standard is not expected to
significantly impact revenue recognition.
This Standard introduces a single lessee
accounting model and requires a lessee
to recognise assets and liabilities for all
leases with a term of more than 12
months, unless the underlying asset is of
low value. A lessee is required to
recognise a right-of-use asset
representing its right to use the
underlying leased asset and a lease
liability representing its obligation to
make lease payments.
Management are still in the process of
assessing the potential impact the new
standard may have on the financial
statements.
* Designates the beginning of the applicable annual reporting period
76
106
ANNUAL REPORT2018 OTTO ENERGY
DIRECTORS’ DECLARATION
FOR THE YEAR ENDED 30 JUNE 2018
107
ANNUAL REPORT2018DIRECTORS’ DECLARATION For the year ended 30 June 2018 77 In accordance with a resolution of the Directors of Otto Energy Limited, I state that: 1.In the opinion of the Directors: a.the financial statements, notes and the additional disclosures included in the audited 2017 Remuneration Report, comply with Australian Accounting Standards (including Australian Accounting Interpretations) and the Corporations Act 2001; b.the financial statements and notes give a true and fair view of the financial position of the Group as at 30 June 2018 and of its performance for the year ended on that date; c.the financial statements and notes comply with International Financial Reporting Standards as disclosed in the ‘Basis of Preparation’ section within the notes to the 2018 Financial Report; and d.there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2.This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the year ended 30 June 2018. On behalf of the Board Mr I Macliver Director 21 September 2018 OTTO ENERGY
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2018
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 Audit of the Financial Report
Opinion
We have audited the financial report of Otto Energy Limited (the Company) and its subsidiaries (the
Group), which comprises the consolidated statement of financial position as at 30 June 2018, 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, and notes
to the financial report, including a summary of significant accounting policies and the directors’
declaration.
In our opinion the accompanying financial report of the Group, is in accordance with the Corporations
Act 2001, including:
(i)
Giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its
financial performance for the year ended on that date; and
(ii)
Complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s responsibilities for the audit of the Financial
Report section of our report. We are independent of the Group in accordance with the Corporations
Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s
APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the
financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance
with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has been
given to the directors of the Company, would be in the same terms if given to the directors as at the
time of this auditor’s report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in
our audit of the financial report of the current period. These matters were addressed in the context of
our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
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
78
108
ANNUAL REPORT2018 OTTO ENERGY
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2018
Carrying Value of Oil and Gas Properties
Key audit matter
How the matter was addressed in our audit
The Group’s carrying value of oil and gas properties as
We evaluated management’s assessment of
disclosed in note 12 is a key audit matter as the
impairment indicators at 30 June 2018 in accordance
assessment of carrying value requires management to
with AASB 136: Impairment of Assets. Our work
exercise judgement in identifying indicators of
included but was not limited to the following
impairment for the purposes of determining whether
procedures:
the assets need to be tested for impairment.
•
Obtaining and reviewing available reserve report
data from the management’s external expert to
determine whether they indicate a significant
change that would impact the value of the asset.
This included assessing the competency and
objectivity of management’s expert;
•
•
•
•
Benchmarking and analysing management’s oil
and gas price assumptions against external
market data, to determine whether they indicate
a significant change that would impact the value
of the asset;
Reviewing the Director’s minutes and ASX
announcements for evidence of consistency of
information with management’s assessment of
the carrying value;
Considering whether there were any other facts
and circumstances that existed to indicate
impairment testing was required; and
Assessing the adequacy of the related disclosures
in note 12 to the financial report.
109
79
ANNUAL REPORT2018 OTTO ENERGY
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2018
Valuation of convertible notes derivatives
Key audit matter
How the matter was addressed in our audit
During the year Otto Energy Limited issued convertible
Our work included but was not limited to the
notes to fund the Group’s operations. The valuation of
following procedures:
embedded derivatives associated with the US Dollar
denominated convertible notes on issue is considered
to be a key audit matter due to the following:
•
•
•
Judgements required by management in the
selection of a suitable valuation methodology;
The inputs used and valuation method
applied; and
The complexity of the accounting policy
adopted by management.
Refer to note 14 of the financial report for a
description of the accounting policy and significant
estimates and judgements applied to these
transactions.
•
•
•
•
•
•
Reviewing the relevant convertible note
agreements;
Enquiring with management to understand
the convertible note transactions;
Assessing whether management’s assessment
of the classification of the instrument was in
accordance with the accounting standards;
Reviewing management’s calculation carried
out in respect of the valuation for debt and
derivative components of instruments;
Assessing the appropriateness of the
volatility and share price assumptions used in
the Group’s calculation of the derivative
components of the instruments; and
Assessing the appropriateness of the
disclosures included in note 14 to the
financial statements.
Other information
The directors are responsible for the other information. The other information comprises the
information in the Group’s annual report for the year ended 30 June 2018, but does not include the
financial report and the auditor’s report thereon.
Our opinion on the financial report does not cover the other information and we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
report or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have nothing to report in this regard.
110
80
ANNUAL REPORT2018 OTTO ENERGY
INDEPENDENT AUDITOR’S REPORT
FOR THE YEAR ENDED 30 JUNE 2018
Responsibilities of the directors for the Financial Report
The directors of the Company are responsible for the preparation of the financial report that gives a
true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001
and for such internal control as the directors determine is necessary to enable the preparation of the
financial report that gives a true and fair view and is free from material misstatement, whether due to
fraud or error.
In preparing the financial report, the directors are responsible for assessing the ability of the group to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to liquidate the Group or to cease
operations, or has no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the Financial Report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with the Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of this financial report.
A further description of our responsibilities for the audit of the financial report is located at the
Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at:
http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf
This description forms part of our auditor’s report.
Report on the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 49 to 59 of the directors’ report for the
year ended 30 June 2018.
In our opinion, the Remuneration Report of Otto Energy Limited, for the year ended 30 June 2018,
complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and presentation of the
Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility
is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with
Australian Auditing Standards.
BDO Audit (WA) Pty Ltd
Jarrad Prue
Director
Perth, 21 September 2018
81
111
ANNUAL REPORT2018 OTTO ENERGY
ADDITIONAL ASX INFORMATION
AS AT 7 SEPTEMBER 2018
ADDITIONAL ASX INFORMATION
As at 7 September 2018
Distribution of shareholdings
Range
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
Shareholders by location (31 August 2018)
Australian holders
Overseas holders
Unmarketable parcels
Number of holders
Number of shares
124
242
529
2,622
1,463
4,980
25,684
769,622
4,386,755
108,840,328
1,756,503,223
1,870,525,612
Number of holders
4,732
257
4,989
Number of shares
1,486,978,475
383,547,137
1,870,525,612
There were 535 shareholders holding less than a marketable parcel of shares.
Twenty largest shareholders
Name
Ordinary shares
1 Molton Holdings Limited
Perennial Value Management
2
Citicorp Nominees Pty Limited
3
J P Morgan Nominees Australia Limited
4
HSBC Custody Nominees (Australia) Limited
5
AMP Life Limited
6
Safari Capital Pty Ltd
7
8 National Nominees Limited
BNP Paribas Nominees Pty Ltd
9
10 John Jetter (Consolidated Relevant Interest)
11 BNP Paribas Noms Pty Ltd
12 Nero Resource Fund Pty Ltd
13
BNP Paribas Nominees Pty Ltd
14 DBS Vickers Securities (Singapore) Pte Ltd
15 Mr Austin Sydney Evan Miller
16 Ecapital Nominees Pty Ltd
17 CS Fourth Nominees Pty Ltd
18 Sphinx Holdings Ltd
19 Debuscey Pty Ltd
20 Mr Andrew McCrea Coulter & Mrs Sally Anne Travis
112
Number of
shares
305,859,697
118,673,345
99,646,230
95,636,100
52,266,506
33,583,462
28,657,138
25,765,970
24,392,331
21,607,020
21,497,521
18,949,153
17,007,110
14,020,833
12,203,389
12,000,000
11,931,228
9,126,587
8,501,292
8,128,572
939,453,484
%
16.35%
6.34%
5.33%
5.11%
2.79%
1.80%
1.53%
1.38%
1.30%
1.16%
1.15%
1.01%
0.91%
0.75%
0.65%
0.64%
0.64%
0.49%
0.45%
0.43%
50.22%
82
ANNUAL REPORT2018
OTTO ENERGY
ADDITIONAL ASX INFORMATION
AS AT 7 SEPTEMBER 2018
ADDITIONAL ASX INFORMATION
As at 7 September 2018
Substantial shareholders
Name
Molton Holdings Limited
Perennial Value Management (IOOF)
Unquoted securities
Ordinary shares
Number of
shares
305,859,697
118,673,345
%
16.35
6.77
The unlisted securities of the Company as at 7 September 2018 are 18,827,000 performance rights and
8,200,000 convertible notes. Neither the performance rights, nor the convertible notes, carry a right to
vote at a general meeting of shareholders.
Performance Rights
Grant date
Expiry date
Exercise price
23 April 2015
29 November 2017
31 December 2019
29 November 2022
A$0.00
A$0.00
Number of
performance
rights
4,640,000
14,187,000
18,827,000
Number of
holders
3
7
Convertible notes
As at 7 September 2018 there were 8,200,000 convertible notes on issue. Refer to the Appendix
3B released to ASX on 2 August 2017 for information on the terms. Refer also to Note 14 of the
financial statements. Subsequent to year end, the conversion price of the notes reduced from A
$0.055 to A$0.05484 as a result of the entitlement offer (ASX release of 31 July 2018).
Voting rights
Ordinary shares
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.
Options
There were no options on issue as at the date of this Financial Report.
Performance rights
There are no voting rights attached to the performance rights.
Corporate Governance
The Company's Corporate Governance Statement for the 2018 financial year can be accessed at
www.ottoenergy.com
83
113
ANNUAL REPORT2018
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114
ANNUAL REPORT2018 OTTO ENERGY
CONTENTS
2
Chairman’s Report
4 Managing Director’s Report
6
8
Strategy
Asset Overview
22 Summary of Assets
23 Reserves & Prospective Resources
29 Financial Report 2018
ANNUAL REPORT
2018
ANNUAL REPORT
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Australian Office
32 Delhi Street
West Perth WA 6005
Australia
PO BOX 1414
West Perth WA 6872
Australia
T: + 61 8 6467 8800
F: + 61 8 6467 8801
Houston Office
Suite #1080
Two Allen Center
1200 Smith Street
Houston
Texas 77002
T: +1 713-893-8894
Email: info@ottoenergy.com
ASX Code: OEL
ABN: 56 107 555 046
ottoenergy.com
OTTO ENERGY LIMITED
2018
Annual Report