Otto Energy
Annual Report 2021

Plain-text annual report

ANNUAL REPORT 2021 Contents 2 OVERVIEW 2 Company Focus 3 Highlights of the Year 4 Areas of Activity 6 About Otto 8 Chairman’s Report 10 Executive Management 12 CORPORATE 13 Strategy 14 Capital Management 16 Risk Management 18 Commodity Price Risk Management 20 Reserves and Prospective Resources 28 OPERATING AND FINANCIAL REVIEW 29 Operational and Financial Highlights 30 Operating Summary 32 Financial Summary 34 Liquidity Summary 36 Asset Overview 40 GOVERNANCE 41 Board of Directors 42 FINANCIAL REPORT 45 Director’s Report 59 Remuneration Report OT TO ENERGY A NNUAL REPOR T 2021 | 1 COM PANY FOCU S Implementing our strategy – building our future PILLAR 1 PILLAR 2 MAXIMIZE BASE BUSINESS DELIVERY OPTIMIZE ORGANIC GROWTH IN EXISTING ASSETS PILLAR 3 DELIVER INORGANIC GROWTH Commercialize the resources-to- reserves-to-production progression of lower risk and cost opportunities, resulting in higher margin returns in the existing base business. Optimize production delivery from our three existing assets within our portfolio, safely and sustainably. Simplify our business through the continued targeting of cost reductions and efficiencies in order to drive lowest operating costs and breakeven costs of supply and deliver highest viable margin returns. Identify and capture growth in value returns through any or all of three lenses: A further lower risk, higher margin infrastructure-led prospect participation. B value accretive acquisitions, sales or mergers. C direct potential to return to shareholders via dividend, stock buybacks or distributions. 2 | OTTO ENERGY ANNUAL REP ORT 2021 OVERVIEW Highlights of the Year Otto Energy Limited is an oil and gas exploration and production company with a regional focus on North America, concentrating on the Gulf of Mexico region near-term. EAR NI N GS $30.1m Net revenue (US$) 31% $29.1m 74% Adjusted EBITDAX1 (US$) CAS H FLOW $18.9m 80% $15.2m 2200% Net operating cashflow (pre-exploration – US$) Net operating cashflow (post-exploration – US$) KE Y D RIVERS 17% 38% Increase in production to 3,032 boe/d at 56% liquids Increase in total WI revenue to US$39.7 million NO N- CORE ASSET DISPOSAL Profit realized on successful sale of Borealis Alaska LLC subsidiary to Pantheon Resources Plc. for 14,272,592 shares of PANR. $8.0m (US$) 1 Considered to be non-IFRS financial information. Refer to audited financial statements released on 27 September 2021 and Appendix 1 for the IFRS information and a reconciliation. OT TO ENERGY ANNUAL REPORT 2021 | 3 OVERVIEW Areas of Activity HOUSTON N EW O RLEANS LIGH TNIN G FI ELD 37.5% Otto Working Interest 28.2% Otto Net Revenue Interest 2 wells Status – Producing From 3,254 boe/day Gross Production (100% basis, at 30 June 2021) 15% Liquids Proportion of 2P Reserves GULF OF MEXIC O G ULF OF M EXIC O SOUTH MA RSH ISLAND 71 SM 7 1 50% Otto Working Interest 40.6% Otto Net Revenue Interest 3 wells Status – Producing From 2,822 boe/day Gross Production (100% basis, at 30 June 2021) 89% Liquids Proportion of 2P Reserves GREEN CA NYON 21 G C 2 1 16.7% Otto Working Interest 13.3% Otto Net Revenue Interest 1 well Status – Producing From 228 boe/day Gross Production (June 2021 Quarter) 91% Liquids Proportion of 2P Reserves 4 | OT TO ENER GY ANNUAL REPORT 2021 OVERVIEW Production GUL F OF ME XIC O Otto Energy considers the US Gulf Coast a core region for its production focus. Today, Otto produces oil and gas from three projects in the Gulf Coast: SM 71, Lightning and GC 21. The Gulf of Mexico (GoM) region is one of the most prolific oil and gas producing regions on earth and the most prolific basin in the US. Otto’s focus in the Gulf region is on evaluating the Pliocene and Miocene gas and liquids rich proven areas. The high density and availability of production platforms utilised for the development of primary reservoirs contributes to low production costs in the region, making projects viable even in a sustained, low oil and gas pricing environment. Additionally, the significant and extensive technical data available gives Otto the ability to reduce its costs of finding and developing, and lowering the overall risk involved in upstream exploration and production. Adding to the advantages of focusing on the Gulf region is the availability of significant market options, with about half of the US fossil fuel refining and processing capacity being located in the Gulf region. Otto has focused on a partnership strategy in the GoM to build a portfolio of diverse, conventional oil and gas opportunities. Otto’s current operating partners in the Gulf of Mexico are Byron Energy (ASX: BYE), Hilcorp Energy, and Talos Energy (NYSE: TALO), resulting in six producing wells over three core assets. Exploration PANTHEON RESOURCES Otto holds approximately 14.3 million shares in Pantheon Resources Plc (LSE: PANR), which is the operator of the recently formed Talitha Unit in Alaska. This unit is located on the North Slope where Pantheon holds a 100% working interest in its various projects. All projects are located adjacent to the major Trans Alaska Pipeline System (TAPS) and the Dalton Highway. Pantheon recently completed drilling of the Talitha #A well to a targeted depth of approximately 3,200 metres. The well has now been logged, with testing of four major oil-bearing zones underway. Otto also retains a 0.5% of 8/8ths ORRI over any future production from the Talitha Unit. OT TO ENERGY ANNUAL REPORT 2021 | 5 OVERVIEW About Otto Otto Energy Limited is an Australian-listed oil and gas exploration and production company with a regional focus on North America. Otto has established non-operating interests in three fields located in onshore Texas, the offshore Gulf of Mexico (GoM) shelf and in the shallower zone within a deepwater area of the Gulf of Mexico. This includes gas/condensate production from the Lightning discovery onshore Matagorda County, Texas and oil with associated gas production from the South Marsh Island 71 (SM 71) and Green Canyon 21 (GC21) fields in the offshore Gulf of Mexico. Otto’s commercial and technical capabilities to screen, identify, pursue and actively capture resource development potentials within the onshore and offshore Gulf of Mexico remains a core company focus. The Gulf of Mexico basin is the most prolific hydrocarbon basin in the US. It is considered a significantly mature hydrocarbon province but continues to yield highly attractive discoveries onshore and offshore. This is complemented by having a well- established regulatory regime, both federal and state, with low royalty rates. The extensive infrastructure from a facilities and pipeline transport perspective also enables lower development costs along with greater access to premium oil and gas sales markets. Commercially, the capacity to actively market and/or hedge oil or gas production from operations provides strong cashflow from these assets, underpinning growth in value for shareholders for years to come. Otto has a clear strategy to deliver shareholder value, through building a strong production and financial base of assets, and will look to optimize the portfolio through with disciplined investments in infrastructure-led development. These efforts have strengthened Otto’s financial capacity and continue to do so. We take a disciplined and prudent approach to capital management, ensuring management of financial risks and maintaining a resilient financial position. This allows us to maximize the value delivered from our portfolio of opportunities. 6 | OT TO ENER GY ANNUAL REPORT 2021 OVERVIEW The Company is continuing to enhance its underlying value delivery, while building on a track record of being recognized as a potential partner of choice” Technology and innovation are essential to Otto’s long-term sustainability. We are growing our energy business, as well as seeking to partner with operators who are using technology to reduce emissions and the carbon footprint of our products. The Company is continually working to bring down its direct and indirect costs. Enhancing operating margins ensures that Otto can continue to find opportunities in the volatile business of developing energy solutions to meet future demands, while growing sustainable value for shareholders. We are committed to upholding our values of integrity, discipline, excellence, teamwork and being a partner of choice. Otto’s success is driven by its people and their capabilities. We aim to manage access to a diverse, high performing workforce while keeping a prudent footprint in size and efficiency. We recognize that enduring, meaningful relationships with all stakeholders are fundamental to maintaining our license to operate and exist. We actively seek to build relationships with stakeholders by creating and sharing our knowledge, while building resilience and gaining access to new opportunities. Our proven track record and distinctive capabilities are underpinned by years of experience and skills, making us a partner of choice. OT TO ENERGY A NNUAL REPOR T 2021 | 7 OVERVIEW Chairman’s Report Dear Shareholders, This past fiscal year has seen a critical period of change in the world, as well as for Otto Energy. The continuing challenges and uncertainties experienced in the face of COVID-19 have resulted in dramatic shifts within the energy sector in terms of demand for, pricing of and expectations around actions to reduce the impacts on our industry. At Otto Energy, we have put tremendous efforts into stabilizing, simplifying and positioning the Company, as well as optimizing efficiencies that will enable us to continue to grow greater value. It has been a year that compelled a rethink about our purpose, ambition for the future and, importantly, resetting the strategy that will guide us there. Otto’s response to this challenging backdrop has driven: • the establishment of a clear and structured strategy • realizing year-on-year production improvements (increase of 17%) • taking actions to reduce operational and structural costs (62% reduction in field lifting costs per boe, and 28% reduction in non-field lifting costs per boe) • making operational improvements across the entire business • increasing transparency and rigour in the performance management of our business • a focus on how we can commercialise the potential for growth It is clear our resilience can be further strengthened by: • continuing to prioritise cash flow generation – operating net investing (increase of 122%) • constantly challenging costs • maintaining disciplined capital management and technical due diligence • building greater brand recognition and broadening our investor base We are clear in our purpose to deliver low cost, high value energy that meets consumer needs” 8 | OT TO ENER GY ANNUAL REPORT 2021 OVERVIEW Positioning Otto Energy for the Future” Underscoring the events of the past year has been a growing confidence in the development and execution of our refreshed strategy. It represents the right roadmap for Otto Energy to position itself to deliver greater value going forward for all stakeholders. We are clear in our purpose to deliver low cost, high value energy that meets consumer needs. Otto is equally focused on its goal of being a preferred energy partner, now and in coming years. We look to the future with determination and resolve. I extend my sincere gratitude to Otto’s leadership team and all those who have showed such commitment in helping to achieve the necessary changes, through these very testing times. I also wish to recognize the contribution and wise counsel of my fellow board members. On behalf of the Board, I thank our shareholders for their support and continuing endorsement of our plans. I look forward to sharing Otto’s continued progress, as we stride ahead. Michael J. Utsler Executive Chairman, Chief Executive Officer and Managing Director OT TO ENERGY A NNUAL REPOR T 2021 | 9 OVERVIEW Executive Management MICHAEL J. UTSLER Executive Chairman, Chief Executive Officer and Managing Director B.S. Petroleum Engineering Mike was appointed Chief Executive Officer and Managing Director of the Company on 11 September 2020, and Executive Chairman on 19 November 2020. Mike is an oil and gas executive with more than 40 years of experience in senior international oil and gas sector roles, including 15 years in the Gulf of Mexico and 5 years as Chief Operating Officer of Woodside in Australia. His career has encompassed senior executive, leadership and board roles with Amoco, BP, Woodside and New Fortress Energy. He holds a B.S. in Petroleum Engineering from the University of Oklahoma. SERGIO CASTRO Chief Financial Officer BBA Accounting, CPA, CFE Sergio joined Otto Energy in December 2019 as Chief Financial Officer. Prior to joining Otto, Sergio was Vice President and Treasurer of Contango Oil & Gas Company for over 13 years. Prior to that, Sergio was a consultant for UHY Advisors TX, LP; a lead credit analyst for Dynegy Inc. and an auditor for Arthur Andersen LLP, where he specialized in energy companies. Sergio was honorably discharged from the U.S. Navy in 1993 as an E-6, where he served onboard a nuclear-powered submarine. He received a BBA in Accounting in 1997 from the University of Houston graduating summa cum laude. Sergio is a CPA and a Certified Fraud Examiner. WILL ARMSTRONG Vice President Exploration and New Ventures B.S. in Geology, M.S. in Geology, emphasis in Geophysics and Hydrogeology Prior to joining Otto, Will worked with Tri-C Resources, a private oil and gas company, developing Gulf Coast conventional prospects for drilling. Prior to this, he screened Gulf Coast, Offshore GOM, and Deepwater GOM prospects for Continental Land & Fur and worked as a geophysical consultant, generating Offshore and Gulf Coast prospects on behalf of Houston Energy, Westport Resources, and Petroquest Energy. Prior to consulting, Will generated prospects for several oil & gas companies, including Newfield Exploration, where he was a founding member and Tenneco Oil Company. Will graduated with a B.S. in Geology, minor in Mathematics, from Grand Valley State College in 1985. He also graduated from Wright State University with a M.S. in Geology, emphasis in Geophysics and Hydrogeology, in 1987. 10 | OTTO ENE RGY ANNUAL REPORT 2021 OVERVIEW PHILIP TRAJANOVICH Senior Commercial Manager JULIE DUNMORE Group Financial Controller Bachelor of Commerce (Hons) Bachelor of Commerce (UWA) Ms. Dunmore is the Group Financial Controller having joined Otto Energy in June 2018. Ms Dunmore has over 20 years experience in financial and management accounting primarily within the oil and gas industry. Ms. Dunmore’s previous experience includes Regional Finance Manager (SEA) for Crondall Energy, Project Finance Manager at Clough Engineering and Wesfarmers Group accountant. Ms. Dunmore is a Chartered Accountant, Graduate of the Australian Institute of Company Directors and a Fellow of the Governance Institute of Australia. Philip was engaged by Otto as a commercial manager in July 2016 and has worked in both the Perth and Houston offices since that time. Prior to joining Otto, Philip was Commercial Manager at Aurora Oil and Gas and its subsequent acquirer Baytex Energy for over four years, focused on the Eagleford shale unconventional play. Philip has also worked with ConocoPhillips as an Asset Manager for nearly three years and Woodside Energy as a Commercial Adviser for over seven years. Philip has gained extensive experience in all facets of upstream oil and gas operations and commercial structures internationally and within the USA. Philip graduated with a B.Com with First Class Honors from the University of Western Australia in 2001. OT TO ENERGY ANNUAL REPORT 202 1 | 11 Corporate 12 | OTTO ENERGY ANNUAL REPORT 2021 CORP ORATE Strategy SHAREHOLD RETURNS PARTNER OF CHOICE TOP QUARTILE TSR LEADING KPI’S LAGGING KPI’S 1 r a l l i P 2 r a l l i P 3 r a l l i P EFFICIENT PROCESSES AND PRACTICES PEOPLE AND ORGANIZATION PILLAR 1 MAXIMIZE BASE BUSINESS DELIVERY Optimize production delivery from our three existing assets within our portfolio, safely and sustainably. Simplify our business through the continued targeting of cost reductions and efficiencies in order to drive lowest operating costs and breakeven costs of supply and deliver highest viable margin returns. PILLAR 2 OPTIMIZE ORGANIC GROWTH IN EXISTING ASSETS Commercialize the resources-to-reserves-to- production progression of lower risk and cost opportunities, resulting in higher margin returns in the existing base business. PILLAR 3 DELIVER INORGANIC GROWTH Identify and capture growth in value returns through any or all of three lenses: A) further lower risk, higher margin infrastructure-led prospect participation, B) value accretive acquisitions, sales or mergers, and C) direct potential to return to shareholders via dividend, stock buybacks or distributions. Growth opportunities can be captured through exploration, mergers, acquisitions, or expansions. Our opportunity management framework is flexible and adaptable with the primary objective of realizing the value of an opportunity whilst mitigating the risk of a sub-optimal outcome. We aim to identify and progress a suite of commercially attractive and sustainable opportunities that complement our existing assets, enable portfolio diversity, and optimize our commercial position. We continue to monitor and assess growth opportunities through mergers and acquisitions on a case-by-case basis. OT TO ENERGY ANNUAL REPORT 202 1 | 13 Free Cash Flow Net Operating Revenue (US$'000) Breakeven Costs Net Operating Revenue (US$'000) Net Operating Revenue (US$'000) 35,000 Net Operating Revenue (US$'000) 35,000 30,000 Breakeven Costs Breakeven Costs $12.00 Breakeven Costs Improvement in Leverage Improvement in Leverage Improvement in Leverage 2019 2021 2019 2020 25,000 2021 (10,000) (20,000) Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) 2020 20,000 2021 2019 (20,000) 2020 Opex Oil Hedges G&A Exploration & Development 2021 15,000 Finance Costs Free Cash Flow (Deficit) 2019 Opex Oil Hedges G&A Exploration & Development Finance Costs 10,000 Free Cash Flow (Deficit) Opex G&A Exploration & Development Finance Costs 600 Free Cash Flow (Deficit) Oil Hedges Capital Expenditures (US$'000) 2019 2020 2019 Capital Expenditures (US$'000) 55,000 2020 2019 $60.00 Capital Expenditures (US$'000) 55,000 $50.00 45,000 2020 2021 Capital Expenditures (US$'000) Improvement in Earnings Free Cash Flow Free Cash Flow 50,000 Free Cash Flow 50,000 40,000 50,000 40,000 30,000 40,000 30,000 20,000 30,000 20,000 10,000 20,000 10,000 - 10,000 - (10,000) - (10,000) (20,000) 2019 D P O B 800 700 500 400 300 200 100 0 800 700 600 500 400 300 200 100 0 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 u t b m M 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 D P O B u t b m M D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $80.00 $70.00 $60.00 $50.00 $30.00 Q4 CY21 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Q3 CY21 $40.00 Q4 CY21 Q1 CY22 $20.00 Q2 CY22 Q3 CY21 BOPD hedged Q1 CY22 Q2 CY22 Hedged Prices Q3 CY22 Q3 CY21 Q4 CY21 Gas Hedges Q1 CY22 BOPD hedged Q2 CY22 Hedged Prices Q3 CY22 25,000 Q3 CY21 Q4 CY21 Q1 CY22 Gas Hedges Q2 CY22 40,000 Q3 CY22 BOPD hedged Hedged Prices Gas Hedges BOPD hedged 40,000 Hedged Prices Jul-21 Aug-21 Sep-21 Jul-21 Aug-21 Sep-21 Mmbtu hedged Oct-21 Nov-21 Hedged Prices Dec-21 Jul-21 Aug-21 Sep-21 Mmbtu hedged Oct-21 $0.50 Nov-21 Hedged Prices Dec-21 Mmbtu hedged $0.00 Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - $80.00 $70.00 $60.00 $40.00 55,000 $30.00 45,000 $20.00 40,000 $10.00 35,000 $0.00 30,000 25,000 20,000 15,000 10,000 $4.00 5,000 $3.50 - $3.00 $2.50 $1.50 12,000 $1.00 $0.50 10,000 $0.00 8,000 6,000 4,000 2,000 - 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 - - 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 12,000 10,000 10,000 8,000 8,000 6,000 6,000 4,000 4,000 2,000 2,000 - - 2019 $80.00 $70.00 $50.00 $40.00 $30.00 $20.00 $10.00 Q3 CY22 $0.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Dec-21 $0.00 $4.00 $3.50 2019 $3.00 $2.50 $1.50 $1.00 Nov-21 $0.50 $0.00 35,000 30,000 2020 5,000 - 55,000 45,000 40,000 35,000 30,000 20,000 15,000 10,000 5,000 - 12,000 Oct-21 10,000 8,000 6,000 4,000 2,000 - $12.00 $10.00 $8.00 $6.00 2020 $4.00 $2.00 2021 $- 40,000 30,000 20,000 10,000 - 2020 (10,000) (20,000) 2021 40.0% 20.0% 0.0% -20.0% 2020 -100.0% 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Gas Hedges 2019 2021 (20,000) 2020 Net operating revenue Adjusted EBIT1 2021 2019 2020 2021 Net operating revenue Adjusted EBIT1 Adjusted EBITDAX1 Improvement in Returns 40.0% 20.0% 20.0% 0.0% 0.0% -20.0% -20.0% -40.0% 2019 -40.0% -60.0% -60.0% -80.0% -80.0% -100.0% -20.0% 2020 40.0% 20.0% 0.0% -40.0% -60.0% -80.0% -100.0% Return on Equity (%) Earnings (US cps) 2019 2019 2021 2021 2019 Proved 2020 Probable -40.0% Possible 2021 Proved 2020 Probable -60.0% Possible 2021 Proved Probable Possible -80.0% $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- $10.00 $8.00 $6.00 $4.00 $2.00 $- $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 2021 2021 Historical Historical Improvement in Earnings Historical Improvement in Earnings Historical 40,000 Improvement in Earnings 40,000 30,000 2021 30,000 20,000 20,000 10,000 10,000 - - (10,000) 2019 (20,000) - (10,000) 2019 2019 2020 2019 (10,000) (20,000) Net operating revenue Adjusted EBITDAX1 800 2021 Adjusted EBITDA1 1,200 2020 1,000 2020 2021 2021 Adjusted EBITDAX1 Adjusted Net Income (Loss) before tax1 Adjusted EBITDA1 600 2019 Reserves (Mboe) 2020 Reserves (Mboe) 12,000 2021 $2.00 2020 Reserves (Mboe) Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Improvement in Returns Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Improvement in Returns 40.0% 200 - 2019 Adjusted Net Income (Loss) before tax1 Adjusted EBITDA1 400 Reserves (Mboe) $2.00 Improvement in Returns 2019 2020 ROACE (adjusted EBIT) (%)1 (20,000) - 2019 ROACE (adjusted EBIT) (%)1 Return on Assets (%) Gearing (%) (10,000) 50,000 1,200 200 2019 2020 2021 Proved Probable Possible Return on Equity (%) Earnings (US cps) Return on Assets (%) Gearing (%) Earnings (US cps) Gearing (%) Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) Free Cash Flow Free Cash Flow GC 21 2020 IMPROVEMENT IN FREE CASH FLOW (US$000) 2021 50,000 SM 71 1,000 40,000 30,000 2020 1,200 50,000 Lightning 40,000 2019 2020 40,000 1,000 2021 2021 800 600 30,000 20,000 10,000 30,000 20,000 10,000 - -100.0% Return on Equity (%) Return on Assets (%) - 400 ROACE (adjusted EBIT) (%)1 (10,000) 800 20,000 10,000 600 - 400 (10,000) 2019 200 (20,000) Improvement in Leverage 0.5 0.4 0.3 2021 CORP ORATE 2021 0.2 2021 0.1 0.5 0.4 0.3 0.2 0.1 - 0.5 0.4 0.3 0.2 0.1 - 2019 0.5 0.4 0.3 0.2 0.1 - Capital Management 1,000 1,200 2020 2019 - 1,200 PRODUCTION (MBOE) Debt to Equity Ratio 1,200 1,000 US$Debt (US$000) 800 1,000 800 600 400 200 - 600 400 200 - 800 600 400 200 - 2019 Free Cash Flow 1,200 1,000 800 600 400 - $25,000 $20,000 $15,000 $25,000 $20,000 $15,000 $10,000 2019 $10,000 2020 $5,000 2021 2019 2020 Debt to Equity Ratio US$Debt (US$000) 2021 $25,000 $20,000 $15,000 $10,000 $25,000 $20,000 $15,000 $10,000 $5,000 $5,000 $- $- $5,000 Debt to Equity Ratio 2020 US$Debt (US$000) 2021 $- Debt to Equity Ratio $- US$Debt (US$000) 2021 2019 Free Cash Flow 2020 2021 2019 Free Cash Flow 50,000 SM 71 2020 Lightning GC 21 2021 Net Operating Revenue (US$'000) Breakeven Costs 1,200 Free Cash Flow 50,000 2020 SM 71 40,000 SM 71 1,000 50,000 2021 40,000 40,000 Lightning 30,000 30,000 20,000 800 30,000 20,000 10,000 600 20,000 10,000 - 10,000 400 - (10,000) - (10,000) 200 (10,000) (20,000) (20,000) 2019 Lightning GC 21 2021 GC 21 Net Operating Revenue (US$'000) 35,000 2019 2019 30,000 2020 25,000 35,000 30,000 2020 Opex 25,000 G&A 2020 Exploration & Development 20,000 Finance Costs 15,000 Free Cash Flow (Deficit) (20,000) 2020 - Opex G&A Opex G&A Oil Hedges Exploration & Development 2019 800 2019 200 (20,000) - 2020 Opex Oil Hedges 2019 2021 Exploration & Development Oil Hedges 800 2020 Opex Oil Hedges 2019 G&A 800 G&A 20,000 2021 15,000 SM 71 2020 Finance Costs 10,000 Lightning 2021 Exploration & Development 2020 Lightning 2021 Free Cash Flow (Deficit) GC 21 Exploration & Development Finance Costs 700 Finance Costs SM 71 600 Free Cash Flow (Deficit) GC 21 5,000 700 SM 71 600 2020 Lightning 500 D P O B G&A Opex Exploration & Development 800 Finance Costs 2020 The foundation of our strategy is disciplined capital management. We have a clear hierarchy for Lightning allocating capital, which takes into consideration a range of macroeconomic scenarios to stress test our portfolio, inform our decision making and ensure we maintain an adequate liquidity position. $70.00 - $80.00 Oil Hedges SM 71 GC 21 D P O B 2019 200 400 300 500 400 500 800 700 600 700 700 Free Cash Flow (Deficit) 2021 600 Oil Hedges 800 300 200 0 • Sustaining capital – We prioritize capital expenditures to ensure the safety of operations and continuity of 300 $70.00 700 500 production. Sustaining capital is funded from operating cash flows. 400 600 300 200 $60.00 100 500 • Strong, flexible balance sheet – We are focused on maintaining a strong, flexible balance sheet with access to Q4 CY21 $30.00 D sufficient liquidity to fund the next phase of growth. Our long-term target gearing is ~50%. In addition, we are P O $20.00 actively pursuing multiple corporate funding options and strategic levers to ensure balance sheet strength. B Q3 CY21 Q4 CY21 Q3 CY21 0 $40.00 100 $50.00 40,000 400 300 200 200 100 $50.00 55,000 Q3 CY21 45,000 $40.00 600 D P O B 100 0 $30.00 Gas Hedges 35,000 $10.00 • Corporate level finance – We are focused on evaluating the marketplace to address project financing and/or 30,000 BOPD hedged 100 Q3 CY21 Q4 CY21 Q2 CY22 Q3 CY22 $20.00 Q1 CY22 Gas Hedges 40,000 infrastructure opportunities. We will continue to assess the viability of selling assets to optimize value capture. Q4 CY21 • Commodity price hedging – We utilize hedging instruments to minimize exposure to short term price fluctuations $10.00 Gas Hedges Hedged Prices Q3 CY22 35,000 BOPD hedged Q3 CY21 Q1 CY22 Q2 CY22 25,000 40,000 20,000 100 $0.00 0 500 400 D P O B 0 by using a series of swaps, costless collars and/or puts. Gas Hedges Q3 CY21 Q2 CY22 Q1 CY22 Q4 CY21 BOPD hedged Q3 CY22 $0.00 Hedged Prices 35,000 40,000 300 200 0 D P O B $80.00 400 • Acquisitions/capital returns – We recognize that capital returns are a key component of shareholder value. 35,000 10,000 40,000 Hedged Prices Gas Hedges BOPD hedged Gas Hedges Accordingly, future merger and acquisition activities will only be considered when adequate capital is available, 5,000 $4.00 the opportunities are value accretive, and the combination is assessed against organic growth options and capital management alternatives. 40,000 25,000 20,000 25,000 30,000 15,000 30,000 35,000 35,000 $3.50 - 30,000 u t b m M 15,000 30,000 25,000 20,000 $50.00 Capital Expenditures (US$'000) $60.00 BOPD hedged Q1 CY22 $10.00 Q2 CY22 Hedged Prices $40.00 Q4 CY21 $30.00 Q1 CY22 40,000 Q2 CY22 35,000 $20.00 $20.00 BOPD hedged Q1 CY22 35,000 Q2 CY22 Hedged Prices Q3 CY22 GC 21 2021 $80.00 $70.00 2019 $60.00 Capital Expenditures (US$'000) $40.00 $50.00 2020 55,000 Capital Expenditures (US$'000) 55,000 $50.00 2020 $30.00 2021 45,000 40,000 2021 $- Improvement in Earnings Historical Historical Improvement in Earnings 2021 $4.00 2021 0.4 Historical 2021 Improvement in Earnings Historical Improvement in Earnings Historical 40,000 2021 Historical Improvement in Earnings 40,000 30,000 2021 Net Operating Revenue (US$'000) Breakeven Costs Net Operating Revenue (US$'000) 35,000 Net Operating Revenue (US$'000) 35,000 30,000 35,000 30,000 30,000 25,000 25,000 20,000 25,000 20,000 15,000 20,000 15,000 15,000 10,000 10,000 5,000 Breakeven Costs $12.00 $10.00 10,000 5,000 - $8.00 5,000 - - 2019 $6.00 2019 Capital Expenditures (US$'000) Capital Expenditures (US$'000) 55,000 2019 $4.00 Capital Expenditures (US$'000) 55,000 $2.00 2020 45,000 2020 2021 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Improvement in Earnings 40,000 30,000 20,000 10,000 2019 2019 - Breakeven Costs $12.00 $10.00 $8.00 $6.00 2020 2020 $4.00 $2.00 2021 $- 40,000 30,000 20,000 10,000 $12.00 $10.00 $8.00 $6.00 2021 $2.00 $- 40,000 30,000 20,000 10,000 Breakeven Costs $12.00 Breakeven Costs $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- $10.00 $8.00 $6.00 $4.00 $2.00 $- $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 2021 20,000 30,000 20,000 10,000 20,000 10,000 - 10,000 - (10,000) - (10,000) (20,000) 2019 2019 $3.00 2019 $2.50 Reserves (Mboe) 2020 12,000 (20,000) 2021 2019 Reserves (Mboe) (10,000) 2020 (20,000) 2021 Net operating revenue Net operating revenue Adjusted EBIT1 Adjusted EBITDAX1 Adjusted Net Income (Loss) before tax1 Improvement in Returns Adjusted EBITDA1 2020 Reserves (Mboe) 12,000 10,000 2021 Net operating revenue Adjusted EBITDA1 Adjusted EBIT1 Adjusted EBITDAX1 Adjusted Net Income (Loss) before tax1 Improvement in Returns 40.0% 2021 $1.00 12,000 10,000 8,000 $0.50 10,000 8,000 6,000 $0.00 8,000 6,000 4,000 6,000 4,000 2,000 4,000 2,000 - 2,000 - - Improvement in Returns 40.0% 20.0% 2019 2019 0.0% 2019 -20.0% Proved 2020 -20.0% Probable Proved 2020 2019 Probable -40.0% Possible 2021 40.0% 20.0% 0.0% 2020 -60.0% Possible -80.0% -100.0% 20.0% 0.0% -20.0% 2019 -40.0% Possible 2020 2021 -60.0% -80.0% -100.0% 4,000 2,000 - 2019 Improvement in Returns 40.0% 20.0% 40.0% 20.0% 0.0% 20.0% 0.0% -20.0% 0.0% -20.0% -40.0% -40.0% 2019 2020 -60.0% -60.0% -80.0% 2019 -20.0% 2020 -40.0% 2021 -60.0% -80.0% -100.0% 2021 Net Operating Revenue (US$'000) 35,000 30,000 25,000 2021 20,000 2021 2021 Finance Costs 15,000 2021 Free Cash Flow (Deficit) 10,000 Free Cash Flow (Deficit) $80.00 $70.00 $60.00 2019 $50.00 $20.00 $10.00 $0.00 $80.00 $70.00 $60.00 $40.00 $30.00 $20.00 $10.00 Q3 CY22 $0.00 5,000 - $80.00 $70.00 2019 $60.00 45,000 $40.00 40,000 $30.00 30,000 $10.00 25,000 $0.00 20,000 15,000 10,000 5,000 $4.00 - $3.50 2019 $3.00 Reserves (Mboe) 2020 $2.50 $2.00 12,000 $1.50 $4.00 $3.50 $2.50 $2.00 $1.50 $1.00 $0.50 Dec-21 $0.00 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - $4.00 $3.50 $3.00 $2.00 $1.50 30,000 Q3 CY22 10,000 5,000 - 55,000 45,000 20,000 15,000 10,000 5,000 - 4,000 2,000 - Improvement in Leverage Improvement in Leverage Improvement in Leverage 0.5 0.4 0.3 0.2 0.1 - 0.5 0.4 0.3 0.2 0.1 - 0.5 0.4 0.3 0.2 0.1 - $25,000 $20,000 $15,000 $10,000 2019 1,200 2020 $5,000 1,000 1,200 1,000 800 600 400 200 - 1,200 2021 1,000 800 600 400 200 - $- 800 600 400 200 - 800 600 400 200 - 800 600 400 200 - 800 600 400 200 - 2019 2020 Improvement in Leverage Improvement in Leverage Improvement in Leverage 0.5 0.3 0.2 0.1 - 2019 1,200 600 400 200 - 2020 1,200 2021 1,000 800 200 - 0.5 0.4 0.3 0.2 0.1 - 2019 2020 1,200 1,000 2021 800 600 400 200 - 2019 0.5 0.4 0.3 2021 0.2 0.1 - 2020 1,200 1,000 800 600 400 200 - 2020 1,200 SM 71 1,000 2021 800 600 400 200 - 800 600 400 200 - 2019 2020 2019 Debt to Equity Ratio 2021 US$Debt (US$000) 2019 2020 - 2020 (10,000) 2021 2019 2020 (10,000) - 2019 (20,000) 2021 2020 (10,000) (20,000) Net operating revenue 1,000 Adjusted EBITDAX1 Adjusted EBITDA1 2020 (20,000) 2020 Net operating revenue Adjusted EBIT1 Adjusted EBITDAX1 Adjusted Net Income (Loss) before tax1 Adjusted EBITDA1 2021 800 Net operating revenue Adjusted EBIT1 Adjusted EBITDAX1 Adjusted Net Income (Loss) before tax1 Adjusted EBITDA1 2020 2021 2021 2021 Adjusted EBIT1 Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted Net Income (Loss) before tax1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Improvement in Returns Improvement in Returns 40.0% 2019 2019 2020 2019 2020 1,200 2021 SM 71 Lightning GC 21 2021 1,000 Lightning 1,000 GC 21 2021 $25,000 $20,000 $15,000 $10,000 2020 2019 $25,000 $20,000 $15,000 $10,000 $- 2019 Debt to Equity Ratio 2020 $5,000 US$Debt (US$000) 2021 Debt to Equity Ratio $5,000 2020 US$Debt (US$000) 2021 $- 2019 Debt to Equity Ratio 2021 US$Debt (US$000) 2020 Debt to Equity Ratio 2021 US$Debt (US$000) Debt to Equity Ratio US$Debt (US$000) $25,000 $20,000 $15,000 $10,000 $5,000 $25,000 $25,000 $20,000 $20,000 $15,000 $15,000 $10,000 $5,000 $- $10,000 2021 $5,000 $- $- 2019 2020 2021 SM 71 2020 Lightning GC 21 2021 SM 71 2020 Lightning GC 21 2021 2019 SM 71 Lightning 2021 GC 21 2019 2019 1,200 1,200 2020 1,000 2020 SM 71 1,200 Lightning 1,000 GC 21 2021 $0.00 25,000 Hedged Prices $4.00 $3.50 $3.00 2019 $2.00 0 $1.50 Jul-21 Aug-21 10,000 $1.00 Sep-21 Mmbtu hedged Oct-21 8,000 Nov-21 Hedged Prices Dec-21 6,000 $0.50 $0.00 Jul-21 Aug-21 Sep-21 $1.00 Oct-21 Mmbtu hedged Nov-21 Dec-21 8,000 $0.50 $0.00 $0.00 Hedged Prices 6,000 Jul-21 Aug-21 Sep-21 Oct-21 Mmbtu hedged Nov-21 $0.50 Hedged Prices Dec-21 6,000 Mmbtu hedged $0.00 Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 4,000 2,000 - 2019 2020 Proved -40.0% Probable 2021 2020 Proved Probable Possible -60.0% 2021 Proved Probable Possible -80.0% -100.0% 2019 2020 2021 Proved Probable Possible Return on Equity (%) Earnings (US cps) Return on Assets (%) Gearing (%) ROACE (adjusted EBIT) (%)1 Return on Equity (%) Earnings (US cps) Return on Assets (%) Gearing (%) ROACE (adjusted EBIT) (%)1 Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) Earnings (US cps) Gearing (%) 2019 SM 71 Lightning GC 21 2019 SM 71 Lightning 2021 GC 21 2020 SM 71 Lightning GC 21 2021 SM 71 Lightning GC 21 2021 -80.0% 2021 -100.0% -100.0% Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Return on Equity (%) Earnings (US cps) Return on Assets (%) Gearing (%) 600 ROACE (adjusted EBIT) (%)1 Return on Equity (%) Earnings (US cps) Return on Assets (%) Gearing (%) 400 ROACE (adjusted EBIT) (%)1 2019 2020 2021 2019 SM 71 2020 Lightning GC 21 2021 SM 71 2020 Lightning GC 21 2021 40,000 30,000 14 | OTTO ENE RGY ANNUAL REPORT 2021 35,000 25,000 u t b m M 30,000 25,000 20,000 15,000 10,000 5,000 0 u t b m M 20,000 15,000 10,000 5,000 0 u t b m M 25,000 20,000 15,000 10,000 5,000 0 u t b m M $4.00 u t b m M 20,000 15,000 10,000 15,000 $3.50 10,000 10,000 $3.00 5,000 5,000 $2.50 0 5,000 0 Jul-21 $3.00 $2.50 $2.50 Reserves (Mboe) $2.00 Reserves (Mboe) $2.00 Jul-21 Aug-21 $1.50 Sep-21 12,000 Oct-21 10,000 Nov-21 $1.00 Aug-21 $1.50 12,000 Sep-21 $1.00 Mmbtu hedged Oct-21 10,000 Nov-21 Hedged Prices Dec-21 8,000 $0.50 CORP ORATE BASE AND ORGANIC GROWTH OPTIONS INORGANIC GROWTH OPPORTUNITIES Base business + organic options Facilitated by underlying base business (3-year group targets) Key targeting criteria S E V I T C E J B O E C N A M R O F R E P Base business outcome (3 years forward) Base outcome incl. exercise of organic options (3 years forward) Year on year metrics ROACE > 20% ROACE > 17.5% ROACE > 15% IRR > 75% (Success case) IRR > 75% (Success Case) IRR > 25% (Full cycle) IRR > 25% (Full Cycle) ROE > 15% DROI (15) > 25% FCF > US$40M FCF > US$40M NAV growth > 10% CAGR Gearing – < 10% Gearing – < 10% Gearing – 45-65% Debt to equity – < 10% Debt to equity – < 10% Debt to equity ratio – < 50% Drives strong operating cash flow and balance sheet Drives effective capital allocation discipline OT TO ENERGY ANNUAL REPORT 2021 | 15 CORP ORATE Risk Management Our approach to risk management enables us to take risk for reward, protect against negative impacts and improve our resilience to emerging risks. Otto recognizes that risk is inherent in our business, and the effective management of risk is vital to delivering our strategic objectives, continued growth, and success. We are committed to managing risks in a proactive and effective manner as a source of competitive advantage. We apply a structured and comprehensive approach to the identification, assessment, and treatment of current risks as well as being able to respond to emerging risks. Our risk management framework provides a single consolidated view of risks across the Company to quantify our full risk exposure and prioritize risk management and governance. The framework is aligned with the intent of the International Standard ISO31000 for risk management, providing line of sight of risk at appropriate levels of the organization, including the executive team and the Board, based on defined materiality thresholds. Our assessment of risk considers both financial and non-financial exposures, including health and safety, environment, finance, reputation, and brand, legal and compliance, social and culture. The framework requires a quarterly review by the executive team and the Board to evaluate the strategic risk profile, the effectiveness of the risk being managed and our resilience to emerging risks. The Board reviewed and confirmed in 2021 that the risk management framework is sound, and that Otto is operating with due regard to the risk appetite endorsed by the Board. Climate change and the transition to a lower-carbon economy influences Otto’s strategy, presenting both risk and opportunity in the operation of our existing assets or commercialization of our growth portfolio. We leverage our risk management framework to ensure an integrated and coordinated approach to the management of climate change across the business. The risks posed by the transition to a lower-carbon economy are recognized given changes in policy, regulation, or social expectations in current or future markets. An overview of the strategic and material risks we have identified and seek to manage through controls and mitigations include: 16 | OTTO ENE RGY ANNUAL REPORT 2021 OPERATIONS • Maintaining the technical integrity and operational performance of our assets is essential to protecting our people, the environment, our license to operate and the financial capacity to support existing business and growth opportunities. Failure to deliver safe, reliable, and efficient operations could result in a sustained, unplanned interruption to production, which can lead to not meeting production forecasts, delivery of the base business or generate revenue to support growth. • Our operating assets are subject to operating hazards associated with major accident events, cyber-attacks, extreme weather events and disruptions within global supply chains that may ultimately lead to a loss of hydrocarbon containment or additional costs. Safe operation is fundamentally embedded through an extensive framework of controls that deliver strong operational performance in our base business. FINANCE Otto’s financial performance and resilience may be impacted by key factors such as: • Management of financial risks. An inability to fund the delivery of strategic portfolio objectives could prevent Otto from unlocking value, weaken financial resilience and result in a loss of shareholder value. • Commodity prices are variable and are impacted by global economic factors and beyond Otto’s control. • Demand for and pricing of our products remain sensitive to external economic and political factors, weather, natural disasters, introduction of new and competing supply, changes in buyer preferences for differing products and price regimes. • Insufficient liquidity to meet financial commitments and fund growth opportunities could have a material adverse effect on our operations and financial performance. • Our financing costs could be affected by interest rate fluctuations or a change in applicable interest rate benchmarks such as LIBOR. CORP ORATE • We are exposed to credit risk; our counterparties INNOVATION could fail or could be unable to meet their payment or performance obligations under contractual arrangements. The delivery of our strategic portfolio objectives requires significant capital expenditure, supported by strong underlying cashflows. • A flexible approach to capital management enables this overall level of investment in the different areas of our business and the mix to be adjusted to reflect the external environment. Our capital management strategy focuses on capital allocation, capital discipline and capital efficiency. • We maintain insurance in line with industry practice and sufficient to cover normal operational risks. However, Otto is not insured against all potential risks because not all risks can be insured and because of constraints on the availability of commercial insurance in global markets. • Insurance coverage is determined by the availability of commercial options and cost/benefit analysis, considering Otto’s risk management program. Losses that are not insured could impact Otto’s financial performance. For example, Otto does not purchase insurance for the loss of revenue arising from an operational interruption. CLIMATE CHANGE • Climate change is impacting the way that the world produces and consumes energy, and this is expected to accelerate in time. Climate change also requires adaptation to physical change. This will impact the transition to a lower carbon economy and may impact demand (and pricing) for fossil fuels. CYBER SECURITY RISKS • Regulatory and compliance obligations are increasing for data protection and security of critical infrastructure. Failure to safeguard the confidentiality, integrity and availability of digital data and information could have an adverse effect on Otto’s operating performance. • Otto’s technology systems may be subject to both unintentional and intentional disruption, for example cybersecurity attack. We are committed to the protection of our people, assets, reputation, and brand through securely enabled digital technologies. Digital risks are identified, assessed, and managed based on the business criticality of our people and systems, and may be required to be segregated and isolated. Our exposure to cyber risk is managed by a control framework that ensures cyber events are identified, contained, and recovered in a timely manner. • We focus on maintaining our competitive advantage by delivering value through new ideas, technologies, or diversified products. The practical application of innovation delivers near-term value to our base business and in the longer-term, transforms and creates opportunities to thrive in a lower carbon economy. • Failure to build, embed, leverage and support innovation may result in a significant threat to the competitive advantage of our base business and our longer-term sustainability. We drive the practical application of innovation through an entrepreneurial, opportunity-focused, agile approach. PEOPLE AND CULTURE • Otto must maintain sufficient talent, capability, capacity, and a strong organizational culture. An engaged and enabled workforce underpins our ability to deliver base business, future growth and to identify and capture new opportunities. SOCIAL LICENSE TO OPERATE Our business performance is underpinned by our social license to operate, that requires compliance with legislation and the maintenance of a high level of ethical behavior and social responsibility. Our business activities are subject to extensive regulation and government policy in each of the countries where we do business. Failure to comply may impact our license to operate. • Stakeholders have evolving expectations of social responsibility and ethical decision making. These are changing at a rate faster than governments can introduce or amend regulation. • A significant or continuous departure from national or local laws, regulations or approvals may result in negative social and cultural impacts, reputation and brand, and loss of license to operate. • Violation of international anti-bribery and corruption laws may expose Otto to fines, criminal sanctions, and civil suits, and negatively impact our international reputation. Otto proactively maintains and builds our social license to operate through the application of our values, effective stakeholder engagement strategies, our regulatory compliance framework and our anti-fraud and corruption program. OT TO ENERGY ANNUAL REPORT 202 1 | 17 CORP ORATE Commodity Price Risk Management Free Cash Flow Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published 50,000 index prices, subject to negotiated price adjustments. 40,000 Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary 30,000 period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the commodities being hedged. Currently, all of Otto’s hedges are swaps, and the Company has no 20,000 three-way collars or short puts. 10,000 OIL HEDGES - As of 30 June 2021, Otto had a total hedge book of 249,889 barrels of oil hedged through September 2022 2020 via swaps, at a weighted average LLS price of US$50.19 as follows: 2019 2021 (10,000) (20,000) Months Volume (Bbls) Weighted Avg Price (LLS) G&A July – December 2021 Opex Exploration & Development Finance Costs 122,650 Free Cash Flow (Deficit) US$50.47 January – September 2022 Oil Hedges 127,239 US$49.92 D P O B 800 700 600 500 400 300 200 100 0 Gas Hedges 40,000 35,000 30,000 25,000 20,000 15,000 u t b m M Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices 18 | OTTO ENE RGY ANNUAL REPORT 2021 10,000 5,000 0 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Net Operating Revenue (US$'000) Breakeven Costs 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 2019 2020 2021 Historical 2021 Capital Expenditures (US$'000) Improvement in Earnings 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Reserves (Mboe) 12,000 10,000 8,000 6,000 4,000 2,000 - 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 2019 2020 2021 SM 71 Lightning GC 21 2019 2020 2021 Improvement in Returns 2019 2021 2020 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 2019 2020 2021 SM 71 Lightning GC 21 $25,000 $20,000 $15,000 $10,000 $5,000 $- 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) Improvement in Leverage 0.5 0.4 0.3 0.2 0.1 - 1,200 1,000 800 600 400 200 - 1,200 1,000 800 600 400 200 - $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% Free Cash Flow Net Operating Revenue (US$'000) Breakeven Costs 2019 2020 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges 800 700 600 CORP ORATE D P O B 500 400 300 200 GAS HEDGES 100 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 Additionally, the Company had a natural gas hedge book of 180,143 Mmbtu of natural gas hedged through December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: $0.00 0 Q4 CY21 Q1 CY22 Q3 CY21 Q3 CY22 Q2 CY22 Months BOPD hedged Hedged Prices Volume (Mmbtu) Weighted Avg Price (HSC) July – December 2021 Gas Hedges 180,143 US$3.11 u t b m M 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 2019 2020 2021 Historical 2021 Capital Expenditures (US$'000) Improvement in Earnings 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Reserves (Mboe) 12,000 10,000 8,000 6,000 4,000 2,000 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 2019 2020 2021 SM 71 Lightning GC 21 2019 2020 2021 Improvement in Returns 2019 2021 2020 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% $25,000 $20,000 $15,000 $10,000 $5,000 $- 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) Improvement in Leverage 0.5 0.4 0.3 0.2 0.1 - 1,200 1,000 800 600 400 200 - 1,200 1,000 800 600 400 200 - For the fiscal year ended 30 June 2021, the Company recorded a loss on hedging of approximately US$10.3 million. Of this amount, US-$0.6 million was realized, while the remaining US-$9.7 million was unrealized. - 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 2019 2020 2021 SM 71 Lightning GC 21 OT TO ENERGY ANNUAL REPORT 202 1 | 19 CORP ORATE Reserves and Prospective Resources On 8 September 2021 the Company released its statement of reserves and prospective resources as at 30 June 2021. The statement of reserves included SM 71, Lightning and GC 21, and were all compiled by independent consultant Ryder Scott Company. Otto Energy Limited’s net reserves and resources for all fields as at 30 June 2021 are summarised below (see additional disclosures provided in the following pages and appendices): RESERVES SUMMARY 30 JUNE 2021 Total Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Gross (100%) Net Oil (MbbL) Gas (MMcf) Mboe Oil (MbbL) Gas (MMcf) Mboe 3,196 4,595 452 8,243 4,935 13,178 2,584 17,814 9,193 15,060 42,067 29,631 71,698 27,507 6,166 6,127 2,962 15,255 9,873 25,128 7,168 1,231 779 129 2,139 982 3,121 665 5,297 2,306 4,302 11,905 8,235 20,140 7,838 2,114 1,162 846 4,122 2,355 6,477 1,971 15,762 99,205 32,296 3,786 27,978 8,448 3,250 24,300 7,300 930 6,930 2,085 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. CHANGES TO RESERVES AND RESOURCES SINCE 30 JUNE 2020 Otto Energy Limited Grand Total – Reserve Reconciliation (Otto Energy NRI Share) Oil (Mbbl) Gas (MMCF) MBOE Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 2,382 1,719 438 196 2,140 14,625 2,411 (308) 11,905 4,820 840 145 4,122 0 (737) 982 9,088 0 (853) 8,235 3,234 (879) 2,355 4,102 438 (541) 3,122 23,712 2,411 (1,161) 20,140 8,054 840 (735) 6,477 Proved (1P) Probable Proved Plus Probable (2P) Possible 1,807 0 (1,142) 665 11,142 (3,304) 7,838 3,664 (1,692) 1,971 Proved Plus Probable Plus Possible (3P) 5,908 438 (1,683) 3,787 34,854 2,411 (4,465) 27,978 11,717 840 (2,427) 8,448 20 | OTTO ENE RGY ANNUAL REPORT 2021 CORP ORATE SOUTH MARSH ISLAND 71 RESERVES AND RESOURCES STATEMENT Comment on the changes to reserves and resources: • SM 71 has now recovered approximately 3.4 MMbbl of oil and 3.8 Bcf of gas since production commenced in March 2018. • The D-5 sand continues to produce water free. • Production performance has exceeded expectations, resulting in the reclassification of some reserves from Probable to Proved. Additionally, some reserves were reclassified out of Possible and into Contingent/ Prospective resources. SM71 Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Gross (100%) Net (40.625%) Oil (MbbL) Gas (MMcf) Mboe Oil (MbbL) Gas (MMcf) Mboe 2,685 496 - 3,181 734 3,915 734 1,924 292 - 2,216 656 2,872 637 3,006 545 - 3,551 843 4,394 840 1,091 202 - 1,293 298 1,591 298 782 119 - 901 267 1,168 259 1,221 221 - 1,442 343 1,785 341 4,649 3,509 5,234 1,889 1,427 2,126 2,650 4,300 3,370 760 1,220 963 SM 71 Field – Reserve Reconciliation (Otto Energy NRI Share) Oil (Mbbl) Gas (MMCF) MBOE Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Proved (1P) 1,251 367 408 1,292 1,052 261 109 900 1,427 411 426 1,442 Probable 670 (372) 298 490 (223) 267 752 (409) 343 Proved Plus Probable (2P) 1,922 367 35 1,590 1,541 261 (114) 1,167 2,178 411 16 1,785 Possible 1,304 (1,006) 298 1,764 (1,505) 259 1,598 (1,256) 341 Proved Plus Probable Plus Possible (3P) 3,225 367 (970) 1,888 3,305 261 (1,619) 1,426 3,776 411 (1,240) 2,126 Otto holds a 50% working interest (40.625% net revenue interest) in SM 71 through a wholly owned subsidiary Otto Energy (Louisiana) LLC. The operator, Byron Energy Limited (ASX:BYE), holds the remaining 50% working interest. OT TO ENERGY ANNUAL REPORT 202 1 | 21 CORP ORATE LIGHTNING RESERVES AND RESOURCES STATEMENT Comment on the changes to reserves and resources: • First production from Green #1 commenced from Lightning in May 2019 following the successful discovery and development of the field. The second well, Green #2, began production in February 2020. Production performance since start-up of the field has continued to deliver strong results. • The joint venture is considering the potential for further wells in the field to fully develop the extensive area of the Lightning discovery. There is the potential for up to five wells being required to ultimately develop the entire Lightning accumulation. Lightning Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Gross (100%) Net (28.214%) Oil (MbbL) Gas (MMcf) Mboe Oil (MbbL) Gas (MMcf) Mboe 472 197 452 1,121 808 1,929 787 15,730 6,560 15,060 37,350 26,939 64,289 26,232 3,094 1,290 2,962 7,346 5,298 12,644 5,159 2,716 90,521 17,803 135 56 129 320 231 551 225 776 4,494 1,874 4,302 10,670 7,696 18,366 7,494 884 368 846 2,098 1,514 3,612 1,474 25,860 5,086 600 20,000 3,930 170 5,710 1,122 Lightning Field – Reserve Reconciliation (Otto Energy NRI Share) Oil (Mbbl) Gas (MMCF) MBOE Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 386 231 617 275 64 64 0 0 0 322 12,873 2,108 (94) 10,671 2,532 415 (16) 2,098 231 7,696 0 7,696 1,514 0 1,514 553 20,569 2,108 (94) 18,367 4,045 415 (16) 3,612 (50) 225 9,144 (1,650) 7,494 1,799 (325) 1,474 892 64 (50) 778 29,713 2,108 (1,743) 25,861 5,844 415 (341) 5,086 Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Note: gas volumes reported above exclude a 2% shrinkage factor Otto holds a 37.5% working interest (28.214% net revenue interest) in Lightning through a wholly owned subsidiary Otto Energy USA Inc. The operator, Hilcorp, holds the remaining working interest. 22 | OTTO ENE RGY ANNUAL REPORT 2021 CORP ORATE GREEN CANYON 21 RESERVES AND RESOURCES STATEMENT Comment on the changes to reserves and resources: • The “Bulleit” appraisal well located at GC 21 commenced production from the deeper MP Sand on 15 October 2020 at rates that were less than what the collected rock property data and analogue reservoirs would suggest. A technical assessment of the MP Sand production performance was completed. Detailed bottomhole pressure and reservoir performance data indicate a smaller reservoir than originally anticipated. While additional technical work is ongoing, the currently favoured path forward is to move away from the MP Sand and execute a recompletion of the well in the shallower DTR-10 Sand in mid CY 2022, to be funded out of existing free cash flow. • This assessment has resulted in the downward revision of Proved, Probable and Possible reserves in the MP Sand. Green Canyon Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Gross (100%) Net (28.214%) Oil (MbbL) Gas (MMcf) Mboe Oil (MbbL) Gas (MMcf) Mboe 39 3,902 - 3,941 3,393 7,334 1,063 160 2,341 - 2,501 2,036 4,537 638 66 4,292 - 4,358 3,732 8,090 1,169 5 521 - 526 453 979 142 8,397 5,175 9,259 1,121 - - - - 21 313 - 334 272 606 85 691 - 9 573 - 582 498 1,080 156 1,236 - Bulleit Field (GC 21) – Reserve Reconciliation (Otto Energy NRI Share) Oil (Mbbl) Gas (MMCF) MBOE Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 Remaining 6/30/2020 Production 2020 Additions & Revisions Remaining 6/30/2021 745 818 1,563 228 7 0 7 0 (212) (365) 526 453 700 902 42 (324) (630) 334 272 862 968 14 (266) (470) 582 498 (577) 979 1,602 42 (954) 606 1,830 14 (736) 1,080 (86) 142 234 (149) 85 267 (111) 156 1,791 7 (663) 1,121 1,836 42 (1,103) 691 2,097 14 (847) 1,236 Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Otto holds a 16.67% working interest (13.333% net revenue interest) in the Green Canyon 21 block through a wholly owned subsidiary Otto Energy (Gulf Two) LLC. The operator, Talos Energy (NYSE: TALO), and another party own the remaining working interest. OT TO ENERGY ANNUAL REPORT 202 1 | 23 CORP ORATE PROSPECTIVE RESOURCES AS AT 30 JUNE 2021 Refer to comments and notes below the tables for commentary on recent activity related to Prospective Resources. SOUTH MARSH 71 Prospect Working Interest Net Revenue Interest Contingent / Prospective Resources 8/8ths Otto Net Revenue Interest Gas (BCF) Oil (MMbbls) Mmboe Gas (BCF) Oil (MMbbls) Mmboe Mean Mean Mean Mean Mean Mean SM 71 F3 ST (D5) 50.00% 40.63% SM 71 F5 ST 50.00% 40.63% SM 71 B65 Sand 50.00% 40.63% 2.22 1.23 0.85 0.56 1.32 0.77 0.93 1.53 0.91 0.63 0.35 0.24 0.16 0.38 0.22 0.26 0.44 0.26 LIGHTNING Prospect Lightning Working Interest Net Revenue Interest Prospective Resources 8/8ths Otto Net Revenue Interest Gas (BCF) Oil (MMbbls) Mmboe Gas (BCF) Oil (MMbbls) Mmboe Mean Mean Mean Mean Mean Mean 37.50% 28.57% 20.00 0.60 3.93 5.71 0.17 1.12 Comment on the changes to prospective resources: BELUGA The Beluga #1 well was spud in October 2020 and drilled to approximately 13,800 ft MD to the base of the target formation. Wireline logs were run in the well and evaluated, and it was determined that sub-commercial quantities of hydrocarbons were encountered. The well was therefore plugged and abandoned. TARPON/MALLARD In October 2020, the Company and Hilcorp mutually agreed to remove all remaining prospects from the eight-well Gulf Coast exploration package due to current market conditions, except for Beluga. The Beluga well concluded the Hilcorp Package 1 program, with no additional drilling required under this agreement. TALITHA UNIT On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis), which holds a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the Alaskan Department of Natural Resources. 24 | OTTO ENE RGY ANNUAL REPORT 2021 Our success is driven by our people and their capabilities and we aim to manage access to a diverse, high performing workforce while maintaining a prudent footprint in size and efficiency” OT TO ENERGY ANNUAL REPORT 2021 | 25 CORP ORATE NOTES TO RESERVES AND RESOURCES STATEMENT RESERVES AND RESOURCES GOVERNANCE Otto’s reserves estimates are compiled annually. Otto engages Ryder Scott Company, a qualified external petroleum engineering consultant, to conduct an independent assessment of reserves on behalf of Otto. Ryder Scott Company is an independent petroleum engineering consulting firm that has been providing petroleum consulting services in the US for more than fifty years. Ryder Scott Company does not have any financial interest or own any shares in the Company. The fees paid to Ryder Scott Company 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 was compiled by technical employees of independent consultants Ryder Scott Company, under the supervision of Mr. Ali Porbandarwala PE. Mr. Porbandarwala is a Senior Vice President at Ryder Scott Company and is a registered professional engineer in the State of Texas and a member of the Society of Petroleum Engineers (SPE). He has a B.S. Chemical Engineering from the University of Kansas and an MBA from the University of Texas. The reserves 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 information reported in this Statement are based on, and fairly represents, information and supporting documentation prepared by, or under the supervision of Mr. Porbandarwala. Mr. Porbandarwala 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 contingent and potential resources was compiled by Mr Ed Buckle B.S. Chemical Engineer (Magna Cum Laude), a full-time contractor of the Company. Mr Buckle has more than 30 years relevant experience in the petroleum industry and is a member of The Society of Petroleum Engineers (SPE). The resources 26 | OTTO ENE RGY ANNUAL REPORT 2021 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 Buckle. Mr Buckle 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. 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. PRICING ASSUMPTIONS Oil and gas price assumptions used in the independent report represent forward-prices (CME Nymex) as at 30 June 2021. CORP ORATE ASX RESERVES AND RESOURCES REPORTING NOTES (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) (ix) For prospective resources, the estimated quantities of petroleum that may potentially be recovered by the application of a future development project(s) relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration, appraisal and evaluation is required to determine the existence of a significant quantity of potentially moveable hydrocarbons (LR 5.28.2) (x) The reserve numbers assume some investment over the life of the field outlined above. (i) (ii) (iii) (iv) (v) (vi) The reserves and prospective resources information in this document is effective as at 30 June 2021 (Listing Rule (LR) 5.25.1) 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) 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) The reserves and prospective resources information in this document has been estimated and prepared using the probabilistic method (LR 5.25.6) 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) 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) GLOSSARY Bbl bcf Bcfe boe barrels billion cubic feet MMcf million cubic feet MBL thousand barrels of oil billion cubic feet equivalent MMBL million barrels of oil barrels of oil equivalent Mboe thousand barrels of oil equivalent Bopd barrels of oil per day MMboe million barrels of oil equivalent Btu EUR British Thermal Units MCF thousand cubic feet Economic Ultimate Recovery mmbtu million British Thermal Units Mcfg thousand cubic of gas NRI net revenue interest Mcfgpd thousand cubic feet of gas per day OT TO ENERGY ANNUAL REPORT 202 1 | 27 Operating And Financial Review 28 | OTTO ENERGY ANNUAL REPORT 2021 OPERATING AND FINANCIAL RE VIE W Operational and Financial Highlights O PER ATIN G SUMMARY 17% 97% 62%/28% Increase in production to 3,032 boe/d at 56% liquids Operational reliability – 97% uptime at SM 71/Lightning Reduction in Field1 and Non-Field Lifting Costs F IN AN CIAL SUMMARY 19% Gearing Ratio 39% Adjusted ROACE2 $17.9m Adj. Net Income before tax (US$) LIQ UI DIT Y SUMMARY 29% Debt to Equity Ratio $11.1m Cash Balance at 30 June 2021 (US$) $11.5m Debt Balance at 30 June 2021 (US$) 1 Please refer to the audited financial statements released on 27 September 2021 and Appendix 1 for calculation. 2 Considered to be non-IFRS financial information. Refer to audited financial statements released on 27 September 2021 and Appendix 1 for the IFRS information and a reconciliation. OT TO ENERGY ANNUAL REPORT 202 1 | 29 2019 2020 2021 Historical 2021 - Production Volumes (Mboe) Capital Expenditures (US$'000) Improvement in Earnings 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Reserves (Mboe) Improvement in Returns 1,200 1,000 800 600 400 200 - 2019 2020 2021 2019 2021 2020 Free Cash Flow Net Operating Revenue (US$'000) Breakeven Costs 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Gas Hedges 2019 2020 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 12,000 10,000 8,000 6,000 4,000 2,000 - $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 2019 2020 2021 Proved Probable Possible $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Gas Hedges $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) Free Cash Flow 2019 2020 2021 SM 71 Lightning GC 21 NET OPERATING REVENUE (US$000) Net Operating Revenue (US$'000) 2019 2020 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Improvement in Leverage OPERATING AND FINANCIAL RE VIE W Operating Summary 0.5 0.4 0.3 0.2 0.1 $25,000 $20,000 $15,000 $10,000 $5,000 2019 South Marsh 71 Lightning Green Canyon 21 2020 2021 Debt to Equity Ratio US$Debt (US$000) 30 June 2021 30 June 2020 30 June 2019 $- 498 590 18 527 420 - 726 15 - 30,137 (14,931) 23,028 (27,395) 31,258 (45,771) 4,122 2,355 1,971 4,820 3,234 3,664 3,670 3,432 3,050 2020 2021 Cash Flows (US$000) Net operating revenue Capital expenditures Reserves (Mboe) Proved Probable Possible 2019 PRODUCTION (MBOE) SM 71 Lightning GC 21 1,200 1,000 800 600 400 200 - • SM 71 production continues to exceed independently calculated production profile. • Second well at Lightning began production in February 2020. • Advancing recommendations for recompletion and development potential at SM 71 and Lightning. • GC 21 planned recompletion to shallower DTR 10 Sand in mid CY 2022, with first production expected in Q3 CY 2022. Breakeven Costs $12.00 • Total WI revenue increased by 38% to US$39.7 million (FY20: US$28.8 million), attributable to increased production and higher crude oil, natural gas and NGL prices. $10.00 $8.00 $6.00 • Net operating revenue increased by 31% to US$30.1 million (FY20: US$23.0 million). $4.00 $2.00 $- 2019 2020 2021 Historical 2021 30 | OTTO ENE RGY ANNUAL REPORT 2021 Capital Expenditures (US$'000) Improvement in Earnings 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 12,000 10,000 8,000 6,000 4,000 2,000 - 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% 2019 2020 2021 2019 2021 2020 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Reserves (Mboe) Improvement in Returns 2019 2020 2021 SM 71 Lightning GC 21 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 2019 2020 2021 SM 71 Lightning GC 21 $25,000 $20,000 $15,000 $10,000 $5,000 $- 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) Improvement in Leverage 0.5 0.4 0.3 0.2 0.1 - 1,200 1,000 800 600 400 200 - 1,200 1,000 800 600 400 200 - Free Cash Flow Free Cash Flow Net Operating Revenue (US$'000) Net Operating Revenue (US$'000) Breakeven Costs Breakeven Costs Reserves (Mboe) Reserves (Mboe) RESERVES (MBOE) Improvement in Returns Improvement in Returns Jul-21 Jul-21 Aug-21 Aug-21 Sep-21 Sep-21 Oct-21 Oct-21 Nov-21 Nov-21 Dec-21 Dec-21 Mmbtu hedged Mmbtu hedged Hedged Prices Hedged Prices 12,000 12,000 10,000 10,000 8,000 8,000 6,000 6,000 4,000 4,000 2,000 2,000 - - 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 OPERATING AND FINANCIAL RE VIE W 10,000 10,000 5,000 5,000 - - 2019 2019 2020 2020 2021 2021 Capital Expenditures (US$'000) Capital Expenditures (US$'000) CAPITAL EXPENDITURES (US$000) 55,000 55,000 45,000 45,000 40,000 40,000 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 - - 2019 2019 2020 2020 2021 2021 2019 2019 2020 2020 2021 2021 Opex Opex G&A G&A Exploration & Development Exploration & Development Finance Costs Finance Costs Free Cash Flow (Deficit) Free Cash Flow (Deficit) Q3 CY21 Q3 CY21 Q4 CY21 Q4 CY21 Q1 CY22 Q1 CY22 Q2 CY22 Q2 CY22 Q3 CY22 Q3 CY22 BOPD hedged BOPD hedged Hedged Prices Hedged Prices $80.00 $80.00 $70.00 $70.00 $60.00 $60.00 $50.00 $50.00 $40.00 $40.00 $30.00 $30.00 $20.00 $20.00 $10.00 $10.00 $0.00 $0.00 $4.00 $4.00 $3.50 $3.50 $3.00 $3.00 $2.50 $2.50 $2.00 $2.00 $1.50 $1.50 $1.00 $1.00 $0.50 $0.50 $0.00 $0.00 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 - - (10,000) (10,000) (20,000) (20,000) Oil Hedges Oil Hedges D D P P O O B B u t u b t b m m M M 800 800 700 700 600 600 500 500 400 400 300 300 200 200 100 100 0 0 40,000 40,000 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 0 0 Gas Hedges Gas Hedges 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 12,000 10,000 8,000 6,000 4,000 2,000 - 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Gas Hedges 2019 2020 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices Free Cash Flow Net Operating Revenue (US$'000) Breakeven Costs BREAKEVEN COSTS (US$/BBL) $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 2019 2020 2021 Historical 2021 Capital Expenditures (US$'000) Improvement in Earnings 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% 2019 2020 2021 2019 2021 2020 $12.00 $12.00 $10.00 $10.00 $8.00 $8.00 $6.00 $6.00 $4.00 $4.00 $2.00 $2.00 $- $- Improvement in Earnings Improvement in Earnings 40,000 • Removed all remaining 40,000 Historical Historical 2021 2021 2019 2019 2020 2020 2021 2021 Debt to Equity Ratio Debt to Equity Ratio US$Debt (US$000) US$Debt (US$000) $25,000 $25,000 $20,000 $20,000 $15,000 $15,000 $10,000 $10,000 $5,000 $5,000 $- $- 30,000 30,000 prospects from the eight- well Gulf Coast exploration package with Hilcorp; ‘addition by subtraction’ given market conditions had deteriorated. 20,000 20,000 10,000 10,000 - - (10,000) (10,000) 2019 2019 • Successful sale of 100%-owned Borealis Alaska LLC subsidiary to Pantheon Resources Plc for 14.27 million Pantheon shares (LSE: PANR) on 20 January 2021 which reduces the need for further capital expenditures. Net operating revenue Net operating revenue Adjusted EBIT1 Adjusted EBIT1 (20,000) (20,000) 40.0% 40.0% • Production profile continues to exceed expectations, resulting 20.0% in reserve additions at H1 FY21 20.0% and again at year-end. 0.0% 0.0% • DTR-10 Sand recompletion 2019 2019 -20.0% -20.0% in mid CY 2022 will allow for access to additional proved reserves. -40.0% -40.0% -60.0% -60.0% 2020 2020 2021 2021 Adjusted EBITDAX1 Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBITDA1 Adjusted Net Income (Loss) before tax1 Adjusted Net Income (Loss) before tax1 2020 2020 2021 2021 2019 2019 2020 2020 2021 2021 SM 71 SM 71 Lightning Lightning GC 21 GC 21 Improvement in Leverage Improvement in Leverage 0.5 0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 - - 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 - - 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 - - $25,000 $20,000 $15,000 $10,000 $5,000 $- • Breakeven costs of US$8.40/ Bbl, down from US$11.00/ Bbl historically. Improvement in Leverage 0.5 • Achieved by carefully analyzing and driving down controllable operating expenses, employee benefits, administrative, licensing, legal and advisory/ consultant costs. 0.3 0.4 0.2 • Will continue to monitor and control. 0.1 - OT TO ENERGY ANNUAL REPORT 202 1 | 31 1,200 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) 1,000 800 600 400 200 - 1,200 1,000 800 600 400 200 - 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Reserves (Mboe) Improvement in Returns 2019 2020 2021 SM 71 Lightning GC 21 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 2019 2020 2021 SM 71 Lightning GC 21 2019 2019 2020 2020 2021 2021 Proved Proved Probable Probable Possible Possible -80.0% -80.0% -100.0% -100.0% Return on Equity (%) Return on Equity (%) Earnings (US cps) Earnings (US cps) Return on Assets (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 ROACE (adjusted EBIT) (%)1 Gearing (%) Gearing (%) 2019 2019 2020 2020 2021 2021 SM 71 SM 71 Lightning Lightning GC 21 GC 21 OPERATING AND FINANCIAL RE VIE W Financial Summary US$‘000 Key Metrics Operating Revenue, net of Royalties Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Unrealized gain (loss) on derivatives Impairment expense Net Income (Loss) before tax Profit from discontinued operations Total comprehensive loss for year, after tax Key Ratios Return on Equity(%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 30 June 2021 30 June 2020 30 June 2019 30,137 29,114 26,438 20,610 17,890 (9,673) (12,850) (4,633) 4,188 (450) -1.1% -0.7% 39.1% -0.01 18.8% 23,028 16,699 3,632 (3,138) (5,530) 4,174 - (1,356) - (1,358) -3.0% -2.4% -6.4% -0.05 29.9% 31,258 23,484 (14,365) (19,372) (18,407) - - (18,407) - (18,409) -49.5% -45.3% -63.6% -0.95 n/a 1 Considered to be non-IFRS financial information. Refer to audited financial statements released on 27 September 2021 and Appendix 1 for the IFRS information and a reconciliation. 32 | OTTO ENE RGY ANNUAL REPORT 2021 Net Operating Revenue (US$'000) Breakeven Costs 30,000 Net Operating Revenue (US$'000) Breakeven Costs $10.00 $12.00 $12.00 $8.00 $10.00 $6.00 $8.00 $4.00 OPERATING AND FINANCIAL RE VIE W $6.00 $2.00 $4.00 $- Historical $2.00 IMPROVEMENT IN EARNINGS (US$000) Improvement in Earnings $- 40,000 Historical 30,000 Improvement in Earnings 2021 2021 20,000 40,000 10,000 30,000 - 20,000 (10,000) 10,000 (20,000) - (10,000) (20,000) 2019 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 2020 Adjusted EBITDA1 2021 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 2019 2020 2021 Opex G&A 2019 Exploration & Development Finance Costs 2020 Free Cash Flow (Deficit) 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) Capital Expenditures (US$'000) 2019 2020 2021 2019 2020 2021 Capital Expenditures (US$'000) 40,000 Free Cash Flow Free Cash Flow 50,000 40,000 30,000 50,000 20,000 40,000 10,000 30,000 - 20,000 (10,000) 10,000 (20,000) - (10,000) Oil Hedges (20,000) Oil Hedges 600 D P O B D P O B u t b m M u t b m M 800 700 500 800 400 700 300 600 200 500 100 400 0 300 200 100 40,000 35,000 40,000 25,000 35,000 20,000 30,000 15,000 25,000 10,000 20,000 5,000 15,000 0 10,000 5,000 0 Gas Hedges 0 Gas Hedges 30,000 $80.00 $70.00 $60.00 $50.00 $80.00 $40.00 $70.00 $30.00 $60.00 $20.00 $50.00 $10.00 $40.00 $0.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $4.00 $2.50 $3.50 $2.00 $3.00 $1.50 $2.50 $1.00 $2.00 $0.50 $1.50 $0.00 $1.00 $0.50 $0.00 Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 35,000 25,000 35,000 20,000 30,000 15,000 25,000 10,000 20,000 5,000 15,000 - 10,000 5,000 - 55,000 45,000 35,000 55,000 30,000 45,000 25,000 40,000 20,000 35,000 15,000 30,000 10,000 25,000 5,000 20,000 15,000 - 10,000 5,000 12,000 8,000 12,000 6,000 10,000 4,000 8,000 2,000 6,000 - 4,000 2,000 - 2019 2020 2021 2019 2020 2021 Reserves (Mboe) - 10,000 Reserves (Mboe) 2019 2020 2021 Proved Probable Possible 2019 2020 2021 Proved Probable Possible 40.0% -20.0% 20.0% -40.0% 0.0% -60.0% -20.0% -80.0% -40.0% -100.0% -60.0% -80.0% -100.0% Improvement in Returns expenditures. 40.0% • Adjusted Net Income before tax1 of US$17.9 million (FY20: -US$5.5 million). 2020 2020 2021 2021 20.0% IMPROVEMENT IN RETURNS lower admin (G&A) costs, and the gain on sale of Borealis Alaska LLC. Adjusted Net Income (Loss) before tax1 2019 2019 Improvement in Returns Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 0.0% • Adjusted EBITDAX1 increased by 74% to US$29.1 million (FY20: US$16.7 million), as a result of higher revenues, • Adjusted EBITDA1 increased by 628% to US$26.4 million (FY20: US$3.6 million), as a result of less exploration Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) • Ongoing implementation of organisation-wide cost reduction and efficiency drive. • 62% reduction in field lifting costs per boe (operating expenses, business development, exploration costs), compared to prior period. • 28% reduction in non-field lifting costs per boe (G&A costs), compared to prior period, across multiple areas including employee benefits, administrative, licensing, legal and advisory/consultant costs. 1 Considered to be non-IFRS financial information. Refer to audited financial statements released on 27 September 2021 and Appendix 1 for the IFRS information and a reconciliation. OT TO ENERGY ANNUAL REPORT 202 1 | 33 $25,000 $20,000 $25,000 $15,000 $20,000 $10,000 $15,000 $5,000 $10,000 $- $5,000 $- Improvement in Leverage 0.5 Improvement in Leverage 0.4 2019 2019 2019 2019 0.5 0.3 0.4 0.2 0.3 0.1 0.2 - 0.1 - 1,200 1,000 800 1,200 600 1,000 400 800 200 600 - 400 200 - 1,200 1,000 800 1,200 1,000 600 400 800 200 600 400 - 200 - Debt to Equity Ratio US$Debt (US$000) Debt to Equity Ratio US$Debt (US$000) 2021 2021 SM 71 Lightning GC 21 SM 71 Lightning GC 21 2021 2021 2020 2020 2020 2020 2019 2019 2020 2020 SM 71 Lightning GC 21 SM 71 Lightning GC 21 2021 2021 OPERATING AND FINANCIAL RE VIE W Liquidity Summary US$000, except ratios Balance Sheet – Assets Cash Accounts Receivable Marketable Securities Total Current Assets Balance Sheet – Liabilities Accounts Payable Total Current Liabilities Total Debt Key Ratios Working Capital Debt to Equity (%) Current Ratio Quick Ratio Cash Ratio 30 June 2021 30 June 2020 30 June 2019 11,100 3,884 8,129 23,550 1,675 14,730 11,500 8,820 29% 1.6 1.6 1.3 16,551 2,111 - 26,942 1,958 10,470 20,700 16,472 46% 2.6 1.8 1.6 7,383 3,311 - 11,932 4,473 4,646 - 7,286 n/a 2.6 2.3 1.6 34 | OTTO ENE RGY ANNUAL REPORT 2021 Free Cash Flow Net Operating Revenue (US$'000) Breakeven Costs 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Oil Hedges D P O B u t b m M 800 700 600 500 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Gas Hedges 2019 2020 2021 Opex G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $0.00 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 BOPD hedged Hedged Prices Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 55,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 12,000 10,000 8,000 6,000 4,000 2,000 - $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% 2019 2020 2021 Historical 2021 Capital Expenditures (US$'000) Improvement in Earnings 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Reserves (Mboe) Improvement in Returns 2019 2020 2021 2019 2021 2020 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) OPERATING AND FINANCIAL RE VIE W Improvement in Leverage IMPROVEMENT IN LEVERAGE 0.5 0.4 0.3 0.2 0.1 - $25,000 $20,000 $15,000 $10,000 $5,000 $- 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) • Balance date cash of US$11.1 million. 1,200 • Balance date cash equivalents (marketable securities) of US$8.1 million. 1,000 • Balance date debt (drawn credit facility) of US$11.5 million, to be paid off by 30 September 2022. 800 Free Cash Flow IMPROVEMENT IN FREE CASH FLOW (US$000) Net Operating Revenue (US$'000) Breakeven Costs 50,000 600 40,000 400 30,000 200 20,000 10,000 - - (10,000) (20,000) 1,200 2019 2020 2021 2019 SM 71 Lightning 2020 GC 21 2021 Opex 1,000 G&A Exploration & Development Finance Costs Free Cash Flow (Deficit) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Oil Hedges 800 • Net operating cashflow (pre-exploration) of US$18.9 million (FY20: US$10.5 million). • Net operating cashflow (post exploration) of US$15.2 million (FY20: -US$0.7 million). 800 $80.00 600 • Free cashflow (operating net investing) of US$3.8 million (FY20: -US$17.3 million). 700 $70.00 • Debt repayment of US$9.2 million during the year. 400 600 $60.00 $50.00 $40.00 $30.00 2019 2020 2021 $20.00 2019 2020 2021 Historical 2021 Capital Expenditures (US$'000) Improvement in Earnings 55,000 45,000 40,000 35,000 30,000 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 40,000 30,000 20,000 10,000 - (10,000) (20,000) 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% 2019 2020 2021 2019 2021 2020 $25,000 $20,000 $15,000 $10,000 $5,000 $- 2019 2020 2021 Debt to Equity Ratio US$Debt (US$000) Improvement in Leverage 0.5 0.4 0.3 0.2 0.1 - 1,200 1,000 800 600 400 200 - 1,200 1,000 800 600 400 200 - SM 71 Lightning GC 21 OT TO ENERGY ANNUAL REPORT 202 1 | 35 $10.00 25,000 Q3 CY21 Q4 CY21 Q1 CY22 Q2 CY22 Q3 CY22 $0.00 BOPD hedged Hedged Prices $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Mmbtu hedged Hedged Prices 20,000 15,000 10,000 5,000 - 12,000 10,000 8,000 6,000 4,000 2,000 - 2019 2020 2021 Net operating revenue Adjusted EBITDAX1 Adjusted EBITDA1 Adjusted EBIT1 Adjusted Net Income (Loss) before tax1 Reserves (Mboe) Improvement in Returns 2019 2020 2021 SM 71 Lightning GC 21 2019 2020 2021 Proved Probable Possible Return on Equity (%) Return on Assets (%) ROACE (adjusted EBIT) (%)1 Earnings (US cps) Gearing (%) 2019 2020 2021 SM 71 Lightning GC 21 D P O B 200 - 500 400 300 200 100 0 Gas Hedges u t b m M 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 OPERATING AND FINANCIAL RE VIE W Asset Overview NORTH AMERICA GULF OF MEXICO Otto Energy considers the Gulf of Mexico its core region for exploration, development and production focus. Today, Otto produces oil and gas from three projects in the Gulf of Mexico: SM 71, Lightning, and GC 21. The Gulf of Mexico (GoM) region is one of the most prolific oil and gas producing regions on earth. About half of the US fossil fuel refining and processing capacity is along the GoM. The high density and availability of production platforms utilised for the development of primary reservoirs contributes to low production costs in the region, making projects viable even in a sustained, low oil price environment. Otto has focused on a partnership strategy in the GoM to build a portfolio of diverse, conventional oil and gas opportunities. Otto’s current operating partners in the Gulf of Mexico are Byron Energy (ASX: BYE), Hilcorp Energy, and Talos Energy (NYSE: TALO), resulting in six producing wells over three core assets. SUMMARY OF GULF OF MEXICO ASSETS AS AT 30 JUNE 2021 Asset Gulf of Mexico Region South Marsh Island 71 (SM 71) Lightning Green Canyon 21 (GC 21) Number of Wells Otto Working Interest Otto Net Revenue Interest Joint Venture Partner 3 2 1 50.00% 40.63% Byron Energy 37.50% 28.21% Hilcorp Energy 16.67% 13.34% Talos Energy (Operator)/ Enven Energy Ventures, LLC Status Producing Producing Producing 36 | OTTO ENE RGY ANNUAL REPORT 2021 OPERATING AND FINANCIAL RE VIE W QUARTERLY PRODUCTION VOLUMES AND SALES REVENUE WI Share (before royalties) (USD) 30 Jun 21 31 Mar 21 31 Dec 20 30 Sep 20 Crude oil (barrels) South Marsh 71 Lightning Field Green Canyon 21 Total oil production Total oil sales revenue (US$’million) Avg oil price (US$/Bbl) – pre-hedges Avg oil price (US$/Bbl) – post-hedges Natural gas (thousand cubic feet) South Marsh 71 Lightning Field Green Canyon 21 Total gas production Gas revenue (US$millions) Avg gas price (US$/Mmbtu) Natural gas liquids (barrels) South Marsh 71 Lightning Field Green Canyon 21 Total NGL production NGL revenue (US$millions) Avg NGL price (US$/Bbl) Total (barrels of oil equivalent) South Marsh 71 Lightning Field Green Canyon 21 Total production (Boe) Total daily production (Boe/d) Percent liquids (%) Total revenue (US$’million) Avg WA price (US$/Boe) – pre-hedges Avg WA price (US$/Boe) – post-hedges 112,232 113,496 110,393 18,437 1,916 21,410 1,425 22,962 5,403 109,215 20,607 n/a 132,585 136,331 138,758 129,822 8.3 62.88 54.14 94,085 563,559 7,416 665,060 2.0 3.00 - 19,581 347 19,929 0.4 20.78 127,913 131,945 3,500 263,357 2,894 58% 10.8 41.00 36.60 7.4 54.52 50.41 79,715 621,573 16,436 717,724 6.6 9.03 - 22,313 558 22,871 0.5 21.07 126,782 147,319 4,722 278,823 3,098 57% 14.5 52.06 50.05 5.4 38.93 42.03 83,515 693,344 23,374 800,233 2.1 2.64 - 24,090 851 24,941 0.3 11.68 124,312 162,609 10,150 297,071 3,229 55% 7.8 26.40 27.85 4.8 37.12 42.12 57,922 670,035 n/a 727,957 1.5 1.99 - 16,301 n/a 16,301 0.2 14.45 118,869 148,581 n/a 267,449 2,907 55% 6.6 24.59 27.01 OT TO ENERGY ANNUAL REPORT 202 1 | 37 OPERATING AND FINANCIAL RE VIE W PRODUCTION SOUTH MARSH ISLAND 71 Otto owns a 50% Working Interest (WI) and a 40.625% Net Revenue Interest (NRI) in South Marsh Island 71 (SM 71) in the Gulf of Mexico, with Byron Energy Limited (Byron) the operator, holding an equivalent WI and NRI. Water depth in the area is approximately 137 feet. The F1 and F3 wells began producing in March 2018 from the primary D5 Sand reservoir, while the F2 well began production in April 2018 from the B55 Sand. In March 2020, the joint venture spudded the F5 well and announced a potential discovery on 23 March 2020. Due to increased uncertainty of continuing operations related to the impact of COVID-19 on operations, the SM71 F5 wellbore was temporarily abandoned in a manner that allows it to be efficiently sidetracked in the future. Recompletion potential for the F2 well and re-entry potential for the F5 are being targeted for CY 2022, consistent with our current planning and budget. The SM 71 lease ranks number three of all Gulf of Mexico active oil producing leases on the US Gulf of Mexico shelf, with the SM71 F3 and F1 ranked as the number one and number two active oil producing wells. Base production from SM 71 continues to produce at or above expectations. LIGHTNING Otto owns a 37.5% WI and a 28.2% NRI in the Lightning Field in Matagorda County, Texas, with Hilcorp Energy Limited (Hilcorp) the operator, holding the remaining interest. Otto earned its 37.5% working interest in this field by paying 50.0% of the cost of drilling the initial Green #1 well. The first well in this field, the Green #1, commenced production in June 2019, while the second well, the Green #2, commenced production in February 2020. Reinterpretation of the 3D seismic by the operator confirms that there are multiple levels of hydrocarbon pay in the Lightning field. While production is currently from the upper Tex Miss 1 zone, the lower Tex Miss 2/3 zone was tested in both wells while they were being drilled. The Tex Miss 2/3 zone appears to be aerially significantly larger and potentially thicker than the Tex Miss 1. In both tests, production from the Tex Miss 2/3 zone has indicated that the zone has lower permeability than the Tex Miss 1 and has not been able to establish steady production. It is planned that a future well will be designed to test the ability to stimulate the Tex Miss 2/3 zone and unlock the significant upside potential. Resource progression is currently targeted for CY 2022, consistent with our current planning and budget. Seismic data and mapping are ongoing to develop specific well proposals for Green #3 and #4. Base production from Lightning continues to produce at or above expectations. There is the potential for up to five wells being required to ultimately develop the entire Lightning accumulation. GREEN CANYON 21 Otto owns a 16.67% WI and a 13.34% NRI in Green Canyon 21 (GC-21) in the Gulf of Mexico, with Talos Energy (Talos) as operator. Otto earned its 16.67% working interest in GC-21 by paying 22.22% of the cost of drilling the “Bulleit” appraisal well. The “Bulleit” appraisal well located at GC 21 commenced production from the deeper MP Sand on 15 October 2020 after experiencing multiple weather delays in reaching stabilized production rates. These rates were less than what the collected rock property data and analogue reservoirs would suggest. A technical assessment of the MP Sand production performance was completed. Detailed bottomhole pressure and reservoir performance data collected after hook-up and first production indicate a smaller reservoir than originally anticipated. While additional technical work is ongoing, the currently favoured path forward is to move away from the MP Sand and execute a recompletion of the well in the shallower DTR-10 Sand. A DTR-10 recompletion will require the procurement of long lead items from manufacturers, which are expected to cost approximately US$3.5 million (US$0.6 million, net to Otto) with payment expected for such items in Q3 CY 2021. Due to deepwater rig availability, weather, timing and long lead items, the recompletion is expected to begin in mid CY 2022, at an estimated remaining cost (after long lead items) of approximately US$28.5 million (US$4.75 million, net to Otto), with production immediately following in mid to late CY 2022. These costs are expected to be paid out of existing free cash flow. 38 | OTTO ENE RGY ANNUAL REPORT 2021 OPERATING AND FINANCIAL RE VIE W While full-cycle economics have been eroded, it is estimated that point-forward economics for the recompletion are highly positive and strongly value accretive. EXPLORATION HILCORP PROGRAM In October 2020, the Company and Hilcorp mutually agreed to remove all remaining prospects from the eight-well Gulf Coast exploration package due to current market conditions, except for Beluga. The Beluga #1 well was spud in October 2020 and was drilled to approximately 13,800 ft MD to the base of the target formation. Wireline logs were run in the well and evaluated, and it was determined that sub-commercial quantities of hydrocarbons were encountered. The well was therefore plugged and abandoned. The well was drilled for approximately US$1.8 million, net to Otto, which was below AFE estimated costs and in fewer days than planned. This well concludes the Hilcorp Package 1 program, with no additional drilling required under this agreement. ALASKA NORTH SLOPE (CENTRAL BLOCKS) On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds a 10.8% interest in the 44,463- acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. The shares were subject to a lock up period through 30 June 2021. On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the Alaskan Department of Natural Resources. In addition to the shares, Otto also maintains an existing 0.5% of 8/8ths overriding royalty interest (ORRI) in any future production from the Talitha Unit. On 19 April 2021, Pantheon announced that operations at the Talitha #A well had concluded for the season. As of 30 June 2021, these shares were valued at approximately US$8.2 million. OT TO ENERGY ANNUAL REPORT 2021 | 39 Governance 40 | OTTO ENE RGY ANNUAL REPORT 2021 GOVERNANCE Board of Directors MICHAEL J. UTSLER Executive Chairman, Chief Executive Officer and Managing Director B.S. Petroleum Engineering Mike was appointed Chief Executive Officer and Managing Director of the Company on 11 September 2020, and Executive Chairman on 19 November 2020. Mike is an oil and gas executive with more than 40 years of experience in senior international oil and gas sector roles, including 15 years in the Gulf of Mexico and 5 years as Chief Operating Officer of Woodside in Australia. His career has encompassed senior executive, leadership and board roles with Amoco, BP, Woodside and New Fortress Energy. Mike joined Oil Search Limited on 30 April 2021 as an Independent Non-Executive Director. He holds a B.S. in Petroleum Engineering from the University of Oklahoma. JOHN JETTER Non-Executive Director GEOFF PAGE Non-Executive Director BLaw, BEcon, INSEAD MBA, CPA, FCMA, FGIA 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 from April 2015 to December 2019. Mr Jetter is Chairman of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee. Mr Geoff Page was appointed 17 July 2020 as Non-Executive Director. He also became Chairman of the Audit and Risk Committee on 1 August 2020. He is a finance professional with over 20 years of senior finance, accounting and management experience gained globally within a number of industries. He has over 10 years of board experience gained in several different firms. Mr Page is a member of the Remuneration and Nomination Committee. Mr Page is also a member of CPA Australia, Fellow Member of the Chartered Institute of Management Accountants and a Fellow Member of the Governance Institute of Australia. PAUL SENYCIA Non-Executive Director BSc Hons (Mining Engineering), ACSM, MAppSc (Geophysics) Mr Paul Senycia was appointed to the Board on 24 April 2018 and became a non-executive director on 1 January 2019. Mr Senycia joined Otto in 2010 as Exploration Manager, and from 2015 until 31 December 2018 led the Company’s technical operations. A seasoned oil and gas professional, trained as an exploration geoscientist, Mr Senycia has over 35 years of international oil and gas experience in both commercial and technical aspects of the business. Mr Senycia is a member of the Audit and Risk Committee and the Remuneration and Nomination Committee. OT TO ENERGY ANNUAL REPORT 202 1 | 41 Financial Report 42 | OTTO ENE RGY ANNUAL REPORT 2021 FINANCIAL RE PORT FINANCIAL REPORT 2021 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 44 45 73 74 75 76 77 78 116 117 121 Annual General Meeting The Annual General Meeting of Otto Energy Limited will be held on 17 November 2021. In light of the novel coronavirus outbreak, and for the health and well-being of our stockholders, employees and directors, this year’s Annual General Meeting will be conducted as a virtual meeting, which will be held exclusively online via the Internet as a virtual web conference at http://www.ottoenergy.com on 17 November 2021 at 1pm AEST. OT TO ENERGY ANNUAL REPORT 202 1 | 43 CORPORATE DIRECTORY Directors Mr Michael Utsler – Executive Chairman, Chief Executive Officer and Managing Director Mr John Jetter – Non-Executive Director Mr Geoff Page – Non-Executive Director Mr Paul Senycia – Non-Executive Director Company Secretary Ms Kaitlin Smith Key Executives Principal registered office in Australia Houston Office Share Registry Auditors Mr Michael Utsler – Executive Chairman, Chief Executive Officer and Managing Director Mr Will Armstrong – Vice President Exploration and New Ventures Mr Sergio Castro – Chief Financial Officer Mr Philip Trajanovich – Commercial and Land Manager Ground Floor 70 Hindmarsh Square Adelaide SA 5000 Tel: + 61 8 6467 8800 Fax: + 61 8 6467 8801 Two Allen Center 1200 Smith Street Houston, TX 77002 Tel: +1 713-893-8894 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 44 | OTTO ENE RGY ANNUAL REPORT 2021 1 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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 2021 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 Geoff Page who was appointed 17 July 2020, Mr Michael Utsler who was appointed 11 September 2020 and Mr Kevin Small who resigned 30 April 2021. Mr Michael Utsler Executive Chairman, Chief Executive Officer and Managing Director Appointed 11 September 2020 Mr Michael Utsler was appointed Managing Director and Chief Executive Officer on 11 September 2020 and Executive Chairman on 19 November 2020. Mr Utsler is an oil and gas executive with more than 40 years of experience in senior international oil and gas sector roles, including 15 years in the Gulf of Mexico and 5 years as Chief Operating Officer of Woodside in Australia. His career has encompassed senior executive, leadership and board roles with Amoco, BP, Woodside and New Fortress Energy. He holds a B.S. in Petroleum Engineering from the University of Oklahoma. Mr Utsler joined Oil Search Limited on 30 April 2021 as an Independent Non-Executive Director. Mr John Jetter BLaw, BEcon, INSEAD Director (Independent Non-Executive) Appointed Non-Executive Director 10 December 2007; Appointed Non-Executive Chairman 25 November 2015; Retired as Chairman but remained as Non-Executive Director 21 November 2019; Re-appointed Non-Executive Chairman 1 April 2020; Appointed Executive Chairman 10 June 2020; Re-appointed Non-Executive Chairman 11 September 2020; Retired as Chairman but remained as Non-Executive Director 19 November 2020. 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 from April 2015 to December 2019. He is Chairman of the Remuneration and Nomination Committee and a member of the Audit and Risk Committee. Mr Paul Senycia BSc (Hons), MAppSc Director (Independent Non-Executive) Appointed Executive Director 24 April 2018; Became Non-Executive Director 1 January 2019 Mr Paul Senycia is a seasoned 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 Mr Senycia 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, Mr Senycia has worked in Europe, Asia, Africa and Australasia both on and offshore. Up until his retirement on 31 December 2018, Mr Senycia was the Vice President – Exploration and New Ventures for the Company. Mr Senycia is a member of the Audit and Risk Committee and Remuneration and Nomination Committee. Mr Senycia has not held any other directorships in the last three years. Mr Kevin Small BSc Geophysical Engineering (Hons) Director (Executive) Appointed Executive Director 29 January 2019, resigned 30 April 2021 Mr Kevin Small is an exploration geoscientist with over forty years’ experience in the Gulf of Mexico both onshore and offshore, and has been responsible for the generation, farm-in, drilling and development of numerous Gulf Coast discoveries. Mr Small brings extensive networks and relevant experience to Otto’s Gulf Coast business. Prior to joining Otto Mr Small worked with Tri-C Resources, a privately owned Houston based oil and gas company, developing Gulf Coast conventional prospects for drilling. Between 2003 and 2012, Mr Small worked for Bluestreak OT TO ENERGY ANNUAL REPORT 202 1 | 45 2 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Exploration Group developing prospects exclusively for LLOG Exploration which resulted in successful discoveries on the Gulf of Mexico Shelf and Deepwater. Mr Small was the Exploration Manager and a founding member of the Houston office of Westport Oil and Gas Company between 1996 and 2003, ultimately helping them go public in October 2000. Mr Small also has worked for the Superior Oil Company and McMoran Oil and Gas. During his time with LLOG, Westport, and McMoRan. Mr Small drilled wells with cumulative production of over 692 BCFG and 82 MMBO. Mr Small has not held any other directorships in the last three years. Mr Small resigned as Executive Director on 30 April 2021 and remains with the Company as Chief Geophysicist. Mr Geoff Page MBA, CPA, FCMA,FGIA Director (Independent Non-Executive) Appointed Non-Executive Director 17 July 2020 Mr Geoff Page is a finance professional with over 20 years of senior finance, accounting and management experience gained globally within a number of industries. He has over 10 years of board experience gained in several different firms. Mr Page is a member of CPA Australia, Fellow Member of the Chartered Institute of Management Accountants and a Fellow Member of the Governance Institute of Australia. Mr Page is Chairman of the Audit and Risk Committee and a member of the Remuneration and Nomination Committee. Company Secretary Ms Kaitlin Smith BCom (Acc), CA Appointed 2 November 2019 Ms Smith provides Company Secretarial and Accounting services to various public and proprietary companies. She holds a Bachelor of Commerce (Accounting) and is a Chartered Accountant. 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 P Senycia Mr G Page Mr M Utsler Principal activities Number of Ordinary Shares 57,881,668 8,691,134 - 5,000,000 Number of Rights 1,804,667 2,769,000 - - 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 2021. Operating and Financial Review During the year ended 30 June 2021, the Company’s Green Canyon 21 “Bulleit” well commenced production on 15 October 2020. Otto also participated in drilling the final well in the Hilcorp exploration program, the Beluga well, which was drilled in October 2020 and ultimately plugged and abandoned after sub-commercial quantities of hydrocarbons were encountered. On 20 January 2021, the Company successfully sold its Borealis Alaska LLC subsidiary to Pantheon Resources Plc for 14,272,592 shares in Pantheon stock (London Stock Exchange: PANR). As of 30 June 2021, these shares were valued at approximately US$8.2 million. 46 | OTTO ENE RGY ANNUAL REPORT 2021 3 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Financial Summary Total loss after tax for the year ended 30 June 2021 was US$0.5 million after recognizing profit from discontinued operations of US$4.2 million on the reversal of the Foreign Currency Translation Reserve associated with the dissolution of Otto Energy Philippines Inc. in June 2021. Consolidated net loss after income tax from continuing operations for the year ended 30 June 2021 was US$4.6 million (2020: net loss of US$1.4 million). This increase in losses was primarily driven by a non-cash impairment charge on Green Canyon 21 (US$12.85 million) and non-cash losses on derivative financial instruments (US$9.67 million), partially offset by higher sales revenues, a profit on disposal of assets, lower exploration expenditures, and lower administrative costs. Excluding the non-cash effects of impairment charges (US$12.85million), profit from discontinued operations (US$4.2 million) and the unrealized derivatives losses (US$9.67 million), the Company would have realized net income before tax of US$17.9 million for the current year, compared to net loss before tax of US$5.4 million for the previous year after excluding unrealized gains on derivatives (US$4.0 million), an improvement of 430%. Net revenue for the current year was US$30.1 million (2020: US$23.0 million), a 31% increase from FY 2020 due to higher production as a result of Green #2 producing for an entire year during FY 2021 and higher crude oil, natural gas and NGL prices. This generated an operating gross profit of US$19.9 million (2020: US$12.7 million), an increase of 57%, as costs of production remained relatively equal to prior year. Profit on disposal of assets was approximately US$8.0 million as a result of the Company’s sale of its subsidiary, Borealis Alaska LLC to Pantheon Resources Plc. Loss on derivative financial instruments was US$10.3 million for the current year (2020: gain of US$6.0 million). Of this amount, US$9.7 million was unrealized (2020: unrealized gain on derivative US$4.0 million) as a result of the mark- to-market value of expected higher future crude oil prices. Impairment charges for the current year were US$12.85 million (2020: nil), as a result of cost overruns and lower than expected performance on the Bulleit well at Green Canyon 21 (GC 21) since beginning production in October 2020. The Company incurred lower exploration expenditures during the current year of US$2.7 million (2020: US$13.1 million), as well as lower administrative costs during the current year of US$4.2 million (2020: US$4.8 million), for a total decrease of US$11.0 million, or 61%. While the majority of the decrease is attributable to less drilling expenditures during the current year (only drilling the Hilcorp-operated Beluga well), the remaining decrease reflects the corporate cost cutting initiatives, including a 40% reduction in key management personnel compensation (see Note 24). Finance costs, including amortisation of borrowing costs, totalled US$2.7 million for the current year (2020: US$2.4 million), which include interest and commitment fees on the Macquarie debt facility. The Group will continue to assess the impact of Covid-19 on existing projects and operations. The duration and spread of the pandemic and regulations imposed by governments continue to be closely monitored to determine any future impact on the Group. Production and Development Reserves Statement as at 30 June 2021 On 9 September 2021 the Company released its statement of reserves and resources as at 30 June 2021 which included Otto’s offshore leases at South Marsh 71 (“SM 71”) and Green Canyon 21 (“GC 21”), and its Lightning Field lease in Matagorda County, TX. The prospective resources cover SM 71. The summary statement of reserves and prospective resources as at 30 June 2021 and changes to reserves and resources since 30 June 2020 is set out below. Full details including the reconciliations and notes on the statements are included in the ASX release of 9 September 2021. Proved reserves totalled approximately 4.1 MMboe, compared to 4.8 MMboe as of 30 June 2020. This decrease is predominantly due to production at the Company’s Lightning and SM 71 fields, partially offset by the reclassification of SM 71 reserves from Probable to Proved as a result of its advanced production profile. OT TO ENERGY ANNUAL REPORT 202 1 | 47 4 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Proved plus Probable reserves totaled approximately 6.5 MMboe as a result of an additional well at Lightning (Green #4), plus an additional 2.4 MMboe of probable reserves on existing assets. This compares to 8.1 MMboe as of 30 June 2020, a decrease attributable to the reclassification of SM 71 reserves from Probable to Proved and the write-down of MP Sand reserves at GC 21. Proved plus Probable plus Possible reserves totaled approximately 8.4 MMboe as a result of an additional well at Lightning (Green #5), plus an additional 1.9 MMboe of possible reserves on existing assets. This compares to 11.7 MMboe as of 30 June 2020, a decrease attributable to revisions at Lightning, the write-down of MP Sand reserves at GC 21, and the reclassification of some SM 71 Possible reserves to Contingent and Prospective resources. Contingent and Prospective resources totaled approximately 2.1 MMboe as a result of additional resources at SM 71 and Lightning. This compares to 58.3 MMboe at 30 June 2020, a decrease attributable to excluding Beluga as this well was drilled during the fiscal year and subsequently plugged and abandoned, and also excluding Tarpon and Mallard as these prospects will no longer be drilled. Another reason for the decrease is the removal of the Company’s interest in the Talitha Unit in Alaska which was sold to Pantheon Resources Plc for 14,272,592 shares in Pantheon (PANR) in January 2021. This decrease in Contingent and Prospective resources was partially offset by the reclassification of some SM 71 Possible reserves to Contingent and Prospective resources. Total Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Oil (MbbL) 3,196 4,595 452 8,243 4,935 13,178 2,584 Gross (100%) Gas (MMcf) 17,814 9,193 15,060 42,067 29,631 71,698 27,507 Mboe 6,166 6,127 2,962 15,255 9,873 25,128 7,168 Oil (MbbL) 1,231 779 129 2,139 982 3,121 665 Net Gas (MMcf) 5,297 2,306 4,302 11,905 8,235 20,140 7,838 Mboe 2,114 1,162 846 4,122 2,355 6,477 1,971 15,762 99,205 32,296 3,786 27,978 8,448 3,250 24,300 7,300 930 6,930 2,085 Changes to reserves and resources since 30 June 2020 Otto Energy Limited Grand Total - Reserve Reconciliation (Otto Energy NRI Share) Gas (MMCF) Oil (Mbbl) MBOE Proved (1P) Probable Proved+Probable (2P) Possible Proved+Probable+ Possible (3P) Remaining 6/30/2020 2,382 1,719 4,102 1,807 Production 2020 438 0 438 0 Additions & Revisions 196 (737) (541) (1,142) Remaining 6/30/2021 2,140 982 3,122 665 Remaining 6/30/2020 14,625 9,088 23,712 11,142 Production 2020 2,411 0 2,411 Additions & Revisions (308) (853) (1,161) (3,304) Remaining 6/30/2021 11,905 8,235 20,140 7,838 Remaining 6/30/2020 4,820 3,234 8,054 3,664 Production 2020 840 840 Additions & Revisions 145 (879) (735) (1,692) Remaining 6/30/2021 4,122 2,355 6,477 1,971 5,908 438 (1,683) 3,787 34,854 2,411 (4,465) 27,978 11,717 840 (2,427) 8,448 Production and Revenue Summary The table below sets forth production and revenue information associated with Otto’s sales of natural gas, oil and natural gas liquids ("NGLs") from its three producing fields at SM71, Lightning and GC 21 for the year ended 30 June 2021. One barrel of oil, condensate or NGL is the energy equivalent of six Mcf of natural gas. 48 | OTTO ENE RGY ANNUAL REPORT 2021 5 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 Production Volumes and Sales Revenue WI Share (before royalties) (USD) Crude oil (barrels) South Marsh 71 Lightning Field Green Canyon 21 Total oil production Total oil sales revenue ($'million) Avg oil price ($/Bbl) - pre-hedges Avg oil price ($/Bbl) - post-hedges Natural gas (thousand cubic feet) South Marsh 71 Lightning Field Green Canyon 21 Total gas production Gas revenue ($millions) Avg gas price ($/Mmbtu) Natural gas liquids (barrels) South Marsh 71 Lightning Field Green Canyon 21 Total NGL production NGL revenue ($millions) Avg NGL price ($/Bbl) Total (barrels of oil equivalent) South Marsh 71 Lightning Field Green Canyon 21 Total production (Boe) Total daily production (Boe/d) Percent liquids (%) Total revenue ($'million) Avg WA price ($/Boe) - pre-hedges Avg WA price ($/Boe) - post-hedges Notes 30-Jun-21 31-Mar-21 31-Dec-20 30-Sep-20 112,232 18,437 1,916 132,585 $ $ $ 8.3 $ $ $ 62.88 54.14 94,085 563,559 7,416 665,060 $ $ 2.0 $ 3.00 $ 113,496 21,410 1,425 136,331 $ 7.4 54.52 $ 50.41 $ 110,393 22,962 5,403 138,758 5.4 $ 38.93 $ 42.03 $ 79,715 621,573 16,436 717,724 6.6 83,515 693,344 23,374 800,233 $ 9.03 $ 2.1 $ $ 2.64 109,215 20,607 n/a 129,822 4.8 37.12 42.12 57,922 670,035 n/a 727,957 1.5 1.99 - 19,581 347 19,929 $ $ 0.4 $ $ 20.78 - 22,313 558 22,871 $ 0.5 21.07 $ - 24,090 851 24,941 0.3 $ 11.68 $ - 16,301 n/a 16,301 0.2 14.45 127,913 131,945 3,500 263,357 2,894 58% 10.8 $ $ $ 41.00 36.60 126,782 147,319 4,722 278,823 3,098 57% 14.5 $ 52.06 $ 50.05 $ 124,312 162,609 10,150 297,071 3,229 55% 7.8 $ 26.40 $ 27.85 $ 118,869 148,581 n/a 267,449 2,907 55% 6.6 24.59 27.01 $ $ $ 1. Otto sells its high-quality crude produced at SM 71 at Louisiana Light Sweet crude (“LLS”) crude pricing which is a premium to West Texas Intermediate (“WTI”) pricing. Deductions are applied for transportation, gravity, and pipeline loss allowances. 2. GC 21 crude is a medium sour grade and sells against the Bonito Sour crude marker. Deductions are applied for 3. transportation, gravity, and pipeline loss allowances. Lightning crude sells against the WTI Houston crude marker. Deductions are applied for transportation and gravity. 4. On average, 1 Mscf = 1.10 MMbtu for SM 71 raw gas production. The thermal content of SM 71 gas may vary over time. 5. On average, 1 Mscf = 1.25 MMbtu for GC 21 raw gas production. The thermal content of GC 21 gas may vary over time. 6. On average, 1 Mscf = 1.10 MMbtu for Lightning raw gas production. The thermal content of Lightning gas may vary over time. OT TO ENERGY ANNUAL REPORT 202 1 | 49 6 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 South Marsh Island 71 (SM 71) – Offshore Gulf of Mexico. Otto WI 50.0% Otto owns a 50% Working Interest (WI) and a 40.625% Net Revenue Interest (NRI) in the South Marsh Island block 71 (“SM 71”) in the Gulf of Mexico, with Byron Energy Limited (Byron) the operator, holding an equivalent WI and NRI. Water depth in the area is approximately 137 feet. The F1 and F3 wells began producing in March 2018 from the primary D5 Sand reservoir, while the F2 well began production in April 2018 from the B55 Sand. In March 2020, the joint venture spudded the F5 well and announced a potential discovery on 23 March 2020. Due to increased uncertainty of continuing operations related to the impact of COVID-19 on operations, the SM71 F5 wellbore was temporarily abandoned in a manner that allows it to be efficiently sidetracked in the future. Recompletion potential for the F2 well and re-entry potential for the F5 are being targeted for CY 2022, consistent with our current planning and budget. The SM 71 lease ranks number three of all Gulf of Mexico active oil producing leases on the US Gulf of Mexico shelf, with the SM71 F3 and F1 ranked as the number one and number two active oil producing wells. Base production from SM 71 continues to produce at or above expectations. The following tables set forth certain information with respect to SM71 production and sales for the twelve months ended 30 June 2021, and reserves as of 30 June 2021: SM 71 Production Volumes Oil (bbls) WI Gas (Mscf) Total (Boe) Total (Boepd) NRI Oil (bbls) Gas (Mscf) Total (Boe) Total (Boepd) SM 71 Sales Revenue WI Oil - $million Oil - $ per bbl Gas - $million Gas – $ per MMbtu Total – US$million NRI Total – US$million 30-Jun-21 31-Mar-21 112,232 94,085 127,913 1,406 91,189 76,444 103,930 1,142 113,496 79,715 126,782 31-Dec-20 30-Sep-20 109,215 57,922 118,869 1,292 110,393 83,515 124,312 1,409 1,351 92,216 64,769 103,011 89,694 67,856 101,003 1,145 1,098 88,737 47,062 96,581 1,050 30-Jun-21 31-Mar-21 31-Dec-20 30-Sep-20 $ $ $ $ $ $ 7.0 $ $ 62.81 6.2 $ 54.31 $ 4.3 38.75 $ $ 4.0 36.94 0.3 $ 3.29 $ 0.3 $ $ 2.77 0.2 2.45 $ $ 0.1 2.10 7.4 $ 6.5 $ 4.5 $ 4.2 6.0 $ 5.2 $ 3.7 $ 3.4 SM71 Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Oil (MbbL) 2,685 496 - 3,181 Gross (100%) Gas (MMcf) 1,924 292 - 2,216 Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) 734 3,915 734 4,649 2,650 50 | OTTO ENE RGY ANNUAL REPORT 2021 Mboe 3,006 545 - 3,551 843 4,394 840 Oil (MbbL) 1,091 202 - 1,293 Net (40.625%) Gas (MMcf) 782 119 - 901 267 1,168 259 298 1,591 298 1,889 Mboe 1,221 221 - 1,442 343 1,785 341 3,509 5,234 1,427 2,126 656 2,872 637 4,300 3,370 760 1,220 963 7 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 Lightning – Onshore Matagorda County, Texas. Otto WI 37.5% Otto owns a 37.5% WI and a 28.2% NRI in the Lightning Field in Matagorda County, Texas, with Hilcorp Energy Limited (Hilcorp) the operator, holding the remaining interest. Otto earned its 37.5% working interest in this field by paying 50.0% of the cost of drilling the initial Green #1 well. The first well in this field, the Green #1, commenced production in June 2019, while the second well, the Green #2, commenced production in February 2020. Reinterpretation of the 3D seismic by the operator confirms that there are multiple levels of hydrocarbon pay in the Lightning field. While production is currently from the upper Tex Miss 1 zone, the lower Tex Miss 2/3 zone was tested in both wells while they were being drilled. The Tex Miss 2/3 zone appears to be aerially significantly larger and potentially thicker than the Tex Miss 1. In both tests, production from the Tex Miss 2/3 zone has indicated that the zone has lower permeability than the Tex Miss 1 and has not been able to establish steady production. It is planned that a future well will be designed to test the ability to stimulate the Tex Miss 2/3 zone and unlock the significant upside potential. Resource progression is currently targeted for CY 2022, consistent with our current planning and budget. Seismic data and mapping are on-going to develop specific well proposals for Green #3 and #4. Base production from Lightning continues to produce at or above expectations. The following tables set forth certain information with respect to Lightning production and sales for the twelve months ended 30 June 2021, and reserves as of 30 June 2021: Lightning Volumes Oil (bbls) WI Gas (Mscf) NGLs (bbls) Total (Boe) Total (Boepd) NRI Oil (bbls) Gas (Mscf) NGLs (bbls) Total (Boe) Total (Boepd) Lightning Sales Revenue WI Oil - $million Oil - $ per bbl Gas - $million Gas – $ per MMbtu NGLs - $million NGLs – $ per bbl Total – US$million NRI Total – US$million 30-Jun-21 31-Mar-21 18,437 563,559 19,581 131,945 1,450 13,871 424,002 14,732 99,271 1,091 21,410 621,573 22,313 147,319 31-Dec-20 30-Sep-20 20,607 670,035 16,301 148,581 1,615 22,962 693,344 24,090 162,609 1,637 1,767 16,108 467,651 16,788 110,838 17,276 521,648 18,124 122,341 1,232 1,330 15,504 504,112 12,264 111,787 1,215 30-Jun-21 31-Mar-21 31-Dec-20 30-Sep-20 $ $ $ $ $ $ $ $ 1.2 $ $ 63.25 1.2 $ 55.74 $ 0.9 $ 39.55 $ 0.8 38.03 1.7 $ 2.96 $ 6.2 $ 10.01 $ 1.9 $ 2.67 $ 1.4 1.98 0.4 $ $ 20.75 0.5 $ 21.10 $ $ 0.3 11.76 $ 0.2 14.45 3.3 $ 7.9 $ 3.1 $ 2.4 2.4 $ 5.9 $ 2.3 $ 1.8 OT TO ENERGY ANNUAL REPORT 202 1 | 51 8 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Lightning Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Oil (MbbL) 472 197 452 1,121 808 1,929 787 Gross (100%) Gas (MMcf) 15,730 6,560 15,060 37,350 26,939 64,289 26,232 Mboe 3,094 1,290 2,962 7,346 5,298 12,644 5,159 Oil (MbbL) 135 56 129 320 231 551 225 Net (28.214%) Gas (MMcf) 4,494 1,874 4,302 10,670 7,696 18,366 7,494 Mboe 884 368 846 2,098 1,514 3,612 1,474 2,716 90,521 17,803 600 20,000 3,930 776 170 25,860 5,086 5,710 1,122 Green Canyon 21 (GC 21) – Offshore Gulf of Mexico. Otto WI 16.67% Otto owns a 16.67% WI and a 13.34% NRI in Green Canyon 21 (GC-21) in the Gulf of Mexico, with Talos Energy (Talos) as operator. Otto earned its 16.67% working interest in GC-21 by paying 22.22% of the cost of drilling the “Bulleit” appraisal well. The “Bulleit” appraisal well located at GC 21 commenced production from the deeper MP sands on 15 October 2020 after experiencing multiple weather delays in reaching stabilized production rates. These rates were less than what the collected rock property data and analogue reservoirs would suggest. A technical assessment of the MP Sand production performance was completed. Detailed bottomhole pressure and reservoir performance data collected after hook-up and first production indicate a smaller reservoir than originally anticipated. While additional technical work is ongoing, the currently favoured path forward is to move away from the MP Sand and execute a recompletion of the well in the shallower DTR-10 Sand. A DTR-10 recompletion will require the procurement of long lead items from manufacturers, which are expected to cost approximately US$3.5 million (US$0.6 million, net to Otto) with payment expected for such items in Q3 CY 2021. Due to deepwater rig availability, weather, timing and long lead items, the recompletion is expected to begin in mid CY 2022, at an estimated remaining cost (after long lead items) of approximately US$28.5 million (US$4.75 million, net to Otto), with production immediately following in mid to late CY 2022. These costs are expected to be paid out of existing free cash flow. While full-cycle economics have been eroded, it is estimated that point-forward economics for the recompletion are highly positive and strongly value accretive. The following tables set forth certain information with respect to GC 21 production and sales for the twelve months ended 30 June 2021, and reserves as of 30 June 2021: 52 | OTTO ENE RGY ANNUAL REPORT 2021 9 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 30-Jun-21 31-Mar-21 31-Dec-20 30-Sep-20 1,916 7,416 347 3,500 38 1,533 5,932 278 2,800 31 1,425 16,436 558 4,722 52 1,140 13,149 446 3,778 42 5,403 23,374 851 10,150 110 4,323 18,699 680 8,120 88 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 30-Jun-21 31-Mar-21 0.12 $ $ 63.57 31-Dec-20 0.08 $ 52.83 $ 0.22 40.09 0.02 $ 2.31 $ 0.05 2.77 $ $ 0.06 2.83 0.01 $ $ 22.14 $ 0.01 19.90 $ 0.01 9.60 30-Sep-20 n/a n/a n/a n/a n/a n/a 0.15 $ 0.14 $ 0.29 n/a 0.12 $ 0.11 $ 0.22 n/a $ $ $ $ $ $ $ $ Oil (MbbL) 39 3,902 - 3,941 3,393 7,334 1,063 Gross (100%) Gas (MMcf) 160 2,341 - 2,501 2,036 4,537 638 Mboe 66 4,292 - 4,358 3,732 8,090 1,169 Oil (MbbL) 5 521 - 526 453 979 142 Net (13.336%) Gas (MMcf) 21 313 - 334 272 606 85 Mboe 9 573 - 582 498 1,080 156 8,397 5,175 9,259 1,121 691 1,236 - - - - - - GC 21 Production Volumes Oil (bbls) WI Gas (Mscf) NGLs (bbls) Total (Boe) Total (Boepd) NRI Oil (bbls) Gas (Mscf) NGLs (bbls) Total (Boe) Total (Boepd) GC 21 Sales Revenue WI Oil - $million Oil - $ per bbl Gas - $million Gas – $ per MMbtu NGLs - $million NGLs – $ per bbl Total – US$million NRI Total – US$million Green Canyon 21 Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Exploration and Appraisal Gulf Coast Package - Hilcorp In October 2020, the Company and Hilcorp mutually agreed to remove all remaining prospects from the eight-well Gulf Coast exploration package due to current market conditions, except for Beluga. The Beluga #1 well was spud in October 2020 and was drilled to approximately 13,800 ft MD to the base of the target formation. Wireline logs were run in the well and evaluated, and it was determined that sub-commercial quantities of hydrocarbons were encountered. The well was therefore plugged and abandoned. The well was drilled for approximately US$1.8 million, net to Otto, which was below AFE estimated costs and in fewer days than planned. This well concludes the Hilcorp Package 1 program, with no additional drilling required under this agreement. OT TO ENERGY ANNUAL REPORT 202 1 | 53 10 FINANCIAL REPORT DIRECTOR’S REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 For the year ended 30 June 2021 DIRECTOR’S REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 For the year ended 30 June 2021 Alaska North Slope (Central Blocks) Alaska North Slope (Central Blocks) Alaska North Slope (Central Blocks) Alaska North Slope (Central Blocks) On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. The 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. The shares were subject to a lock up period through 30 June 2021. shares were subject to a lock up period through 30 June 2021. On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon. Under the terms of the sale, Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. The 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. The shares were subject to a lock up period through 30 June 2021. shares were subject to a lock up period through 30 June 2021. On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the Alaskan Department of Natural Resources. In addition to the shares, Otto also maintains an existing 0.5% of 8/8ths Alaskan Department of Natural Resources. In addition to the shares, Otto also maintains an existing 0.5% of 8/8ths overriding royalty interest (ORRI) in any future production from the Talitha Unit. overriding royalty interest (ORRI) in any future production from the Talitha Unit. On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the On 29 March 2021, the Company announced that the sale of Borealis had been completed, following approval by the Alaskan Department of Natural Resources. In addition to the shares, Otto also maintains an existing 0.5% of 8/8ths Alaskan Department of Natural Resources. In addition to the shares, Otto also maintains an existing 0.5% of 8/8ths overriding royalty interest (ORRI) in any future production from the Talitha Unit. overriding royalty interest (ORRI) in any future production from the Talitha Unit. On 19 April 2021, Pantheon announced that operations at the Talitha #A well had concluded for the season. On 19 April 2021, Pantheon announced that operations at the Talitha #A well had concluded for the season. On 19 April 2021, Pantheon announced that operations at the Talitha #A well had concluded for the season. On 19 April 2021, Pantheon announced that operations at the Talitha #A well had concluded for the season. As of 30 June 2021, these shares were valued at approximately US$8.2 million. As of 30 June 2021, these shares were valued at approximately US$8.2 million. As of 30 June 2021, these shares were valued at approximately US$8.2 million. As of 30 June 2021, these shares were valued at approximately US$8.2 million. Corporate and Administration Corporate and Administration Corporate and Administration Corporate and Administration Executive Changes Executive Changes Executive Changes Executive Changes In September 2020, the Company announced that Mr Michael J. Utsler had been hired as the Company’s new Chief In September 2020, the Company announced that Mr Michael J. Utsler had been hired as the Company’s new Chief Executive Officer and Managing Director. Executive Officer and Managing Director. In September 2020, the Company announced that Mr Michael J. Utsler had been hired as the Company’s new Chief In September 2020, the Company announced that Mr Michael J. Utsler had been hired as the Company’s new Chief Executive Officer and Managing Director. Executive Officer and Managing Director. Related Parties Related Parties Related Parties Related Parties Effective 1 April 2020, the Board of Directors engaged Mr John Jetter to serve as a consultant to the Company, to Effective 1 April 2020, the Board of Directors engaged Mr John Jetter to serve as a consultant to the Company, to Effective 1 April 2020, the Board of Directors engaged Mr John Jetter to serve as a consultant to the Company, to Effective 1 April 2020, the Board of Directors engaged Mr John Jetter to serve as a consultant to the Company, to perform any services required by the Company. Under the terms of the consultancy agreement, Mr Jetter is to consult perform any services required by the Company. Under the terms of the consultancy agreement, Mr Jetter is to consult perform any services required by the Company. Under the terms of the consultancy agreement, Mr Jetter is to consult perform any services required by the Company. Under the terms of the consultancy agreement, Mr Jetter is to consult for a maximum of three days per week at a rate of AUD$2,500 per day. For the fiscal year ended 30 June 2021, Mr for a maximum of three days per week at a rate of AUD$2,500 per day. For the fiscal year ended 30 June 2021, Mr for a maximum of three days per week at a rate of AUD$2,500 per day. For the fiscal year ended 30 June 2021, Mr for a maximum of three days per week at a rate of AUD$2,500 per day. For the fiscal year ended 30 June 2021, Mr Jetter earned AUD$62,500 under this consultancy agreement. This consultancy agreement ceased in September 2020 Jetter earned AUD$62,500 under this consultancy agreement. This consultancy agreement ceased in September 2020 Jetter earned AUD$62,500 under this consultancy agreement. This consultancy agreement ceased in September 2020 Jetter earned AUD$62,500 under this consultancy agreement. This consultancy agreement ceased in September 2020 on the appointment of Mr Utsler as Chief Executive Officer and Managing Director on the appointment of Mr Utsler as Chief Executive Officer and Managing Director on the appointment of Mr Utsler as Chief Executive Officer and Managing Director on the appointment of Mr Utsler as Chief Executive Officer and Managing Director Commodity Price Risk Management Commodity Price Risk Management Commodity Price Risk Management Commodity Price Risk Management Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price agreements, with sales prices tied to industry standard published index prices, subject to negotiated price adjustments. adjustments. Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price agreements, with sales prices tied to industry standard published index prices, subject to negotiated price adjustments. adjustments. Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the commodities being hedged. Currently, all of Otto’s hedges are swaps, and the Company has no three-way collars or commodities being hedged. Currently, all of Otto’s hedges are swaps, and the Company has no three-way collars or short puts. short puts. Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the commodities being hedged. Currently, all of Otto’s hedges are swaps, and the Company has no three-way collars or commodities being hedged. Currently, all of Otto’s hedges are swaps, and the Company has no three-way collars or short puts. short puts. As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via swaps, at a weighted average LLS price of US$50.19 as follows: swaps, at a weighted average LLS price of US$50.19 as follows: As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via swaps, at a weighted average LLS price of US$50.19 as follows: swaps, at a weighted average LLS price of US$50.19 as follows: Months Months Months Months Volume (Bbls) Volume (Bbls) Weighted Avg Weighted Avg Volume (Bbls) Volume (Bbls) Price (LLS) Price (LLS) Weighted Avg Weighted Avg Price (LLS) Price (LLS) July - December 2021 July - December 2021 July - Decem ber 2021 July - Decem ber 2021 122,650 122,650 122,650 122,650 US$50.47 US$50.47 January - September 2022 January - September 2022 January - Septem ber 2022 January - Septem ber 2022 127,239 127,239 127,239 127,239 US$49.92 US$49.92 US$50.47 US$50.47 US$49.92 US$49.92 Additionally, the Company had a natural gas hedge book of 180,143 Mmbtu of natural gas hedged through December Additionally, the Company had a natural gas hedge book of 180,143 Mmbtu of natural gas hedged through December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: Additionally, the Company had a natural gas hedge book of 180,143 Mmbtu of natural gas hedged through December Additionally, the Company had a natural gas hedge book of 180,143 Mmbtu of natural gas hedged through December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: Months Months Months Months Volume (Mmbtu) Volume (Mmbtu) Weighted Avg Weighted Avg Volume (Mmbtu) Volume (Mmbtu) Price (HSC) Price (HSC) Weighted Avg Weighted Avg Price (HSC) Price (HSC) July - December 2021 July - December 2021 July - December 2021 July - December 2021 180,143 180,143 180,143 180,143 US$3.11 US$3.11 US$3.11 US$3.11 54 | OTTO ENE RGY ANNUAL REPORT 2021 11 11 11 11 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 For the fiscal year ended 30 June 2021, the Company recorded a loss on hedging of approximately US$10.3 million as a result of these hedges. Strategy Otto has a clear strategy to deliver shareholder value through building a strong production and financial base of assets, optimizing the portfolio through disciplined investments in exploration and development and driving effective cost management. These efforts are resulting in a strengthening of its balance sheet and creating a robust financial capacity from which to build value. Otto holds attractive exploration and appraisal assets in the prolific petroleum provinces of the onshore and offshore Gulf of Mexico. The Company’s exploration portfolio has led to discovering two of the top twelve largest Gulf of Mexico Shelf and Gulf coast Onshore fields based on resources found over the past few years. Otto continues to leverage access to high quality exploration potential in the Gulf of Mexico through its access and use of technology and experience. Key Risks The key areas of risk, uncertainty and material issues that could affect the achievement of Otto’s goals and delivering on its targets are described below. Note that this is not an exhaustive list of risks that may potentially affect the Company. Operating Risk Sustained, unplanned interruption to production may impact Otto’s financial performance and its ability to fund its forward programs. The facilities in which Otto currently has a non-operated working interest and third-party pipelines, refineries and gas plants which are utilized for sales and transportation of hydrocarbons are subject to operating hazards associated with major accident events, cyber-attack and weather events, which can result in a loss of hydrocarbon containment, diminished production, additional costs, environmental damage and harm to people or reputation. This risk also extends to unexpected sub-surface outcomes. Otto has insurance cover for a number of these risks where it is appropriate and commercially justifiable to do so. For example, Otto has insurance cover for property damage, but does not have cover for loss of profits as the cost is prohibitive. As Otto is non-operator, the operating risks are extended to include the performance of the operator. These risks could include inadequate resourcing or systems, misalignment of interest, inadequate capture or provision of data and information, poor financial position or unfavourable or inadequate agreement with the operator. Consequences of poor performance by an operator could extend to operational incidents, financial loss, loss of opportunity, non- compliance, legal disputes or less than optimal financial returns from the field. Otto seeks to manage the risks around performance of the operator by entering into ventures with operators who have demonstrated competencies and financial capacity. Through its due diligence Otto seeks to ensure that the operator’s reputation is sound and that Otto’s interests are in alignment before committing to participation. Unsuccessful Exploration and Oil and Gas Reserves Depletion Risk Without additions to reserves through exploration and development drilling success or acquisitions, Otto’s oil and gas production, and hence revenues and cash flows, will decrease over time as production from existing fields declines naturally. The rate of decline is dependent on reservoir characteristics. Exploration for and development of reserves may be unsuccessful or unprofitable due to a number of factors that are inherent in the oil and gas industry and are outside Otto’s control. These include the risk that Otto will not discover commercially productive reservoirs or discovers reservoirs that do not produce sufficient revenues to return a profit. Drilling and development operations may be curtailed, delayed or cancelled as a result of other sub-surface, mechanical or environmental factors or events causing significant financial losses. OT TO ENERGY ANNUAL REPORT 202 1 | 55 12 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Otto seeks to mitigate the risk of unsuccessful exploration by having an exploration strategy based around a strict set of criteria including geographical restrictions, probabilities of success, partner and operator capacity and reputation (including drilling contractors) and required rates of return. Otto then seeks to ensure that it has suitably qualified and experienced staff and advisors to generate and evaluate opportunities within the set criteria. Any acquisition of reserves is subject to the same discipline. Where possible, Otto also seeks to reduce the likelihood or impact of such risks through commercial agreements where possible. Key Management Risk As Otto is a non-operator of its key interests, it has a small management team. Having a suitably qualified and reputable operating team in place with appropriate relationships and experience in the Gulf of Mexico oil and gas business is critical to Otto’s success so far and in the future. The loss of the services of members of the Houston operating team could have a negative impact on the Company’s operations and relationships. Particularly in the short term until suitable replacements could be recruited. Otto does not maintain or plan to obtain any insurance against the loss of any key management personnel. Commodity price risk Otto’s revenues, profitability and generation of cash flows depend significantly on crude oil and natural gas prices. Oil and natural gas prices are volatile and low prices could have a material adverse impact on profitability and cash flow. There are a number of factors that can cause fluctuations in price that are beyond the control of Otto. Otto monitors and analyses the oil and gas markets and seeks to reduce price risk where reasonable and practical. The Company has policies and procedures for entering into hedging contracts to mitigate against the fluctuations in oil price and exchange rates. Liquidity and Debt Otto’s cash on hand at 30 June 2021 was approximately US$11.1 million (including US$5.4 million of restricted cash in a Macquarie debt service reserve account). On 4 November 2019 the Company announced it had entered into a three- year senior secured US$55 million term debt facility (Debt Facility) with Macquarie Bank Limited (Macquarie). The initial commitment under the Debt Facility was US$35 million with an additional US$20 million subject to further credit approval from Macquarie. Key Terms of the Facility include: • US$25 million available immediately under Tranche A1. As of 30 June 2021, the Company had drawn the US$25 million available under this tranche, and had repaid US$13.5 million, resulting in an ending debt balance of US$11.5 million. Repaid amounts are not available to be re-borrowed; Additional US$10 million available under Tranche A2; Interest rate of LIBOR plus 8.0% per annum; • • • Matures in November 2022 (36 months from initial drawdown); • Quarterly principal repayments commenced 31 March 2020; • Senior secured non-revolving facility with security over US based assets; and • The Facility may be paid off early without penalty. On 21 January 2021, the Company announced that the Debt Facility had been amended to extend the expiration date of Tranche A2 out until 31 March 2022, to establish the timing for a GC 21 mitigation plan, and to establish a minimum quarterly average production requirement of 1,900 boepd until the GC 21 mitigation is completed (WI volume). The Company was in compliance with all of its financial covenants throughout the year. Option Issue In addition to customary upfront fees payable to Macquarie, the Company issued to Macquarie 42.5 million options to subscribe for fully paid ordinary shares in the Company at an exercise price of A$0.08 to access Tranche A1 (November 2019). A further 42.5 million options will be issued on initial draw of Tranche A2 and will expire four years after issue date. 56 | OTTO ENE RGY ANNUAL REPORT 2021 13 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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 11 September 2020, the Company announced the appointment of new Chief Executive Officer and Managing Director, Mr Michael Utsler. Mr Utsler is an oil and gas executive with more than 40 years of experience in senior international oil and gas sector roles. • • On 15 October 2020, the “Bulleit” well at GC 21 began producing from the MP reservoir. • In October 2020, the Company and Hilcorp mutually agreed to remove all remaining prospects from the eight- well Gulf Coast exploration package due to current market conditions, except for Beluga. In October 2020, the Beluga #1 well was spud and drilled to approximately 13,800 ft MD to the base of the target formation. Sub-commercial quantities of hydrocarbons were encountered, and the well was therefore plugged and abandoned. This well concludes the Hilcorp Package one program, with no additional drilling required under this agreement. • On 20 January 2021, the Company announced that it had sold its subsidiary, Borealis Alaska LLC (Borealis) which holds a 10.8% interest in the 44,463-acre Talitha Unit in Alaska, to Pantheon Resources in exchange for 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR). Significant events after the balance date No matters or circumstances have arisen since 30 June 2021 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: • On 23 August 2021, the Company announced that the Debt Facility had been amended to remove all timing and production requirements associated with the “Bulleit” well at GC 21, and extended the minimum group quarterly production rate average (WI basis) of 1,900 BOEPD until 31 December 2021, and then reduces it to 1,400 BOEPD from 1 January 2022 until the maturity date (4 November 2022). • On 27 August 2021, the Company announced that 30,000,000 options had been issued to Foster Stockbroking Pty Ltd pursuant to the terms of an Equity Capital Markets Advisory Agreement. Of these, 20,000,000 options have an exercise price of A$0.02 per option and 10,000,000 options have an exercise price of A$0.025 per option. All the options expire on 27 August 2024. • Reserves Statement On 9 September 2021 the Company released its statement of reserves and prospective resources for SM 71, Lightning and Green Canyon 21 as at 30 June 2021. The reserves were compiled by Otto’s independent consultant Ryder Scott Company. The summary statement of reserves and prospective resources as at 30 June 2021 and Changes to reserves and resources since 30 June 2020 is set out below. For full details refer to ASX release dated 9 September 2021.The individual statements for each field are included in the Production and Development section above. Total Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Oil (MbbL) 3,196 4,595 452 8,243 4,935 13,178 2,584 Gross (100%) Gas (MMcf) 17,814 9,193 15,060 42,067 29,631 71,698 27,507 Mboe 6,166 6,127 2,962 15,255 9,873 25,128 7,168 Oil (MbbL) 1,231 779 129 2,139 982 3,121 665 Net Gas (MMcf) 5,297 2,306 4,302 11,905 8,235 20,140 7,838 Mboe 2,114 1,162 846 4,122 2,355 6,477 1,971 15,762 99,205 32,296 3,786 27,978 8,448 3,250 24,300 7,300 930 6,930 2,085 OT TO ENERGY ANNUAL REPORT 202 1 | 57 (cid:3) 14 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 Changes to reserves and resources since 30 June 2020: Otto Energy Limited Grand Total - Reserve Reconciliation (Otto Energy NRI Share) Gas (MMCF) Oil (Mbbl) MBOE Proved (1P) Probable Proved+Probable (2P) Possible Proved+Probable+ Possible (3P) Remaining 6/30/2020 2,382 1,719 4,102 1,807 Production 2020 438 0 438 0 Additions & Revisions 196 (737) (541) (1,142) Remaining 6/30/2021 2,140 982 3,122 665 Remaining 6/30/2020 14,625 9,088 23,712 11,142 Production 2020 2,411 0 2,411 Additions & Revisions (308) (853) (1,161) (3,304) Remaining 6/30/2021 11,905 8,235 20,140 7,838 Remaining 6/30/2020 4,820 3,234 8,054 3,664 Production 2020 840 840 Additions & Revisions 145 (879) (735) (1,692) Remaining 6/30/2021 4,122 2,355 6,477 1,971 5,908 438 (1,683) 3,787 34,854 2,411 (4,465) 27,978 11,717 840 (2,427) 8,448 The impact of the Coronavirus (Covid-19) pandemic is ongoing and its impact on the Group has been disclosed within the Directors Report. It is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly changing and is dependent on measures imposed by the Australian Government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. Likely developments and expected results Likely developments in the operations of the Group that were not finalised at the date of this report included: • • • A recompletion of GC 21 in the shallower DTR-10 Sand Recompletion of the F2 well and re-entry of the temporarily abandoned F5 well at SM 71 Possible participation in a Green #3 development well at the Lightning Field with Hilcorp 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 licenses. Procedures are adopted for each exploration program to ensure that environmental conditions of the Group’s tenements are met. 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 (ARC) Number eligible to attend 15 11 15 12 14 Number attended 14 11 15 10 14 Number eligible to attend - - 3 - 3 Number attended - - 3 - 3 Remuneration and nomination committee (RNC) Number eligible to attend 1 - 1 - 1 Number attended 1 - 1 - 1 Director Mr J Jetter Mr M Utsler(i) Mr P Senycia Mr K Small(ii) Mr G Page(iii) (i) (ii) (iii) Mr M Utsler was appointed as Chief Executive Officer and Managing Director on 11 September 2020. Mr K Small resigned as Executive Director on 30 April 2021 Mr G Page was appointed Non-Executive Director on 17 July 2020 58 | OTTO ENE RGY ANNUAL REPORT 2021 15 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Indemnification and insurance of Directors and officers During the financial year, the Company paid a premium of approximately $146,000 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 willful 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. BDO Australia received or are due to receive the following amounts for the provision of non-audit services: 2020 US$ 2021 US$ Tax compliance services Tax consulting and tax advice 13,433 6,970 20,403 15,017 31,114 46,131 Auditor’s independence declaration The auditor’s independence declaration is included on page 73 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 2021. This structure includes the share rights and option plans approved by the shareholders at the Company’s Annual General Meeting on 19 November 2020. The report has been prepared in accordance with Section 300A of the Corporations Act 2001 and its regulations. OT TO ENERGY ANNUAL REPORT 202 1 | 59 16 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Otto Energy’s remuneration policy is designed to ensure that the level and form of compensation achieves certain objectives, including: attraction and retention of employees and management to pursue the Group’s strategy and goals; a) 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 2021 were generally the same as for 2020. Key management personnel disclosed in this report are: Directors Mr John Jetter Mr Paul Senycia Mr Kevin Small Mr Geoff Page Mr Michael Utsler Non-Executive Director, resigned as Non-Executive Chairman 19 November 2020 Non-Executive Director Executive Director and Chief Geophysicist; resigned as Executive Director 30 April 2021 Non-Executive Director, appointed 17 July 2020 Executive Chairman, Chief Operating Office and Managing Director, appointed 11 September 2020; Executive Chairman 19 November 2020 Executives Mr Will Armstrong Mr Sergio Castro Mr Philip Trajanovich Vice President – Exploration and New Ventures Chief Financial Officer Senior Commercial Manager 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. The Committee considers independent advice, where circumstances require, on the appropriateness of remuneration to ensure the Group attracts, motivates and retains high quality people. The ASX Listing Rules require that the maximum aggregate amount of remuneration to be allocated among the non- executive Directors be approved by shareholders in a general meeting. In proposing the maximum amount for consideration by shareholders and in determining the allocation, the Remuneration and Nomination Committee takes account of the time demands made on Directors and such factors as fees paid to non-executive Directors in comparable Australian companies. The Remuneration and Nomination Committee is currently comprised of three non-executive Directors. Remuneration arrangements for Directors and executives are reviewed by the Remuneration and Nomination Committee and recommended to the Board for approval. The Remuneration and Nomination Committee considers external data and information, where appropriate, and may engage independent advisors where appropriate to establish market benchmarks. Remuneration arrangements are determined in conjunction with the annual review of the performance of Directors, executives and employees of the 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 60 | OTTO ENE RGY ANNUAL REPORT 2021 17 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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. On 6 April 2020, the Company announced initiatives to reduce costs in its Houston office. Among those was a temporary 50% reduction in Director fees. Effective 1 April 2021, Director fees were reviewed again and permanently reestablished at approximately 85% of their original amount. 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 15 November 2018 following approval by shareholders at the Company’s Annual General Meeting. The grant was based on 50% 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. 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. Directors’ fees The following fees have applied: Base fees Chair(i) Non-executive Directors From 1 May 2021 to 30 June 2021 From 1 April 2020 to 30 April 2021 From 1 July 2019 to 31 March 2020 - A$75,000 A$75,000 A$45,000 A$150,000 A$90,000 A$10,000 A$5,000 A$5,000 - A$10,000 - Additional fees Audit and Risk Management Committee Chair Remuneration Committee Chair (i) Mr M Utsler was appointed as Executive Chairman on 19 November 2020, no Non-Executive Chair position held from 19 November 2020. 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 at least 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 2021 is summarised below. OT TO ENERGY ANNUAL REPORT 202 1 | 61 18 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 The remuneration structure in place for the year ended 30 June 2021 applies to all employees including key management personnel and staff members of the Group. The Group‘s remuneration structure has three elements: a) b) c) fixed annual remuneration (FAR) or base salary (including superannuation); short term incentive (STI) award which provides a reward for performance in the past year; and 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 2020 or 2021 calendar year reviews. 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 The Board and Remuneration Committee have the discretion to grant annual short-term incentive (STI) awards to the CEO and other members of the executive team at a certain percentage of FAR. The Committee did not exercise its discretion to meet to discuss possible STI awards for the fiscal year ended 2021. 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 re-approved by shareholders at the 2020 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. 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 if there are no further measurement dates. Once vested, the performance rights are automatically converted into shares. Performance rights are granted under the plan for no consideration. No rights were issued for the year ended 30 June 2021. 62 | OTTO ENE RGY ANNUAL REPORT 2021 19 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 On 15 November 2018 and 21 December 2018, the Company issued a total of 25,489,002 performance rights to executives and directors, based on a flat rate of 50% of FAR. These performance rights vest over a three-year period with a measurement date of 15 November, expire at the end of five years on 15 November 2023, and have a TSR hurdle of 15% per annum (based on a 90-day VWAP). On the 15 November 2019 and 15 November 2020 measurement dates, the TSR hurdle was not met and the performance rights will continue to exist and be tested at the next measurement date. Additionally, 7,456,000 performance rights lapsed upon cessation of employment during the fiscal year ended 30 June 2021. The number of remaining performance rights held by executives and directors as of 30 June 2021 is 9,137,000. On 29 November 2017, the Company issued 14,187,000 performance rights to executives and directors, based on a flat rate of 33% of FAR. These performance rights vest over a three-year period, expire at the end of five years, and have a TSR hurdle of 10% per annum (based on 30-day VWAP). On the 29 November 2018 measurement date, 4,729,000 performance rights vested based on a TSR of 19.8%. On the 29 November 2019 and 29 November 2020 measurement dates, the TSR hurdle was not met and the performance rights will continue to exist and be tested at the next measurement date. Additionally, 4,134,000 performance rights lapsed upon cessation of employment during the fiscal year ended 30 June 2021, resulting in 2,788,667 performance rights held by executives and directors as of 30 June 2021. 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. The Board exercised its discretion regarding the cap for the 2018 grants and issued a total of 32,668,000 performance rights of which 25,489,002 related to executives and directors, which amounted to 2.1% of the issued capital as at 30 June 2018. The Board discretion was exercised considering the following important factors: i) ii) the issue amounted to 1.7% of the shares on issue prior to the granting of the rights as there had been a share issue since 30 June 2018; and the rights issued included the one-off issue of sign on performance rights to three new, highly qualified and experienced US staff members recruited to form the US-based technical team as set out in Otto’s ASX release of 16 July 2018. The sign on performance rights formed an important part of their remuneration packages and provide incentives linked to increases in shareholder value. Such sign on benefits are customary in the US. 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 2020 Annual General Meeting At its 2020 Annual General Meeting, the Company received approximately 96% of “yes” votes on its remuneration report for the 2020 financial year and the Company did not receive any specific feedback at the Annual General Meeting on its remuneration practices. All resolutions put to the meeting at the 2020 Annual General Meeting were carried on a poll. OT TO ENERGY ANNUAL REPORT 202 1 | 63 20 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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. 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) Details of remuneration 30 June 2017 30 June 2018 30 June 2019 30 June 2020 30 June 2021 (5,247) (5,194) (18,409) (1,358) 0.025 (0.44) - - 0.064 (0.37) - - 0.054 (0.95) - - 0.007 (0.05) - - (450) 0.008 (0.01) - - 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 US staff and executives are formalised in service agreements. Each of these agreements provides for performance related conditions and details relating to remuneration are set out in the following table: 64 | OTTO ENE RGY ANNUAL REPORT 2021 21 FINANCIAL REPORT- 9 0 4 5 9 , , 4 6 0 7 4 1 6 6 9 6 8 2 , - 4 5 2 0 4 , 7 5 6 1 4 , 5 7 0 6 8 , 0 4 9 5 1 2 , , 5 3 1 4 6 3 - - - - - 9 7 2 4 , 0 7 4 0 1 , - 7 9 8 3 , 7 4 1 2 1 , 1 4 1 5 , 0 1 8 5 1 , , 3 4 9 3 2 7 5 7 9 7 3 , - - 7 2 7 7 1 , 8 6 0 8 4 , , 6 2 2 0 8 6 2 1 0 , 7 8 3 1 , - ) 3 6 0 9 ( , - ) 3 8 0 8 ( , 7 1 3 3 1 , 6 5 2 9 5 , - - - - - - - 7 0 4 8 1 , 0 0 0 0 2 , - - - - - - - 0 0 0 0 2 , 7 0 4 8 1 , - - - - - - - - - - - - - - - - - - - - - - - - - 7 9 6 3 4 , - 5 1 5 9 , 5 0 1 0 2 , - - - - - 2 9 4 3 , 6 7 2 3 , 8 4 2 6 , 2 4 7 7 , - - - - - - - - - - - 6 7 8 1 1 , ) 1 1 2 3 ( , 1 9 6 4 4 2 , 3 3 8 6 1 , 4 4 4 4 6 , - - - - 2 1 2 3 5 , 6 9 7 4 6 2 , - - 4 2 3 2 , 2 7 8 4 , 0 1 5 4 1 , 3 5 1 2 4 , - - - - - 3 3 2 1 6 , l a t o T n o i t a r e n u m e r e b a i r a V l n o i t a r e n u m e r d e x i F S U $ S U $ S U $ S U $ e c n a m r o f r e P ) i ( s t h g i r h s a C ) v i ( s u n o b n o i t a n m r e T i s t i f e n e b r e h t O s t i f e n e b ) i i ( S U $ - r e p u S n o i t a u n n a & l a u n n A e c i v r e s g n o l S U $ e v a e l S U $ r e h t O s e e f d n a y r a a S l r a e Y T R O P E R S ’ R O T C E R D I 1 2 0 2 e n u J 0 3 d e d n e r a e y e h t r o F 0 1 6 4 4 , 8 6 2 5 5 , s n o i t c a s n a r t ) i i i ( S U $ - - - - - - - - - - - - - - 0 1 6 4 4 , 8 6 2 5 5 , - 0 2 5 6 4 , 6 2 3 1 8 , 9 6 2 3 4 2 , - 2 6 7 6 3 , 4 8 4 4 3 , 2 7 2 9 4 , 2 4 5 3 7 1 , 5 5 5 9 1 3 , - - 0 0 0 0 6 3 , - 6 6 4 4 2 , 0 8 2 1 5 , 7 7 5 4 3 5 , 8 9 8 5 8 8 , S U $ 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 ) i i i ( r e t t e J J r M s r o t c e r i D ) v ( r e l s t U M r M ) i v ( e g a P G r M a i c y n e S P r M ) i i v ( l l a m S K r M M r M ) i i i v ( n e l l A ) x i ( r e v i I c a M I r M ) x ( o i r e s o B I r M r o t c e r i D l a t o T n o i t a r e n u m e r o t 9 5 s e g a p n o t r o p e R n o i t a r e n u m e R s i h t n i i d e n a t n o c s i l i n a P s t h g R e c n a m r o f r e P e h t f o s l i l a t e d r e h t r u F . l e d o m e c i r p e r a h s e g n i s a g n i s u d e u a v n e e b e v a h s t h g i r e c n a m r o f r e P l , a r o f y a d r e p 0 0 5 2 $ D U A t a s e c i v r e s y c n a t l u s n o c f o n o i s i v o r p e h t r o f 0 2 0 2 l i r p A 1 e v i t c e f f e , 0 2 0 2 y l u J 4 2 d e t a d y n a p m o C e h t h t i w t n e m e e r g a n a o t n i d e r e t n e r e t t e J J r M . ) s n o i t c u d e d l l o r y a p S U r e h t o d n a e c n a r u s n i h t l a e h g n d u l c n i ( i s t i f e n e b y r a t e n o m - n o n d n a s e c n a w o l l a f o e u a v e h t l s t c e l f e R . 1 2 0 2 e n u J 0 3 o t t n e m e e r g a s i h t i , r e d n u d a p ) 0 0 0 0 8 A $ : 0 2 0 2 ( 0 0 5 2 6 A $ s e d u l c n , i s n o i t c a s n a r t r e h t O . k e e w r e p s y a d e e r h t f o m u m i x a m O E C e h t f o n o i t e r c s i d e h t t a r a e y e h t t u o h g u o r h t l s n o i t c u d e r y r a a s d n a e c n a m r o f r e p f o n o i t i n g o c e r n i i d a p e r e w ’ s u n o b h s a C . t e m t o n a i r e t i r c e c i v r e s e r e h w d e t s e v t o n s t h g i r r o f d e s r e v e r e r a s t s o c n a p e r a h s e e y o p m E . l l 4 2 e t o N d n a 1 7 . 0 2 0 2 r e b m e t p e S 1 1 e v i t c e f f e r o t c e r i D g n g a n a M d n a e c i f f i O g n i t a r e p O i f e h C d e t n o p p a s a w i r e l s t U r M 2 2 . 1 2 0 2 l i r p A 0 3 o t 0 2 0 2 y l u J 1 m o r f n o i t a r e n u m e r s e d u l c n i e r u s o l c s i d n o i t a r e n u m e r 1 2 0 2 . 1 2 0 2 l i r p A n i r o t c e r i D s a d e n g i s e r l l a m S K r M 0 2 0 2 y l u J 7 1 r o t c e r i D e v i t u c e x E - n o N d e t n o p p a s a w e g a P G r i M ) i ( ) i i ( ) i i i ( ) v i ( ) v ( ) i v ( ) i i v ( OT TO ENERGY ANNUAL REPORT 202 1 | 65 FINANCIAL REPORT l a t o T n o i t a r e n u m e R e b a i r a V l n o i t a r e n u m e R d e x i F S U $ e c n a m r o f r e P ) i ( s t h g i r S U $ ) v i ( s u n o b h s a C S U $ n o i t a n m r e T i s t i f e n e b r e h t O s t i f e n e b S U $ S U $ ) i i i ( n o i t a u n n a - r e p u S S U $ g n o l & l a u n n A e v a e l e c i v r e s S U $ S U $ s e e f d n a y r a a S l r a e Y (cid:3) . 9 1 0 2 r e b m e v o N 1 2 r o t c e r i D e v i t u c e x e - n o N s a d e n g i s e r r e v i l c a M . 0 2 0 2 l i r p A 1 r o t c e r i D e v i t u c e x e - n o N s a d e n g i s e r o i r e s o B I I r M r M . 0 2 0 2 r e b m e c e D l i t n u P M K - n o n s a y n a p m o C e h t h t i i w d e n a m e r d n a 0 2 0 2 e n u J h t 0 1 n o O E C d n a r o t c e r i D g n g a n a M i s a d e n g i s e r n e l l A r M ) i i i v ( ) x i ( ) x ( T R O P E R S ’ R O T C E R D I 1 2 0 2 e n u J 0 3 d e d n e r a e y e h t r o F 1 0 7 7 4 2 , 7 5 1 1 6 1 , 3 0 0 2 7 2 , 3 5 4 5 5 3 , 7 4 6 6 9 1 , 6 1 8 4 4 3 , - 4 7 8 2 7 , 1 5 3 6 1 7 , 9 9 2 4 3 9 , 7 7 5 , 6 9 3 1 , 3 4 0 , 6 6 2 2 , - - 6 3 5 8 , 6 1 0 4 2 , ) 1 6 5 9 3 ( , - 9 0 3 7 1 , ) 2 2 4 1 2 ( , ) 5 2 0 1 3 ( , 4 0 9 9 1 , 0 6 1 9 7 , ) 8 0 7 7 1 ( , - 0 0 0 0 2 , 0 0 0 0 2 , - 0 0 0 0 2 , - - 4 4 4 1 3 , 0 0 0 0 6 , 4 4 4 1 3 , 0 0 0 0 8 , 2 5 8 9 4 , - - - - - - - - 5 6 4 2 1 , 6 5 0 6 , 4 4 2 3 2 , 7 3 8 1 2 , 6 7 3 1 1 , 4 4 0 2 3 , - 4 3 9 5 8 0 7 4 , 1 7 8 0 6 , 6 9 2 0 0 1 , 7 6 6 5 2 3 , 8 7 2 8 , 1 0 7 5 , 9 3 2 9 , 6 8 6 9 , 0 7 1 1 , 8 8 7 9 , - 3 7 8 7 , 7 8 6 8 1 , 8 4 0 3 3 , 8 9 1 3 3 , 1 0 2 5 7 , - - - - ) 4 7 0 7 ( , - - ) 8 6 1 4 ( , ) 2 8 0 2 2 ( , ) 4 2 3 3 3 ( , - 9 0 9 7 2 , 8 5 9 6 0 2 , 0 0 4 9 4 1 , 4 8 9 0 1 2 , 8 8 9 6 0 3 , 2 6 6 3 0 2 , 2 4 8 9 8 2 , - 6 2 1 6 7 , 4 0 6 1 2 6 , 6 5 3 2 2 8 , 2 8 1 , 6 5 1 1 , 4 5 2 , 8 0 7 1 , 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 1 2 0 2 0 2 0 2 3 2 9 1 0 2 r e b m e v o N 1 e v i t c e f f e y r a t e r c e S y n a p m o C d n a r e c i f f O l i i a i c n a n F f e h C s a d e n g i s e r h c i R D r M l 1 2 0 2 y a M e e y o p m e o t k c a b d e t r e v e r n e h t 0 2 0 2 r e b m e t p e S n i t n a t l u s n o c o t d e t r e v n o c , 9 1 0 2 y l u J n i r e g a n a M l i i a i c r e m m o C r o n e S d e t n o p p a s a w h c i v o n a a r T P r j M O E C e h t f o n o i t e r c s i d e h t t a r a e y e h t t u o h g u o r h t s n o i t c u d e r y r a l a s d n a e c n a m r o f r e p f o n o i t i n g o c e r n i i d a p e r e w ’ s u n o b h s a C 9 1 0 2 y l u J n i s e r u t n e V w e N d n a n o i t a r o p x E , l i P V d e t n o p p a s a w g n o r t s m r A W r M 9 1 0 2 r e b m e c e D 9 e v i t c e f f e r e c i f f O l a i c n a n F i i i f e h C d e t n o p p a s a w o r t s a C S r M ) i ( o r t s a C S r M s e v i t u c e x E ) i i ( g n o r t s m r A W r M ) i i i ( h c i v o n a a r T j P r M ) v ( h c i R D r M n o i t a r e n u m e r e v i t u c e x e l a t o T l a t o T ) i ( ) i i ( ) i i i ( ) v i ( ) v ( 66 | OTTO ENE RGY ANNUAL REPORT 2021 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 The relative proportions of remuneration that are linked to performance and those that are not are as follows: Fixed and other 2020 2021 At risk – STI At risk – LTI (i) 2021 2020 2021 2020 Directors Mr J Jetter Mr P Senycia Mr M Utsler(ii) Mr G Page(iii) Mr K Small(iv) Mr M Allen(v) Mr I Macliver(vi) Mr I Boserio(vii) Executives Mr S Castro Mr W Armstrong Mr P Trajanovich Mr D Rich(viii) 96% 91% 100% 100% 89% - - - 92% 90% 90% - 93% 65% 95% - 96% 95% 100% 100% 100% 93% 95% 67% - - - - 9% - - - - - 10% - - 21% - - - - - - - - - 33% 4% 9% - - 2% - - - 8% 7% - - 7% 14% 5% - 4% 5% - - - 7% 5% - (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) 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. Mr M Utsler was appointed Chief Operating Office and Managing Director effective 11 September 2020. Mr G Page was appointed Non-executive Director 17 July 2020 Mr K Small resigned as Director in April 2021. 2021 remuneration disclosure includes remuneration from 1 July 2020 to 30 April 2021 Mr Allen resigned as Managing Director and CEO on 10th June 2020 and remained with the Company as a non-KMP until December 2020. Mr I Macliver resigned as Non-executive Director 21 November 2019 Mr I Boserio resigned as Non-executive Director 1 April 2020 Mr D Rich resigned as Chief Financial Officer and Company Secretary effective 1 November 2019 Performance against key measures for LTI: Metric STI LTI Performance rights issued 2018 No STI awards set for the fiscal year ended 2021. (i) No vesting for the fiscal year ended 2021 TSR hurdle rate not met 15% 3 year TSR Target Performance Impact on Incentive Reward Performance rights issued 2017 10% 3 year TSR TSR hurdle rate not met (i) A discretionary bonus was paid at discretion of CEO. Refer remuneration table Performance rights rolled over to next measurement date in November 2021 Performance rights rolled over to next measurement date in November 2021 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. OT TO ENERGY ANNUAL REPORT 202 1 | 67 24 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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. For the US staff, terms have been agreed and service agreements formalised. 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 Michael Utsler Managing Director and Chief Executive Officer(i) Mr Sergio Castro(iii) Chief Financial Officer Mr W Armstrong(iii) VP, Exploration and New Ventures Mr P Trajanovich(iii) Senior Commercial Manager(vi) Commencement of contract 11 September 2020 Base salary including superannuation/other retirement benefits(ii)(iii) $US per annum $300,000 Termination benefit(iv) 3 months base salary 9 December 2019 $260,000 3 months base salary 1 August 2018 $240,000 3 months base salary 1 August 2018 $240,000 3 months base salary (i) (ii) (iii) (iv) Mr M Utsler was appointed Managing Director and Chief Executive Officer 11 September 2020 Executive contracts are reviewed annually by the Board and the Remuneration and Nomination Committee. New executive agreements with reduced base salaries are effective 1 May 2021. Base salary above reflects employment agreements as at 30 June 2021. 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 23. All rights expire on the earlier of their expiry date or termination of individual’s employment. Performance rights granted carry no dividend or voting rights. The value of rights included in remuneration for the year is calculated in accordance with Australian Accounting Standards. The assessed fair value at grant date of the performance rights is allocated equally over the period from grant date to vesting date and the amount is included in the remuneration tables. Where rights vest fully in the year 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. No performance rights were granted in 2021 financial year. The inputs into the fair value calculation of the rights granted and outstanding as at 30 June 2021 are set out in the following table 68 | OTTO ENE RGY ANNUAL REPORT 2021 25 FINANCIAL REPORT0 2 0 2 v o N 9 2 ) i ( 9 1 0 2 v o N 9 2 1 2 0 2 v o N 5 1 0 2 0 2 v o N 5 1 ) i ( 9 1 0 2 v o N 5 1 1 2 0 2 v o N 5 1 0 2 0 2 v o N 5 1 ) i ( 9 1 0 2 v o N 5 1 e t a d t n e m e r u s a e M 7 1 0 2 v o N 9 2 7 1 0 2 v o N 9 2 8 1 0 2 v o N 5 1 8 1 0 2 v o N 5 1 2 2 0 2 v o N 9 2 2 2 0 2 v o N 9 2 3 2 0 2 v o N 5 1 3 2 0 2 v o N 5 1 8 1 0 2 v o N 5 1 3 2 0 2 v o N 5 1 8 1 0 2 c e D 1 2 8 1 0 2 c e D 1 2 3 2 0 2 v o N 5 1 3 2 0 2 v o N 5 1 8 1 0 2 c e D 1 2 3 2 0 2 v o N 5 1 e t a d t n a r G e t a d y r i p x E s t h g i r e c n a m r o f r e p d e s a b R S T – 1 2 0 2 e n u J 0 3 d e d n e r a e Y T R O P E R S ’ R O T C E R D I 1 2 0 2 e n u J 0 3 d e d n e r a e y e h t r o F - - - - - - - - - - - - - - - - - - - - - - - - - , 4 3 3 4 4 3 0 0 0 , 0 5 0 1 , , 3 3 3 4 4 3 0 0 0 , 0 5 0 1 , 0 0 0 2 7 3 , 0 0 0 3 2 2 , 0 0 0 2 7 3 , 0 0 0 3 2 2 , 0 0 0 2 7 3 , 0 0 0 3 2 2 , - - - - - - - - - - - - - - - - - - 3 3 3 , 5 2 2 1 , 7 6 6 , 0 5 4 2 , 0 0 0 , 6 7 6 3 , 4 3 3 , 4 9 3 1 , 3 3 3 , 4 9 3 1 , , 0 0 0 5 9 5 0 0 0 5 9 5 , 0 0 0 5 9 5 , 3 3 3 , 5 2 2 1 , 7 6 6 , 0 5 4 2 , 0 0 0 , 6 7 6 3 , 4 0 0 . % 0 2 l i N % 9 0 2 . 5 1 0 0 . 5 1 9 0 2 , 4 0 0 . % 0 2 l i N % 9 0 2 . 0 2 0 0 . 7 8 8 7 2 , 5 0 0 . % 0 7 l i N % 6 1 2 . 7 2 0 0 . 5 6 0 6 1 , 5 0 0 . % 0 7 l i N % 8 0 2 . 5 2 0 0 . 5 7 8 4 1 , 5 0 0 . % 0 7 l i N % 8 0 2 . 2 2 0 0 . 0 9 0 3 1 , 4 0 0 . % 0 7 l i N % 0 9 1 . 4 1 0 0 . 5 5 1 7 1 , 4 0 0 . % 0 7 l i N % 7 9 1 . 2 1 0 0 . 8 0 4 9 2 , 4 0 0 . % 0 7 l i N % 7 9 1 . 8 0 0 0 . 8 0 4 9 2 , 6 2 . 0 2 0 2 r e b m e v o N 5 1 n o g n i r i p x e s t h g i r e h t r o f 1 2 0 2 r e b m e v o N 5 1 d n a 0 2 0 2 r e b m e v o N 9 2 n o g n i r i p x e s t h g i r e h t r o f 1 2 0 2 r e b m e v o N 9 2 o t d r a w r o f d e l l o r ‘ r a e y t a e u s s i n o s t h g i r P M K : d n e a i c y n e S P r M r e l s t U M r M r e t t e J J r M e g a P G r M g n o r t s m r A W r M h c i v o n a a r T P r j M o r t s a C S r M t a e u s s i n o s t h g i r l a t o t P M K d n e r a e y $ A – e t a d t n a r g t a e c i r p e r a h S l d e i y d n e d i v i d d e t c e p x E l y t i l i t a o v d e t c e p x E s a w e t a d t n e m e r u s a e m e h T ) i ( $ A – e u a v r i a F l e t a r e e r f k s i R $ A – e u a v l l a t o T OT TO ENERGY ANNUAL REPORT 202 1 | 69 FINANCIAL REPORT DIRECTOR’S REPORT For the year ended 30 June 2021 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 issued to KMP within the 30 June 2019 financial year require a compound TSR of 15% per annum from the grant date to the measurement date in order to vest. All rights issued prior to 1 July 2018 require a compound TSR of 10% per annum from the grant date to the measurement date in order to vest. 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. 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 2021 is set out below. Key Management Personnel Directors Mr J Jetter Mr P Senycia Mr M Utsler(i) Mr G Page(ii) Mr K Small(iii) Executives Mr S Castro Mr P Trajanovich Mr W Armstrong Balance at start of year Granted as compensation Vested and exercised Lapsed/ expired Number % Balance on resignation as KMP Balance at end of year 1,804,667 2,769,000 - - 4,840,000 9,413,667 Balance at start of year Granted as compensation - 4,982,000 7,352,000 12,334,000 - - - - - - - - - - - - - - - - Vested and exercised - - - - - - - - - - - Lapsed/ expired - - - - - - (4,982,000) 100% - - (4,982,000) 1,804,667 2,769,000 - - - 4,573,667 4,840,000 4,840,000 Balance on resignation as KMP Balance at end of year - - 7,352,000 7,352,000 (i) (ii) (iii) Mr M Utsler was appointed Managing Director and Chief Executive Officer 11 September 2020 Mr G Page was appointed Non-executive Director 17 July 2020 Mr K Small resigned as Director on 30 April 2021. No longer a KMP from 1 May 2021 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 to key management personnel during the financial year. 70 | OTTO ENE RGY ANNUAL REPORT 2021 27 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 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 Directors Mr J Jetter Mr M Utsler(i) Mr P Senycia Mr G Page(ii) Mr K Small(iii) Executives Mr W Armstrong Mr S Castro Mr P Trajanovich Balance at start of year Purchased during the year 57,881,668 - 8,691,134 - 49,486,383 116,059,185 - 5,000,000 - - - 5,000,000 750,000 - - - 758,000 1,508,000 117,567,185 - - 5,000,000 Received through conversion of performance rights during the year Sold during the year Balance on resignation as KMP Balance at end of year - - - - - - - - - - - - - - - - - - - - - - 49,486,383 49,486,383 - 49,486,383 57,881,668 5,000,000 8,691,134 - 71,572,802 750,000 - 758,000 1,508,000 73,080,802 (i) (ii) (iii) Mr M Utsler was appointed Managing Director and Chief Executive Officer 11 September 2020 Mr G Page was appointed Non-executive Director 17 July 2020 Mr K Small resigned as Director on 30 April 2021. No longer a KMP from 1 May 2021 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 (2020: nil). End of Remuneration Report Diversity Proportion of women employees at 30 June 2021: Whole organisation* Senior executive positions Board Number 3/12 0/4 Proportion 25% 0% 0/3 0% *Includes three non-executive Directors OT TO ENERGY ANNUAL REPORT 202 1 | 71 28 FINANCIAL REPORTDIRECTOR’S REPORT For the year ended 30 June 2021 Performance rights on issue at 30 June 2021 Date granted 29 November 2017 15 November 2018 21 December 2018 Date of expiry 29 November 2022 15 November 2023 15 November 2023 Number 2,788,667 1,785,000 19,371,000 23,944,667 Options on issue at 30 June 2021 Date granted Date of expiry 4 November 2019 4 November 2023 Exercise Price $A0.08 Number 42,500,000 42,500,000 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 to employees at 30 June 2021. 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 59 to 71. This report is made in accordance with a resolution of Directors. Mr Michael Utsler Executive Chairman 28 September 2021 72 | OTTO ENE RGY ANNUAL REPORT 2021 29 FINANCIAL REPORT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 PHILLIP MURDOCH TO THE DIRECTORS OF OTTO ENERGY LIMITED As lead auditor of Otto Energy Limited for the year ended 30 June 2021, 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. Phillip Murdoch Director BDO Audit (WA) Pty Ltd Perth, 28 September 2021 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. OT TO ENERGY ANNUAL REPORT 202 1 | 73 FINANCIAL REPORTCONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2021 Note 2021 US$’000 2020 US$’000 Operating Revenue (Net) Cost of sales Gross profit Other income Loss on disposal of property, plant and equipment Profit on disposal of subsidiary Exploration expenditure Impairment Finance income/(costs) Gains/(losses) on derivative financial instruments Administration and other expenses Loss before income tax Income tax expense Loss from continuing operations Profit from discontinued operations Loss for the period after tax Other comprehensive income that may be recycled to profit or loss Total other comprehensive income Total comprehensive loss for the year Earnings per share from continuing operations Basic and diluted loss per share (US cents) Earnings per share attributable to the ordinary equity holders of the company Basic and diluted loss per share (US cents) 2 3 2 4 5 13 6 15 6 8 19 7 7 30,137 (10,198) 19,939 203 - 7,971 (2,676) (12,850) (2,720) (10,313) (4,187) (4,633) (5) (4,638) 4,188 (450) 23,028 (10,302) 12,726 244 (3) - (13,067) - (2,392) 5,971 (4,835) (1,356) (2) (1,358) - (1,358) - (450) - (1,358) (0.10) (0.05) (0.01) (0.05) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 74 | OTTO ENE RGY ANNUAL REPORT 2021 31 FINANCIAL REPORTCONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2021 Note 2021 US$’000 2020 US$’000 Current assets Restricted cash Cash equivalents Trade and other receivables Derivative financial instruments Financial assets at fair value through profit or loss Other financial assets Total current assets Non-current assets Oil and gas properties Right-of-use assets Derivative financial instruments Property, plant and equipment Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings (net of transaction costs) Derivative financial instruments Lease liabilities Provisions Total current liabilities Non-current liabilities Borrowings (net of transaction costs) Derivative financial instruments Lease liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 9 9 11 15 12 12 13 15 12 14 16 15 17 16 15 17 18 19 5,380 5,720 3,884 - 8,129 437 23,550 36,963 242 - 201 375 37,781 61,331 1,675 8,179 4,703 151 22 14,730 1,950 809 123 3,820 6,702 21,432 39,899 5,000 11,551 2,111 2,907 - 5,373 26,942 39,793 402 1,254 288 600 42,337 69,279 1,958 8,179 - 139 194 10,470 10,127 - 274 3,757 14,158 24,628 44,651 133,223 10,414 (103,738) 39,899 133,242 14,697 (103,288) 44,651 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. OT TO ENERGY ANNUAL REPORT 202 1 | 75 32 FINANCIAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2021 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2021 Contributed equity Contributed equity Share-based payments reserve Share-based payments reserve Foreign currency translation reserve US$’000 Foreign currency translation reserve US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 Accumulated Accumulated losses losses Total Total Balance at 1 July 2019 Balance at 1 July 2019 Loss for the period Loss for the period Other comprehensive income Other comprehensive income Total comprehensive loss for the year Total comprehensive loss for the year 125,041 125,041 - - - - - - 9,879 9,879 - - - - - - 4,188 4,188 - - - - - - (101,930) (101,930) (1,358) (1,358) - - (1,358) (1,358) 37,178 (1,358) - (1,358) 37,178 (1,358) - (1,358) Transactions with owners in their Transactions with owners in their capacity as owners: capacity as owners: Issue of shares (net of costs) Issue of shares (net of costs) Issue of options – Note 23 Issue of options – Note 23 Equity benefits issued to employees Equity benefits issued to employees Balance at 30 June 2020 Balance at 30 June 2020 8,201 8,201 - - - - 133,242 133,242 - 528 102 10,509 - 528 102 10,509 - - - - - - 4,188 4,188 - - - - - - (103,288) (103,288) 8,201 528 102 44,651 8,201 528 102 44,651 Balance at 1 July 2020 Balance at 1 July 2020 Gain (loss) for the period Gain (loss) for the period Profit from discontinued operations Profit from discontinued operations Total comprehensive loss for the year Total comprehensive loss for the year 133,242 133,242 - - - - - - 10,509 - - - 10,509 - - - 4,188 4,188 - - - - - - (103,288) (4,638) 4,188 (450) (103,288) (4,638) 4,188 (450) 44,651 (4,638) 4,188 (450) 44,651 (4,638) 4,188 (450) Transactions with owners in their Transactions with owners in their capacity as owners: capacity as owners: Issue of shares (net of costs) Issue of shares (net of costs) Issue of options – Note 23 Issue of options – Note 23 Equity benefits issued to employees Equity benefits issued to employees Foreign currency translation Foreign currency translation Balance at 30 June 2021 Balance at 30 June 2021 (19) (19) - - - - - - 133,223 133,223 - - (95) - 10,414 - - (95) - 10,414 - - - (4,188) - - - - (4,188) - - - - - - - - - (103,738) (103,738) (19) (19) - - (95) (95) (4,188) (4,188) 39,899 39,899 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 76 | OTTO ENE RGY ANNUAL REPORT 2021 33 33 FINANCIAL REPORT CONSOLIDATED STATEMENT OF CASHFLOWS For the year ended 30 June 2021 Note 2021 US$’000 2020 US$’000 Cash flows from operating activities Oil and Gas Sales (net) Other income Payments to suppliers and employees Payments for exploration and evaluation Interest received/(paid) Income tax paid Net cash inflow /(outflow) from operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for development and evaluation Bond for development asset Net cash outflow from investing activities Cash flows from financing activities Net proceeds from borrowings / (loan repayments) Transaction costs relating to borrowings Proceeds from issue of shares Transaction costs - shares Net cash inflow/(outflow) from financing activities 10 Net (decrease)/increase 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 9 28,370 203 (7,856) (3,676) (1,805) (4) 15,232 (172) (11,255) (50) (11,477) (9,200) - - (19) (9,219) (5,464) 16,551 13 11,100 24,217 176 (12,341) (11,189) (1,582) (2) (721) (418) (16,206) 43 (16,581) 20,700 (2,545) 8,785 (585) 26,355 9,053 7,383 115 16,551 There is no impact on the statement of cashflows from discontinued operations. The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. OT TO ENERGY ANNUAL REPORT 202 1 | 77 34 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 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 28 September 2021. 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 2020. Refer to note 30 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 21. 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. 78 | OTTO ENE RGY ANNUAL REPORT 2021 35 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 ABOUT THIS REPORT (continued) 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. 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 Otto’s financial statements have been prepared on a going concern basis. 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 8 Note 13 Note 17 Note 23 Income tax Oil and gas properties Provisions Share-based payments Impact of Coronavirus (COVID-19) pandemic Judgement has been exercised in considering the impacts that the Coronavirus (COVID-19) pandemic has had, or may have, on the company based on known information. Other than as addressed in specific notes, there does not currently appear to be either any significant impact upon the financial statements or any significant uncertainties with respect to events or conditions which may impact the company unfavourably as at the reporting date OT TO ENERGY ANNUAL REPORT 202 1 | 79 36 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 Segment information Revenue and other income Cost of sales Profit on sale of subsidiary Exploration expenditure Financial performance 1. 2. 3. 4. 5. 6. Other expenses 7. 8. 9. 10. Reconciliation of loss after income tax to net cash outflow from Earnings per share Income tax Cash and cash equivalents operating activities Operating assets and liabilities 11. Trade and other receivables 12. Other financial assets 13. Oil and gas properties 14. Trade and other payables 15. Derivative financial liabilities 16. 17. Provisions Interest bearing loans and borrowings Capital structure, financial instruments and risk 18. Contributed equity 19. Reserves 20. Financial instruments Interest in joint operations Other disclosures 21. Subsidiaries 22. 23. Share-based payments 24. Related parties 25. Auditor’s remuneration 26. Contingent liabilities 27. Commitments 28. Events after the reporting period 29. Parent entity disclosures 30. New accounting standards and interpretations 81 82 84 84 84 85 85 86 88 88 90 90 91 95 95 96 97 99 99 100 106 106 107 111 111 112 112 113 114 115 80 | OTTO ENE RGY ANNUAL REPORT 2021 37 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 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) 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. The Group had two reportable segments during 2021. Reportable segments exclude results from discontinued operations. The segment information for the reportable segments for the year ended 30 June 2021 is as follows: 2021 Operating Revenue Cost of Production Gross Profit Other income Profit on disposal of subsidiary Exploration expenditure Impairment Finance costs Losses on derivative financial instruments Administration and other expenses Profit (Loss) before income tax from continuing operations Income tax expense Profit (Loss) after income tax from continuing operations Total non-current assets Total assets Total liabilities Gulf of Mexico (USA) US$’000 30,137 (10,198) 19,939 178 - (2,476) (12,850) (2,877) (10,313) (3,037) (11,436) - (11,436) 37,777 47,350 21,099 Other Consolidated US$’000 - - - 25 7,971 (200) - 157 - (1,150) 6,803 (5) 6,798 4 13,981 333 US$’000 30,137 (10,198) 19,939 203 7,971 (2,676) (12,850) (2,720) (10,313) (4,187) (4,633) (5) (4,638) 37,781 61,331 21,432 OT TO ENERGY ANNUAL REPORT 202 1 | 81 38 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 1. Segment information (continued) The segment information for the reportable segments for the year ended 30 June 2020 is as follows: 2020 Gulf of Mexico (USA) US$’000 Other Consolidated US$’000 US$’000 Operating Revenue Cost of Production Gross Profit Other income Loss on disposal of property, plant and equipment Exploration expenditure Finance costs Gains on derivative financial instruments 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 2. Revenue and other income South Marsh 71 (SM71) Sales(i) (iv) Oil Sales Gas Sales Facility Fee Total Sales Less: Royalties(i) SM71 Operating Revenue (Net) Bulleit Field (GC-21) Sales(i) (iv) Oil Sales Gas Sales Natural Gas Liquids Sales Total Sales Less: Royalties(i) GC-21 Operating Revenue (Net) 82 | OTTO ENE RGY ANNUAL REPORT 2021 23,028 (10,302) 12,726 196 (3) (13,231) (2,388) 5,971 (4,035) (764) - (764) 42,086 63,199 24,145 - - - 48 - 164 (4) - (800) (592) (2) (594) 251 6,080 483 23,028 (10,302) 12,726 244 (3) (13,067) (2,392) 5,971 (4,835) (1,356) (2) (1,358) 42,337 69,279 24,628 2021 US$’000 2020 US$’000 21,524 1,021 - 22,545 (4,212) 18,333 414 127 28 569 (107) 462 21,488 965 380 22,793 (4,217) 18,576 - - - - - - 39 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 2. Revenue and other income (continued) Lightning Sales(ii) (iv) Oil Sales Gas Sales Natural Gas Liquids Sales Lightning Operating Revenue (Net) Total Operating Revenue (Net) Interest income(iii) Other income 2021 US$’000 2020 US$’000 2,890 7,058 1,394 11,342 30,137 2021 US$’000 1 202 203 1,581 2,242 629 4,452 23,028 2020 US$’000 68 176 244 (i) SM71 and GC-21 operating revenue is shown net of royalty payments payable to the (USA) Office of Natural Resources Revenue. (ii) Proceeds from the sale of oil and gas from the Lightning field are received net of royalty payments. (iii) Interest income is recognised using the effective interest rate method. (iv) Gross oil revenue (US$21.524m) from Gulf of Mexico SM71 and Gross oil revenue (US$0.414m) from Gulf of Mexico GC-21, were sold to the same single customer. Net gas revenue (US$1.021m) from Gulf of Mexico SM71, net oil revenue (US$2.890m) and net gas revenue (US$8.452m) from Lightning were all sold to different single customers. Net gas revenue (US$0.155m) from Gulf of Mexico GC-21 was sold to multiple different customers. Recognition and measurement Revenue from the sale of SM 71 oil & gas is recognised and measured in the accounting period in which the goods and/or services are provided based on the amount of the transaction price allocated to the performance obligations. The performance obligation is the supply of oil & gas over the contractual term; the units of supply represent a series of distinct goods that are substantially the same with the same pattern of transfer to the customer. The performance obligation is considered to be satisfied as the customer receives the supply through the pipeline, based on the units delivered. Hence revenue is recognised over time. Revenue from Lightning oil sales is recognised upon transfer of the product to the purchaser’s transportation mode, currently via truck for oil, and at the production facilities for gas which is the point that title passes. Hence revenue is recognized at a point in time. Production from GC 21 travels from the well via subsea flowline to the Talos owned GC 18 platform where the production is processed and sent to separate oil and gas transportation pipelines. Revenue from the sale of GC- 21 oil is recognized at the inlet to the Shell Boxer Pipeline where the sale takes place. Gas is transported through the Manta Ray and Nautilus pipeline systems delivering gas at the Enterprise owned Neptune gas plant where the gas is processed and NGLs extracted from the gas stream. Revenue is recognized separately at this point for NGLs and residue gas as each product is sold at this point, hence revenue is recognised at a point in time. OT TO ENERGY ANNUAL REPORT 202 1 | 83 40 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 3. Cost of Sales Cost of Sales Gathering and Production charges Amortisation of capitalised developments – Note 13 Total Cost of Sales 4. Profit on disposal of subsidiary Profit on sale of Borealis Alaska LLC Total Profit on sale of investments 2021 US$’000 2020 US$’000 4,624 5,574 10,198 3,738 6,564 10,302 2021 US$’000 2020 US$’000 7,971 7,971 - - On 20 January 2021, Otto advised it had reached agreement to sell the Otto subsidiary, Borealis Alaska LLC (Borealis) which held a 10.8% interest in the 44,463 acre Talitha Unit in Alaska to the acreage operator Pantheon Resources (Pantheon). As part of the sale terms, Otto will retain an existing a 0.5% of 8/8ths overriding royalty interest (ORRI) in any future production from the Talitha Unit. On 29 March 2021, the company advised that Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. These shares are subject to a lock up period through 30 June 2021. A profit on sale of US$7,970,594 was recognised in the consolidated statement of profit or loss and other comprehensive income. 5. Exploration expenditure Exploration expenditure – Gulf of Mexico/Gulf Coast Exploration expenditure – Alaska North Slope 2021 US$’000 2020 US$’000 2,476 200 2,676 13,231 (164) 13,067 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 are expensed. Once an exploration discovery has been determined, evaluation and development expenditure from that point on is capitalised to the Consolidated Statement of Financial Position as oil and gas properties. Exploration expenditure in relation to the Gulf of Mexico/Gulf Coast includes the exploration drilling of the Beluga (US$2.1M) prospect. 84 | OTTO ENE RGY ANNUAL REPORT 2021 41 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 6. Other expenses i) Finance costs Interest and commitment fees on borrowings Interest expense leases Amortisation of borrowing costs Accretion of decommissioning fund Gain on investments at fair value Other Total finance costs/ (income) ii) Administration and other expenses Employee benefits expense Defined contribution superannuation expense Share-based payment (reversal)/expense Other employee benefits expenses Total employee benefits expense Depreciation expense(i) Right-of-use assets Right-of-use assets – buildings Right-of-use assets – plant and equipment Total depreciation expense right-of-use assets Property, plant and equipment Furniture and equipment Total depreciation expense Corporate and other costs Business development Foreign currency (gains)/losses Total administration and other expenses 2021 US$’000 2020 US$’000 1,805 25 1,023 23 (158) 2 2,720 49 (95) 2,454 2,408 138 22 160 94 254 1,177 361 (13) 1,525 4,187 1,650 25 679 25 - 13 2,392 84 102 3,070 3,256 103 21 124 82 206 1,097 391 (115) 1,373 4,835 (i) Depreciation and amortisation charges are included above in Note 6 other expenses and Note 3 Cost of sales. Total depreciation and amortisation for the Consolidated Entity is US$5.8 million (2020: US$6.8 million) 7. Earnings per share Basic earnings per share is calculated by dividing the profit or loss attributable to owners of the Company, excluding any costs of servicing equity (other than dividends), by the weighted average number of ordinary shares, adjusted for the bonus element. OT TO ENERGY ANNUAL REPORT 202 1 | 85 42 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 7. Earnings per share (continued) Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. The following table reflects the income and share data used in the basic and diluted EPS calculations: Loss after tax from continuing operations Profit after tax from discontinued operations Loss attributable to owners of the Company (US$’000) Weighted average number of ordinary shares on issue for basic and diluted earnings per share (number) Performance rights on issue Options on issue Basic and diluted loss per share from continuing operations (US cents) Basic and diluted profit per share from discontinued operations (US cents) Basic and diluted loss per share attributable to owners of the Company (US cents) 8. 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 from continuing operations Profit before income tax from discontinued operations Loss before income tax Prima facie income tax at 30% 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 Income tax expense Deferred tax assets Temporary differences – provisions and other corporate costs – exploration and evaluation costs 86 | OTTO ENE RGY ANNUAL REPORT 2021 2021 2020 (4,638) 4,188 (450) (1,358) - (1,358) 4,795,009,773 2,935,246,867 23,944,667 42,500,000 (0.10) 35,534,667 42,500,000 (0.05) 0.09 (0.01) - (0.05) 2021 US$’000 2020 US$’000 5 - - 5 (4,633) 4,188 (445) (133) 1,188 - (1,753) 704 5 235 - 235 2 - - 2 (1,356) - (1,356) (407) 3,172 - (4,026) 1,263 2 337 - 337 43 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 8. Income tax (continued) 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 2021 US$’000 2020 US$’000 7,819 12,450 20,504 (9,473) (11,031) - 7,351 11,358 19,046 (10,579) (8,468) - 2021 US$’000 2020 US$’000 9,473 (9,473) - 10,579 (10,579) - 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. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively OT TO ENERGY ANNUAL REPORT 202 1 | 87 44 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 8. Income tax (continued) 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. 9. Cash and cash equivalents Cash at bank and on hand Restricted cash – debt service reserve account (DSRA) Balance at end of period 2021 US$’000 2020 US$’000 5,720 5,380 11,100 11,551 5,000 16,551 Recognition and measurement Cash at bank and on hand 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. On 2nd November 2019, the Company entered into a three-year senior secured US$55 million term debt facility (Facility) with Macquarie Bank Limited (Macquarie). Under the terms of the agreement a Debt Service Reserve Account (DSRA) is required with a balance of the greater of 6 months of the forecast debt service or US$5,000,000. The DSRA may only be applied in reduction of the loan. 10. Reconciliation of loss after income tax to net cash outflow from operating activities 2021 US$’000 2020 US$’000 Profit (Loss) after income tax Non-cash items: Impairment Depreciation expense – furniture and equipment Foreign currency translation reserve reversal Profit on sale of subsidiary Gain on investments at fair value Share-based payments (Gain) Loss on derivative instruments at fair value Finance costs – see note 6(i) Amortisation of capitalised developments – see note 3 Other non-cash items 88 | OTTO ENE RGY ANNUAL REPORT 2021 (450) (1,358) 12,850 254 (4,188) (7,971) (158) (95) 9,673 1,071 5,574 238 - 206 - - - 102 (4,035) 729 6,564 (360) 45 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 10. Reconciliation of loss after income tax to net cash outflow from operating activities (continued) Change in assets and liabilities: (Increase)/Decrease in trade and other receivables (Increase) Decrease in other assets Increase in trade and other payables Increase/(Decrease) in provisions Net cash outflow from operating activities Changes in financing liabilities arising from cash flow and non-cash flow items Borrowings Balance at the start of the year Proceeds/repayment on borrowings Borrowing transaction costs Amortisation borrowing costs Balance at the end of the year 2021 US$’000 2020 US$’000 (1,767) 407 (24) (182) 15,232 18,306 (9,200) - 1,023 10,129 1,189 (4,239) 466 15 (721) - 20,700 (3,073) 679 18,306 OT TO ENERGY ANNUAL REPORT 202 1 | 89 46 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 OPERATING ASSETS AND LIABILITIES 11. Trade and other receivables Trade receivables(i) Other receivables 2021 US$’000 2020 US$’000 3,791 93 3,884 2,024 87 2,111 Recognition and measurement Other receivables are initially recognised at fair value and subsequently measured at amortised cost less an allowance for uncollectible amounts. Impairment The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance at the amount equal to the expected lifetime credit losses. In using this practical expedient, the Group uses its historical experience, external indicators and forward looking information to calculate the expected credit losses using a provision matrix. The Group considers a financial asset in default when contractual payment are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. (i) Trade receivable relates to June 2021 Lightning (net of royalties), SM 71 and GC-21 oil and gas sales (before deduction of SM 71 and GC-21 royalties). 12. Other financial assets Current Financial assets at fair value through profit or loss(i) Prepayments Other assets Non-current Bonds(ii) 2021 US$’000 2020 US$’000 8,129 348 89 8,566 375 375 - 5,287 86 5,373 600 600 (i) On 20 January 2021, Otto advised it had reached agreement to sell the Otto subsidiary, Borealis Alaska LLC (Borealis) which held a 10.8% interest in the 44,463 acre Talitha Unit in Alaska to the acreage operator Pantheon Resources (Pantheon). As part of the sale terms, Otto will retain an existing a 0.5% of 8/8ths overriding royalty interest (ORRI) in any future production from the Talitha Unit. On 29 March 2021, the company advised that Otto received 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) in exchange for Borealis Alaska LLC. These shares are subject to a lock up period through 30 June 2021 (ii) Development bond for SM 71 (US$325,000), GC-21 (US$50,000) 90 | OTTO ENE RGY ANNUAL REPORT 2021 47 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 12. Other financial assets (continued) 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. 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. Financial assets held at fair value through profit or loss (FVPL) The Group’s classification of financial assets held at fair value through profit or loss applies to equity investments which are held for trading or where the FVOCI election has not been applied. They are carried on the balance sheet at fair value with changes in fair value recognised in profit or loss with any associated changes in fair value recognised in the income statement. Financial assets held at fair value through other comprehensive income (FVOCI) The Group’s classification of financial assets held at fair value through other comprehensive income applies to equity investments where the Group has made the irrevocable election to present the fair value gains or losses on revaluation of the asset in other comprehensive income. This election can be made for each investment; however, it is not applicable to equity investments which are held for trading. These assets are included in non- current assets unless management intends to dispose of the investment within 12 months of the reporting date. These instruments are recognised at fair value, with changes in fair value being recognised directly in other comprehensive income. Management have elected not to apply the FVOCI election and to hold the equity investment in Pantheon shares at fair value through profit and loss. The increase in fair value of US$0.158 million was recognised through profit and loss at reporting date. (PANR GBP0.4125 and USD/GBP exchange rate 1.3807). 13. Oil and gas properties Producing and development assets At cost SM71 balance at beginning of year SM71 expenditure for the year SM71 amortisation of assets SM71 balance at end of year Lighting balance at beginning of year Lightning expenditure for the year Lightning amortisation of assets Lightning balance at end of year 2021 US$’000 2020 US$’000 18,890 70 (4,000) 14,960 5,984 (42) (1,302) 4,640 23,632 768 (5,510) 18,890 1,934 5,104 (1,054) 5,984 OT TO ENERGY ANNUAL REPORT 202 1 | 91 48 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 13. Oil and gas properties (continued) GC-21 balance at beginning of year GC-21 expenditure for the year GC-21 impairment GC-21 amortisation of assets GC-21 balance at end of year 2021 US$’000 2020 US$’000 14,919 15,566 (12,850) (272) 17,363 5,416 9,503 - - 14,919 Total oil and gas properties including decommissioning assets 36,963 39,793 Recognition and measurement i) Producing and development assets 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 as prescribed by the relevant accounting standards. The carrying value of oil and gas properties is reviewed annually by directors to ensure it is not in excess of the recoverable amount. The recoverable amount of an asset or CGU is the greater of its fair value less costs of disposal (FVLCD) and its value-in-use (VIU), using an asset’s estimated future cashflows (as described below) discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 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. 92 | OTTO ENE RGY ANNUAL REPORT 2021 49 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 13. Oil and gas properties (continued) 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 costs relating to commercially producing 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. 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. Impairment Assets are tested for impairment in line with AASB 136. 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, which is a product of quantity of reserves, prices, and operating costs, less the cost to sell and value in use. Impairment indicators were identified on the GC-21 oil and gas asset during the year in relation to the lower- than-expected performance and cost overruns on the Bulleit well at Green Canyon (GC-21) as per the following table. Drilling Subsea Tieback Platform Modifications Completion Costs Original Estimated Cost Updated Estimated Cost US$millions US$millions 7.4 10.8 1.4 3.9 23.5 16.7 12.6 3.2 6.7 39.2 OT TO ENERGY ANNUAL REPORT 202 1 | 93 50 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 13. Oil and gas properties (continued) At 31 December 2020, the Group assessed the GC-21 Bulleit cash-generating unit and determined that there was a US$US12.8 million impairment loss. Recoverable value at 31 December 2020 was calculated using a VIU calculation. The estimated future cash flows for the VIU calculation were based on estimates, the most significant of which are hydrocarbon reserves (excluding uncommitted developments), future production profiles, commodity prices, operating costs and committed development costs. Estimates of future commodity prices were based on the Group’s best estimate of future market prices with reference to external market analyst’s forecasts, current spot prices and forward curves, which averaged US$49.45/Bbl oil and US$2.58/MMBtu gas. The discount rates applied to the future forecast cash flows were based on the weighted average cost of capital. The pre-tax discount rates that has been applied to non-current assets was 14%. Sensitivity To the extent oil and gas cash generating units have been written down to their respective recoverable amounts in the current and prior years, any change in key assumptions on which valuations are based would further impact asset carrying values. When modelled in isolation, it is estimated that changes in key assumptions would result in the following additional impairment: Oil and gas assets GC-21 Production decrease 5% US$’000 1,425 Discount rate increase 0.5% US$’000 327 Oil and gas price decrease 10% all years US$’000 2,985 There were no impairment indicators identified for the other assets at 30 June 2021. Amortisation Estimation of amortisation of the SM 71, GC-21 and Lightning oil and gas assets is based on the updated 2P reserves estimate and estimated future development costs as at 30 June 2021. Producing assets are amortised on a unit of production basis on 2P reserves. The reserves for SM-71 Lightning and Green Canyon 21 were compiled by Otto’s independent consultant Ryder Scott Company. The method of amortisation necessitates the estimation of oil and gas reserves over which the carrying value of the relevant asset will be expensed to profit or loss. See below for judgements relating to reserve estimates. Reserve Estimates Estimation of reported recoverable quantities of proved and provable reserves include judgemental assumptions regarding commodity prices, exchange rates, discount rates and production and transportation cost for future cash flows. It also requires interpretation of complex geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. Changes in reported reserves can impact assets’ carrying amounts, provision for restoration and recognition of deferred tax asses due to changes in expected future cash flows. Reserves are integral to the amount of depreciation, amortisation and impairment charged to the income statement. 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. 94 | OTTO ENE RGY ANNUAL REPORT 2021 51 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 13. Oil and gas properties (continued) 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. 14. Trade and other payables Trade payables Other Accrued expenses 2021 US$’000 2020 US$’000 1,526 149 1,675 1,720 238 1,958 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. 15. Derivative financial instruments Current assets Balance at the beginning of the period Unrealised gains on oil price fixed swaps Current oil price fixed swaps – held at fair value through profit or loss Non-current assets Balance at the beginning of the period Unrealised gains on oil price fixed swaps Non-current oil price fixed swaps – held at fair value through profit or loss Total derivative financial instrument assets 2021 US$’000 2020 US$’000 - - - - - - - 126 2,781 2,907 - 1,254 1,254 4,161 OT TO ENERGY ANNUAL REPORT 202 1 | 95 52 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 15. Derivative financial instruments (continued) Current liability Balance at the beginning of the period Unrealised losses on oil and natural gas price fixed swaps Current oil price fixed swaps – held at fair value through profit or loss Non-current liability Balance at the beginning of the period Unrealised losses on oil and natural gas price fixed swaps Non-current oil and natural gas price fixed swaps – held at fair value through profit or loss Total derivative financial instrument liabilities Realised gains/(losses) on oil and natural gas price fixed swaps Unrealised gains/(losses) on oil and natural gas price fixed swaps Total(gain/(loss) on derivative financial instruments 2021 US$’000 2020 US$’000 (2,907) 7,610 4,703 (1,254) 2,063 809 5,512 - - - - - - 2021 US$’000 2020 US$’000 (640) (9,673) (10,313) 1,936 4,035 5,971 Recognition and measurement Derivatives are initially recognised at their fair value when the Group becomes a party to the contract and are subsequently measured at fair value through profit or loss. The Group has not adopted Hedge Accounting under AASB 9 Financial Instruments. 16. Interest bearing loans and borrowings Borrowings Current Secured Principal outstanding Less: Facility transaction costs Balance at the end of the period Non – Current Secured Principal outstanding Less: Facility transaction costs Balance at the end of the period 2021 US$’000 2020 US$’000 9,200 (1,021) 8,179 9,200 (1,021) 8,179 2,300 (350) 1,950 11,500 (1,373) 10,127 96 | OTTO ENE RGY ANNUAL REPORT 2021 53 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 16. Interest bearing loans and borrowings (continued) On 2nd November 2019, the Company entered into a three-year senior secured US$55 million term debt facility (Facility) with Macquarie Bank Limited (Macquarie). The key terms of the facility were disclosed in the 30 June 2020 Annual Report. On 21 January 2021, the company announced an amendment to the Facility. The amendments are as follows: • • • Extension of access to and utilisation of the US$10 million Tranche A2 through to 31 March 2022 Extension of time to identify and progress the GC 21 partners’ well intervention plans (until 31 July 2021) In the interim, pending a GC 21 resolution, establish a minimum quarterly production rate average of 1,900 BOEPD At 30 June 2021, US$25 million was drawn under the Facility and US$13.5 million had been repaid. 42.5 million options vested in November 2019 and an expense of US$528,000 has been capitalised against borrowings and is amortised over the life of the facility. The fair value of the options was calculated using a Black-Scholes model. Transaction costs are accounted for under the effective interest rate method. These costs are incremental costs that are directly attributable to the Facility and include Facility origination fees, legal fees and other costs relating to the establishment of the Facility. The balance of unamortised transaction costs of US$1.4 million is offset against the facility borrowings of US$11.5 million. Total capitalised transaction costs relating to the facility agreement are US$3.1 million of which $1.0 million was amortised during the period (2020: $0.7 million) The facility agreement has certain financial covenants that the Company has to comply with. All such financial covenants have been complied with in accordance with the facility agreement. 17. Provisions Current Employee benefits Tax Non-current Employee benefits (i) Decommissioning fund – GC-21 Bulleit(ii) Decommissioning fund – Lightning(ii) Decommissioning fund – SM 71 (ii) 2021 US$’000 2020 US$’000 18 4 22 - 1,694 175 1,951 3,820 191 3 194 11 1,673 209 1,864 3,757 (i) The non-current provision for employee benefits includes amounts not expected to be settled within the next 12 months. (ii) The total present value of the estimated expenditure required to decommission the wells and facilities. The expenditure is expected to be settled at the end of the field life for the 2P production profile. OT TO ENERGY ANNUAL REPORT 202 1 | 97 54 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 17. Provisions (continued) 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. 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. 98 | OTTO ENE RGY ANNUAL REPORT 2021 55 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 CAPITAL STRUCTURE, FINANCIAL INSTRUMENTS AND RISK 18. Contributed equity Share capital Balance at beginning of year Shares issued – placement Shares issued – entitlement offers Balance at end of year (i) Share placements 2021 Number 4,795,009,773 - - 4,795,009,773 2020 Number 2021 US$’000 2020 US$’000 2,460,464,725 231,109,326(i) 2,103,435,722(ii) 4,795,009,773 133,242 - (19) 133,223 125,041 780 7,421 133,242 a. March 2020 at AU0.06 per share, converted to USD at the exchange rate on the transaction date of 0.6166. Net of share issue costs. (ii) Share entitlements: a. Institutional entitlement issued April 2020 at AUD0.06 per share, converted to USD at the weighted average exchange rate on the transaction date of 0.6104. Net of share issue costs. b. Retail entitlement issued April 2020 at AUD0.06 per share, converted to USD at the weighted average exchange rate for the transaction dates of 0.6471. Net of share issue costs. Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number and amount paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. The ordinary shares have no par value and the Company does not have a limited amount of authorized capital. (cid:3) Options Information relating to the Otto Energy Employee Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the reporting period, is set out in Note 23. Performance rights Information relating to the Otto Energy Employee Performance Rights Plan, including details of performance rights issued, exercised and lapsed during the financial year and performance rights outstanding at the end of the reporting period, is set out in Note 23. Recognition and measurement Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 19. Reserves Share-based payments reserve Foreign currency translation reserve 2021 US$’000 2020 US$’000 10,414 - 10,414 10,509 4,188 14,697 OT TO ENERGY ANNUAL REPORT 202 1 | 99 56 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 19. Reserves (continued) Share-based payments reserve Balance at beginning of year Options reserve Share-based payment expense Balance at end of year Foreign currency translation reserve Balance at beginning of year Balance at end of year 2021 US$’000 2020 US$’000 10,509 - (95) 10,414 - - 9,879 528 102 10,509 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 26 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. The FCTR balance has been carried forward since 2011 when the functional currency for the financial statements of Otto Energy Philippines Inc. was changed from PHP to USD following the election by Otto Energy Philippines Inc to use USD as it’s functional currency. Otto Energy Philippines Inc was officially deregistered on 28 June 2021 and the associated foreign currency translation reserve reversed. This has been presented as profit from discontinued operations within the financial report. 20. 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 or Senior Commercial Manager 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 did 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. 100 | OTTO ENE RGY ANNUAL REPORT 2021 57 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 20. Financial instruments (continued) b) 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 USD to AUD exchange rate on Australian dollar 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 exchange rates. The exposure to currency risk is measured using sensitivity analysis and cash flow forecasting. The Board has formed the view that in the ordinary course of business 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. The company will undertake capital raising activities via the issue of new shares on the ASX. These capital raisings are priced and received in AUD. Over the time period of a capital raising there is some short-term exposure to movements in the AUD to USD exchange rates. There were no capital raising activities in the current financial year. A hypothetical change of 10% (2020: 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 2021, management has assessed that the entity’s exposure to foreign exchange movements is immaterial and therefore no further analysis is provided. c) Interest rate risk Interest rate risk is the risk that the Group’s financial position will fluctuate due to changes in market interest rates. At 30 June 2021 the Group’s exposure to the risk of changes in the market interest rates relates to interest income on cash and cash equivalents held with financial institutions and interest rate risk on borrowings. The restricted cash in the debt service reserve account held by Macquarie is non-interest bearing so excluded from this analysis. The financial instruments exposed to movements in variable interest rates are as follows: Cash at bank and on hand Borrowings (excludes capitalised borrowing costs) 2021 US$’000 2020 US$’000 5,720 (11,500) (5,780) 11,551 (20,700) (9,149) The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. The 1.0% sensitivity is based on reasonably possible changes, over a financial year, using an observed range of historical short term deposit rate movements over the last 3 years. OT TO ENERGY ANNUAL REPORT 2021 | 101 58 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. Financial instruments (continued) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 For the year ended 30 June 2021 For the year ended 30 June 2021 For the year ended 30 June 2021 Judgements of reasonably possible movements 20. Financial instruments (continued) 20. Financial instruments (continued) 20. Financial instruments (continued) 20. Financial instruments (continued) Judgements of reasonably possible movements Judgements of reasonably possible movements Judgements of reasonably possible movements Judgements of reasonably possible movements Increase 100 basis points Decrease 100 basis points Effect on post tax losses Increase/(decrease) 2020 2021 US$’000 US$’000 58 (58) Effect on post tax losses Effect on post tax losses Effect on post tax losses Effect on post tax losses Increase/(decrease) Increase/(decrease) Increase/(decrease) Increase/(decrease) 2020 2020 2021 2021 2020 2021 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 2021 US$’000 2020 US$’000 91 (91) 58 58 58 (58) (58) (58) 91 91 91 (91) (91) (91) 91 (91) d) Commodity price risk Increase 100 basis points Increase 100 basis points Increase 100 basis points Increase 100 basis points Decrease 100 basis points Decrease 100 basis points Decrease 100 basis points Decrease 100 basis points d) Commodity price risk 58 Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, (58) to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price adjustments. Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price adjustments. Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the commodities being hedged. Currently, all of Otto’s hedges are oil swaps, and the Company has no three-way collars or short puts. d) Commodity price risk d) Commodity price risk d) Commodity price risk Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, Otto derives its revenue from the sale of oil and natural gas. As a result, the Company’s revenues are determined, to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to to a large degree, by prevailing oil and natural gas prices. Otto sells its production to purchasers pursuant to sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price sales agreements, with sales prices tied to industry standard published index prices, subject to negotiated price adjustments. adjustments. adjustments. Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations Otto typically utilizes commodity price hedge instruments to minimize exposure to short term price fluctuations by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary by using a series of swaps, costless collars and/or puts. Unrealized gains or losses associated with hedges vary period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve period to period, and are a function of hedges in place, the strike prices of those hedges and the forward curve pricing for the commodities being hedged. Currently, all of Otto’s hedges are oil swaps, and the Company has pricing for the commodities being hedged. Currently, all of Otto’s hedges are oil swaps, and the Company has pricing for the commodities being hedged. Currently, all of Otto’s hedges are oil swaps, and the Company has pricing for the commodities being hedged. Currently, all of Otto’s hedges are oil swaps, and the Company has no three-way collars or short puts. no three-way collars or short puts. no three-way collars or short puts. no three-way collars or short puts. As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via swaps, at a weighted average LLS price of US$50.19 as follows: via swaps, at a weighted average LLS price of US$50.19 as follows: via swaps, at a weighted average LLS price of US$50.19 as follows: via swaps, at a weighted average LLS price of US$50.19 as follows: As of 30 June 2021, Otto had a crude oil hedge book of 249,889 barrels of oil hedged through September 2022 via swaps, at a weighted average LLS price of US$50.19 as follows: Months Months Months Months Months July - December 2021 July - Decem ber 2021 July - Decem ber 2021 July - Decem ber 2021 July - Decem ber 2021 January - Septem ber 2022 January - Septem ber 2022 January - September 2022 January - Septem ber 2022 January - Septem ber 2022 Volume (Bbls) Volume (Bbls) Volume (Bbls) Volume (Bbls) Volume (Bbls) 122,650 122,650 122,650 127,239 122,650 122,650 127,239 127,239 127,239 127,239 Weighted Avg Price (LLS) Weighted Avg Weighted Avg Price (LLS) Price (LLS) Weighted Avg Price (LLS) Weighted Avg Price (LLS) US$50.47 US$50.47 US$50.47 US$49.92 US$50.47 US$49.92 US$49.92 US$50.47 US$49.92 US$49.92 Additionally, the Company had a natural gas hedge book 180,143 Mmbtu of natural gas hedged through Additionally, the Company had a natural gas hedge book 180,143 Mmbtu of natural gas hedged through Additionally, the Company had a natural gas hedge book 180,143 Mmbtu of natural gas hedged through Additionally, the Company had a natural gas hedge book 180,143 Mmbtu of natural gas hedged through December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: Additionally, the Company had a natural gas hedge book 180,143 Mmbtu of natural gas hedged through December 2021 via swaps, at a weighted average Houston Ship Channel price of US$3.11 as follows: Months Months Months Months Months July – December 2021 July – December 2021 July – December 2021 July – December 2021 July – December 2021 Volume (Mmbtu) Volume (Mmbtu) Volume (Mmbtu) Volume (Mmbtu) 180,143 180,143 180,143 180,143 Weighted Avg Price (HSC) Weighted Avg Price (HSC) Weighted Avg Price (HSC) US$3.11 US$3.11 US$3.11 Weighted Avg Price (HSC) US$3.11 Weighted Avg Price (HSC) US$3.11 Volume (Mmbtu) 180,143 The fair value of the derivative financial instruments held at fair value through profit and loss is based on The fair value of the derivative financial instruments held at fair value through profit and loss is based on The fair value of the derivative financial instruments held at fair value through profit and loss is based on The fair value of the derivative financial instruments held at fair value through profit and loss is based on forward prices as at 30 June 2021. An increase in forward prices would reduce the fair value of the derivative forward prices as at 30 June 2021. An increase in forward prices would reduce the fair value of the derivative forward prices as at 30 June 2021. An increase in forward prices would reduce the fair value of the derivative forward prices as at 30 June 2021. An increase in forward prices would reduce the fair value of the derivative financial liability held at fair value through profit and loss. An increase of 10% in trade forward prices would financial liability held at fair value through profit and loss. An increase of 10% in trade forward prices would financial liability held at fair value through profit and loss. An increase of 10% in trade forward prices would financial liability held at fair value through profit and loss. An increase of 10% in trade forward prices would result in a decrease of US$0.55 million of the fair value of the derivative financial liability held at fair value result in a decrease of US$0.55 million of the fair value of the derivative financial liability held at fair value result in a decrease of US$0.55 million of the fair value of the derivative financial liability held at fair value result in a decrease of US$0.55 million of the fair value of the derivative financial liability held at fair value through the profit or loss. A decrease of 10% in trade forward prices would result in an increase of US$0.55 through the profit or loss. A decrease of 10% in trade forward prices would result in an increase of US$0.55 through the profit or loss. A decrease of 10% in trade forward prices would result in an increase of US$0.55 through the profit or loss. A decrease of 10% in trade forward prices would result in an increase of US$0.55 million of the fair value of the derivative financial liability held at fair value through the profit or loss. million of the fair value of the derivative financial liability held at fair value through the profit or loss. million of the fair value of the derivative financial liability held at fair value through the profit or loss. million of the fair value of the derivative financial liability held at fair value through the profit or loss. The fair value of the derivative financial instruments held at fair value through profit and loss is based on forward prices as at 30 June 2021. An increase in forward prices would reduce the fair value of the derivative financial liability held at fair value through profit and loss. An increase of 10% in trade forward prices would result in a decrease of US$0.55 million of the fair value of the derivative financial liability held at fair value through the profit or loss. A decrease of 10% in trade forward prices would result in an increase of US$0.55 e) Credit risk e) Credit risk million of the fair value of the derivative financial liability held at fair value through the profit or loss. e) Credit risk Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that Credit risk is the risk that a contracting entity will not complete its obligation under a financial instrument that 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 will result in a financial loss to the Group. Credit risk arises from the financial assets of the Group, which comprise will result in a financial loss to the Group. Credit risk arises from the financial assets of the Group, which comprise 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. trade and other receivables and deposits with banks and financial institutions. trade and other receivables and deposits with banks and financial institutions. trade and other receivables and deposits with banks and financial institutions. e) Credit risk e) 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. 102 | OTTO ENE RGY ANNUAL REPORT 2021 59 59 59 59 59 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 20. Financial instruments (continued) 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, GC-21 and Lightning 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. The maximum exposure to credit risk at reporting date was as follows: Cash and cash equivalents Trade and other receivables f) Liquidity risk 2021 US$’000 2020 US$’000 11,100 3,884 14,984 16,551 6,634 23,185 Liquidity risk is the risk that Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. It is the policy of the Board to ensure that the Group is able to meet its financial obligations and maintain the flexibility to pursue attractive investment opportunities through the Group maintaining sufficient working capital and access to further funding when required through debt, equity or other means. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows with scenario analysis. As at reporting date the Group had sufficient cash reserves to meet its current requirements and no receivables were overdue. The contractual maturity analysis of payables at the reporting date was as follows: Carrying Value US$’000 Total US$’000 Less than 1 year US$’000 Between 1-2 years US$’000 Between 2-5 years US$’000 1,675 1,958 274 413 1,675 1,958 274 413 10,129 18,306 10,129 18,306 1,675 1,958 151 139 8,179 8,179 - - 123 151 - - - 123 1,950 8,179 - 1,948 Trade and other payables 2021 2020 Lease liabilities 2021 2020 Borrowings 2021 2020 g) Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while optimization the potential return to shareholders through the optimization of the debt and equity balance. The capital structure of the Group at year end comprises 75% equity and 25% debt (2020: 59% equity and 41% debt) 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 OT TO ENERGY ANNUAL REPORT 2021 | 103 60 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 20. Financial instruments (continued) schedules, credit facility covenants and also to generate adequate free cash available for corporate and oil and gas exploration, development and production activities. The Group may consider raising capital when an opportunity to invest in an opportunity, business or company is seen as value adding relative to the company’s current share price at the time of the investment. h) Equity price risk The Group is exposed to equity price risk on its equity investments. The group holds 14,272,592 shares in Pantheon Resources Plc (London Stock Exchange: PANR) The following sensitivity analysis is based on the equity price risk exposures in existence at the reporting date. The 10.0% sensitivity is based on reasonable possible changes. Judgements of reasonably possible movements Increase 10% Decrease 10% i) Fair values Effect on post tax losses Increase/(decrease) 2021 US$’000 2020 US$’000 813 (813) - - The following table shows the carrying amounts and fair values of financial assets and liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets 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: Financial assets measured at fair value Financial assets at fair value through profit and loss(ii) Financial assets at fair value through profit and loss(i) Financial assets at fair value through profit and loss Total financial assets measured at fair value Financial liabilities measured at fair value(i) Derivative financial liabilities at fair value through profit and loss Derivative financial liabilities at fair value through profit and loss Derivative financial liabilities at fair value through profit and loss Total financial liabilities measured at fair value Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 2021 US$’000 8,129 - - 8,129 2021 US$’000 - 5,512 - 5,512 2020 US$’000 - 4,161 - 4,161 2020 US$’000 - - - - (i) The fair value of the derivatives were determined based on a “mark to market” approach, calculated based on forward prices relative to contracted prices for contracts held as at 30 June 2021 as disclosed in note 15 (ii) The fair value of equity investments was determined based on a “mark to market” approach, calculated based on the closing price of PANR shares as at 30 June 2021 as disclosed in note 12. 104 | OTTO ENE RGY ANNUAL REPORT 2021 61 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 20. Financial instruments (continued) 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. OT TO ENERGY ANNUAL REPORT 2021 | 105 62 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 OTHER DISCLOSURES 21. 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 Functional 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 Otto Energy Alaska (Delaware) LLC Otto Energy Resources Corporation (Delaware) Borealis Alaska LLC Otto Energy (USA) Inc Otto Energy (Louisiana) LLC Otto Energy (Gulf One) LLC Otto Energy (Gulf Two) LLC Otto Operating LLC Otto Energy (Lightning) LLC Otto Energy (Patrick Henry) LLC 22. Interest in operations a) Operations Australia Bermuda Philippines Denmark Denmark Switzerland Australia USA USA USA USA USA USA USA USA USA USA USD USD USD USD 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 Ordinary Ordinary Ordinary Ordinary Ownership Interest (i) 2021 (%) 100 100 - 100 100 100 100 100 100 - 100 100 100 100 100 100 100 2020 (%) 100 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 The Group’s share of the assets, liabilities, revenues and expenses of 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 operations is detailed below. Oil and Gas exploration and production is the principal activity performed across these assets. Country Asset South Marsh Island 71 USA Onshore Alaska North Slope – Central Blocks USA USA Lightning GC-21 (i) USA 2021 Group interest 50% - 37.5% 16.67% 2020 Group interest 50% 8 – 10.8% 37.5% 16.67% (i) Otto earned it’s 16.67% working interest in GC-21 by paying 22.22% of the cost of drilling the “Bulleit” appraisal well 106 | OTTO ENE RGY ANNUAL REPORT 2021 63 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 22. Interest in operations (continued) b) Commitments through interests in operations The aggregate of the Group’s commitments through its interests in operations is as follows: Exploration expenditure commitments – not later than 1 year Exploration expenditure commitments – Later than one year but not later than five years Capital expenditure commitments – not later than 1 year 2021 US$’000 2020 US$’000 103 198 - 301 6,203 2,901 9,436 18,540 23. Share-based payments a) Employee share option plan The establishment of the Employee Share Option Plan was approved by shareholders at the 2016 Annual General Meeting and again at the 2019 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. There were no employee options on issue during the 2021 financial year. The Company did not grant any employee options during the 2021 or 2020 financial years. During the year ended 30 June 2021, nil (2020: nil) options expired. b) Options issued to external parties In addition to customary upfront fees payable to Macquarie, the Company issued to Macquarie 42.5 million options to subscribe for fully paid ordinary shares in the Company at an exercise price of A$0.08 to access Tranche A1. A further 42.5 million options will be issued on initial draw of Tranche A2 and will expire four years after issue date. The initial 42.5 million options vested in November 2019 and an expense of US$528,000 has been capitalised against borrowings and is amortised over the life of the facility. The fair value of the options was calculated using a Black-Scholes model. c) Performance rights The Performance Rights Plan was approved by shareholders at the 2013 Annual General Meeting and again at the 2016 Annual General Meeting. The Performance Rights Plan is designed to provide long term incentives for senior managers and employees to deliver long term shareholder returns. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. The amount of performance rights that will vest depends on vesting period and/or Otto Energy Limited’s TSR, including share price growth, dividends, and capital returns. Once vested, the performance rights are automatically converted to shares. If the vesting condition is not met on a measurement date (no rights OT TO ENERGY ANNUAL REPORT 2021 | 107 64 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 23. Share-based payments (continued) vest), the performance rights will not lapse and will continue to exist as unvested performance rights to be retested at the next measurement date or expiry date, whichever is later. Performance rights are granted under the plan for no consideration. Rights granted under the plan carry no dividend or voting rights. Any unvested performance rights lapse on cessation of employment or office. Set out below are summaries of rights granted and outstanding under the Performance Rights Plan: 2021 Grant date 29 Nov 2017 29 Nov 2017 Expiry date 29 Nov 2022 29 Nov 2022 Fair value on date of issue Fair value on date of issue Balance at start of the year A$ US$ Number Rights issued during the year Numb er Exercise d/ vested Lapsed/ expired Balance at end of the year Number Number Number 0.02 0.02 0.02 3,461,333 0.01 3,461,334 21 Dec 2018 15 Nov 2023 0.01 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 0.01 0.02 0.01 0.03 0.01 0.03 0.01 Total Weighted average exercise price – A$ 0.01 0.01 0.02 0.01 0.02 0.01 0.02 0.01 5,919,333 2,959,667 1,925,000 4,652,667 1,925,000 4,652,667 1,925,000 4,652,666 35,534,667 0.01 - - - - - - - - - - - - - - - - - - - - - - (2,067,000) 1,394,333 (2,067,000) 1,394,334 - - (1,330,000) 5,919,333 2,959,667 595,000 (1,155,334) 3,497,333 (1,330,000) 595,000 (1,155,332) 3,497,335 (1,330,000) 595,000 (1,155,334) 3,497,332 (11,221,333) 23,944,667 0.01 108 | OTTO ENE RGY ANNUAL REPORT 2021 65 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 23. Share-based payments (continued) Fair value on date of issue Fair value on date of issue Balance at start of the year A$ US$ Number Rights issued during the year Numb er Exercise d/ vested Lapsed/ expired Balance at end of the year Number Number Number 2020 Grant date 23 Apr 2015 23 Apr 2015 29 Nov 2017 29 Nov 2017 Expiry date 31 Dec 2019 31 Dec 2019 29 Nov 2022 29 Nov 2022 0.06 0.07 0.02 0.02 21 Dec 2018 15 Nov 2023 0.01 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2018 21 Dec 2018 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 15 Nov 2023 0.01 0.02 0.01 0.03 0.01 0.03 0.01 Total Weighted average exercise price – A$ 0.05 1,543,334 0.05 3,086,666 0.02 4,729,000 0.01 4,729,000 0.01 0.01 0.02 0.01 0.02 0.01 0.02 0.01 5,919,333 2,959,667 2,396,000 5,533,667 2,396,000 5,533,667 2,396,000 5,533,666 46,756,000 0.02 - - - - - - - - - - - - - - - - - - - - - - - - - - (1,543,334) (3,086,666) - - (1,267,667) 3,461,333 (1,267,666) 3,461,334 - - (471,000) 5,919,333 2,959,667 1,925,000 (881,000) 4,652,667 (471,000) 1,925,000 (881,000) 4,652,667 (471,000) 1,925,000 (881,000) 4,652,666 (11,221,333) 35,534,667 0.01 Set out below is the share based payment (reversal)/expense: Performance rights issued prior to 1 July 2017 Performance rights issues in financial year 2018 Performance rights issues in financial year 2019 Total 2021 US$’000 2020 US$’000 (126) 2 29 (95) - 1 101 102 No performance rights were granted under the Plan in the financial year 2021. 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. The TSR performance required for all rights on issue as at 30 June 2018 is 10% per annum (based on 30 day VWAP) and for the rights granted during the year ended 30 June 2019 is 15%, compounding from the date of grant to the measurement date (based on 90 day VWAP). OT TO ENERGY ANNUAL REPORT 2021 | 109 66 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 23. Share-based payments (continued) If 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 if there are no further measurement dates. Any unvested performance rights will lapse on cessation of employment or office under the Performance Rights Plan. For the year ended 30 June 2021, the Group recognised share-based payments expense reversal of US$95,500 in the Consolidated Statement of Profit or Loss and Other Comprehensive Income (2020: US$102,942). This included reversals of US$133,641 for the following forfeited unlisted performance rights. Number 4,134,000 7,456,000 Details of Lapsed Performance Rights Unlisted Employee and Director Performance Rights on or before 29 November 2022 Unlisted Employee and Director Performance Rights on or before 15 November 2023 Recognition and measurement The Group has in previous financial years 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 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 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 is treated as if it was a modification of the original award, as described in the preceding paragraph. 110 | OTTO ENE RGY ANNUAL REPORT 2021 67 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 23. Share-based payments (continued) 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 a single share price barrier 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. 24. Related parties Key management personnel compensation Short-term employee benefits Consulting fees(i) Post-employment benefits Other benefits Share-based payments Total USD Total AUD equivalent 2021 US$’000 2020 US$’000 1,236,182 44,610 33,198 100,296 (17,708) 1,396,578 1,885,591 1,786,015 55,268 75,201 325,667 79,160 2,321,311 3,464,456 (i) Effective 1 April 2020, the Board of Directors engaged Mr John Jetter to serve as a consultant to the Company, to perform any services required by the Company. Under the terms of the consultancy agreement, Mr Jetter is to consult for a maximum of three days per week at a rate of AUD$2,500 per day. For the 12 months ended 30 June 2021, Mr Jetter earned AUD$62,500 (2020: AUD$80,000) under this consultancy agreement. With the hiring of Mr Utsler in September 2020, it is not expected that Mr Jetter will continue to serve as a consultant. Detailed disclosures provided in the remuneration report on pages 59 to 71 25. Auditor’s remuneration During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: BDO Australia Audit and review of financial statements Tax compliance services Tax consulting and tax advice Total remuneration of BDO Australia Network firms of BDO Australia Audit and review of financial statements Tax compliance services International tax consulting Total remuneration of network firms of BDO Australia 2021 US$’000 2020 US$’000 61,481 13,433 6,970 81,884 23,441 4,963 53,290 81,694 52,266 15,017 31,114 98,397 10,139 9,500 - 19,639 OT TO ENERGY ANNUAL REPORT 2021 | 111 68 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 25. Auditor’s remuneration (continued) Non-BDO Audit and review of financial statements Tax compliance services Total remuneration of non-BDO audit firms Total 2021 US$’000 2020 US$’000 - - - 163,578 1,166 - 1,166 119,202 It is the Group’s policy to employ BDO on assignments additional to their statutory audit duties where BDO’s expertise and experience with the Group are important. These assignments are principally tax advice where BDO is awarded assignments on a competitive basis. It is the Group’s policy to seek competitive tenders for all major consulting projects. 26. Contingent liabilities There are no contingent liabilities at balance date. 27. Commitments a) Exploration expenditure commitments Exploration expenditure contracted for at the reporting date but not recognised as liabilities are as follows: Not later than 1 year Later than one year but not later than five years 2021 US$’000 2020 US$’000 103 198 301 6,203 2,901 9,104 Under the Joint Exploration and Development Agreement with Hilcorp dated 31 July 2018, Otto Energy (USA) Inc was originally required to pay Hilcorp liquidated damages (LD’s) of US$1,000,000 for each prospect that was not an earned prospect, in the event of a default of the Company’s obligations. As per ASX announcement dated 5 October 2020, Hilcorp and Otto mutually agreed to remove the Tarpon, Oil Lake and Mallard prospects from the agreement. With Otto’s participation in the drilling of the Beluga well, Otto has no further drilling related obligations to Hilcorp under the Joint Exploration and Development Agreement. Under the agreement between Great Bear Petroleum Operating LLC and Borealis Alaska LLC, there was a remaining commitment to take part in two exploration wells with a capped expenditure of US$2.6 million per wellI. In the ASX announcement dated 20 January 2021, Otto advised it had reached an agreement to sell the Otto subsidiary, Borealis Alaska LLC which holds a 10.8% interest in the 44,463 acre Talitha unit in Alaska to the acreage operator Pantheon Resources subject to Alaskan DNR approval. In the ASX announcement 29 March 2021, Otto advised the sale had been finalised. Accordingly, there are no further drilling obligations in relation to Borealis Alaska LLC. 112 | OTTO ENE RGY ANNUAL REPORT 2021 69 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 27. Commitments (continued) b) Capital expenditure commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities are as follows: Not later than 1 year Later than one year but not later than five years There are no capital expenditure commitments at reporting date. 2021 US$’000 2020 US$’000 - - - 9,436 - 9,436 28. Events after the reporting period No matters or circumstances have arisen since 30 June 2021 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: • • • On 23 August 2021, the Company announced that the Debt Facility had been amended to remove all timing and production requirements associated with the “Bulleit” well at GC 21, and extended the minimum group quarterly production rate average (WI basis) of 1,900 BOEPD until 31 December 2021, and then reduces it to 1,400 BOEPD from 1 January 2022 until the maturity date (4 November 2022). On 27 August 2021, the Company announced that 30,000,000 options had been issued to Foster Stockbroking Pty Ltd pursuant to the terms of an Equity Capital Markets Advisory Agreement. Of these, 20,000,000 options have an exercise price of A$0.02 per option and 10,000,000 options have an exercise price of A$0.025 per option. All the options expire on 27 August 2024. On 9 September 2021 the Company released its statement of reserves and prospective resources for SM 71, Lightning and Green Canyon 21 as at 30 June 2021. The reserves were compiled by Otto’s independent consultant Ryder Scott Company. The summary statement of reserves and prospective resources as at 30 June 2021 and Changes to reserves and resources since 30 June 2020 is set out below. For full details refer to ASX release dated 9 September 2021.The individual statements for each field are included in the Production and Development section above. Total Proved Producing Proved Behind Pipe Proved Undeveloped Proved (1P) Probable Proved Plus Probable (2P) Possible Proved Plus Probable Plus Possible (3P) Total Prospective Resource (best estimate, unrisked) Oil (MbbL) 3,196 4,595 452 8,243 4,935 13,178 2,584 Gross (100%) Gas (MMcf) 17,814 9,193 15,060 42,067 29,631 71,698 27,507 Mboe 6,166 6,127 2,962 15,255 9,873 25,128 7,168 Oil (MbbL) 1,231 779 129 2,139 982 3,121 665 Net Gas (MMcf) 5,297 2,306 4,302 11,905 8,235 20,140 7,838 Mboe 2,114 1,162 846 4,122 2,355 6,477 1,971 15,762 99,205 32,296 3,786 27,978 8,448 3,250 24,300 7,300 930 6,930 2,085 OT TO ENERGY ANNUAL REPORT 2021 | 113 70 FINANCIAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 28. Events after the reporting period (continued) Changes to reserves and resources since 30 June 2020: Otto Energy Limited Grand Total - Reserve Reconciliation (Otto Energy NRI Share) Gas (MMCF) Oil (Mbbl) MBOE Proved (1P) Probable Proved+Probable (2P) Possible Proved+Probable+ Possible (3P) Remaining 6/30/2020 2,382 1,719 4,102 1,807 Production 2020 438 0 438 0 Additions & Revisions 196 (737) (541) (1,142) Remaining 6/30/2021 2,140 982 3,122 665 Remaining 6/30/2020 14,625 9,088 23,712 11,142 Production 2020 2,411 0 2,411 Additions & Revisions (308) (853) (1,161) (3,304) Remaining 6/30/2021 11,905 8,235 20,140 7,838 Remaining 6/30/2020 4,820 3,234 8,054 3,664 Production 2020 840 840 Additions & Revisions 145 (879) (735) (1,692) Remaining 6/30/2021 4,122 2,355 6,477 1,971 5,908 438 (1,683) 3,787 34,854 2,411 (4,465) 27,978 11,717 840 (2,427) 8,448 The impact of the Coronavirus (Covid-19) pandemic is ongoing and its impact on the Group has been disclosed within the Directors Report. It is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly changing and is dependent on measures imposed by the Australian Government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. 29. Parent entity disclosures As at, and throughout the financial year ended 30 June 2021, 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 2021 US$’000 2020 US$’000 Parent entity (31,918) (31,918) (38,905) (38,905) 2021 US$’000 2020 US$’000 5,767 34,315 40,082 183 - 183 5,727 40,728 46,455 293 11 304 39,899 46,151 114 | OTTO ENE RGY ANNUAL REPORT 2021 71 FINANCIAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 30 June 2021 29. Parent entity disclosures (continued) Total equity of the parent entity comprises: Share capital Share based payments reserves Foreign currency translation reserve Accumulated losses Total equity 2021 US$’000 2020 US$’000 133,223 10,414 - (103,738) 39,899 133,242 10,509 118 (97,718) 46,151 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. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2021 and 30 June 2020 beyond those listed in Note 29 Significant accounting policies 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. 30. New accounting standards and interpretations There are no new and amended standards adopted by Otto Energy Limited OT TO ENERGY ANNUAL REPORT 2021 | 115 72 FINANCIAL REPORTDIRECTORS’ DECLARATION For the year ended 30 June 2021 In accordance with a resolution of the Directors of Otto Energy Limited, I state that: 1. In the opinion of the Directors: a. b. c. d. the financial statements, notes and the additional disclosures included in the audited 2021 Remuneration Report, comply with Australian Accounting Standards (including Australian Accounting Interpretations) and the Corporations Act 2001 and other mandatory professional reporting requirements; the financial statements and notes give a true and fair view of the financial position of the Group as at 30 June 2021 and of its performance for the year ended on that date; the financial statements and notes comply with International Financial Reporting Standards as disclosed in the ‘Basis of Preparation’ section within the notes to the 2021 Financial Report; and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 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 2021. On behalf of the Board Mr M Utsler Director 28 September 2021 116 | OTTO ENE RGY ANNUAL REPORT 2021 73 FINANCIAL REPORT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 2021, 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 2021and 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 (including Independence Standards) (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. OT TO ENERGY ANNUAL REPORT 2021 | 117 FINANCIAL REPORT Impairment testing of Cash Generating Unit Key audit matter How the matter was addressed in our audit The Group’s carrying value of oil and gas Our work included but not limited to the following procedures: properties as disclosed in note 13 represents a significant asset to the Group and is comprised of several Cash Generating Units (“CGUs”). The Australian Accounting Standards require the Group to assess whether there are any indicators that oil and gas properties may be impaired. The Group concluded there was an impairment indicator during the year pertaining to its Bulleit well at Green Canyon (GC-21) as a result of lower than expected well performance and cost overruns. Accordingly, the Group was required to estimate the recoverable amount of the GC- 21 CGU in accordance with the Australian Accounting Standards from which an impairment was recognised as per note 13. The assessment of impairment is complex and contains a number of estimates and judgements. The key judgements and estimates used in the group’s impairment assessment are disclosed in note 13 to the financial report. Accordingly, this matter was considered to be a key audit matter. • Assessing the appropriateness of the Group’s categorisation of Cash Generating Units (“CGUs”) and the allocation of assets to the carrying value of CGUs based on our understanding of the Group’s business and internal reporting; • • • • Considering management’s valuation methodology applied in measuring the fair value of the respective assets identified within the GC-21 CGU; Obtaining and reviewing available reserve data from management’s external experts to determine whether the data has been correctly included in the impairment model. This included assessing the competency and objectivity of management’s expert; Reviewing the accuracy and integrity of management’s value in use model; Challenging key inputs used in the value in use calculation including but not limited to the following: • • • In conjunction with our valuation specialist, considering the appropriateness of the discount rate used; Benchmarking and analysing management’s oil and gas price assumptions against external market data; Reviewing and analysing the appropriateness of forecasted operating and production costs contained within managements model against actuals and source documentation where possible; and • Performing sensitivity analysis on the commodity pricing, reserves and discount rates. • Reviewing the Director’s minutes and ASX announcements for evidence of consistency of information with management’s assessment of the carrying value of GC-21; and • Assessing the adequacy of the related disclosures in note 13 to the financial report. 118 | OTTO ENE RGY ANNUAL REPORT 2021 FINANCIAL REPORT 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 2021, 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. 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: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our auditor’s report. OT TO ENERGY ANNUAL REPORT 2021 | 119 FINANCIAL REPORT Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 59 to 71 of the directors’ report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Otto Energy Limited, for the year ended 30 June 2021, 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 Phillip Murdoch Director Perth, 27th September 2021 120 | OTTO ENE RGY ANNUAL REPORT 2021 FINANCIAL REPORT ADDITIONAL ASX INFORMATION As at 16 September 2021 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 Australian holders Overseas holders Unmarketable parcels Number of holders 166 210 439 1,860 1,616 4,291 Number of shares 23,156 652,312 3,680,666 82,435,222 4,708,218,417 4,795,009,773 Number of holders 4,079 2238 4,317 Number of shares 4,627,120,876 167,888,897 4,795,009,773 There were 1,919 shareholders holding less than a marketable parcel of shares. Twenty largest shareholders Name CS THIRD NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMINEES PTY LTD ACF CLEARSTREAM BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMINEES PTY LTD SIX SIS LTD CITICORP NOMINEES PTY LIMITED 1 2 3 4 5 6 MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED 7 MR JOHN PHILIP DANIELS 8 9 10 MR NEIL DAVID OLOFSSON & MRS BELINDA OLOFSSON 11 MR DOUGAL JAMES FERGUSON 12 13 MR ANASTASIOS MAZIS 14 MR MATTHEW GERARD ALLEN 15 MR THOMAS FRITZ ENSMANN 16 MR ANDREW MCKENZIE & MRS CATHERINE MCKENZIE 17 ASB NOMINEES LIMITED 18 MR DANIEL LEE 19 DANIEL LEE PTY LTD 20 MR KERRY ELDON NOBLE TROPICAL INVESTMENTS WA PTY LTD Ordinary shares Number of shares 2,344,488,621 160,355,138 130,919,019 87,581,664 77,942,143 60,684,395 49,406,330 36,625,112 33,002,776 26,600,000 24,340,000 22,555,555 22,122,603 21,541,602 20,000,000 19,966,667 18,703,524 18,211,778 17,771,431 17,269,563 3,210,087,921 % 48.89% 3.34% 2.73% 1.83% 1.63% 1.27% 1.03% 0.76% 0.69% 0.55% 0.51% 0.47% 0.46% 0.45% 0.42% 0.42% 0.39% 0.38% 0.37% 0.36% 66.95% OT TO ENERGY ANNUAL REPORT 2021 | 121 78 FINANCIAL REPORTADDITIONAL ASX INFORMATION As at 16 September 2021 Substantial shareholders Name Molton Holdings Limited Unquoted securities Ordinary shares Number of shares 2,305,859,697 % 48.38% The unlisted securities of the Company are 35,534,667 performance rights. The performance rights do not carry a right to vote at a general meeting of shareholders. Performance Rights Grant date Expiry date Exercise price 29 November 2017 15 November 2018 21 December 2018 29 November 2022 15 November 2023 15 November 2023 A$0.00 A$0.00 A$0.00 Number of performance rights 2,788,667 1,785,000 19,371,000 23,944,667 Number of holders 2 2 4 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 42,500,000 options on issue as at 30 June 2021. Performance rights There are no voting rights attached to the performance rights. Corporate governance The Company’s Corporate Governance Statement can be accessed at www.ottoenergy.com 122 | OTTO ENE RGY ANNUAL REPORT 2021 79 FINANCIAL REPORTAUSTRALIAN OFFICE Ground Floor 70 Hindmarsh Square Adelaide SA 5000 PO BOX 1414 West Perth WA 6872 Australia T: + 61 8 6467 8800 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 OT TO ENERGY ANNUAL REPORT 2021 | 123 FINANCIAL REPORTOTTOENERGY.COM 

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