2015 ANNUAL REPORT
2015 HIGHLIGHTS:
Corporate and
Financial Highlights
Operational Highlights
Subsequent to year-end:
• Average daily oil sales in 2015
• Al Amir SE-23 brought onto
• Completed a business combination
between Sea Dragon Energy Inc.
(“Sea Dragon”) and Madison PetroGas
Ltd. (“Madison”) on October 1,
2015 to create “SDX Energy Inc.”;
•
•
12 months to December 31, 2015
realized net revenues of US$17.6
million (“MM”) and netback of
US$11.5MM (2014: US$44.5MM
and US$32.8MM, respectively);
12 months to December 31, 2015
realized average oil price of US$41.55
per barrel (“bbl”) (2014:US$82.34/bbl);
• Exited 2015 with cash on hand of
US$8.2MM and zero debt after
repaying a US$1.65MM reserves based
loan and a US$2.05MM debenture;
•
•
•
Invested US$6.4MM of capital
expenditure into business;
12 months to December 31, 2015, total
comprehensive income of US$7.4MM
compared to total comprehen-
sive (loss) of US$(1.0)MM for the
12 months to December 31,2014;
In SDX’s 2015 financial statements
which, under International Financial
Reporting Standards (“IFRS”) are
required to reflect 12 months
financial results of Madison and
three months financial results of
Sea Dragon, total comprehensive
income in 2015 will be US$9.4MM
compared to US$7.9MM in 2014; and
• Total comprehensive income for the
12 months to December 31, 2015 and
under IFRS includes an US$18.3MM
gain on the business combination and
a US$6.8MM impairment charge.
of 1,519 barrels of oil equivalent
(“BOE”) per day (“BOE/D”);
• Average daily natural gas and natural
gas liquids production in 2015 of 152
BOE/D (to be invoiced in 2016);
• As at December 31, 2015, pursuant to the
Degolyer and MacNaughton Report (as
defined below), proved and probable
reserves net to SDX of 7.34MM BOE
(North West Gemsa and Meseda) and
gross mean prospective resources of
490 billion cubic feet (“BCF”) of gas and
16.33MM barrels of oil and liquids (269.5
BCF and 8.98 MM barrels of oil and
liquids net to SDX) at South Disouq;
•
•
In North West Gemsa, completed
seven successful work-over wells and
spudded Al Amir SE-23 development
well, which was completed and tested
at 4,080 BOE/D in February 2016;
In Meseda the MSD-6 well logged 146 feet
of net pay and was brought on production
at 330 BOE/D. Two further wells were
drilled during the year and will be used
for water injection needs and to delineate
the northern boundary of the field;
• Contractor appointed to carryout
300km2 3D seismic survey at South
Disouq. Government approvals obtained
and mobilisation commenced;
• Well planning and surveys completed
for Manatee-1 exploration well at
West Bakassi in Cameroon; and
• Completed technical review of
prospectivity at South Ramadan
development concession.
production and Al Amir SE-24
development well spud in February
2016, with results expected in
late April/early May 2016;
• South Disouq 300 km2 3D
seismic survey acquisition
commenced March 2016; and
• Manatee-1 spud on March 2, 2016
and on March 27, 2016 reached
a total depth of 1,447 meters
(“m”) after intersecting 26m of
gas bearing section of varying
quality. Results being assessed.
2016 Guidance and Outlook:
• Complete drilling of AASE-24
development well at North
West Gemsa and carry out
nine well workover program;
• Progress 11 well workover
program, infill drilling and a
waterflood program at Meseda;
• Complete South Disouq 300 km2
3D seismic survey and drill carried
exploration well before year end;
• Assess result of Manatee-1 well
in Cameroon and technical
review at South Ramadan
and decide on optimum way
forward for these assets; and
• Continue to work to reduce G&A
post business combination.
Contents
Financial and Operating Highlights 2
Chairman’s Statement 4
CEO / COO’s Review 3
Review of Operations 9
Management’s
19
Discussion & Analysis
Financial Statements 41
Interim Consolidated Balance Sheets 42
Notes to the Interim
Consolidated Financial Statements 46
Corporate Information 61
SDX ENERGY
(SDX-TSX.V)
Our activities are concentrated in Egypt and Cameroon where we have interests
in five concessions with both short and long-term potential.
1
FINANCIAL AND OPERATING HIGHLIGHTS
The following tables provide a summary of SDX’s financial and operating results for the Proforma combined business and the audited
financial statements for the three and twelve month periods ended December 31, 2015 and 2014.
Consolidated financial statements with Management’s Discussion and Analysis (“MD&A”) are available on the Company’s website at
sdxenergy.com and on SEDAR at www.sedar.com.
PROFORMA COMBINED BUSINESS
$000s except per unit amounts
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
2015
2014
FINANCIAL
Gross Revenues
Royalties
Net Revenues
Operating costs
Netback
Net Income/(Loss)
per share
Funds from operations
per share
Cash, end of period
Working capital (excl. cash)
Capital expenditures
Total assets
Shareholders’ equity
Common shares outstanding (000’s)
OPERATIONAL
Oil sales (bbl/d)
Gas sales (mcf/d)
NGL sales (bbl/d)
Production Service Fee (bbl/d)
Total boe/d
Brent Oil Price ($/bbl)
West Gharib Oil Price ($/bbl)
Net realized price ($/bbl)
Royalties ($/bbl)
Operating costs ($/bbl)
Netback ($/bbl)
2
4,128
(686)
3,442
(2,483)
959
8,542
0.1 5
(934)
(0.02)
8,170
3,382
2,404
60,01 6
55,246
37,642
652
–
–
704
1,356
43.56
34.35
33.09
5.50
19.90
7.69
12,946
(4,760)
8,186
(3,131)
5,055
(2,784)
(0.02)
1,389
0.04
17,935
(3,522)
(519)
49,092
39,449
56,348
1,239
–
–
904
2,143
76.37
69.82
65.65
24.14
15.88
25.63
23,030
(5,467)
17,563
(6,039)
11,524
7,358
0.20
758
0.02
8,170
3,382
6,358
60,01 6
55,246
37,642
759
–
–
760
1,519
52.30
42.81
41.55
9.86
1 0.89
20.80
7 1,331
(26,879)
44,452
(11,630)
32,822
(1,024)
(0.02)
14,269
0.25
17,935
(3,522)
17,950
49,092
39,449
56,348
1,346
705
16
894
2,373
98.94
90.16
82.34
31.03
13.42
37.89
SDX ENERGY INC. 2015 ANNUAL REPORT
AUDITED FINANCIAL STATEMENTS
$000s except per unit amounts
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
2015
2014
FINANCIAL
Gross Revenues
Royalties
Net Revenues
Operating costs
Netback
Net Income/(Loss)
per share
Funds from operations
per share
Cash, end of period
Working capital (excl. cash)
Capital expenditures
Total assets
Shareholders’ equity
Common shares outstanding (000’s)
OPERATIONAL
Oil sales (bbl/d)
Production Service Fee (bbl/d)
Total boe/d
Brent Oil Price ($/bbl)
West Gharib Oil Price ($/bbl)
Net realized price ($/bbl)
Royalties ($/bbl)
Operating costs ($/bbl)
Netback ($/bbl)
4,128
(686)
3,442
(2,483)
959
4,831
12,058
24,533
–
4,831
(1,159)
3,672
(686)
11,372
(4,973)
6,399
–
24,533
(3,639)
20,894
8,542
(993) 9,400
7,936
0.23
(934)
(0.02)
8,170
3,382
2,404
60,01 6
55,246
37,642
652
704
1,356
43.56
34.35
33.09
5.50
19.90
7.69
(0.02)
2,652
0.05
17,935
(3,522)
685
49,092
39,449
56,348
–
904
904
76.37
69.82
58.07
–
13.94
44.13
0.20
1,902
0.04
8,170
3,382
5,120
60,01 6
55,246
37,642
1 64
760
924
52.30
42.81
35.74
2.03
14.74
1 8.97
0.15
17,020
0.30
17,935
(3,522)
13,634
49,092
39,449
56,348
–
894
894
98.94
90.16
75.15
–
11.15
64.00
3
CHAIRMAN’S
Statement
Michael Doyle
Chairman
This past year has seen the creation of SDX Energy and I am
delighted to be writing to all the shareholders of this new entity
for the first time. The merger between Sea Dragon Energy and
Madison Petrogas was a key moment in the history of both
companies as it created SDX Energy, a company that provides a
strong platform for future growth.
The management teams of both companies had explored
strategic options to achieve scale and materiality, to provide
long-term financial stability and to create a balanced portfolio
providing exposure to low-cost production and high-impact exploration. It soon became
apparent that the two companies were a perfect match with strong synergies, and the
subsequent merger enabled the successful achievement of all of those key strategic
criteria. Whilst we are still in the early days as SDX Energy, the strategic rationale for
the merger has already proved successful with increased production and G&A and
Operating cost reductions already being realised.
The combined portfolio is well-balanced and provides value creation opportuni-
ties in both oil and gas, across the full spectrum of producing, development and
exploration assets within our portfolio. The low-cost production we obtain from
Meseda and NW Gemsa enables resilience in a low oil price environment and
ensures that we can remain profitable should the challenging market conditions
continue. The combined synergies from these two producing assets has enabled
us to drive the costs down further on both assets resulting in average combined
operating costs of circa US$10.89 per barrel. This impressively low operating cost
metric provides a sustainable platform in this current business environment while it
also ensures we are extremely well placed to benefit from an eventual recovery in
commodity pricing in the future.
Whilst the Company’s business plan is predicated on growing low-cost production,
we are also excited by the exploration potential in the combined portfolio. Our
high-impact gas potential in the South Disouq concession, in Egypt, could be trans-
formational and we are looking forward to completing the 3D seismic program and
drilling a well carried by our partner, at the end of 2016. In Cameroon the Manatee-1
well encountered 26 meters of gas bearing section and we are currently studying the
well results to help us decide on the optimum way forward for this asset.
The sector back-drop is certainly challenging as Brent crude prices averaged US$52/
bbl through 2015, almost half the average price from the previous year. The first
quarter of 2016 has witnessed further deterioration in market conditions as a result
of global over supply. Consequently, Brent crude oil spot prices decreased by US$7/
bbl in January to a monthly average of US$31/bbl, the lowest monthly average price
since December 2003. Whilst we remain confident that a rebalancing will occur in
the medium term, and we have seen signs of this in the last month, the industry has
adapted to the reality that a strong near term recovery is unlikely.
4
SDX ENERGY INC. 2015 ANNUAL REPORT The challenging backdrop created by this rapid and sustained
fall in oil and gas prices further supports the rationale for our
merger as the strong balance sheet, debt free position and cash
generation profile of SDX Energy ensures that we are uniquely
placed to not only survive in a prolonged downturn, but in fact
to benefit from the opportunities this presents. Firstly, we have
One factor that is adding to our enthusiasm for Egypt is the
an active work program ahead including a 3D seismic program
potential of the country’s growing gas market and the need for
and a further well in South Disouq. Two development wells,
indigenous gas discoveries to help meet the growing domestic
one of which has already been successfully tested, and a 9 well
demand for gas. This is particularly relevant for SDX in regards
workover program is planned in NW Gemsa and in Meseda,
to the South Disouq concession, which will see an exploration
we complete an 11 well workover program, infill drilling and a
well drilled towards the end of this year. If successful, SDX’s
water flood program. Operating costs have fallen in line with
South Disouq concession could become a major supplier of
oil prices, so we have taken advantage of these falling costs
indigenous gas into the Egyptian market and at the same time
with the contractors we are using for our operational activity.
become a transformational value catalyst for the Company.
Secondly, we are seeing a lot of interesting new venture op-
portunities in Egypt from companies in distressed situations or
from those wishing to rationalise their portfolios. Our strong
presence and network in Egypt ensures that we obtain early
access to many of these opportunities and our management
team continues to screen the most compelling of these to
assess whether they would complement our existing portfolio.
Our growth strategy is based on both organic growth through
production ramp-up and exploration success, and acquisition
SDX Energy possesses an extremely experienced and well
respected Board with a deep pool of industry talent and
expertise. Your Board is mindful of the challenges facing the
sector and is fully focussed on ensuring SDX Energy moves
forward efficiently and effectively. A strict commitment to
capital discipline is a key priority and the Company has already
successfully reduced the operating costs and overheads in all
aspects of the business.
based growth, and we may see some corporate activity this
As previously described, we are very conscious of the difficul-
year should we find assets which fit into our existing business
ties within the sector at present and we are aware that we are
and overall growth strategy.
Egypt continues to improve as an operating environment and
the government has taken great strides in addressing some of
the issues that had previously impacted the perception of the
country as a favourable place for foreign oil companies to do
business. Despite the diversification of our portfolio through
the addition of our acreage in Cameroon, Egypt remains our
core market due to our long-term and strong relationships with
the Energy Ministry and Government. These relationships, built
over many years of doing business in country, have enabled us
to manage our portfolio efficiently and avoid any issues with
overdue receivables. We continue to be encouraged with the
stability that President Sisi’s government is maintaining within
the country and believe that we are well-positioned to benefit
from the opportunities presented by this continued de-risking
not totally immune to some of the issues that this presents.
However, we strongly believe that we have a solid platform
based on our low-cost production and stable financial position,
and are therefore uniquely placed to thrive despite the
challenging sector backdrop. In summary, 2015 was truly trans-
formational, for the Company and our shareholders and it’s
with excitement and enthusiasm that we move ahead into 2016.
Finally, I would like to thank all of our shareholders for their
continued support and belief in the Company, and we hope to
repay you through long-term value creation.
of Egypt as an operating environment.
Michael Doyle, Chairman
5
CEO/COO’S
Message
Paul Welch
President
Chief Executive Officer
Chief Operating Officer
SDX Energy has experienced a truly transforma-
tional year in 2015 with the Company benefitting
significantly from the merger between TSX listed
Sea Dragon Energy and privately held Madison
PetroGas in early October 2015. The rationale for
the merger was to create materiality and scale
through consolidation. Specifically, we sought to create a combined entity
with an enhanced ability to grow shareholder value through production
growth and exploration success and, which also had the ability to access
capital and provide greater liquidity for our shareholders. The merger
significantly strengthened and diversified our portfolio which contains four
concessions in Egypt and one in Cameroon. The Egyptian concessions consist
of two producing assets, North West Gemsa and Meseda, a development
asset, South Ramadan and an exploration asset, South Disouq and in
Cameroon, an exploration asset called West Bakassi.
Throughout 2015 we have continued to refocus SDX’s portfolio towards
low-cost producing assets. Previously, Sea Dragon sold Kom Ombo (with
Opex of c.US$60/bbl) and relinquished Shukheir Marine (with Opex of
c.US$100/bbl). The October 2015 merger saw SDX acquire Meseda, a
high-margin producing asset in Egypt. Additionally we have set up a task force
with our partners NPIC and Circle Oil to reduce Opex at our other producing
asset in Egypt, North West Gemsa. In 2015 we achieved average Opex of
US$10.89/bbl and our aim is to reduce this further during 2016. This focus on
reduction of Opex is a key part of our strategy and has given us two resilient
producing assets that will enable the Company to remain profitable even in a
sub US$30 oil price environment, whilst also providing leveraged upside to an
eventual rebalancing of the oil price.
We continue to focus on increasing production at both North West Gemsa
and Meseda and have an active work plan for 2016. In North West Gemsa,
2 development wells will be drilled and 9 well workovers will be carried out.
In Meseda we will progress an 11 well
workover program, infill drilling and a
waterflood program. The commence-
ment of this work plan has already
produced positive results on the North
West Gemsa field with the successful
Al Amir SE-23 development well which
flowed on test light 42.2° API oil at a
rate of 4080 BOPD (1.3% water cut;
48/64ths choke).
6
SDX ENERGY INC. 2015 ANNUAL REPORT
The Al Amir SE-24 development well was spud in February
2016, with results expected in late April/early May 2016.
Our already low and falling cost of production ensures
that we are uniquely placed amongst our industry peers to be able to generate positive free cash
flow despite the low oil price environment.
Another significant focus for the Company in 2015 has been to reduce our General and Administra-
tive (G&A) expenses. We have re-bid all service company costs and also successfully cut in half the
cost of the 3D seismic program on South Disouq compared to previous estimates. It is our goal to
further drive down SDX’s G&A in 2016 by c. US$0.75 million or circa. 15%.
Another key aspect of the merger was the financial stability that it brought to the combined entity.
We have strengthened our balance sheet by entirely eliminating all Company debt over the course of
2015. At the start of 2015 the Company had over US$10M of debt and this was completely eliminated
by October 2015. The rapid and sustained fall in oil prices has put a lot of strain on industry peers
leveraged by debt so we are fortunate to be in a position where this is not an issue for SDX. Our
focus on cost-cutting combined with our now debt-free balance sheet puts the Company on a solid
footing going into 2016.
Looking ahead, we have some very exciting exploration opportunities coming up in 2016, which if
successful, could transform the Company in the near term. In our South Disouq concession, located
onshore in the Nile Delta area of Egypt, the Company has commenced the acquisition of 300km² of
3D seismic. The acquisition will complete mid-year and an exploration well is planned towards the
end of 2016 where SDX’s drilling costs are carried by our partner. In Cameroon, the Manatee-1 well
was spud on March 2, 2016 and on March 27, 2016 reached a total depth of 1,447 meters (“m”) after
intersecting 26 meters of gas bearing section of varying quality. The well results are currently being
assessed and a decision will be made in the near future on the optimum way forward for this asset.
We look forward to updating our shareholders on our progress throughout the year.
7
The combined strength of our low-cost producing assets, stable financial position, and
high-impact work program has created a company which is a solid platform for growth.
We are well placed to remain resilient through a sustained low oil price environment
with our high value producing fields that require very modest levels of capital
expenditure to maintain production levels. Furthermore, our exploration activities,
which are already underway, are an exciting extension of our offering to sharehold-
ers and provide a number of firm catalysts with the potential to generate significant
shareholder value over the next 12 months. Finally, we are uniquely positioned to
capitalise on new opportunities that arise in Egypt through our extended network
and influence there, and we will be leveraging our stable platform for growth to take
advantage of the opportunities we see in the current environment.
To conclude, I would like to personally thank SDX’s shareholders, both new and old,
for their continued support and belief in our story. I would also like to thank my Board
and all my SDX colleagues for their dedication, hard work, creativity and vision which
has enabled us to build up such positive momentum as we head into 2016. Despite the
industry headwinds that result from the current oil price environment, the Company
is in a solid position and the management team is focussed on the main task at hand
which is generating value for all of our shareholders. I hope this overview helps convey
the enthusiasm and excitement that SDX’s management possesses for the future of this
company. We anticipate that the year ahead will be as equally transformational as the
previous year, and we look forward to utilising the solid platform we have created to
achieve our ambitious growth objectives going forward.
tives going forward.
Paul Welch
President
Chief Executive Officer
Chief Operating Officer
8
SDX ENERGY INC. 2015 ANNUAL REPORT Reserves SUMMARY
Reserve estimates have been calculated in compliance with the National Instrument 51-101 Standards of Disclosure (“NI 51-101”). Under
NI 51-101, proved reserves are defined as reserves that can be estimated with a high degree of certainty to be recoverable with a target
of a 90 percent probability that the actual reserves recovered over time will equal or exceed proved reserve estimates, while probable
reserves are defined as having an equal (50%) probability that the actual reserves recovered will equal or exceed the proved and
probable reserve estimates. In accordance with NI 51-101, proved undeveloped reserves have been recognized in cases where plans are
in place to bring the reserves on production within a short, well defined time frame. Proved undeveloped reserves often involve infill
drilling into existing pools. Of the net present value of the Company’s reserves, 100 percent were evaluated by an independent third
party engineer, DeGolyer and MacNaughton Canada Limited, Calgary, Alberta, Canada (“DeGolyer”) in their report dated February 19,
2016.
The decrease in reserves year on year is primarily based on the amount produced from the existing assets. Technical and commercial
(pricing) revisions in North West Gemsa and Meseda have largely offset each other.
RECONCILIATION OF GROSS RESERVES AS AT DECEMBER 31, 2015
FORECAST PRICES AND COSTS
LIGHT & MEDIUM
CRUDE OIL
HEAVY OIL
NATURAL GAS
NATURAL GAS
LIQUIDS
BOE
PROVED PROBABLE
PROVED
PLUS
PROBABLE
PROVED PROBABLE
PROVED
PLUS
PROBABLE
PROVED
PROBABLE
PROVED
PLUS
PROBABLE
PROVED PROBABLE
PROVED
PLUS
PROBABLE
PROVED PROBABLE
PROVED
PLUS
PROBABLE
(mbbl)
(mbbl)
(mbbl)
(mbbl)
(mbbl)
(mbbl)
(mmcf)
(mmcf)
(mmcf)
(mbbl)
(mbbl)
(mbbl)
(mbbl)
(mbbl)
(mbbl)
1,551
641
2,192
3,233
2,453
5,686
1,520
1,222
2,742
52
41
93
5,098
3,346
8,444
(709)
(432)
(1,141)
586
985
1,57 1
(590)
(988)
(1,578)
(25)
(34)
(59)
(250)
348
99
Production
(270)
(13)
–
–
(12)
–
(270)
(859)
–
–
–
(16)
(859)
(282)
–
–
(17)
(282)
(1)
(8)
December
31, 201 5
559
209
769
2,960
3,438
6,398
632
234
865
18
–
–
7
(1)
(8)
(17)
–
(16)
(1,186)
– (1,186)
25
3,645
3,694
7,341
December
31, 2014
Technical
Revisions
Economic
Factors
SUMMARY OF OIL & GAS RESERVES AS AT DECEMBER 31, 2015
LIGHT & MEDIUM
CRUDE OIL
HEAVY CRUDE OIL
NGLS
NATURAL GAS
Category
GROSS
(mbbls)
NET
(mbbls)
GROSS
(mbbls)
NET
(mbbls)
GROSS
(mbbls)
NET
(mbbls)
GROSS
(mmcf)
NET
(mmcf)
Proved Developed Producing
430
199
2,61 0
999
Proved Developed
Non-Producing
Proved Undeveloped
Total Proved
Probable
Total Proved plus Probable
Possible
Total Proved plus Probable
plus Possible
1 06
23
559
21 0
769
204
49
1 0
258
97
355
89
-
350
2,960
3,438
6,398
2,022
-
134
1,1 33
1,31 0
2,443
770
973
444
8,420
3,21 3
14
4
-
1 8
7
25
7
32
7
1
-
8
3
11
3
490
226
121
21
632
233
865
235
56
1 0
292
1 08
400
1 02
14
1,1 00
502
9
SUMMARY OF NET PRESENT VALUES OF FUTURE NET REVENUES
AS OF DECEMBER 31, 2015
FORECAST PRICES AND COSTS
(IN US$ MILLIONS)
BEFORE INCOME TAX
DISCOUNTED AT
AFTER INCOME TAX
DISCOUNTED AT
Reserve Category
0%
5%
10%
15%
20%
0%
5%
10%
15%
20%
Proved Developed
Producing
Proved Developed
Non-Producing
37,092
31,900
28,119
25,257
23,018
30,643
26,501
23,465
21,153
19,335
3,099
2,780
2,516
2,292
2,1 03
3,098
2,780
2,515
2,292
2,1 03
Proved Undeveloped
2,362
1,757
1,295
939
661
1,878
1,344
938
626
383
Total Proved
42,553
36,437
31,930 28,488
25,782
35,619
30,625
26,9 1 8
24,07 1
21,821
Probable
59,572
46,135
36,935
30,354
25,473
47,11 0
36,515
29,242
24,027
20,153
Total Proved plus Probable
1 02,125
82,572
68,865
58,842
51,255
82,729
67,140
56,1 60 48,098
41,974
Possible
43,054
31,593
24,211
19,212
15,677
34,314
25,264
19,418
15,446
12,629
Total Proved plus Probable
plus Possible
Reserve Definitions:
145,179 114,1 65
93,076
78,054
66,932 117,043
92,404
75,578
63,544
54,603
(1)
Proved reserves are those that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual
remaining quantities recovered will exceed the estimated Proved reserves.
(2) Proved Undeveloped reserves have been recognized in cases where plans are in place to bring the reserves on production
within a short, well defined time frame. Proved Undeveloped reserves often involve infill drilling into existing pools.
(3) Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely
that the actual remaining quantities recovered will be greater or less than the sum of estimated proved plus probable.
(4) Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. It is unlikely that
the actual remaining quantities recovered will exceed the sum of the estimated proved plus probable plus possible reserves.
The disclosures required in accordance with National Instrument 51-1 01 of the Canadian Securities Administrators are available on
the Company’s Annual Information Form to be filed on the SEDAR website at www.sedar.com.
10
SDX ENERGY INC. 2015 ANNUAL REPORT REVIEW OF OPERATIONS
11
REVIEW OF
OPERATIONS
EGYPT
SDX Energy is actively involved in production, exploration and development activities
in three of Egypt’s premier oil provinces – the Eastern Desert, the Nile Delta, and the
Gulf of Suez. The Eastern Desert and Gulf of Suez areas account for the bulk of Egypt’s
historical oil production. These two areas are geologically related and expertise gained
in one translates across to the other. The Nile Delta area offers exciting exploration
opportunities in a prolific and proven hydrocarbon system with multiple productive
horizons.
12
SDX ENERGY INC. 2015 ANNUAL REPORT EASTERN DESERT
NORTH WEST GEMSA CONCESSION
The NW Gemsa concession is located in the Eastern Desert, 300 km southeast of
Cairo. The concession is 82.7 km2 in area and includes three fields; Geyad, Al Amir
SE, and Al Ola (the southern extension of Al Amir SE). All of the fields are covered by
development leases.
The fields are operated by PetroAmir, a joint operating company between the
partners (SDX Energy, 10%; Circle Oil, 40%; and Zenhua Oil, 50%) and Ganoub El Wadi
(a subsidiary of the Egyptian General
Petroleum Corporation). The Al Amir
SE and Geyad fields produce light oil
(40-42° API oil; priced at Brent less
5%) from two reservoir intervals; the
Miocene-aged Shagar and Rahmi
sandstones of the Kareem Formation.
2015 production averaged 8,753 BOEPD (875 BOEPD net to SDX from the Al Amir
SE and Geyad fields. Cumulative production from NW Gemsa for 2015 was 3,195
MBOE, bringing total production over the life of the fields to more than 22.29
million BOE.
The 2015 work program was focused on production optimization (ESP installations
and replacements, tubing replacements), development of PDP reserves (recomple-
tions of behind pipe pay intervals), and pressure maintenance. As such, a seven
well workover program was initiated in Q2 2015. Highlights from this campaign are
summarized below.
Al Amir SE-18 (AASE-18): The AASE-18 was shut-in during Q1 2015 due to low
reservoir pressure. In late Q2 the well was recompleted to the Shagar sandstone
and was brought onto production at ~500 BOEPD.
Geyad-6ST: In Q3 2015 an ESP was installed on the Geyad 6-ST, increasing
production from ~350 BOEPD to over 600 BOEPD.
Al Amir SE-21 (AASE-21): The AASE-21 was shut-in in late Q1 2015 due to high
water cut and decreasing reservoir pressure. In Q3 2015 the well was recompleted
to the Rahmi sandstone and brought on production at ~500 BOEPD with a less
than 1% water cut.
Additionally, in late Q4 2015 a rig was mobilized for a two well development
drilling campaign. A summary of the initial results from the wells is given below.
13
Al Amir SE-23 (AASE-23a): The AASE-23 was spud in December, 2015 and drilled
to a TD of 9820 feet; the well was subsequently side-tracked (AASE-23ST) to
a more geologically favourable location and reached TD in January, 2016. The
well logged 22 feet of net pay in the Shagar sandstone and 29 feet of net pay
in the Rahmi sandstone. The well was completed in the Shagar sandstone and
was tested at 4080 BOEPD (1.3% water cut; 48/64ths choke). Improved drilling
technique allowed the original wellbore to be drilled for 30% under approved
expenditure limits, and the sidetrack 17% under approved expenditure limits,
greatly improving well economics.
Cross-section of North West Gemsa
Al Amir SE-24 (AASE-24): The
AASE-24 was spud in February, 2016
and drilled to a TD of 9800 feet; the
well was subsequently side-tracked
(AASE-24ST) to a more geologically
favourable location and reached
TD in March, 2016. The well logged
15 feet of net pay in the Shagar
sandstone and 7 feet of net pay in
the Rahmi sandstone. Results are
expected in May, 2016.
UNITIZATION
Unitization talks with the offset
operator have continued to progress
throughout 2015. Resolution is
expected in 2016.
1414
SDX ENERGY INC. 2015 ANNUAL REPORTOPERATIONS REVIEW BLOCK-H MESEDA
Block-H is located in the Eastern Desert, 230 km southeast of Cairo. The concession is
22 km2 in area and is currently producing from the Meseda field (which is covered by
the Meseda-H development lease). The field is covered by a risked service agreement,
which allows for more efficient operations than the traditional joint venture structure,
as evidenced by production costs of US$10.89/bbl. SDX Energy has a 50% working
interest, while Dublin International Petroleum (the operator) holds the remaining 50%
working interest.
The Meseda field produces
from the high-quality
Miocene-aged Asl sands of
the Rudeis Formation. 2015
production from the Meseda
field averaged 3,944 BOPD
(749 BOPD net to SDX Energy)
of 16-18° API oil. Cumulative
production through the end
of 2015 for the Meseda field
was 5,284 MBO.
The 2015 work program was
focused on field delineation
and development drilling and
providing water injection
and handling capabilities. A
summary of this activity is
given below:
Meseda H-12 (MSD-12): The
MSD-12 well was drilled in Q2
2015 to the north of Meseda
field to delineate the northern
boundary of the field. The well was
classified as a dry hole and was plugged
and abandoned.
Meseda H-6 (MSD-6): The MSD-6 was
drilled in Q2 2015. The well logged 146 feet
of high-quality net pay in the Asl sand,
and was brought onto production at ~330
BOPD in September, 2015.
Meseda H-WI-1 (MSD-WI1): The
MSD-WI1 was drilled in Q2 2015 to provide
pressure support for the field. The well
logged a full reservoir interval that is in
pressure communication with Meseda
field. The well is currently being evaluated
as part of a larger review of water
injection needs.
15
EPJ-1X: The EPJ-1X well was a historical exploration dry hole that was drilled before acquisition
of the concession. The well was converted to a water disposal well to increase the field’s water
handling capabilities.
Cross-section of Meseda Field
In late Q4 2015 a strategic
initiative between the partners
was started to better define the
potential benefits of a water
injection program, how to
optimize production from existing
wells through more optimal speci-
fication of the ESPs used in the
wells, and to outline additional
exploration opportunities on the
block. Work on these initiatives is
expected to continue through the
first half of 2016.
This initiative has resulted in
a two-phase program. The
first phase, which is currently
underway, is a workover program
focused on ensuring asset
integrity and flow assurance
(e.g. removing fill, performing
well-bore clean-outs, tubing
replacements, etc.) while delivering incremental production gains by adding perforations and
optimizing pumping parameters. The second phase, which will start before year end, comprises an
eleven well workover program that will be focused on increasing production through ESP replace-
ments and optimization and a water injection program with associated infill drilling.
16
SDX ENERGY INC. 2015 ANNUAL REPORTOPERATIONS REVIEW GULF OF SUEZ
SOUTH RAMADAN CONCESSION
The 26 km2 South Ramadan development concession is located in the offshore Gulf of Suez, between the prolific
Ramadan and Morgan fields. SDX Energy holds a 12.75% working interest, with Pico (the operator) holding 37.25%,
and GPC holding the remaining 50%. The concession is considered prospective for the Lower Cretaceous-aged
Nubia sandstone and has historical production from the Eocene-aged Thebes and Upper Cretaceous-aged
Matulla formations.
In Q3 2015 reprocessing of
three merged seismic surveys
was initiated after awarding
the contract to a local vendor
in Cairo.
In Q1 2016 seismic reprocess-
ing activities were completed
and the final PSTM and PSDM
3D seismic volumes were
received. Subsequent inter-
pretations of the data have
delineated potential appraisal
locations. A technical review
of prospect volumetrics
and economics is currently
underway.
It is anticipated that a
development/appraisal well
will be drilled in Q4 2016 to
satisfy the work program
commitments. Operations
will occur during the Gulf of
Suez’s seasonal drilling window
(which runs from October-
April).
SHUKHEIR MARINE CONCESSION
The Shukheir Marine concession was relinquished on January 31, 2015 due a
lack of future commercial potential driven by high operating costs.
17
NILE DELTA
SOUTH DISOUQ CONCESSION
South Disouq is a 1,275 km2 concession located 65 km north of Cairo in the Nile Delta region.
The concession is along trend with numerous, prolific gas fields in the Abu Madi Formation, and
is estimated to have a resource potential in excess of 1.2 TCF in a large, undrilled Abu Madi trap
(based on a recent independent resource report). The area is under-explored, but an evaluation
of 26 reprocessed regional 2D seismic lines indicates that the Abu Madi trend continues into the
South Disouq concession. This evaluation outlined the area of interest where our 300 km2 3D
seismic shoot will be conducted.
A tendering process for seismic acquisition was undertaken, with 15 technically-qualified
companies invited to bid. After a thorough review with partners (SDX Energy, 55%; IPR 45%)
and approval by government authorities the contract for seismic acquisition was awarded to a
contractor with a track record of operational success in the region.
During Q4 2015 and into early Q1 2016 the focus of activity shifted to detailed logistical planning
and gaining the necessary approvals from relevant government ministries. All necessary approvals
have been obtained and equipment mobilization is complete. In January 2016 site surveying
commenced and in
February 2016 the
initial shot holes
for the survey
were drilled. The
seismic recording
operations
started on March
3, 2016 and will
be concluded in
June 2016 (59%
completed to
date). Contracts
for seismic
processing are
in place, and it is
expected that the
initial exploration
well will be drilled
in Q4 2016.
18
SDX ENERGY INC. 2015 ANNUAL REPORTOPERATIONS REVIEW 19
CAMEROON
SDX Energy is engaged in exploration in
the Bakassi West Concession located in
the Rio Del Rey basin, which comprises
the easternmost portion of the Niger
delta complex in offshore Cameroon. The
near-shore Rio Del Rey basin is character-
ized by detachment-based growth faults
that set up downthrown fault traps; these
are typically present at moderate depths
with productive horizons typically shallower
than 2000m. Reservoir properties are
generally excellent and AVO analysis has
been employed successfully across the
basin.
20
RIO DEL REY
BASIN
BAKASSI WEST
CONCESSION
The Bakassi West concession
(SDX Energy, 35%; Dana
Petroleum, 55%, operator;
SoftRock Oil and Gas, 10%)
is located in the Rio Del
Rey Basin, adjacent to the
Cameroon-Nigeria border.
The concession is 388 km2
in area and covers an area
that comprises shallow
open-water, channels and
mangroves.
SDX ENERGY INC. 2015 ANNUAL REPORTOPERATIONS REVIEW During 2014 new 2D seismic data was
acquired, and subsequent analyses
outlined a number of prospects and
play types, and in Q1 2015 AVO analysis
was undertaken to further de-risk the
prospects. Additionally, micro-seep (Q2
2015) and macro-seep (Q3 2015) studies
were conducted to better understand
the petroleum system and hydrocarbon
distribution. This work resulted in the
identification of 13 leads and prospects
within the concession. These leads and
prospects were then technically ranked
and several were selected as potential
drilling candidates for the 2016 campaign.
During the second half of 2015 the focus
shifted from play de-risking and prospect
analysis to pre-drill planning. Shallow
hazard mapping and bathymetric studies
of the proposed drilling locations were completed, and a jack-up rig was identified for
use in the 2016 drilling campaign.
The Manatee-1 exploration well (formerly referred to as the P1-West prospect) was
spud on March 2, 2016 and on March 27, 2016 reached a TD of 1,447 meters after
intersecting 26 meters of gas bearing section of varying quality. The well results
are currently being assessed and a decision will be made in the near future on the
optimum way forward for this asset.
21
22
SDX ENERGY INC. 2015 ANNUAL REPORTOPERATIONS REVIEW MANAGEMENT’S DISCUSSION & ANALYSIS
23
Basis of Presentation
The following Management’s Discussion and Analysis (the “MD&A”) dated April 29, 2016 is a review of results of operations and the
liquidity and capital resources of SDX Energy Inc. (the “Company” or “SDX”), formerly known as Sea Dragon Energy Inc., and Madison
Petrogas Ltd., for the three and twelve months ended December 31, 2015. This MD&A should be read in conjunction with the accompa-
nying audited consolidated financial statements for the years ended December 31, 2015 and 2014. In order to provide the reader with a
better understanding of the underlying operational performance of the combined business (of Sea Dragon and Madison) for the years
to December 31 2015 and 2014, this MD&A also includes various sections headed ‘Proforma’. These proforma sections include details
of the performance of the combined business on a 12 months to December 31, 2015 basis versus 12 months to December 2014 basis.
The proforma sections commence after the completion of the sections of the MD&A based on the audited consolidated financial
statements for the years to December 31, 2015 and 2014 which have been prepared under IFRS 3 Business Combinations.
Certain information contained herein is forward-looking and based upon assumptions and anticipated results that are subject to risks,
uncertainties and other factors. Should one or more of these uncertainties materialize or should the underlying assumptions prove
incorrect, actual results may vary materially from those expected. See “Forward Looking Statements”, below.
All financial references in this MD&A are in thousands of United States Dollars unless otherwise noted.
Additional information related to the Company can be found on SEDAR at www.sedar.com.
Forward-Looking Statements
Certain statements included or incorporated by reference in this MD&A constitute forward-looking statements or forward-looking
information under applicable securities legislation. Such forward-looking statements or information are for the purpose of providing
information about Management’s current expectations and plans relating to the future. Readers are cautioned that reliance on
such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking statements or
information typically contain statements with words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “estimate”, “propose”,
“project” or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information
in this MD&A include, but are not limited to, statements or information with respect to: business strategy and objectives; development
plans; exploration plans; acquisition and disposition plans and the timing thereof; reserve quantities and the discounted present value
of future net cash flows from such reserves; future production levels; capital expenditures; net revenue; operating and other costs;
royalty rates and taxes.
Forward-looking statements or information are based on a number of factors and assumptions that have been used to develop such
statements and information but may prove to be incorrect. Although the Company believes that the expectations reflected in such for-
ward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because
the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions that
may be identified in this MD&A, assumptions have been made regarding, among other things: the impact of increasing competition;
the general stability of the economic and political environment in which the Company operates; the timely receipt of any required
regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost-efficient
manner; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and
effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the
ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs of
pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transporta-
tion; future oil and natural gas prices; currency exchange and interest rates; the regulatory framework regarding royalties, taxes and
environmental matters in the countries in which the Company operates; and the ability of the Company to successfully market its
oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions that may
have been used.
24
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of
risks and uncertainties that could cause actual results to differ materially from those anticipated by the Company and described in the
forward-looking statements or information. The risks and uncertainties that may cause actual results to differ materially from the for-
ward-looking statements or information include, among other things: the ability of Management to execute its business plan; general
economic and business conditions; the risk of war or instability affecting countries or states in which the Company operates; the risks
of the oil and natural gas industry, such as operational risks in exploring for, developing and producing crude oil and natural gas;
market demand; the possibility that government policies or laws may change or governmental approvals may be delayed or withheld;
risks and uncertainties involving geology of oil and natural gas deposits; the uncertainty of reserves estimates and reserves life; the
ability of the Company to add production and reserves through acquisition, development and exploration activities; the Company’s
ability to enter into or renew production sharing concession; potential delays or changes in plans with respect to exploration or
development projects or capital expenditures; the uncertainty of estimates and projections relating to production (including decline
rates), costs and expenses; fluctuations in oil and natural gas prices, foreign currency exchange, and interest rates; risks inherent in the
Company’s marketing operations, including credit risk; uncertainty in amounts and timing of oil revenue payments; health, safety and
environmental risks; risks associated with existing and potential future law suits and regulatory actions against the Company; uncer-
tainties as to the availability and cost of financing; and financial risks affecting the value of the Company’s investments. Readers are
cautioned that the foregoing list is not exhaustive of all possible risks and uncertainties.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions
based on information available at the time. These estimates and assumptions affect the reported amounts of assets, particularly the
recoverability of accounts receivable and acquisition costs of property and equipment. Estimates and assumptions also affect the
recording of liabilities and contingent liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Due to various factors affecting future costs and operations, actual results could
differ from management’s best estimates.
Business Combination
On August 18, 2015 Sea Dragon Energy Inc. (“Sea Dragon”) and Madison Petrogas Ltd (“Madison”) entered into an Arrangement
Agreement whereby Sea Dragon acquired all the issued and outstanding Madison shares. Prior to the closing of the transaction Sea
Dragon effected a 35:1 share consolidation and as a result of this share consolidation the exchange ratio equated to 0.477143 Sea
Dragon share for each Madison share.
The business combination and closing of the transaction was effected on October 1, 2015 at which date the former Madison share-
holders held approximately 71% of the combined entity known as SDX Energy Inc.
In preparing the consolidated financial statements the Company must conform with IFRS 3 – Business Combinations. Given that the
former Madison shareholders hold 71% of the combined entity Madison is treated as the acquirer.
This means that in the audited Financial Statements, the 2015 Statement of Comprehensive Income for the combined entity contains
twelve months of revenue and costs for Madison and three months of revenue and costs for the former Sea Dragon group (the 2014
Statement of Comprehensive Income relates to Madison only). The Balance Sheet as at December 31, 2015 represents the combined
Balance Sheets for SDX and Madison as at October 1, 2015 plus the monthly movements for October to December 2015 (the 2014 Balance
Sheet relates to Madison only). For more information relating to the Business Combination see note 4 of the Financial Statements.
Non-IFRS Measures
The MD&A contains the terms “funds from operations”, and “netbacks” which are not recognized measures under IFRS. The Company
uses these measures to help evaluate its performance.
In order to provide the reader with a better understanding of the underlying operational performance of the combined business (of
Sea Dragon and Madison) for the years to December 31 2015 and 2014, this MD&A also includes various sections headed ‘Proforma’.
These proforma sections include details of the performance of the combined business on a 12 months to December 31, 2015 basis
versus 12 months to December 2014 basis.
25
Funds from operations
Funds from operations is a non-IFRS measure that represents funds generated from operating activities before changes in non-cash
working capital. Funds from operations should not be considered an alternative to, or more meaningful than, cash flow from operating
activities. Management uses funds from operations to analyze performance and considers it an indication of the Company’s ability to
generate the cash necessary to fund future capital investments. The Company’s determination of funds from operations may not be
comparable to that reported by other companies nor should it be viewed as an alternative to cash flow from operating activities, net
earnings or other measures of financial performance calculated in accordance with IFRS.
Reconciliation of cash flow from operations and funds from operations:
$000’s
Cash from/(used in) operating activities
Less: Changes in non-cash working capital
Less: Income taxes paid
Funds generated by/(used in) operations - (FFO)
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
(3,536)
(2,602)
–
(934)
2014
3,756
1,1 03
–
2,652
2015
(5,214)
(2,1 83)
(4,933)
1,902
2014
25,531
12,941
(4,430)
17,020
For the three months ended December 31, 2015 the Company used funds from operations before investing and financing activities
of US$0.9 million. For the twelve months ended December 31, 2015 the company generated funds from operations of US$1.9 million.
Netback
Netback is a non-IFRS measure that represents sales net of all operating expenses and government royalties. Management believes
that netback is a useful supplemental measure to analyze operating performance and provide an indication of the results generated
by the Company’s principal business activities prior to the consideration of other income and expenses. Management considers
netback an important measure as it demonstrates the Company’s profitability relative to current commodity prices. Netback may not
be comparable to similar measures used by other companies. See netback reconciliation schedule under the outlook section below.
26
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) SDX ENERGY’S BUSINESS, STRATEGY AND WORK PROGRAM
SDX’s Business
SDX is engaged in the exploration, development and production of oil and gas. Current activities are concentrated in Egypt and
Cameroon, where the Company has interests in five concessions with short and long-term potential. The Company’s strategy is to
develop the potential of its existing concessions while seeking growth opportunities within its region of focus. The Company intends
to create shareholder value by enhancing the value of its assets and through significant growth in production volumes, cash flow and
earnings.
Strategy
The Company’s strategy is to create value through low cost production growth and low cost high impact exploration success. The
Company is underpinned by a portfolio of low cost onshore producing assets combined with onshore exploration prospects in Egypt.
SDX intends to organically increase production and cash flow generation through an active work program consisting of workover
and development wells in its existing portfolio in Egypt, combined with high impact exploration drilling in Egypt. The Company is in
the process of analyzing the results of its recent Bakassi West exploration well in Cameroon and, once this is complete, it will make
a decision on its future strategy in the country. In pursuing this strategy, SDX also intends to leverage its balance sheet, early mover
advantage and regional network to grow through the acquisition of undervalued and/or underperforming producing assets principally
in onshore Egypt, while maintaining a strict financial discipline to ensure an efficient use of funds.
The Company currently holds working interests (“W.I.”) in three development and one exploration concession in Egypt, having re-
linquished its interest in the Shukheir Marine concession, effective January 31, 2015. The Company also has a working interest in one
exploration concession in Cameroon:
•
•
•
•
•
The NW Gemsa Concession (“NW Gemsa”) – (10% W.I.);
The South Ramadan Concession (“South Ramadan”) – (12.75% W.I.);
The South Disouq Concession (“South Disouq”) – (55% W.I.);
The Block-H Meseda production service agreement (“Meseda”) – (50% W.I.);
The Bakassi West Concession (“Bakassi”) – (35% W.I.).
2016 Work Program
The Company’s expected gross capital expenditure program for 2016 is approximately US$19.9 million.
The Company’s forecast capital expenditure program for NW Gemsa in 2016 is c. US$1.3 million and includes the drilling of two
production wells, one of which was spud in 2015, and the undertaking of nine well workovers.
In Meseda the Company plans to undertake an extensive well workover program to replace/repair Electrical Submersible Pumps and
improve production rates in up to 11 wells. Thereafter the Company will carry-out an infill drilling and water flood program to extend
plateau production in these wells. The overall cost to SDX, of this program, is estimated at US$5.2 million.
The Company’s capital expenditure program for South Disouq in 2016 is estimated at US$7.0 million and primarily comprises of the
cost to complete the 3D seismic program (acquisition and processing) and the annual training fees for the concession. As the Company
incurs this expenditure the State will release its work program security of US$3.0 million of withheld receivables.
In Cameroon the total cost of the Bakassi well and associated post-well analysis is estimated at US$6.4 million.
27
OPERATIONAL AND FINANCIAL HIGHLIGHTS:
In accordance with Canadian industry practice, production volumes and revenues are reported on a Company interest basis, before
deduction of royalties.
Operational and Financial information contained below represents the audited IFRS 3 information extracted from the Financial
Statements for the years to December 31, 2015 and 2014.
$000’s unless stated
OPERATIONAL
Oil revenue
Royalties
Net Oil revenue
Production service fee revenue
Total Net Revenue
Operating Costs
Netback (pre tax)
Oil Sales (bbl/d)
Production service fee (bbl/d)
Total boe/d
Oil sales volumes (bbls)
Production service fee volumes (bbls)
Total sales volumes (boe)
Brent Oil Price (US$/bbl)
West Gharib Oil Price (US$/bbl)
Realized oil price (US$/bbl)
Realized Service fee (US$/bbl)
Net Realized price (US$/boe)
Total Royalties (US$/boe)
Operating costs (US$/boe)
Netback (US$/boe)
Capital expenditures
(1) Three months ended September 30, 2015
PRIOR
QUARTER (1)
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
2015
2014
–
–
–
2,215
2,215
(816)
1,399
–
723
723
–
66,517
66,517
$50.26
$40.7 1
$0.00
$33.31
$33.31
$0.00
$12.27
$21.04
797
2,322
(686)
1,636
1,806
3,442
(2,483)
959
652
704
1,356
59,988
64,751
124,739
$43.56
$34.35
$38.70
$27.59
$33.09
$5.50
$19.9 1
$7.69
2,404
–
–
–
4,831
4,831
(1,159)
3,672
–
904
904
–
83,189
83,189
$76.37
$69.82
$0.00
$58.07
$58.07
$0.00
$13.94
$44.13
685
2,322
(686)
1,636
9,736
11,372
(4,973)
6,399
1 64
760
924
59,988
277,407
–
–
–
24,533
24,533
(3,639)
20,894
–
894
894
–
326,479
337,395
326,479
$52.30
$42.81
$38.70
$33.7 1
$35.74
$2.03
$14.74
$1 8.97
5,120
$98.94
$90.16
$0.00
$75.15
$75.15
$0.00
$11.15
$64.00
13,634
28
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Oil Sales and Production Service Fee Revenues
Oil Sales Revenue
Production Fee Revenues
Oil Sales and Production Fee Revenues
PRIOR
QUARTER
–
2,215
2,215
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2,322
1,806
4,128
2014
–
4,831
4,831
2015
2,322
9,736
12,058
2014
–
24,533
24,533
Total revenues for the three and twelve months ended December 31, 2015 were US$4.1 million and US$12.1 million compared to US$4.8
million and US$24.5 million for the comparative periods in the prior year.
For the twelve months ended December 31, 2015 (compared to the prior year ending December 31, 2014) the decrease in production
service fees of US$14.8 million, 60%, to US$9.7 million in 2015 is due to a decrease in realized price of US$11.1 million or, 45%, and a
decrease in volumes of US$3.7 million, or 15%.
Oil sales revenue relates to the NW Gemsa field and the three months ended December 31, 2015 is the first quarter of reporting due
to the business combination effective October 1, 2015.
Direct Operating Costs
$000’s except per unit amounts
N W Gemsa
Shukheir Marine
Block-H Meseda
Other
Direct operating costs
PRIOR
QUARTER
–
–
816
–
816
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
377
1,205
897
4
2,483
2014
–
–
1,159
–
1,159
2015
377
1,205
3,387
4
4,973
2014
–
–
3,639
–
3,639
Direct operating costs for the three and twelve months ended December 31, 2015 were US$2.5 million and US$5.0 million compared to
US$1.2 million and US$3.6 million for the comparative periods in the prior year.
As a result of the business combination effective October 1, 2015 the three months ended December 31, 2015 is the first quarter of
reporting for the NW Gemsa and Shukheir Marine concessions. Although the Company relinquished the Shukheir Marine concession
in January 2015, the above US$1. 2 million charge relates to costs incurred up to the date of the relinquishment which had not been
previously recognized.
Direct operating costs for Block-H Meseda saw a reduction of 22.6% for the three months ended December 31, 2015 compared to 2014
and 6.9% for the twelve months of 2015 compared to 2014.
29
Impairment charge
At the reporting date an impairment test was triggered due to falling crude oil prices and a reduction in the proved and probable
reserves for the NW Gemsa concession. The impairment test was carried out for the NW Gemsa and Block-H Meseda fields. The
impairment test was carried out in accordance with the accounting policy note stated in Note 3 to the audited Financial Statements
for the year to December 31, 2015. The recoverable amounts of the fields have been determined based on value-in-use calculations.
These calculations require the use of estimates. The present values of future cash flows were computed by applying forecast prices
for oil and gas reserves to estimated future production of proved and probable reserves. The present value of estimated future net
revenues is computed using a discount factor of 15%. The discount rate used reflects the specific risks relating to the underlying cash
generating units (“CGUs”).
Using this calculation an impairment charge of US$6.8 million was recognized in the three months ended December 31, 2015. Further
details of the methodology to calculate this impairment charge is shown below.
The value in use calculation assumes Brent oil sales prices in US$/bbl as follows:
2016
2017
2018
2019
2020
2021
2022
US$42.48
US$60.10
US$63.34
US$69.86
US$75.58
US$80.41
US$87.65
If the discount factor applied to the impairment test were to decrease by 5% above the current factor of 15%, the impairment of the
NW Gemsa fields would be US$7.5 million.
If the discount factor applied to the impairment test were to decrease by 5% below the current factor of 15%, the impairment of the
NW Gemsa fields would be US$6.1 million.
If the oil price assumptions used in the impairment test were to decrease by 5% the impairment of the NW Gemsa fields would be
US$8.3 million.
The combined group also incurred an impairment expense for the NW Gemsa concession in 2014 for US$2.8 million due to falling
crude oil prices. The value in use calculation for the 2014 impairment assumed Brent oil sales prices in US$/bbl as follows:
2015
2016
2017
2018
2019
2020
US$62.00
US$69.00
US$72.50
US$74.50
US$80.00
US$90.00
General and administrative expenses
$000’s
Wages and employee costs
Consultants - inc. PR/IR
Legal fees
Audit, tax and accounting services
Public company fees
Travel
Office expenses
IT expenses
Transaction costs
Service recharges
Total - Net G&A
PRIOR
QUARTER
1,328
42
–
33
–
17
84
20
496
–
2,020
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
1,063
265
11 3
(287)
228
86
243
38
–
(669)
1,080
2014
450
184
–
167
–
89
78
16
–
–
984
2015
2,828
499
124
449
228
250
490
75
496
(669)
4,770
2014
1,430
456
8
394
–
235
317
58
–
–
2,898
General and administrative (“G&A”) expenses for the three and twelve months ended December 31, 2015 were US$1.1 million and US$4.8
million compared to US$1.0 million and US$2.9 million for the comparative periods in the prior year. G&A for the twelve months ended
December 31, 2015 was higher than 2014 by US$1.9 million or 64.6%. Of this US$1.9 million increase US$1.5 million related to restructur-
ing costs, of which US$1.0 million is included within Wages and employee costs and US$0.5m is shown as a separate line item called
Transaction costs. Both of these items were costs that were incurred as part of, or as a result of the business combination.
30
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Current taxes
$000’s
Current taxes
PRIOR
QUARTER
55
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
346
2014
(164)
2015
1,1 68
2014
4,308
Current taxes for the three and twelve months ended December 31, 2015 were US$0.3 million and US$1.2 million compared to US$(0.2)
million and US$4.3 million in the comparative periods of the prior year.
Current taxes are higher in the three months ended December 31, 2015 due to the inclusion of the NW Gemsa concession; which
accounted for US$0.25 million. Current taxes fell by US$3.1 million for the twelve months ended December 31, 2015 when compared to
2014 due to falling crude oil prices and a 15% fall in production volumes.
Although not shown above, the Consolidated Statement of Comprehensive Income also reflects the movement in Deferred Income
Tax liabilities.
Capital expenditures
The following table shows the capital expenditure for the Company in accordance with IFRS3 –Business Combinations and this agrees
to the Consolidated Statement of Cash Flows contained in the Financial Statements for the year to December 31, 2015.
$000’s
Property, plant and equipment expenditures (“PP&E”)
Exploration and evaluation expenditures (“E&E”)
Office furniture and equipment
PRIOR
QUARTER
447
350
–
797
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
(28)
2,419
1 3
2,404
2014
82
590
13
685
2015
1,375
3,728
17
5,120
2014
1,928
11,670
36
13,634
During the three months ended December 31, 2015, the Company incurred US$2.4 million of E&E expenditure. This expenditure is
allocated US$1.4 million for the South Disouq 3D program, Egypt and US$1.0 million for geological and geophysical studies and pre-
planning for the drilling of the Manatee-1 well in the West Bakassi concession, Cameroon.
During the twelve months ended December 31, 2015, the Company incurred US$1.4 million on PP&E and US$3.7 million on E&E.
PP&E US$1.4 million on Block-H Meseda consisted of facilities costs of US$0.1 million, pipe inventory of US$0.1 million and drilling a step
out development well and a water injector for US$1.2 million.
The E&E additions of US$3.7 million related to i) US$1.4 million for the South Disouq concession and ii) US$2.3 million for the West
Bakassi, Cameroon; an explanation relating to this is included in the Intangible Exploration and Evaluation Assets section on the
next page.
31
Property, Plant and Equipment
The following table shows the cumulative costs and associated depletion, depreciation and impairment for property and equipment
on all of the Company’s oil and gas properties. Please see Note 10 of the Financial Statements for further details.
$000’s
Oil and gas properties, at cost
Accumulated depletion and impairment
Net Book Value
Furniture and fixtures, at cost
Accumulated depreciation
Net Book Value
Property, plant and equipment assets, end of period
DECEMBER 31, 2015
DECEMBER 31, 2014
44,775
(26,446)
1 8,329
567
(495)
72
18,401
12,824
(3,478)
9,346
174
(128)
46
9,392
At December 31, 2015 for the purposes of the depletion calculation, US$3.4 million (December 31, 2014 – US$2.4 million) of future
development costs are included in the calculation of cost in determining the depletion rate.
Intangible Exploration and Evaluation Assets
The following table shows the cumulative costs for the intangible exploration and evaluation assets on all the Company’s oil and
gas properties:
$000’s
DECEMBER 31, 2015
DECEMBER 31, 2014
Exploration and evaluation assets, beginning of period
Additions
Acquisitions (business combination)
Transfers to PP&E
Transfers to exploration expense
Exploration and evaluation assets, end of period
1 6,460
3,728
3,267
–
18
23,473
8,520
11,670
–
(963)
(2,767)
16,460
The E&E additions of US$3.7 million were incurred in South Disouq ( points i to ii ), Egypt and Bakassi West ( points iii to v),
Cameroon concessions and relate to i) purchase of dynamite for the 3D seismic campaign – US$1.1 million, ii) mobilization costs
– US$0.3 million, iii) geological and geophysical technical work – US$0.4 million, iv) Geotechnical and site surveys pre-drilling for
US$0.8 million, v) well planning costs of US$0.8 million and vi) admin and general overheads – US$0.3 million.
32
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) LIQUIDITY AND CAPITAL RESOURCES
Share capital
The Company’s authorized share capital consists of an unlimited number of common shares and an unlimited number of preferred
shares, issuable in one or more series. The common shares of SDX trade on the TSX Venture Exchange under the symbol SDX. The
information shown below is for SDX post combination only and for the three months ended December 31, 2015.
SDX, formerly Sea Dragon Energy Inc. undertook a 35:1 share consolidation in September 2015 and including 2014 comparatives would
confuse the reader of the 2015 Annual Report. Madison was a private company whose shares were not freely traded.
TRADING STATISTICS
High (CDN)
Low (CDN)
Average Volume
THREE MONTHS ENDED
DECEMBER 31 2015
$1.05
$0.43
29,669
The following table summarizes the outstanding common shares, options and warrants as at April 29, 2016, December 31, 2015,
September 30, 2015 and December 31, 2014 for SDX Energy Inc. pre and post combination.
OUTSTANDING AS AT:
Common shares
APRIL 29, 2016
DECEMBER 31, 2015
SEPTEMBER 30, 2015
DECEMBER 31, 2014
SDX Energy Inc. post combination
37,642,067
37,642,067
–
–
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
–
–
–
–
1 0,755,973
376,459,358
56,348,080
56,348,080
Warrants
SDX Energy Inc. post combination
61 0,743
61 0,743
–
–
Madison Petrogas Ltd - pre combination
–
Options
1,280,000
1,280,000
–
–
SDX Energy Inc. post combination
2,650,000
2,650,000
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
–
–
–
–
–
–
–
–
33,200,000
4,950,000
The following table summarizes the outstanding options as at December 31, 2015:
EXERCISE PRICE RANGE
NUMBER OF OPTIONS
REMAINING CONTRACTUAL LIFE
NUMBER OF OPTIONS
REMAINING CONTRACTUAL LIFE
$0.63
2,650,000
4.9 years
883,325
4.9 years
OUTSTANDING OPTIONS
VESTED OPTIONS
33
Stock based compensation
The Company has an option program that entitles officers, directors, employees and certain consultants to purchase shares in the
Company.
Stock-based compensation expense is the amortization over the vesting period of the fair value of stock options granted to employees,
directors and key consultants of the Company. The fair value of all options granted is estimated using the Black-Scholes option pricing
model. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. Compensation
cost is expensed over the vesting period with a corresponding increase in contributed surplus. When stock options are exercised, the
cash proceeds along with the amount previously recorded as contributed surplus are recorded as share capital.
Effective October 1, 2015, and prior to the closing of the business combination between SDX Energy Inc., formerly Sea Dragon Energy
Inc., and Madison, both the Company and Madison cancelled all outstanding stock options. Written agreement was obtained from all
directors, officers and employees.
The Company cancelled 28,900,000 stock options with a weighted average exercise price of CDN$0.09 and the directors, officers and
employees of the Company each received a nominal payment of CDN$1.00 for their cancelled options.
Madison cancelled 5,630,000 stock options with a weighted average exercise price of CDN$0.91. The directors, officers and employees
of Madison received cash compensation for cancelled options, based on the Black Scholes model, of CDN$300,083.
Post business combination the enlarged Company introduced a new option program. Pursuant to a Board Resolution effective
November 30, 2015 the Company granted Options to acquire 2,650,000 common shares at an exercise price of CDN$0.63 per common
share. The Options have a three year vesting period and expire five years from the anniversary date.
For the year ended December 31, 2015 the Company recorded stock based compensation of US$0.8 million (2014 – US$1.1 million) in
relation to the previously granted 5,630,000 Madison options and the new SDX options.
34
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Capital Resources
As at December 31, 2015 the Company had working capital of approximately US$11.6 million. The Company expects to fund its 2016
capital program through funds from operations, cash on hand and the raising of equity.
As at December 31, 2015, the Company had cash and cash equivalents of US$8.2 million compared to US$17.9 million as at December 31,
2014. The company utilized US$9.8 million during 2015, please see sources and uses table on the next page.
As at December 31, 2015, the Company had US$6.7 million in accounts receivable outstanding compared to US$3.3 million as at
December 31, 2014. Approximately US$5.0 million is due from a government of Egypt controlled corporation (EGPC) for oil sales and
production service fees; US$2.0 million is expected to be received in the normal course of operations; the remaining US$3.0 million is
with-held as a rolling guarantee towards the work program for the South Disouq concession.
Subsequent to the year end the Company collected US$2.2 million from EGPC for accounts receivables; US$2.0 million related to
outstanding trade receivables as at December 31, 2015.
The following table outlines the Company’s working capital. Working capital is defined as current assets less current liabilities, and
includes drilling inventory materials which may not be immediately monetized.
$000's
Current Assets
Cash and cash equivalents
Trade and other receivables
Inventory
Current Assets
Current Liabilities
Trade and other payables
Debentures
Current income taxes
Current Liabilities
Working Capital
DECEMBER 31, 2015
DECEMBER 31, 2014
8,170
6,678
1,1 88
1 6,036
3,556
–
928
4,484
11,552
17,935
3,306
–
21,241
1,686
2,207
5,142
9,035
12,206
The movement in working capital of US$0.7 million since December 31, 2014 for the combined entity SDX Energy Inc., formerly Sea
Dragon Energy Inc. and Madison Petrogas Ltd, reflects i) cash outflow of US$9.8 million, ii) increased trade receivables of US$3.4 million,
iii) inventory US$1.2 million, iv) increased trade payables of US$1.9 million, v) the repayment of the debentures of US$2.2 million, and
vi) the payment of current income taxes of US$4.3 million.
35
The following table outlines the Company’s sources and uses of cash for the three and twelve months ended December 31, 2015 and
2014:
$000’s
Sources:
Funds from operations
Cash from disposal of office assets
Dividends received
Sea Dragon Energy Inc. net working capital
as a result of the business combination
effective October 1, 2015
Changes in non-cash working capital
Uses:
Property, plant and equipment expenditures
Exploration and evaluation expenditures
Repayment of debentures
Repayment of bank facility
Investment in associate
Income taxes paid
Effect of foreign exchange on cash
and cash equivalents
Changes in non-cash working capital
Increase/(decrease) in cash
PRIOR
QUARTER
(744)
–
–
–
2,055
1,311
(447)
(350)
–
–
(48)
(837)
(1 00)
–
(1,782)
(47 1)
Cash and cash equivalents at beginning of period
12,463
Cash and cash equivalents at end of period
11,992
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
2015
2014
(934)
8
–
3,9 11
–
2,985
14
(2,419)
–
(1,650)
–
–
(1 50)
(2,602)
(6,807)
(3,822)
11,992
8,170
2,652
–
407
–
1,1 03
4,162
(95)
(590)
–
–
–
–
(416)
–
(1,1 01)
3,061
14,874
17,935
1,902
8
9 17
3,9 11
–
6,738
(1,392)
(3,728)
(2,052)
(1,650)
–
(4,933)
(565)
(2,1 83)
17,020
–
1,11 0
–
12,941
31,07 1
(1,964)
(11,670)
–
–
–
(4,430)
(615)
–
(1 6,503)
(18,679)
(9,765)
17,935
8,170
12,392
5,543
17,935
The Company’s funds from operations for the year ended December 31, 2015 compared to the prior year has decreased by US$15.1
million due to:
i)
ii)
a decrease of US$13.2 million in net revenues as a result of the declining oil price and a reduction in production service fee
volumes, partially offset by the inclusion in Q4, 2015 of the NW Gemsa oil revenue due to the business combination;
an increase in operating costs of US$1.3 million as a result of the provision for the relinquishment of the Shukheir Marine
concession and inclusion of the operating expenses incurred by the NW Gemsa concession during Q4, 2015;
iii) an increase of US$1.9 million in general and administrative costs as a result of one-off transaction and restructuring costs due to
the business combination;
iv) offset by a decrease in finance costs, which includes foreign exchange of US$1.1.
36
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Financial Instruments
The Company is exposed to financial risks due to the nature of its business and the financial assets and liabilities that it holds.
The following discussion reviews material financial risks, quantifies the associated exposures, and explains how these risks, and the
Company’s capital are managed.
Market risk
Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates could affect
the Company’s income or the value of the financial instruments. The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while optimizing the return.
Commodity price risk
Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices.
Commodity prices for oil and natural gas are impacted by not only the relationship between the United States dollar and other
currencies but also world economic events that impact the perceived levels of supply and demand. The Company may hedge some
oil and natural gas sales through the use of various financial derivative forward sales contracts and physical sales contracts. The
Company’s production is sold on the daily average price. The Company, however, may give consideration in certain circumstances to
the appropriateness of entering into long term, fixed price marketing contracts. The Company will not enter into commodity contracts
other than to meet the Company’s expected sale requirements.
At December 31, 2015 the Company did not have any outstanding derivatives in place.
Foreign currency risk
Currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. The
reporting and functional currency of the Company is United States dollars (US$). Substantially all of the Company’s operations are in
foreign jurisdictions and as a result, the Company is exposed to foreign currency exchange rate risk on some of its activities primarily
on exchange fluctuations between the Egyptian Pound (EGP) and the US$, Sterling (GBP) and the US$ and the Canadian Dollar (CAD$)
and US$. The majority of capital expenditures are incurred in US$ and EGP and oil and service fee revenues are received in both US$
and EGP. The Company is able to utilize EGP to fund its Egyptian office general and administrative expenses and to part-pay cash calls
for both capital and operating expenditure therefore reducing the Company’s exposure to foreign exchange risk during the period.
The table below shows the Company’s exposure to foreign currencies for its financial instruments:
As at December 31, 2 015
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Current income taxes
Balance sheet exposure
(1) denotes Financial Statements
TOTAL PER FS(1)
US$
EGP
US$ EQUIVALENT
8,170
6,678
(3,556)
(928)
7,124
6,128
(2,822)
–
1 0,364
1 0,430
785
61
(4)
(928)
(86)
EUR
54
23
(52)
–
25
CAD
GBP
48
75
(398)
–
(275)
159
391
(280)
–
270
The average exchange rate during the year ended December 31, 2015 was 1 US$ equals:
AVERAGE: 1 January 201 5 to 31 December 201 5
AVERAGE: 1 January 2014 to 31 December 2014
Period Average
1.2783
0.6542
0.9012
7.6849
Period Average
1.1 041
0.6072
0.7536
7.0545
USD/CAD
USD/GBP
USD/EUR
USD/EGP
USD/CAD
USD/GBP
USD/EUR
USD/EGP
The exchange rate at December 31, 2015 was 1 US$ equals:
PERIOD END: 31 December 201 5
PERIOD END: 31 December 2014
December 31, 2015
1.3869
0.6755
0.9168
7.8041
December 31, 2014
1.1627
0.6437
0.8226
7.1296
USD/CAD
USD/GBP
USD/EUR
USD/EGP
USD/CAD
USD/GBP
USD/EUR
USD/EGP
37
Trade and other payables
The foreign currency risk from a trade and other payables perspective is due to the fact that the Company’s operations are conducted
in Egypt and Cameroon and its corporate offices are in London and Canada with listing and regulatory costs in Canada.
As at December 31, 2015 and 2014, the Company’s trade and other payables is as follows:
$000’s
Current
Trade payables
Accruals
Other payables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
198
1,284
2,074
3,556
–
182
1,504
1,686
Trade payables of US$0.2 million are due to suppliers of the Company’s corporate office.
Accruals comprise South Disouq training fees and general and administrative costs related to restructuring, audit, tax, legal, corporate
services and reserve reporting fees.
Other payables comprise an estimated liability of US$1.1 million related to the relinquishment of the Shukheir Marine concession,
partner current accounts of US$0.7 million for the NW Gemsa and Cameroon concessions and UK payroll taxes and deferred payroll
of US$0.3 million.
The joint venture partner current accounts represent the net of monthly cash calls paid less billings received.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company’s receivables from joint operations partners, oil and natural gas marketers, and
cash held with banks. The maximum exposure to credit risk at the end of the period is as follows:
$000’s
Cash and cash equivalents
Trade and other receivables
Total
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
8,170
6,678
14,848
17,935
3,306
21,241
38
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Trade and other receivables:
All of the Company’s operations are conducted in Egypt and Cameroon. The Company’s exposure to credit risk is influenced mainly
by the individual characteristics of each counter party. The Company does not anticipate any default as it expects continued payment
from customers
The maximum exposure to credit risk for loans and receivables at the reporting date by type of customer was:
$000’s
Current
Government of Egypt controlled corporations
Joint venture partners
Other
Total trade and other receivables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
5,01 8
862
798
6,678
3,272
–
34
3,306
Current receivables of US$5.0 million are related to oil sales and production service fees due from EGPC (December 31, 2014: US$3.3
million), a Government of Egypt controlled corporation. Receivables in respect of oil sales and service fees are normally collected in
one to two months following production. The Company expects to collect outstanding receivables of US$0.8 million for NW Gemsa
and US$1.2 million for Block – H Meseda, in the normal course of operations; the remaining US$3.0 million being the pledged Shukheir
Marine receivables.
The Shukheir Marine trade receivables of US$3.0 million relate to invoices withheld as a rolling production guarantee for the work
program of the South Disouq concession. Please see Note 8 of the Financial Statements for further details.
The joint venture partners receivables of US$0.9 million relates to the joint venture partner accounts for Block-H Meseda (US$0.1
million) and South Disouq (US$0.8 million).
The other receivables of US$0.8 million consist of US$0.2 million for accrued gas and liquids revenue yet to be invoiced, US$0.3 million
related to prepayments, US$0.2 million for GST/ VAT and US$0.1 million for other items.
As at December 31, 2015 and 2014, the Company’s trade and other receivables is aged as follows:
$000’s
Current
Current (less than 90 days)
Past due (more than 90 days)
Total - current
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
3,364
3,314
6,678
3,272
34
3,306
The balances which are past due are not considered impaired.
Current trade and other receivables past due (more than 90 days old) have increased by US$3.3 million when compared to December
31, 2014. This increase is due to the US$3.0 million Shukheir Marine pledged receivables and represents April to October 2014 oil sales
invoices, US$0.2 million for accrued gas and liquids revenue and US$0.1 million held by EGPC for a well commitment in Block H -
Meseda.
Subsequent to December 31, 2015 the Company collected US$2.2 million from a government of Egypt controlled corporation for NW
Gemsa and Block-H Meseda receivables, thereby reducing the current (less than 90 days) balance.
39
Cash and cash equivalents
The Company limits its exposure to credit risk by only investing in liquid securities and only with highly rated counterparties. The
Company’s cash and cash equivalents are currently held by banks with A or AA ratings. Given these credit ratings, management does
not expect any counterparty to fail to meet its obligations.
The Company defines and computes its capital as follows:
$000’s
Equity
Working capital (1)
Total
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
55,246
(11,552)
43,694
39,449
(12,206)
27,243
(1) Working capital is defined as current assets less current liabilities.
The Company’s objective when managing its capital is to ensure it has sufficient capital to maintain its ongoing operations, pursue the
acquisition of interests in producing or near to production oil and gas properties and to maintain a flexible capital structure which
optimizes the cost of capital at an acceptable risk. The Company manages its capital structure and makes adjustments to it, based on
the funds available to the Company, in order to support the exploration and development of its interests in its existing properties and
to pursue other opportunities.
The working capital has decreased in the year to December 31, 2015 when compared to December 31, 2014 by US$0.7 million due to;
i) a reduction in cash and cash equivalents of US$9.8 million, ii) increased trade receivables of US$3.4 million, iii) inventory of US$1.2
million, iv) increased trade payables of US$1.9 million, v) the repayment of the debentures of US$2.2 million and vi) the payment of
current income taxes of US$4.2 million.
40
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) ACCOUNTING POLICIES AND ESTIMATES
The Company is required to make judgments, assumptions and estimates in the application of accounting policies that could have a
significant impact on our financial results. Actual results may differ from those estimates, and those differences may be material. The
estimates and assumptions used are subject to updates based on experience and the application of new information. The accounting
policies and estimates are reviewed annually by the Audit Committee of the Board. Further information on the basis of presentation
and our significant accounting policies can be found in the notes to the Consolidated Financial Statements and Annual MD&A for the
year ended December 31, 2015.
Accounting policies
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the new standards
and interpretations effective January 2015.
However there was a change in accounting policy in relation to the depreciation of office assets. SDX Energy Inc., formerly Sea Dragon
Energy Inc., recognized depreciation in the Statement of Comprehensive Income on a straight-line basis over the estimated useful lives
of each part of an item of property, plant and equipment whereas Madison Petrogas Ltd.’s depreciation policy was to depreciate on
a declining balance basis at rates of 20% to 50% approximating to their estimated useful lives. The change in policy was immaterial to
the Company and the office assets in question were sold during October 2015 as a result of the business combination. SDX Energy Inc.
continues to adopt the straight-line basis for office assets.
Further information on the accounting policies and estimates can be found in the notes to the Consolidated Financial Statements and
Annual MD&A for the year ended December 31, 2015.
New standards and interpretations not yet adopted
At the date of authorization of the consolidated financial statements, the International Accounting Standards Board (“IASB) has issued
the following new and revised standards which are not yet effective for the relevant periods:
IFRS 9 – Financial Instruments (“IFRS 9”)
In July 2014, the IASB issued IFRS 9, which replaces IAS 39, Financial Instruments – Recognition and Measurement, and establishes
principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users
of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This new standard
is effective for the Company’s interim and annual consolidated financial statements commencing January 1, 2018. The Company is
assessing the impact of this new standard on its consolidated financial statements.
IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 was issued in May 2014 and will provide a more structured approach to measuring and recognizing revenue. The new guidance
includes a five-step recognition and measurement approach and enhanced qualitative disclosure requirements. The underlying
principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity
expects to be entitled to in exchange for those goods or services. The standard is effective for annual periods beginning on or after
January 1, 2018. Entities will have a choice of full retrospective application, or prospective application with additional disclosures
(simplified transition method). The Company is assessing the impact of this standard on the consolidated financial statements.
IFRS 16 – Leases (“IFRS 16”)
On January 13, 2016, the IASB published IFRS 16 which replaces the current guidance in IAS 17. IFRS 16 requires lessees to recognize a
lease liability reflecting the future lease payments and a “right-of-use asset” for virtually all lease contracts. The standard applies to
annual periods beginning on or after January 1, 2019 with earlier application permitted if IFRS 15 is applied. The Company is assessing
the impact of this new standard on its consolidated financial statements.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the
Company.
Future changes in accounting policies
There are no updates to future changes in accounting policies in the twelve months of 2015. Further information on future changes
in accounting policies can be found in the notes to the Consolidated Financial Statements and Annual MD&A for the year ended
December 31, 2015.
41
BUSINESS RISK ASSESSMENT
There are a number of inherent business risks associated with oil and gas operations and development. Many of these risks are beyond
the control of management. The following outlines some of the principal risks and their potential impact to the Company.
Political Risk
SDX operates in Egypt and Cameroon which have different political, economic and social systems compared to North America and
which subject the Company to a number of risks not within the control of the Company. Exploration or development activities in such
countries may require protracted negotiations with host governments, national oil companies and third parties and are frequently
subject to economic and political considerations such as taxation, nationalization, expropriation, inflation, currency fluctuations,
increased regulation and approval requirements, corruption and the risk of actions by terrorist or insurgent groups, changes in laws and
policies governing operations of foreign-based companies, economic and legal sanctions and other uncertainties arising from foreign
governments, any of which could adversely affect the economics of exploration or development projects.
Financial Resources
The Company’s cash flow from operations may not be sufficient to fund its ongoing activities and implement its business plans. From
time to time the Company may enter into transactions to acquire assets or the shares of other companies. Depending on the future
exploration and development plans, the Company may require additional financing, which may not be available or, if available, may
not be available on favorable terms. Failure to obtain such financing on a timely basis could cause the Company to forfeit its interest
in certain properties, miss certain acquisition opportunities and reduce or terminate operations. If the revenues from the Company’s
reserves decrease as a result of lower oil prices or otherwise, it will impact its ability to expend the necessary capital to replace its
reserves or to maintain its production. If cash flow from operations are not sufficient to satisfy capital expenditure requirements,
there can be no assurance that additional debt, equity, or asset dispositions will be available to meet these requirements or available
on acceptable terms. In addition, cash flow is influenced by factors which the Company cannot control, such as commodity prices,
exchange rates, interest rates and changes to existing government regulations and tax and royalty policies.
Exploration, Development and Production
The long-term success of SDX will depend on its ability to find, acquire, develop and commercially produce oil and natural gas reserves.
These risks are mitigated by SDX through the use of skilled staff, focusing exploration efforts in areas in which the Company has
existing knowledge and expertise or access to such expertise, using up-to-date technology to enhance methods, and controlling costs
to maximize returns. Despite these efforts, oil and natural gas exploration involves a high degree of risk, which even a combination
of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that SDX will be able to locate
satisfactory properties for acquisition or participation or that the Company’s expenditures on future exploration will result in new
discoveries of oil or natural gas in commercial quantities. It is difficult to accurately project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various
drilling conditions such as over-pressured zones, tools lost in the hole and changes in drilling plans and locations as a result of prior
exploratory wells or additional seismic data and interpretations thereof.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do
not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure
a profit on the investment or recovery of drilling, completion, infrastructure and operating costs. In addition, drilling hazards and/
or environmental damage could greatly increase the costs of operations and various field operating conditions may adversely affect
the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-in of
wells resulting from extreme weather conditions or natural disasters, insufficient transportation capacity or other geological and
mechanical conditions. As well, approved activities may be subject to limited access windows or deadlines which may cause delays
or additional costs. While diligent well supervision and effective maintenance operations can contribute to maximizing production
rates over time, production delays and declines from normal field operating conditions cannot be eliminated and can be expected to
adversely affect revenue and cash flow levels to varying degrees.
The nature of oil and gas operations exposes SDX to risks normally incident to the operation and development of oil and natural gas
properties, including encountering unexpected formations or pressures, blow-outs, and fires, all of which could result in personal
injuries, loss of life and damage to the property of the Company and others. The Company has both safety and environmental policies
in place to protect its operators and employees, as well as to meet the regulatory requirements in those areas where it operates. In
addition, the Company has liability insurance policies in place, in such amounts as it considers adequate. The Company will not be fully
insured against all of these risks, nor are all such risks insurable.
42
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Oil and Natural Gas Prices
The price of oil and natural gas will fluctuate based on factors beyond the Company’s control. These factors include demand for
oil and natural gas, market fluctuations, the stability of regional state-owned monopolies to control gas prices, the proximity and
capacity of oil and natural gas pipelines and processing equipment and government regulations, including regulations relating to en-
vironmental protection, royalties, allowable production, pricing, importing and exporting of oil and natural gas. Fluctuations in price
will have a positive or negative effect on the revenue to be received by the Company.
Reserve Estimates
There are numerous uncertainties inherent in estimating quantities of oil, natural gas and natural gas liquids, reserves and cash flows
to be derived there from, including many factors beyond the Company’s control. In general, estimates of economically recoverable oil
and natural gas reserves and the future net cash flows there from are based upon a number of variable factors and assumptions, such
as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures,
marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating
costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and
natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and
estimates of future net revenues expected there from prepared by different engineers, or by the same engineers at different times,
may vary. The Company’s actual production, revenues and development and operating expenditures with respect to its reserves will
vary from estimates thereof and such variations could be material.
Estimates of proved reserves that may be developed and produced in the future are often based upon volumetric calculations and
upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less
reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history
and production practices will result in variations in the estimated reserves and such variations could be material.
The Company’s actual future net cash flows as estimated by independent reserve engineers will be affected by many factors which
include, but are not limited to: actual production levels; supply and demand for oil and natural gas; curtailments or increases in
consumption by oil and natural gas purchasers; changes in governmental regulation; taxation changes; the value of the Canadian dollar
and US$; and the impact of inflation on costs.
Actual production and cash flows derived there from will vary from the estimates contained in the applicable engineering reports.
The reserve reports are based in part on the assumed success of activities the Company intends to undertake in future years. The
reserves and estimated cash flows to be derived there from contained in the engineering reports will be reduced to the extent that
such activities do not achieve the level of success assumed in the calculations.
Reliance on Operators and Key Employees
To the extent the Company is not the operator of its oil and natural gas properties, the Company will be dependent on such operators
for the timing of activities related to such properties and largely is unable to direct or control the activities of the operators. In
addition, the success of the Company will be largely dependent upon the performance of its management and key employees. The
Company has no key-man insurance policies, and therefore there is a risk that the death or departure of any member of management
or any key employee could have a material adverse effect on the Company.
Government Regulations
The Company may be subject to various laws, regulations, regulatory actions and court decisions that can have negative effects on
the Company. Changes in the regulatory environment imposed upon the Company could adversely affect the ability of the Company
to attain its corporate objectives. The current exploration, development and production activities of the Company require certain
permits and licenses from governmental agencies and such operations are, and will be, governed by laws and regulations governing
exploration, development and production, labor laws, waste disposal, land use, safety, and other matters. There can be no assurance
that all licenses and permits that the Company may require to carry out exploration and development of its projects will be obtainable
on reasonable terms or on a timely basis, or that such laws and regulation would not have an adverse effect on any project that the
Company may undertake.
43
Environmental Factors
All phases of the Company’s operations are subject to environmental regulation in Egypt and Cameroon. Environmental legislation
is evolving in a manner which requires stricter standards and enforcement, increased fines, and penalties for non-compliance, more
stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers,
directors and employees.
Insurance
The Company’s involvement in the exploration for and development of oil and natural gas properties may result in the Company or
its subsidiaries, as the case may be, becoming subject to liability for pollution, blow-outs, property damage, personal injury or other
hazards. Prior to drilling, the Company or the operator will obtain insurance in accordance with industry standards to address certain
of these risks. However, such insurance has limitations on liability that may not be sufficient to cover the full extent of such liabilities.
In addition, such risks may not in all circumstances be insurable or, in certain circumstances, the Company or its subsidiaries, as the case
may be, may elect not to obtain insurance to deal with specific risks due to the high premiums associated with such insurance or other
reasons. The occurrence of a significant event that the Company may not be fully insured against, or the insolvency of the insurer of
such event, could have a material adverse effect on the Company’s financial position.
Regulatory Matters
The Company’s operations will be subject to a variety of federal and provincial or state laws and regulations, including income tax laws
and laws and regulations relating to the protection of the environment. The Company’s operations may require licenses from various
governmental authorities and there can be no assurance that the Company will be able to obtain all necessary licenses and permits
that may be required to carry out planned exploration and development projects.
Operating Hazards and Risks
Exploration for natural resources involves many risks, which even a combination of experience, knowledge and careful evaluation may
not be able to overcome. Operations in which the Company has a direct or indirect interest will be subject to all the hazards and risks
normally incidental to exploration, development and production of resources, any of which could result in work stoppages, damages
to persons or property and possible environmental damage.
Although the Company has obtained liability insurance in an amount it considers adequate, the nature of these risks is such that
liabilities might exceed policy limits, the liabilities and hazards might not be insurable, or the Company might not elect to insure itself
against such liabilities due to high premium costs or other reasons, in which event the Company could incur significant costs that could
have a material adverse effect upon its financial condition.
Repatriation of earnings
All of the Company’s production and earnings are generated in Egypt. Currently there are no restrictions on foreign entities repatri-
ating earnings from Egypt. However, there can be no assurance that restrictions on repatriation of earnings from Egypt will not be
imposed in the future.
Disruptions in Production
Other factors affecting the production and sale of oil and gas that could result in decreases in profitability include: (i) expiration
or termination of permits or licenses, or sales price redeterminations or suspension of deliveries; (ii) future litigation; (iii) the timing
and amount of insurance recoveries; (iv) work stoppages or other labor difficulties; (v) changes in the market and general economic
conditions, equipment replacement or repair, fires, civil unrest or other unexpected geological conditions that can have a significant
impact on operating results.
Foreign Investments
All of the Company’s oil investments are located outside of Canada. These investments are subject to the risks associated with
foreign investment including tax increases, royalty increases, re-negotiation of contracts, currency exchange fluctuations and political
uncertainty. The jurisdictions in which the Company operates, Egypt and Cameroon, have well-established fiscal regimes.
As operations are primarily carried out in US dollars, the main exposure to currency exchange fluctuations is the conversion to
equivalent Canadian funds, EGP, EURO and GBP.
44
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) Competition
The Company operates in the highly competitive areas of oil and gas exploration, development and acquisition with a substantial
number of other companies, including U.S.-based and foreign companies doing business in Egypt. The Company faces intense
competition from independent, technology-driven companies as well as from both major and other independent oil and gas
companies in seeking oil and gas exploration licences and production licences in Egypt; and acquiring desirable producing properties
or new leases for future exploration.
The Company believes it has significant in-country relationships within the business community and government authorities needed
to obtain cooperation to execute projects.
Disclosure Controls and Procedures
As the Company is classified as a Venture Issuer under applicable Canadian securities legislation, it is required to file basic Chief
Executive Officer and Chief Financial Officer Certificates, which it has done for the period ended December 31, 2015. The Company
makes no assessment relating to establishment and maintenance of disclosure controls and procedures and internal controls over
financial reporting as defined under Multilateral Instrument 52-109 as at December 31, 2015.
45
Income Statement Reconciliation
The table below is a reconciliation of the audited Statement of Comprehensive Income and associated operating data from the
audited Financial Statements for the 12 months to December 31, 2015 to the full twelve months of proforma unaudited operating data
which is discussed within the remainder of this MD&A.
TWELVE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2015
2015
2014
2014
2014
SDX ENERGY INC
AS PER
FINANCIAL
STATEMENTS 1
SEA DRAGON
ENERGY INC
(PRE-
COMBINATION)
FULL TWELVE
MONTHS OF
COMBINED
SDX GROUP -
PRO FORMA
UNAUDITED
SDX ENERGY INC
AS PER
FINANCIAL
STATEMENTS 2
SEA DRAGON
ENERGY INC
(PRE-
COMBINATION)
FULL TWELVE
MONTHS OF
COMBINED
SDX GROUP -
PRO FORMA
UNAUDITED
2,322
(686)
1,636
1 0,972
(4,781)
6,191
1 3,294
(5,467)
7,827
–
–
–
–
–
–
9,736
11,372
(4,973)
6,399
(73)
(2,057)
(6,842)
–
(761)
1,024
(3)
–
–
(4,770)
(7,083)
(96)
1 8,289
(1,1 68)
1 05
1 0,047
–
–
–
–
–
–
–
6,191
(1,066)
5,125
(557)
(1,7 18)
–
–
(140)
–
–
235
–
(3,132)
(187)
(605)
–
(1,250)
–
(2,043)
–
–
–
–
–
–
9,736
17,563
(6,039)
11,524
(630)
(3,775)
(6,842)
–
(901)
1,024
(3)
235
–
(7,902)
(7,270)
(701)
1 8,289
(2,41 8)
1 05
8,005
–
–
–
–
–
–
–
–
–
24,533
24,533
(3,639)
20,894
(2,767)
(1,602)
–
–
(1,064)
1,1 30
–
–
–
(2,898)
1 3,693
(1,009)
–
(4,308)
(20)
8,356
46,126
(26,043)
20,083
46,126
(26,043)
20,083
257
(319)
(62)
415
(517)
(1 02)
–
19,919
(7,991)
11,928
(395)
(4,639)
(2,820)
(1,235)
(447)
–
–
257
(319)
(62)
41 5
(517)
(1 02)
24,533
44,452
(11,630)
32,822
(3,1 62)
(6,241)
(2,820)
(1,235)
(1,511)
1,1 30
–
(111)
(111)
(351)
(4,651)
(2,721)
(1,532)
–
(351)
(7,549)
1 0,972
(2,541)
–
(4,707)
(9,01 5)
–
(8,960)
(20)
(604)
(647)
–
(647)
(420)
–
(420)
9,400
(2,043)
7,358
7,936
(8,960)
(1,024)
(CONTINUED)
$000’s except per unit amounts
FINANCIAL
Oil revenue
Royalties
Net Oil revenue
Gas revenue
Royalties
Net Gas revenue
NGL revenue
Royalties
Net NGL revenue
Production service fee revenue
Total Net Revenue
Operating Costs
Netback (pre tax)
Exploration and evaluation expense
Depletion, depreciation and amortization
Impairment expense
Impairment of materials inventory
Stock based compensation
Equity in income of associate
Loss on disposal of office assets
Gain/(Loss) on disposal of
materials inventory
Loss on disposal of
Kom Ombo concession
General and administrative expenses
Operating (Loss)/Income
Net Finance Expense
Gain on acquisition
Current Income tax expense
Deferred Income tax expense
Net Income/(loss)
Other comprehensive loss
Foreign exchange
Total comprehensive income/(loss)
for the year
46
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) TWELVE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2015
2015
2014
2014
2014
SDX ENERGY INC
AS PER
FINANCIAL
STATEMENTS 1
SEA DRAGON
ENERGY INC
(PRE-
COMBINATION)
FULL TWELVE
MONTHS OF
COMBINED
SDX GROUP -
PRO FORMA
UNAUDITED
SDX ENERGY INC
AS PER
FINANCIAL
STATEMENTS 2
SEA DRAGON
ENERGY INC
(PRE-
COMBINATION)
$000’s except per unit amounts
OPERATIONAL
Oil Sales (bbl/d)
Gas Sales (bbl/d)
NGL Sales (bbl/d)
652
794
759
–
–
–
794
760
1,519
Production service fee (bbl/d)
Total boe/d
760
1,412
Oil sales volumes (bbls)
Gas sales volumes (mcf)
NGL sales volumes (bbls)
Production service fee volumes (bbls)
Total sales volumes (boe)
Brent Oil Price (US$/bbl)
West Gharib Oil price (US$/bbl)
59,988
216,868
276,856
–
–
277,407
337,395
$52.30
$42.81
–
–
–
216,868
$55.24
–
–
277,407
554,263
$52.30
$42.81
–
894
894
–
–
–
326,479
326,479
$98.94
$90.1 6
Realized oil price (US$/bbl)
Realized gas price (US$/bbl)
Realized NGL price (US$/bbl)
Realized Service fee (US$/bbl)
Net Realized (US$/boe)
Total Royalties (US$/boe)
Operating costs (US$/boe)
Netback (US$/boe)
Capital expenditures
$38.70
$50.59
$48.02
$0.00
–
–
–
$50.59
$22.04
$4.91
$23.64
1,239
$35.1 0
$35.74
$2.03
$14.74
$1 8.97
5,120
$35.1 0
$41.55
$9.86
$1 0.89
$20.80
6,359
$75.1 5
$75.1 5
$0.00
$11.1 5
$64.00
1 3,634
FULL TWELVE
MONTHS OF
COMBINED
SDX GROUP -
PRO FORMA
UNAUDITED
1,346
705
1 6
894
2,373
49 1,126
257,31 0
5,811
326,479
866,301
$98.94
$90.1 6
$93.92
$1.00
$7 1.47
$75.1 5
$82.34
$31.03
$1 3.42
$37.89
17,949
1,346
705
16
–
1,479
491,126
257,31 0
5,811
–
539,822
$98.94
–
$93.92
$1.00
$7 1.47
–
$86.70
$49.79
$14.80
$22.11
4,31 5
1
2
SDX Energy Inc contains financial information from the Statement of Comprehensive Income; see Financial Statements.
It represents a full twelve months for Madison Petrogas Ltd and three months for Sea Dragon Energy Inc. in accordance with
IFRS-3 Business Combinations.
SDX Energy Inc contains financial information from the Statement of Comprehensive Income; see Financial Statements.
It represents a full twelve months for Madison Petrogas Ltd only in accordance with IFRS-3 Business Combinations.
47
PROFORMA UNAUDITED FINANCIAL INFORMATION
As per the audited Financial Statements for the twelve months ended December 31, 2015, the Company recorded total comprehensive
income of US$9.4 million, compared to US$7.9 million for the twelve months ended December 31, 2014.
The following table, however, shows the summarized Net Earnings (Total comprehensive income/(loss)) for the year as if the business
combination had been in effect for a full twelve months of 2015 and 2014 comparators. The constituent parts of this table are shown
in more detail on the previous page.
YEAR ENDED DECEMBER 31
2015
17,563
(6,039)
11,524
(630)
(3,775)
(6,842)
(901)
1,024
(3)
235
–
–
(7,902)
(7,270)
(701)
18,289
1 0,31 8
(2,41 8)
1 05
8,005
(647)
7,358
2014
44,452
(11,630)
32,822
(3,162)
(6,241)
(2,820)
(1,511)
1,130
–
(111)
(1,235)
(351)
(7,549)
1 0,972
(2,541)
–
8,431
(9,015)
(20)
(604)
(420)
(1,024)
$000’s except per unit amounts
Revenue, net of royalties
Operating Costs
Netback (pre tax)
Exploration and evaluation expense
Depletion, depreciation and amortization
Impairment expense
Stock based compensation
Dividends received
Loss on disposal of office assets
(Gain)/Loss on disposal of materials inventory
Impairment of materials inventory
Loss on disposal of Kom Ombo concession
General and administrative expenses
Operating (Loss)/income
Net finance expense
Gain on acquisition
Income before income taxes
Current income tax expense
Deferred income tax expense
Net Income/(loss)
Other comprehensive loss
Foreign exchange
Total comprehensive income/(loss) for the year
48
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) PROFORMA UNAUDITED FINANCIAL INFORMATION
$000’s unless stated
OPERATIONAL
Oil revenue
Royalties
Net Oil revenue
Gas revenue
Royalties
Net Gas revenue
NGL revenue
Royalties
Net NGL revenue
PRIOR
QUARTER (1)
2,848
(1,058)
1,790
–
–
–
–
–
–
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
2015
2014
2,322
(686)
1,636
–
–
–
–
–
–
8,115
(4,208)
3,907
–
(208)
(208)
–
(344)
(344)
1 3,294
(5,467)
7,827
–
–
–
–
–
–
46,126
(26,043)
20,083
257
(319)
(62)
415
(517)
(1 02)
Production service fee revenue
2,215
1,806
4,831
9,736
24,533
Total Net Revenue
Operating Costs
Netback (pre tax)
Oil Sales (bbl/d)
Gas Sales (mcf/d)
NGL Sales (bbl/d)
Production service fee (bbl/d)
Total boe/d
Oil sales volumes (bbls)
Gas sales volumes (mcf)
NGL sales volumes (bbls)
Production service fee volumes (bbls)
Total sales volumes (boe)
Brent Oil Price (US$/bbl)
West Gharib Oil Price (US$/bbl)
Realized oil price (US$/bbl)
Realized gas price (US$/bbl)
Realized NGL price (US$/bbl)
Realized Service fee (US$/bbl)
Net Realized price (US$/boe)
Total Royalties (US$/boe)
Operating costs (US$/boe)
Netback (US$/boe)
Capital expenditures
(1) Three months ended September 30, 2015
4,005
(1,467)
2,538
674
–
–
723
1,397
3,442
(2,483)
959
652
–
–
704
1,356
8,186
(3,131)
17,563
44,452
(6,039)
(11,630)
5,055
11,524
32,822
1,239
–
–
904
2,143
759
–
–
760
1,519
62,031
59,988
113,999
276,856
–
–
66,517
128,548
$50.26
$40.7 1
$45.91
–
–
$33.31
$39.39
$8.23
$11.41
$19.75
1,578
–
–
64,751
124,739
$43.56
$34.35
$38.70
–
–
$27.90
$33.09
$5.50
$19.90
$7.69
2,404
–
–
83,189
197,188
$76.37
$69.82
$7 1.18
–
–
$58.07
$65.65
$24.14
$15.88
$25.63
(520)
–
–
277,407
554,263
$52.30
$42.81
$48.02
–
–
$35.1 0
$41.55
$9.86
$1 0.89
$20.80
6,359
1,346
705
16
894
2,373
491,126
257,31 0
5,811
326,479
866,301
$98.94
$90.16
$93.92
$1.00
$7 1.47
$75.15
$82.34
$31.03
$13.42
$37.89
17,949
49
Oil Sales Volumes (relates to NW Gemsa and Shukheir Marine only)
Total oil sales volumes for the three and twelve months ended December 31, 2015 averaged 652 bbl/d and 759 bbl/d compared to 1,239
bbl/d and 1,346 bbl/d for the comparative periods in the prior year.
Total sales volumes fell by 214,270 barrels, 44%, to 276,856 in 2015 compared to 491,126 in 2014. 112,512 barrels of this decline relates to
the relinquishment of the Shukheir Marine concession, effective January 31, 2015. The relinquishment of Shukheir Marine contributed
a net reduction of 308 bbl/d in 2015 compared to 2014.
The NW Gemsa concession reached peak production rate in Q4 2014 and volumes have now started to decline with 2015 volumes
showing a 101,758 barrel, 27%, decline to 266,763 compared to 2014. This natural decline contributed a net reduction of 279 bbl/d in
2015 compared to 2014.
The crude oil sales volumes by concession are shown in the table below:
N W Gemsa
Shukheir Marine
Total Crude Oil Sales
PRIOR
QUARTER
62,031
–
62,031
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
59,988
–
59,988
2014
84,861
29,138
113,999
2015
266,763
1 0,093
276,856
2014
368,521
122,605
491,126
Production Service Fee volumes (relates to Meseda only)
The Company began oil production from the Meseda area of Block H in late 2011, and as a result has recorded service fee revenue
relating to the oil production that was delivered to the State Oil Company (“EGPC”). The Company is entitled to a service fee of
between 19.0% and 19.25% of the delivered volumes, and has a 50% working/paying interest. Service fee is based on the current market
price of West Gharib crude oil, adjusted for a quality differential.
Total production service fee volumes decreased by 49,072 barrels, 15%, to 277,407 compared to 2014. This was as a result of natural
reservoir declines. This contributed to a net reduction of 134 bbl/d in 2015 compared to 2014.
The production service fee volumes are shown in the table below:
Meseda - Block H
Total Production Service Fee Volumes
Pricing
PRIOR
QUARTER
66,517
66,517
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
64,751
64,751
2014
83,189
83,189
2015
277,407
277,407
2014
326,479
326,479
The Company is exposed to the volatility in commodity price markets for all of its oil sales and service fee volumes and changes in
the foreign exchange rate between the Egyptian pound and the US dollar for oil revenues and capital and operational expenditure.
The Operational and Financial Highlights table on the previous page outlines the changes in various benchmark commodity prices and
economic parameters which affect the prices received for the Company’s oil sales and service fee volumes.
For the three and twelve months ended December 31, 2015 the Company received an average price per barrel of oil of US$38.70 and
US$48.02 compared to the average Brent Oil price (“Brent”) of US$43.56 and US$52.30 per barrel; a discount of US$4.86 and US$4.28
per barrel respectively. The Company receives a discount to Brent due to the quality of the oil produced and a contracted discounted
price levied by EGPC.
For the three and twelve months ended December 31, 2015 the Company received an average service fee per barrel of oil of US$27.90
and US$35.10 compared to the average West Gharib price of US$34.35 and US$42.81 per barrel; a discount of US$6.45 and US$7.71 per
barrel respectively. The Company receives a discount to West Gharib due to the quality of the oil produced.
50
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) PROFORMA UNAUDITED FINANCIAL INFORMATION
During the three and twelve months ended December 31, 2015 the Brent price ranged from a low of US$35.26 per barrel on December
22, 2015 to a high of US$66.33 per barrel on May 13, 2015. The decrease in the oil price is due to over-supply in the market particularly
from OPEC countries and US shale producers and lower demand as a result of lower growth in countries such as China. At this time,
the Company does not hedge any of its production.
The Company commenced sales of gas and Natural Gas Liquids (“NGL”) in February 2013 from the NW Gemsa concession. The operator
continues to be in the process of addressing contractual invoicing with EGPC. No revenue or sales volumes have been recognized for
the three and twelve months ended December 31, 2015; pending the issuance of invoices.
Crude Oil Sales
$000’s except per unit amounts
Crude oil sales
Per bbl
PRIOR
QUARTER
2,848
45.91
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2,322
38.70
2014
8,115
7 1.18
2015
13,294
48.02
2014
46,126
93.92
Crude oil sales for the three and twelve months ended December 31, 2015 were US$2.3 million and US$13.3 million, compared to US$8.1
million and US$46.1 million for the three and twelve months ended December 31, 2015.
The crude oil sales per concession were:
$000’s
NW Gemsa
Shukheir Marine
Total Crude Oil Sales
Variance from prior year
PRIOR
QUARTER
2,848
–
2,848
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
2,322
–
2,322
2014
6,112
2,003
8,115
2015
12,879
41 5
1 3,294
2014
34,944
11,182
46,126
For the twelve months ended December 31, 2015 (compared to the prior year ending December 31, 2014) the decrease in revenue of
US$32.8 million, 71%, to US$13.3 million is due to a decrease in realized sales price (US$12.7 million) or 28%, and a decrease in sales
volume (US$20.1 million) or 43%.
As explained above the decrease in the sales volume compared to the prior year is due to the relinquishment of the Shukheir Marine
concession effective January 31, 2015 and the NW Gemsa concession commencing decline after reaching plateau production during
the fourth quarter of 2014.
$000’s
Twelve months ended December 31, 2014
Price variance
Production variance
Twelve months ended December 31, 201 5
Production Service Fees
$000’s except per unit amounts
Production service fees
Per bbl
46,126
(12,709)
(20,123)
1 3,294
PRIOR
QUARTER
2,215
33.31
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
1,806
27.90
2014
4,831
58.07
2015
9,736
35.1 0
2014
24,533
75.15
Production services fees from Meseda for the three and twelve months ended December 31, 2015 were US$1.8 million and US$9.7
million, compared to US$4.8 million and US$24.5 million for the three and twelve months ended December 31, 2014.
51
Variance from prior year
For the twelve months ended December 31, 2015 (compared to the prior year ending December 31, 2014) the decrease in production
service fees of US$14.8 million, 60%, to US$9.7 million in 2015 is due to a decrease in realized price of US$11.1 million or, 45%, and a
decrease in volumes of US$3.7 million, or 15%.
$000’s
Twelve months ended December 31, 2014
Price variance
Production variance
Twelve months ended December 31, 201 5
Gas and Natural Gas Liquids (“NGL”) Sales
24,533
(11,1 09)
(3,688)
9,736
The operator continues to be in the process of addressing contractual invoicing with EGPC. No revenue or sales volumes have been
recognized for the three and twelve months ended December 31, 2015; pending issuance of invoices.
Royalties
$000’s except per unit amounts
Royalties
Per boe
Royalties as a percent of revenue (%)
PRIOR
QUARTER
1,058
8.23
37
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
686
5.50
30
2014
4,760
24.14
59
2015
5,467
9.86
41
2014
26,879
31.03
58
Royalties fluctuate in Egypt from quarter to quarter due to changes in production and commodity prices impacting the amount of
cost oil allocated to the contractors and thereby impacting the calculation of profit oil from which royalties are calculated.
Royalties per concession are as follows:
$000’s
NW Gemsa
Shukheir Marine
Total Royalties by Concession
Royalties per boe by concession are as follows:
$000’s
NW Gemsa
Shukheir Marine
Total Royalties by Concession
PRIOR
QUARTER
1,058
–
1,058
PRIOR
QUARTER
17.06
–
17.06
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
686
–
686
2014
3,912
848
4,760
2015
5,29 1
176
5,467
2014
22,145
4,734
26,879
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
11.43
–
11.43
2014
46.1 0
29.11
41.75
2015
19.83
17.45
19.75
2014
53.08
38.61
49.79
52
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) PROFORMA UNAUDITED FINANCIAL INFORMATION
The Concession agreements allow for the recovery of operating and capital costs through a cost oil allocation which has an impact
on the government share of production as highlighted below:
CONCESSION
NW Gemsa (up to 10,000 BOPD Gross)
NW Gemsa
(10,000 BOPD to 25,000 BOPD Gross)
NW Gemsa – Gas and LPG
Shukheir Marine
SDX’s WI (1)
COST OIL TO
CONTRACTORS (2)
CAPITAL COST
RECOVERED (2)
OPERATING COST
RECOVERED (2)
EXCESS OIL TO
CONTRACTOR (3)
PROFIT OIL TO
CONTRACTOR (4)
1 0%
1 0%
1 0%
1 00%
30%
30%
30%
40%
5 years
Immediate
5 years
5 years
Immediate
Immediate
5 years (5)
Immediate
Nil
Nil
Nil
Nil
16.1%
15.4%
18.2%
17.5%
(1) WI denotes the Company’s Working interest
(2) Cost oil is the amount of oil revenue that is attributable to SDX and its joint venture partners (the “Contractor”) subject to the limitation of
the cost recovery pool. Oil revenue, up to a specified percentage is available for recovery by the Contractor for costs incurred in exploring
and developing the concession. Operating costs and capital costs are added to a cost recovery pool (the “Cost Pool”). Capital costs for
exploration and development expenditures are amortized into the Cost Pool over a specified number of years with operating costs being
added to the Cost Pool as incurred.
(3)
If the costs in the Cost Pool are less than the cost oil attributable to the Contractor, the shortfall, referred to as excess cost oil (“Excess Oil”),
reverts 1 00 percent to the State in NW Gemsa and Shukheir Marine.
(4)
Profit oil is the amount of oil revenue that is attributable to the Contractor.
(5) Under the original concession agreement, development expenditures were amortized over ten years. However, development expenditures
incurred after July 27, 2005 effective date of the Amended Agreement shall be recoverable at the rate of 20 percent per year.
Direct operating costs
$000’s except per unit amounts
Direct operating costs
Per boe
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
PRIOR QUARTER
1,467
11.41
2015
2,483
19.90
2014
3,131
15.88
2015
6,039
10.89
2014
11,630
13.42
Direct operating costs for the three and twelve months ended December 31, 2015 were US$2.5 million (US$19.90 per boe) and US$6.0
million (US$10.89 per boe), compared to US$3.1 million (US$15.88 per boe) and US$11.6 million (US$13.42 per boe) in the comparative
periods of the prior year.
The direct operating costs for the three months ended December 31, 2015 show a higher per boe cost compared to 2014. This is due
to the Company accounting for a relinquishment provision of US$1.2 million related to the Shukheir Marine concession. Excluding this
adjustment from the quarter would result in direct operating costs of US$1.3 million and per boe cost of US$10.24.
The direct operating costs for the twelve months ended December 31, 2015 have decreased by US$5.4 million compared to 2014; a 47%
decrease. The decrease in direct operating costs was due to relinquishment of the Shukheir Marine concession, effective January 31,
2015 which also had a higher direct operating cost per boe.
The direct operating costs per concession were:
$000’s
NW Gemsa
Shukheir Marine
Meseda - Block H
Other
PRIOR
QUARTER
595
–
816
56
Total Direct Operating Costs by Concession
1,467
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
377
1,205
897
4
2,483
2014
266
1,706
1,159
–
3,131
2015
1,922
669
3,387
61
6,039
2014
1,825
6,160
3,639
6
11,630
53
The direct operating costs per boe per concession were:
$000’s
NW Gemsa
Shukheir Marine
Meseda - Block H
Other
Total Direct Operating Costs (US$/boe)
by Concession
Current taxes
$000’s
Current taxes
PRIOR
QUARTER
9.59
–
12.27
–
11.41
PRIOR
QUARTER
314
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
6.28
–
1 3.85
–
19.90
2014
3.13
58.55
13.94
–
15.88
2015
7.20
66.31
12.21
–
1 0.89
2014
4.37
50.24
11.15
–
13.42
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
346
2014
649
2015
2,41 8
2014
9,015
Pursuant to the terms of the Company’s concession agreements for NW Gemsa and Shukheir Marine, the 40.4% corporate tax liability
of the joint venture partners is paid by the government of Egypt controlled corporations (“Corporations”) out of the profit oil at-
tributable to the Corporations, and not by the Company. For accounting purposes the corporate taxes paid by the Corporations are
presented gross and included in net oil revenues and income tax expense thereby having a net neutral impact on Net Income.
The Company also has a corporate tax liability in relation to its service agreement for Block H- Meseda. The Company’s Egyptian
subsidiary, Madison Egypt Limited, is subject to corporate tax on its profits at an income tax rate of 22.5%.
The Company also incurred 2014 corporation tax for Sea Dragon Energy (UK) Ltd which amounted to US$61k.
The current taxes per concession were:
$000’s
NW Gemsa
Shukheir Marine
Meseda - Block H
Other
Total Current Taxes by Concession
PRIOR
QUARTER
314
–
55
61
430
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
255
–
9 1
–
346
2014
67 1
143
(165)
–
649
2015
1,414
30
9 1 3
61
2,41 8
2014
3,906
801
4,308
–
9,015
54
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) PROFORMA UNAUDITED FINANCIAL INFORMATION
General and administrative costs
$000’s
Wages and employee costs
Consultants - inc. PR/IR
Legal fees
Audit, tax and accounting services
Public company fees
Travel
Office expenses
IT expenses
Transaction costs
Service recharges
Total - Net G&A
PRIOR
QUARTER
2,241
59
58
168
48
93
211
38
496
–
3,412
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
1,063
265
11 3
209
228
86
243
38
–
(669)
1,576
2014
1,024
532
(53)
255
51
216
193
70
–
–
2,288
2015
4,838
594
246
790
383
407
846
1 36
496
(834)
7,902
2014
3,621
1,185
226
644
209
606
722
286
–
–
7,459
General and administrative (“G&A”) costs for the three and twelve months ended December 31, 2015 and 2014 were US$1.6 million and
US$7.9 million, compared to US$2.3 million and US$7.5 million for the comparative periods in the prior year.
As a result of the business combination Madison Petrogas Ltd incurred restructuring and transaction costs in Qtr. 3, 2015 of US$1.5
million; US$1.0 million in relation to wages and employee costs for restructuring and US$0.5 million in transaction costs related to the
business combination. The transaction costs of US$0.5 million have been separately disclosed in the table above.
G&A costs in the above table represent a full twelve months for SDX Energy Inc., formerly Sea Dragon Energy Inc. and Madison
Petrogas Ltd.
The increase for the year of US$0.4 million, a 4.7% increase is due to the following:
•
•
•
•
•
•
•
•
•
higher wages and employee costs as a result of internal restructuring due to the business combination;
higher audit, tax and accounting services as a result of increased annual audit fees due to the business combination;
higher public company fees due to higher Director’s fees, filing fees, AGM costs and D & O insurance;
higher office costs due to the cost of rental leases for two local offices in Cairo until June 2015 and the lease of a yard;
transaction costs of US$0.5 million as a result of the business combination;
offset by lower consultants fees as a result of a fixed price annual reserves audit fee, the cancellation of the PR and IR contracts
during 2015 and a curtailment in the use of consultants during 2015;
offset by lower travel – curtailment in travel related to business development;
offset by lower IT costs as a result of the cancellation of software licence agreements;
offset by service recharges related to the 2015 cross charging of technical and administrative time spent by the Company on its
exploration assets.
55
The Company has identified US$5.5 million of one-off and restructuring costs; US$4.0 million for G&A, US$1.0 million for Finance costs
and US$0.5 million for stock-based compensation, and anticipates that as a result of the business combination the following synergies
can be obtained.
General and administrative costs
$000’s
Wages and employee costs
Consultants - inc. PR/IR
Legal fees
Audit, tax and accounting services
Public company fees
Travel
Office expenses
IT expenses
Total
DECEMBER 31, 2015
2,394
400
651
1 02
1 58
172
124
2
4,003
Depletion, depreciation and amortization (“DD&A”)
$000’s except per unit amounts
Depletion, depreciation and amortization
Per bbl
PRIOR
QUARTER
803
6.25
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
837
6.71
2014
1,467
7.44
2015
3,775
6.81
2014
6,241
7.20
For the three and twelve months ended December 31, 2015, depletion, depreciation and amortization (“DD&A”) was US$0.8 million and
US$3.8 million, compared to US$1.5 million and US$6.2 million in the comparative periods in the prior year.
The DD&A per concession was:
$000’s
NW Gemsa
Shukheir Marine
Meseda - Block H
Corporate - office assets
Total
Net Earnings
PRIOR
QUARTER
439
–
324
40
803
THREE MONTHS ENDED DECEMBER 31
TWELVE MONTHS ENDED DECEMBER 31
2015
396
–
41 3
28
837
2014
599
340
479
49
1,467
2015
1,835
1 84
1,619
1 37
3,775
2014
2,398
2,083
1,585
175
6,241
As per the Financial Statements for the twelve months ended December 31, 2015, the Company recorded Total Comprehensive Income
of US$9.4 million, compared to US$7.9 million for the twelve months ended December 31, 2014.
The main components of the comprehensive income of US$9.4 million are:
a gain on acquisition; due to the business combination of US$18.3 million;
lower exploration and evaluation expenses of US$2.7 million;
lower net finance expense of US$1.0 million;
lower current income tax expense of US$3.1 as a result of lower revenues due to the falling oil price; offset by
a fall in revenues of US$13.2 million as a result of the falling oil price;
higher direct operating costs of US$1.3 million; of which US$1.2 million related to further costs for the relinquishment of the
Shukheir Marine concession;
an impairment expense of US$6.8 million related to the NW Gemsa concession.
•
•
•
•
•
•
•
56
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) PROFORMA UNAUDITED FINANCIAL INFORMATION
SUMMARY OF QUARTERLY RESULTS
The fiscal and operational quarterly results shown below include full quarterly information for SDX Energy Inc., formerly Sea Dragon
Energy Inc. and Madison Petrogas Ltd prior to the business combination (pre-combination), effective October 1, 2015. The quarterly
results for Q4, 2015 represent the first quarter for the newly combined group, SDX Energy Inc. post-combination.
SDX Energy Inc., formerly Sea Dragon Energy Inc. produces and sells via its concession agreement, oil, gas and NGL. Madison has a
production service agreement and obtains a per barrel service fee.
2015
Q3
Q2
Q1
Q4
2014
Q3
Q2
Q1
FISCAL YEAR
Financial $000’s
Cash, beginning of period
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Cash, end of period
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Working capital
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Funds from operations
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Funds from operations per share
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Income/(loss) and comprehensive income/(loss)
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Net Income/(loss) per share - basic
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Capital expenditures
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Total assets
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Shareholders’ equity
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Common shares outstanding (000’s)
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Warrants outstanding (000’s)
SDX Energy Inc. post combination
Sea Dragon Energy Inc. - pre combination
Madison Petrogas Ltd - pre combination
Q4
12,482
–
–
8,170
–
–
11,552
–
–
(934)
–
–
–
494
12,463
–
490
11,992
–
3,911
11,943
–
3,1 05
19,056
–
494
12,463
–
2,838
13,634
–
(1,152)
(744)
–
767
1,221
–
2,966
17,936
–
1,789
14,874
–
1,397
13,839
–
1,789
14,874
–
6,317
12,456
–
2,966
17,936
–
5,055
12,206
–
(1,261)
2,650
–
(77)
2,616
–
875
12,361
–
1,397
13,839
–
6,148
12,157
–
1,598
3,430
–
3,1 05
19,056
–
2,243
15,028
–
282
1,318
–
0.001
0.023
–
4,287
5,543
–
875
12,361
–
5,747
14,908
–
1,297
4,016
–
0.003
0.07 1
(0.02)
–
–
–
(0.003)
(0.013)
–
0.002
0.022
–
(0.003)
0.047
–
(0.000)
0.046
–
0.004
0.061
8,542
–
–
0.227
–
–
2,405
–
–
–
(1,755)
(1,029)
–
230
1,11 0
–
(516)
777
–
(6,47 1)
(993)
–
(1,207)
1,913
–
(249)
3,199
–
(1,033)
3,816
–
(0.005)
(0.013)
–
0.001
0.019
–
(0.001)
0.018
–
(0.017)
(0.012)
–
(0.003)
0.038
–
(0.001)
0.055
–
(0.002)
0.068
–
781
797
–
270
1,605
–
188
313
–
(1,204)
685
–
(349)
2,679
–
1,015
6,391
–
4,853
3,880
60,01 6
–
–
–
28,258
42,912
–
29,145
44,333
–
38,011
49,425
–
40,283
49,091
55,246
–
–
–
23,925
40,769
–
25,644
41,660
–
25,355
40,403
–
25,828
39,449
–
45,587
50,345
–
32,208
40,124
–
47,119
53,470
–
40,026
45,274
–
33,313
37,960
–
33,363
34,511
37,642
–
376,459
56,348
–
376,459
56,348
–
376,459
56,348
–
376,459
56,348
–
376,459
56,348
–
376,459
56,348
–
376,459
56,348
611
–
–
–
–
1,280
–
–
1,280
–
–
1,280
–
–
1,280
–
–
1,280
–
–
1,280
–
–
1,280
57
FISCAL YEAR
$000’s
Operational
Oil sales (bbl/d)
Gas sales (mcf/d)
NGL sales (bbl/d)
PROFORMA UNAUDITED FINANCIAL INFORMATION
2015
Q4
Q3
Q2
Q1
Q4
2014
Q3
Q2
Q1
Production service fee (bbl/d)
704
723
783
91 0
904
652
674
7 19
993
1,239
1,248
1,426
–
–
–
–
–
–
–
–
–
–
855
21
951
927
21
812
1,489
1,058
22
91 0
Total boe/d
1,356
1,397
1,502
1,826
2,143
2,363
2,396
2,597
Oil sales volumes (bbls)
59,988
62,031
65,434
89,403
113,999
114,839
128,317
133,970
Gas sales volumes (mcf)
NGL sales volumes (bbls)
Production service fee
volumes (bbls)
Total sales and service fee
volumes (boe)
–
–
–
–
–
–
–
–
–
–
78,642
83,442
95,226
1,936
1,933
1,942
64,751
66,517
7 1,216
74,923
83,189
87,472
73,897
81,921
124,739
128,547
136,650
164,326
197,188
217,356
218,055
233,700
Brent oil price (US$/bbl)
Realized oil price (US$/bbl)
Realized gas price (US$/mcf)
Realized NGL price (US$/bbl)
43.56
38.70
–
–
Realized Service fee (US$/bbl)
27.90
Net Realized price (US$/boe)
33.09
50.26
45.91
–
–
33.31
39.39
61.72
57.44
–
–
53.78
48.83
–
–
76.37
1 01.87
1 09.70
1 08.14
7 1.18
–
–
95.56
1.00
68.45
77.7 1
1 03.90
1 02.31
1.00
73.58
83.91
1.00
72.43
81.84
40.72
37.57
58.07
48.73
43.69
65.65
82.74
90.60
88.35
Royalties (US$/boe)
5.50
8.23
14.46
1 0.62
34.81
35.49
28.74
24.14
Sea Dragon Energy Inc. -
pre combination
Madison Petrogas Ltd -
pre combination
–
–
17.06
30.19
19.53
41.75
48.09
53.69
53.60
–
–
–
–
–
–
–
Operating costs (US$/boe)
19.90
11.41
4.89
8.65
15.88
16.51
10.34
11.36
Sea Dragon Energy Inc. -
pre combination
Madison Petrogas Ltd -
pre combination
Netback - (US$/boe)
Sea Dragon Energy Inc. -
pre combination
Madison Petrogas Ltd -
pre combination
–
–
7.69
–
–
1 0.49
(5.13)
8.40
17.30
20.31
10.57
12.23
12.27
19.75
14.09
8.95
29.38
24.42
13.94
14.96
1 0.85
30.74
9.91
9.74
51.53
52.84
18.36
32.38
20.90
12.13
17.72
29.79
26.02
21.04
26.63
28.61
44.13
66.86
74.00
72.1 0
58
SDX ENERGY INC. 2015 ANNUAL REPORTManagement’s Discussion & Analysis FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2015 (PREPARED IN US$) FINANCIAL STATEMENTS
59
Independent Auditor’s REPORT
April 29, 2016
To the Shareholders of SDX Energy Inc.
We have audited the accompanying consolidated financial statements of SDX Energy Inc. and its subsidiaries, which comprise the
consolidated balance sheet as at December 31, 2015 and December 31, 2014 and the consolidated statements of comprehensive loss,
consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and the related
notes, which comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical require-
ments and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material mis-
statement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SDX Energy Inc.
and its subsidiaries as at December 31, 2015 and December 31, 2014 and their financial performance and their cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Emphasis of matter
Without qualifying our opinion, we draw attention to note 2 in the consolidated financial statements which describes matters and
conditions that indicate the existence of a material uncertainty that may cast significant doubt about the corporation’s ability to
continue as a going concern.
Other matter
The consolidated financial statements of Madison Petrogas Ltd. for the year ended December 31, 2014, were audited by another
auditor who expressed an unmodified opinion on those statements on April 29, 2015.
PricewaterhouseCoopers LLP
Chartered Accountants
London
60
SDX ENERGY INC. 2015 ANNUAL REPORT
Consolidated Balance Sheet
for the years ended December 31, 2 015 and 2 014
(thousands of United States dollars)
Assets
Cash and cash equivalents
Trade and other receivables
Inventory
Current assets
Investments
Property, plant and equipment
Intangible exploration and evaluation assets
Non-current assets
Total Assets
Liabilities
Trade and other payables
Debentures
Current income taxes
Current liabilities
Decommissioning provision
Deferred income taxes
Non-current liabilities
Total Liabilities
Equity
Share capital
Warrants
Contributed surplus
Other comprehensive loss
Retained Earnings
Equity
Equity and liabilities
The notes are an integral part of these consolidated financial statements.
Approved on behalf of the Board of Directors
7
8
9
12
1 0
11
14
15
16
17
18
18
AS AT
DECEMBER 31, 2015
AS AT
DECEMBER 31, 2014
8,170
6,678
1,1 88
1 6,036
2,1 06
1 8,401
23,473
43,980
17,935
3,306
–
21,241
1,999
9,392
16,460
27,851
60,01 6
49,092
3,556
–
928
4,484
–
286
286
1,686
2,207
5,142
9,035
217
391
608
4,770
9,643
30,148
99
5,175
(1,1 54)
20,978
55,246
24,512
99
4,414
(507)
1 0,931
39,449
60,01 6
49,092
Paul Welch
Chief Executive Officer
Mark Reid
Chief Financial Officer
61
Consolidated Statements of Comprehensive Income
(thousands of United States dollars, except per share data)
Revenue, net of royalties
Revenue
Direct operating expense
Exploration and evaluation expense
Depletion, depreciation and amortization
Impairment expense
Stock based compensation
Equity in income of associate
Loss on disposal of office assets
General and administrative expenses
Operating (Loss)/Income
Net finance expense
Gain on acquisition
Income before income taxes
Current income tax expense
Deferred income tax (credit)/expense
Total Current and Deferred income tax expense
Net Income
Other comprehensive loss
Foreign exchange
Total comprehensive income for the year
Net income per share
Basic
Diluted
The notes are an integral part of these consolidated financial statements.
NOTE
20
11
1 0
1 0
19
12
1 0
21
22
4
17
17
23
23
YEAR ENDED DECEMBER 31
2015
11,372
11,372
4,973
73
2,057
6,842
761
(1,024)
3
4,770
(7,083)
96
(18,289)
11,11 0
1,1 68
(1 05)
1,063
1 0,047
647
9,400
$0.195
$0.195
2014
24,533
24,533
3,639
2,767
1,602
–
1,064
(1,130)
–
2,898
13,693
1,009
–
12,684
4,308
20
4,328
8,356
420
7,936
$0.148
$0.144
62
SDX ENERGY INC. 2015 ANNUAL REPORT Consolidated Statement of Changes in Equity
(thousands of United States dollars)
Share Capital
Balance, beginning of year
Issuance of common shares
Balance, end of year
Warrants
Balance, beginning of year
Balance, end of year
Contributed Surplus
Balance, beginning of year
Share based payments for the year
Balance, end of year
Accumulated Other Comprehensive Loss
Balance, beginning of year
Foreign currency translation adjustment for the year
Balance, end of year
Retained Earnings
Balance, beginning of year
Net income for the year
Balance, end of year
Total Equity
The notes are an integral part of these consolidated financial statements.
YEAR ENDED DECEMBER 31
2015
2014
24,512
5,636
30,148
99
99
4,414
761
5,175
(507)
(647)
(1,1 54)
1 0,931
1 0,047
20,978
24,512
–
24,512
99
99
3,350
1,064
4,414
(87)
(420)
(507)
2,575
8,356
1 0,931
55,246
39,449
63
Consolidated Statement of Cash Flows
for the years ended December 31, 2 015 and 2 014
(thousands of United States dollars)
Cash flows from/(used in) operating activities
Income before income taxes
Adjustments for:
Depletion, depreciation and amortization
Exploration expense
Impairment expense
Amortization of deferred transaction costs
Finance costs
Stock-based compensation
Gain on acquisition
Equity in income of associate
Loss on disposal of office assets
Operating cash flows before working capital movements
(Increase)/decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Increase on inventory
Cash (used in)/generated from operating activities
Income taxes paid
Net cash (used in)/from operating activities
Cash flows (used in)/from investing activities
Property, plant and equipment expenditures
Exploration and evaluation expenditures
Gain on disposal of office assets
Dividends received
Sea Dragon Energy Inc. net working capital as a result of the business
combination effective October 1, 2015
Net cash used in investing activities
Cash flows used in financing activities
Repayment of debentures
Repayment of bank facility
Net cash used in financing activities
Change in cash and cash equivalents
Effect of foreign exchange on cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
The notes are an integral part of these consolidated financial statements.
YEAR ENDED DECEMBER 31
NOTE
2015
2014
11,11 0
12,684
1 0
11
1 0
22
4
12
1 0
4
12
1 0
1 0
11
12
15
13
2,057
73
6,842
378
(9)
761
(18,289)
(1,024)
3
1,902
(3,372)
2,377
(1,1 88)
(281)
(4,933)
(5,214)
(1,392)
(3,728)
8
9 17
3,9 11
(284)
(2,052)
(1,650)
(3,702)
1,602
2,767
–
–
33
1,064
–
(1,130)
–
17,020
13,005
(64)
–
29,960
(4,430)
25,531
(1,964)
(11,670)
–
1,11 0
–
(12,524)
–
–
–
(9,200)
13,007
(565)
17,935
8,170
(615)
5,543
17,935
64
SDX ENERGY INC. 2015 ANNUAL REPORT
(tabular amounts are in thousands of United States dollars except where stated)
Note 1
Reporting entity
SDX Energy Inc. (“SDX” or “the Company”), formerly known as Sea Dragon Energy Inc., is a company domiciled in Canada.
The address of the Company’s registered office is 1900, 520 – 3rd Avenue SW, Centennial Place, East Tower, Calgary, Alberta
T2P 0R3. The consolidated financial statements of the Company as at and for the years ended December 31, 2015 and 2014
comprise the Company and its wholly owned subsidiaries and associates. As described in Note 4 to the Consolidated
Financial Statements, on August 18, 2015 Sea Dragon Energy Inc. and Madison PetroGas Limited entered into a Business
Combination Arrangement Agreement, and, on October 1, 2015 the transaction completed creating the new SDX Energy Inc.
combined entity. Full details of the Business Combination is set out in Note 4. The Company is engaged in the exploration
for and development and production of oil and natural gas and conducts many of its activities jointly with others. These
consolidated financial statements reflect only the Company’s proportionate interest in such activities. The Company’s
principle properties are located in the Arab Republic of Egypt and the Republic of Cameroon.
The Company is listed on the Toronto Venture Stock Exchange (TSX-V) and trades under the symbol SDX.
Note 2
Basis of preparation
(a)
Statement of compliance
The audited consolidated financial statements of the Company have been prepared in accordance with International
Financial Reporting Standards and interpretations (collectively referred to as “IFRS”) as issued by the International
Accounting Standards Board (“IASB”).
The accounting policies that follow set out those policies that apply in preparing the audited consolidated financial
statements for the year ended December 31, 2015. The policies applied are based on IFRS issued and outstanding as
of April 29, 2016.
(b)
Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis.
(c)
Functional and presentation currency
These audited consolidated financial statements are expressed in United States dollars ($ or US$), which is the
Company’s functional currency.
(d)
Use of estimates and judgments
The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates
and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities,
income and expenses. Actual results may differ from these estimates and affect the results reported in these con-
solidated financial statements. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.
In accounting for property, plant and equipment, amounts recorded for depletion and amounts used for impairment
test calculations are based on estimates of oil and gas reserves and cash flows, including development costs,
production volumes and oil and gas prices. The provision for decommissioning costs and related accretion expense,
derivative fair value calculations, fair value of share-based payments expense, deferred tax provisions, as well as fair
values assigned to any identifiable assets and liabilities in business combinations are also based on estimates. By
their nature, the estimates are subject to measurement uncertainty and the impact on the consolidated financial
statements of future periods could be material.
65
(e)
Going concern
The Directors have reviewed the Company’s forecast cash flows for the next twelve months from the date of
publication of this Annual Report and through until December 31, 2017. The capital expenditure and operating
costs used in these forecast cash flows are based on the Company’s Board approved 2016 corporate budget which
reflects approved operating budgets for each of its Joint Ventures and an estimate of 2016 SDX corporate general
and administrative expenses. The Company’s forecast cash flows also reflect its best estimate of operational and
corporate expenditure, including corporate general and administrative costs for the year to December 31, 2017. The
Directors have made enquiries into and considered the Egyptian business environment, future expectations regarding
commodity price risk and, in particular, oil price risk given the substantial fall in quoted Brent and Crude oil WTI
prices. On the basis of the budgeted cash flows, additional funds are required to complete the Company’s committed
and planned capital expenditure and the directors are exploring a number of options to access additional sources of
funding. The directors are extremely confident of making an announcement to update shareholders on this issue in
the very near term.
Having considered these sensitivities and potential outcomes relating to:
(i)
(ii)
country and commodity price risks;
the Company’s ability to change the timing and scale of discretionary capital expenditure;
(iii)
the Company’s ability to manage operating costs;
(iv)
the Company’s ability to manage general and administrative costs; and
(v)
the Company’s ability to access additional sources of working capital resources.
The Directors consider that, whilst a material uncertainty exists that may cast significant doubt over the Company’s
committed and planned capital expenditure, they are extremely confident that this will be resolved in a very short
period and that the going concern basis of accounting is appropriate, albeit no assurance can be provided. The
financial statements do not reflect the adjustments that would be required if this basis was not appropriate.
Given the above, these Consolidated Financial Statements continue to be prepared under the going concern basis of
accounting.
66
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 Note 3
Significant accounting policies
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial
statements, and have been applied consistently by the Company and its subsidiaries.
(a)
Basis of consolidation
(i)
Subsidiaries
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to
govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that currently are exercisable are taken into account. The financial statements
of subsidiaries are included in the consolidated financial statements from the date that control commences
until the date that control ceases.
(ii)
Jointly controlled assets
The Company is engaged in oil and gas exploration, development and production through unincorporated
joint arrangements (“Joint Operations”). Where joint control exists the Company accounts for its share of
the results and net assets of these Joint Operations as jointly controlled assets. The consolidated financial
statements include the Company’s share of these jointly controlled assets and a proportionate share of the
relevant revenue and related costs.
(iii)
Investments in associates
An associate is an entity over which the Company has significant influence. The Company’s subsidiary Madison
Egypt Oil and Gas Ltd owns a 50% equity interest in Brentford Oil Tools (“Brentford”); an Egyptian incorpo-
rated private company. The Company accounts for its investment in Brentford using the equity method of
accounting. Under the equity method of accounting, the investment in Brentford, is initially recognized at cost
and adjusted thereafter for the post-acquisition change in the net assets. The Company’s Statement of Com-
prehensive Income includes its share of Brentford’s profit or loss. The Company’s other comprehensive income
includes its share of Brentford’s other comprehensive income. Dividends received or receivable from Brentford
are recognized as a reduction in the carrying amount of the investment.
(iv)
Transactions eliminated on consolidation
Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany
transactions are eliminated in preparing the consolidated financial statements.
(b)
Foreign currency
Transactions in foreign currencies are translated to United States dollars at exchange rates at the dates of the transac-
tions. Monetary assets and liabilities denominated in foreign currencies are translated to United States dollars at the
period end exchange rate.
67
(c)
Financial instruments
(i)
Non-derivative financial instruments
Non-derivative financial instruments comprise of trade and other receivables, cash and cash equivalents, and
trade and other payables. Non-derivative financial instruments are recognized initially at fair value. Subsequent
to initial recognition non-derivative financial instruments are measured as described below.
Financial assets and liabilities are recognized when the Company becomes party to the contractual provisions
of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets
have expired or have been transferred and the Company has transferred substantially all risks and rewards of
ownership.
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a
legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or
realize the asset and settle the liability simultaneously.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash in hand, deposits with banks, term deposits, and other
short-term highly liquid investments with original maturities of three months or less. Cash and cash equivalents
are designated as loans and receivables.
Financial assets at fair value through the Statement of Comprehensive Income
An instrument is classified at fair value through the Statement of Comprehensive Income if it is held for trading
or is designated as such upon initial recognition. Financial instruments are designated at fair value through the
Statement of Comprehensive Income if the Company manages such investments and makes purchase and sale
decisions based on their fair value in accordance with the Company’s risk management or investment strategy.
Upon initial recognition attributable transaction costs are recognized in the Statement of Comprehensive
Income when incurred. Financial instruments are measured at fair value, and changes therein are recognized in
the Statement of Comprehensive Income.
Financial liabilities
Financial liabilities at amortized cost include trade payables. Trade payables are initially recognized at the
amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently,
trade payables are measured at amortized cost using the effective interest method.
Financial assets
Trade and other receivables, which are non-derivative financial assets that have fixed or determinable
payments that are not quoted in an active market, are classified as loans and receivables. They are included
in current assets, except for maturities greater than 12 months after the reporting date, which are classified as
non-current assets.
(ii)
Equity instruments
Equity instruments are classified as equity. Incremental costs directly attributable to the issue of common
shares and share options are recognized as a deduction from equity, net of any tax effects, if any.
(d)
Inventory
Inventories consist of tangible drilling materials, and other consumables. Inventories are stated at the lower of cost
and net realizable value. Cost is determined using the weighted average method. Net realizable value is the estimated
selling price less applicable selling expenses.
68
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (e)
Property, plant and equipment and intangible exploration and evaluation expenses
(i)
Recognition and measurement
Development and production costs
Property, plant and equipment is stated at cost, less accumulated depletion and depreciation and accumulated
impairment losses.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable
to bringing the asset into operation, the initial estimate of any decommissioning obligation, if any, and, for
qualifying assets, borrowing costs. The purchase price or the construction cost is the aggregate amount paid
and the fair value of any other consideration given to acquire the asset.
Expenditures on major maintenance, inspections or overhauls are capitalized when the item enhances the
life or performance of an asset above its original standard. Such capitalized oil and natural gas interests
generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing
production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount
of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property, plant
and equipment are recognized in the Statement of Comprehensive Income as incurred. Where an asset or
part of an asset that was separately depreciated is replaced and it is probable that future economic benefits
associated with the item will flow to the Company, the expenditure is capitalized and the carrying amount
of the replaced asset is derecognized. Inspection costs associated with major maintenance programs are
capitalized and amortized over the period to the next inspection. All other maintenance expenditures are
expensed as incurred.
Intangible exploration and evaluation expenditures
Pre-licence costs are recognized in the Consolidated Statement of Comprehensive Income in the period that
they are incurred.
Exploration and evaluation expenditures, including the costs of acquiring licences and directly attributable
general and administrative costs, geological and geophysical costs, acquisition of mineral and surface rights,
technical studies, other direct costs of exploration (drilling, trenching, sampling and evaluating the technical
feasibility and commercial viability of extraction) and appraisal are accumulated and capitalized as intangible
exploration and evaluation (“E&E”) assets.
On a quarterly basis, a review of any areas classified and accounted for as E&E is performed to determine
whether enough information exists to make a determination of the technical feasibility and commercial
viability of the area. Where appropriate, review may indicate that an area should be further sub-divided due
to a significant portion having been explored whilst a significant undeveloped portion with different traits (i.e.
different zone, technical approach, play type, etc.) remains that requires additional E&E activities to arrive at
the point where it can be assessed for technical feasibility and commercial viability.
The assessment of technical feasibility and commercial viability is performed on an area level basis unless
further sub-division is merited. Depending on the extent and complexity of the prospective play, many wells
may need to be drilled and potentially significant E&E costs accumulated prior to obtaining enough information
to make the determination of technical feasibility and commercial viability possible.
E&E costs are not amortized prior to the conclusion of appraisal activities. At the completion of appraisal
activities, if technical feasibility is demonstrated and commercial reserves are discovered, then, the carrying
value of the relevant E&E asset will be reclassified as a development and production asset (“D&P”) into the
cash generating unit (“CGU”) to which it relates, but only after the carrying value of the relevant E&E asset has
been assessed for impairment, and where appropriate, its carrying value adjusted. Typically, technical feasibility
and commercial viability of extracting a mineral resource is considered to be demonstrable when proven or
probable reserves are determined to exist. However, if the Company determines the area is not technically
feasible and commercially viable, accumulated E&E costs are expensed.
69
(ii)
Depletion and depreciation
The net carrying value of development and production assets is depleted using the unit of production
method by reference to the ratio of production in the year to the related proven and probable reserves,
taking into account estimated future development costs necessary to bring those reserves into production.
Future development costs are estimated taking into account the level of development required to produce the
reserves. These estimates are reviewed by independent reserve engineers at least annually.
For other assets (see below), prior to the business combination, effective October 1, 2015 Madison Petrogas
Ltd’s depreciation policy was to depreciate on a declining balance basis at rates of 20% to 50%, approximating
their estimated useful lives.
However SDX Energy Inc., formerly Sea Dragon Energy Inc., recognized depreciation in the Statement of Com-
prehensive Income on a straight-line basis over the estimated useful lives of each part of an item of property,
plant and equipment. SDX Energy Inc. continues to adopt the straight-line basis for other assets.
As a result of the required accounting for the business combination, however, depreciation on other assets
for the year ended December 31, 2015, see note 10, is a combination of both methods. For the nine months to
September 30, 2015 a declining balance basis has been used and for the three months from October 1, 2015 to
December 31, 2015, the straight-line method has been adopted for the combined entity.
The estimated useful lives for other assets for the current year is as follows:
Office equipment
Fixtures and fittings
1 – 5 years
1 – 5 years
Depreciation methods, useful lives and residual values are reviewed at each reporting date.
(f)
Impairment
(i)
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that
it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more
events have had a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference
between its carrying amount and the present value of the estimated future cash flows discounted at the
original effective interest rate.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial
assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the Statement of Comprehensive Income.
An impairment loss is reversed when there is a significant change in the underlying estimates or other objective
evidence. For financial assets measured at amortized cost the reversal is recognized in the Statement of Com-
prehensive Income.
70
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (ii)
Non-financial assets
Exploration and evaluation costs are tested for impairment when reclassified to D&P assets or whenever facts
and circumstances indicate potential impairment. Exploration and evaluation assets are tested separately for
impairment. An impairment loss is recognized for the amount by which the exploration and evaluation ex-
penditure’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the
exploration and evaluation expenditure’s fair value less cost of disposal and their value in use.
Values of oil and gas properties and other property, plant and equipment are reviewed for impairment when
indicators of such impairment exist. If any indication of impairment exists an estimate of the asset’s recoverable
amount is calculated. Assets are grouped for impairment assessment purposes at the lowest level at which
there are identifiable cash flows that are largely independent of the cash flows of other groups of assets (the
cash generating unit “CGU”). The recoverable amount of an asset or CGU is the greater of its fair value less cost
of disposal and its value in use. Where the carrying amount of an asset group exceeds its recoverable amount,
the asset group is considered impaired and is written down to its recoverable amount. An impairment loss is
charged to the income statement. In assessing value in use, the estimated future cash flows are adjusted for
the risks specific to the asset group and are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication
that previously recognized impairment losses may no longer exist or may have decreased, if such indication
exists, the Company makes an estimate of the recoverable amount. A previously recognized impairment loss
is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognized. If that is the case the carrying amount of the asset is increased
to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.
(g)
Share based payments
The grant date fair value of options granted to employees is recognized as stock based compensation expense, with a
corresponding increase in contributed surplus over the vesting period. Each tranche granted is considered a separate
grant with its own vesting period and grant date fair value. A forfeiture rate is estimated on the grant date and is
adjusted to reflect the actual number of options that vest.
(h)
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the senior operating
decision-makers. The senior operating decision-makers have been identified as the Executive directors that, as a
group, make strategic decisions regarding the Company.
(i)
Provisions
A provision is recognized, if, as a result of a past event, the Company has a present legal or constructive obligation
that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the liability. Provisions are not
recognized for future operating losses.
(j)
Decommissioning obligations
Although the Company has no Decommissioning obligations as at December 31, 2015, the explanation following
sets out the Company’s accounting policy relating to the obligation that was in place as at December 31, 2014. The
Company’s activities can give rise to dismantling, decommissioning and site disturbance remediation activities.
Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category.
Decommissioning obligations are measured at the present value of management’s best estimate of expenditure
required to settle the present obligation at the balance sheet date. Subsequent to the initial measurement, the
obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as finance
costs whereas increases/decreases due to changes in the estimated future cash flows are capitalized. Actual costs
incurred upon settlement of the asset retirement obligations are charged against the provision to the extent the
provision is established.
71
(k) Revenue
Revenue from the sale of oil, condensates, natural gas and natural gas liquids (“NGL”) is recorded when the significant
risks and rewards of ownership of the product is transferred to the buyer which is usually when legal title passes to
the external party. This is generally at the time product enters the pipeline or is delivered to the refinery. Revenue is
measured net of discounts, customs duties and royalties.
Revenue from the services provided in the production of oil and natural gas is recognized when title passes from the
Company to the customer. Production service fee revenue represents the Company’s share of oil and gas production
that remains after all obligations under its contracts have been recorded, inclusive of any royalty obligations to
government and other mineral interest owners.
Tariffs and tolls charged to other entities for the use of pipelines and facilities owned by the Company are recognized
as revenue as they accrue in accordance with the terms of the service or tariff and tolling agreements.
(l)
Income tax
Income tax expense comprises current and deferred tax. Income tax expense is recognized in the Statement of
Comprehensive Income except to the extent that it relates to items recognized directly in equity, in which case it is
recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Pursuant to the terms of the Company’s Egyptian concession agreements, the corporate tax liability of the joint
venture partners is paid by the government controlled corporations (“Corporations”) out of the profit oil attributable
to the Corporations, and not by the Company. For accounting purposes the corporate taxes paid by the Corpora-
tions are treated as a benefit earned by the Company; the amount is included in net oil revenues and in income tax
expense, therefore having a net neutral impact on reported net income. Income tax expense is recognized in each
interim period based on the best estimate of the weighted average annual income tax rate expected for the full
financial year.
The Company also has a production service agreement in Egypt relating to Block – H Meseda. The Company’s
subsidiary, Madison Egypt Ltd (“MEL”) an Egyptian registered entity, is the SDX contracting party in this production
service agreement. Corporate tax is payable by MEL based on its taxable income, from this production service
agreement, for the year using tax rates enacted or substantively enacted at the reporting date.
Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.
Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business
combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial
recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting
date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to
income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend
to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against
which the temporary difference can be utilized.
72
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 (m)
Earnings per share
Basic earnings per share is calculated by dividing the profit or loss attributable to common shareholders of the
Company by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average
number of common shares outstanding for the effects of dilutive instruments such as options granted to employees
and warrants.
(n) New standards and interpretations not yet adopted
At the date of authorization of these consolidated financial statements, the International Accounting Standards
Board (“IASB) has issued the following new and revised standards which are not yet effective for the relevant periods:
IFRS 9 – Financial Instruments (“IFRS 9”)
In July 2014, the IASB issued IFRS 9, which replaces IAS 39, Financial Instruments – Recognition and Measurement, and
establishes principles for the financial reporting of financial assets and financial liabilities that will present relevant
and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty
of an entity’s future cash flows. This new standard is effective for the Company’s interim and annual consolidated
financial statements commencing January 1, 2018. The Company is assessing the impact of this new standard on its
consolidated financial statements.
IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15 was issued in May 2014 and will provide a more structured approach to measuring and recognizing revenue.
The new guidance includes a five-step recognition and measurement approach and enhanced qualitative disclosure
requirements. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or
services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.
The standard is effective for annual periods beginning on or after January 1, 2018. Entities will have a choice of full
retrospective application, or prospective application with additional disclosures (simplified transition method). The
Company is assessing the impact of this standard on the consolidated financial statements.
IFRS 16 – Leases (“IFRS 16”)
On January 13, 2016, the IASB published IFRS 16 which replaces the current guidance in IAS 17. IFRS 16 requires lessees to
recognize a lease liability reflecting the future lease payments and a “right-of-use asset” for virtually all lease contracts.
The standard applies to annual periods beginning on or after January 1, 2019 with earlier application permitted if IFRS
15 is applied. The Company is assessing the impact of this standard on the consolidated financial statements.
73
Note 4
Business Combination
On August 18, 2015 Sea Dragon Energy Inc. (“Sea Dragon”) and Madison PetroGas Ltd. (“Madison”) entered into an Arrangement
Agreement whereby:
•
•
•
•
Sea Dragon acquired all of the issued and outstanding Madison shares on the basis of an exchange ratio of 16.7 Sea
Dragon common shares (on a pre-Sea Dragon Share Consolidation basis) for each Madison share or 0.477143 of a
Sea Dragon share for each Madison share on a post-Sea Dragon Consolidation basis. Sea Dragon affected the share
consolidation (the “Sea Dragon Consolidation”) on the basis of one (1) post-share consolidation Sea Dragon share for
thirty-five (35) pre-share consolidation Sea Dragon shares;
Upon closing the transaction, the existing Madison shareholders hold approximately 71% of the combined entity,
which was renamed “SDX Energy Inc.”, with the holders of Sea Dragon shares holding approximately 29% of the
combined entity; and
Notwithstanding that as described above, Sea Dragon acquired all of the issued and outstanding shares of Madison,
the guidance in IFRS 10, Consolidated Financial Statements and IFRS 3, Business Combinations, it has been determined
that Sea Dragon Energy Inc. is actually the accounting acquiree and Madison Petrogas Limited, is the accounting
acquirer. As Madison Petrogas Limited is the accounting acquirer, the consolidated financial statements of SDX
Energy Inc. is a continuation of the Madison Petrogas Limited consolidated financial statements, reflecting the equity
instruments of Sea Dragon Energy Inc.
Immediately prior to the business combination completing, the name of the group was changed to SDX Energy
Inc. The effective date of this name change was September 30, 2015 and the effective date of the transaction was
October 1, 2015.
The effective date of the transaction is October 1, 2015, the date on which the transaction completed.
As discussed above, under IFRS 3 the business combination is deemed to be a reverse takeover whereby Madison acquires
Sea Dragon. This means that a calculation is undertaken to compare the fair value of consideration provided to Sea Dragon
shareholders versus the fair value of the assets that they contributed to the combined entity. As described below, this
transaction resulted in a Gain on Acquisition for SDX Energy Inc. as the fair value of the Sea Dragon assets acquired was
greater than the consideration it provided to the Sea Dragon shareholders by way of issue of SDX Energy Inc. common
shares.
Calculation of Fair Value of shares issued to Sea Dragon Shareholders:
000’s
Post consolidation SDX Energy Inc. outstanding shares
SDX Energy Inc. closing share price as at September 30, 2015 in CAD$
Fair Value of shares issued
USD/CAD exchange rate
Fair Value of Shares issued – US$
1 0,756
0.70
7,529
0.7485
5,636
Transaction costs associated with this transaction have been included in the Statement of Comprehensive Income; see
note 21.
As required by IFRS 3 Business Combinations, management adopted the recognition principle and concluded that the fair
value of Sea Dragon’s net assets acquired was considered to be equal to their book value. Concomitantly to this transaction,
management assessed impairment for its PP&E assets during Q3 2015 and concluded that an insignificant headroom existed at
that time, therefore any impairment was deemed to have already been reflected in the financial statements as at September
30, 2015 and the book value of its PP&E was therefore concluded to be similar to its fair value at that time. Subsequent to
the issuance of Sea Dragon’s Q3 2015 Financial Statements, a significant decrease in oil prices triggered a new impairment
assessment at year end, which resulted in an impairment being recorded as at December 31, 2015 which is described in Note
10 to the Consolidated Financial Statements.
74
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 The deemed fair value of Sea Dragon Energy Inc.’s identifiable assets and liabilities has been determined as their accounting
book value as at the date of the business combination and these are shown below:
000’s
Current Assets (including cash acquired)
Current Liabilities (excluding bank debt)
Bank Debt
Property, plant and equipment
Intangible exploration and evaluation assets
Paid By:
Fair Value of shares issued
Less: Fair Value of Assets acquired
Gain on Acquisition
8,244
(2,683)
(1,650)
16,747
3,267
23,925
5,636
23,925
18,289
In the 9 months to September 30, 2015 Revenues and Total comprehensive loss of Sea Dragon were US$6.2 million and
US$(2.0) million respectively.
Note 5
Determination of fair values
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial
and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based
on the following methods. When applicable, further information about the assumptions made in determining fair values is
disclosed in the notes specific to that asset or liability.
The different levels of financial instrument valuation methods have been defined as follows:
Level 1 Fair value measurements are based on unadjusted quoted market prices.
Level 2 Fair value measurements are based on valuation models and techniques where the significant inputs are derived from
quoted indices.
Level 3 Fair value measurements are based on unobservable information.
The carrying value of cash and cash equivalents, trade and other receivables, trade and other payables, and loans and
borrowings included in the consolidated balance sheet approximate to their fair value due to the short term nature of those
instruments.
(a)
Stock options
The fair value of employee stock options is measured using a Black-Scholes option pricing model. Measurement
inputs include share price on measurement date, exercise price of the instrument, expected volatility based on
weighted average historic volatility adjusted for changes expected due to publicly available information, weighted
average expected life of the instruments based on historical experience and general option holder behavior, expected
dividends, and the risk-free interest rate.
75
Note 6
Financial risk management
(a) Overview
The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development,
production, and financing activities such as:
•
•
•
•
•
credit risk;
liquidity risk;
market risk;
foreign currency risk; and
other price risk.
This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives,
policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantita-
tive disclosures are included throughout these consolidated financial statements.
The Board of Directors oversees managements’ establishment and execution of the Company’s risk management
framework. Management has implemented and monitors compliance with risk management policies. The Company’s
risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate
risk limits and controls, and to monitor risks and adherence to market conditions and the Company’s activities.
(b)
Credit risk
Credit risk is the risk of financial loss to the Company if a customer, partner, or counterparty to a financial instrument
fails to meet its contractual obligations, and arises principally from the Company’s receivables from joint venture
partners, oil and natural gas marketers, and cash held with banks. The maximum exposure to credit risk at the end of
the period is as follows:
$000’s
Cash and cash equivalents
Trade and other receivables
Total
Trade and other receivables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
8,170
6,678
14,848
17,935
3,306
21,241
All of the Company’s operations are conducted in Egypt and Cameroon. The Company’s exposure to credit risk is
influenced mainly by the individual characteristics of each counter party.
The Company does not anticipate any default as it expects continued payment from customers. As such no provision
for doubtful accounts has been recorded as at December 31, 2015 and 2014.
76
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 The maximum exposure to credit risk for loans and receivables at the reporting date by type of customer was:
$000’s
Current
Government of Egypt controlled corporations
Joint venture partners
Other
Total trade and other receivables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
5,01 8
862
798
6,678
3,272
–
34
3,306
Current receivables of US$5.0 million related to oil sales and production service fees which are due from EGPC
(December 31, 2014: US$3.3 million), a Government of Egypt controlled corporation. Receivables in respect of oil sales
and service fees are normally collected in one to two months following production. The Company expects to collect
outstanding receivables of US$0.8 million for NW Gemsa and US$1.2 million for Block – H Meseda, in the normal
course of operations; the remaining US$3.0 million being the pledged Shukheir Marine receivables. The Shukheir
Marine trade receivables of US$3.0 million relate to invoices withheld as a rolling production guarantee for the work
program of the South Disouq concession. Please see Note 8 for further details.
The joint venture partners receivables of US$0.9 million relates to the joint venture partner accounts for Block-H
Meseda (US$0.1 million) and South Disouq (US$0.8 million).
The other receivables of US$0.8 million consist of US$0.2 million for accrued gas and liquids revenue yet to be
invoiced, US$0.3 million related to prepayments, US$0.2 million for GST/ VAT and US$0.1 million for other items.
As at December 31, 2015 and December 31, 2014, the Company’s trade and other receivables is aged as follows:
$000’s
Current
Current (less than 90 days)
Past due (more than 90 days)
Total - current
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
3,364
3,314
6,678
3,272
34
3,306
The balances which are past due are not considered impaired.
Current trade and other receivables past due (more than 90 days old) have increased by US$3.3 million when compared
to December 31, 2014. This increase is due to the US$3.0 million Shukheir Marine pledged receivables and represents
April to October 2014 oil sales invoices, US$0.2 million for accrued gas and liquids revenue and US$0.1 million held by
EGPC for a well commitment in Block H - Meseda.
Subsequent to December 31, 2015 the Company collected US$2.2 million from a government of Egypt controlled
corporation for NW Gemsa and Block-H Meseda receivables, thereby reducing the current (less than 90 days) balance.
Cash and cash equivalents
The Company limits its exposure to credit risk by only investing in liquid securities and only with highly rated counter-
parties. The Company’s cash and cash equivalents are currently held by banks with A or AA credit ratings, therefore
management does not expect any counterparty to fail to meet its obligations.
77
(c)
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The
Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity
to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or
risking damage to the Company’s reputation.
Typically the Company ensures that it has sufficient cash on demand to meet expected operational expenses,
including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that
cannot reasonably be predicted, such as natural disasters and political unrest. To achieve this objective, the Company
prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary.
Further, the Company utilizes authorizations for expenditures on projects to further manage capital expenditure and
has a Board of Director approved signing authority matrix. The Company also attempts to match its payment cycle
with collection of oil and service fee revenue to the extent possible.
As at December 31, 2015, the Company’s financial liabilities are due within one year.
(d) Market risk
Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates
will affect the Company’s income or the value of the financial instruments. The objective of market risk management
is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
The Company may use both financial derivatives and physical delivery sales contracts to manage market risks. All such
transactions are conducted within risk management tolerances that are reviewed by the Board of Directors.
(e)
Foreign currency risk
Currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange
rates. The reporting and functional currency of the Company is the United States dollars (US$). Substantially all of
the Company’s operations are in foreign jurisdictions and as a result, the Company is exposed to foreign currency
exchange rate risk on some of its activities primarily on exchange fluctuations between the EGP and US$, GBP and
US$ and CAD$ and the US$. The majority of capital expenditures are incurred in US$ and EGP and oil and service fee
revenues are received in both US$ and EGP. The Company is able to utilize EGP to fund its Egyptian office general and
administrative expenses and to part-pay cash calls for both capital and operating expenditure, therefore reducing the
Company’s exposure to foreign exchange risk during the period.
The table below shows the Company’s exposure to foreign currencies for its financial instruments:
As at December 31, 2015
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Current income taxes
Balance sheet exposure
(1) denotes Financial Statements
TOTAL PER FS (1)
US$
EGP
EUR
CAD
GBP
US$ EQUIVALENT
8,170
6,678
(3,556)
(928)
7,124
6,128
(2,822)
–
1 0,364
1 0,430
785
61
(4)
(928)
(86)
54
23
(52)
–
25
48
75
(398)
–
(275)
159
391
(280)
–
270
78
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
The average exchange rates during the year ended December 31, 2015 and 2014 were 1 US$ equals:
AVERAGE: January 1, 201 5 to December 31, 201 5
AVERAGE: January 1, 2014 to December 31, 2014
USD / CAD
USD / GBP
USD / EUR
USD / EGP
USD / CAD
USD / GBP
USD / EUR
USD / EGP
Period Average
1.2783
0.6542
0.9012
7.6849
Period Average
1.1 041
0.6072
0.7536
7.0545
The period end exchange rates as at December 31, 2015 and 2014 were 1 US$ equals:
PERIOD END: December 31, 2015
PERIOD END: December 31, 2014
USD / CAD
USD / GBP
USD / EUR
USD / EGP
USD / CAD
USD / GBP
USD / EUR
USD / EGP
December 31,
2015
1.3869
0.6755
0.9168
7.8041
December 31,
2014
1.1627
0.6437
0.8226
7.1296
(f) Other price risk
Other price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity
prices. Commodity prices for oil and natural gas are impacted by not only the relationship between the United States
dollar and other currencies but also macro-economic events that impact the perceived levels of supply and demand.
The Company may hedge some oil and natural gas sales through the use of various financial derivative forward sales
contracts and physical sales contracts. The Company’s production is sold on the daily average price. The Company,
however, may give consideration in certain circumstances to the appropriateness of entering into long term, fixed
price marketing contracts.
At December 31, 2015 the Company did not have any outstanding derivatives in place.
(g)
Capital management
The Company defines and computes its capital as follows:
$000’s
Equity
Working capital (1)
Total capital
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
55,246
(11,552)
43,694
39,449
(12,206)
27,243
(1) Working capital is defined as current assets less current liabilities.
The Company’s objective when managing its capital is to ensure it has sufficient funds to maintain its ongoing
operations, to pursue the acquisition of interests in producing or near to production oil and gas properties and to
maintain a flexible capital structure which optimizes the cost of capital at an acceptable risk. The Company manages
its capital structure and makes adjustments to it based on the funds available to the Company, in order to support the
exploration and development of its interests in its existing oil and gas properties and to pursue other opportunities.
79
Note 7
Cash and cash equivalents
Bank Balances
Cash and cash equivalents
Cash at bank earns interest at floating rates based on the daily bank deposit rates.
Note 8
Trade and other receivables
Trade receivables
Other receivables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
8,170
8,170
17,935
17,935
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
5,018
1,660
6,678
3,272
34
3,306
Current trade and other receivables are unsecured and non-interest bearing. The normal collection pattern for trade
receivables is 30 to 60 days.
Trade receivables comprise the US$0.8 million of crude oil sales invoices for the NW Gemsa concession, US$1.2 million of
service fee invoices for Block-H Meseda and US$3.0 million of pledged Shukheir Marine oil invoices.
The pledged Shukheir Marine receivables of US$3.0 million will be collected once the Company satisfies its obligations
under the South Disouq work program. The mechanism for the operation of the guarantee is prescribed in the South Disouq
concession agreement. The guarantee will reduce on a quarterly basis once the Company starts to incur capital expenditure
under the South Disouq work program.
The other receivables of US$1.7 million include: US$0.9 million of joint venture partner current accounts for Block-H
Meseda and South Disouq, US$0.2 million for accrued gas and liquids revenue yet to be invoiced, US$0.3 million related to
prepayments, US$0.2 million for GST/VAT and US$0.1 million for other.
The joint venture partner current accounts present the net of monthly cash calls paid less billings received.
Subsequent to December 31, 2015 the Company collected US$2.2 million from a government of Egypt controlled corporation
for NW Gemsa and Block-H Meseda trade receivables.
Note 9
Inventory
A full review of the Company’s materials inventory was undertaken during 2015 in light of continuing difficult market
conditions for the oil and gas sector. The Company considers that the current value for the materials inventory represents
the net realizable value and no adjustment has therefore been made. The value remains at US$1.2 million. The Balance Sheet
for 2014 relates only to Madison which did not carry any inventory as at December 31, 2014.
80
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 Note 10
Property, plant and equipment
Cost:
Balance at December 31, 201 3
Additions
Transfer from exploration and evaluation assets (note 11)
Foreign currency revaluation
Decommissioning provision
Disposals
Balance at December 31, 2014
Additions
Acquisitions (see Note 4)
Foreign currency revaluation
Decommissioning provision
Disposals
Assets scrapped
Balance at December 31, 201 5
Accumulated depletion and depreciation:
Balance at December 31, 201 3
Depletion and depreciation for the year
Balance at December 31, 2014
Depletion and depreciation for the year
Foreign currency revaluation
Impairment for the year
Assets scrapped
Balance at December 31, 201 5
NBV Property, plant and equipment
as at December 31, 2014
NBV Property, plant and equipment
as at December 31, 201 5
OIL INTERESTS
FURNITURE
AND FIXTURES
9,875
1,928
963
(4)
62
12,824
1,375
16,679
–
(208)
–
(7)
30,663
(1,893)
(1,585)
(3,478)
(2,014)
–
(6,842)
–
(12,334)
9,346
1 8,329
1 39
36
–
(1)
–
174
17
68
(32)
–
(8)
(99)
120
(112)
(16)
(128)
(43)
28
–
95
(48)
46
72
TOTAL
1 0,0 14
1,964
963
(5)
62
12,998
1,392
16,747
(32)
(208)
(8)
(1 06)
30,783
(2,005)
(1,601)
(3,606)
(2,057)
28
(6,842)
95
(12,382)
9,392
1 8,401
During the year ended December 31, 2015 the Company had PP&E additions of US$1.4 million; which consisted of US$1.3
million relating to Block-H Meseda and US$0.1 million for the NW Gemsa concession.
The Block-H Meseda additions were for the drilling of one step-out well and a water injector at a cost of US$1.2 million and
pipe inventory of US$0.1 million.
The NW Gemsa additions were for the drilling of Al Amir SE23, US$0.2 million, a well workover programme of US$0.1 million
and reversing over-accruals related to the 2014 drilling and work over programme of US$(0.2) million.
The Company has also recorded, on the face of the table above, the assets acquired from SDX Energy Inc., formerly Sea
Dragon Energy Inc., as a result of the business combination effective October 1, 2015. The gross cost of the assets acquired
was US$31.3 million and the accumulated depletion and depreciation (“DD&A”) US$14.6 million; shown above as a net cost
of US$16.7 million.
81
The Company sold and scrapped office assets with a gross cost of US$0.1 million incurring a small residual loss, which is
disclosed on the face of the Statement of Comprehensive Income.
At December 31, 2015 for the purposes of the depletion calculation, US$3.4 million (December 31, 2014 – US$2.4 million) of
future development costs are included in the calculation of cost in determining the depletion rate.
At the reporting date an impairment test was triggered due to falling crude oil prices and a reduction in the proved and
probable reserves for the NW Gemsa concession. The impairment test was carried out for the NW Gemsa and Block-H
Meseda fields. The impairment test was carried out in accordance with the accounting policy note stated in Note 3. The
recoverable amounts of the fields have been determined based on value-in-use calculations. These calculations require
the use of estimates and these estimates were obtained from independent 3rd party sources; namely DeGolyer and
MacNaughton Canada who produced the Company’s NI 51-101 Reserves Report as of December 31, 2015. The present values
of future cash flows was computed by applying forecast prices for oil and gas reserves to estimated future production of
proved and probable reserves. The present value of estimated future net revenues is computed using a discount factor of
15%. The discount rate used reflects the specific risks relating to the underlying cash generating units (“CGUs”).
Based on this calculation no impairment is required for Block-H Meseda and for NW Gemsa an impairment of US$6.8 million
has been recorded.
The value in use calculation assumes Brent oil sales prices in US$/bbl as follows:
2016
2017
2018
2019
2020
2021
2022
US$42.48
US$60.1 0
US$63.34
US$69.86
US$75.58
US$80.41
US$87.65
If the discount factor applied to the impairment test were to increase by 5% above the current factor of 15%, the impairment
of the NW Gemsa fields would be US$7.5 million.
If the discount factor applied to the impairment test were to decrease by 5% below the current factor of 15%, the
impairment of the NW Gemsa fields would be US$6.1 million.
If the oil price assumptions used in the impairment test were to decrease by 5% the impairment of the NW Gemsa fields
would be US$8.3 million.
82
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 Note 11
Intangible exploration and evaluation assets
Balance at December 31, 201 3
Additions
Transfers to property, plant and equipment (note 1 0)
Transfers to exploration expense
Balance at December 31, 2014
Additions
Acquisitions (see Note 4)
Unsuccessful well effort
Balance at December 31, 201 5
8,520
11,670
(963)
(2,767)
1 6,460
3,728
3,267
18
23,473
Intangible exploration and evaluation (“E&E”) additions of US$3.7 million for 2015 consist of US$2.3 million in relation to the
West Bakassi block in Cameroon (“West Bakassi”) and US$1.4 million in relation to the South Disouq concession.
The additions for West Bakassi consisted of 2D seismic acquisition and processing, well planning for the exploration well,
which was drilled in March, 2016, and geological and geophysical costs.
The additions for South Disouq consisted of geological and geophysical work, crew and equipment mobilization and the
purchase of dynamite in preparation for the 3D seismic program which commenced in Q1, 2016.
The Company has also recorded, on the face of the table above, the assets acquired from SDX Energy Inc., formerly Sea
Dragon Energy Inc., as a result of the business combination effective October 1, 2015. The cost of the assets acquired was
US$3.3 million and related to the costs associated with the award, in the 2012 bid round, and the costs incurred in the 3D
seismic program for the South Disouq concession as at September 30, 2015.
During the year ended December 31, 2015 the Company incurred US$0.1 million (2014 – US$2.8 million) in pre-license costs
which were expensed and recorded as exploration and evaluation expenses on the face of the Statement of Comprehensive
Income. The pre-licence costs consist of US$0.1 million in business development costs.
83
Note 12
Investments
The Company owns a 50% equity interest in Brentford Oil Tools LLC (“Brentford”), an oilfield equipment rental business
incorporated in Egypt. The Company is accounting for this investment using the equity method in accordance with IAS28
– “Investments in Associates”. The investment is reviewed regularly for indicators of impairment and no impairment was
identified for the years ended December 31, 2015 and 2014.
The following table summarizes the changes in investments for the year ended December 31, 2015 and 2014:
Investments, beginning of year
Dividends received
Share of operating income
Investments, end of year
DECEMBER 31, 2015
DECEMBER 31, 2014
1,999
(9 17)
1,024
2,1 06
1,978
(1,1 09)
1,130
1,999
The following table summarizes the Company’s 50% interest in the assets, liabilities, revenue and operating income of
Brentford as at and for the years ended December 31, 2015 and 2014:
SDX Energy share (50%) of Brentford:
DECEMBER 31, 2015
DECEMBER 31, 2014
Total assets
Total liabilities
Revenue
Net Income
2,469
316
1,816
1,024
2,704
484
2,006
1,130
During the year ended December 31, 2015 50% (December 31, 2014 – 50%) of Brentford’s revenue was earned from fees
charged to the Company.
Note 13
Loans and borrowings
On September 23, 2011 SDX Dragon Energy Inc., formerly Sea Dragon Energy Inc., entered into a credit agreement with HSBC
and BNP Paribas for a 5-year senior secured credit facility (the “Facility”) in the amount of US$50 million. The Facility was
secured by a first charge on the shares, project accounts and interests of certain of the Sea Dragon group of Companies.
As at October 7, 2015 SDX Energy Inc. repaid the US$1.65 million that was outstanding on the Facility such that as at December
31, 2015 the Facility had been repaid in full. All charges and liens held against the Company’s assets were released upon
execution of the Deed of Release dated December 10, 2015.
As at September 30, 2015, prior to the business combination Sea Dragon Energy Inc. had US$0.4 million of deferred financing
costs. The deferred financing costs represented the unamortized costs of establishing the Facility which had been amortizing
straight line over the five year term of the loan facility. This amount was released to the Statement of Comprehensive
Income in October 2015 as a result of the full repayment and termination of the Facility, see note 22.
84
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Note 14
Trade and other payables
$000’s
Current
Trade Payables
Accruals
Other payables
CARRYING AMOUNT
DECEMBER 31, 2015
DECEMBER 31, 2014
198
1,284
2,074
3,556
–
182
1,504
1,686
Trade payables are non-interest bearing and are normally settled on 30 day terms or, where this differs, in accordance with
supplier payment terms or agreed payment plans.
Trade payables of US$0.2 million are due to suppliers of the Company’s corporate office.
Accruals comprise South Disouq training fees and general and administrative costs related to restructuring, audit, tax, legal,
corporate services and reserve reporting fees.
Other payables comprise an estimated liability of US$1.1 million related to the relinquishment of the Shukheir Marine
concession, partner current accounts of US$0.7 million for the NW Gemsa and Cameroon concessions and UK payroll taxes
and deferred payroll of US$0.3 million. The joint venture partner current accounts present the net of monthly cash calls
paid less billings received.
Note 15
Debentures
On July 27, 2012 the Company completed a private placement for secured debentures in the amount of CDN$2,560,000.
The debentures pay interest at a rate of 10% per annum, payable semi-annually, and are repayable after two years. The
debentures are redeemable after one year at face value plus accrued interest, at the company’s option. During 2014, the
Company extended the repayment of the debentures until July 31, 2015. The debentures were repaid in full on May 4, 2015.
The debentures also included the issue of warrants to acquire common shares, on the basis of 500 warrants for each $1,000
of debentures. 1,280,000 warrants were issued at an exercise price of CDN $0.80 per share, exercisable at any time and
expiring after two years. During 2014, the Company extended the expiry date of the warrants until July 27, 2016.
On October 1, 2015, as a result of the business combination, a common share purchase warrants second supplemental
indenture agreement was entered into which amended the number of warrants to 610,743 with an exercise price of CDN$1.68.
The Company valued the debentures assuming the discount on the interest rate, as a result of including warrants, was ap-
proximately 2%. This resulted in a fair value of the debentures being CDN $2,460,000, with the remaining fair value of CDN
$100,000 (US$ 99,400) being assigned to the warrants.
Accretion of the debentures for the year ended December 31, 2015 of $nil (2014 - $28,670) was recorded as interest expense,
resulting in an effective interest rate on the debentures of 10% (2014 – 10.98%).
85
Note 16 Decommissioning provision
The Company has recognized a decommissioning provision in relation to its obligations under the Production Service
Agreement (“PSA”) in managing the oil and natural gas assets including well sites and gathering systems for Block-H Meseda.
The total decommissioning provision was estimated based on the Company’s contractual interest in all wells and facilities,
estimated costs to plug all wells drilled and remove all facilities, equipment and other assets from the field, and the estimated
timing of the costs to be incurred in future years.
Upon conclusion of the business combination between SDX Energy Inc., formerly Sea Dragon Energy Inc., and Madison
Petrogas Ltd., effective October 1, 2015 a full review of the PSA was undertaken. Upon completion of this review the
Company has concurred that there is no obligation under the PSA and the decommissioning provision has therefore been
released. At the termination of the PSA the Company is obliged to return all assets, including well sites, gathering systems,
facilities and other assets to the Egyptian state owned oil company for the continued commercial production of the block.
As at September 30, 2015 the total future undiscounted cash flows was US$0.3 million (December 31, 2014 – US$0.3 million),
to be incurred between the years 2017 and 2035 and the liability was discounted using a risk-free rate of 2.20% (December
31, 2014 – 2.47%).
The following table summarizes the changes in the decommissioning provision for the twelve months ended December 31,
2015.
$000’s
Decommissioning provisions, beginning of year
Changes in estimates and discount rates
Liabilities incurred
Accretion
Release of decommissioning provision
Decommissioning provisions, end of year
TWELVE MONTHS ENDED DECEMBER 31
2015
217
(4)
36
(9)
(240)
–
2014
151
17
45
4
–
217
86
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 Note 17
Income Tax - Current and Deferred
Pursuant to the terms of the Company’s concession agreements, the corporate tax liability of the joint venture partners is
paid by the government controlled corporations (“Corporations”) out of the profit oil attributable to the Corporations, and
not by the Company. For accounting purposes the corporate taxes paid by the Corporations are treated as a benefit earned
by the Company; the amount is included in net oil revenues and deducted as an income tax expense.
The Company has a PSA related to Block-H Meseda with legal title belonging to Madison Egypt Ltd, an Egyptian incorporated
entity. The Company is governed by the laws and tax regulations of the Arab Republic of Egypt and pays corporate taxes on
the adjusted profit of the entity.
(a)
Income tax expense differs from that which would be expected from applying the effective Canadian federal and
provincial income tax rates of 26% (2014 – 25%) to income before income taxes as follows:
Statement of Comprehensive Income
$000’s
Income before income taxes
Canadian statutory income tax rate
Expected income taxes
Adjustments:
Non deductible items
Non taxable gain on acquisition
Unrecognized income tax benefit
Foreign tax differential
Expenses incurred with no recognized tax benefit
Total income tax expense - current and deferred
TWELVE MONTHS ENDED DECEMBER 31
2015
11,11 0
26%
2,889
193
(4,750)
344
(50)
2,437
1,063
2014
12,684
25%
3,171
423
–
(77)
811
–
4,328
(b)
The components of the deferred income tax assets and liabilities at December 31, 2015 and 2014 include the following:
Consolidated Balance Sheet
$000’s
Deferred tax assets (liabilities):
Investments
Property and equipment
Decommissioning liability
Share issue costs
Debentures
Non-capital losses
Deferred tax assets not recognized
Deferred income tax liability
TWELVE MONTHS ENDED DECEMBER 31
2015
2014
(7)
(286)
–
–
–
1 5,258
(1 5,251)
(286)
(7)
(397)
54
23
(60)
1,688
(1,692)
(391)
(c)
(d)
The Company has US$56.8 million of non-capital losses available at December 31, 2015 (December 31, 2014 – US$7.0
million) to shelter future taxable income, the majority of which were incurred in Canada and expire between 2026 and
2035.
The Company has not recognized its deferred tax assets of US$15.3 million at December 31, 2015 (December 31, 2014
– US$1.8 million) primarily relating to its Canadian business as it has determined that its deferred tax assets are not
probable to be realized from current operations.
87
Note 18
Share capital
(a)
The Company is authorized to issue unlimited common shares with no-par value and unlimited preferred shares with
no-par value.
(b)
Common Shares issued
DECEMBER 31, 2015
DECEMBER 31, 2014
NUMBER OF SHARES
(000’S)
STATED VALUE
($000’S)
NUMBER OF SHARES
(000’S)
STATED VALUE
($000’S)
24,512
–
5,636
30,148
56,348
(29,462)
10,756
37,642
51,633
56,348
24,512
–
–
–
–
56,348
24,512
56,348
DECEMBER 31, 2015
DECEMBER 31, 2014
NUMBER OF SHARES
(000’S)
STATED VALUE
($000’S)
NUMBER OF SHARES
(000’S)
STATED VALUE
($000’S)
1,280
(669)
611
99
–
99
1,280
–
1,280
99
–
99
Balance, beginning of year
Business combination
Share for share exchange
Balance, end of year
Weighted average shares
outstanding
(c)
Common Share Warrants issued
Balance, beginning of year
(see note 15)
Business combination
Balance, end of year
Note 19
Stock-Based compensation
The Company has an option program that entitles officers, directors, employees and certain consultants to purchase shares
in the Company.
Stock-based compensation expense is the amortization over the vesting period of the fair value of stock options granted
to employees, directors and key consultants of the Company. The fair value of all options granted is estimated using
the Black-Scholes option pricing model. Each tranche in an award is considered a separate award with its own vesting
period and grant date fair value. Compensation cost is expensed over the vesting period with a corresponding increase in
contributed surplus. When stock options are exercised, the cash proceeds along with the amount previously recorded as
contributed surplus are recorded as share capital.
Effective October 1, 2015, and prior to the closing of the business combination between SDX Energy Inc., formerly Sea
Dragon Energy Inc., and Madison, both the Company and Madison cancelled all outstanding stock options. Written
agreement was obtained from all directors, officers and employees.
The Company cancelled 28,900,000 stock options with a weighted average exercise price of CDN$0.09 and the directors,
officers and employees of the Company each received a nominal payment of CDN$1.00 for their cancelled options.
Madison cancelled 5,630,000 stock options with a weighted average exercise price of CDN$0.91. The directors, officers
and employees of Madison received cash compensation for cancelled options, based on the Black Scholes model, of
CDN$300,083.
Post business combination the enlarged Company introduced a new option program. Pursuant to a Board Resolution
effective November 30, 2016 the Company granted Options to acquire 2,650,000 common shares at an exercise price of
CDN$0.63 per common share. The Options have a three year vesting period and expire five years from the anniversary
date.
88
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
For the year ended December 31, 2015 the Company recorded stock based compensation of US$0.8 million (2014 – US$1.1
million) in relation to the previously granted 5,630,000 Madison options and the new SDX options.
The number and weighted average exercise prices of share options for the Company’s option program is as follows:
Outstanding January 1, 201 5
Cancelled during the year
Issued during the year
Outstanding December 31, 201 5
Exercisable December 31, 201 5
NUMBER OF OPTIONS
(000’S)
WEIGHTED AVERAGE
EXERCISE PRICE (CDN$)
4,950
(4,950)
2,650
2,650
883
0.92
0.92
0.63
0.63
0.63
The exercise price of the outstanding options is as follows:
OUTSTANDING OPTIONS
VESTED OPTIONS
EXERCISE PRICE RANGE
NUMBER OF OPTIONS
REMAINING
CONTRACTUAL LIFE
NUMBER OF OPTIONS
$0.63
2,650,000
4.9 years
883,325
REMAINING
CONTRACTUAL LIFE
4.9 years
Fair value at grant date (CDN)
Share price (CDN)
Exercise price (CDN)
Volatility (%)
Forfeiture (%)
Option life
Dividends (%)
Risk-free interest rate (%)
2015
$0.61
$0.63
$0.63
70
0
5 years
0
0.8
89
Note 20 Revenue, net of royalties
Oil revenue
Royalties
Oil revenue, net of royalties
Production service fees
Total net revenue before tax
TWELVE MONTHS ENDED DECEMBER 31
2015
2,322
(686)
1,636
9,736
11,372
2014
–
–
–
24,533
24,533
The oil revenue and royalties relate to the NW Gemsa concession, which is governed by a PSC, and covers the period
October to December 2015.
The royalties are those attributable to the government take in accordance with the fiscal terms of the PSC.
The production service fees relate to Block-H Meseda, which is governed by a PSA, and covers the period January to
December 2015.
The operator continues to be in the process of addressing contractual invoicing with EGPC in relation to gas and liquids.
No revenue or sales volumes have been recognized for the year ended December 31, 2015; pending issuance of invoices.
Note 21
General and Administration expenses
$000’s
Wages and employee costs
Consultants - inc. PR/IR
Legal fees
Audit, tax and accounting services
Public company fees
Travel
Office expenses
IT expenses
Transaction costs
Service recharges
Total - Net G&A
TWELVE MONTHS ENDED DECEMBER 31
2015
2,828
499
124
449
228
250
490
75
496
(669)
4,770
2014
1,430
456
8
394
–
235
317
58
–
–
2,898
Key management personnel have been identified as the non-executive directors and executive officers of the Company. The
executive officers include the President and CEO, CFO and Egypt Country Manager. Details of key management remunera-
tion is shown in note 28.
General and administrative (“G&A”) costs for 2015 were US$4.8 million, which represented an increase of US$1.9 million
compared to 2014.
In accordance with IFRS 3 - Business Combinations (see note 4) the G & A expenses represent three months of SDX Energy
Inc., formerly Sea Dragon Energy Inc., and twelve months of Madison Petrogas Ltd.
The Company incurred US$0.5 million of transaction costs in relation to the business combination.
90
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 Note 22 Net Financing costs
Interest and bank charges
Foreign exchange (gain) - realized
Amortization of Facility costs
Accretion of debentures
Accretion of decommissioning provisions
Net Financing Expense
TWELVE MONTHS ENDED DECEMBER 31
2015
441
(7 14)
378
–
(9)
96
2014
1,473
(497)
–
29
4
1,009
The interest and bank charges of US$0.4 million consist of finance fees from EDBE bank to provide a factoring facility for
the Block-H Meseda monthly production service fees invoices and monthly bank charges. The amortization of Facility costs
relates to the release of the deferred BNP Facility transaction costs as a result of the repayment of the outstanding balance
and the cancellation of the Facility, see note 13.
Note 23
Income per share
Net income before other comprehensive income for the year
Weighted average number of shares (000’s)
Basic
Diluted
Per share amount
Basic
Diluted
YEAR ENDED
DECEMBER 31, 2015
10,047
YEAR ENDED
DECEMBER 31, 2014
8,356
51,633
51,633
$0.195
$0.195
56,348
57,907
$0.148
$0.144
Basic income per share is calculated by dividing the income attributable to shareholders of the Company by the weighted
average number of ordinary shares in issue during the period. Diluted per share information is calculated by adjusting the
weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The
Company computes the dilutive impact of common shares assuming the proceeds received from the pro-forma exercise of
in-the-money stock options or warrants are used to purchase common shares at average market prices. At December 31, 2015
the strike price of such instruments was above the average market share price, therefore they became anti-dilutive which
resulted in a diluted EPS equal to the basic EPS.
91
Note 24
Segmental Reporting:
Functional segments
Management has determined the operating segments based on the reports reviewed by the executive directors that are
used to make strategic decisions. The executive directors consider the business from a functional perspective, that is from
an ‘operations’ functional standpoint which includes all of the company’s oil and gas operations irrespective of geography
and from a ‘corporate’ functional standpoint. The corporate function includes the Company’s administrative and head office
function in the UK and residual functions in Canada related to the Board of Directors and TSX-V listing requirements. All
key decisions are made by management having regard to these two functions. For the purpose of providing more detailed
information in the MD&A, the operations function has been analyzed further to provide some of the production statistics
on a field by field basis in Egypt. The company’s operations in Cameroon are still in the exploration phase and therefore are
not generating production information. Set out below is segmented information on a functional basis.
YEAR ENDED DECEMBER 31, 2015
YEAR ENDED DECEMBER 31, 2014
CORPORATE
OPERATIONS
TOTAL
CORPORATE
OPERATIONS
TOTAL
Revenue
Direct operating expenses
Exploration and evaluation expense
Depletion, depreciation and amortization
Impairment expense
Stock based compensation
Equity in income of associate
Loss on disposal of office assets
General and administrative expenses
–
–
73
43
–
761
–
3
4,1 37
11,372
11,372
4,973
4,973
–
2,014
6,842
73
2,057
6,842
–
–
–
8
–
–
761
1,064
(1,024)
(1,024)
3
–
633
4,770
2,504
–
–
24,533
24,533
3,639
2,767
1,594
–
–
(1,130)
–
394
3,639
2,767
1,602
–
1,064
(1,130)
–
2,898
Operating income/(loss)
(5,017)
(2,066)
(7,083)
(3,576)
17,269
13,693
Net finance expense
Gain on acquisition
(74)
170
96
(296)
1,305
1,009
(1 8,289)
–
(1 8,289)
–
–
–
Income/(loss) before income taxes
1 3,346
(2,236)
11,11 0
(3,280)
15,964
12,684
Current income tax expense
Deferred income tax expense
Total Current and Deferred
income tax expense
–
–
–
1,1 68
(105)
1,1 68
(105)
1,063
1,063
–
–
–
4,308
4,308
20
20
4,328
4.328
Net income/(loss) after income taxes
1 3,346
(3,299)
1 0,047
(3,280)
11,636
8,356
Other comprehensive (income)/loss
- foreign exchange
Comprehensive income/(loss)
for the period
647
–
647
420
–
420
12,699
(3,299)
9,400
(3,700)
11,636
7,936
92
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 The segment assets and liabilities as at December 31, 2015 and 2014 are as follows:
Segment assets
Segment liabilities
YEAR ENDED DECEMBER 31, 2015
YEAR ENDED DECEMBER 31, 2014
CORPORATE
OPERATIONS
TOTAL
CORPORATE
OPERATIONS
TOTAL
5,505
1,249
54,511
60,016
3,521
4,770
5,722
3,227
43,370
49,092
6,416
9,643
The segment capital expenditures for the year ended December 31, 2015 and 2014 are as follows:
YEAR ENDED DECEMBER 31, 2015
YEAR ENDED DECEMBER 31, 2014
Capital additions - PP&E oil interests
–
1,375
1,375
–
1,928
CORPORATE
OPERATIONS
TOTAL
CORPORATE
OPERATIONS
TOTAL
1,928
Capital additions - intangible exploration
and evaluation assets
Capital additions - office assets
–
17
3,728
3,728
–
17
–
36
11,670
11,670
–
36
Note 25
Commitments
Pursuant to the concession and production service fee agreements in Egypt and Cameroon, the Company is required to
perform certain minimum exploration and development activities that include a 3D seismic campaign and the drilling of
exploration and development wells. These obligations have not been provided for in the consolidated financial statements.
The commitments relate to a 3D seismic campaign and the drilling of one exploration well for South Disouq (US$6.6
million), the drilling of one development well and facilities upgrade for South Ramadan (US$2.9 million), the drilling of one
development well for Block-H Meseda (US$0.1 million) and the drilling of one exploration well in Bakassi West – Cameroon
(US$7.0 million).
The work program for South Disouq is secured by a US$3.0 million withholding of Shukheir Marine receivables.
The development well for Block-H Meseda, is secured by a deposit of US$0.1 million withheld from the Company’s service
fee revenue.
The work program for Bakassi West – Cameroon is secured by a Parent Company Guarantee (“PCG”) of US$7.0 million.
Currently the commitments as part of the concession agreements are as follows:
Less than one year
Between one and five years
Non-cancellable office leases
DECEMBER 31, 2015
DECEMBER 31, 2014
1 3,677
2,933
1 6,61 0
7,250
125
7,375
The Company has a lease commitment for its office premises in Calgary and London under non-cancellable operating leases
expiring within two to five years.
Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:
Less than one year
Between one and five years
More than five years
DECEMBER 31, 2015
DECEMBER 31, 2014
302
81 3
–
1,11 5
309
566
–
875
93
Note 26
Contingencies
There are no contingencies as at December 31, 2015.
Note 27
Related party transactions
All subsidiaries and associates (Brentford Oil Tools) are listed below. A list of the investments in subsidiary undertakings (all
of whose operations comprise one class of business, being Oil and Gas Exploration, Development and Production), including
the name, proportion of ownership interest, country of operation and country of registration, is given below.
NAME
PERCENTAGE
COUNTRY OF OPERATION
COUNTRY OF REGISTRATION
Sea Dragon Holdings Ltd. (Alberta)
Sea Dragon Energy (UK) Ltd.
SDX Energy Investments (UK) Ltd
Sea Dragon Cooperatieve U.A. (Netherlands)
Sea Dragon Energy Holding B.V. (Netherlands)
Sea Dragon Energy (Kom Ombo) B.V. (Netherlands)
Sea Dragon Energy (GOS) B.V. (Netherlands)
Sea Dragon Energy (Nile) B.V. (Netherlands)
Sea Dragon Energy (NW Gemsa) B.V.
Sea Dragon Energy Holding Ltd. (BVI)
NPC (Shukheir Marine) Ltd (BVI)
NPC (South Ramadan) Ltd (BVI)
Madison International Oil & Gas Ltd
Madison Egypt Oil & Gas Ltd
Madison Cameroon Oil & Gas Ltd
Madison Egypt Ltd
Brentford Oil Tools
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
1 00%
50%
Canada
U.K.
U.K.
Netherlands
Netherlands
Egypt
Egypt
Egypt
Egypt
Canada
U.K.
U.K.
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
British Virgin Islands
British Virgin Islands
Egypt
Egypt
Barbados
Egypt
Cameroon
Egypt
Egypt
British Virgin Islands
British Virgin Islands
Barbados
Barbados
Barbados
Egypt
Egypt
Note 28
Compensation of key management personnel
The remuneration of directors and other key management personnel during the years ended December 31, 2015 and 2014
was as follows:
$000’s
Salaries, incentives and short term benefits
Director’s fees
Stock based compensation
Total
2015
2,27 1
124
642
3,037
2014
1,123
41
890
2,054
94
SDX ENERGY INC. 2015 ANNUAL REPORTNotes to the Consolidated Financial StatementsFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 CORPORATE INFORMATION
EXECUTIVE OFFICERS
STOCK EXCHANGE LISTING
Paul Welch
President and
Chief Executive Officer
Chief Operating Officer
Mark Reid
Chief Financial Officer
Ahmed Farid Moaaz
Country Manager
INDEPENDENT
DIRECTORS
Michael Doyle
Non Executive Chairman
David Mitchell
David Richards
Barrie Wright
Paul Moase
TSX Venture Exchange
Symbol: SDX
Registrar and
Transfer Agent
TMX Equity Transfer Services
200 University Avenue, Suite 300
Toronto, ON
M5H 4H1 Canada
Telephone: +(416) 361-0152
Fax: +(416) 361-0470
INDEPENDENT
ENGINEERS
DeGolyer and MacNaughton
Canada Limited
Calgary, Alberta, Canada
AUDITORS
PriceWaterhouseCoopers LLP
1 Embankment Pl,
London
WC2N 6RH
United Kingdom
PUBLIC RELATIONS
Buchanan Communications Ltd.
107 Cheapside
London
EC2V 6DN
+44 207 466 5000
SDX ENERGY
OFFICE LOCATIONS
Canada
Centennial Place, East Tower
1900, 520-3rd Avenue SW
Calgary, Alberta
Canada, T2P 0R3
Telephone: +1 (403) 457-5035
Fax: +(403) 457-5420
Egypt
Building #12, Al Nahda St.,
El-Maadi, Kornish El Nile
Cairo, Egypt
Telephone: +(20) 2 2358 2172
Fax: +(20) 2 2750 8534
United Kingdom
38 Welbeck Street
London
W1G 8DP
United Kingdom
Telephone: +44 203 219 5640
Fax: +44 203 219 5655
EMAIL:
SARAH@SDXENERGY.COM
WWW.SDXENERGY.COM
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