Pancontinental Energy NL Annual Report 2013

Plain-text annual report

PANCONTINENTAL OIL & GA S N L – A N N U A L R E P O R T 2 0 1 3 Corporate Information ABN 95 003 029 543 Directors Henry David Kennedy (Non-Executive Chairman) Roy Barry Rushworth (Executive Director & Chief Executive Ofﬁcer) Ernest Anthony Myers (Executive Finance Director) Anthony Robert Frederick Maslin (Non-Executive Director) Company Secretary Vesna Petrovic Registered Ofﬁce 288 Stirling Street Perth WA 6000 Telephone: +61 8 9227 3220 Fax: +61 8 9227 3211 Share Register Advanced Share Registry Services PO Box 1156 Nedlands WA 6909 Telephone: +61 8 9389 8033 Auditors Rothsay Chartered Accountants Level 1, Lincoln House 4 Ventnor Avenue West Perth WA 6005 Internet Address & Contact www.pancon.com.au info@pancon.com.au ASX Code PCL Contents Chairman’s Review Review of Operations Directors’ Report Auditor’s Independence Declaration Corporate Governance Statement Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report ASX Additional Information 1 3 26 34 35 39 40 41 42 43 60 61 63 Pancontinental Oil & Gas NL - Annual Report 2013 Chairman’s Review Pancontinental has advanced its projects signiﬁcantly this year against a backdrop of slower activity in the resources sector and in equity markets. Your Company has positioned itself for what we expect to be an exciting year ahead in regions where active hydrocarbon systems have only recently been proven and where we expect to commence major drilling programmes in 2014. The Company is ﬁnancially healthy, with some $33.8 million in cash reserves at year end. Pancontinental is in a unique position in two of the world’s newest oil and gas frontiers, namely offshore East Africa with its Kenyan projects, and offshore southwestern Africa in Namibia. Both regions are potentially game-changers on a global scale. We believe that the industry, including Pancontinental, is making good progress to unlock these regions as major new hydrocarbon provinces. These are vast areas by international standards and historic ﬁnds have been made in the last eighteen months, with active hydrocarbon systems being proven in both regions. The East African margin continues to host major gas discoveries offshore Mozambique and southern Tanzania. Pancontinental is exploring in the northern part of the East African margin and here we have four exploration areas offshore Kenya, covering a total area of some 20,000 square kilometres. In our Kenya projects L10A and L10B, operated by Britain’s BG Group plc (“BG”), using our two 3D seismic surveys we have identiﬁed a number of drillable prospects. We expect the ﬁrst well of a two well drilling programme to commence in these projects early in 2014. The most likely target is one of a number of Miocene Reefs. Around the world such reefs have a notable record of trapping hydrocarbons, and BG is pursuing the L10 reefs as oil, rather than gas, objectives. In one of our other offshore Kenyan areas, L6, the 3D seismic programme that we carried out in 2012 has now yielded several Prospects for possible drilling. We are seeking a farminee to participate in the drilling that we are currently planning for 2014. One of the main Prospects in L6 is the large Kifaru Prospect. This is an outstanding stacked Miocene Reef prospect, with potential to contain some 170 million barrels of recoverable oil as a best estimate by the L6 operator FAR Limited. There is excellent follow-up in the similar Kifaru West Prospect, also mapped on 3D seismic, as well as a number of other Miocene Reefs that have yet to be covered by 3D. An oil discovery in any one of the reefs, either in L6 or elsewhere, would open an entire new and potentially highly productive play off the Kenyan coast. Pancontinental holds interests over roughly three quarters of the reef trend offshore Kenya and currently has more than twenty-ﬁve of the reefs mapped as Prospects and Leads in its portfolio. During the reporting year the Company made the Mbawa 1 gas discovery in L8 offshore Kenya, and I reported on this in the previous Annual Report. This is the ﬁrst-ever discovery offshore Kenya and the ﬁrst discovery of any kind in the northern part of the East African offshore margin. The importance of the Mbawa discovery is multi-fold. Well data analysis indicates an opportunity for oil, rather than gas, at deeper levels and the joint venture continues to look to deeper targets for a next well. The year ahead will be an exciting one for oil and gas exploration in Kenya. The string of world class discoveries further south offshore Mozambique and Tanzania started in a similar way to our ﬁrst Kenyan discovery, and we have good reason to be extremely enthusiastic about the future for oil discoveries here. As in virtually all frontier areas, the ﬁrst discoveries pave the way for often more successful future exploration. Turning from East Africa to the other side of the African continent, one of Pancontinental’s key achievements, and a signiﬁcant milestone in managing its risk proﬁle and conserving funds was the farm-out of our major Namibian project, EL 0037, to Tullow Oil plc (“Tullow”) in September 2013. 1 Pancontinental Oil & Gas NL - Annual Report 2013 Chairman’s Review Pancontinental will have a free carry of 30% through extensive 3D and 2D seismic campaigns, as well as drilling by Tullow should a suitable prospect be deﬁned. Before the Tullow farmin, the Company increased its interest to 95% by the purchase of 10% from our joint venture partner Paragon Oil & Gas (Pty) Ltd in July 2012. The Tullow farmin has no “caps”, meaning that Pancontinental will not have any overhanging ﬁnancial exposure for the exploration work under the farmout. Pancontinental estimates that Tullow’s total farmin expenditure could be as much as $130 million. The Namibian EL0037 area is very large, at approximately 17,000 square kilometres, and numerous large geological Leads have already been identiﬁed. The farmout came after the ﬁrst oil recovery ever offshore Namibia during the year just to the south of EL 0037, by HRT in its Wingat-1 well. The proving of an oil generating system in the Central Walvis Basin must not be underestimated. HRT also reported good mature source rocks and, under our interpretation, some of Pancontinental’s channel and turbidite sandstone objectives are positioned to be fed directly with oil from these mature source rocks. Tullow is a highly successful oil ﬁnder, particularly in Africa, and it is very pleasing to see that Tullow has recognised Pancontinental’s exploration concepts in Namibia and joined the Company’s efforts in Block EL 0037. Looking forward in EL 0037, we expect to see the ﬁrst 3D seismic acquired by Tullow in early 2014. In Australia, our projects continue to be advanced as a lower priority in our predominantly African portfolio; however our Canning Basin projects have been given some encouragement by signiﬁcant discoveries elsewhere in the Basin. Pancontinental is widely recognised in the industry for its efforts in Africa. It is one of only a few junior oil and gas companies to successfully compete with, as well as participate alongside, some of the world’s most notable petroleum companies. In summary, Pancontinental has been successful in progressing its projects while the regions in which it operates are further de-risked. Your Company continues to be prudently managed from a capital and risk perspective. The outcome of the Mbawa well in Kenya particularly leaves us with a very high degree of optimism for all of our Kenyan projects and we continue to be regarded as one of the most notable junior explorers on the African scene. We look forward to building on this in the coming year. We have an excellent asset portfolio and intend to use our strong funding position, our established relationships with major petroleum companies and our well deﬁned exploration programme to generate a strong outcome for all shareholders. HD (David) Kennedy, Chairman Pancontinental Oil & Gas NL 2 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Pancontinental Projects Asset Kenya L6 Kenya L8 PCL% Sq Km Partner Operator 5,010 FAR 60% FAR 40% 15% 5,115 Kenya L10A 15% 4,962 Kenya L10B 15% 5,585 Apache 50% * Origin 20% Tullow 15% BG Group 40% PTTEP 25% Premier 20% BG Group 45% PTTEP 15% Premier 25% Apache BG Group BG Group Asset PCL% Sq Km Operator Carnarvon Basin EP424 EP 110 Canning Basin EP 104 / R1, L15 38.5% 38.5% 11.11% 12.0% 79 750 736 Strike Energy Buru Energy * * AUSTRALIA KENYA * * * NAMIBIA Asset Namibia EL 0037 PCL% Sq Km Partner Operator 30% post year end 17,295 (3 Blocks) Tullow 65% Paragon 5% Tullow Oil * At an Operating Committee Meeting held on 10th October Apache indicated their intention to withdraw from the block. 3 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Block Block Kenya L6 Kenya L6 Kenya L8 Kenya L8 Kenya L10A Kenya L10A Kenya L10B Kenya L10B Namibia EL 0037 Namibia EL 0037 EP 424 (Australia) EP 424 (Australia) EP 110 (Australia) EP 110 (Australia) EP 104 / R1 (Australia) EP 104 / R1 (Australia) L15 (Australia) L15 (Australia) Area (km2) Area (km2) 5,010 5,010 5,115 5,115 4,962 4,962 5,585 5,585 17,295 17,295 79 79 750 750 736 736 150 150 PCL Interest (%) PCL Interest (%) 40.0% Operator (%) Operator ASSET SUMMARY (%) FAR Limited(60%) FAR Limited(60%) Apache (50%) 40.0% 15.0% Partners (%) Partners (%) FAR Limited (60%) FAR Limited (60%) Apache (50%) Origin Energy (20%), Tullow (15%) * Apache (50%) Origin Energy (20%), Tullow (15%) BG (40%) PTTEP (25%), Premier (20%) BG (40%) PTTEP (25%), Premier (20%) BG (45%) PTTEP (15%), Premier (25%) BG (45%) PTTEP (15%), Premier (25%) Tullow Oil (65%) Paragon (Local Partner) (5%) Tullow Oil (65%) Paragon (Local Partner) (5%) Strike Energy (61.5%) Strike Energy (61.5%) Strike Energy (61.5%) Strike Energy (61.5%) Buru Energy (43.28%) Emerald Gas (14.17%), Buru Energy (43.28%) Emerald Gas (14.17%), Gulliver (16.44%), FAR (8.89%), Indigo Oil (6.11%) Gulliver (16.44%), FAR (8.89%), Indigo Oil (6.11%) Buru Energy (15.5%) Gulliver (49%), FAR (12%), Indigo Oil (11.5%) Buru Energy (15.5%) Gulliver (49%), FAR (12%), Indigo Oil (11.5%) * At an Operating Committee Meeting held on 10th October Apache indicated their intention to withdraw from the block. 15.0% 15.0% 15.0% 15.0% 15.0% 30.0% 30.0% 38.5% 38.5% 38.5% 38.5% 11.11% 11.11% Apache (50%) BG (40%) BG (40%) BG (45%) BG (45%) Tullow Oil (65%) Tullow Oil (65%) Strike Energy (61.5%) Strike Energy (61.5%) Strike Energy (61.5%) Strike Energy (61.5%) Buru Energy (43.28%) Buru Energy (43.28%) 12.00% 12.00% Buru Energy (15.5%) Buru Energy (15.5%) HIGHLIGHTS Namibia EL 0037 – Pancontinental Farmed out 65% to Tullow Oil plc for 2D and 3D Seismic and Drilling. Tullow becomes EL 0037 Operator. Namibia EL 0037 – Pancontinental increased its interest from 85% to 95% by a purchase from Paragon Oil & Gas in July 2012. Namibia EL 0037 – Independent assessment of potential for 8.7 Billion Barrels Prospective Oil Resources (Pmean). Kenya L10A & L10B – 3D and 2D seismic surveys identify multiple Prospects including extensive Miocene Reefs. Preparations under way for two wells in 2014. Kenya L8 – Mbawa-1 gas discovery September 2012; the ﬁrst hydrocarbon discovery offshore northern East Africa. Kenya L6 - Kifaru, Kifaru West and Tembo Prospects fully mapped on 3D. Farminee now sought for drilling. Corporate - Available funds of $33.8 million, 30 June 2013. Pancontinental continues to assess a number of acquisition and new venture opportunities with a primary African focus. 4 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations INTERNATIONAL KENYA Pancontinental’s Strategy Offshore Kenya Kenya’s stable legal and ﬁscal regimes and Pancontinental’s strong acreage position place the company very favourably in the East African region. Offshore East Africa has become an industry focus through recent major deepwater gas discoveries offshore Tanzania and Mozambique. Pancontinental proposes that the prime areas to develop good oil source rocks, and to have these fully mature to generate oil, is the restricted environment where the Tana River delta carried sediments and nutrients into the deep troughs inboard of the Davie Walu Ridge. Tana River Delta Concept The Tana River delta developed inboard from the Davie - Walu Ridge into the Tembo and Maridadi Troughs Restricted depositional environments, from the Jurassic to Tertiary Pancontinental recognised this opportunity early and acquired exploration licences Residual Gravity Map Coastal & Offshore Kenya KENYA R L6 L8 L10A L10B L5 L7 L12 L11A L11B Tana River feeds sediment into the offshore troughs KENYA Tertiary carbonate shelf and reefs L6 L8 Davie - Walu Ridge restricts depositional environment , directing Tana delta to the south L10A L10B Tana River Delta progrades to the South Schematic of Cretaceous and Tertiary Deposition Figure 1 - Tana River Delta Concept Pancontinental has identiﬁed a major oil and gas play offshore Kenya and has acquired four licence areas. Pancontinental participated in the ﬁrst-ever discovery, the Mbawa gas discovery, in September 2012 (Pancontinental 15%). 5 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Offshore Kenya (cid:177) Pancontinental Licence Areas Pancontinental has four licence areas offshore Kenya covering 20,672 sq km (5,108,162 acres) Mbawa Gas discovery (2012) and Kubwa oil shows (2013) prove working oil and gas systems offshore Kenya L6 5,010 sq km (Reinstated) Pancontinental 40% L8 5,115 sq km Pancontinental 15%* L10A 4,962 sq km Pancontinental 15% L10B 5,585 sq km Pancontinental 15% Mbawa 1 Gas Discovery Sept 2012 Kubwa 1 April 2013 (cid:179)(cid:49)(cid:82)(cid:81)-commercial Oil shows in reservoir - (cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:86)(cid:68)(cid:81)(cid:71)(cid:86)(cid:171)(cid:17)(cid:17)(cid:87)(cid:75)(cid:72)(cid:3) presence of a working (cid:83)(cid:72)(cid:87)(cid:85)(cid:82)(cid:79)(cid:72)(cid:88)(cid:80)(cid:3)(cid:86)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:180) L6 FAR Kiboko 1 Drilling April- Aug 2013 3 Figure 2 - Pancontinental’s Licence Areas offshore Kenya Pancontinental has extended its strategy of exploring for oil to the south of the L8 and L6 blocks by acquiring the L10 blocks in 2011. The new blocks cover the same deep Tertiary troughs that the company interprets to be oil-generating in L8 and L6. Pancontinental has participated in ﬁve 3D surveys offshore Kenya and these have generated numerous prospects and leads. The Mbawa gas discovery is only the ﬁrst to be drilled out of numerous prospects and leads in Pancontinental’s four licence areas offshore Kenya. The Mbawa discovery establishes the existence of a working hydrocarbon system offshore Kenya. The source material of the gas is interpreted to be a thermally mature mixed gas and oil-prone source and this means that oil may also have been generated. Pancontinental is well funded for exposure to up to four offshore Kenyan wells directly (one well depends on the completion of farmout in Block L6) over the coming 12-18 months. 6 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Prospects and Leads Offshore Kenya Figure 3 - Schematic of Prospects and Leads offshore Kenya (Not deﬁnitive) KENYA BLOCK L8 OFFSHORE LAMU BASIN Pancontinental 15% Licence area L8 covers 5,114.9 sq km offshore Kenya in water depths from 100m to 1,300m. L8 holds the Mbawa gas discovery made in September 2012. Mbawa 1 Discovery The Mbawa Prospect, drilled during August and September 2012, is the ﬁrst well on the numerous prospects and leads in Pancontinental’s four licence areas offshore Kenya. The interpreted extensive deep oil and gas generating “kitchen” near the Prospect extends to the north into area L6 and south into L10A and L10B. 7 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Mbawa 1 is the ﬁrst ever Natural Gas discovery and the ﬁrst ever hydrocarbon (oil or gas) discovery offshore Kenya. The three discovery zones have 51.8 net metres (~170 feet) of natural gas pay with favourable reservoir characteristics (porosity approximately 24%). The discovery was on a single culmination on the southern extremity of the Mbawa structure and the potential of the remainder of the structure remains to be assessed. The Mbawa 1 exploration well was spudded in August 2012 and drilled to a TD of 3,151m MD. The well was plugged and abandoned according to the drilling programme and has been left in a state that allows re-entry. The well proves the existence of a working hydrocarbon system that, in the case of the Mbawa gas, is interpreted to be derived from a mature Type II (gas / oil) source. L8 Prospects and Leads The extensive 3D seismic surveys in L8 have generated a large number of prospects and leads. These are shown in Figure 4 below. Kenya L8 Prospects and Leads Figure 4 - Kenya L8 Prospects and Leads 8 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations L8 - Forward Exploration Programme Following the Mbawa 1 discovery a major, second, deeper play type has yet to be tested. The deeper play is regarded as being oil prone, rather than gas prone. The L8 Joint Venture has yet to make a formal decision on the second well. The Kipungu Prospect (formerly the “Tai Prospect”) is amongst a number of main prospects under consideration for drilling. The Kipungu Prospect is the updip extremity of an interpreted large channel and “fan” system that extends to the south. Kipungu and similar follow-up prospects are Lower Cretaceous channel and turbidite sandstone plays (“Tai Sands”) that are deeper than the gas discovery sands in Mbawa 1 and are considered to be in a separate petroleum system that is more favourable to trap oil (see Figure 5 below). Kipungu Prospect- Follow Up to Mbawa 220 Million Bbls Oil Potential (P Mean) Detachment Level ------------- 2 Km 130 m - - - - - Tai Sands Cretaceous Faulting Seismic Cross Section through Tai Prospect Figure 5 - Seismic Cross Section through Kipungu (Tai) Prospect Oil remains Pancontinental’s prime focus offshore Kenya and the deeper levels and numerous other prospects at various levels remain untested and are the subject of current exploration work. KENYA BLOCKS L10A & L10B OFFSHORE LAMU BASIN Pancontinental 15% The L10A and L10B Blocks have respective areas of 4,962.03 sq km and 5,585.35 sq km and water depths of 200 to 1,900m, which is easily within the reach of modern drilling and development technology. Pancontinental joined the UK major BG Group plc (“BG”), Premier Oil plc and PT Exploration and Production Public Company Limited (following its takeover of Cove Energy plc) in the award of the two Production Sharing Contracts L10A and L10B in 2011. 9 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations With BG as operator, the Joint Venture has undertaken an aggressive exploration programme leading to future drilling in this highly promising exploration province. The L10A and L10B joint venture completed a second 3D survey in the western portion of the licence areas in January 2013. The joint venture now has excellent 3D coverage totalling 4,872 square kilometres over a large number of leads and prospects. The two 3D surveys cover the areas shown below in Figure 6. The latest survey covers a cluster of Miocene reefs and the large Crombec Lead. These leads are possible drilling targets. Prospects and Leads In the western sector of the L10A and L10B areas, the joint venture operator BG has mapped a number of very large leads for further work and possible drilling. Kenya L10A & L10B Prospects & Leads L10A & L10B EXPLORATION Numerous Prospects and Leads Multiple Play Types Opportunity for multiple follow-ups over large area Extensive 3D coverage Aggressive Exploration Programme led by BG Group L10A & L10B PROSPECTS AND LEADS MAP Mombasa Sunbird L10A Turaco Chatterer KENYA --------------- 0 Km 20 Longclaw Hoopoe Prospects and Leads (cid:41) >20 Main closures (cid:41) Miocene reefs - Sunbird, Chatterer, Turaco, Babbler etc (cid:41) Crombec 550 sq km (cid:41) Numerous other Outboard clastic prospects Multiple Play Types (cid:41) Miocene Reefs Babbler L10B 3D Area 2,289 sq km Crombec Akalat Francolin 3D Area 2,583 sq km Pipit (cid:41) Tertiary & Cretaceous Channels (cid:41) Cretaceous anticlines Weaver East Extensive 3D Coverage Weaver (cid:41) 3D surveys totalling ~ 4,800 sq km (cid:41) Plus extensive 2D data Figure 6 - Kenya L10A and L10B Prospects and Leads Map 10 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations The largest Leads targeted by the new 3D survey in the western sector are- (i) A cluster of more than 10 interpreted Miocene Reefs. Miocene reefs are known globally to have very high per-well production potential. The L10 reefs are in water depths of approximately 500m and within 50km of the major Kenyan port of Mombasa. (ii) The Crombec Prospect is a large anticline in the western sector of the areas. Crombec has four-way dip closure from the Tertiary to the Lower Jurassic. It has sands onlapping the crest, indicating a likely growth structure. In the eastern sector of the areas, mapping continues on a number of Prospects. Two of the diverse play types are- (i) An extensive system of Tertiary channels. The Tertiary section holds most of the gas discovered to date offshore Mozambique and Tanzania. The channels in L10A and L10B may be gas charged, possibly representing a very large resource. (ii) Structural Leads in the Tertiary to Cretaceous section. Some of the Leads are dip reversals associated with faults. These have stacked potential within Tertiary stacked channels and Cretaceous thrust and sub-thrust plays. Kenya L10A & L10B Prospects & Leads Sunbird Prospect (cid:135) Stacked reefs developed over Turaco Prospect carbonate platform Miocene Reef Prospects Babbler Prospect (cid:135) Multiple follow (cid:177)ups (cid:135) Highly productive global analogues (cid:135) Various drill depths & sizes (cid:135) Full 3D coverage Crombec Prospect Very large Cretaceous anticline --- 550 sq km (cid:135) (cid:135) Multiple potential shoreface and deepwater sandstone reservoirs (cid:135) (cid:135) Onlap / pinchouts at various levels Fully covered by 3D Interpreted underlying Eocene source rocks Crombec Prospect Figure 7 - Seismic Cross-Sections through Miocene Reefs and Crombec Prospects 11 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Drilling Plans A number of Prospects and play types have been mapped and the two major series of prospects are Miocene reefs and clastic (sandstone) plays. Three main Miocene reefs have been fully mapped using 3D seismic data - Turaco, Sunbird and Babbler. The L10A and L10B joint ventures are planning a two well drilling programme commencing early 2014. Subject to Joint Venture approval it is expected that one of three fully mapped Miocene reef prospects will be the ﬁrst well in the drilling campaign in 2014. The location of further drilling will be determined by additional 3D mapping and the outcome of the ﬁrst well. KENYA BLOCK L6 OFFSHORE / ONSHORE LAMU BASIN Pancontinental 40% The L6 area is the northernmost of Pancontinental’s four areas offshore Kenya. L6 covers 5,010 sq km (following a reinstatement of relinquished acreage) with about one quarter onshore and the rest offshore to 400 meters water depth. L6 is areally and geologically continuous to L8 with a deep sedimentary section extending from the Tertiary to at least the Jurassic. L6 lies in the Lamu Basin and within the Tana River delta, north of recent world-scale natural gas discoveries off the coasts of Mozambique and Tanzania. Following encouraging hydrocarbon generation and migration studies, the joint venture is exploring the offshore portion of the licence area. A deep central graben in this area is considered to be an oil and gas “source kitchen” and potential hydrocarbon trapping prospects have been identiﬁed immediately adjacent to this area. The largest prospect is the Kifaru Prospect in water depths of 80m to 100m in the southwest of the L6 area. This prospect and several others have been covered by a 3D seismic survey. The L6 joint venture is operated by FAR Limited (ASX: FAR). The L6 joint venture group intends to secure a farminee for drilling. Completion of Kifaru 3D Offshore Seismic Survey The Kifaru 3D seismic survey acquisition was completed in offshore Kenya during July 2012. The survey covered 778 sq km over several prospects, including the primary Kifaru Prospect, in a southern portion of the L6 area. 12 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Prospective Resource Estimates According to an assessment by operator FAR Limited, the L6 area has potential to contain approximately 3.7 billion barrels of oil or 10.2 trillion cubic feet of gas prospective resources on a gross, un-risked, best-estimate basis. The three prospects covered by new 3D seismic (Kifaru, Kifaru West and Tembo) have combined potential for approximately 630 million barrels of oil on an un-risked, best estimate, undivided 100% basis. Pancontinental’s 40% share of the total Gross Prospective Resources is 1.5 billion barrels of oil or 4.09 trillion cubic feet of gas on the same basis. The details of the prospective resource estimates are shown in Table 1 below: Play Prospect Prospects defined on 3D seismic Kifaru Kifaru West Tembo Miocene reef Miocene reef Eocene clastics Prospects defined on 2D seismic 11 Prospects 13 Prospects 6 Prospects Miocene reef Eocene clastics Late Cretaceous clastics Unrisked Prospective Resources Best Estimate Oil (mmbbls) Gas (bcf) Oil (mmbbls) Gas (bcf) Oil (mmbbls) Gas (bcf) High Estimate Low Estimate 34 30 91 297 451 21 104 87 227 821 1,287 101 178 130 327 517 388 807 849 545 1,212 2,321 1,579 2,907 1,249 1,743 126 3,461 4,515 547 5,194 6,582 684 14,032 16,132 2,808 Total Gross 925 2,627 3,754 10,235 15,066 39,779 Table 1: Table of L6 Unrisked Prospective Resource Estimates From the new 3D data three prospects have been mapped, Tembo, Kifaru and Kifaru West, with prospective oil equivalent resources of 327, 178 and 130 million barrels respectively (un-risked best estimate, 100% basis). In a gas-only case the respective volumes are 807, 517 and 388 billion cubic feet. The chance of a discovery has been assessed at 21%, 19% and 18% respectively. The Kifaru Prospect and Kifaru West Prospects are interpreted to be large stacked Miocene reefs, with interpreted good lateral and top seals and close proximity to mature Eocene source rocks. Tembo is a large tilted fault block trap, with interpreted sandstone reservoirs at a number of levels. L6 Prospect Inventory A number of oil and gas play types and prospects have been mapped and it is on this basis that the location of the ﬁrst exploration well will be selected (See Figure 8 below). Following the reinstatement of a previously relinquished area, re-examination of 2D seismic data has revealed a cluster of interpreted Miocene Reefs that will be subject to further mapping. These reefs are on trend and north of the Kifaru Prospect. The L6 Joint Venture is in a strong position to secure a farminee partner for drilling. 13 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Figure 8 - L6 Prospects and Leads Map Several major prospects have potential in excess of 100 million barrels recoverable oil or 0.5 trillion cubic feet of gas. Eight prospects have been mapped in ﬁve clusters: (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) The Kifaru Prospects in the southwest of the block in water depths of 60 metres (Kifaru West) and 100 metres (Kifaru East). These Prospects are now one of the main focuses of exploration work; The Kiboko and Nyati clusters are large and well situated in water depths from 100 metres to 350 metres; The Chui Prospects are large features in near-shore water depths up to 120 metres; and The Kudu Prospect, being onshore, is located where a smaller gas or oil discovery could be readily commercialised. 14 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Figure 9 - Seismic Cross Section through Kifaru Prospect The Kifaru Prospect, a Miocene reef accumulation, has been assessed by L6 operator FAR to have potential to contain approximately 178 Million Barrels of recoverable oil (Best Estimate Unrisked Prospective Resource). Kenya L6 (cid:177) Kifaru & Tembo Prospects KIFARU WEST PROSPECT Miocene reef play (cid:135) KIFARU PROSPECT Miocene reef play (cid:135) (cid:135) 130 MmBbls OR 388 Bcf Unrisked Recoverable Prospective Resource (Best Estimate) (cid:135) 178 MmBbls OR 517 Bcf Unrisked Recoverable Prospective Resource (Best Estimate) TEMBO PROSPECT (cid:135) (cid:135) Eocene sand play 327 MmBbls OR 807 Bcf Unrisked Recoverable Prospective Resource (Best Estimate) Kifaru Kifaru West Tembo Figure 10 - Kenya L6 -Maps of Kifaru, Kifaru West and Tembo Prospects 15 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations The similar Kifaru West Prospect has potential for 130 Million Barrels. A number of other possible Miocene Reefs have been identiﬁed to the north of the Kifaru area. L6 Forward Programme With the increasing recognition of the hydrocarbon potential offshore Kenya, the L6 joint venture is seeking a farminee for drilling. Planning has commenced for drilling in 2014. The location, timing, depth and stratigraphy of the well will be determined after ﬁnal interpretation of the 3D seismic data and discussions with any farminee. NAMIBIA EL 0037 OFFSHORE WALVIS BASIN Pancontinental 30% (post year end) Petroleum Exploration Licence No. 0037 (“EL 0037”) covers 17,295 sq km (4.2 million acres) in water depths extending to 1,800m in the Walvis Basin offshore northern Namibia. Before farmout to Tullow in September 2013 the licence was held by Pancontinental (95%) and Paragon Oil & Gas (Pty) Ltd (“Paragon”) (5%). Pancontinental and co-venturer Paragon were awarded the 0037 Exploration Licence on 28 June 2011 and a corresponding Production Agreement was signed on 4 July 2011 (also effective 28 June 2011). Offshore Namibia (cid:177) Pancontinental Areas Large Exploration Area (cid:135) (cid:135) (cid:135) EL 0037 covers 17,295 sq km (4,273,687 acres) over 3 blocks Pancontinental 30% Free Carried Tullow 65% and Operator under farmin (September 2013) EL 0037 Prospective Resource* estimated at- (cid:135) (cid:135) 8.7 billion barrels of oil or 11 primary Leads High Level of Activity (cid:135) (cid:135) Up to 5 wells drilled by others 2013/14 Neighbour HRT drilled first oil recovery with Wingat -1 in May 2013 Multiple Potential (cid:135) (cid:135) (cid:135) (cid:49)(cid:88)(cid:80)(cid:72)(cid:85)(cid:82)(cid:88)(cid:86)(cid:3)(cid:48)(cid:68)(cid:77)(cid:82)(cid:85)(cid:3)(cid:179)(cid:47)(cid:72)(cid:68)(cid:71)(cid:86)(cid:180)(cid:3) Multiple Play types Good 2D coverage Exploration (cid:135) Mapping, 3D and 2D planned before drilling * Pmean estimated by DeGolyer and MacNaughton Figure 11 – Offshore Namibia Licence Map 16 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Pancontinental increased its interest from 85% to 95% through a purchase of 10% from co- venturer Paragon in July 2012. Pancontinental farmed out to Tullow in September 2013, thereby reducing its interest to 30% and under conditions that will see it free carried through extensive 3D and 2D seismic programmes and a possible exploration well. Regional Activities Offshore Namibia is part of the plate tectonic “conjugate” of offshore Brazil, where world-scale oil and gas discoveries have been made in recent years and it lies on the West African continental margin adjacent to Angola, where there have also been many major oil discoveries. Offshore Namibia is an extension of the West African continental margin and in Pancontinental’s opinion offshore Namibia has the potential to hold very large oil and gas reserves and it is signiﬁcantly under-explored. On 20 May 2013 it was announced that the Wingat-1 well adjacent to EL 0037 proved well- developed mature marine source rocks and a recovery of 1.8 litres of light oil from poorly-developed reservoir rocks. For the ﬁrst time, the reported oil recovery and source rocks veriﬁed a working oil system in the Walvis Basin. Pancontinental’s EL 0037 licence area and HRT’s PEL 23 area are contiguous over the “Inner Graben” that is interpreted by Pancontinental to be a main regional oil generating zone and one of the most critical factors to ﬁnding commercial oil offshore Namibia. The Wingat-1 is located in Petroleum Exploration Licence 23 (“PEL-23”), in the Walvis Basin, immediately south of Pancontinental’s EL 0037 area. On 20 May 2013, HRT announced – (cid:118)(cid:0) The Wingat-1 well, spudded on March 25, was drilled in a water depth of approximately 1,005 meters and reached a ﬁnal depth of 5,000 meters; Oil was found, although not in commercial volumes; 4 samples of oil of 450cc each were recovered; The recovered oil is Light Oil (38 Two well-developed source rocks, rich in organic carbon, have been penetrated and both are within the oil-generating window; Several thin-bedded sandy reservoirs that are saturated by oil were encountered and no water saturated zones were encountered in the drilled section; and The well commenced encountering increasing concentrations of hydrocarbon shows below 1,500m. o to 42o API), with minimal contamination; (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) Two other wells, Murombe-1 and Moosehaed-1, were later completed by HRT. Both wells were reported to have hydrocarbon shows and to have veriﬁed mature marine source rocks, however they are not classiﬁed as discoveries. 17 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Pancontinental has mapped a number of large “leads” of which some are interpreted to be at approximately the same stratigraphic level as the oil found in Wingat-1, as well as close vertically to the interpreted oil source rocks. In addition Tower Resources plc (“Tower”) announced that the drilling of the Welwitschia-1 well in its EL 0010 by the operator, Repsol, is planned to commence in mid-February 2014 and a rig has been fully secured. Farmout to Tullow Oil On 6 September 2013 Pancontinental announce a farmout agreement (the “Farmout Agreement”) with Tullow Kudu Limited (“Tullow”), a wholly owned subsidiary of Tullow Oil plc, regarding licence EL 0037 offshore Namibia. Subject to certain conditions, including Ministerial approval, which Pancontinental and Tullow anticipate to be satisﬁed, Tullow will be assigned a 65% interest in EL 0037 and Pancontinental will retain a free-carried 30% interest out of its current 95% interest. Pursuant to the Farmout Agreement Tullow will become operator and earn and maintain its 65% by fully carrying Pancontinental through extensive programmes of 2D seismic and 3D seismic and, subject to identifying a drillable prospect, fully carry Pancontinental through an exploration well. Pancontinental estimates that Tullow’s total farmin expenditure may be in the range of US$110 million to US$130 million (100% basis). Paragon Oil & Gas (Pty) Ltd’s 5% free-carried interest will be included in the Tullow farmin expenditure. The Farmout Agreement provides for Tullow- (cid:118)(cid:0) (cid:118)(cid:0) Taking over as Operator of Licence EL 0037 from Pancontinental; Funding 100% of the costs of a 3D seismic survey of not less than 3,000 km before 31 December 2014; Funding 100% of the costs of a 2D seismic survey of not less than 1,000 km (either coincident or possibly later than the 3D seismic survey); Subject to identifying a drillable prospect, fully funding 100% of the costs of one exploration well (with no expenditure ‘cap’) to not less than 3,500 metres below the sea surface; Reimbursing Pancontinental for 65% of past expenditures incurred; Purchasing, interpreting and mapping existing seismic data; and Paying 100% of any other costs and expenses during the farmin period. 2 commencing (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) The farmin programme is not subject to expenditure “caps”. Under the terms of the Farmout Agreement, Tullow will pay 65% of back costs and 100% of forward costs during the farmin period and complete the 2D and 3D seismic surveys outlined above. Should the 2D and 3D seismic not deliver a suitable drilling target, Tullow shall be entitled to withdraw from its commitment to drill the well outlined above by giving written notice to Pancontinental not later than 16 months after the date of the completion of the acquisition of the 3D seismic or 13 months prior to the expiry of the First Renewal Exploration Period, whichever is the earlier. Commencement of the acquisition phase of the 3D seismic is required by 31 December 2014, and may possibly occur as soon as early-2014 depending on seismic vessel availability and other factors. If Tullow withdraws after fulﬁlling its 2D and 3D seismic commitments it must re-assign its 65% interest back to Pancontinental, at no cost to Pancontinental. 18 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations This EL 0037 farmout agreement brings a highly successful operator for exploration and drilling, and an extensive high-tech 3D seismic programme. In addition it covers the free-carried 5% interest held by Paragon, the third partner in the licence. While Tullow has a commitment to commence the extensive 3D seismic programme before 31 December 2014 it is expected that the 3D acquisition will commence as soon as the required EIA’s are approved and a selected seismic contractor can commence acquisition. Following completion of the farmout the Namibia EL 0037 consortium will consist of - Tullow Kudu Limited 1 (Operator) 65% Pancontinental Namibia (Pty) Ltd 2 30% Paragon Oil & Gas (Pty) Ltd 3 5% 1 Tullow Kudu Limited is a wholly owned subsidiary of Tullow Oil plc 2 Pancontinental Namibia (Pty) Ltd is a wholly owned subsidiary of Pancontinental Oil & Gas NL 3 Paragon Oil & Gas (Pty) Ltd is a wholly owned subsidiary of Paragon Investment Holding’s (Pty) Ltd Independent Resource Estimate Overview On 24 May 2013 Pancontinental announced that leading independent consulting ﬁrm DeGolyer and MacNaughton (“D&M”) had carried out an assessment of the oil and gas potential of the EL 0037 area. D&M provided estimates for 11 oil leads in the EL 0037 licence area of total mean prospective resources of 8.7 billion barrels of oil – 8.2 billion barrels net to Pancontinental’s 95% interest (these volumes are not adjusted for geologic and/or economic risk). D&M are recognised as the leader in resource estimation for the petroleum industry and have extensive international experience with a diverse range of clients in a diverse range of regions, including onshore and offshore East and West Africa. D&M’s resource estimates recognise large stratigraphic leads in potential clastic turbidite targets. These targets appear to be in the oil window. These potential accumulations are categorised as “leads” based on the available seismic and geologic data. The potential accumulations are not yet classiﬁed as “prospects” that are available for drilling. The summary potential volumetric ﬁndings of the report are reproduced in Table 2 below; the details of each lead are given in Table 3. D&M has prepared the assessment of licence area EL 0037 offshore Namibia in accordance with the Petroleum Resources Management System (PRMS) approved by the Society of Petroleum Engineers, the World Petroleum Council, the American Association of Petroleum Geologists, and the Society of Petroleum Evaluation Engineers. D&M’s Mean Estimate for the total 11 Leads is 8.7 Billion Barrels of Gross Prospective (recoverable) Oil Resources. 19 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Table 2-Estimate of Gross Prospective Oil Resources Low Estimate (103bbl) Best Estimate (103bbl) High Estimate (103bbl) Mean Estimate (103bbl) Probability Of Geological Success (Pg) Pg-Adjusted Mean Estimate (103bbl) Statistical Aggregate 4,591,213 7,817,133 13,913,089 8,706,734 0.050 435,337 1. 2. 3. 4. 5. 6. 7. 90, P50, P10, and mean respectively. Low, best, high, and mean estimates follow the PRMS guidelines for prospective resources. Low, best, high, and mean estimates in this table are P g is deﬁned as the probability of discovering reservoirs which ﬂow petroleum at a measurable rate. P Application of any geological and economic chance factor does not equate prospective resources to contingent resources or reserves. Recovery efﬁciency is applied to prospective resources in this table. There is no certainty that any portion of the prospective resources estimated herein will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the prospective resources evaluated. Leads are features that are not sufﬁciently well deﬁned to be drillable, and need further work and/or data. In general, Leads are signiﬁcantly more risky than Prospects and therefore volumetrics estimates for Leads are only indicative of relative size. Table 3 –Details of leads assessed by DeGolyer & MacNaughton in Namibia EL 0037 (Prospective Gross Ultimate Recovery, Million Barrels, Rounded to two decimal places) LEAD Potential Target P90 P50 P10 Mean A/B Barremian 100.75 471.46 1,767.86 782.83 C D E F G H K M N O Cretaceous Slope Channel Cretaceous Basin Floor Fan 77.92 49.37 364.15 1,398.65 610.19 231.20 900.07 388.19 Cretaceous Basin Floor Fan 221.14 1,057.91 4,171.05 1,770.03 Barremian 36.40 167.86 Turonian Turbidite Synrift Pinchout 8.87 5.63 38.36 26.07 653.54 146.14 99.83 280.45 63.78 43.07 Cretaceous Basin Floor Fan 22.68 102.99 408.14 174.24 Cretaceous Slope Channel 143.60 702.89 2,700.27 1,165.19 Santonian Channel 239.96 1,097.33 4,345.22 1,875.90 Cretaceous Channel 200.23 942.68 3,560.95 1,552.85 20 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Namibia EL 0037 Exploration Pancontinental believes that a critical factor for oil exploration offshore Namibia is oil maturity- where source rocks are sufﬁciently buried and heated to generate oil - within the “Oil Window”. Pancontinental has interpreted an “Oil Mature Fairway” that extends through EL 0037. Pancontinental believes that EL 0037 is one of the few areas covering an oil generating “sweet spot” where oil prone source rocks are sufﬁciently buried to generate oil; similar to its four projects offshore Kenya. Pancontinental is exploring ponded basin ﬂoor turbidites, slope fans and channels seen under the company’s earlier Reconnaissance Licence. These targets are associated with a restricted graben trough interpreted to hold the rich and mature oil source rocks identiﬁed in regional wells. Pancontinental has identiﬁed and mapped a number of ponded turbidite, slope turbidite, basin ﬂoor turbidite fans and channels forming major very large “leads” closely associated with, and within, the Inner Graben in EL 0037. Offshore Namibia (cid:177) Exploration Concepts Basin Floor Axis (Transition Zone) EL 0037 Slope / Shelf Boundary OIL MATURE FAIRWAY - Top Transition Zone Oil Generated and (cid:410)(cid:396)(cid:258)(cid:393)(cid:393)(cid:286)(cid:282)(cid:3)(cid:3)(cid:349)(cid:374)(cid:3)(cid:862)(cid:47)(cid:374)(cid:374)(cid:286)(cid:396)(cid:3) (cid:39)(cid:396)(cid:258)(cid:271)(cid:286)(cid:374)(cid:863) OIL SYSTEM (cid:135) Good Oil Prone Source Rocks seen regionally (cid:135) Oil recovery form Wingat-1 (380 (cid:177) 400 API), 2013 (cid:135) Source Rocks regionally are not always deeply buried enough (cid:11)(cid:179)Mature(cid:180)(cid:12)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:76)(cid:79)(cid:3)(cid:3)(cid:69)(cid:88)(cid:87)- (cid:135) Oil-(cid:80)(cid:68)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:41)(cid:68)(cid:76)(cid:85)(cid:90)(cid:68)(cid:92)(cid:3)(cid:179)(cid:46)(cid:76)(cid:87)(cid:70)(cid:75)(cid:72)(cid:81)(cid:180)(cid:3)(cid:76)(cid:81)(cid:3)(cid:44)(cid:81)(cid:81)(cid:72)(cid:85)(cid:3)(cid:42)(cid:85)(cid:68)(cid:69)(cid:72)(cid:81)(cid:3)(cid:76)(cid:81)(cid:3) EL 0037 ------ (cid:50)(cid:76)(cid:79)(cid:3)(cid:179)(cid:54)(cid:90)(cid:72)(cid:72)(cid:87)(cid:3)(cid:54)(cid:83)(cid:82)(cid:87)(cid:180) (cid:135) (cid:51)(cid:82)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)(cid:55)(cid:88)(cid:85)(cid:69)(cid:76)(cid:71)(cid:76)(cid:87)(cid:72)(cid:3)(cid:179)(cid:41)(cid:68)(cid:81)(cid:86)(cid:180)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:79)(cid:82)(cid:83)(cid:72)(cid:3)(cid:38)(cid:75)(cid:68)(cid:81)(cid:81)(cid:72)(cid:79)(cid:86)(cid:3)(cid:3) identified in Oil Mature Fairway Wingat 1 Light Oil Recovery SW Murombe 1 Oil generating zone modeled in Oil Mature Fairway Basin Floor Fans- Basin Floor Fans- Primary Objectives Primary Objectives Slope Incised Channels- Slope Incised Channels- Primary Objectives Primary Objective Slope Pinchouts- Primary Objectives NE Schematic Cross- Section NE to SW OUTER HIGH INNER GRABEN Basin Floor Axis- (Transition Zone) OIL MATURE FAIRWAY EL 0037 Slope / Shelf Boundary 15 Figure 12 – EL 0037 Interpreted Oil Mature Fairway 21 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations A number of the leads exceed several hundred square kilometers in area based on current mapping, and detailed mapping will be undertaken to deﬁne the full extent of the structural and stratigraphic closures and potential oil-bearing traps. Offshore Namibia is continuing to attract signiﬁcant international interest as an emerging oil and gas province in southwest Africa. The reservoirs interpreted by Tullow and Pancontinental in EL 0037; while they are interpreted to be closely associated with the interpreted source rocks, are also interpreted to be different and better developed than those drilled by HRT. The Oil Mature Fairway and Inner Graben are asymmetric, with considerably larger “fetch” for oil generation and migration on the Eastern side of the Graben, covered by EL 0037. Crucially, the Oil Mature Fairway lies to the Eastern side of the axis of the Basin Floor and within the Eastern part of the Basin Floor and the Eastern Slope area (See Figure 13 below). Oil migration is therefore interpreted to be predominantly to the East. Figure 13 – Interpreted Leads and Plays and Depositional Environments Maps Pancontinental therefore believes that the Eastern Flank is the environment that is most likely to contain volumes of trapped oil, and this is where EL 0037 is situated. 22 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations Namibia EL 0037 (cid:177) Numerous Leads Transition Zone ?Detached Basin- Floor Fan Dalia Field Angola Flat Event Transition Zone Reef (?) Turonian Flexure Transition Zone Channel A B D Santonian Channel incised into Turonian Flat Event Transition Zone Basin (cid:884)Floor Antiform N E NAMIBIA EL 0037 Numerous large Leads in slope and basin setting Interpreted Source Horizon Transition Zone Channel Syn-Rift Channel Basal Transition Zone Channel O M C Figure 14 – Seismic Cross Sections through selected Leads Forward Work Programme The EL 0037 Joint Venture now led by operator Tullow is planning an exploration programme consisting of- (cid:118)(cid:0) (cid:118)(cid:0) (cid:118)(cid:0) 3,000 sq km of 3D Seismic acquisition, processing and interpretation 2,000 linear km of 2D Seismic Depending on the outcome of the seismic programmes, one exploration well. While Tullow has a commitment to commence the extensive 3D seismic programme before 31 December 2014 it is expected that the 3D acquisition will commence as soon as the required EIA’s are approved and a selected seismic contractor can commence acquisition. 23 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations AUSTRALIA EP 104 / R1 ONSHORE CANNING BASIN Pancontinental 11.11% The RL1 area has been excised from the EP 104 exploration area to allow retention of the Point Torment gas discovery and the Stokes Bay 1 area. RL1 was renewed by the Minister of Mines and Petroleum of Western Australia for a period of ﬁve years from 8 November 2010. The joint venture is undertaking an examination of the prospectivity of the licence areas to plan a revised forward programme. L15 ONSHORE CANNING BASIN Pancontinental 12% Pancontinental and its co-venturers have been granted Petroleum Production Licence L15 over the West Kora-1 oil discovery well in the Canning Basin of Western Australia. The licence is for 21 years commencing 1 April 2010. The L15 Joint Venture is considering upgrading the existing production facility and restore oil production from West Kora -1. The Company is examining the future potential and value of this project. EP 424 OFFSHORE CARNARVON BASIN Pancontinental 38.462% EP 110 is operated in conjunction with EP- 424. The parties in EP-110 have identical equities to those in permit EP-424. Following a technical review of the Baniyas potential and due to the absence of success in extending Joint Venture access over all of the Baniyas Prospect, it was decided to consider selling or farming out the licences. EP 110 ONSHORE CARNARVON BASIN Pancontinental 38.462% This permit is operated in conjunction with EP- 424. The parties in EP-110 have identical equities to those in permit EP-424. The Joint Venture is considering a further review aimed at outlining possible onshore leads and prospects in EP 110. 24 Pancontinental Oil & Gas NL - Annual Report 2013 Review of Operations NEW VENTURES Pancontinental continuously reviews new opportunities in Australia and internationally. During the year a number of new opportunities were assessed and one was completed, being the acquisition of an additional 10% interest in Namibian EL 0037. PANCONTINENTAL TEAM Pancontinental is fortunate to have a small and dedicated team who have contributed immensely to the Company’s success. The accounting and administration team, led by Company Secretary Vesna Petrovic, and comprising Linda Underwood, Margaret Johnson and Roberta Gowans have been invaluable in their contribution to the Company. In Namibia, Pancontinental has been fortunate to gain the services of experienced oil & gas veteran, Mr Ger Kegge. Ger has had a long and successful career, ﬁrstly with Shell, and latterly with Tullow and he is Pancontinental’s Namibia in-country manager. Pancontinental employs, on a part time basis, a number. of experienced and highly respected consultants for activities including prospective resource assessments and new venture opportunities. 25 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report Your directors submit their report for the year ended 30 June 2013. DIRECTORS The names and details of the company’s directors in ofﬁce during the ﬁnancial year and until the date of this report are as follows. Directors were in ofﬁce for this entire period unless otherwise stated. Names, qualiﬁcations, experience and special responsibilities Henry David Kennedy MA (Geology), SEG (Non-Executive Chairman) Mr Kennedy has had a long association with Australian and New Zealand resource companies and as a technical director has been instrumental in the formation and/or development of a number of successful listed companies. During his term as executive director, these companies were involved in discovery of the Tubridgi gas ﬁeld, South Pepper, North Herald and Chervil oil ﬁelds in Western Australia and the Kupe South and Rua oil/gas condensate ﬁelds in New Zealand. Mr Kennedy is currently a non-executive director of Norwest Energy NL (since April 1997) and East Africa Resources Limited (since March 2013). Roy Barry Rushworth, BSc (Executive Director, Chief Executive Ofﬁcer) Mr Rushworth has more than twenty ﬁve years experience in petroleum exploration. He is a graduate of Sydney University, with a Bachelor of Science Degree in Geology and Marine Sciences. Commencing with positions in exploration operations, his career then extended to a period as Chief Geologist and subsequently Exploration Manager for an Australian listed company. A number of oil and gas discoveries were made by the company during that time. More recently, as the General Manager and Director of Afrex Limited, he was responsible for acquiring international new venture opportunities for Afrex Limited and its then co-venturer Pancontinental Oil & Gas NL. In this position he identiﬁed and negotiated projects in Malta, Kenya and Morocco. Following the merger of Afrex Limited with Pancontinental in August 2005, he accepted the position of Director - New Ventures for Pancontinental and is now the Chief Executive Ofﬁcer of the company. Ernest Anthony Myers CPA (Executive Finance Director) Mr Myers has over 30 years experience in the resources industry. Mr Myers is an accountant (CPA) who has held senior management and executive roles within a number of ASX listed companies. Mr Myers joined Pancontinental in March 2004 as Company Secretary and was appointed Finance Director in January 2009. He brings corporate and operational experience in a variety of ﬁelds including project development, feasibility studies and both equity and debt ﬁnancing. Mr Myers has extensive experience in exploration and operational issues, particularly in Africa. Mr Myers has been an alternate director of East Africa Resources Limited since June 2010. Anthony Robert Frederick Maslin BBus (Independent Non-Executive Director) Mr Maslin is an ex-stockbroker with corporate experience in both management and promotion, along with an extensive understanding of ﬁnancial markets. Mr Maslin has been instrumental in the capital raisings and promotion of several resource development companies. Mr Maslin is also a director of Buxton Resources Ltd (since November 2010). COMPANY SECRETARY Vesna Petrovic, BComm, CPA Mrs Petrovic is a Certiﬁed Practicing Accountant with over 10 years experience in the resources sector and has previously held positions with numerous publicly listed entities. In particular, Mrs Petrovic has signiﬁcant experience with companies involved in Africa. Mrs Petrovic holds a Bachelor of Commerce, Major in Accounting and Business Law and has completed the Graduate Diploma in Applied Corporate Governance from Chartered Secretaries Australia Ltd. 26 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report The relevant interest of each director in the shares and options of the company as at 30 June 2013 is as follows: (cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:44)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:86) Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin EARNINGS PER SHARE Basic earnings (loss) per share Diluted earnings (loss) per share CORPORATE INFORMATION Ordinary Shares Options over Ordinary Shares 134,051,602 36,335,609 400,714 14,583 1,250,000 2,500,000 750,000 500,000 Cents (0.06) (0.06) Corporate structure Pancontinental Oil & Gas NL is a no liability company incorporated and domiciled in Australia. Nature of operations and principal activities The principal activity during the year of entities within the consolidated entity was exploration for oil and gas. There have been no significant changes in the nature of those activities during the year. Employees The consolidated entity had no employees as at 30 June 2013, (2012: no employees). The consolidated entity employs the services of specialised consultants where and when needed. OPERATING AND FINANCIAL REVIEW Review of Operations Kenya L8 [15%] The Mbawa 1 exploration well in block L8 was drilled during the year. Mbawa 1 is the first natural gas discovery and the first ever hydrocarbon discovery offshore Kenya. The joint venture is considering a second well on deeper oil play. Kenya L6 [40%] During the year, a 3D seismic survey was completed over the Kifaru and Tembo prospects. The joint venture also secured additional acreage by regaining a previously relinquished area. Going forward, the joint venture is seeking a farminee for drilling. Kenya L10A & L10B [15%] In blocks L10A and L10B new 3D seismic surveys were completed with major prospects mapped. The joint ventures are considering a two well drilling programme commencing late 2013. Namibia EL 0037 [95%, post year end 30%] Activity in Namibia EL 0037 continued with multiple leads identified on the exploration permits as well as farmout efforts during the year. Post year end, the joint venture secured Tullow Oil as a farminee and new operator of the permit. 27 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report Group Overview Pancontinental Oil and Gas NL was incorporated in 1985 and listed on the Australian Securities Exchange in 1986. Performance Indicators The board closely monitors the g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:79)(cid:68)(cid:81)(cid:86)(cid:15)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:69)(cid:88)(cid:71)(cid:74)(cid:72)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:68)(cid:79)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)e. Dynamics of the Business The company continues to look for new opportunities, particularly in Africa. Whilst the company is committed to further developing existing projects, emerging opportunities are reviewed on a timely basis. Risk Management The group takes a proactive approach to risk management. The board is responsible for ensuring that risks and opportunities are identified on a timely basis and that the group's objectives and activities are aligned with the risks and opportunities identified by the board. The group believes that it is crucial for all board members to be a part of this process and as such the board has not established a separate risk management committee. The board has a number of mechanisms in place to ensure that its objectives and activities are aligned with the risks identified. These include the following: (cid:120) (cid:120) (cid:120) (cid:120) Implementation of operating plans and cash flow budgets by management and board monitoring of progress against these budgets. Analysis of specific business risks, including such matters as exchange rate movements, environmental issues and security matters. The group has advised each director, manager and consultant that they must comply with a set of ethical standards maintaining appropriate core company values and objectives. Such standards ensure shareholder value is delivered and maintained. Standards cover legal compliance, conflict resolution, privileged information and fair dealing. The board provides shareholders with information using a comprehensive Continuous Disclosure Policy which includes identifying matters which have a material effect on the underlying security price. ASX announcements, the web page of the company and other media resources are used to convey such information. The board encourages full participation by shareholders at the AGM and shareholders are requested to vote on board and executive remuneration aggregates as well as Employee Incentive Schemes. 28 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report Operating Results for the Year Summarised operating results are as follows: Non-segment and unallocated revenues and results Consolidated entity revenues and results from ordinary activities before income tax expense 2013 Revenues $ 1,295,429 Results $ (662,822) 1,295,429 (662,822) Shareholder Returns The group is in the exploration phase and so returns to shareholders are primarily measured through capital growth. Basic earning per share (cents) 2013 (0.06) 2012 (0.23) 2011 (0.16) 2010 (0.32) 2009 (1.26) 2008 (0.36) Investments for Future Performance The group continues to evaluate opportunities utilising in-house commercial expertise as well as corporate advice. Review of Financial Condition Capital Structure The group has a sound capital structure from which to continue its development programmes. During the year, the company successfully raised approximately $4.3 million dollars (net of costs) by way of a shortfall placement (cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:182) share purchase plan and exercise of options as detailed below: Share Capital Beginning of the financial year Issued during the year: (cid:16) Shortfall from Share Purchase Plan (net of costs) (cid:16) Exercise of Options (net of costs) End of the financial year Movements in the options of the company during the year are as per below: Option Reserve Balance at beginning of year (cid:16) exercised (cid:16) issued Balance at end of year Number of shares 1,123,444,094 $ 95,132,106 25,300,002 2,250,000 1,150,994,096 4,148,781 131,111 99,411,998 Number of options 4,500,000 (2,250,000) 2,750,000 5,000,000 Weighted average exercise price 0.09 0.59 0.12 0.12 Treasury policy The board has not considered it necessary to establish a separate treasury function because of the size and scope of the group's activities. Liquidity and Funding (cid:120) (cid:120) The group has sufficient liquidity and funding to continue operations into the foreseeable future. All operating plans and budgets are approved and progress is reviewed continuously. Statement of Compliance The above report is based on the guidelines in The Group of 100 Incorporated publication Guide to the Review of Operations and Financial Condition. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS No significant changes in the state of affairs of the company occurred during the financial year. SIGNIFICANT EVENTS AFTER THE BALANCE DATE Significant events after balance date include: 29 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report Tullow Oil farm-in to Namibia EL 0037 In September 2013, Pancontinental announced that Tullow Oil had farmed in to licence EL 0037. Tullow were assigned a 65% interest as well as operatorship, with Pancontinental retaining a 30% free carried interest. Kenya L8 At an Operating Committee Meeting held on 10th October, Apache indicated their intention to withdraw from the block. Apart from the above, no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the company, the results of those operations, or the state of affairs of the company in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The economic entity expects to maintain the present status and level of operations and hence there are no likely developments in the entity's operations. ENVIRONMENTAL REGULATION AND PERFORMANCE The company's operations are not regulated by a particular environmental regulation under a law of the Commonwealth or of a State or Territory. SHARE OPTIONS Unissued shares At the date of this report there were 5,000,000 unissued ordinary shares under options. Refer to the notes for further details on the options outstanding. During the year, 2,250,000 options were exercised (as per below) and 2,750,000 new options issued. Shares issued as a result of the exercise of Options 2,250,000 options were exercised with shares issued as a result, during the financial year. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS Since the end of the previous financial year the company has paid insurance premiums in respect of directors' and officers' liability and legal expenses insurance contracts. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors and officers and legal expenses insurance contracts as such disclosure is prohibited under the terms of the contract. The premiums were paid in respect of the following officers of the company and its controlled entities: HD Kennedy, RB Rushworth, EA Myers, ARF Maslin and V Petrovic. 30 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report REMUNERATION REPORT (Audited) This report outlines the remuneration arrangements in place for directors and executives of Pa(cid:81)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:50)(cid:76)(cid:79)(cid:3)(cid:9)(cid:3)(cid:42)(cid:68)(cid:86)(cid:3)(cid:49)(cid:47)(cid:3)(cid:11)(cid:179)(cid:87)(cid:75)(cid:72)(cid:3) company(cid:180)). Remuneration philosophy A description of the remuneration structures in place is as follows: The non-executive directors received a fixed fee for their services. They do not receive performance based remuneration. The chief executive officer received a fixed fee for his respective executive services (with no bonus or other performance-based remuneration). Directors do not receive any termination or retirement benefits. Remuneration committee The full board carries out the role of the remuneration committee. Remuneration structure In accordance with best practice corporate governance, the structure of non-executive and executive remuneration is separate and distinct. Non-executive director remuneration Objective The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the directors as agreed. The latest determination was at the Annual General Meeting held on 29 November 2007 when shareholders approved an aggregate remuneration of $400,000 per year. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst directors is reviewed annually. The board considers advice from external sources as well as the fees paid to non-executive directors of comparable companies when undertaking reviews. The non-executive directors of the company can participate in Employee Option Incentive Schemes with shareholder approval. The remuneration of executive and non-executive directors for the period ending 30 June 2013 is detailed in Table 1 of this report. Senior management and executive director remuneration Objective The board seeks to set aggregate remuneration at a level which provides the company with the ability to attract and retain executives of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure In determining the level and make up of executive remuneration, the board takes independent advice from external sources when necessary. It is the board's policy that employment contracts are only entered into with the chief executive officer and with (cid:78)(cid:72)(cid:92)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:17)(cid:3)(cid:39)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:40)(cid:50)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:29) Basic Sum: Capacity: Commencement Date: Termination Period: $650,000 Chief Executive Officer 1 July 2012 6-12 months Fixed remuneration Objective The level of fixed directors(cid:182) fees is set so as to provide a base level which is both appropriate to the position and is competitive in the market. Structure Fixed primary remuneration is paid on a cash basis and there are no fringe benefits or other costs incurred by the company. Company performance Company performance is reflected in the movement of the company's share price over time. As the company is in an exploration phase, returns to shareholders will primarily come through share price appreciation. The board(cid:182)s strategy in achieving this aim is to acquire early stage projects which can attract quality joint venture partners. The company has developed skills in the acquisition of projects and also built strategic alliances with other companies to further develop its project portfolio. 31 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report Table 1: Director remuneration for the year ended 30 June 2013 Primary benefits Post Employment Salary & Fees Cash STI Superannuation Equity Options (Issued) Value of options as proportion of Revenue Total Henry David Kennedy (Non-Executive Chairman) 2013 2012 Roy Barry Rushworth (Executive Director, Chief Executive Officer) 2013 2012 Ernest Anthony Myers1 (Executive Finance Director) 2013 2012 Anthony Robert Frederick Maslin (Non-Executive Director) 2013 2012 Total Current Year Remuneration 50,000 50,000 650,000 550,000 48,000 48,000 48,000 48,000 796,000 - - - - - - - - - - - - - - - - - - 28,000 63,726 78,000 113,726 2.2% 14.6% 56,000 127,453 706,000 677,453 4.3% 29.2% 42,000 - 90,000 48,000 3.2% - 28,000 - 76,000 48,000 2.2% - 154,000 950,000 - Note 1. Mr Myers has a 50% interest in a consulting company which provides staff, accounting and administrative services to listed companies, including Pancontinental. Mr Myers is paid a salary from that company. The same company also pays the staff who provide company secretarial, accounting and administrative services to Pancontinental. The total fees paid for these services and functions was $305,400 (2012: $289,500). Table 2: Options granted as part of remuneration for the year ended 30 June 2013 (as approved by Shareholders) Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Total Options Issued Issued 500,000 1,000,000 750,000 500,000 2,750,000 Options granted as part of director and management remuneration have been valued using an appropriate option pricing model, in which the option exercise price, the current level and volatility of the underlying share price, the risk-free interest rate, expected dividends on the underlying shares, the current market price of the underlying shares and the expected life of the options are taken into account. See following table for further details. 2,750,000 options were granted to directors during the year. Fair values of options: The fair value of each option is estimated on the date of grant using an appropriate option pricing model. Expected volatility Risk-free interest rate Expected life of option 2013 2012 2011 2010 2009 2008 110% 2.74% 4 years 120% 3.57% 3 years - - - - - - - - - 113% 6.42% 5 years Number of options Grant date Vesting date 2,250,000 2,750,000 29 Nov 11 30 Nov 12 28 May 12 30 Nov 12 Weighted average fair value 0.08 0.06 END OF REMUNERATION REPORT 32 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Report DIRECTORS' MEETINGS The numbers of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director were as follows: Number of meetings held: Number of meetings attended: Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Directors' Meetings 2 2 2 2 1 Notes The directors are of the opinion that it is often more efficient to deal with matters by circular resolutions than by board meetings, and 7 matters were dealt with in such a manner during the year. ROUNDING The amounts contained in this report and in the financial report have been rounded to the nearest $1 (where rounding is applicable) under the option available to the company under ASIC Class Order 98/0100. The company is an entity to which the Class Order applies. (cid:36)(cid:56)(cid:39)(cid:44)(cid:55)(cid:50)(cid:53)(cid:182)(cid:54)(cid:3)(cid:44)(cid:49)(cid:39)(cid:40)(cid:51)(cid:40)(cid:49)(cid:39)(cid:40)(cid:49)CE DECLARATION (cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:82)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:68)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:86)(cid:72)(cid:87)(cid:3)(cid:82)(cid:88)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:86)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3) ended 30 June 2013. NON-AUDIT SERVICES Rothsay did not receive any payment for non-audit services during the year. Signed in accordance with a resolution of the Directors. Ernest Anthony Myers Director Perth 26 September 2013 33 Pancontinental Oil & Gas NL - Annual Report 2013 Auditor’s Independence Declaration AUDITOR INDEPENDENCE The directors received the following declaration from the auditor of Pancontinental Oil & Gas NL: Auditor's Independence Declaration to the Directors of Pancontinental Oil & Gas NL (cid:44)(cid:81)(cid:3)(cid:68)(cid:70)(cid:70)(cid:82)(cid:85)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:22)(cid:19)(cid:26)(cid:38)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:21)(cid:19)(cid:19)(cid:20)(cid:3)(cid:11)(cid:87)(cid:75)(cid:72)(cid:3)(cid:179)(cid:36)(cid:70)(cid:87)(cid:180)(cid:12)(cid:3)(cid:44)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:69)(cid:92)(cid:3)(cid:71)(cid:72)(cid:70)(cid:79)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:92)(cid:3)(cid:78)(cid:81)(cid:82)(cid:90)(cid:79)(cid:72)(cid:71)(cid:74)(cid:72)(cid:3) and belief there have been: i) ii) no contraventions of the auditor independence requirements of the Act in relation to the audit of the 30 June 2013 annual financial statements; and no contraventions of any applicable code of professional conduct in relation to the audit. Mr Graham Swan Lead Auditor 26 September 2013 34 Pancontinental Oil & Gas NL - Annual Report 2013 Corporate Governance Statement In accordance with the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations ("ASX Principles and Recommendations")1, Pancontinental Oil & Gas NL ("the company") has made it a priority to adopt systems of control and accountability as the basis for the administration of corporate governance. Some of these policies and procedures are summarised in this statement. Commensurate with the spirit of the ASX Principles and Recommendations, the company has followed each recommendation where the board has considered the recommendation to be an appropriate benchmark for corporate governance practices, taking into account factors such as the size of the company and the board, resources available and activities of the company. Where, after due consideration, the company's corporate governance practices depart from the ASX Principles and Recommendations, the board has offered full disclosure of the nature of and reason for the adoption of its own practice. Further information about the company's corporate governance practices is set out on the company's website at www.pancon.com.au. In accordance with the ASX Principles and Recommendations, information published on the company's website includes charters (for the board and its committees), the company's code of conduct and other policies and procedures relating to the board and its responsibilities. EXPLANATIONS FOR DEPARTURES FROM BEST PRACTICE RECOMMENDATIONS During the company's 2012/2013 financial year ("reporting period") the company has followed each of the ASX Principles and Recommendations, other than in relation to the matters specified below. Principle 2 Recommendation 2.1: A majority of the board should be independent directors Notification of Departure: Currently only one of the four directors is considered to be independent (cid:177) Mr Maslin. Messrs Rushworth and Myers are executives and Mr Kennedy, a substantial shareholder. Explanation for Departure: Given the size and scope of the company's operations the board considers that it is appropriately structured to discharge its duties in a manner that is in the best interests of the company. The board believes its current composition is in line with the long term interests of shareholders. Furthermore, mechanisms are in place so that if a director considers it necessary, they may obtain independent professional advice. The board considers independence, amongst other things, when recommending new directors to the board. Principle 2 Recommendation 2.2: The chair should be an independent director Notification of Departure The chair is not considered to be independent. Explanation for Departure Mr Kennedy is not independent by virtue of his substantial shareholding in the company. However, the board considers that Mr Kennedy's interests are aligned with the long term interests of shareholders. Given Mr Kennedy's extensive experience and qualifications, the board believes Mr Kennedy is the most appropriate director to carry out the role of chair. 1 A copy of the ASX Principles and Recommendations is set (cid:82)(cid:88)(cid:87)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:72)(cid:81)(cid:87)(cid:76)(cid:87)(cid:79)(cid:72)(cid:71)(cid:3)(cid:5)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)(cid:5)(cid:17) 35 Pancontinental Oil & Gas NL - Annual Report 2013 Corporate Governance Statement Principle 2 Recommendation 2.4: The board should establish a nomination committee Notification of Departure: The full board fulfils the role of a nomination committee. Explanation for Departure: The full board considers those matters that would usually be the responsibility of a nomination committee. The board considers that no efficiencies or other benefits would be gained by establishing a separate nomination committee. The board has adopted a nomination committee charter, which it applies when convening as the nomination committee. Principle 4 Recommendation 4.1: The board should establish an audit committee Recommendation 4.2: Structure of the audit committee Notification of Departure: The full board fulfils the role of an audit committee. Explanation for Departure: The composition of the board is not suitable for the formation of a separate audit committee in accordance with the recommendation. Further, the independent director does not possess the requisite financial expertise recommended in an audit committee. The board has adopted an audit committee charter to assist with its function as an audit committee. The audit committee charter provides that independent directors may meet with the external auditor. Principle 7 Recommendation 7.2: Implement, manage and report on risk management system Notification of Departure: The board has not received a formal documented report from management on the effectiveness of their management of the (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:80)(cid:68)(cid:87)(cid:72)(cid:85)(cid:76)(cid:68)(cid:79)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:89)erbal updates. Explanation for Departure: Although a formal risk management system has not been implemented, the board has continued focus on risk management during the year. Frequent discussions and reviews of the various risks that the Pancontinental group may be exposed to are (cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:85)(cid:79)(cid:92)(cid:3) (cid:70)(cid:68)(cid:85)(cid:85)(cid:76)(cid:72)(cid:71)(cid:3) (cid:82)(cid:88)(cid:87)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:76)(cid:86)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:71)(cid:3) (cid:87)(cid:82)(cid:3) (cid:73)(cid:88)(cid:85)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3) (cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:76)(cid:81)(cid:74)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:86)(cid:87)(cid:85)(cid:72)(cid:81)(cid:74)(cid:87)(cid:75)(cid:72)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:85)(cid:76)(cid:86)(cid:78)(cid:3) (cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) policies. Principle 8 Recommendation 8.1: The board should establish a remuneration committee Recommendation 8.2: Structure of the remuneration committee Notification of Departure: The board fulfils the function of a remuneration committee. Explanation for Departure: Given the size and composition of the board, it is not practicable that a separate committee be formed. To assist it to carry out its function in relation to remuneration matters, the board has adopted a remuneration committee charter. 36 Pancontinental Oil & Gas NL - Annual Report 2013 Corporate Governance Statement COMMITTEE MEETINGS Due to the size of the current board, the functions of the Nomination, Audit and Remuneration Committees were carried out by the full board during the financial year. As such, no separate meetings were held for the Nomination and Remuneration Committees. The board agenda may incorporate these items and appropriate discussions held at the board meetings. Details of each of the director's qualifications are set out in the (cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)(cid:3)(cid:36)(cid:79)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)directors have substantial industry experience and consider themselves to be financially literate. Mr Myers is a Certified Practising Accountant and therefore meets the tests of financial expertise. OTHER Skills, Experience, Expertise and term of office of each Director A profile of each director containing the skills, experience, expertise and term of office of each director is set out in the Directors' Report. Identification of Independent Directors In considering the independence of directors, the board refers to the criteria for independence as set out in Box 2.1 of the ASX Principles and Recommendations ("Independence Criteria"). To the extent that it is necessary for the board to consider issues of materiality, the board refers to the thresholds for qualitative and quantitative materiality as adopted by the board and contained in the board charter, which is disclosed in full on the c(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:17) Applying the Independence Criteria, the independent director of the company for the current financial year was Mr Maslin. Corporate Reporting ASX Principle 7.3 requires the board to disclose whether it has received assurance from the Chief Executive Officer (or equivalent) and the Chief Financial Officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. The board confirms that such assurance has been received. Statement concerning availability of Independent Professional Advice If a director considers it necessary to obtain independent professional advice to properly discharge the responsibility of his/her office as a director, then, provided the director first obtains approval for incurring such expense from the chair, the company will pay the reasonable expenses associated with obtaining such advice. Confirmation of whether performance Evaluation of the Board and its members has taken place and how it was conducted During the reporting period a formal evaluation of the board and its members was not carried out as it was not considered to be a beneficial procedure given the size and composition of the board and the nature of the company's operations. However, the composition of the board and its suitability to carry out the company's objectives is discussed on an as-required basis. Existence and Terms of any Schemes for Retirement Benefits for Executive and Non-Executive Directors There are no termination or retirement benefits for non-executive directors. (cid:39)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:82)(cid:85)(cid:86)(cid:182)(cid:3)(cid:55)(cid:72)(cid:85)(cid:80)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:50)(cid:73)(cid:73)(cid:76)(cid:70)(cid:72) Name Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Term in office 14 years 8 years 4 years 2 years For additional details regarding board appointments, please refer to the Pancontinental website. 37 Pancontinental Oil & Gas NL - Annual Report 2013 Corporate Governance Statement Diversity (cid:177) Board Composition The mix of skills and diversity for which the company is looking to achieve in membership of the board is one that is as diverse as (cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:74)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:86)(cid:76)(cid:93)(cid:72)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:86)(cid:70)(cid:82)(cid:83)(cid:72)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:75)(cid:68)(cid:86)(cid:3) (cid:68)(cid:71)(cid:82)(cid:83)(cid:87)(cid:72)(cid:71)(cid:3) (cid:68) Diversity Policy which is available (cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:90)(cid:72)(cid:69)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)he Corporate Governance section. Diversity (cid:177) Measurable Objectives (cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:83)(cid:85)(cid:76)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:85)(cid:72)(cid:74)(cid:68)(cid:85)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:29) (cid:190) (cid:190) (cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:82)(cid:68)(cid:85)(cid:71)(cid:15)(cid:3)(cid:72)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:68)(cid:69)(cid:79)(cid:72)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) to provide equal (cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3) (cid:68)(cid:79)(cid:79)(cid:3) (cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3) (cid:87)(cid:82)(cid:3) employment based on merit. Primary objectives set by the company with regard to diversity have been met, as described below: (cid:190) blend of skills (cid:177) wide range of backgrounds; geology, petroleum exploration, finance and corporate experience; (cid:190) cultural backgrounds (cid:177) Australian, European and American; (cid:190) gender (cid:177) both male and female members; and (cid:190) age (cid:177) the age range spans over 40 years. The above points relate to the composition of the board, as the company does not have any employees. Diversity (cid:177) Annual Reporting (cid:55)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:68)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:70)(cid:72)(cid:81)(cid:87)(cid:68)(cid:74)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:73)(cid:72)(cid:80)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:82)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:29) Employees N/A [no employees] N/A [no employees] Executives & Board Members 20% 20% % Female 2013 2012 38 Pancontinental Oil & Gas NL - Annual Report 2013 Statement of Comprehensive Income YEAR ENDED 30 JUNE 2013 Notes OPERATING ACTIVITIES Other revenue Depreciation and amortisation expenses Salaries, fees and benefits Audit fees Generative exploration expenditure and write off Annual report costs ASX fees Administration, accounting and secretarial fees Insurance Legal fees Share registry costs Rent and outgoings Travel Other revenues and expenses TOTAL OPERATING ACTIVITIES FINANCING ACTIVITIES Financing income Financing expense TOTAL FINANCING ACTIVITIES PROFIT/(LOSS) BEFORE INCOME TAX Income tax expense PROFIT/(LOSS) FOR THE PERIOD OTHER COMPREHENSIVE INCOME/(LOSS) Other comprehensive income TOTAL OTHER COMPREHENSIVE INCOME/(LOSS) TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 2, 6 2 3 10 15 CONSOLIDATED 2012 2013 $ $ - (1,587) (559,094) (31,500) (82,210) (16,591) (58,242) (307,686) (20,842) (18,142) (66,319) (85,675) (100,555) (340,980) (1,689,423) 5,500 (1,651) (461,773) (40,500) (42,035) (6,828) (40,944) (291,764) (21,561) (11,699) (42,878) (96,937) (132,841) (557,246) (1,743,157) 1,295,429 (268,828) 1,026,601 430,403 (493,019) (62,616) (662,822) - (662,822) (1,805,773) - (1,805,773) - - - - (662,822) (1,805,773) (0.06) (0.06) (0.23) (0.23) The Statement of Comprehensive Income is to be read in conjunction with the Notes to the Financial Statements. 39 Pancontinental Oil & Gas NL - Annual Report 2013 Statement of Financial Position AT 30 JUNE 2013 Notes CURRENT ASSETS Cash assets Trade and other receivables TOTAL CURRENT ASSETS NON-CURRENT ASSETS Property, plant and equipment Deferred exploration, evaluation and development costs TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables TOTAL CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Parent entity interest Contributed equity Reserves Accumulated losses Total parent entity interest in equity TOTAL EQUITY 4 6 7 8 9a 10 10 CONSOLIDATED 2013 $ 2012 $ 33,821,848 1,930,056 35,751,904 47,722,233 98,582 47,820,815 2,804 3,598 38,938,195 38,940,999 23,211,960 23,215,558 74,692,903 71,036,373 121,266 121,266 235,805 235,805 121,266 235,805 74,571,637 70,800,568 99,411,998 345,179 (25,185,540) 74,571,637 95,132,106 298,956 (24,630,494) 70,800,568 74,571,637 70,800,568 The Statement of Financial Position is to be read in conjunction with the Notes to the Financial Statements. 40 Pancontinental Oil & Gas NL - Annual Report 2013 Statement of Changes in Equity AT 30 JUNE 2013 Consolidated Share Capital Balance at 1 July 2012 Profit or loss Other comprehensive income/(loss) Shares issued (net of costs) Share options Balance at 30 June 2013 Balance at 1 July 2011 Profit or loss Other comprehensive income/(loss) Shares issued (net of costs) Share options Balance at 30 June 2012 $ 95,132,106 - - 4,279,892 99,411,998 38,166,253 - - 56,965,853 95,132,106 Retained Earnings $ (24,630,494) (662,822) - - 107,776 (25,185,540) (23,481,202) (1,805,773) - - 656,481 (24,630,494) Option Reserve $ 298,956 - - - 46,223 345,179 764,258 - - - (465,302) 298,956 Total Equity $ 70,800,568 (662,822) - 4,279,892 153,999 74,571,637 15,449,309 (1,805,773) - 56,965,853 191,179 70,800,568 The above Statement of Changes in Equity is to be read in conjunction with the Notes to the Financial Statements. 41 Pancontinental Oil & Gas NL - Annual Report 2013 Statement of Cash Flows YEAR ENDED 30 JUNE 2013 Notes CASH FLOWS FROM OPERATING ACTIVITIES Payments to suppliers and employees Sundry income Recharges & refunds of exploration expenditure Expenditure on exploration interests NET CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment NET CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Interest received Proceeds from issues of ordinary shares Share issue costs NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH HELD Add opening cash brought forward Effects of exchange rate changes CLOSING CASH CARRIED FORWARD 11(b) 11(a) (19,465,068) (15,394,321) CONSOLIDATED 2012 2013 $ $ (1,874,229) - 2,268,613 (19,859,452) (1,686,512) 5,500 - (13,713,309) (794) (794) (3,803) (3,803) 1,295,429 4,560,250 (292,906) 5,562,773 430,256 60,705,250 (3,725,804) 57,409,702 (13,903,089) 47,722,233 2,704 33,821,848 42,011,578 5,710,905 (250) 47,722,233 The above Statement of Cash Flows is to be read in conjunction with the Notes to the Financial Statements. 42 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This financial report was authorised for issue by the directors on 26 September 2013. Statement of Compliance This financial report is a general purpose financial report, which has been prepared in accordance with Australian Accounting Standards (AASBs), adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. International Financial Reporting Standards (IFRSs) form the basis of AASBs adopted by the AASB, and for the purpose of this report are called Australian equivalents to IRFS (AIFRS) to distinguish from previous Australian GAAP. The financial report complies with IFRSs and interpretations adopted by the International Accounting Standards Board. Basis of preparation The report has been prepared on the basis of historical costs and except where stated does not take into account changing money values or current valuation of non-current assets. The accounting policies adopted are consistent with those of the previous year. The following specific accounting policies have been consistently applied, unless otherwise stated. (a) Income Tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, and any adjustment to tax payable in respect of prior years. Deferred tax is provided using the balance sheet liability method, providing for temporary difference between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. (b) Exploration Expenses Exploration, evaluation and development costs are accumulated in respect of each separate area of interest. Such costs are carried forward where they are expected to be recouped through successful development and exploitation of the area of interest or alternatively, by its sale, or where activities in the area of interest have not yet reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves. (c) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Pancontinental Oil & Gas NL (the parent entity) and all entities which Pancontinental Oil & Gas NL controlled from time to time during the year and at balance date. Information from the financial statements of subsidiaries is included from the date the parent company obtains control until such time as control ceases. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the parent company has control. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. (d) Foreign currencies Translation of foreign currency transactions Transactions in foreign currencies of entities within the consolidated entity are converted to local currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. A monetary item arising under a foreign currency contract outstanding at the reporting date where the exchange rate for the monetary item is fixed in the contract is translated at the exchange rate fixed in the contract. All resulting exchange differences arising on settlement or re-statement are recognised as revenues and expenses for the financial year. Any gains or costs on entering a hedge are deferred and amortised over the life of the contract. (e) Cash and cash equivalents For the purposes of the Statement of Cash Flows, cash includes cash on hand and in banks, and money market investments readily convertible to cash within two working days, net of outstanding bank overdrafts. Interest expense is charged as an expense as it accrues. 43 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements (f) Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written-off as incurred. Receivables from related parties are recognised and carried at the nominal amount due. Bills of exchange and promissory notes are measured at the lower of cost and net realisable value. (g) Investments Investments in controlled entities are carried in the company’s financial statements at the lower of cost and recoverable amount. (h) Recoverable Amount The carrying amounts of non-current assets valued on the cost basis, other than exploration and evaluation expenditure carried forward are reviewed to determine whether they are in excess of their recoverable amount at reporting date. If the carrying amount of a non-current asset exceeds its recoverable amount, the asset is written down to the lower amount. The write down is expensed in the reporting period in which it occurs. (i) Property, plant and equipment Cost and valuation Property, plant and equipment is measured at cost. Depreciation Depreciation is provided on a diminishing value basis on all property, plant and equipment. Major depreciation rates are: Plant and equipment: 2013 30% 2012 30% (j) Joint ventures Interests in the joint venture operations are brought to account by including in the respective classifications, the share of individual assets employed and share of liabilities and expenses incurred. In the company’s financial statements, investments in joint venture operations were carried at the lower of cost and recoverable amount. (k) Going concern The directors consider that the going concern basis for the consolidated entity is appropriate and recognise that additional funding is required to ensure the consolidated entity can continue its operations for the twelve month period from the date of this financial report and to fund the continued development of the consolidated entity’s exploration assets. This basis has been determined after consideration of the following factors: (cid:120) The ability to issue additional share capital under the Corporations Act 2001, if required, by a share purchase plan, share placement or rights issue; (cid:120) The option of farming out all or part of the consolidated entity’s exploration projects; and (cid:120) The ability, if required to dispose of interests in exploration and development assets. Accordingly, the directors believe that the consolidated entity will obtain sufficient cash inflows to enable it to continue as a going concern and that it is appropriate to adopt that basis of accounting in the preparation of the financial statements. (l) Payables Liabilities for trade creditors and other amounts are carried at cost which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Payables to related parties are carried at the principal amount. Deferred cash settlements are recognised at the present value of the outstanding consideration payable on the acquisition of an asset discounted at prevailing commercial borrowing rates. (m) Provisions Provisions are recognised when the economic entity has a legal, equitable or constructive obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events, it is probable that a future sacrifice of economic benefits will be required and a reliable estimate can be made of the amount of the obligation. 44 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements (n) Contributed equity Issued and paid up capital is recognised at the fair value of the consideration received by the company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. (o) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rendering of Services Where the contract outcome can be reliably measured, control of the right to be compensated for the services and the stage of completion can be reliably measured. Stage of completion is measured by reference to the labour hours incurred to date as a percentage of total estimated labour hours for each contract. Where the contract outcome cannot be reliably measured, revenue is recognised only to the extent that costs have been incurred. Interest Revenue Control of the right to receive the interest payment. Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset. (p) Taxes Tax-effect accounting is applied using the income statement liability method whereby income tax is regarded as an expense and is calculated on the accounting profit after allowing for permanent differences. To the extent timing differences occur between the time items are recognised in the financial statements and when items are taken into account in determining taxable income, the net related taxation benefit or liability, calculated at current rates, is disclosed as a future income tax benefit or a provision for deferred income tax. The net future income tax benefit relating to tax losses and timing differences is not carried forward as an asset unless the benefit is virtually certain of being realised. Where assets are revalued no provision for potential capital gains tax has been made. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: (cid:120) where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. (cid:120) The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (q) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave, sick leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave, sick leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. Employee benefit expenses and revenues arising in respect of the following categories: (cid:120) wages and salaries, non-monetary benefits, annual leave, long service leave, sick leave and other leave benefits; and (cid:120) other types of employee benefits are charged against profits on a net basis in their respective categories. 45 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements (r) Earnings per share Basic EPS is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to members, adjusted for: (cid:120) costs of servicing equity (other than dividends); (cid:120) the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and (cid:120) other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (s) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (t) Financial Instruments See financial instruments note for compliance notes with AASB 7, financial instruments: disclosures. (u) New accounting standards and interpretations The financial report is presented in Australian dollars which is the company’s functional currency. A number of new standards, amendments to standards and interpretations are effective for the current annual report period; however, none have been applied in preparing these consolidated financial statements. The standards are not expected to have a material impact on the accounting policies or consolidated financial statements of the group. 46 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 2. DEPRECIATION AND WRITE OFF Notes Expenses Depreciation of non-current assets: Office furniture and equipment Generative exploration and write off: Exploration, evaluation and development costs 3. INCOME TAX (a) Income Tax (Benefit)/Expense The prima facie tax, using tax rates applicable in the country of operation, on profit and extraordinary items differs from the income tax provided in the financial statements as follows: Prima facie tax on profit from ordinary activities Tax effect of permanent differences: Other items (net) Amount not brought to account as a carried forward future income tax benefit Income tax expense attributable to ordinary activities (b) Future Income Tax Benefit not taken into account The potential future income tax benefit calculated at 30% in respect of : CONSOLIDATED 2012 2013 $ $ 1,587 1,651 82,210 42,035 CONSOLIDATED 2012 2013 $ $ (198,104) (541,732) 46,200 - 151,904 541,732 - - Adjustments to carry forward tax losses Tax Losses not brought to account Total This future income tax benefit will only be obtained if: future assessable income is derived of a nature and of an amount sufficient to enable the benefit to be realised; (a) the conditions for deductibility imposed by tax legislation continue to be complied with; and (b) (c) no changes in tax legislation adversely affect the consolidated entity in realising the benefit. - 6,122,404 6,122,404 - 5,965,816 5,965,816 4. RECEIVABLES (CURRENT) Sundry receivables Total CONSOLIDATED 2012 2013 $ $ 98,582 1,930,056 98,582 1,930,056 (a) Terms and conditions (i) (ii) Sundry debtors and other receivables are non-interest bearing and have repayment terms between 30 and 90 days. Trade debtors are non-interest bearing and generally on 30 day terms. 47 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements INTERESTS IN SUBSIDIARIES 5. Name Euro Pacific Energy Pty Ltd Provision for diminution in value of investment Loan to Euro Pacific Energy Pty Ltd Provision for loss on loan to Euro Pacific Energy Pty Ltd Pancontinental Namibia Pty Ltd Provision for diminution in value of investment Loan to Pancontinental Namibia Pty Ltd Provision for loss on loan to Pancontinental Namibia P/L Afrex Ltd * Provision for diminution in value of investment Loan to Afrex Ltd Provision for loss on loan to Afrex Ltd Starstrike Resources Ltd * Provision for diminution in value of investment Loan to Starstrike Resources Ltd Provision for loss on loan to Starstrike Resources Ltd Total Country of incorporation Percentage of equity interest held by the consolidated entity Investment 2013 % 2012 % 2013 $ Australia 100 100 Australia 100 100 2 (2) (162,659) - 1 (1) 4,839,699 2012 $ 2 (2) (162,889) - 1 (1) 6,351 Saint Lucia 100 100 British Virgin Islands 100 100 *Indicates companies not audited by Rothsay Chartered Accountants. 6. PROPERTY, PLANT AND EQUIPMENT Office equipment At cost Less: Accumulated depreciation Total written down amount Reconciliations Reconciliations of the carrying amounts of property, plant and equipment Office equipment Carrying amount opening balance Additions Depreciation expense Total written down amount 48 Pancontinental Oil & Gas NL - Annual Report 2013 (4,328) (1,207) 10,584,107 10,584,107 (4,514,920) (4,541,703) 4,682,033 7,561,202 - - 380,000 380,000 (380,000) (380,000) 54,760 60,315 - - 18,336,633 10,648,235 CONSOLIDATED 2012 2013 $ $ 54,375 (51,571) 2,804 53,582 (49,984) 3,598 3,598 793 (1,587) 2,804 2,404 2,845 (1,651) 3,598 Notes to the Financial Statements 7. DEFERRED EXPLORATION, EVALUATION AND DEVELOPMENT COSTS Exploration, evaluation and development costs carried forward Pre-production: exploration and evaluation phases: Carrying amount at 1 July Expenditure & acquisitions during the year Exploration expenditure written off Recovery and refunds of exploration expenditure * Carrying amount at 30 June CONSOLIDATED 2013 $ 2012 $ 23,211,960 19,723,183 (18,250) (3,978,698) 38,938,195 9,879,712 13,410,027 (21,187) (56,592) 23,211,960 The ultimate recoupment of costs carried forward for exploration and evaluation phases is dependent on the successful development and commercial exploitation or sale of the respective mining areas. * For the year ended 30 June 2012, the recoveries relate to ordinary joint venture recharges; for the 30 June 2013 financial year the recoveries relate to refunds of exploration expenditure previously cash called. 8. TRADE and OTHER PAYABLES (CURRENT) Trade creditors Total 9. CONTRIBUTED EQUITY (a) Issued and paid up capital Ordinary shares fully paid Total (b) Movements in shares on issue CONSOLIDATED 2012 2013 $ $ 235,805 235,805 121,266 121,266 CONSOLIDATED 2012 2013 $ $ 99,411,998 95,132,106 99,411,998 95,132,106 Beginning of the financial year Issued during the year: (cid:16) Placement (net of costs) (cid:16) Shortfall from Share Purchase Plan (net of costs) (cid:16) Exercise of Options (net of costs) End of the financial year 2013 2012 Number of shares 1,123,444,094 $ Number of shares $ 95,132,106 660,779,809 38,166,253 - 25,300,002 2,250,000 1,150,994,096 - 4,148,781 131,111 99,411,998 457,142,858 56,323,935 512,168 129,750 1,123,444,094 95,132,106 3,271,427 2,250,000 49 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 10. RESERVES AND ACCUMULATED LOSSES Reserves Beginning of the financial year Directors and employee options issued Options exercised End of the financial year Accumulated losses Beginning of the financial year Net loss attributable to members of Pancontinental Oil & Gas NL Share options exercised Total available for appropriation End of the financial year 11. STATEMENT OF CASH FLOWS (a) Reconciliation of the net loss after tax to the net cash flows from operations Net loss Non-Cash Items, Non-Operating Items Depreciation of non-current assets Options Financing income Changes in assets and liabilities (Increase)/decrease in trade and other receivables (Increase)/decrease in property, plant & equipment (Increase)/decrease in exploration, evaluation & development (Increase)/decrease in interests in subsidiaries (Decrease)/increase in trade and other payables (Decrease)/increase in employee entitlements Other non-cash Effect of exchange rate changes Net cash flow from operating activities (b) Reconciliation of cash Cash balance comprises: (cid:16) cash assets Closing cash balance CONSOLIDATED 2013 $ 2012 $ 298,956 153,999 (107,776) 345,179 764,258 191,179 (656,481) 298,956 (24,630,494) (23,481,202) (662,822) 107,776 (25,185,540) (25,185,540) (1,805,773) 656,481 (24,630,494) (24,630,494) CONSOLIDATED 2013 $ 2012 $ (662,822) (1,805,773) 1,587 153,999 (1,295,429) 1,651 191,179 (430,256) (1,831,474) 794 (54,554) (1,194) (15,726,235) (13,332,248) - (114,539) - 9,051 - (19,465,068) - 48,065 - (11,191) - (15,394,321) 33,821,848 33,821,848 47,722,233 47,722,233 50 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 12. EXPENDITURE COMMITMENTS Capital expenditure commitments Estimated capital expenditure contracted for at reporting date, but not provided for, payable: not later than one year (cid:16) other later than one year and not later than five years (cid:16) other later than five years Total CONSOLIDATED 2013 $ 2012 $ 21,607,950 1,432,795 31,584,412 2,874,288 53,192,362 4,307,083 13. EMPLOYEE BENEFITS Employee Share Scheme Information with respect to the number of options under the employee share incentive scheme is as follows: Balance at beginning of year (cid:16) expired (cid:16) exercised (cid:16) issued Balance at end of year 2013 2012 Number of options 4,500,000 - (2,250,000) 2,750,000 5,000,000 Weighted average exercise price 0.09 - 0.59 0.12 0.12 Weighted average exercise price 0.08 0.10 0.59 0.13 0.09 Number of options 13,750,000 (9,250,000) (2,250,000) 2,250,000 4,500,000 Options held at the end of the reporting period The following table summarises information about options held by directors and employees as at 30 June 2013: Number of options 2,250,000 2,750,000 Grant date 29 Nov 11 30 Nov 12 Expiry date 28 Nov 14 29 Nov 16 Weighted average exercise price 0.1275 0.1230 14. SUBSEQUENT EVENTS Significant events after balance date include: Tullow Oil farm-in to Namibia EL 0037 In September 2013, Pancontinental announced that Tullow Oil had farmed in to licence EL 0037. Tullow were assigned a 65% interest as well as operatorship, with Pancontinental retaining a 30% free carried interest. Kenya L8 At an Operating Committee Meeting held on 10th October, Apache indicated their intention to withdraw from the block. Apart from the above, no matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the company, the results of those operations, or the state of affairs of the company in future financial years. 51 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 15. EARNINGS PER SHARE CONSOLIDATED 2013 $ 2012 $ The following reflects the income and share data used in the calculations of basic and diluted earnings per share: Net profit Adjustments: Earnings used in calculating basic and diluted earnings per share (662,822) (662,822) (1,805,773) (1,805,773) Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilutive securities: Share options Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share Number of shares Number of shares 1,147,339,986 795,045,367 - 4,500,000 1,147,339,986 799,545,367 16. AUDITORS' REMUNERATION Amounts received or due and receivable by Rothsay for: (cid:16) an audit or review of the financial report of the entity and any other entity in the consolidated entity (cid:16) other services in relation to the entity and any other entity in the consolidated entity CONSOLIDATED 2012 2013 $ $ 31,500 40,500 - 31,500 4,000 44,500 52 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 17. DIRECTOR AND EXECUTIVE DISCLOSURES (a) Details of Specified Directors and Specified Executives (i) Specified Directors Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Non-Executive Director (ii) Specified Executives Vesna Petrovic Company Secretary Non-Executive Chairman Executive Director, Chief Executive Officer Executive Finance Director Total remuneration for all non-executive directors, last voted upon by shareholders at the 2007 AGM, is not to exceed $400,000 per annum and is set with reference to fees paid to other non-executive directors of comparable companies. Non-executive and executive directors do not receive performance related remuneration but they are eligible to participate in Employee Option Schemes approved by shareholders. Directors do not receive any termination or retirement benefits. (b) Remuneration of Specified Directors /Officers Salary & Fees Primary Cash Bonus Non Monetary benefits Post Employment Super-annua tion Retirement benefits Equity Options Bonuses Other Total Specified Directors/Officers Henry David Kennedy 2013 2012 Roy Barry Rushworth 2013 2012 Ernest Anthony Myers 2013 2012 50,000 50,000 650,000 550,000 48,000 48,000 Anthony Robert Frederick Maslin 2013 2012 Vesna Petrovic 2013 2012 48,000 48,000 - - - - - - - - - - - - - - - - - - - - - - Total Remuneration: Specified Directors /Officers 2013 2012 796,000 696,000 - - - - - - - - - - - - - - - - - - 28,000 63,726 - 78,000 - 113,726 - 56,000 - 127,453 - 706,000 - 677,453 - - - 42,000 - - 90,000 48,000 - - - 28,000 - - 76,000 48,000 - - - - - - - - - - 154,000 - 191,179 - 950,000 887,179 Mr Myers has a 50% interest in a consulting company which provides staff, accounting and administrative services to listed companies, including Pancontinental. Mr Myers is paid a salary from that company. The same company also pays the staff who provide company secretarial, accounting and administrative services to Pancontinental. The total fees paid for these services and functions was $305,400 (2012: $289,500). Mrs Petrovic received no direct remuneration from the company for her services as company secretary however during the year the company paid fees to Resource Services International (Aust) Pty Limited totalling $305,400 (2012: $289,500) for the provision of corporate, accounting and administration services. Mrs Petrovic is employed by Resource Services International (Aust) Pty Limited. See Note 20 for further information. 53 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 17. DIRECTOR AND EXECUTIVE DISCLOSURES (cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:182)(cid:71)(cid:12) (c) Remuneration options: Granted and vested during the year Terms & Conditions for Each Grant Granted Number Grant Date Value per option at grant date ($) Exercise Price per share ($) First Exercise Date Last Exercise Date Specified Directors Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Total 500,000 30 Nov 12 1,000,000 30 Nov 12 750,000 30 Nov 12 500,000 30 Nov 12 2,750,000 0.06 0.06 0.06 0.06 0.123 0.123 0.123 0.123 30 Nov 12 30 Nov 12 30 Nov 12 30 Nov 12 29 Nov 16 29 Nov 16 29 Nov 16 29 Nov 16 (d) Option holdings of specified directors and specified executives Specified Directors Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin Total Balance at beginning of period 1 July 2012 1,500,000 3,000,000 - - 4,500,000 Granted as Remuneration Options Exercised/ (Expired) Net Change Other Balance at end of period 500,000 1,000,000 750,000 500,000 2,750,000 (750,000) (1,500,000) - - (2,250,000) - - - - - 30 June 2013 1,250,000 2,500,000 750,000 500,000 5,000,000 (e) Shareholdings of Specified Directors and Specified Executives Ordinary Shares held in Pancontinental Oil & Gas NL Specified Directors Henry David Kennedy Roy Barry Rushworth Ernest Anthony Myers Anthony Robert Frederick Maslin 133,301,602 35,335,610 285,715 14,583 Balance 1 July 2012 Acquisitions (Disposals) Balance 30 June 2013 750,000 999,999 114,999 - 134,051,602 36,335,609 400,714 14,583 170,802,508 Total 168,937,510 1,864,998 54 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 18. SEGMENT INFORMATION Segment accounting policies The group has adopted AASB 8 Operating Segments which requires operating segments to be identified on the basis of internal reports about components of the group that are reviewed by the chief operating decision-maker in order to allocate resources to the segment and to assess its performance. The board of Pancontinental reviews internal reports prepared as consolidated financial statements and strategic decisions of the group are determined upon analysis of these internal reports. During the period the group operated predominately in one business segment, being the oil and gas sector. Accordingly, under the management approach outlined only one operating sector has been identified and no further disclosures are required in the notes to the consolidated financial statements. 19. FINANCIAL INSTRUMENTS Financial risk management Overview: The company and group have exposure to the following risks from their use of financial instruments: (a) credit risk (b) liquidity risk (c) market risk This note presents information about the c(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3) (cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3) (cid:72)(cid:68)(cid:70)(cid:75)(cid:3) (cid:82)(cid:73)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:68)(cid:69)(cid:82)(cid:89)(cid:72)(cid:3) (cid:85)(cid:76)(cid:86)(cid:78)(cid:86)(cid:15)(cid:3) (cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3) objectives, policies and processes for measuring and managing risk, and the management of capital. The board of directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the group through regular reviews of the risks. (a) Credit risk: Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. In this industry, it arises principally from the receivables of joint venture re-charges and recuperations of cost. For the group, it arises from receivables due from subsidiaries and re-charges to joint venture partners. (i) Trade and other receivables: The group operates predominantly in the oil and gas exploration sector; it does not ordinarily have material trade receivables and is therefore not ordinarily exposed to credit risk in relation to trade receivables. The c(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3) (cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3) (cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3) (cid:85)(cid:76)(cid:86)(cid:78)(cid:3) (cid:76)(cid:86)(cid:3) (cid:76)(cid:81)(cid:73)(cid:79)(cid:88)(cid:72)(cid:81)(cid:70)(cid:72)(cid:71)(cid:3) (cid:71)(cid:76)(cid:85)(cid:72)(cid:70)(cid:87)(cid:79)(cid:92)(cid:3) and indirectly by the individual characteristics of each joint venture. The balance of any outstanding amounts is monitored and payments are received promptly from joint venture partners. (ii) Loans to subsidiaries: The company has provided funding to it(cid:86)(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:69)(cid:92)(cid:3)(cid:90)(cid:68)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:82)(cid:68)(cid:81)(cid:86)(cid:17)(cid:3)(cid:37)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:89)(cid:76)(cid:72)(cid:90)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) subsidiaries net tangible asset position and cash flow projections, the current carrying value of the loans have been assessed to be fully recoverable. Repayment of these loans will occur through future business activities of each respective entity. 55 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements (cid:20)(cid:28)(cid:17)(cid:3)(cid:3)(cid:3)(cid:3)(cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:3)(cid:44)(cid:49)(cid:54)(cid:55)(cid:53)(cid:56)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:182)(cid:71)(cid:12) Exposure to credit risk The carrying amount of the c(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3) (cid:68)(cid:81)(cid:71)(cid:3) g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3) (cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3) (cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:3) (cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3) (cid:80)(cid:68)(cid:91)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3) (cid:70)(cid:85)(cid:72)(cid:71)(cid:76)(cid:87)(cid:3) (cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:17)(cid:3) (cid:55)(cid:75)(cid:72)(cid:3) maximum exposure to credit risk at the reporting date was: Consolidated Trade and other receivables Cash and cash equivalents Total Note 4 Carrying amount 2013 $ 2012 $ 98,582 47,722,233 1,930,056 33,821,848 35,751,904 47,820,815 *Note, the above trade receivable for 2013 mostly relates to the expected refund of joint venture contributions. Impairment losses: None of the c(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:182)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:68)(cid:69)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:83)ast due at 30 June 2013, (2012: nil). An impairment write down in respect of inter-group loans and shares was recognised during the current year from an analysis of the subsidiaries respective financial positions. The total impairment write down recognised through impairment of loans to subsidiaries and shares held in subsidiaries during the current period was $29,904 (2012: $27,114). Whilst the loans were not payable at 30 June 2013 a provision for impairment based/reversed on the subsidiaries financial position was carried forward from previous periods. The balance of this provision may vary due to performance of a subsidiary in a given year. (b) Liquidity risk: Liquidity risk is the risk that the group will not be able to meet its financial obligations as they fall due. The g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:87)(cid:82)(cid:3) managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:88)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17) The group manages liquidity risk by maintaining adequate cash reserves through continuously monitoring forecast and actual cash flows. (c) Market risk: Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:82)(cid:85)(cid:3)the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. (i) Currency risk: The group is from time to time exposed to currency risk on investments, and foreign currency denominated purchases in a currency other than the respective functional currencies of group entities, primarily the Australian dollar (AUD). The other material currency that these transactions are denominated in is the (USD). The group has not entered into any derivative financial instruments to hedge such transactions and anticipated future receipts or payments that are denominated in a foreign currency. 56 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 19. (cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:3)(cid:44)(cid:49)(cid:54)(cid:55)(cid:53)(cid:56)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:182)(cid:71)(cid:12) Exposure to currency risk: The g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:72)(cid:91)(cid:83)(cid:82)(cid:86)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:85)(cid:76)(cid:86)(cid:78)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:68)(cid:79)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:73)(cid:82)(cid:79)(cid:79)(cid:82)(cid:90)(cid:86)(cid:15)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:81)(cid:82)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:86)(cid:29)(cid:3) AUD AUD USD Total AUD 30 June 2013 30 June 2012 USD Cash & cash equivalents Trade & other receivables Trade and other payables 31,766,074 69,180 (121,266) 2,055,774 1,860,876 - 33,821,848 1,930,056 (121,266) 45,675,133 98,582 (235,805) 2,047,100 - - Total 47,722,233 98,582 (235,805) Net balance sheet exposure 31,713,988 3,916,650 35,630,638 45,537,910 2,047,100 45,537,910 The following significant exchange rates applied during the year: AUD : USD Sensitivity analysis: Average rate Reporting date spot rate 2013 1.027 2012 1.032 2013 0.913 2012 1.016 A 10 percent strengthening of the Australian dollar against the USD at 30 June would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2012. Effect in AUD 30 June 2013 10% strengthening 30 June 2012 10% strengthening Consolidated Equity Profit or loss 206,764 206,764 - - A 10 percent weakening of the Australian dollar against the USD at 30 June would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. The sensitivity analysis only had an effect on the equity or profit and loss of the company in relation to the trade receivables as the other bank transactions in foreign currencies are predominately guarantees for exploration expenditure and would not have an effect on the financial position of the company until their maturity date and only then, if the guarantee is to be extended and that extension is at a different AUD to USD rate. Interest rate risk: At balance date the group had exposure to interest rate risk, through its cash and equivalents held within financial institution. Variable rate instruments Cash and cash equivalents Fair value sensitivity analysis for fixed rate instruments: Consolidated Carrying Amount 30 June 2012 30 June 2013 33,821,848 47,722,233 The company and group do not account for any fixed rate financial assets at fair value through profit or loss. Therefore, a change in interest rates at reporting date would not affect profit or loss or equity. 57 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 19. (cid:41)(cid:44)(cid:49)(cid:36)(cid:49)(cid:38)(cid:44)(cid:36)(cid:47)(cid:3)(cid:44)(cid:49)(cid:54)(cid:55)(cid:53)(cid:56)(cid:48)(cid:40)(cid:49)(cid:55)(cid:54)(cid:3)(cid:11)(cid:70)(cid:82)(cid:81)(cid:87)(cid:182)(cid:71)(cid:12) Fair values: The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows: Consolidated 30 June 2013 30 June 2012 Carrying amount Fair value Trade and other receivables Cash and cash equivalents Trade and other payables 1,930,056 33,821,848 (121,266) 1,930,056 33,821,848 (121,266) Carrying amount 98,582 47,722,233 (235,805) Fair value 98,582 47,722,233 (235,805) 35,630,638 35,630,638 47,585,010 47,585,010 The basis for determining fair values is disclosed in note [1]. Capital Management: The b(cid:82)(cid:68)(cid:85)(cid:71)(cid:182)(cid:86)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:76)(cid:81)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)tal base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The board of directors monitors the return on capital, which the group (cid:71)(cid:72)(cid:73)(cid:76)(cid:81)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:182)(cid:3)(cid:72)(cid:84)(cid:88)ity, excluding non-redeemable preference shares and minority interests. Equity attributable to shareholders of the Company Minorities Equity Total assets Equity ratio in % Average equity Net Profit Return on Equity in % 2013 2012 - 74,571,637 74,692,903 99.84% 72,686,103 (662,822) (0.91)% - 70,800,568 71,036,373 99.67% 43,124,939 (1,805,773) (4.19)% There were no changes in the g(cid:85)(cid:82)(cid:88)(cid:83)(cid:182)(cid:86)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:17) Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements. 58 Pancontinental Oil & Gas NL - Annual Report 2013 Notes to the Financial Statements 20. RELATED PARTY (a) During the year the company paid fees to Resource Services International Limited, a company in which Mr Kennedy has a financial interest, for consulting services. The amount paid to was $50,000 (2012: $50,000). Refer note 17. (b) During the year the company paid fees to Resource Services International (Aust) Pty Limited, a company of which Mr Myers is a director, to cover the provision of corporate, accounting and administration services. The amount paid to Resource Services International (Aust) Pty Limited was $305,400 (2012: $289,500). Amounts were billed based on normal market rates for such services and were due and payable under normal payment terms. (c) The company has effected Directors and Officers Liability Insurance. 21. PARENT INFORMATION The Group has applied amendments to the Corporations Act (2001) which remove the requirement for the Group to lodge parent entity financial statements. Parent entity financial statements have been replaced by the specific parent entity disclosures below. AT 30 JUNE 2013 STATEMENT OF COMPREHENSIVE INCOME Profit/(Loss) for the period TOTAL COMPREHENSIVE INCOME/(LOSS) STATEMENT OF FINANCIAL POSITION Assets Current assets TOTAL ASSETS Liabilities Current liabilities TOTAL LIABILITIES Equity Contributed equity Reserves Accumulated losses TOTAL EQUITY 2013 2012 $ $ (653,500) (1,799,775) (653,500) (1,799,775) 2013 2012 $ $ 34,315,253 47,017,877 74,590,496 70,923,805 118,341 118,341 232,041 232,041 99,411,998 345,179 (25,285,022) 74,472,155 95,132,106 298,956 (24,739,298) 70,691,764 59 Pancontinental Oil & Gas NL - Annual Report 2013 Directors’ Declaration In accordance with a resolution of the directors of Pancontinental Oil & Gas NL, I state that: (1) In the opinion of the directors: (a) the financial statements and notes of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company's and consolidated entity's financial position as at 30 June 2013 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) 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 financial period ending 30 June 2013. On behalf of the Board Ernest Anthony Myers Director Perth 26 September 2013 60 Pancontinental Oil & Gas NL - Annual Report 2013 Independent Audit Report 61 Pancontinental Oil & Gas NL - Annual Report 2013 Independent Audit Report 62 Pancontinental Oil & Gas NL - Annual Report 2013 ASX Additional Information Additional information required by the ASX Ltd and not shown elsewhere in this report is as follows. The information is current as at 30 September 2013. (a) Distribution of equity securities The number of shareholders, by size of holding, in each class of share are: 1 1,001 5,001 10,001 - - - - 1,000 5,000 10,000 100,000 100,001 and over The number of shareholders holding less than a marketable parcel of shares are: (b) Twenty largest shareholders The names of the twenty largest holders of quoted shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED SUNDOWNER INTERNATIONAL LTD CITICORP NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED JP MORGAN NOMINEES AUSTRALIA LIMITED CM SKYE TRUSTEES LIMITED DESERTFOX PTY LTD NATIONAL NOMINEES LIMITED BLUE CAPITAL LIMITED ROY BARRY RUSHWORTH BLUE CAPITAL LIMITED BRISPOT NOMINEES PTY LTD MR PETER JOHN BRUNTON MR ROBERT ALBERT BOAS NATIONS NATURAL GAS PTY LTD P & L CAPITAL INVESTMENTS PTY LTD MR TIMOTHY ARTHUR KESTELL OLD BLOOD AND GUTS PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA QUICKSILVER ASSET PTY LTD Ordinary shares Number of holders Number of shares 421 365 504 90,775 1,302,053 4,268,423 2,007 88,090,277 923 1,057,242,568 4,220 925 1,150,994,096 2,235,039 Listed ordinary shares Number of shares Percentage of ordinary shares 146,632,990 132,256,827 88,151,252 86,229,690 28,818,705 26,277,940 17,210,485 17,107,626 14,553,334 9,057,670 9,000,000 7,834,921 7,816,825 7,525,000 7,500,000 6,751,094 6,711,104 6,600,000 6,333,222 6,107,523 12.74 11.49 7.66 7.49 2.5 2.28 1.5 1.49 1.26 0.79 0.78 0.68 0.68 0.65 0.65 0.59 0.58 0.57 0.55 0.53 638,476,208 55.47 63 Pancontinental Oil & Gas NL - Annual Report 2013 ASX Additional Information (c) Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. (d) Substantial Shareholders The details of substantial shareholders as disclosed in substantial shareholder notices received by the Company are set out below: Sundowner International Limited, Indago Resources Limited and HSBC Custody Nominees Roy Barry Rushworth and CM Skye Trustees Limited as trustee for the Mulberry Trust 118,499,351 34,764,181 Number of Shares (e) Permit Schedule Permits and Licence Interests Permit reference Petroleum prospects Western Australia Kenya Namibia * 30% post year end L15 EP 104 (R1) EP 110 EP 424 L6 L8 L10A L10B EL 0037 Interest 12 % 10 % 38.462% 38.462% 40% 15% 15% 15% 95% * 64 Pancontinental Oil & Gas NL - Annual Report 2013 288 Stirling Street Perth WA 6000 Telephone: +61 8 9227 3220 Fax: +61 8 9227 3211

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