PENNPETRO ENERGY PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED
31 DECEMBER 2018
PENNPETRO ENERGY PLC
Officers and Professional Advisers
Chairman’s Statement
Executive Director’s Statement
Operations Report
Financial Report
Strategic Report
Report of the Directors
Statement of Directors’ Responsibilities
Corporate Governance Report
Directors’ Remuneration Report
Audit Committee Report
Report of the Independent Auditor
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Company Statement of Financial Position
Consolidated Statements of Changes in Equity
Company Statements of Changes in Equity
Consolidated Statements of Cash Flows
Company Statements of Cash Flows
Notes to the Financial Statements
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CONTENTS
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PENNPETRO ENERGY PLC
OFFICERS AND PROFESSIONAL ADVISORS
Directors
Secretary
Keith Graeme Edelman (Non-Executive Chairman)
Olof Nils Anders Rapp (Senior Non-Executive Director)
Thomas Martin Evans (Executive Director)
Philip Tudor Nash (Non-Executive Director)
David Middleburgh (MA Law Trinity Hall Cambridge),
FHF Corporate Finance Limited
Technical Adviser
Eur. Ing. Dr. Michael Smith, FIMMM, C.Eng.
Registered Office
Legal Advisers
1/88 Whitfield Street
London
W1T 4EZ
UK Legal Advisers
Birketts LLP
22 Station Road,
Cambridge,
Cambridgeshire,
CB1 2JD UK.
US Legal Advisers
Walne Law, PLLC.
4900 Woodway, Suite 975
Houston, TX 77056, USA.
Fladgate LLP
16 Great Queen Street,
London, WC2B 5DG, UK.
Porter Hedges LLP
1000 Main Street, 36th Fl.
Houston, TX 77002, USA.
CMS Cameron McKenna Nabarro Olswang LLP,
Cannon Place, 78 Cannon Street
London EC4N 6AF, UK.
Independent Auditor
Crowe U.K. LLP
Statutory Auditor
St Bride's House
10 Salisbury Square
London
EC4Y 8EH
Registrars
Computershare Investor Services Plc,
The Pavilions,
Bridgewater Road,
Bristol,
BS13 8AE
Communications
Instinctif Partners,
65 Gresham Street,
London EC2V 7QN
Registered Number
10166359
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PENNPETRO ENERGY PLC
CHAIRMAN’S STATEMENT
Chairman’s Statement
I am pleased to present the second set of annual results for Pennpetro Energy PLC (“Pennpetro”) since
we listed on the Main Board of the London Stock Exchange (“LSE”) in December 2017.
During the previous year under review, the Company successfully acquired Nobel Petroleum UK Limited
(“Nobel UK”) and its US-based subsidiary companies, Nobel Petroleum US, Inc. and Nobel Petroleum
LLC, ahead of listing the Company on the LSE. This acquisition resulted in Pennpetro becoming the
holding company for an oil and gas development Group, with assets in Texas, US.
During the current year under review, the Company has as a furtherance of its growth and expansionary
strategies within the US petroleum sector incorporated Pennpetro USA Corp., (“Pennpetro USA”) as an
acquisition vehicle through which it intends to utilise completion initiatives on asset projects being made
available to the Company. Pennpetro USA is headquartered in Houston, Texas and is currently examining
various complimentary asset opportunities.
Nobel UK’s US-based subsidiaries own a portfolio of leasehold petroleum mineral interests centered on
the City of Gonzales, in southeast Texas, comprising the undeveloped central portion of the Gonzales Oil
Field. The petroleum assets include approximately 1,000 leases covering 2,500 acres of land and contain
proven oil condensates. The Competent Persons Report (“CPR”) prepared in advance of the acquisition
estimated that, as a result of the acquisition, Pennpetro Group would have a Working Interest in the
portfolio of petroleum mineral leases of 2,000 MBBL of oil and 1,000 MMcf of gas. Most recently, Nobel
has increased its working interest in the portfolio of petroleum interests from 50% to 75%, thereby its
working interest is now over 3,000 MBBL of oil and 1,500 MMcf of gas.
The most recent CPR prepared in December 2017, estimated that the Group’s then 50% working interest
basis undiscounted Net Revenue Interest in the Gonzales petroleum leases amounted to $62 million; with
the recent increase to a 75% working interest and further undiscounted Net Revenue Interest, this has now
increased to $92 million.
Moving on to our oil assets, our US-operating teams completed the first horizontal well during the current
year and having tested recoverable levels of oil, the object is to move into commercial production, and plan
for the second horizontal well.
The year under review has been one of real progress and the Company is now well placed to capitalise
on the recovery in sentiment within the US and global petroleum sectors.
We remain confident in our petroleum assets, our US operations and the Board, to continue to build upon
what has been a very successful and busy first year for the Group, since listing on the LSE.
Keith Edelman
Non-Executive Director, Chairman
30 April 2019
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PENNPETRO ENERGY PLC
EXECUTIVE DIRECTOR’S STATEMENT
Executive Director’s Statement
Pennpetro’s intention is to become an active independent North American development production
company.
The key elements of Pennpetro’s strategy for achieving this goal are:
• The creation of value through production development success and operational strengths,
commencing with the Group's City of Gonzales Lease (“COGLA”) assets.
• Focusing on commercialisation and monetisation of oil and gas discoveries, and potentially utilising
cash flows from initial projects to fund the acquisition or development of future projects.
• Active asset portfolio management.
• Positioning the Company as a competent partner of choice to maximise opportunities and value
throughout the E&P lifecycle.
• Asset acquisitions of producing hydrocarbons.
Our focus during 2018 was to continue to develop our proven reserve base at our licences in Gonzalez.
According to the Group's Competent Person's Report ("CPR"), prepared in December 2017, Pennpetro
had a working interest in 2,000 Mbbl of oil and 1,000 MMcf of gas across its Gonzalez leases. Most
recently, Nobel has increased its working interest in the portfolio of petroleum interests from 50% to 75%,
thereby its working interest is now over 3,000 MBBL of oil and 1,500 MMcf of gas resulting in a substantive
uplift in our valuation metric.
The low oil price environment since mid-2014 presented the opportunity to acquire leases in our core areas
of focus, most notably the prolific Austin Chalk and Eagleford Shale in South Texas. To this, we have been
able to add additional reserves from the Buda Formation from the drilling of an initial horizontal well, which
we have now completed with the operator having advised the Texas Railroad Commission, the local
authority, that the well is designated as a discovery and commercial unit. Commercial quantities of test
hydrocarbons have been sold from this well. The well is currently undergoing improvements to its
submersible jet pumping unit, whereupon it will recommence hydrocarbon deliverability.
These highly active plays are well suited to thrive in today’s stronger oil price environment. The wells we
are drilling and plan to drill are economic at oil prices sub US$30/bbl; record production rates have been
reported as the horizontal laterals are extended and the amount of pay in each well has increased; drilling
and completion costs have been significantly reduced; and initial decline rates during the first 12-18 months
of production are lower than those in other US plays. Over the last two years, we have taken advantage
of depressed market conditions to increase our exposure to these areas.
West Texas Intermediate (“WTI”) averaged US$64.94/bbl during 2018, more than 27% higher than
US$50.88/bbl averaged during 2017. The value of WTI as at 24 April 2019 was US$66.04 (source:
Bloomberg Markets).
Operations
In terms of our operations, our focus has been on completing our initial horizontal well and organizing the
permitting of our second targeted horizontal well situated to the north of COG#1-H. Our operator has filed
formal completion certificates with the Texas Railroad Commission confirming that the COG#1-H well is
being completed as a producer. We will begin Austin Chalk oil operations once the process of pump water
removal from the lower reservoirs is completed, while at the same time recovering oil as the oil-cut
increases.
Financially, the Company used 2018 to further lay the foundations for future revenue generation.
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PENNPETRO ENERGY PLC
EXECUTIVE DIRECTOR’S STATEMENT
A sustained rally in the oil price was triggered in Q4 2016 by the agreement between members and non-
members of OPEC to cut production. During late 2018, there was a sustained pull-back in the price of WTI
occasioned by directives lead by the President of the USA; however, there has been a re-emergence of
price strength on the back of OPEC initiatives. In this stronger oil price environment, Pennpetro has
emerged from the oil vicissitudes as a low-cost, asset-backed US onshore oil and gas business. Subject
to oil prices, market conditions and sentiment, I remain confident that we can deliver our strategy by not
only acquiring leases in active and producing US onshore plays and proving up the reserves by drilling
new wells, but also by our new strategic acquisition focus on producing assets.
This platform is one that has, at its core, the active management of all types of risk associated with the oil
and gas industry. Broadly speaking development risk is managed by focusing on proven formations;
execution risk is managed by participating in drilling activities alongside established industry partners and
operators such as our joint venture partners, Av-Tech Oil & Gas, LLC, who have an extensive history in
South Texas operations, as well as our operations offsetting those of major industry players, such as EOG
Resources, Inc., a $61.8 billion Goliath; individual well risk is managed by building a diversified portfolio of
leases and wells and limiting the amount of interest the Group holds in any one well; meanwhile oil price
risk is managed by focusing on areas that require relatively low oil prices to breakeven and ensuring our
cost base, capital commitments and financing costs remain low, manageable and flexible.
Our asset acquisition strategies target only producing assets and applying proven horizontal technologies
to conventional reserves from a firm productive foundation. This initiative is being driven through our
Houston technical office with a number of asset opportunities under current investigation.
Pennpetro’s Board currently comprises four Directors, who collectively have extensive international
experience and a proven track record in investment, corporate finance and business acquisition, operation
and development and are well placed to implement the Company's business objectives and strategy.
In February 2018, we were pleased to appoint Dr. Michael Smith as a technical consultant to the Company.
Graduating from University of Durham in 1965 with a degree in Geology (First Class Honours), and
thereafter taking a PhD at University of Edinburgh (Application of Probability and Systems Theory – direct
application to the risk and probability aspects of oil and gas reservoir development).
Michael started his career as a consultant to the British National Oil Corporation in 1975, before moving to
become VP Exploration for American Barrick Resources and thereafter embarking upon on a worldwide
career within the resources sector. Michael has numerous years of experience as an exploration and
production geologist and geoscientist, particularly exploring and developing onshore US fields in
Oklahoma and South Texas.
We believe the Company’s Board and US management team is strong in terms of having the right mix of
industry expertise covering all key areas of the business, including lease acquisition, geology, engineering,
and finance.
Outlook
In line with our strategy, all our operations are in highly active plays where the economics of drilling and
producing remain attractive at sub-US$30 oil prices. This highlights the success we have had in taking
advantage of the prior industry downturn to accelerate the positioning of our South Texas leasehold
position in favour of the Austin Chalk and Eagleford Shale. With a strategic foothold in these prolific, low-
cost plays established and a proven management team in place, we will look to further expand our position
in this US onshore sweet spot, as and when management considers it most advantageous to do so.
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PENNPETRO ENERGY PLC
EXECUTIVE DIRECTOR’S STATEMENT
For 2019, our main objectives are to build upon the initiative that commenced with the completion of our
initial well, COG#1-H, and to further acquire additional land leases and to progress the permitting and
horizontal development of our second objective well. I look forward to providing updates on our progress
in the year ahead.
Finally, I would like to thank the Board, management team and all our advisers for their hard work over the
last twelve months and also to our shareholders for their continued support.
Thomas Evans
Executive Director
30 April 2019
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PENNPETRO ENERGY PLC
OPERATIONS REPORT
Operations Report
Summary
Nobel Petroleum USA, Inc., has operational teams on the ground working from its offices in the City of
Gonzales. During the period, one new horizontal well in which the Group has an interest commenced
completion activity. The Group is planning to initiate an encompassing 3D seismic survey in 2019 with
Dawson Geophysical Company to complement its comprehensive well logs geological analysis, together
with an enhanced programme of additional new petroleum leasing contiguous to the area, with proposed
planning to provide a further number of permitted drilling locations by year end.
In addition, the company’s recently formed corporate entity, Pennpetro USA Corp, Inc., through its highly
regarded Houston based technical teams, has begun to examine a number of asset opportunities
encompassing producing hydrocarbons with offsetting strategic leasehold interests capable of both
additional infill and expansionary drilling locations.
SOUTH TEXAS
The Company, through its indirect wholly-owned subsidiary, Nobel Petroleum USA, Inc., holds interests in
acreage within active oil and gas plays within the County of Gonzales, State of Texas: The Austin Chalk,
and Eagleford Shale horizontal development and vertical development of the Buda formation. Nobel
Petroleum USA, Inc. has observed an increase in the value of its interests within its project acreage, due
in part to higher energy price parameters and increased consolidation of its acreage positions.
Austin Chalk
The play covers an extensive area with over a million acres yet to be developed and runs all the way from
the Pearsale Field south of Gonzales to the giant Giddings Oil Field, the largest oilfield found in Texas in
the past 50 years to the north of Gonzales, and further north onto the North Rayou Jack Field. The Austin
Chalk overlays the oil rich Eagleford Shale, with both formations capable of interacting with each other,
and is a low permeability fractured reservoir that has been the target for horizontal drilling since the mid-
1980s and consists of interbedded chalks, volcanic ash and marls. It is located at drill depths from 7,000
to 8,000 feet. It can be a liquids-rich play, yielding high volumes of oil and condensate. Initial production
rates can range over 1,000 bopd with ultimate reserves exceeding 500 MBO per well.
• EOG Resources Inc., also continued to delineate the South Texas Austin Chalk,
completing 14 wells in the third quarter, including the Pinyon Pine D, E, F and G wells in
Gonzales County, with lateral completions out to 5,500 feet gross production of 1815
bopd/2485 boed. 6 completions in the fourth quarter with gross production 2650
bopd/3650 boed.
Eagleford Shale
The Eagle Ford continues to prove itself as a world-class crude oil field having produced in excess of 2.9
billion barrels of crude oil and condensate. This play is classified as a petroleum system in that it is a self-
sourced reservoir with seals. Migration of Eagleford hydrocarbons was primarily along bedding planes
during the expulsion phase. Absent of traps, hydrocarbons migrated up-dip or north where vertical natural
fractures were encountered. These natural fractures were associated with the regional fault trends. Here,
the hydrocarbons migrated into the extensively fractured Austin Chalk. Initial production rates with laterals
exceed 1,000 bopd.
• According to EOG Resources Inc., its South Texas Eagle Ford remained the most active
area of the company in the third quarter 2018. EOG now expects to complete 290 net
wells in 2018, an addition of 20 net wells from the prior forecast.
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PENNPETRO ENERGY PLC
OPERATIONS REPORT
Buda Formation
The Buda is a biomicritic limestone lying below the Eagleford Shale and above the Del Rio Shale. There
has been an increase in the focus on, and the development of, the Buda formation by a number of US
operators in South Texas, with a number of horizontal wells having been completed.
As previously identified, while the Buda has always been acknowledged as a resource play in South Texas,
it sits at the bottom of our drilling prognosis, as it can be drilled as a separate vertical completion and added
to our overall horizontal programme. Furthermore, its unit spacing can be brought significantly down to 40
acres, thereby fulfilling a separate in-fill operation alongside our horizontal drilling focus.
Thomas Evans
Executive Director
30 April 2019
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PENNPETRO ENERGY PLC
FINANCIAL REPORT
Financial Report
The financial results for the year ended 31 December 2018 show a loss after tax of $ 788,630 (2017: loss
$153,269).
The majority of the cost contributing to the Group’s loss for the year included legal and professional fees,
directors’ emoluments and interest charges, which were in line with the Board’s expectations.
The Group’s borrowings, which were non-current, at 31 December 2018 were $ 5,863,863 (2017:
$6,092,657).
The Group had cash balances at 31 December 2018 of $ Nil (2017: $22,073) and short-term investments
of $ 166,367 (2017: $2,073,299). The year on year decrease in cash and short-term investments was
primarily a result of cash used in operating activities and development expenditure.
On 15 February 2019, the Company issued 1,433,702 Ordinary shares at a price of £0.55 per share, raising
gross proceeds of £788,536.
In addition, the Group had a receivables balance at 31 December 2018 of $ 523,482 (2017: $1,537,448).
The year on year decrease principally related to the reclassification of amounts owed by former participant
Sunrise to Intangible Drilling assets, as a result of Sunrise’s exit from the Operating Agreement.
Following additions of $56,382, cumulative Petroleum mineral lease expenditure which has been
capitalised in property, plant and equipment was $1,275,597 at 31 December 2018 (2017: $1,219,215).
Following additions of $750,473, cumulative Drilling-related expenditure which has been capitalised in
intangible assets was $ 3,842,241 at 31 December 2018 (2017: $1,908,751). The increase in capitalised
Drilling-related expenditure included $ 1,183,017 of expenditure that was re-categorised from receivables,
as a result of former participant Sunrise’s departure from the Gonzales Project.
The Group expects to generate revenue in 2019 from its first horizontal well and intends to use its cash
balances and cashflow from oil production to fund additional development of its lease interests in Gonzales.
Philip Nash
Non-Executive Director
30 April 2019
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PENNPETRO ENERGY PLC
STRATEGIC REPORT
Strategic Report
The Directors of the Company and its subsidiaries (which together comprise “the Group”) present their
Strategic Report on the Group for the year ended 31 December 2018.
Principal Activities
On 17 May 2017, the Company successfully completed the acquisition of Nobel Petroleum UK Limited
which resulted in Pennpetro becoming the holding company for an oil and gas development Group, with
assets in Texas, US.
The principal activity of the Group is onshore oil and gas exploration and production in the United States
of America. Pennpetro Energy Plc acts as a holding company and provides direction and other services to
its subsidiary.
The Company’s UK wholly-owned subsidiary Nobel Petroleum UK Limited holds 100% of the US
operational subsidiary Nobel Petroleum USA, Inc. (“Nobel USA”), an independent oil and gas production
company based in the City of Gonzales, Gonzales County, Texas, USA. Nobel USA took over the activities
of Nobel Petroleum LLC, the Company’s other subsidiary entity in December 2017 pursuant to a seamless
internal reorganisation of operational activities and taxation advice. Nobel USA’s core area of business is
in the Austin Chalk and Eagleford Shale oil and gas horizontal formations together with the lower oil and
gas reservoir, the Buda Formation in South Texas, United States.
The Company also holds 100% of its newly incorporated US subsidiary Pennpetro US Corp., which was
incorporated on 14 September 2018 and which will be used as an acquisition vehicle for asset projects
that are made available to the Company.
The review of business and future developments is included in the Executive Directors’ Statement and the
Operations Report.
Organisation Review
The Board is responsible for providing strategic direction for the Group. This incorporates setting out
objectives, management policies and performance criteria. The Board assesses its performance against
these on a monthly basis.
Composition of the Board at 31 December 2018 was one Executive Director and three Non-Executive
Directors. The Board believes that the present composition provides an appropriate mix to conduct the
Group’s affairs.
Strategic Approach
The Board’s strategic intent is to maximise shareholder value through the continuing investment into new
wells and leases in proven US onshore formations and participating alongside established operators in
multiple wells, while further reducing costs, where applicable.
The Company provides shareholders with exposure to the high growth associated with the producing oil
and gas sector. This is achieved with a low overhead base.
Key Performance Indicators
In its first year of operations, the Board monitored the overall performance of the Group by reference to
certain key milestones. These milestones were the listing of Pennpetro on the LSE and commencing
drilling of the first well. Both milestones were achieved during that year.
During the current year under review, key milestones were the completion of the first well and permitting
of the Company’s second horizontal well. Both milestones were achieved.
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PENNPETRO ENERGY PLC
STRATEGIC REPORT
The Group considers its financial KPI’s to include:
Net cash flows from Operating Activities $1,051,030 in 12 months ended 31 December 2018, (2017:
outflow of $1,866,026);
Cash and short term investment balances: (31 December 2018: $166,367, 31 December 2017:
$2,095,372);
Headroom on its loan facilities: (31 December 2018: $1.1m, 31 December 2017 $1.1m).
Our expectations for 2019 are that we commence commercial production and recognise revenue from our
initial well, COG#1-H and progress the permitting and horizontal development of our second objective well.
Participation in well drilling programmes are monitored on an individual project basis in terms of revenue
and cost per barrel of oil or Mcf (one thousand cubic feet) of gas, together with the anticipated payback
period on each project.
Board diversity
Although the Board consisted of four male Directors, the Board supports diversity in the Boardroom. Aside
from the Directors, there are no employees in the Company. The Board will pursue an equal opportunity
policy and seek to employ those persons most suitable to delivering value for the Company.
Social, community and human rights issues
This report does not contain information on such matters.
Corporate responsibility
The Group operates a management system that embodies Environmental, Health, Safety and Social
Responsibility principles.
A number of objectives have been set by the Board to address these principles and the Executive director
is responsible for demonstrating to the Board that these principles are adhered to in its US Oil and Gas
operation.
The policy of the Board of Pennpetro is to be fully accountable for the necessary practices, procedures
and means being in place so as to ensure that each objective is demonstrated and that continuous
improvement practices are operating to ensure that the required practices, procedures and means are
being monitored, refined and optimised as necessary.
The objectives of the Environment, Health, Safety and Social Responsibility Policy include:
-The Group shall manage all operations in a manner that protects the environment and the health and
safety of employees, third parties and the community.
-Risk identification, assessment and prioritisation can reduce risk and mitigate hazards to employees, third
parties, the community and the environment. Management of risk is a continuous process.
-The use of internationally recognised standards, procedures and specifications for design, construction
and commissioning activities are essential for achieving operational excellence.
-The minimisation of environmental risks and liabilities are integral parts of the Group’s operations.
-Third parties who provide materials and services or operate facilities on the Group’s behalf have an impact
on Environmental, Health and Safety and Social Responsibility excellence. It is essential that third-party
services are provided in a manner consistent with the Group’s Policy.
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PENNPETRO ENERGY PLC
STRATEGIC REPORT
-Preparedness and planning for emergencies are essential to ensuring that all necessary actions are taken
if an incident occurs, to protect employees, third parties, the public, the environment, the assets and brand
of Pennpetro.
-Open and honest communication with the communities, authorities and stakeholders with which the Group
operates builds confidence and trust in the integrity of Pennpetro.
-The Group has as yet minimal greenhouse gas emissions to report from the operations of the Company
and its subsidiaries and does not have responsibility for any other emission producing sources under the
Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2014.
During 2018, the Group closely monitored the drilling, completion and production operations of its COG#1-
H well and there have been no breaches of any applicable Acts recorded against the Group during the
reporting period.
Risks and Uncertainties
The Group’s activities expose it to a variety of risks and uncertainties.
Market risk
The Group operates in an international market for hydrocarbons and is exposed to risk arising from
variations in the demand for and price of the hydrocarbons. Oil and gas prices historically have fluctuated
widely and are affected by numerous factors over which the Group does not have any control, including
world production levels, international economic trends, currency exchange fluctuations, inflation,
speculative activity, consumption patterns and global or regional political events. The Group will consider
hedging against the risks of fluctuating oil prices and currency exchange once the initial well is in
commercial production.
Non-operator risk
On non-operated interests, the Group, in most instances, will depend on operators to initiate and supervise
the drilling and operation of such wells. As such the Group cannot always accurately predict the timing of
the cash flows associated with the drilling of these wells. If the Group is unable or unwilling to comply with
its payment obligations, it would seek to negotiate a farm-out with some sort of back-in upon pay-out or
sell down a portion of its leasehold interests and participate with a smaller interest. This could reduce the
Group’s future revenues and earnings. The Group holds a majority interest in the Gonzales asset and
makes financial, operational and strategic decisions about the development and management of this asset,
with input from its partners and operator.
Oil and gas exploration and production risks
The Group is primarily a non-operator working interest owner and is reliant on the operator for managing
all aspects of its production activities in its non-operated interests. Although it does not engage in
exploration activities, per se, it might engage in some limited exploration activity if it was in an area
offsetting producing assets and the Company decided such activity was worthwhile on a minimised risk
basis to enhance its lease profile. There are significant risks and hazards inherent in the exploration and
production of oil and gas, including environmental hazards, industrial incidents, labour disputes, fire,
drought, flooding and other acts of God. The occurrence of any of these hazards can delay or interrupt
production and increase production costs. The Group operates a management system that embodies
Environmental, Health, Safety and Social Responsibility principles in order to mitigate these hazards.
There is no guarantee that oil and/or gas will be discovered in any of the Group’s existing or future
licences/permitted acreage or that commercial quantities of oil and/or gas can be recovered.
The Group currently holds less than a 100 per cent working interest in its yet to be completed wells and in
wells which are being drilled. It is also likely to hold less than 100 per cent in wells which may be drilled in
the future. The Group could be held liable for the joint activity obligations of the other working interest
owners, such as non-payment of costs and liabilities arising from the actions of those other working interest
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PENNPETRO ENERGY PLC
STRATEGIC REPORT
owners. In the event that other working interest owners do not pay their share of such costs, the Group
would be likely to have to pay those costs but would pick up an additional proportionate interest in the well.
Environmental risk
The Group’s operations are subject to environmental regulation in all the jurisdictions in which it operates.
The Group is unable to predict the effect of additional environmental laws and regulations which may be
adopted in the future, including whether any such laws or regulations would adversely affect the Group’s
operations. There can be no assurance that such new environmental legislation once implemented will not
oblige the Group to incur significant expenses and undertake significant investments. The Group identifies,
assesses and prioritises environmental risks on an ongoing basis, as part of its management system.
Licences and title
The leases in which the Group has or is seeking to have an interest will be subject to termination after the
primary term of such leases unless there is current production of oil and/or gas in commercial quantities.
If a lease is not extended after the primary term, the Group may lose the opportunity to develop and
discover any hydrocarbon resources on that lease area. The Group retains the services of a team of
experienced land managers who monitor and report on the Group’s portfolio of leases to the Executive
director on an ongoing basis. In taking an assignment of an oil and/or gas lease, the Group would, in
accordance with industry practice, rely on the warranty provisions.
This report was approved by the Board on 30 April 2019 and signed on its behalf:
Keith Edelman
Non-Executive Director, Chairman
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PENNPETRO ENERGY PLC
REPORT OF THE DIRECTORS
The Directors present their Annual Report and the audited Financial Statements for the year ended
31 December 2018.
The Company’s ordinary shares are listed on the London Stock Exchange, on the Official List pursuant to
Chapter 14 of the Listing Rules, which sets out the requirements for Standard Listings.
Directors and Directors’ interests
The Directors who held office during the year to the date of approval of these Financial Statements,
together with their beneficial interests in the ordinary shares of the Company, are shown below.
31 December 2018
1 January 2018
Ordinary
Options and
warrants
Shares
Ordinary
Shares
Options and
warrants
Keith Edelman
1,000,000
425,000
1,000,000
Olof Rapp
Philip Nash
2,000,000
425,000
2,000,000
-
425,000
-
Thomas Evans (1)
5,000,000
425,000
5,000,000
-
-
-
-
(1) Thomas Martin Evans shares are held by FHF Securities (A’Asia) Limited.
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PENNPETRO ENERGY PLC
REPORT OF THE DIRECTORS
Board of Directors
Keith Graeme Edelman, Non-Executive Chairman
Keith Edelman graduated from UMIST (University of Manchester Institute Science and Technology) in
1971 with a BSc (Hons) in Management Sciences. He worked for Rank Xerox, IBM and Fiat before joining
Bank of America in 1978. Starting as Planning Manager, EMEA Division and then Finance Director, UK
and Nordic Region, he eventually became Managing Director of Bank of America Finance.
In 1983 he joined Grand Metropolitan as a UK Strategic Director/Director of Finance, Foods Division. In
1985 he joined the Ladbroke Group as Corporate Planning Director and completed a number of major
acquisitions and disposals for that group these included the acquisitions of Hilton International, Texas
Homecare Plc, Thomson T Line Plc and Gable House Properties Plc and disposals of many leisure
businesses including Ladbroke Holidays, Seenews, the 20% stake in Central TV, Laskys to name but a
few. Following the acquisition of Hilton International he became Chairman of Texas Homecare, a chain
of DIY stores. In 1991 he left to become Managing Director of Carlton Communications and in 1993 Group
Chief Executive of Storehouse plc, which included Mothercare and BHS.
He also held a number of executive and non-executive appointments, including Eurotunnel (Audit &
Remuneration Committees 1994–2004), Haberdashers' Aske's School (Governor 1994–2005), where he
was a pupil from prep school through A Levels, Include (Director (Charity) 1997 – 2001), Glenmorangie
(Chairman 2002–2005), Qualceram Shires plc (Director 2005 to 2009) and Arnotts Holdings (2009-2010).
Currently he is Chairman of Revolution Bars Group Plc, Chairman of Bullion by Post Limited, a Director
of the London Legacy Development Corporation and E20 LLP, Non-Executive Director of Altitude Group
PLC and senior Independent Director of Headlam Group plc.
In 2000 he joined Arsenal Football Club as Managing Director, bringing his financial and business
experience to the Club. Mr. Edelman was responsible for all commercial and administrative activities at
the club. In a period of increased commercialisation of football, he completed the first strategic partnership
the Club entered into since its formation, selling a 10 percent stake to Granada Media for £77 million. He
oversaw the club's re-branding and crest redesign to create copyright protection and was subsequently
involved in a sponsorship deal with Nike, valued at £130 million over 10 years.
He was instrumental in the club's development of its new stadium and he arranged all the funding raising
over £380 million of banking facilities. He refinanced these projects finance borrowings with a credit
wrapped AAA rated bond and in so doing established Arsenal as the very first club to achieve an
investment grade rating from the world’s rating agencies. He also completed one of the largest football
sponsorship deals with Emirates Airlines for over £100 million, including naming rights to the Emirates
Stadium. He opened the stadium in August 2006 both on time and on budget and set up all the
operational aspects of the stadium that has made Emirates so successful. He oversaw the development
of Highbury Square and pre-sold over 90% of all units and brought the project in on time and on budget.
In 2007 Keith became club President of the Arsenal Ladies team. He has always been pragmatic about
the club's future and did not rule out the club eventually going public or the major shareholders eventually
deciding to sell their stakes. He resigned as a Director at Arsenal Holdings plc on 1 May 2008 and
continued until May 2009 as a consultant.
Thomas Martin Evans, Executive Officer
Thomas Evans started his career as a financial executive with Extel Financial Ltd, moving to equity sales
at Barclays de Zoete Wedd Ltd and RBC Dominion Securities Limited, director CIBC World Markets
Limited prior to founding Bishopsgate Capital Management Ltd in 2000 dealing in institutional fund
management which was merged with Athanor Capital Partners Ltd assuming the role of Chief Investment
Officer, expanding all the combined entities FSA regulated permitted businesses. Established TME
Consulting creating UCITS compliant umbrella structure to be marketed to both retail and wholesale
clients. CEO and founder of the Caplain group created to acquiring stockbroking and wealth management
entities and Aerarius PCC Ltd (Guernsey) fund structure for European investment strategies.
15
PENNPETRO ENERGY PLC
REPORT OF THE DIRECTORS
Board of Directors (continued)
Financial Services Authority (UK) Ltd previously approved for the following control functions – CF1
Director, CF3 Chief Executive, CF8 Appointment & Oversight, CF27 Investment Management.
Olof Nils Anders Rapp, Senior Non-Executive Director
Olof Rapp joined VistaJet International as Senior Vice President in 2015 after 34 years with Rolls- Royce
International and Volvo Truck Corporation. He has vast international experience and has held leading
managerial positions in various parts of the world, from South America to Asia (Brazil, Iran, Turkey,
Singapore, Thailand and Malaysia). His last position at Rolls Royce was as Regional Director, Malaysia,
with overall responsibility for Rolls-Royce’s business in Malaysia and Brunei (Civil & Defence Aviation,
Marine, Civil Nuclear and Energy) and represented the company at the highest level, leading and
facilitating the company’s interest and activities. His last position at Volvo was Managing Director of Volvo
Malaysia, where he led a successful restructuring of the company.
He was born in Gothenburg, Sweden, and studied International Business at IHM Business School. Olof
is actively involved in several start-up companies and serves as a committee member of the Malaysian
Swedish Business Association.
Philip Tudor Nash, Non-Executive Director
Philip Nash qualified as a Chartered Accountant in 1997 and went on to join Hambros Bank, holding a
number of finance positions in its Insurance arm, including Group Financial Controller of Cunningham
Lindsey, a leading loss adjusting group. In 2001 he joined Arsenal Football Club as Stadium Project
Director, reporting to the CEO. He was involved in all aspects of the successful Emirates Stadium Project
including raising finance, financial control, project management and commercial activities. In 2008 Philip
joined Liverpool Football Club as CFO and played a significant role in the transformation of the club. He
was involved in the sale of the club to Fenway Sports Group in 2010. He strengthened the club’s finance
and technology functions, improved governance and lead on a variety of major projects including the
appraisal of the Anfield Stadium redevelopment. Philip subsequently spent 5 years as an independent
business consultant, working across a variety of SME’s. He is currently COO of Real World Technologies
Ltd. Philip holds a Psychology degree from the University of Reading and is a member of the ICAEW.
16
PENNPETRO ENERGY PLC
REPORT OF THE DIRECTORS
Directors’ Remuneration
The Board assesses the appropriateness of the nature and amount of emoluments of its Directors on a
periodic basis by reference to relevant employment market conditions with the overall objective of ensuring
maximum stakeholder benefit from the retention of a high quality Board and senior executive team.
Fees and benefits in kind of $ 228,097 were payable to Directors who held office during the year ended 31
December 2018 (2017: $Nil).
Director Thomas Evans has received a loan of £10,000 which was outstanding as at 31 December 2018.
The loan is repayable within 12 months.
Directors’ and Officers’ Indemnity Insurance
The Company has made qualifying third-party indemnity provisions for the benefit of its Directors and
Officers. These were made during the previous period and remain in force at the date of this report.
Dividends
The Directors do not recommend the payment of a dividend (2017: $Nil).
Share capital and major shareholdings
The issued share capital of the Company as at 31 December 2018 comprised 70,900,000 1p ordinary
shares (2017: 70,900,000).
The Company has only one class of share capital formed of ordinary shares. All shares forming part of
the ordinary share capital have the same rights and each carries one vote.
As at 18 April 2019 the Company had been notified of the following interests in the Company’s ordinary
share capital:
Number of shares
Percentage
York Energy Group Limited
International Immobiliare Ltd
FHF Securities (A’Asia) Limited
Nobel Petroleum Ireland Limited
Nomura PB Nominees Limited
FHF Corporate Finance Limited
Invictorium Limited
Mrs. B. Shaw
Mrs. P. Evans
19,000,000
16,300,000
5,000,000
3,400,000
3,378,000
3,300,000
3,200,000
3,200,000
3,100,000
26.27
22.53
6.91
4.70
4.67
4.56
4.42
4.42
4.29
To the best of the Directors’ knowledge, no shareholder directly or indirectly, exercises or could exercise
control over the Company.
17
PENNPETRO ENERGY PLC
REPORT OF THE DIRECTORS
Going Concern
The Group has prepared cashflow forecasts for 12 months from the date of signing the Financial
Statements.
The Directors have considered these forecasts and have a reasonable expectation that the Company and
Group has adequate resources to continue in operational existence through 30 April 2020 as projected.
This is subject to commencing commercial oil production from summer 2019 and is subject to material
adverse unforeseen events that may occur, including but not limited to oil and gas prices and non-
operational control of wells.
In addition, Petroquest Energy Limited has confirmed to the directors that $1.1m is still available to draw
under its loan facility of $5m.
Events after the Reporting Period
On 15 February 2019, the Company issued 1,433,702 Ordinary shares of £0.01 each at a price of £0.55
per share.
On 5 March 2019, Pennpetro announced that its subsidiary, Nobel Petroleum UK Limited, had through its
US based entities, increased its working interest from 50% to 75% in the leasehold petroleum interests
centred on the City of Gonzales, southwest Texas, comprising the undeveloped central portion of the
Gonzales Oil Field. The interest was acquired from existing working interest parties pursuant to contractual
obligations within the Joint Operating Agreement, by crediting $ 1.1 million of outstanding receivables and
debiting drilling cost intangible assets.
Provision of Information to Auditor
So far as each of the Directors is aware at the time this report is approved:
•
there is no relevant audit information of which the Company's auditor is unaware; and
•
the Directors have taken all steps that they ought to have taken to make themselves aware of any
relevant audit information and to establish that the auditor is aware of that information.
Independent Auditor
The auditor, Crowe U.K. LLP will be proposed for reappointment in accordance with section 485 of the
Companies Act 2006. Crowe U.K. LLP has signified its willingness to continue in office as auditor.
This report was approved by the board on 30 April 2019 and signed on its behalf:
Keith Edelman
Non-Executive Director, Chairman
18
PENNPETRO ENERGY PLC
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance
with applicable law and regulations. Company law requires the Directors to prepare financial statements
for each financial year. Under that law the Directors have elected to prepare the Group and Parent
Company Financial Statements in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union.
Under company law the Directors must not approve the Financial Statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Company and Group as at the end of the financial
year and of the profit or loss of the Group for that period. In preparing these Financial Statements, the
Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether the applicable IFRS’s as adopted by the European Union have been followed;
subject to any material departures disclosed and explained in the Financial Statements; and
• prepare the Financial Statements on a going concern basis unless it is inappropriate to presume
that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and
explain the Company’s transactions and disclose with reasonable accuracy at any time the financial
position of the Company and the Group and enable them to ensure that the Financial Statements comply
with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and
Group and hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
The maintenance and integrity of the website is the responsibility of the Directors. The work carried out by
the auditors does not involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the information contained in the Financial
Statements since they were initially presented on the website. Legislation in the United Kingdom governing
the preparation and dissemination of the Financial Statements and other information included in annual
reports may differ from legislation in other jurisdictions.
The Company is compliant with the London Stock Exchange regarding the Company’s website.
This Statement was approved by the board on 30 April 2019 and signed on its behalf:
Keith Edelman
Non-Executive Director, Chairman
19
PENNPETRO ENERGY PLC
CORPORATE GOVERNANCE REPORT
Introduction
The Company recognises the importance of, and is committed to, high standards of corporate governance.
Corporate Governance Practices
As a company with a Standard Listing, the Company is not required to comply with the provisions of the
Corporate Governance Code. However, in the interests of observing best practice on corporate
governance, the Company intends to comply with the provisions of the Corporate Governance Code
insofar as is appropriate having regard to the size and nature of the Company and the size and composition
of the Board, except that:
• given the size of the Board and the Company’s current limited operational status, certain provisions of
the Corporate Governance Code (in particular the provisions relating to the composition of the Board and
the division of responsibilities between the Chairman and chief executive and executive compensation),
are not being complied with by the Company as the Board does not consider these provisions to be
appropriate for the Company;
• the Board as a whole will review audit, remuneration and risk matters, on the basis of adopted terms of
reference governing the matters to be reviewed and the frequency with which such matters are considered.
The Board as a whole will also take responsibility for the appointment of auditors and payment of their
audit fee, monitor and review the integrity of the Company’s financial statements and take responsibility
for any formal announcements on the Company’s financial performance;
• the Board as a whole will be responsible for the appointment of executive and non-executive Directors.
The Company does not currently believe it is necessary to have a separate nominations committee at this
time. The requirement for a nominations committee will be considered on an ongoing basis;
• the Board believes in the benefits of diversity, including the need for diversity in order to effectively
represent shareholders’ interests. This diversity is not restricted to gender but also includes geographic
location, nationality, skills, age, educational and professional background. The board’s policy remains that
selection should be based on the best person for the role;
• the Board as a whole will consider the Board’s size, structure and composition and the scale and structure
of the Directors’ fees, taking into account the interests of Shareholders and the performance of the
Company;
• the Board does not comply with the provision of the Corporate Governance Code that at least half of the
Board, excluding the Chairman, should comprise non-executive directors determined by the Board to be
sufficiently independent;
• the Company has in place procedures ensuring compliance with the new Market Abuse Regulation and
the Board will be responsible for taking all proper and reasonable steps to ensure compliance with the
Market Abuse Regulation by the Directors; and
• the Company will not seek Shareholder approval at a general meeting in respect of any further
acquisitions it may make, unless it is required to do so for the purposes of facilitating the financing
arrangements or for other legal or regulatory reasons.
The Board of Directors
As at 31 December 2018, the Board of Directors comprised four members: one Executive Director and
three Non-Executive Directors. Keith Edelman was appointed to the Board as Non-Executive Chairman.
Philip Nash was appointed to the Board as Non-Executive Director. The Executive Director has a wealth
of experience analytically covering the oil and gas industry. Similarly, the Non-Executive Directors together
have extensive corporate and financial experience.
20
PENNPETRO ENERGY PLC
CORPORATE GOVERNANCE REPORT
Corporate Governance Practices (continued)
The Company has policy of appraising Board performance annually and had adopted an internal policy
of regular face to face meetings in which all Board members discuss any issues as and when they arise
in relation to the Board or any individual member’s performance.
Board Meetings
The Board ordinarily meets on a bi-monthly basis and as and when further required, providing effective
leadership and overall management of the Group’s affairs by reference to those matters reserved for its
decision. This includes the approval of the budget and business plan, major capital expenditure,
acquisitions and disposals, risk management policies and the approval of the financial statements. Formal
agendas, papers and reports are sent to the Directors, in a timely manner, prior to the Board meetings.
Number held and entitled to
attend
6
6
6
6
Number attended
6
6
6
6
Keith Edelman
Thomas Evans
Olof Rapp
Philip Nash
Internal Controls
The Board recognises the importance of both financial and non-financial controls and has reviewed the
Group's control environment and any related shortfalls during the year. Since the Group was established,
the Directors are satisfied that, given the current size and activities of the Group, adequate internal controls
have been implemented. Whilst they are aware that no system can provide absolute assurance against
material misstatement or loss, in light of the current activity and proposed future developments of the
Group, continuing reviews of internal controls will be undertaken to ensure that they are adequate and
effective.
Relations with Shareholders
The Board is committed to providing effective communication with the shareholders of the Company.
Significant developments are disseminated through stock exchange announcements and regular updates
on the Company website. The Board views the Annual General Meeting as a forum for communication
between the Group and its shareholders and encourages their participation in its agenda.
Keith Edelman
Non-Executive Director, Chairman
30 April 2019
21
PENNPETRO ENERGY PLC
DIRECTORS’ REMUNERATION REPORT
Introduction
Board Meetings
Directors’ Remuneration Report
The Company’s Remuneration Committee comprises two Non-Executive Directors: Keith Edelman
(Chairman) and Olof Rapp.
Pennpetro’s Remuneration Committee operates within the terms of reference approved by the Board.
In the year to 31 December 2018, the two members of the Remuneration Committee have met once.
The items included in this report are unaudited unless otherwise stated.
Committee’s main responsibilities
•
•
•
•
•
The Remuneration Committee considers the remuneration policy, employment terms and
remuneration of the Executive Directors;
The Remuneration Committee’s role is advisory in nature and it makes recommendations to the
Board on the overall remuneration packages for Executive Directors in order to attract, retain and
motivate high quality executives capable of achieving the Company’s objectives;
The Remuneration Committee also reviews proposals for any share option plans and other incentive
plans, makes recommendations for the grant of awards under such plans as well as approving the
terms of any performance-related pay schemes;
The Board’s policy is to remunerate the Company’s executives fairly and in such a manner as to
facilitate the recruitment, retention and motivation of suitably qualified personnel; and
The Remuneration Committee, when considering the remuneration packages of the Company’s
executives, will review the policies of comparable companies in the industry.
Consideration of shareholder views
The Remuneration Committee considers shareholder feedback received and guidance from shareholder
bodies. This feedback, plus any additional feedback received from time to time, is considered as part of
the Company’s periodic reviews of its policy on remuneration.
Statement of policy on Directors’ remuneration
The Company’s policy is to maintain levels of remuneration so as to attract, motivate, and retain Directors
and Senior Executives of the highest caliber who can contribute their experience to deliver industry leading
performance with the Company’s operations. Currently Director’s remuneration is not subject to specific
performance targets.
In future periods the Company intends to implement a remuneration policy so that a meaningful proportion
of Executive remuneration is structured so as to link rewards to corporate and individual performance, align
their interests with those of shareholders and to incentivise them to perform at the highest levels. The
Remuneration Committee considers remuneration policy and the employment terms and remuneration of
the Executive Directors and makes recommendations to the Board of Directors on the overall remuneration
packages for the Executive Directors. No Director takes part in any decision directly affecting their own
remuneration.
22
PENNPETRO ENERGY PLC
DIRECTORS’ REMUNERATION REPORT
Directors Remuneration Report (continued)
Directors’ remuneration
The Directors who held office at 31 December 2018 are summarised as follows:
Name of Director Position
Keith Edelman
Thomas Evans
Philip Nash
Olof Rapp
Chairman, Non-Executive Director
Executive Director
Finance Director and Non-Executive Director
Senior Non-Executive Director
Each of the Directors entered into service agreements when they were appointed as Directors of the
Company. Details of those service agreements are set out below. The remuneration aspects of the service
agreements only commenced after the Company was listed, which occurred on 21 December 2017. There
were no other major remuneration decisions in the period.
Keith Edelman was appointed as a Non-Executive Director and Chairman of the Company on 2 May 2017
and entered into a letter of appointment with the Company. Pursuant to his letter of appointment Mr.
Edelman is entitled to an annual fee of £35,000 for a minimum of 2 days’ work per month, which includes
consideration for chairing the Remuneration Committee. He will be entitled to an additional fee if he is
required to perform any specific and additional services. The Chairman is not entitled to receive any
compensation on termination of his appointment (other than payment in respect of a notice period where
notice is served) and is entitled to be reimbursed all reasonable out-of-pocket expenses incurred in the
proper performance of his duties. Mr. Edelman is entitled to 425,000 share options, which were issued to
him in November 2018. Mr. Edelman’s appointment is for an initial term of three years unless terminated
earlier by either party giving to the other three month’s prior written notice.
Thomas Evans was appointed as Executive Director of the Company on 17 June 2016 and entered into a
letter of appointment with the Company. Pursuant to his letter of appointment Mr. Evans is entitled to an
annual fee of £30,000 for a minimum of 2 days’ work per month. He will be entitled to an additional fee if
he is required to perform any specific and additional services. The Director is not entitled to receive any
compensation on termination of his appointment (other than payment in respect of a notice period where
notice is served) and is entitled to be reimbursed all reasonable out-of-pocket expenses incurred in the
proper performance of his duties. Mr. Evans is entitled to 425,000 share options, which were issued to him
in November 2018. Mr. Evans’ appointment is for an initial term of three years unless terminated earlier by
either party giving to the other three month’s prior written notice.
Philip Nash was appointed as a Non-Executive Director and Finance Director of the Company on 17 June
2017 and entered into a letter of appointment with the Company. Pursuant to his letter of appointment Mr.
Nash is entitled to an annual fee of £30,000 for a minimum of 2 days’ work per month, which includes
being a member of the Audit Committee. He will be entitled to an additional fee if he is required to perform
any specific and additional services. The Director is not entitled to receive any compensation on
termination of his appointment (other than payment in respect of a notice period where notice is served)
and is entitled to be reimbursed all reasonable out-of-pocket expenses incurred in the proper performance
of his duties. Mr. Nash is entitled to 425,000 share options, which were issued to him in November 2018.
Mr. Nash’s appointment is for an initial term of three years unless terminated earlier by either party giving
to the other three month’s prior written notice.
Olof Rapp was appointed as Senior Non-Executive Director of the Company on 6 May 2016 and entered
into a letter of appointment with the Company. Pursuant to his letter of appointment Mr. Rapp is entitled to
an annual fee of £30,000 for a minimum of 2 days’ work per month, which includes being a member of the
Remuneration Committee and the Audit Committee. He will be entitled to an additional fee if he is required
to perform any specific and additional services. The Director is not entitled to receive any compensation
on termination of his appointment (other than payment in respect of a notice period where notice is served)
and is entitled to be reimbursed all reasonable out-of-pocket expenses incurred in the proper performance
of his duties. Mr. Rapp is entitled to 425,000 share options, which were issued to him in November 2018.
Mr. Rapp’s appointment is for an initial term of three years unless terminated earlier by either party giving
to the other three month’s prior written notice.
23
PENNPETRO ENERGY PLC
DIRECTORS’ REMUNERATION REPORT
Directors Remuneration Report (continued)
Remuneration components
Keith Edelman
Olof Rapp
Philip Nash
Thomas Evans
Emoluments
Valuation of options
Emoluments
Valuation of options
Emoluments
Valuation of options
Emoluments
Valuation of options
Group
2018
$
2017
$
Company
2017
$
2018
$
47,026
15,039
40,306
15,038
40,306
15,038
40,306
15,038
________
-
-
-
-
-
-
-
-
________
47,026
15,039
40,306
15,038
40,306
15,038
40,306
15,038
-
-
-
-
-
-
-
-
________ _______
228,097
_____ __
-
________
228,097
-
________ _______
None of the Directors earned any emoluments in the year ended 31 December 2017.
None of the share options vested in the year.
The Executive director's remuneration is disclosed in full in the above table and is not linked to
performance. Consequently the Group has not disclosed a separate chart showing the levels of
remuneration based on the Group's current remuneration policy.
Directors beneficial share interests (audited)
The interests of the Directors who served during the year in the share capital of the Company at 31
December 2018 and at the date of this report were as follows:
31 December 2018
Ordinary
Options and
warrants
Shares
1 January 2018
(or later date of
appointment)
Ordinary
Shares
Options and
warrants
Keith Edelman (Appointed 2 May 2017)
1,000,000
425,000
1,000,000
Olof Rapp
2,000,000
425,000
2,000,000
Philip Nash (Appointed 15 June 2017)
-
425,000
-
Thomas Evans (1)
5,000,000
425,000
5,000,000
-
-
-
-
(1) Thomas Martin Evans shares are held by FHF Securities (A’Asia) Limited.
24
PENNPETRO ENERGY PLC
DIRECTORS’ REMUNERATION REPORT
Directors Remuneration Report (continued)
Total pension entitlements (audited)
The Company does currently not have any pension plans for any of the Directors and does not pay pension
amounts in relation to their remuneration.
The Company has not paid out any excess retirement benefits to any Directors or past Directors.
Payments to past directors (audited)
The Company has not paid any compensation to past Directors.
Payments for loss of office (audited)
No payments were made for loss of office during the year.
Directors interests in share warrants (audited)
None of the Directors had interests in share warrants.
25
PENNPETRO ENERGY PLC
DIRECTORS’ REMUNERATION REPORT
Directors Remuneration Report (continued)
Policy for new appointments
Base salary levels will take into account market data for the relevant role, internal relativities, the
individual’s experience and their current base salary. Where an individual is recruited at below market
norms, they may be re-aligned over time (e.g. two to three years), subject to performance in the role.
Benefits will generally be in accordance with the approved policy.
For external and internal appointments, the Committee may agree that the Company will meet certain
relocation and/or incidental expenses as appropriate.
Policy on payment for loss of office
Payment for loss of office would be determined by the remuneration committee, taking into account
contractual obligations.
Other matters
The Company does not currently have any annual or long-term incentive schemes in place for any of the
Directors and as such there are no disclosures in this respect.
Share performance graph
Source: London Stock Exchange website of Pennpetro Energy Plc share prices chart.
Approved by the Board on 30 April 2019.
Keith Edelman
Non-Executive Director, Chairman
26
PENNPETRO ENERGY PLC
AUDIT COMMITTEE REPORT
Audit Committee Report
The Audit Committee comprises two Non-Executive Directors (Olof Rapp and Philip Nash). It oversees
the Company’s financial reporting and internal controls and provides a formal reporting link with the
external auditors. The ultimate responsibility for reviewing and approving the annual report and accounts
and the half-yearly report remains with the Board.
Main Responsibilities
The Audit Committee acts as a preparatory body for discharging the Board’s responsibilities in a wide
range of financial matters by:
•
•
•
•
•
•
•
monitoring the integrity of the financial statements and formal announcements relating to the
Company’s financial performance;
reviewing significant financial reporting issues, accounting policies and disclosures in financial
reports, which are considered to be in accordance with the key audit matters identified by the external
auditors;
overseeing that an effective system of internal control and risk management systems are maintained;
ensuring that an effective whistle-blowing, anti-fraud and bribery procedures are in place;
overseeing the Board’s relationship with the external auditor and, where appropriate, the selection
of new external auditors;
approving non-audit services provided by the external auditor, or any other accounting firm, ensuring
the independence and objectivity of the external auditors is safeguarded when appointing them to
conduct non-audit services; and
ensuring compliance with legal requirements, accounting standards and the Listing Rules and the
Disclosure and Transparency Rules
Governance
The Code requires that at least one member of the Audit Committee has recent and relevant financial
experience. Philip Nash, who was appointed to the Audit Committee in 2017 has been a qualified
Chartered Accountant with extensive experience of high level finance roles. As a result, the Board is
satisfied that the Audit Committee has recent and relevant financial experience.
Members of the Audit Committee are appointed by the Board and whilst shareholders, the Company
believes they are considered to be independent in both character and judgement.
The Company’s external auditor is Crowe U.K. LLP and the Audit Committee will closely monitor the level
of audit services they provide to the Company.
The audit committee believes that the Company does not require an internal audit function due to the
current size of the organisation and its operations.
Meetings
In the year to 31 December 2018 the two members of the Audit Committee have met twice.
The key work undertaken by the Audit Committee is as follows;
•
•
•
•
•
•
interview of external auditors and recommendation to the Board;
review of audit planning and update on relevant accounting developments;
consideration and approval of the risk management framework, appropriateness of key performance
indicators;
consideration and review of full-year results;
review of the effectiveness of the Audit Committee; and
review of internal controls
27
PENNPETRO ENERGY PLC
AUDIT COMMITTEE REPORT
Audit Committee Report (continued)
The Code states that the Audit Committee should have primary responsibility for making a
recommendation on the appointment, reappointment or removal of the external auditor.
External auditor
During the Year under review, the Company’s Reporting accountant Welbeck Associates was acquired by
the Groups’ auditors at the time, PKF Littlejohn LLP. By way of its listing on the LSE, Pennpetro is classed
as a public interest entity. Under section 290.172 of the ICAEW code of ethics, auditors shall not prepare
financial statements for public interest companies. Consequently, in order that the Company could
continue to retain its Reporting accountant and continuity of accounting services, PKF Littlejohn LLP were
required to resign as the Group’s auditors.
The Audit Committee appointed Crowe U.K. LLP as auditors to the Company, commencing with the audit
of the year ended 31 December 2018. The external auditor has unrestricted access to the Audit Committee
Chairman. The Committee is satisfied that Crowe U.K. LLP has adequate policies and safeguards in place
to ensure that auditor objectivity and independence are maintained. The external auditors report to the
Audit Committee annually on their independence from the Company. In accordance with professional
standards, the partner responsible for the audit is changed every five years. The current auditor, Crowe
U.K. LLP were first appointed by the Company in 2019 following a tender process and therefore the current
partner is due to rotate off the engagement after completing the December 2022 audit. Having assessed
the performance objectivity and independence of the auditors, the Committee will be recommending the
reappointment of Crowe U.K. LLP as auditors to the Company at the 2019 Annual General Meeting.
Keith Edelman
Non-Executive Director, Chairman
30 April 2019
28
PENNPETRO ENERGY PLC
REPORT OF THE INDEPENDENT AUDITOR
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PENNPETRO ENERGY PLC
Opinion
We have audited the financial statements of Pennpetro Energy Plc (the “Company” and its subsidiaries
(the “Group”) for the year ended 31 December 2018 which comprise the consolidated statements of
comprehensive income, the consolidated and parent company statements of financial position, the
consolidated and parent company statements of cashflows, the consolidated and parent company
statements of changes in equity and notes to the financial statements, including a summary of significant
accounting policies. The financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European
Union.
In our opinion, the financial statements:
• give a true and fair view of the state of the group’s and company’s affairs as at 31 December 2018
and of its loss for the year then ended;
• have been properly prepared in accordance with International Financial Reporting Standards and
as adopted by the European Union; and
• have been prepared in accordance with the requirements of the Companies Act 2006, and, as
regards the group financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our report. We are independent of the
Company in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to
report to you when:
• The directors’ use of the going concern basis of accounting in the preparation of the financial
statements is not appropriate; or
• The directors have not disclosed in the financial statements any identified material uncertainties that
may cast significant doubt about the Company’s ability to continue to adopt the going concern basis of
accounting for a period of at least twelve months from the date when the financial statements are
authorised for issue.
Overview of our audit approach
Materiality
In planning and performing our audit we applied the concept of materiality. An item is considered material
if it could reasonably be expected to change the economic decisions of a user of the financial statements.
We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements
identified.
Based on our professional judgement, we determined overall materiality for the financial statements as a
whole to be $115,000, based on 2% of total assets.
We use a different level of materiality (‘performance materiality’) to determine the extent of our testing for
the audit of the financial statements. Performance materiality is set based on the audit materiality as
adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit
area having regard to the internal control environment.
Where considered appropriate performance materiality may be reduced to a lower level, such as, for
related party transactions and directors’ remuneration.
29
PENNPETRO ENERGY PLC
REPORT OF THE INDEPENDENT AUDITOR
We agreed with the Audit Committee to report to it all identified errors in excess of $3,000. Errors below
that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative
grounds.
Overview of the scope of our audit
The Company and Group finance function is based in the United Kingdom and a full scope audit was
carried out thereon from our office with discussions with management as required and with information
being requested from the US where appropriate. This provided us with sufficient evidence for our opinion
on the consolidated financial statements.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our
audit of the financial statements of the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) that we identified. These matters included those which
had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
This is not a complete list of all risks identified by our audit.
Key audit matter
Valuation of producing properties and
capitalised drilled costs and equipment
The group’s primary focus is onshore oil and
gas exploration and production in Texas, USA.
As at 31 December 2018 assets totalling $5.1m
were recognised comprising Petroleum Leases
within property, plant and equipment of $1.3m
and Drilling Costs within intangible assets of
$3.8m.
We considered the risk that these assets are
impaired.
How the scope of our audit addressed the key audit
matter
reviewed management’s assessment which
We
concluded that there are no facts or circumstances that
suggest the recoverable amount of the asset does not
exceed the carrying amount.
In considering this assessment we reviewed the following
sources of evidence:
•The primary lease agreements in place supporting the
company’s right of extraction;
•The competent persons report that formed the basis of
the valuation;
• Discussing plans and intentions with management;
• Current oil prices and futures to support key assumptions
used when assessing the recoverable amount; and
• Current market capitalisation
We are satisfied that there are no indicators of impairment
in respect of the drilling costs and that the estimated
recoverable amount in respect of the petroleum leases is
in excess of the carrying value.
30
PENNPETRO ENERGY PLC
REPORT OF THE INDEPENDENT AUDITOR
Going concern
to make an
The Board are required
assessment of
to
continue as a going concern for a period of
at least 12 months from the date of signing
the financial statements.
the Group’s ability
The Board has concluded that the going
concern basis is appropriate and that no
material uncertainties exist.
the estimates and
judgements
Given
required by management
in preparing
forecast cash flows, including factors such
as oil and gas prices, the quantum and
timing of future revenues and receivables
and the availability of lending facilities.
We have obtained cash flow forecasts from management
and performed a detailed review, challenging the key
assumptions.
We confirmed the integrity of the forecast models and
sensitivities and performed our own sensitivities for
production delays.
We have reviewed the terms and availability of facilities in
place.
We reviewed
the adequacy and completeness of
disclosure in the financial statements in relation to going
concern.
We are satisfied that the use of the going concern
assumption is appropriate.
Our audit procedures in relation to these matters were designed in the context of our audit opinion as a
whole. They were not designed to enable us to express an opinion on these matters individually and we
express no such opinion.
Other information
The directors are responsible for the other information. The other information comprises the information
included in the annual report, other than the financial statements and our auditor’s report thereon. Our
opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in
accordance with the Companies Act 2006.
In our opinion based on the work undertaken in the course of our audit
•
•
the information given in the strategic report and the directors' report for the financial year for which
the financial statements are prepared is consistent with the financial statements; and
the directors’ report and strategic report have been prepared in accordance with applicable legal
requirements.
31
PENNPETRO ENERGY PLC
REPORT OF THE INDEPENDENT AUDITOR
Matters on which we are required to report by exception
In light of the knowledge and understanding of the group and the parent company and their environment
obtained in the course of the audit, we have not identified material misstatements in the strategic report or
the directors’ report.
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us
to report to you if, in our opinion:
• adequate accounting records have not been kept by the company, or returns adequate for our
audit have not been received from branches not visited by us; or
•
the financial statements and the part of the directors’ remuneration report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit
Responsibilities of the directors for the financial statements
As explained more fully in the directors’ responsibilities statement set out on page 19, the directors are
responsible for the preparation of the financial statements and for being satisfied that they give a true and
fair view, and for such internal control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the directors either intend to liquidate the
Group or Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements.
We designed our audit approach to be capable of detecting irregularities, including fraud. In particular:
We gained an understanding of the legal and regulatory framework applicable to the Group and considered
the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud.
We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may
involve deliberate concealment.
Our tests included but were not limited to: review of the financial statement disclosures to underlying
supporting documentation and enquiries of management. There are inherent limitations in the audit
procedures described above and the further removed non-compliance with laws and regulations is from
the events and transactions reflected in the financial statements, the less likely we would become aware
of it. We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits
we also addressed the risk of management override of internal controls, including testing journals and
evaluating whether there was evidence of bias by the directors that represented a risk of material
misstatement due to fraud.
A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
32
PENNPETRO ENERGY PLC
REPORT OF THE INDEPENDENT AUDITOR
Other matters which we are required to address
We were appointed by the Board on 25 March 2019 to audit the financial statements for the year ended
31 December 2018. Our total uninterrupted period of engagement is 1 year, covering the year ended 31
December 2018.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the company and
we remain independent of the group and the parent company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16
of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's
members those matters we are required to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company's members as a body, for our audit work, for this report, or for the opinions we
have formed.
Matthew Stallabrass
Senior Statutory Auditor
For and on behalf of
Crowe U.K. LLP
Statutory Auditor
London
30 April 2019
33
PENNPETRO ENERGY PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 December 2018
Continuing Operations
Administrative expenses
Note
Year ended
31 December
2018
$
Year ended
31 December
2017
$
6
(595,074)
________
(708,295)
________
Operating Loss
(595,074)
(708,295)
Finance income
Finance costs
Loss before Tax
Income tax
Loss for the year attributable to owners of the parent
Other Comprehensive Income:
Items that may be reclassified subsequently to profit
or loss
10
10
9
273,126
(466,682)
________
561,849
(6,823)
________
(788,630)
(153,269)
-
________
-
________
(788,630)
________
(153,269)
________
Currency translation differences
(27,579)
19,718
Other Comprehensive Income for the Year, Net of Tax
Total Comprehensive Income for the Year attributable
to the owners of the parent
Loss per share attributable to the owners of the parent
during the year
_______
_______
(27,579)
________
19,718
________
(816,209)
(133,551)
________
________
Basic (cents per share)
Diluted (cents per share)
11
(1.11)
_______
(0.34)
________
(1.11)
________
(0.34)
________
The notes to the consolidated financial statements form an integral part of these Financial Statements.
34
PENNPETRO ENERGY PLC
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 31 December 2018
ASSETS
Non–Current Assets
Property, plant and equipment
Intangible assets
Total Non-Current Assets
Current Assets
Trade and other receivables
Short term investments
Cash and cash equivalents
Total Current Assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity attributable to Owners of Parent
Share capital
Share premium
Convertible reserve
Reorganisation reserve
Foreign exchange reserve
Share based payment reserve
Retained losses
Total Equity
Non-Current Liabilities
Borrowings
Total Non-Current Liabilities
Current Liabilities
Trade and other payables
Total Current Liabilities
TOTAL EQUITY AND LIABILITIES
Note
As at
31 December
2018
$
As at
31 December
2017
$
12
13
15
16
17
18
18
20
21
1,279,914
4,007,448
_________
1,226,647
2,173,533
_________
5,287,362
_________
3,400,180
_________
523,482
166,367
-
________
1,537,448
2,073,299
22,073
________
689,849
________
3,632,820
________
5,977,211
_________
7,033,000
_________
908,404
625,504
6,021,575
(6,578,229)
(7,861)
60,153
(1,055,368)
_________
908,404
625,504
6,021,575
(6,578,229)
19,718
-
(266,738)
_________
(25,822)
_________
730,234
_________
5,863,863
________
6,092,657
________
5,863,863
________
6,092,657
________
139,170
________
210,109
________
139,170
________
210,109
________
5,977,211
_________
7,033,000
_________
These Financial Statements were approved by the Board of Directors on 30 April 2019 and signed on its
behalf by:
Keith Edelman
Non-Executive Director, Chairman
The notes to the consolidated financial statements form an integral part of these Financial Statements.
35
PENNPETRO ENERGY PLC
COMPANY STATEMENT OF FINANCIAL POSITION
As at 31 December 2018
ASSETS
Non–Current Assets
Investments in subsidiaries
Property, plant and equipment
Total Non–Current Assets
Current Assets
Trade and other receivables
Short term investments
Cash and cash equivalents
Total Current Assets
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity attributable to Shareholders
Share capital
Share premium
Convertible reserve
Foreign exchange reserve
Share based payment reserve
Retained losses
Total Equity
Current Liabilities
Trade and other payables
Total Current Liabilities
TOTAL EQUITY AND LIABILITIES
Note
As at
31 December
2018
$
As at
31 December
2017
$
14
12
15
16
17
18
18
6,622,720
3,163
________
6,625,883
________
12,736
166,367
-
_________
7,027,100
5,700
________
7,032,800
________
13,514
1,194,948
-
_________
179,103
_________
1,208,462
_________
6,804,986
_________
8,241,262
_________
908,404
625,504
6,021,575
45,228
60,153
(1,344,363)
_________
908,404
625,504
6,021,575
417,578
-
(714,397)
_________
6,316,501
_________
7,258,664
_________
21
488,485
_________
982,598
_________
488,485
_________
982,598
_________
6,804,986
_________
8,241,262
_________
The Company has elected to take the exemption under Section 408 of the Companies Act 2006 from
presenting the Parent Company Statement of Comprehensive Income. The loss for the Parent Company
for the year was $629,966 (2017: $669,777).
These Financial Statements were approved by the Board of Directors on 30 April 2019 and were signed
on its behalf by:
Keith Edelman
Non-Executive Director, Chairman
The notes to the consolidated financial statements form an integral part of these Financial Statements.
36
PENNPETRO ENERGY PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2018
Attributable to the owners of the parent
Share
Premium
Convertible
reserve
Reorganisation
reserve
Foreign
Exchange
Reserve
Share Based
Payments
Reserve
-
-
-
-
-
-
-
-
-
-
-
-
-
-
19,718
19,718
Share
capital
135
-
-
-
Group ($)
Balance at 1 January 2017
Loss for the year
Other Comprehensive Income
Currency translation differences
Total Comprehensive Income
for the Year
Transactions with Owners
Reverse merger
Shares issued for cash
Share raising cost
Transaction with owners,
recognised directly in equity
Shares issued as consideration
for listing fees
191,550
-
686,920
303,677
6,021,575
(6,578,229)
29,799
-
332,969
(11,142)
-
-
-
-
-
-
908,269
625,504
6,021,575
(6,578,229)
-
-
-
-
-
Balance at 31 December 2017
908,404
625,504
6,021,575
(6,578,229)
19,718
Loss for the year
Share based payments
Other Comprehensive Income
Currency translation differences
Total Comprehensive Income
for the Year
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(27,579)
Retained
losses
Total
equity
(17,838)
(17,703)
(153,269)
(153,269)
-
19,718
(153,269)
(133,551)
(95,631)
338,312
-
-
-
191,550
362,768
(11,142)
(95,631)
881,488
(266,738)
730,234
(788,630)
(788,630)
-
-
60,153
(27,579)
-
-
-
-
-
-
-
-
-
-
-
60,153
-
Balance at 31 December 2018
908,404
625,504
6,021,575
(6,578,229)
(7,861)
60,153
(1,055,368)
(25,822)
The notes to the consolidated financial statements form an integral part of these Financial Statements.
37
(27,579)
60,153
(788,630)
(756,056)
PENNPETRO ENERGY PLC
COMPANY STATEMENT OF CHANGES IN EQUITY
Year ended 31 December 2018
Attributable to the owners of the shareholders
Share
premium
Convertible
reserve
Retained losses
Translation
reserve
Share based
payments
reserve
Total equity
Shares issued for cash
29,799
332,969
Company ($)
Balance at 1 January 2017
Loss for the year
Other Comprehensive Income
Total Comprehensive Income for the Year
Transactions with owners
Share
capital
116,590
-
-
-
Shares issued as consideration for listing
fees
Shares issued as consideration in the
reverse merger
Convertible loan note issued as
consideration in the reverse merger
Share issue costs
Total contributions by and distributions
to owners of the parent, recognised
directly in equity
191,550
570,465
-
-
303,677
-
-
-
-
-
-
-
-
-
-
-
-
-
6,021,575
(44,620)
(669,777)
-
(669,777)
(33,358)
-
450,936
450,936
-
-
-
-
-
-
-
-
-
-
-
-
(11,142)
-
791,814
321,827
6,021,575
-
-
-
-
-
-
-
-
-
-
342,289
(669,777)
450,936
(218,841)
362,768
191,550
570,465
6,021,575
(11,142)
7,135,216
-
-
7,258,664
(629,966)
60,153
60,153
Balance at 31 December 2017
908,404
625,504
6,021,575
(714,397)
417,578
Loss for the year
Share based payments
Other Comprehensive Income
Total Comprehensive Income for the Year
-
-
-
-
-
-
-
-
-
-
-
-
(629,966)
-
-
-
-
(372,350)
-
(372,350)
(629,966)
(372,350)
60,153
(942,163)
Balance at 31 December 2018
908,404
625,504
6,021,575
(1,344,363)
45,228
60,153
6,316,501
The notes to the consolidated financial statements form an integral part of these Financial Statements.
38
PENNPETRO ENERGY PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December 2018
Note
Year ended
31 December
2018
$
Year ended
31 December
2017
$
Cash Flows from Operating Activities
(Loss) before tax
Depreciation
Amortisation
Unrealised foreign exchange
Finance income
Finance costs
Share base payment charge
Changes to working capital
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Trade and other payables on reverse merger
Shares issued to settle professional fees
Cash generated (used in) operations
Interest paid
Net Cash used in Operating Activities
Cash Flows from Investing Activities
Purchases of development expenditure
Purchases of property, plant and equipment
Short term investments
Short term investments on reverse merger
Interest received
Net Cash generated from (used in) Investing
Activities
Cash Flows from Financing Activities
Proceeds from issue of ordinary shares
Issue costs
Proceeds from/ (repayments to) borrowings
Borrowing arrangement fees
12
13
10
10
19
18
13
12
18
18
Net Cash generated from (used in) Financing
Activities
Net (Decrease) in Cash and Cash Equivalents
Movement in Cash and Cash Equivalents
Cash and cash equivalents at the beginning of the year
Exchange (loss)/gain on cash and cash equivalents
Net (decrease) in cash and cash equivalents
17
(788,630)
2,907
99,575
(183,110)
(273,126)
466,682
60,153
________
(153,269)
2,921
5,557
-
(561,849)
6,823
-
________
(615,549)
(699,817)
(169,050)
(70,937)
-
-
________
(855,536)
(195,494)
________
(1,509,336)
167,747
(9,268)
191,550
________
(1,859,124)
(6,912)
________
(1,051,030)
________
(1,866,036)
________
(750,473)
(56,382)
1,906,932
-
31
________
1,100,108
________
-
-
-
(71,151)
-
________
(1,908,751)
(65,065)
(2,073,299)
347,904
89
________
(3,699,122)
________
362,768
(11,142)
-
5,469,506
(270,339)
________
(71,151)
________
5,550,793
________
(22,073)
________
(14,365)
________
22,073
-
(22,073)
_______
20,904
15,534
(14,365)
________
Cash and Cash Equivalents at the End of the Year
22,073
________
The notes to the consolidated financial statements form an integral part of these Financial Statements.
-
_______
17
39
PENNPETRO ENERGY PLC
Cash Flows from Operating Activities
Loss before tax
Depreciation
Share based payments
Unrealised foreign exchange
Finance income
Finance costs
Changes to working capital
Increase in funding received from subsidiary undertaking
Decrease/(increase) in trade and other receivables
(Decrease)/increase in trade and other payables
Shares issued to settle professional fees
18
Cash generated/ (used in) operations
Interest paid
Net Cash generated from/ (used in) Operating
Activities
Cash Flows from Investing Activities
Short term investments
Purchase of property, plant and equipment
Interest received
Net Cash used in Investing Activities
COMPANY STATEMENT OF CASH FLOWS
Year ended 31 December 2018
Year
ended
31 December
2018
Note
Year
ended
31 December
2017
$
$
(629,966)
2,329
60,153
32,238
(31)
839
_______
(669,777)
2,344
-
-
(89)
643
_______
(534,438)
(666,879)
-
(394,803)
(98,532)
-
_______
793,960
(13,514)
179,370
191,550
_______
(493,335)
1,151,366
(1,027,773)
(839)
484,487
(643)
(1,028,612)
483,844
_______
_______
1,028,581
-
31
________
1,028,612
________
(831,510)
(4,049)
89
________
(835,470)
________
Cash Flows from Financing Activities
Proceeds from issue of ordinary shares
Issue costs
18
18
-
-
362,768
(11,142)
Net Cash generated from/ (used in) Financing
Activities
Net movement in Cash and Cash Equivalents
Cash and cash equivalents at the beginning of the year
Exchange gain on cash and cash equivalents
Net Decrease in cash and cash equivalents
17
Cash and Cash Equivalents at the End of the Year
17
________
-
________
-
________
-
-
-
_______
-
_______
________
351,626
________
-
________
-
-
-
_______
-
_______
The notes to the consolidated financial statements form an integral part of these Financial Statements.
40
PENNPETRO ENERGY PLC
1. GENERAL INFORMATION
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
The Consolidated Financial Statements of Pennpetro Energy plc (“the Company”) consists of the
following companies (together “the Group”):
Pennpetro Energy plc
Nobel Petroleum UK Limited
Nobel Petroleum USA Inc
Nobel Petroleum LLC
Pennpetro USA Corp
UK registered company
UK registered company
US registered company
US registered company
US registered company
The Company is a public limited company which is listed on the standard market of the London Stock
Exchange and incorporated and domiciled in England and Wales. Its registered office address is First
Floor, 88 Whitfield Street, London, W1T 4EZ.
The Group is an oil and gas developer with assets in Texas, United States. The Company’s US-based
subsidiaries own a portfolio of leasehold petroleum mineral interests centred on the City of Gonzalez,
in southeast Texas, comprising the undeveloped central portion of the Gonzales Oil Field.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these Consolidated Financial Statements
are set out below. These policies have been consistently applied to all the years presented, unless
otherwise stated.
2.1.Basis of preparation of Financial Statements
The Consolidated Financial Statements of Pennpetro Energy plc have been prepared in accordance
with International Financial Reporting Standards (IFRS) and IFRIC interpretations (IFRS IC) as
adopted by the European Union and the Companies Act 2006 applicable to companies reporting under
IFRS.
The Financial Statements have been prepared under the historical cost convention.
The preparation of Financial Statements in conformity with IFRS requires the use of certain critical
accounting estimates. It also requires management to exercise its judgement in the process of applying
the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated Financial Statements are
disclosed in Note 4.
2.2.Basis of consolidation
The Consolidated Financial Statements consolidate the Financial Statements of Pennpetro Energy plc
and the audited Financial Statements of its subsidiary undertakings made up to 31 December 2018.
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the
Group is exposed to, or has rights to, variable returns from its involvement with the investee and has
the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated
from the date on which control is transferred to the Group. They are deconsolidated from the date that
control ceases.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the
accounting policies used into line with those used by other members of the Group. All inter-company
transactions and balances between Group entities are eliminated on consolidation.
41
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2.2 Basis of consolidation (continued)
Acquisition
On 17 May 2017 Pennpetro energy plc (“Pennpetro”) acquired 100% of the issued capital of Nobel
Petroleum UK Limited (“Nobel UK”) in a share for share exchange with the shareholders of Nobel UK’s
parent company at that time, Nobel Petroleum Ireland Limited (“Nobel Ireland”). Due to the relative size
of the companies, Nobel Ireland’s shareholders became the majority shareholders in the enlarged
share capital. Pennpetro’s shares were later listed on the London Stock Exchange in December 2017.
The transaction fell outside the scope of IFRS 3 (“Business Combinations”) and as such has been
treated as a reverse merger and accounted for as a share-based payment transaction which should
be accounted for in accordance with IFRS 2. On the basis of the guidance in para B21 of IFRS 3, the
reverse merger has been treated as a continuation of the Nobel Group into the Pennpetro Group. The
consideration included the issue of new share capital and the issue of a convertible bond.
Reason for the reverse merger
Pennpetro was incorporated with the intention of obtaining a Listing on the LSE shortly after completing
a reverse merger with Nobel UK Limited by way of a share swap with Nobel UK’s parent company
Nobel Ireland. Nobel Ireland’s shareholders retained a majority interest in the listed Pennpetro after
the transaction.
Business Combinations
The acquisition of other subsidiaries are expected to be accounted for using the acquisition method of
accounting. The consideration transferred for the acquisition is the fair values of the assets transferred,
the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group.
The consideration transferred includes the fair value of any asset or liability resulting from a contingent
consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at their fair values at the acquisition date.
The Group recognises any non-controlling interest in the acquiree at the non-controlling interest’s
proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Acquisition-
related costs are expensed as incurred. Any contingent consideration to be transferred by the Group
is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the
contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS
39, either in the Income Statement or as a change to other comprehensive income. Contingent
consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted
for within equity. Goodwill is initially measured as the excess of the aggregate of the consideration
transferred and the fair value of non-controlling interest over the identifiable net assets acquired and
liabilities assumed.
2.3.Going concern
The Group’s business activities, together with the factors likely to affect its future development and
performance are set out in the Executive Director’s Statement. In addition, notes 3 and 23 to the
Financial Statements disclose the Group’s and Company’s objectives, policies and processes for
managing financial risks and capital.
The Group has prepared cashflow forecasts for 12 months from the date of signing the Financial
Statements.
The Directors have considered these forecasts and have a reasonable expectation that the Company
and Group has adequate resources to continue in operational existence through to 30 April 2020 as
projected. This is subject to commencing commercial oil production from summer 2019 and is subject
to material adverse unforeseen events that may occur, including but not limited to oil and gas prices
and non-operational control of wells. For this reason, the Directors continue to adopt the going concern
basis of accounting in preparing the Financial Statements.
In addition, Petroquest Energy Limited has confirmed to the directors that $1.1m is still available to
draw under its loan facility of $5m.
42
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.4.Changes in accounting policy and disclosure
a) New standards, amendments and interpretations adopted by the Group effective for the
first time for the financial year beginning on or after 1 January 2018
- IFRS 9 Financial Instruments
- IFRS 15 Revenue from Contracts with Customers
IFRS9 Financial Instruments
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and
measurement of financial assets and financial liabilities, derecognition of financial instruments,
impairment of financial assets and hedge accounting. The classification depends on the
entity’s business model for managing the financial assets and the contractual terms of the
cash flows. Financial assets are derecognised when the rights to receive cash flows from the
financial assets have expired or have been transferred and the group has transferred
substantially all the risks and rewards of ownership.
Financial assets
From 1 January 2018, the Group classifies its financial assets as those to be measured at
amortised cost. Other trade debtors and receivables from Development participants are held
to collect contractual cash flows and are expected to give rise to cash flows representing
principal and interest. The Company analysed the contractual cash flow characteristics of
those instruments and concluded that they meet the criteria for amortised cost measurement
under IFRS 9. Therefore, reclassification for these instruments is not required. Based on the
review of historical credit losses, considerations of prospective factors and give the Group’s
active management of credit risk, the Group did not identify any credit losses requiring
provision.
A Developer participant exited the Gonzales project in March 2019 and as a result, the related
receivables balance was reclassified to PPE as at 31 December 2018.
The outlook for the oil and gas industry is not expected to result in a significant change in the
Group’s exposure to credit losses.
Financial liabilities
Financial liabilities held by the Group comprise trade and other payables and borrowings.
Trade and other payables are initially measured at fair value and are subsequently measured
at amortised cost using the effective interest method. Borrowings are recognised initially at
fair value. Borrowings are subsequently carried at amortised cost; any difference between
the proceeds (net of transaction costs) and the redemption value is recognised in the Income
Statement over the period of the borrowings, using the effective interest method. The Group
has reviewed its financial liabilities and there was no impact from the adoption of the new
standard on 1 January 2018.
IFRS 15 Revenue from Contracts with Customers
The IASB has issued a new standard for the recognition of revenue. This replaced IAS 18
which covers contracts for goods and services and IAS 11 which covers construction
contracts. The new standard is based on the principle that revenue is recognised when control
of a good or service transfers to a customer.
The Group has not generated revenue in the year under review or the prior year, so IFRS 15
has no impact on the Financial Statements.
The Group expects to generate revenue during 2019 and given the nature of the Group’s oil
marketing and gas sale arrangements, with control passing to the customer upon transfer of
physical possession, the Group principally satisfies its performance obligations at a point in
time as opposed to over a period of time.
43
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.4. Changes in accounting policy and disclosure (continued)
b) New and amended standards and interpretations issued but not yet effective or
endorsed and not early adopted
At the date of authorisation of these Financial Statements, the Group and Company have not
applied the following new and revised IFRSs that have been issued but are not yet effective and
(in some cases) have not yet been endorsed by the EU. The Group and Company intend to adopt
these standards, if applicable, when they become effective.
Standard / Interpretation Title
Effective date
IFRS 16
IFRIC 23
IFRS 9 (Amendments)
IAS 28 (Amendments)
IFRS 3 (Amendments)
IFRS 11 (Amendments)
IAS 12 (Amendments)
IAS 23 (Amendments)
IAS 19 (Amendments)
1 January 2019
Leases
Uncertainty over Income Tax Treatments
1 January 2019
Prepayment Features with Negative Compensation 1 January 2019
Long-term Interests in Associates and Joint
1 January 2019
Ventures
Business Combinations – Annual Improvements to
IFRS (2015-2017 Cycle)
Joint Arrangements – Annual Improvements to
IFRS (2015-2017 Cycle)
Income Taxes – Annual Improvements to IFRS
(2015-2017 Cycle)
Borrowing Costs - Annual Improvements to IFRS
(2015-2017 Cycle)
Employee Benefits – Plan Amendment,
Curtailment or Settlement
1 January 2019
1 January 2019
1 January 2019
1 January 2019
1 January 2019
The Group and Company are evaluating the impact of the new and amended standards above.
The Directors do not anticipate that the adoption of these standards, amendments and
interpretations will have a material impact on the Group’s financial statements in the periods of
initial application.
44
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.5.Foreign Currency Translation
(a) Functional and presentation currency
Items included in each of the Financial Statements of the Group’s entities are measured using
the currency of the primary economic environment in which the entity operates (the ‘functional
currency’). The functional currency of the UK parent entity and Nobel UK Limited is sterling
and the functional currency of the US subsidiaries is US Dollars. The Financial Statements
are presented in US Dollars, rounded to the nearest Dollar, which is the Group’s and
Company’s presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange
rates prevailing at the dates of the transactions or valuation where such items are re-
measured. Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognised in the statement of comprehensive
income.
(c) Group companies
The results and financial position of all the Group entities that have a functional currency
different from the presentation currency are translated into the presentation currency as
follows:
• assets and liabilities for each Statement of Financial Position presented are translated
at the closing rate at the date of that Statement of Financial Position;
•
income and expenses for each statement of comprehensive income are translated at
average exchange rates (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which case income
and expenses are translated at the dates of the transactions); and
• all resulting exchange differences are recognised in other comprehensive income.
On consolidation, exchange differences arising from the translation of the net investment in
foreign entities, and of monetary items receivable from foreign subsidiaries for which
settlement is neither planned nor likely to occur in the foreseeable future are taken to other
comprehensive income. When a foreign operation is sold, such exchange differences are
recognised in the Statement of Comprehensive Income as part of the gain or loss on sale.
2.6.Property, plant and equipment
Following evaluation of successful exploration of wells, if commercial reserves are established and
the technical feasibility of extraction demonstrated, and once a project is sanctioned for commercial
development, then the related capitalised exploration costs are transferred into a single field cost
centre within ‘producing properties’ within property, plant and equipment after testing for
impairment. Where results of exploration drilling indicate the presence of hydrocarbons which are
ultimately not considered commercially viable, all related costs are written off to the Statement of
Comprehensive Income.
45
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.6. Property, plant and equipment (continued)
The net book values of ‘producing properties’ are depreciated on a unit of production basis at a
rate calculated by reference to proven and probable reserves and incorporating the estimated
future cost of developing and extracting those reserves once production has commenced.
The Petroleum (Mineral lease) expenditure to date is over land that has already had historical
vertical drilled wells and has proven oil reserves. All these costs were therefore immediately
capitalised within property, plant and equipment.
All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons
has been demonstrated, are capitalised within ‘drilling costs and equipment’ on a well by well basis.
Subsequent expenditure is capitalised only where it either enhances the economic benefits of the
development/producing asset or replaces part of the existing development/producing asset. Any
costs remaining associated with the part replaced are expensed.
Net proceeds from any disposal of an exploration asset are credited to the Statement of
Comprehensive Income in full. Capitalised costs are removed from assets and debited to the
Statement of Comprehensive Income.
All property, plant and equipment other than oil and gas assets are stated at historical cost less
depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of
the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset,
as appropriate, only when it is probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably. All other repairs and
maintenance are charged to the Statement of Comprehensive Income during the financial period
in which they are incurred.
Depreciation is charged so as to allocate the cost of assets, over their estimated useful lives, on a
straight line basis as follows:
Office equipment – 4 years
Oil and gas producing properties held in property, plant and equipment are mainly depreciated on
a unit of production basis at a rate calculated by reference to proven and probable reserves and
incorporating the estimated future cost of developing and extracting those reserves.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each
financial year-end.
Gains and losses on disposal are determined by comparing proceeds with carrying amount. These
are included in the Income Statement.
46
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.7. Intangible assets
a. Development expenditure
Expenditure on the construction, installation and completion of infrastructure facilities such as
platforms, pipelines and the drilling of development wells, including service, is capitalised
initially within intangible fixed assets and when the well has formally commenced commercial
production, then it is transferred to property, plant and equipment and is depreciated from the
commencement of production as described in the accounting policy for property, plant and
equipment
b. Drilling costs and Petroleum mineral leases
The Group applies the successful efforts method of accounting for oil and gas assets, having
regard to the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’.
Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately
to the Statement of Comprehensive Income.
Exploration expenditure incurred in the process of determining exploration targets is
capitalised initially within intangible assets as drilling costs. Drilling costs are initially
capitalised on a well by well basis until the success or otherwise has been established. Drilling
costs are written off on completion of a well unless the results indicate that hydrocarbon
reserves exist and there is a reasonable prospect that these reserves are commercially viable.
Drilling costs are subsequently transferred into ‘Drilling expenditure’ within property, plant and
equipment and depreciated over their estimated useful economic life. All such costs are
subject to regular technical, commercial and management review on at least an annual basis
to confirm the continued intent to develop or otherwise extract value from the discovery. Where
this is no longer the case, the costs are immediately expensed to the Statement of
Comprehensive Income.
Impairment of Non-Financial Assets
Assets not ready for use are not subject to amortisation and are tested annually for impairment.
Assets that are subject to amortisation or depreciation are reviewed for impairment at each
reporting date. An impairment loss is recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating
units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible
reversal of the impairment at each reporting date.
47
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.8.Investments in subsidiaries
Investments in subsidiaries are accounted for at cost less impairment.
2.9.Financial assets
Classification
Financial assets are recognised when the Group becomes a party to the contractual provisions of
the instrument. At initial recognition, the Group classifies its financial assets as loans and
receivables which comprise ‘trade and other receivables’ and ‘cash and cash equivalents’.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are included in current assets, except for maturities
greater than 12 months after the end of the reporting period.
Recognition and measurement
Loans and receivables are initially recognised at the amount expected to be received, less where
material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and
receivables are measured at amortised cost using the effective interest method less a provision for
impairment.
Derecognition
The Group derecognises a financial asset when the contractual rights to the cash flows from the
asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in
a transaction in which substantially all the risks and rewards of the ownership of the financial asset
are transferred. Any interest in transferred financial assets that is created or retained by the Group
is recognised as a separate asset or liability.
Derecognition also takes place for certain assets when the Group writes-off balances pertaining to
the assets deemed to be uncollectible.
The Group derecognises a financial liability when its contractual obligations are discharged or
cancelled or expire.
Impairment of financial assets
IFRS 9 mandates the use of an expected credit loss model to calculate impairment losses rather
than an incurred loss model, and therefore it is not necessary for a credit event to have occurred
before credit losses are recognised. The new impairment model applies to the Group’s financial
assets and loan commitments. The Group recognises lifetime expected credit losses (“ECL”) when
there has been a significant increase in credit risk since initial recognition. However, if the credit
risk on the financial instrument has not increased significantly since initial recognition, the Group
measures the loss allowance for that financial instrument at an amount equal to 12 month ECL. No
changes to the impairment provisions were made on transition to IFRS 9.
The Group’s financial assets due from Development participants and other counterparties are
without material credit risk concerns at the time of transition. Short term investments and bank
balances are highly liquid investments that are readily convertible to known amounts of cash and
are subject to an insignificant risk of changes in value.
48
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Group is satisfied that the credit risk of its financial assets has not significantly increased
and no provision for losses is required. The Group has concluded this on the basis of ongoing
monitoring of the credit status of bank counterparties and the long term operating relationships
that the Group has with the other debtor counterparties and the remaining participants in the
Gonzales project.
2.10.Loans and recievables
Loans and receivables are recognised initially at fair value and subsequently measured at
amortised cost using the effective interest method, less provision for impairment.
2.11.Short term investments
Short term investments include amounts held in bank accounts and deposits by financial service
companies that have been approved by the Directors.
2.12.Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and demand deposits with banks.
2.13.Trade and other payables
Trade and other payables are initially measured at fair value, net of transaction costs that are
directly attributable to the issue of the financial liability and are subsequently measured at
amortised cost using the effective interest method if the time value of money is significant.
2.14.Borrowings
Borrowings are recognised initially at fair value minus transaction costs that are directly attributable
to the issue of the financial liability. Borrowings are subsequently carried at amortised cost; any
difference between the proceeds (net of transaction costs) and the redemption value is recognised
in the Income Statement over the period of the borrowings, using the effective interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer
settlement of the liability for at least 12 months after the end of the reporting period.
2.15.Share capital
Ordinary shares are classified as equity when there is no obligation to transfer cash or other assets.
Incremental costs directly attributable to the issue of equity instruments are shown in equity as a
deduction from the proceeds, net of tax. Incremental costs directly attributable to the issue of equity
instruments as consideration for the acquisition of a business are included in the cost of acquisition.
49
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.16.Reserves
The reverse merger as described in Accounting policy 2.2 has been accounted for as a share-
based payment transaction which should be accounted for in accordance with IFRS 2. On the
basis of the guidance in para 13A of IFRS 2, the reverse merger has been treated as a continuation
of the Nobel Group into the Pennpetro Group. The consideration included the issue of new share
capital and the issue of a convertible bond. The total consideration less the share capital in Nobel
UK resulted in the creation of the reorganisation reserve.
The convertible reserve represents the principal value of a mandatory convertible note issued by
Pennpetro Petroleum plc to Nobel Petroleum Ireland Limited in part consideration for the
acquisition of Nobel Petroleum UK under an agreement dated 17 May 2017.
The translation reserve represents effects of currency translation in the year.
2.17.Taxation
The tax expense or credit comprises current and deferred tax. It is calculated using tax rates that
have been enacted or substantively enacted by the Statement of Financial Position date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary
differences arising from differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax basis used in the computation of taxable profit. In
principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that taxable profits will be available
against which deductible temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction,
which affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in
subsidiaries and associates, and interests in joint ventures, except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realised, or the liability is settled. Deferred tax is charged
or credited in the Statement of Comprehensive Income, except when it relates to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax
assets and liabilities are offset when they relate to income taxes levied by the same taxation
authority and the Group intends to settle its current tax assets and liabilities on a net basis.
2.18.Segment Information
Operating segments are reported in a manner consistent with the internal reporting provided to the
chief operating decision-maker (“CODM”), who is responsible for allocating resources and
assessing performance of the operating segments and making strategic decisions. The CODM is
determined to be the board of Directors.
50
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2.19.Share based payments
All services received in exchange for the grant of any share based remuneration are measured at
their fair values. These are indirectly determined by reference to the fair value of the share
options/warrants awarded. Their value is appraised at the grant date and excludes the impact of
any non-market vesting conditions (for example, profitability and sales growth targets).
Share based payments are ultimately recognised as an expense in the Statement of
Comprehensive Income with a corresponding credit to other reserves in equity, net of deferred tax
where applicable. If vesting periods or other vesting conditions apply, the expense is allocated
over the vesting period, based on the best available estimate of the number of share
options/warrants expected to vest. Non-market vesting conditions are included in assumptions
about the number of options/warrants that are expected to become exercisable. Estimates are
subsequently revised, if there is any indication that the number of share options/warrants expected
to vest differs from previous estimates. No adjustment is made to the expense or share issue cost
recognised in prior periods if fewer share options ultimately are exercised than originally
estimated.
Upon exercise of share options, the proceeds received net of any directly attributable transaction
costs up to the nominal value of the shares issued are allocated to share capital with any excess
being recorded as share premium.
Where share options are cancelled, this is treated as an acceleration of the vesting period of the
options. The amount that otherwise would have been recognised for services received over the
remainder of the vesting period is recognised immediately within the Statement of Comprehensive
Income.
3. FINANCIAL RISK MANAGEMENT
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and
cash flow and interest rate risk), credit risk and liquidity risk.
Market risk
The Group operates in an international market for hydrocarbons and is exposed to risk arising from
variations in the demand for and price of the hydrocarbons. Oil and gas prices historically have
fluctuated widely and are affected by numerous factors over which the Group has no control, including
world production levels, international economic trends, exchange rate fluctuations, speculative activity
and global or regional political events.
Currency risk
The majority of the Group’s purchase transactions and expenditure are denominated in US dollars.
The currencies are stable, and any exchange risk is managed by maintaining bank accounts
denominated in those currencies.
51
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
3. FINANCIAL RISK MANAGEMENT (continued)
Credit risk
The Group’s principal financial assets are cash and cash equivalents, amounts due from participants,
other receivables and short term investments.
Credit risk represents the risk of loss the Group would incur if third party operators and counterparties
fail to fulfil their credit obligations. The risk is concentrated between a relatively small group of operators
given the small number of parties involved in oil and gas exploration and production activities. The
Group seeks to mitigate this risk where possible by assessing the credit quality of the participants and
by establishing ongoing and long-term relationships.
The initial credit risk on cash and cash equivalents and short term investments is limited because it is
the Group’s policy to invest with banks that firstly offer the greatest degree of security in the view of
the Group and, secondly the most competitive interest rates. The credit risk for short term investments
and cash and cash equivalents is considered negligible since the counterparties are reputable banks.
The credit risk on receivables from Development participants is initially low since diligence is performed
on those parties prior to their participation in the Gonzales project. By signing up to a Joint Operating
Agreement, each Development participant provides a lien over its lease interests and a security interest
over its interest in well assets.
Other receivables include amounts due from parties that have been involved in the Gonzales Project
since its inception and continue to have an interest in the Group in their capacity as shareholders in
Pennpetro or as lenders to the Group. Other receivables are therefore initially considered low credit
risk.
Development Participants are considered in default if they have not met their payment obligations
under the Joint Operating Agreement, having been served notice by the Project's Operator. Other
receivables are considered in default if the entity or party has not settled its payment obligation by the
due date set out in the underlying contracts and agreements.
A loss allowance is recognised for expected credit losses on all financial assets held at the balance
sheet date. Given risk mitigation steps undertaken by the directors, no provision has been made for
losses.
The maximum exposure due to credit risk for the Group on financial assets during the year was
$689,849 (2017: $3,632,820). All amounts are expected to be received in full and on time.
52
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
3. FINANCIAL RISK MANAGEMENT (continued)
Liquidity risk
Cash flow forecasting is performed in the operating entities of the Group and aggregated by Group
Finance. Group Finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it
has sufficient cash to meet operational needs, while seeking to maintain sufficient headroom on its
undrawn committed borrowing facilities (Note 20) at all times, so that the Group does not breach
borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting
takes into consideration the Group’s debt financing plans, covenant compliance, compliance with
internal Statement of Financial Position ratio targets, and, if applicable, external regulatory or legal
requirements (for example, currency restrictions).
The table below analyses the Group’s non-derivative financial liabilities and net-settled derivative
financial liabilities into relevant maturity groupings, based on the remaining period at the Statement of
Financial Position to the contractual maturity date. The amounts disclosed in the table are the
contractual undiscounted cash flows.
Group
At 31 December 2018
Less than
1 year
Between
1 and 2 years
Between
2 and 3 years
Borrowings (undiscounted)
Trade and other payables
At 31 December 2017
Borrowings (undiscounted)
Trade and other payables
202,247
139,170
6,596,156
-
-
-
194,354
210,109
202,247
6,823,046
-
-
53
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Use of estimates and judgements
The preparation of Financial Statements in conformity with IFRSs requires management to make
judgements, estimates and assumptions that affect the application of policies and reported amounts of
assets and liabilities, income and expenses. The estimates and associated assumptions are based on
historical experience and various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making the judgements about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the revision affects both current and future
periods. In particular, information about significant areas of estimation uncertainty and critical
judgements in applying accounting policies that have the most significant effect on the amount
recognised in the financial statements are described below.
Critical accounting judgements
• Recognising the convertible loan fully within equity
A convertible loan note which was issued by Pennpetro to Nobel Ireland in the Reverse merger of
Nobel UK, will be converted into 19 million ordinary shares if certain conditions are met, at a fixed
subscription price of 25 pence. If Pennpetro agrees to a delisting of its shares as a consequence
of trading or a merger or acquisition, then there is an obligation for the Company to settle the note
in cash. The directors have judged that a delisting is unlikely to occur for the forseeable future and
in particular given the early stage of the Company and its recent listing on the London Stock
Exchange and therefore, in the prior year, accounted for the note as equity.
• Going concern
The directors’ have assessed the Group’s ability to continue as a going concern for a period of at
least 12 months from the date of signing the financial statements. The directors have used
judgements with regards to oil and gas prices, the quantum and timing of future revenues and
receivables and the availability of lending facilities. Having run several downside sensitivities, the
board has concluded that the going concern basis is appropriate and that no material uncertainties
exist.
Key sources of estimation uncertainty
• Recoverability of non-producing mineral leases and capitalised drilling costs &
equipment
Management tests annually whether non-producing mineral leases have future economic value in
accordance with the accounting policies. This assessment takes into consideration the likely
commerciality of the asset, the future revenues and costs pertaining and the discount rates to be
applied for the purposes of deriving a recoverable value. In the event that a lease does not
represent an economic drilling target and results indicate that there is no additional upside, the
mineral lease and drilling costs will be impaired. The Directors have reviewed the estimated value
of the licences and have concluded that an impairment charge of $Nil (2017: $Nil) should be
recognised. The directors do not consider that there is a significant risk of material adjustment to
the estimated value will of the leases given the underlying value of proven reserves and the
successful testing, trials and completion of the initial well, which will move into production during
2019.
54
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
4. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)
• Estimated impairment of producing properties and capitalised drilling costs &
equipment
At 31 December 2018, petroleum mineral leases and capitalised drilling costs & equipment on
petroleum properties have a total carrying value of $5,117,838 (2017: $3,127,966), (Notes 12 and
13). Management tests annually whether the assets have future economic value in accordance
with the accounting policies and has placed reliance on the Competent Persons Report (“CPR”)
prepared in December 2017.
All of the mineral leases were offered on an initial term of three years with an option to extend them
by two years. All of the leases covering the initial permit area do not need renewing whilst there is
any production from the permitted area.
The recoverable amount of each property has been determined based on a value in use calculation
which requires the use of certain estimates and assumptions such as long-term commodity prices
(i.e. oil and gas prices), pre-tax discount rates, operating costs, future capital requirements and
mineral resource estimates. These estimates and assumptions are subject to risk and uncertainty
and therefore a possibility that changes in circumstances will impact the recoverable amount.
The following information has been used by the Directors in determining the recoverability of the
Company’s Petroleum properties. The Source for this information is the CPR prepared in
December 2017.
• The Pennpetro Group owns approximately 1,000 leases on 2,500 acres in Gonzales, Texas.
• The Group’s Net Working interests are 3,000 Mbbl of oil and 1,500 MMcf of gas.
• Base case oil sold is assumed at $55 per barrel and gas at $3.20 per thousand cubic feet.
• Oil and gas pricing held constant to depletion in 2031.
• The total proved future Net Revenue interest after costs as at 1 December 2017:Undiscounted
$92m (2017: $62m).
The directors are comfortable in relying on the CPR for the following reasons:
- The oil sold price used of $55 in the calculations is lower than current and future forecast WTI
prices. The WTI price as at 24 April 2019 was $66.04 (source: Bloomberg markets) and is
forecast to continue to rise to $70 in 2022, $78 in 2025, $84 in 2028 and $89 in 2031 (source:
Energy & Information Administration).
- Operating costs remain unchanged.
- The Group’s Working interest and Net revenue interest has increased by 50% as a result of
former participant Sunrise’s exit from the Gonzales Project.
Based on the information provided in the CPR, the Directors have determined that the Company’s
oil properties have not been impaired as at the 31 December 2018. The directors also do not
consider that there is a significant risk of material adjustment to the estimates used to assess
impairment of producing properties and capitalised drilling costs & equipment in the next 12 months
but have disclosed this as an area of significant estimation based on the size of the balance.
55
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
4. CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)
• Estimated useful lives of property, plant and equipment
Useful lives are based on industry standards and historical experience which are subjected to
yearly evaluation. For producing properties, the Group’s considerations include the lease period of
the agreement, estimated levels of proven and probable reserves and the estimated future cost of
developing and extracting those reserves. Management review property, plant and equipment at
each Statement of Financial Position date to determine whether there are any indications of
impairment. If any such indication exists, an estimate of the recoverable amount is performed, and
an impairment loss is recognised to the extent that the carrying amount exceeds the recoverable
amount. The Directors have reviewed the estimated value of each property and do not consider
any further impairment to be necessary. The directors do not consider that there is a significant risk
of material downward adjustment to the estimated levels of proven and probable reserves in the
next 12 months but have disclosed this as an area of significant estimation based on the size of
the balance.
•
Impairment of investments
The directors have assessed at year end whether there is any indication that the carrying value of
the Company’s investment in its subsidiaries has been impaired. The directors have determined
that the value of the assets owned by its subsidiaries, namely the mineral leases, the proven oil
and gas reserves and Net Revenue Interests are significantly higher than the Investment carried
in the Company’s books. The directors therefore do not consider any impairment is necessary. The
directors do not consider that there is a significant risk of material downward adjustment to the
estimated levels of proven and probable reserves in the next 12 months but have disclosed this as
an area of significant estimation based on the size of the balance.
• Share based payments
The calculation of the fair value of equity-settled share based awards and the resulting charge to
the statement of comprehensive income requires assumptions to be made regarding future events
and market conditions. These assumptions include the future volatility of the Company’s share
price. These assumptions are then applied to a recognised valuation model in order to calculate
the fair value of the awards. Details of these assumptions are set out in note 19. The directors do
not consider that there is a significant risk of material adjustment to the estimates used in
calculating the share based payments in the next 12 months, but have disclosed this as an area of
significant estimation because the options have been awarded to directors of the Company.
56
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
5. SEGMENTAL INFORMATION
The Group operates in two geographical areas, the United Kingdom and the United States of America.
Activities in the UK are mainly administrative in nature whilst the activities in the USA relate to
exploration and production from oil and gas wells. The reports reviewed by the Board of Directors that
are used to make strategic decisions are based on these geographical segments.
Year ended 31 December 2018
USA
$
Intra-segment
balances
$
UK
$
Total
$
Operating profit/ (loss)
34,085
________
(629,159)
_______
-
___
(595,074)
________
Depreciation and amortisation
Capital expenditure
Development expenditure
Total assets
Total liabilities
100,153
56,382
750,473
5,794,945
5,912,927
_________
2,329
-
-
580,645
488,485
_________
-
-
-
(398,379)
(398,379)
_________
102,482
56,382
750,473
5,977,211
6,003,033
_________
Year ended 31 December 2017
USA
$
Intra-segment
balances
$
UK
$
Total
$
Operating loss
(39,073)
________
(669,222)
_______
-
___
(708,295)
________
Depreciation
Capital expenditure
Development expenditure
Total assets
Total liabilities
577
61,016
1,908,751
6,612,798
6,114,127
_________
2,344
4,049
-
1,214,162
982,599
_________
-
-
-
(793,960)
(793,960)
_________
2,921
65,065
1,908,751
7,033,000
6,302,766
_________
57
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
5. SEGMENTAL INFORMATION (continued)
A reconciliation of the operating loss to loss before taxation is provided as follows:
Year ended
31 December
2018
Year ended
31 December
2017
$
$
Operating Loss for reportable segments
(595,074)
(708,295)
(Finance costs net of finance income)
(193,556)
555,026
Loss before tax
________
_______
(788,630)
________
(153,269)
_______
The amounts provided to the Board of Directors with respect to total assets are measured in a manner
consistent with that of the Financial Statements. These assets are allocated based on the operations
of the segment and physical location of the asset.
Reportable segments’ assets are reconciled to total assets as follows:
Year ended
31 December
2018
$
Year ended
31 December
2017
$
Segmental assets for reportable segments
5,977,211
7,033,000
Total assets per Statement of Financial Position
5,977,211
_________
7,033,000
_________
58
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
5. SEGMENTAL INFORMATION (continued)
Information about major customers/operating partners
As at 31 December 2018, Nobel USA’s ownership interests were 50% Working Interest (“WI”). Nobel’s
three industry partners in the project which owned the remaining 50% Net Working Interest were
Sunrise Energy LLC (“Sunrise”), Av-Tech Oil & Gas LLC (“Av-Tech”) and Landex Petroleum LLC
(“Landex”). Av-Tech provides valuable experience to Nobel USA, having successfully drilled some 250
wells and produced wells drilled throughout the subject area.
On 5 March 2019, Pennpetro announced that its subsidiary, Nobel Petroleum UK Limited, had through
its US based entities, increased its working interest from 50% to 75% in the leasehold petroleum
interests centred on the City of Gonzales, southwest Texas, comprising the undeveloped central
portion of the Gonzales Oil Field. This was as a result of former participant Sunrise’s departure from
the Gonzales Project.
Nobel’s two industry partners, Av-Tech and Landex continue to own 25% Net Working Interest.
6. EXPENSES BY NATURE
Group
Legal, professional and compliance costs
Depreciation and amortisation
Other costs
Total administrative expenses
7. AUDITOR REMUNERATION
2018
2017
$
$
388,452 649,031
2,921
102,482
56,343
104,140
________ ________
595,074 708,295
________ ________
Services provided by the Company’s auditor and its associates
During the year, the Group (including its overseas subsidiaries) obtained the following services from
the Company’s auditor:
Fees payable to the Company’s auditor for the audit of the Parent Company
and consolidated Financial Statements
Fees payable to the Company’s auditor for other services:
- in relation to transaction services
2018
$
2017
$
33,588
27,855
12,500
_______ _______
-
59
PENNPETRO ENERGY PLC
8. STAFF COSTS
Wages and salaries
Social security costs
Valuation of options
Directors’ Emoluments
Keith Edelman
Olof Rapp
Philip Nash
Thomas Evans
Emoluments
Valuation of options
Emoluments
Valuation of options
Emoluments
Valuation of options
Emoluments
Valuation of options
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
Group
2018
$
2017
$
Company
2017
$
2018
$
167,944
12,166
60,153
________
-
-
-
________
167,944
12,166
60,153
-
-
-
________ _______
240,263
_____ __
-
________
240,263
-
________ _______
Group
2018
$
2017
$
Company
2017
$
2018
$
47,026
15,039
40,306
15,038
40,306
15,038
40,306
15,038
________
-
-
-
-
-
-
-
-
________
47,026
15,039
40,306
15,038
40,306
15,038
40,306
15,038
-
-
-
-
-
-
-
-
________ _______
228,097
_____ __
-
________
228,097
-
________ _______
The Group does not employ any full time employees at its US subsidiaries. Instead the Group uses
specialist service providers to fulfil its well drilling and land management requirements.
The average monthly number of staff, including the Directors, during the financial year was as follows:
Directors
Group
2018
2017
Company
2017
2018
4
_______
4
________
4
4
________ _______
60
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
9. INCOME TAX
Tax charge for the period
The tax charge for the year is $Nil (2017: $Nil).
Factors affecting the tax charge for the period
The tax charge for each year is explained below:
Loss for the year before taxation
UK Loss before tax multiplied by the UK tax rate 19% (2017:
19%)
Tax effect of:
Expenses not deductible for tax purposes
Unutilised tax losses carried forward
Income tax charge
2018
2017
$
$
(788,630)
(153,269)
(149,840)
(29,121)
30,901
118,939
_______
-
_______
-
29,121
_______
-
_______
The Group has UK tax losses of approximately $148,060 (2017: $29,121) to carry forward against
future profits.
10. FINANCE INCOME AND FINANCE COSTS
Group
Loan adjustment for effective interest and bank interest
Bank charges and interest expense
2018
2017
$
$
273,126
_______
561,849
_______
(466,682)
_______
(6,823)
_______
61
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
11. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is based on the following loss and number of
shares:
Year ended
31 December 2018
Year ended
31 December 2017
Loss for the year
$788,630
$153,269
Weighted average shares in issue
Basic earnings per share (cents)
70,900,000
44,295,000
(1.11)
(0.34)
There is no difference between the basic and diluted earnings per share as the effect would be to
decrease earnings per share.
62
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
12. PROPERTY, PLANT AND EQUIPMENT
Group
Cost
At 1 January 2017
Additions
Acquired in reverse merger
Currency translation
At 31 December 2017
Additions
Currency translation
At 31 December 2018
Accumulated Depreciation and
Impairment
At 1 January 2017
Acquired in reverse merger
Charge for the year
Currency translation
At 31 December 2017
Charge for the year
Currency translation
At 31 December 2018
Net Book Amount
At 31 December 2017
At 31 December 2018
Petroleum
(Mineral
Leases)
$
Office
equipment
$
Total
$
1,158,199
2,309
1,160,508
61,016
-
-
________
4,049
4,871
454
________
65,065
4,871
454
_________
1,219,215
11,683
1,230,898
56,382
-
________
-
(540)
________
56,382
(540)
_________
1,275,597
________
11,143
________
1,286,740
_________
-
-
-
-
-
-
________
1,218
2,921
112
_______
1,218
2,921
112
________
-
4,251
4,251
-
-
________
-
________
1,219,215
________
1,275,597
________
2,907
(332)
_______
2,907
(332)
_________
6,826
_______
6,826
________
7,432
____ __
1,226,647
_________
4,317
____ __
1,279,914
_________
Office equipment depreciation expense of $2,907 (2017: $2,921) has been charged in administrative
expenses.
Certain leases capitalised in property, plant and equipment have been pledged as collateral against the
loan from Pennpetro Bonds II Limited.
Further details regarding consideration of the carrying value is contained in note 4.
63
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
12. PROPERTY, PLANT AND EQUIPMENT (continued)
Company
Cost
At 1 January 2017
Additions
Currency translation
At 31 December 2017
Additions
Currency translation
At 31 December 2018
Accumulated Depreciation
At 1 January 2017
Charge for the period
Currency translation
At 31 December 2017
Charge for the period
Currency translation
At 31 December 2018
Net Book Amount
At 31 December 2017
At 31 December 2018
Office
equipment
$
4,871
4,049
454
______
9,374
-
(540)
______
8,834
______
1,218
2,344
112
______
3,674
2,329
(332)
______
5,671
_____
5,700
______
3,163
______
Office equipment depreciation expense of $2,329 (2017: $2,344) has been charged in administrative
expenses.
64
PENNPETRO ENERGY PLC
13. INTANGIBLE ASSETS
Group
Cost
At 1 January 2017
Additions
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
Loan
arrangement
fees
$
Total
$
Drilling costs
$
-
1,908,751
________
-
270,339
________
-
2,179,090
________
At 31 December 2017
1,908,751
270,339
2,179,090
Additions
Add: Reclassification from other receivables
At 31 December 2018
Amortisation
At 1 January 2017
Amortisation charge for the year
At 31 December 2017
Amortisation charge for the year
At 31 December 2018
Net Book Amount
At 31 December 2017
At 31 December 2018
750,473
1,183,017
________
-
-
________
750,473
1,183,017
_________
3,842,241
________
270,339
________
4,112,580
_________
-
-
________
-
-
________
-
5,557
________
5,557
99,575
________
-
5,557
_________
5,557
99,575
_________
-
________
105,132
________
105,132
________
1,908,751
________
3,842,241
________
264,782
_____ _
2,173,533
_________
165,207
_____ _
4,007,448
_________
Amounts due from development participants for drilling costs are disclosed under note 15 trade and
other receivables.
Drilling costs represents acquired intangible assets with an indefinite useful life and are tested annually
for impairment. Drilling costs are capitalised on a well by well basis if the results indicate the existence
of a commercially viable level of reserves. No amounts are pledged as security for liabilities.
Impairment review – Intangible assets
The Directors have undertaken a review to assess whether circumstances exist which could indicate
the existence of impairment, considering the following indicators:
• The Group no longer has title to mineral leases.
• A decision has been taken by the Board to discontinue exploration due to the absence of a
commercial level of reserves.
• Sufficient data exists to indicate that the costs incurred will not be fully recovered from future
development and participation.
Following their assessment, the Directors recognised that no impairment charge is necessary.
Further details regarding consideration of the carrying value is contained in note 4.
65
PENNPETRO ENERGY PLC
14. INVESTMENTS
Investments in subsidiaries
Company
Shares in group undertakings
At 1 January
Additions
Exchange movements
At 31 December
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
2018
$
2017
$
7,027,100
-
- 6,592,040
435,060
________ ________
(404,380)
6,622,720 7,027,100
________ ________
Investments in group undertakings are recorded at cost, which is the fair value of the consideration
paid.
Under an agreement dated 17 May 2017, between the Company (as the Purchaser) and Nobel
Petroleum Ireland Limited (as the Seller), the Company acquired from the Seller all of the issued capital
of Nobel Petroleum UK Limited, being 100 fully paid ordinary shares, in consideration of the issue of
3,400,000 Ordinary Shares and the issue of a mandatory convertible note to the Seller, which is
convertible into up to 19,000,000 Ordinary Shares. A further 41,600,000 Ordinary shares were issued
under the acquisition agreement, to settle sums owed to the subscribers for advisory, introduction,
broking and financing services to the Group. In addition, 10,000,000 ordinary shares were issued in
consideration for professional fees directly associated with the acquisition.
Nobel Petroleum Ireland Limited was issued with a mandatory convertible note of principal amount
£4.75M as part of the consideration for the sale of Nobel Petroleum UK Limited. This note is convertible
at any time into 19,000,000 Ordinary Shares, calculated at the conversion price of £0.25 per Ordinary
Share. The conversion can be exercised at any time in respect of up to such number of Ordinary
Shares that does not cause the Company to be in breach of its obligations under Listing Rules 14.2.2
or 14.3.2 to ensure that at least 25% of the Company's Ordinary Shares are in public hands or triggering
an obligation under section 85 CA 2006 to publish a prospectus, as more particularly described in such
provisions. If the Note is not fully converted, the Company is required to issue a replacement note in
respect of the balance of the Principal amount, which shall be convertible into the relevant balance of
Ordinary Shares when those terms so allow. The Note contains certain covenants applying to the
Company. It also contains events of default following which the Company would be required to redeem
the Note. The Note is transferrable in whole or in part.
66
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
14. INVESTMENTS (continued)
Investments in subsidiaries (continued)
Principal subsidiaries
Name
Nobel Petroleum UK
Limited
Country of
incorporation and
residence
1/88 Whitfield St.
London W1T 4EZ
UK
Nature of
business
Registered
capital
Holding
Ordinary
£100
Proportion of
equity shares
held by Company
100%
Nobel Petroleum LLC 3867 Plaza Tower DR
Oil & Gas
Ordinary
100% via Nobel
UK
Nobel Petroleum USA
Inc.
Pennpetro USA Corp
Baton Rouge,
Louisiana 70816-
4378
USA
198 West 13th Street,
Wilmington, Delaware
19801
USA
8 The Green
Ste A, Dover
Delaware 19901
USA
Oil & Gas
Ordinary
100% via Nobel
UK
Oil & Gas
Ordinary
100%
These subsidiary undertakings are included in the consolidation. The proportion of the voting rights in
the subsidiary undertaking held directly by the Parent Company does not differ from the proportion of
ordinary shares held.
67
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
15. TRADE AND OTHER RECEIVABLES
Amounts due from Development participants
Other receivables
Group
2018
$
2017
$
Company
2017
$
2018
$
192,042
331,440
_______
1,070,205
467,243
________
-
12,736
-
13,514
________ _______
523,482
_______
1,537,448
________
12,736
13,514
________ _______
The fair value of all receivables is the same as their carrying values stated above.
On 5 March 2019, Pennpetro announced that its subsidiary, Nobel Petroleum UK Limited, had through
its US based entities, increased its working interest from 50% to 75% in the leasehold petroleum
interests centred on the City of Gonzales, southwest Texas, comprising the undeveloped central
portion of the Gonzales Oil Field. The interest was acquired from existing working interest parties
pursuant to contractual obligations within the Joint Operating Agreement, by crediting $ 1.1million of
outstanding receivables and debiting drilling cost intangible assets.
Group
The carrying amounts of the Group’s trade and other receivables are denominated in the following
currencies:
UK Pounds
US Dollar
2018
$
2017
$
12,736
13,514
510,746 1,523,934
_______ ________
523,482 1,537,448
__ _____ ________
The maximum exposure to credit risk at the reporting date is the carrying value of each class of
receivable mentioned above. With respect to amounts due from Development participants, each
participant has provided a lien over its lease interests and a security interest over its interest in well
assets. The Group does not hold any collateral as security for other receivables.
The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying
value of other receivables denominated in UK Pounds by $1,273 (2017: $1,351). The impact of a 10%
adverse movement in the US Dollar to UK Pound would reduce the carrying value of other receivables
denominated in UK Pounds by $1,273 (2017: $1,351).
Company
The carrying amounts of the Company’s trade and other receivables are denominated in UK Pound
sterling. The carrying amounts of the Company’s US subsidiary companies are denominated in US
Dollars.
68
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
16. SHORT TERM INVESTMENTS
Short term investments
Group
2018
$
2017
$
Company
2018
$
2017
$
166,367
___ _ ___
166,367 1,194,948
2,073,299
_______ _ __ ___ ___ ___
Short term investments include $166,367 (2017: $1,194,948) of cash being held by FHF Corporate
Finance Limited on behalf of Pennpetro and $Nil (2017: $878,351) of cash being held by brokers
Monsas on behalf of Nobel US. These amounts are held in Pounds Sterling. Thomas Evans was a
director of FHF Corporate Finance Limited from 1 June to 13 June 2018.
Group
The carrying amounts of the Group’s short term investments are denominated in the following
currencies:
UK Pounds
US Dollar
2018
$
2017
$
166,367 2,073,299
-
-
_________ ________
166,367 2,073,299
__ _ ____ ________
The maximum exposure to credit risk at the reporting date is the carrying value of each class of
receivable mentioned above. The Group does not hold any collateral as security.
The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying
value of short term investments denominated in UK Pounds by $16,636 (2017: $207,329). The impact
of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of short
term investments denominated in UK Pounds by $16,636 (2017: $207,329).
Company
The carrying amounts of the Company’s short term investments are denominated in UK Pound sterling.
17. CASH AND CASH EQUIVALENTS
Cash at bank
Group
2018
$
2017
$
Company
2017
$
2018
$
-
___ _ ___
22,073
_______
-
-
_ __ ___ ______
At 31 December 2018, the Group held cash of $Nil (2017: $22,073) in banks with a Fitch credit rating
of A (Stable).
69
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
18. SHARE CAPITAL AND PREMIUM
Ordinary shares
Share premium
Group
Number of
shares
value
£
value
$
value
£
value
$
Total
$
At 1 January 2017
8,600,000
86,000
116,590
224,000
303,677
420,267
Shares issued for cash
Shares issued as
consideration for
reverse merger
Shares issued as
consideration for
Acquisition and Listing
fees
2,300,000
23,000
29,799
257,000
332,969
362,768
45,000,000
450,000
570,465
15,000,000
150,000
191,550
-
-
-
-
570,465
191,550
Issue costs
-
-
-
(8,600)
(11,142)
(11,142)
___________
_______
________
________
_________
_________
At 31 December 2017
70,900,000
___________
709,000
_______
908,404
________
472,400
________
625,504
_________
1,533,908
___ _____
___________
_______
________
________
_________
_________
At 31 December 2018
70,900,000
___________
709,000
_______
908,404
________
472,400
________
625,504
_________
1,533,908
___ _____
Each ordinary share has a nominal value of 1 pence per share.
A convertible loan note which was issued by Pennpetro to Nobel Ireland in the Reverse merger of
Nobel UK, may be converted into 19 million ordinary shares if certain conditions are met, at a fixed
subscription price of 25 pence.
70
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
19. SHARE BASED PAYMENTS
Share options
On 2nd November 2018 the Company granted options under the Pennpetro Energy Plc Option Share
Plan with an exercise price of £0.35p per share over, in aggregate, 1,700,000 ordinary shares of £0.01
each to Directors Keith Edelman, Phillip Nash, Tom Evans and Olof Rapp, who will each receive
425,000 Options.
At 1 January 2018
Awarded
Forfeited
Exercisable At 31 December 2018
2018
Weighted average
exercise price £
2018
Number of
awards
-
0.35
-
________
0.35
__ _____
-
1,700,000
-
________
1,700,000
________
The options outstanding at 31 December 2018 have a weighted average remaining contractual life of
2.8 years.
At 31 December 2018, the following options were issued to directors of the Company under the share
option incentive scheme:
Date of grant
Number granted
Contractual life
Exercise price
Estimated fair value
2 November 2018
1,700,000
5 years
£0.35
£0.50
None of the share options vested in the year.
The fair value of the options issued during the year was determined using the Black-Scholes valuation
model. $60,153 was recognised in the statement of comprehensive income in relation to share based
payment transactions.
Other significant inputs into the model are:
Issue date share price
Risk free rate
Expected volatility
£0.685
0.8%
75%
The average volatility has been calculated by using the average volatility for the Company and other
similar companies.
Share based payments reserve
Movements in the share based payments reserve in the period relate to:
At 1 January 2018
Share options granted
At 31 December 2018
71
2018
$
-
60,153
________
60,153
________
PENNPETRO ENERGY PLC
20. BORROWINGS
Non-current
Corporate borrowings
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
Group
2018
$
2017
$
Company
2018
$
2017
$
5,863,863
_______ _
6,092,657
__ _____
-
__ __ __ _ _
-
As at 31 December 2018, the Group had a $5 million Loan Note arrangement with Petroquest Energy
Limited and subject to certain conditions being met, the maturity date is 31 December 2020. The annual
interest rate is set at 1% below Barclays Bank base rate, which has been less than 0.75% since the
loan’s inception and therefore no interest has been charged on the loan. The undiscounted balance
drawn against this loan note as at 31 December 2018 was $3,951,706 (2017: $3,951,706). The
borrowing facility is secured against certain petroleum leases owned by the Group. The discounted
present value of the loan as at 31 December 2018 was $3,387,953 (2017: $3,389,857) and reflects an
adjustment for effective interest calculated at 8% per annum over the remaining term of the loan.
As at 31 December 2018, Nobel Petroleum USA, Inc. had a Loan Agreement of £1,944,025 (2017:
£2,000,000) with Pennpetro Bonds II Limited at an annual interest rate of 8% which is due for
repayment on 31 October 2020. The balance outstanding on the loan as at 31 December 2018 was
$2,475,010 (2017: $2,702,800). Arrangement costs of $270,339 have been capitalized in Intangible
assets and are being charged to the Statement of Comprehensive Income over the life of the Loan.
The borrowing facility is secured against certain petroleum leases owned by the Group.
The movement in borrowings in the year was as follows
At 1 January
Advance
Interest charge
Net repayment
Adjustment for effective interest
Foreign currency exchange
At 31 December
Group
2018
$
2017
$
Company
2018
$
2017
$
6,092,657
-
271,189
(71,151)
(273,094)
(155,738)
________
5,863,863
_______ _
1,185,000
5,469,506
-
-
(561,849)
-
________
6,092,657
__ _____
-
-
-
-
-
-
-
-
-
-
________ ________
-
-
__ __ __ _ _
The fair value of borrowings equals their carrying amount. Borrowings are denominated in US dollars.
2018
$
Expiring beyond one year 5,863,863
________
2017
$
6,092,657
________
Group
Company
2017
2018
$
$
-
-
_ ___ __ __
Group
The carrying amounts of the Group’s borrowings are denominated in the following currencies:
UK Pounds
US Dollar
2018
$
2,475,910
3,387,953
________
5,863,863
__ _____
2017
$
2,702,800
3,389,857
________
6,092,657
________
72
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
20. BORROWINGS (continued)
The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying
value of borrowings denominated in UK Pounds by $247,591 (2017: $270,280). The impact of a 10%
adverse movement in the US Dollar to UK Pound would reduce the carrying value of other receivables
denominated in UK Pounds by $247,591 (2017: $270,280).
Company
The company does not carry any borrowings. The carrying amounts of the Company’s US subsidiary
companies are denominated in US Dollars and UK sterling.
21. TRADE AND OTHER PAYABLES
Current
Trade and other payables
Amounts owed to group undertakings
Accrued expenses
Group
2018
$
2017
$
Company
2018
$
2017
$
91,929
-
47,241
________
4,065
-
206,044
________
42,865
-
398,379 793,960
47,241 188,638
_______ ______
139,170
________
210,109
________
488,485 982,598
_ _____ ______
Group
The carrying amounts of the Group’s trade and other payables are denominated in the following
currencies:
UK Pounds
US Dollar
2018
$
2017
$
90,106 188,638
21,471
49,064
_______ ________
139,170 210,109
__ _____ ________
The impact of a 10% favourable movement in the US Dollar to UK Pound would increase the carrying
value of trade and other payables denominated in UK Pounds by $9,010 (2017: $18,864). The impact
of a 10% adverse movement in the US Dollar to UK Pound would reduce the carrying value of trade
and other payables denominated in UK Pounds by $9,010 (2017: $18,864).
Company
The carrying amounts of the Company’s trade and other payables are denominated in UK Pound
sterling. The carrying amounts of the Company’s US subsidiary companies are denominated in US
Dollars.
73
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
22. FINANCIAL INSTRUMENTS BY CATEGORY
Assets as per Statement of Financial Position
Group
2018
$
2017
$
Company
2018
$
2017
$
Loans and receivables:
Trade and other receivables
(excluding prepayments)
Short term investments
Cash and cash equivalents
523,482
1,537,448
12,736
13,514
166,367
-
_______
2,073,299
22,073
166,367 1,194,948
-
_______ ________ ________
-
689,849
_______
3,632,820
179,103 1,208,462
_______ ________ ________
Liabilities per Statement of Financial Position
Financial liabilities at amortised cost:
Borrowings
Trade and other payables
(excluding non-financial liabilities)
5,863,863
91,929
________
6,092,657
4,065
________
-
-
441,244 793,960
______ ______
5,955,792
________
6,096,722
________
441,244 793,960
______ ______
Certain leases which have been capitalised in Property Plant and Equipment have been pledged as collateral
against the loan from Pennpetro Bonds II Limited. No other financial assets are pledged as security.
23. TREASURY POLICY
The Company and Group operate informal treasury policies which include ongoing assessments of
interest rate management and borrowing policy. The Board approves all decisions on treasury policy.
The Group has financed its activities by raising funds through borrowings set out in Note 20 above.
There are no material differences between the book value and fair value of the financial assets.
24. CAPITAL MANAGEMENT POLICIES
The Group and Company set the amount of capital in proportion to its overall financing structure and
manage their capital structure and make adjustments to it in the light of changes in economic conditions
and the risk characteristics of the underlying assets.
The Group considers its equity to be its capital.
The Group and Company’s capital management objectives are:
•
to ensure compliance with borrowing covenants;
•
to ensure the Group’s and Company’s ability to continue as a going concern; and
•
to provide an adequate return to shareholders.
74
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
24. CAPITAL MANAGEMENT POLICIES (continued)
In order to maintain or adjust the capital structure, the Group may issue new shares or sell assets to
reduce debts. The Group will continue making interest payments in accordance with financial and
non-financial loan covenants.
25. CAPITAL COMMITMENTS
As at 31 December 2018 and 2017, the Group had no capital commitments for drilling and equipment
costs contracted but not provided for.
26. RELATED PARTY TRANSACTIONS
Transactions with Directors
An amount of £10,000 that was previously advanced to Thomas Evans remains outstanding as at 31
December 2018 (2017: £10,000). The amount is secured against shares held by him in the Company
and is due for repayment within 12 months. No interest has been charged on the advance.
Thomas Evans is a Director of Pennpetro Bonds II Limited, which provided a £2m loan facility to the
Group during the current reporting period. In his capacity as a Director of Pennpetro Bonds II Limited,
Mr. Evans received director’s fees of £0 (2017: £8,000) from that Company.
Thomas Evans is a Director of the following companies which are considered as related parties:
• Pennpetro Bonds II Limited – the provider of a £2m loan facility to Nobel Petroleum USA., Inc.
• FHF Securities (A’Asia) Limited – a shareholder in Pennpetro with a 6.91% shareholding in the
Company.
• Nobel Petroleum UK Limited which is a 100% subsidiary of Pennpetro.
• Nobel Petroleum LLC, which is a 100% directly owned subsidiary of Nobel Petroleum UK
Limited.
• Nobel Petroleum USA, Inc, which is a 100% owned subsidiary of Nobel Petroleum UK Limited.
• Pennpetro USA Corp., which is a 100% owned subsidiary of Pennpetro.
Thomas Evans was a director of FHF Corporate Finance Limited from 1 June to 13 June 2018.
Details of arrangements with FHF Corporate Finance Limited can be found in note 16.
Transactions with Group undertakings
During the year ended 31 December 2018, Pennpetro provided funds to its wholly owned subsidiary
Nobel Petroleum UK Limited of $580,826 (2017: $489,870) and received funds from Nobel Petroleum
UK Limited of $217,527 (2017: $1,283,830). After a foreign exchange gain of $32,282 (2017: $Nil) the
amount due to Nobel Petroleum UK limited as at 31 December 2018 was $398,379 (2017 $793,960).
All Group transactions were eliminated on consolidation
27. ULTIMATE CONTROLLING PARTY
As at the Statement of Financial Position date, the Directors do not consider there is an ultimate
controlling party.
75
PENNPETRO ENERGY PLC
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2018
28. EVENTS AFTER THE REPORTING PERIOD
On 15 February 2019, the Company issued 1,433,702 Ordinary shares at a price of £0.55 per share,
raising gross proceeds of £788,536.
On 5 March 2019, Pennpetro announced that its subsidiary, Nobel Petroleum UK Limited, had through
its US based entities, increased its working interest from 50% to 75% in the leasehold petroleum
interests centred on the City of Gonzales, southwest Texas, comprising the undeveloped central
portion of the Gonzales Oil Field. The interest was acquired from existing working interest parties
pursuant to contractual obligations within the Joint Operating Agreement, by crediting $ 1.1 million of
outstanding receivables and debiting drilling cost intangible assets. An amount of $ 0.4m is being
sought from Sunrise which has arisen as a result of its default under the Participation Agreement.
The Group has commenced legal proceedings to recover this amount and as at the date of signing
these Financial Statements, the Directors are confident of recovering this amount in full. This is not
included in the balance sheet at 31 December 2018.
76