SERICA ENERGY PLC
2014
ANNUAL REPORT AND ACCOUNTS
Company Number: 5450950
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CHAIRMAN’S STATEMENT
Dear Shareholder
2014 was a torrid year for upstream oil and gas companies and a particularly difficult
year for the independents. Serica was no exception. We had to contend with an ever
increasing industry cost base, increasing transaction complexity, high taxation levels and
an oil price collapse. As a result capital markets showed a reluctance to invest and funds
to build our business all but dried up.
Serica’s reaction has been to cut its operating cost base drastically whilst, at the same
time, seeking to rebase our operations and strengthen our finances by acquiring a
production base in an area of the North Sea which we know well, where our tax position
gives us an advantage and where we believe material value can be added. We are doing
this whilst trying to preserve the potential which we continue to see in our exploration
acreage elsewhere, particularly offshore Namibia and Ireland, although we believe it will
be some time before the economics of deep water drilling bring renewed interest there.
The first part of this strategy was the agreement reached in June 2014 to purchase an
18% interest in the Central North Sea Erskine field from BP. Erskine lies close to our
existing Columbus discovery and produces gas rich in condensate through an
infrastructure system that Serica has been trying for years to access. The complexities
of North Sea agreements, the tightness of markets and the collapse in oil prices at the
end of 2014 have delayed closing of this transaction but I am delighted to report that
the transaction is expected to complete imminently.
The acquisition brings material benefits to Serica. It adds approximately 3.6 mmboe
(effective 1 January 2014) of producing, proven and probable oil and gas reserves net to
Serica at a cost per barrel of approximately US$4. In addition, as the result of
adjustments at completion to account for net revenue since the effective acquisition date
and deferral of part of the consideration payable, the Company is receiving a cash
payment of approximately US$9 million from BP at completion which enhances our
working capital position. Net current assets at year end 2014 stood at US$8.2 million,
including cash balances of US$9.9 million. BP will also receive a meaningful equity stake
in Serica. As part of the working capital adjustments at completion this has been set at
13.5 million shares, approximately 5% of Serica’s enlarged issued share capital.
In addition to improving our immediate cash resources and bringing cash flow to the
Company, the purchase of an interest in Erskine is a very important step for Serica. It
brings us production from a field where there is significant room for improved
productivity. During 2014 the field showed it was capable of producing up to 4,000
boepd net to Serica but only averaged around 1,100 boepd as the result of poor
infrastructure performance downstream (excluding the period of planned shutdown).
Erskine recommenced production in late May after being closed late last summer to
enable major works to be undertaken on the Lomond field through which it produces. It
is the intention of all field participants to improve production performance radically by
focussing on downstream infrastructure performance and Serica will be working closely
with Chevron, the field operator, and BG, the operator of Lomond and also a partner in
Erskine, to achieve this. If we are successful in this endeavour it will bring significant
returns for Serica.
The value of Erskine is also enhanced significantly as a result of our tax position. At the
year end this amounted to approximately US$186 million of unused Ring Fence
Corporation Tax losses from past UK investment made by Serica. This is a valuable
asset which can be used to offset tax liabilities, not only from Erskine but also from other
UK producing fields whether acquired or, in the instance of Columbus, developed by the
Company.
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The transaction therefore brings many valuable benefits to Serica. It is our intention to
use our contacts, expertise and the benefits of our tax position to build on this to expand
Serica’s position in the North Sea in anticipation of a recovery in oil prices over the
medium term and we will now be seeking financial partners with whom we can build on
these advantages. We already have the Columbus discovery and a 15% interest in the
very interesting 22/19c block lying nearby, in which we have two clear large HPHT
prospects and a full carry on the first well. Acquiring an interest in Erskine and access to
nearby infrastructure is complementary to this and provides a platform with which, with
a fair wind, renewed interest from financial markets and strong partners, we can build
our business and realise the considerable potential in our assets to the benefit of
shareholders.
We are now able to review how we might progress Columbus. We are currently
evaluating a proposal received from the Lomond field operator for the handling of
Columbus gas and condensate. Pending a decision on export routes for Columbus, we
have taken the step of reclassifying Columbus reserves, which stand at 5.2 mmboe, as
contingent resources. It is expected that these resources will be reclassified as reserves
once the decision on an export route and field development has been taken. Post the
acquisition of Erskine our oil and gas resources therefore stand at approximately 3.3
mmboe of producing, proven and probable reserves in Erskine (after 2014 production)
and approximately 5.2 mmboe of oil and gas resources in Columbus contingent on
infrastructure access. We have also written down the investment in Columbus to a level
which takes account of the recent fall in forward oil prices.
We do this in parallel with maintaining our exploration interests elsewhere in the UK,
Namibia and Ireland. Following recent drilling results we are reviewing our position in
Morocco. Prudent and careful risk management and cash constraints in a difficult market
have resulted in us having no debt and no material commitments. All the commitments
relating to our licences have been met in full and the reality of the current industry
retrenchment has meant that we are dealing with government agencies who are
sympathetic to extending licence terms and reducing costs. In the UK we have seen the
government reduce the heavy tax burden and more needs to be done. In parallel there
are now clear signs that major operators and the service companies recognise that costs
must be cut and practices changed, both offshore and in head office functions, if
profitability is to be restored and jobs retained. In the North Sea it is a critical moment
but I am optimistic that the ability of the industry and the government to recognise the
need for change will result in significant improvement with the consequence that
investment will return.
Whilst we have been trying to build for the future we have also made major cuts to our
operating overheads. The two things work in opposite directions but, with the backdrop
of tight financial markets, both have been essential. Since the start of 2015 our monthly
overhead costs have been reduced by more than half. This includes a major reduction in
office space, a reduction in staff levels to the absolute minimum, delisting in Canada and
cut-backs in offshore work programmes. As part of this the non-executive directors
have also taken a 50% cut in fees since the start of the year and I have taken a 67%
cut. Of course, we have to be prepared to pay the full cost of talent if we are to grow
and a balance has to be met. I believe we are now at the minimum level compatible
with growing the Company and we will be looking to restore the balances as conditions
improve.
We have announced earlier this month that Chris Hearne, our Finance Director, has
accepted a new role with a US independent and will be leaving Serica at the end of May.
We have also announced that Mitch Flegg, our COO, has accepted the role of CEO at
another AIM listed independent. Whilst we are very sorry to lose the services of these
two highly experienced individuals I am delighted that their talents have been
recognised and I am sure that all shareholders will want to wish them well in their new
careers. On a personal level, I would like to thank them both for their commitment to
the Company. They have put in place a solid team on both the operational and finance
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sides which has all the experience needed to meet the Company’s needs and I am
confident that we have all the skills needed to build as market conditions improve.
As shareholders will be aware, I have been taking the role as acting CEO as well as non-
executive Chairman whilst we sought to reposition the Company and strengthen the
Company’s balance sheet. This has taken far longer to achieve than anticipated. We still
have further steps to make to place the Company on a sounder financial footing but I
believe the Erskine deal will go a considerable way to helping us to achieve that. Whilst
we pursue the various objectives to give the Company the resources to maximise the
value of what is a small but potentially a very exciting portfolio I shall be continuing to
provide executive continuity to enable us to achieve that and will be taking the role of
Executive Chairman from 1 June whilst we review the need to replace the positions left
vacant by Mitch and Chris. I am supported by a small but very talented team of
employees and retained consultants who have the experience and knowledge of our
assets and the commitment that is needed.
We are also announcing changes at the non-executive level. Steve Theede, will not be
standing for re-election at the Annual General Meeting and will be standing down at the
end of that meeting. Steve has been on the Board since mid-2007 and his experience
and counsel have been invaluable to the Board during very difficult times for the
industry. Steve has moved to the USA and, whilst his input now that we are about to
enter the North Sea production phase would be invaluable, he and we agree that it is
difficult for him to provide that from such a distance. I would like to thank him for all
that he has done to assist and promote the Company’s interests. It goes without saying
that all these Board changes will further cut the Company’s overhead costs and I believe
that we are now operating at the minimum level consistent with the need also to build
the Company.
The past year has been difficult for all independents but I believe that Serica has
weathered the storm and emerges a considerably strengthened company as the direct
result of steps taken by management to reduce overhead costs, farm-out licence
obligations and, importantly, to conclude the acquisition of a strategically important
interest in a producing North Sea field where there is considerable upside for improved
performance. The acquisition of the interest in Erskine gives Serica both access to
important infrastructure and a meaningful cash flow profile which, if its full potential is
realised, will bring considerable benefit to shareholders and open up significant new
opportunities for Serica.
Shareholders continue to enjoy exposure to high impact exploration both in the UK and
overseas but with licence commitments now reduced to virtually zero as the result of our
successful farm-out campaign. Wells are still planned for both the Doyle prospect in the
East Irish Sea, where we are carried for the first £11 million of gross drilling costs, and
to test the very significant HPHT prospects in Block 22/19c, where we have a fully
carried 15% interest. The timing has slipped in the current environment but the wells
are expected to be drilled in 2016 and 2017 respectively and hold great promise for the
Company at very little cost to shareholders.
In short, if Erskine produces as planned, Serica has the financial resources, an exciting
asset mix and very low overhead to pursue different ways of releasing the value inherent
in Serica’s portfolio. There is considerable opportunity to add value to Erskine by
improving downstream performance, to realise the value of Columbus through field
development, to enhance the value of our exploration assets through the drill bit,
particularly where we are carried, and to extract full value of our tax position through
further acquisitions, potentially in partnership with others. We plan to follow these
objectives aggressively in 2015 and beyond.
Tony Craven Walker
Chairman
29 May 2015
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STRATEGIC REPORT
The following Strategic Report of the operations and financial results of Serica Energy plc
and its subsidiaries (the “Group”) should be read in conjunction with Serica’s
consolidated financial statements for the year ended 31 December 2014.
References to the “Company” include Serica and its subsidiaries where relevant. All
figures are reported in US dollars (“US$”) unless otherwise stated.
Although the Company delisted from the TSX in March 2015, the Company is a
“designated foreign issuer” as that term is defined under National Instrument 71-102 -
Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. The Company
is subject to the foreign regulatory requirements of the Alternative Investment Market of
the London Stock Exchange in the United Kingdom.
Serica is an oil and gas company with exploration and development activities based in
the UK, Ireland, Namibia and Morocco, and an economic interest in an oilfield offshore
Norway.
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REVIEW OF OPERATIONS
UK Operations
Erskine Acquisition
In June 2014, Serica announced that agreement had been reached with BP in an
innovative deal for the Company to acquire an 18% interest in UK blocks 23/26a (Area
B) and 23/26b (Area B), located in the UK Central North Sea and containing the Erskine
field. The other partners in the field are BG and Chevron (operator). The transaction,
which will be completed imminently, provides the Company with a tax efficient income
stream and increases Serica’s 2P reserves by an estimated 3.6 mmboe effective 1
January 2014 (Company estimates).
The key elements to the transaction, announced in June 2014, provided for a
consideration payable to BP of US$11.1 million in cash plus 27 million new Ordinary
Shares in Serica on completion subject to certain working capital adjustments to account
for revenue and cost items occurring after the effective date of 1 January 2014.
Completion arrangements provide that the US$11.1 million cash element is to be paid in
four equal instalments; the first at completion followed by payments in July 2016, July
2017 and July 2018. As a result of these working capital adjustments, Serica will receive
a completion cash sum amounting to approximately US$9 million net of the first tranche
of cash consideration payable on completion, whilst the share element has also been
reduced to 13.5 million new Ordinary Shares, representing approximately 5.1% of
Serica’s enlarged issued share capital.
Field production offers the balance of both gas and oil condensate revenues. Realised
gas prices for the field during 2014 averaged 41 pence per therm and forward gas prices
support expectations of continuing healthy gas demand in the UK. Realised oil prices for
the field during 2014 averaged US$100 per barrel, including 55,000 barrels of overlift,
thus insulating Serica from the impact of market oil prices over recent months and for
the first couple of months following production restart.
The transaction contains provisions for decommissioning which are also innovative in the
North Sea and recognise the need to share these costs between the buyer and seller.
Decommissioning at the end of field life has been provided for on the basis that BP will
meet all decommissioning costs up to the current estimate for decommissioning agreed
by Serica and BP. This has been fixed at a gross £174.0 million (£31.32 million net to
Serica) with this figure adjusted for inflation and Serica only being responsible for any
costs above the inflated level.
The Erskine transaction brings a tax efficient income stream to Serica. Net production
from Erskine for the year 2014 accruing to the interest acquired was in excess of
317,000 boe. This was lower than expected due to extended periods of shutdown for
both planned and unplanned maintenance programmes on the Lomond platform which
fluids. This extensive
provides processing
maintenance programme has continued in 2015 but has now been completed and the
field is back in production. It is expected that the impact of this maintenance
programme will be to improve the field uptime for the remainder of 2015. Initial
production will be used to reduce an overlift position acquired at completion.
for the Erskine production
facilities
We also expect to derive significant additional benefit from the strong synergies with
Serica’s existing operations. The Erskine, Lomond and Columbus assets are clearly
inter-related and the transaction is significant for the Company in view of our efforts to
build a stronger position in the area around Columbus. It will give us a position in the
nearby infrastructure and more closely align Serica with Chevron and BG as operators of
Erskine and Lomond respectively. This is important in our efforts to find a solution to
develop Columbus.
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Columbus Development
The main challenge for Serica in the UK during 2014 has been how to resolve the delay
in the Columbus field development resulting from BG’s decision early in 2013 not to build
the Bridge Linked Platform at Lomond, then an integral part of our plans to develop
Columbus. Technical work conducted during 2014 has considered several alternative
offtake routes and confirmed that Lomond provides the easiest and most cost effective
offtake route for Columbus. The acquisition of an interest in Erskine, which also uses the
facilities at Lomond, helps us with this process. We are therefore continuing with our
efforts to seek a commercial solution which will provide an acceptable and proportionate
commercial return to the Columbus partners whilst also providing the Lomond Operator
with a reasonable return on its risk and investment.
The Wood Report, commissioned by DECC, focuses wholly on the problems experienced
by the operators of smaller fields to gain access to infrastructure on terms which provide
sufficient returns for the field partners. Implementation of this report, the findings of
which DECC have accepted in full, will be fundamental to ensuring that small discoveries
are not left stranded in the North Sea, particularly at a time of uncertainty in the security
of energy supplies. Amongst other findings, the report advocates stronger co-operation
and greater alignment between North Sea operators to open up greater sharing of
facilities.
Our efforts to gain access to infrastructure related to Columbus are wholly in line with
these findings of the Wood Report and are intended to lead to greater co-operation on
infrastructure sharing. In the light of these findings, constructive negotiations have
continued with the Lomond owner who has provided indicative commercial principles
upon which they are prepared to negotiate with the Columbus owners with a view to
reaching agreement on terms which are acceptable to both parties.
Falling oil prices in the second half of 2014 have an effect on the Columbus field
economics, however more than two-thirds of the economic value of Columbus is derived
from gas rather than condensate sales and expected reductions in field development
costs will have an offsetting effect. UK gas prices have remained relatively strong
compared to condensate prices (which are strongly linked to oil prices). The oil price fall
has to some extent also been offset by UK tax changes. From 1 January 2015, the rate
of Supplementary Charge (SC) will be 20 per cent – a further reduction of 10 percentage
points in addition to the 2 percentage point cut announced in the Chancellor’s Autumn
Statement. This reduces the headline rate of tax from 62% to 50%.
The fall in oil prices has also led to reduced capital expenditure across the industry which
in turn has already led to significant cost reductions throughout the supply chain. In
particular, drilling rig costs have fallen significantly and lower rig rates will lead to
significantly lower well costs for Columbus. Similarly, it is expected that future
development capital and operating costs will also fall which should also assist the field
economics. Consequently, given the complexities and the many moving parts involved,
we expect negotiations with the Lomond owners to continue throughout 2015. The
current licence expires in December 2015 and discussions have commenced with DECC
to extend this.
Independent consultant Netherland, Sewell & Associates, Inc (“NSAI”) carried out a
reserves report on the Columbus field for the end of 2013. This report estimated that
the gross Proved plus Probable Reserves of the field are 66.0 bcf of gas and 4.5 mmbbl
of liquids, a total of 15.5 mmboe. Serica holds a 50% interest in those Columbus
reserves lying in Block 23/16f. After providing for reserves lying in the adjacent Block,
NSAI estimates the Company’s share of proved and probable reserves in the field to be
21.9 bcf of sales gas and 1.5 mmbbl of liquids, a net 5.2 mmboe to Serica. The directors
of Serica believe that in the current oil price environment, it is appropriate for these to
now be properly considered as Contingent Resources rather than the previous
categorisation as Reserves. In view of the re-classification and since no new information
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relating to the field was obtained in 2014, it was not considered cost effective or
necessary to obtain an updated report at the end of 2014.
Exploration
Central North Sea: Block 22/19c
Block 22/19c is located approximately 20 kilometres to the west of Serica’s Columbus
field. Following the farm-out of an 85% interest to JX Nippon in 2012, Serica has a 15%
interest in the block and has a full carry on this licence up to and including the drilling of
an exploration well.
In 1H 2014 JX Nippon executed and completed an agreement with ENI for the latter to
join the block as operator with a 50% interest.
The group has identified significant deep High Pressure High Temperature (“HPHT”)
potential in the Jurassic and Triassic and ENI bring considerable experience in HPHT
technology. A site survey is expected to be acquired in 2016 in preparation for drilling an
HPHT exploration well in 2017.
A Competent Person’s Report (“CPR”) conducted by NSAI and commissioned by Serica,
has assessed the highest ranked prospect, Rowallan, to contain between a P90 of
40mmboe and a P10 of 243mmboe of unrisked prospective gross resources.
Central North Sea: Block 15/21g and 15/21a (part) – Spaniards Appraisal
Serica has a 21% interest in the amalgamated area of Block 15/21g and Block 15/21a
(part). The focus of the 2014 work programme was to mature the Spaniards West
prospect so that a decision can be made whether to drill another well or withdraw from
the licence. This work has not resulted in an economically viable well proposal and so it
is likely that Serica will exit this licence during 2015.
Southern North Sea: Blocks 47/2b (Split), 47/3g (Split), 47/7 (Split) & 47/8d (Part)
Serica has a 37.5% interest in these blocks which are operated by Centrica. These
blocks are contiguous part blocks immediately adjacent to the producing York field, also
operated by Centrica.
A number of gas prospects, including a possible extension to the York field, have been
identified on the blocks at Leman (Permian) level with additional leads at Namurian
(Carboniferous) level. The work obligation, comprising a 3D seismic acquisition survey
and reprocessing of existing seismic data, has been completed. A drilling decision on one
of the prospects will be made during 2015.
East Irish Sea: Block 110/8b
Serica has a 100% interest and operatorship of Block 110/8b. Interpretation of existing
data has been completed and work is ongoing to complete the minor outstanding work
programme commitments.
East Irish Sea: Blocks 113/26b and 113/27c - Doyle Prospect
In August 2014, following the receipt of the required approvals, the Company announced
the completion of the agreement with Centrica, through Centrica’s subsidiary
Hydrocarbon Resources Limited (“HRL”), for the farm-out of UK East Irish Sea Blocks
113/26b and 27c. Under the agreement, HRL acquired an operated 45% interest in the
licence, while Serica has retained 20%, in consideration for HRL bearing Serica’s share of
costs associated with the drilling of an exploration well up to a gross cap of £11 million.
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A Triassic gas prospect, the Doyle prospect, lies in the north of Block 113/27c. A fault
and dip closed structure; this prospect has been fully matured and is ready to drill. The
site survey has been completed and the well was expected to be drilled in early 2015.
However, the Operator of the block has now chosen not to drill the well in this
timeframe.
DECC has agreed a nine month extension to Licence P1482 (to the end of December
2015) in order to allow the partnership to present a clear forward plan to drill the
exploration well.
East Irish Sea: Block 113/22a
In November 2013 Serica was awarded a traditional licence in the 27th Offshore
Licensing Round, announced by DECC. Block 113/22a in the East Irish Sea was awarded
to a group in which Serica had a 35% operated interest.
This block is adjacent to Serica Block 113/27c and the farm-out agreement for Blocks
113/26b and 113/27c with Centrica noted above, extended to the new licence offered.
Following the completion of the farm-out in August, Serica has a 20% interest both in
the Block 113/22a and in Blocks 113/26b & 27c. The other participants in the licence
award are HRL 45% (and operator), MPX Limited 25% and Agora Limited (a subsidiary of
Cairn Energy) 10%.
The Doyle prospect in Block 113/27c is believed to extend into Block 113/22a.
Ireland
Frontier Exploration Licence 1/09: Blocks 5/17, 5/18, 5/22, 5/23, 5/27, and 5/28 -
Muckish Prospects
Serica holds a 100% working interest in six blocks in this licence covering a total area of
993 square kilometres in the north-eastern part of the Rockall Basin off the west coast of
Ireland.
A large exploration gas condensate prospect, Muckish, has been fully delineated from 3D
seismic data in Blocks 5/22 and 5/23. Muckish is analogous to the nearby Dooish gas
condensate discovery and provides material upside in a proven hydrocarbon basin. The
evaluation of 3D seismic data coverage and the nearby Dooish gas-condensate
discovery, give confidence in the potential of the prospect which covers an area of
approximately 30 square kilometres with over 600 metres of vertical closure in a water
depth of 1,450 metres. The NSAI CPR attributes P50 unrisked prospective resources of
677bcf (with a range from a P90 of 155bcf to a P10 of 3.4tcf) to the Muckish prospect with
a geological risk factor of 26%.
It is Serica’s intention to find one or more farm-in partners prior to entering the next
phase of the licence which would involve committing to the drilling of an exploration well.
A data room was open in 2014 but economic concerns driven largely by falling oil prices
mean that a farm-in partner has not yet been secured. In March 2015, Serica made a
request to the Department of Communications, Energy and Natural Resource for a
further two year extension to the first phase of the licence in order to allow time to
complete the farm-out process. At the same time Serica also submitted a relinquishment
proposal, retaining 39% of the licence area around the key prospect. Post relinquishment
the licence will cover 364 square kilometres thus reducing the licence fees significantly.
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Frontier Exploration Licence 4/13 - Blocks 11/10, 11/15, 12/1(part), 12/6 and
12/11(part) - Midleton and Derryveagh Prospects
In December 2013, following the initial two year period of the licence award, Serica
converted Licence Option 11/01, also located in the Rockall Basin, into a full Frontier
Exploration Licence (“FEL”). Following a mandatory 25% relinquishment at the time of
the option conversion into FEL 4/13, the three blocks and two part blocks now cover an
area of approximately 925 square kilometres.
The area covered by the licence contains two pre-Cretaceous fault block prospects,
Midleton and West Midleton which are analogous to the proven gas-condensate bearing
Dooish discovery lying immediately to the east. These complement and provide
additional diversity to the Muckish prospect lying in Serica’s acreage just to the north
east and the award will enable a comprehensive exploration programme covering the
Muckish and Midleton prospects.
2D and 3D seismic reprocessing work and other geological studies have firmed up these
pre-Cretaceous prospects and have also identified the Derryveagh Prospect, a deepwater
fan supported by a seismic anomaly. The Derryveagh prospect overlies the Midleton
prospect and so could be penetrated by a single dual objective well.
Frontier Exploration Licence 01/06: Blocks 27/4 (part), 27/5 (part) and 27/9 (part) -
Liffey & Boyne Prospects
Licence FEL 1/06 covers an area of approximately 305 square kilometres in the Slyne
Basin off the west coast of Ireland. Serica (operator) holds a 50% interest in three
blocks which lie some 40 kilometres south of the Corrib discovery, which has reserves of
approximately 800 bcf of gas.
In 2009 Serica drilled a well (Bandon) on the blocks and found a new oil play in a
shallow high quality Jurassic reservoir, the Bandon discovery. Deeper prospects, such as
the Boyne and Liffey prospects, have been identified with the potential for commercial
accumulations.
The Company, in partnership with RWE, has launched a farm-out campaign to follow up
on the 2009 Bandon oil discovery made by Serica. Subject to identifying a suitable
partner or partners a well is targeted to be drilled on the Boyne prospect in 2016.
The Irish authorities commissioned a Wood Mackenzie report into the fiscal regime; the
results of the review were announced on 18 June 2014. This was considered to have a
delaying effect on the farm-out market as companies awaited its recommendations. The
recommendations to increase the maximum rate of tax applying to new licences from
40% to 55%, importantly do not apply to existing licences (such as 01/06).
NSAI in their CPR attribute P50 gross unrisked prospective resources (for the combined
Jurassic and Triassic objectives in Boyne and Liffey) of 215mmboe (with a range from a
P90 of 56mmboe to a P10 of 824mmboe).
Namibia
Luderitz Basin: Blocks 2512A, 2513A, 2513B and 2612A (part)
Serica has an 85% interest in a Petroleum Agreement covering Blocks 2512A, 2513A,
2513B and 2612A (part) in the Luderitz Basin, offshore Namibia in partnership with The
National Petroleum Corporation of Namibia (Pty) Limited (“NAMCOR”) and Indigenous
Energy (Pty) Limited. The blocks lie in the centre of the basin and cover a total area of
approximately 17,400 square kilometres.
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Interpretation of the 4,180 square kilometre 2012 3D seismic survey undertaken by
Serica helped delineate the size and nature of Prospect B, one of three large structures
identified on the licence at Lower Cretaceous (Barremian) level, and to examine
prospectivity at shallower levels.
The results of this work confirmed Prospect B as having the clear characteristics of a
large carbonate platform extending over 700 square kilometres with a vertical closure of
up to 300 metres. The expectation of a predominantly carbonate structure has been
reinforced by third party drilling elsewhere in Namibia which has proven the presence of
large structures with associated carbonate build-up at Lower Cretaceous level.
An independent assessment of the unrisked prospective resources contained in our
Namibian licence has been performed by NSAI and covers prospects which have been
mapped from early 2D seismic as well as the highly detailed 3D. This CPR recognises
the multi-prospect nature of the licence and gives a combined best estimate of gross
unrisked prospective oil resources associated with 7 prospects and 2 leads identified on
licence of 2,297 million barrels and 437 million barrels respectively. It also states that
Prospect B at the primary Barremian level alone contains P50 unrisked prospective
recoverable oil resources of 623 million barrels (with a P90 to P10 range of 138 million to
2.81 billion barrels). The report gives a geological risk factor of 16%.
In 1H 2014 Serica commenced a farm-out process to attract one or more new partners
to enter the Joint Venture arrangement. However the farm-out market in Namibia has
been extremely challenging due to the fall in oil price and also due to the negative
market sentiment caused by the lack of commercial success encountered in recent wells
drilled by other operators in Namibia. These wells have all been in different basins from
the Serica acreage and have limited geological significance for our prospects.
In September 2014, the Ministry of Mines and Energy granted Serica a one year
extension to the licence in order to allow more time to complete the farm-out process
and secure a partner to commit to an exploration well on the licence. If a farm-in partner
has not been secured by Q4 2015 then a further extension to the licence may be sought.
Morocco
Sidi Moussa and Foum Draa Petroleum Agreements
Serica holds licence interests in the Sidi Moussa and adjacent Foum Draa Petroleum
Agreements offshore Morocco. The blocks cover a total area of approximately 8,375
square kilometres in the sparsely explored Tarfaya-Ifni Basin and extend from the
Moroccan coastline into water depths reaching a maximum of 2,000 metres. The
Tarfaya-Ifni Basin is geologically analogous to the oil producing salt basins of West
Africa. Under the terms of the licence agreements the participants are required to carry
the State oil company ONHYM for a 25% interest through the exploration and appraisal
phase. Both licences are currently in the First Extension Period, which entailed the
drilling of a commitment well in each block.
Sidi Moussa
Serica has a 5% working interest in the Sidi Moussa licence and cost exposure is
considerably limited under a farm-out agreement whereby the operator Genel carried
Serica’s retained 5% working interest and the associated share of the state oil company
interest for the first US$50million of gross well costs. The rig Noble Paul Romano was
contracted by Genel and the SM-1 well spudded on 30th July 2014 to evaluate the Nour
prospect. The well was drilled to a total depth of 2,825 metres and encountered oil in
fractured and brecciated cavernous Upper Jurassic carbonates. During the course of
drilling and well control operations, 26 degree API oil was produced to surface with the
drilling fluids. A subsequent testing programme confirmed the presence of oil but it was
not possible to achieve all of the objectives of the testing programme, most likely as a
- 11 -
consequence of the significant reservoir damage suffered during the earlier well control
operations.
The forward work programme is to complete the interpretation of the well data and to
integrate the results with existing subsurface models. This programme is being
completed in a cost-effective manner and will result in a decision on whether to continue
in this licence, by Q3 2015.
Foum Draa
Following a farm-out to Cairn Energy, Serica has an 8.33% interest in the Foum Draa
licence and in late 2013 the FD-1 well was drilled. Although commercial hydrocarbons
and clastic reservoir rocks were not found, gas shows were encountered indicating an
active thermogenic petroleum system. The well was plugged and abandoned. Under the
terms of the 2012 farm out agreement Serica was carried by Cairn for its share of
drilling costs up to a gross well cost of US$60 million.
The group is now evaluating the valuable data recovered from the well and will soon
agree on a forward plan for the licence. It is likely that Serica will exit this licence.
Norway
Serica has an economic interest in the development of the Vette (formerly Bream) field
and is due a payment (related to oil price) at first production. In their 2014 Annual
Report, the Operator, Premier, stated that FEED work on the Vette FPSO development
was successfully completed during 2014. However, following the sharp reduction in the
oil price, they have chosen to defer the final investment decision until the end of 2015,
enabling re-engagement with the supply chain with the aim of negotiating lower costs for
the project.
- 12 -
LICENCE HOLDINGS
The following table summarises the Company's licences as at 31 December 2014.
Block(s)
Description
Role
% at
31/12/14
Location
UK
15/21g
15/21a (part)
22/19c
23/16f
47/2b (split)
47/3g (split)
47/7 (split)
47/8d (part)
110/8b
113/26b
113/27c
113/22a
Ireland
27/4 (part)
27/5 (part)
27/9 (part)
5/17
5/18
5/22
5/23
5/27
5/28
11/10
11/15
12/1 (part)
12/6
12/11 (part)
Namibia
2512A
2513A
2513B
2612A (part)
Morocco
Foum Draa
Sidi Moussa
Exploration
Exploration
Exploration
Columbus Field -
Development planned
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Non-operator
Non-operator
Non-operator
Operator
Non-operator
Non-operator
Non-operator
Non-operator
Operator
Non-operator
Non-operator
Non-operator
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
21%
21%
15%
50%
37.5%
37.5%
37.5%
37.5%
100%
20%
20%
20%
50%
50%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
85%
85%
85%
85%
Central North Sea
Central North Sea
Central North Sea
Central North Sea
Southern North Sea
Southern North Sea
Southern North Sea
Southern North Sea
East Irish Sea
East Irish Sea
East Irish Sea
East Irish Sea
Slyne Basin
Slyne Basin
Slyne Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Rockall Basin
Luderitz Basin
Luderitz Basin
Luderitz Basin
Luderitz Basin
Non-operator
Non-operator
8.3333% Tarfaya-Ifni Basin
Tarfaya-Ifni Basin
5%
- 13 -
GLOSSARY
bbl
bcf
boe
DECC
FEED
FPSO
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
P10
P50
P90
Proved
Reserves
Probable
Reserves
Possible
Reserves
Reserves
Contingent
Resources
Prospective
Resources
TAC
tcf
barrel of 42 US gallons
billion standard cubic feet
barrels of oil equivalent (barrels of oil, condensate and LPG plus the
heating equivalent of gas converted into barrels at a rate of 6,000
standard cubic feet per barrel)
Department of Energy & Climate Change
Front End Engineering Design
Floating, production, storage and offloading unit
High pressure high temperature
thousand standard cubic feet
million barrels
million barrels of oil equivalent
million standard cubic feet
million standard cubic feet per day
A high estimate that there should be at least a 10% probability that the
quantities recovered will actually equal or exceed the estimate
A best estimate that there should be at least a 50% probability that the
quantities recovered will actually equal or exceed the estimate
A low estimate that there should be at least a 90% probability that the
quantities recovered will actually equal or exceed the estimate
Proved reserves are those Reserves 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.
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 the
estimated proved + probable reserves.
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 +
probable + possible reserves
Estimates of discovered recoverable commercial hydrocarbon reserves
calculated in accordance with the Canadian National Instrument 51-101
Estimates of discovered recoverable hydrocarbon resources for which
commercial production is not yet assured, calculated in accordance with
the Canadian National Instrument 51-101
Estimates of the potential recoverable hydrocarbon resources attributable
to undrilled prospects, calculated in accordance with the Canadian
National Instrument 51-101
Technical Assistance Contract
trillion standard cubic feet
- 14 -
FINANCIAL REVIEW
The Group entered 2014 having recently completed a financing providing additional
funding ready for the Group’s exploration programme from 1H 2014 and to support
further business growth.
The completion of the Erskine acquisition is expected imminently and will bring a
significant new revenue stream comprising sales of oil, gas and other liquids. This
transaction is covered in more detail below.
Results from operations
Following the cessation of production and the decommissioning of the Kambuna field
facilities in the second half of 2013, the financial results of the Kambuna field business
segment are disclosed within ‘discontinued operations’ in the financial statements and
separate from the results of the retained core business segments. A high level summary
of the income statement results for continuing and discontinued operations is given
below.
Income statement – continuing operations
The Company generated a loss before tax from continuing operations of US$35.6 million
for 2014 compared to a loss before tax of US$5.1 million for 2013. The significant
increase in loss for the year is due to the impairment charge of US$30.0 million against
certain exploration and evaluation (‘E&E’) assets noted below.
The aggregate E&E asset impairment charge in 2014 is largely comprised from asset
write offs from the Sidi Moussa (US$7.4 million) and Foum Draa (US$5.0 million)
licences in Morocco, and a US$17.5 million pre-tax impairment recorded against E&E
assets related to the Columbus field asset.
Management currently sees limited prospectivity on the Foum Draa block and given it
will not be funding any significant work on the licence has writen off the costs incurred.
Whilst interpretation of the Sidi Moussa well data is ongoing, there are no plans to fund
significant future expenditure on this block and the costs have also been written off. The
partial impairment recorded against Columbus book amounts has arisen from revised
economic evaluations, the primary factor being the use of lower hydrocarbon prices in
management’s estimation of future discounted cash flows of the asset.
Other minor asset write offs in 2014 and 2013 included costs from relinquished licences
and obsolete inventory amounts.
Pre-licence expenditure of US$0.5 million for 2014 was slightly increased from the 2013
charge of US$0.3 million. Pre-licence costs included direct costs and allocated general
administrative costs incurred on oil and gas activities prior to the award of licences,
concessions or exploration rights.
Administrative expenses of US$4.3 million for 2014 decreased from US$4.5 million for
2013. The Company has worked to reduce overhead in recent years which gave an
underlying benefit in 2014 despite an adverse impact on US$ charges from the £ sterling
exchange rate in 2014 against 2013. Following the recent severe drop in oil prices and
consequent impact upon the financial resources available to companies such as Serica,
management has reviewed all of its expenditure commitments and reduced its
personnel, office and other costs substantially effective 1H 2015.
Income statement - discontinued operations
Serica generated a loss from discontinued operations of US$0.5 million for the year
ended 31 December 2014 (2013: profit of US$0.1 million) arising from its previously
- 15 -
held 25% interest in the Kambuna field. Field production ceased in July 2013, the
facilities were decommissioned in 2H 2013 and the Glagah Kambuna TAC was formally
terminated in December 2013. The loss for 2014 comprised a final assessment for asset
write offs and minor operator expense as residual matters are closed out.
Balance Sheet
During 2014, the total carrying value of investments in E&E assets decreased by
US$16.8 million from US$74.6 million to US$57.8 million. This decrease consisted of the
significant impairment charge noted above of US$30.0 million from the Columbus asset
in the UK (US$17.5 million) and asset write-offs in Morocco (US$12.4 million) and UK
(US$0.1 million), offset by US$13.2 million of additions in the year.
The more significant exploration costs in the year were incurred on the following assets:
In Africa, US$7.3 million was capitalised on the Sidi Moussa licence in Morocco (largely
consisting of dry hole expenditure, above a capped carry, and subsequent testing costs
of the SM-1 well drilled in 2H 2014) and US$2.1 million was capitalised on the Foum
Draa licence in Morocco (largely consisting on the costs of the FD-1 well drilled in Q4
2013 where operations continued into January 2014). A further US$1.4 million was
incurred in respect of the Luderitz basin licence interests in Namibia.
In the UK, US$0.6 million was incurred on the Greater York interests in the Southern
North Sea, Columbus development and other exploration licences. In Ireland, US$0.8
million was incurred on exploration work on the Rockall licences and US$0.3 million on
the Slyne interest.
Long-term other receivables of US$0.2 million are represented by the final amounts from
Kambuna operations that are expected to be recovered from the Indonesian authorities.
Trade and other receivables at 31 December 2014 totalled US$2.4 million, a decrease of
US$1.5 million from the 2013 balance of US$3.9 million. The fall is mainly attributable to
the recovery during the period of Indonesian trade debtors and a drop in Kambuna JV
partner recoverables as activity on the asset closed out.
Cash and cash equivalents decreased from US$26.1 million to US$9.9 million during the
year. The most significant cash outflows on E&E assets were incurred in Morocco on the
2H 2014 SM-1 well (US$5.3 million) and settlement of the final costs of the 2013 FD-1
exploration well (US$3.5 million). Other costs included work across the portfolio in
Namibia, the UK & Ireland, together with new venture Erskine acquisition costs, ongoing
administrative costs and corporate activity.
Trade and other payables totalled US$4.0 million at 31 December 2014 and include
US$2.0 million from the Sidi Moussa well drilled in Morocco in 2H 2014. This is reduced
from the 2013 year-end balance of US$4.4 million which included US$1.7 million of
liabilities from the Foum Draa well drilling in Morocco and US$1.1 million from the
Kambuna field operations and decommissioning.
Erskine acquisition
The Company expects to complete imminently the acquisition of an 18% interest in UK
blocks 23/26a (Area B) and 23/26b (Area B) containing the Erskine Field, from BP.
Under the terms of the transaction, the base cash consideration to BP amounts to
US$11.1 million in cash plus 13.5 million Serica new Ordinary Shares (the “Consideration
Shares”), a reduced number of shares due to the impact of certain interim period
adjustments. 25% of the cash consideration will be settled at completion with the
remaining 75% payable in three equal tranches on 1 July 2016, 1 July 2017 and 1 July
2018 respectively.
- 16 -
The net cash of US$9 million to be received by Serica at completion will result from the
impact of certain working capital and interim period adjustments between 1 January
2014, the Effective Date of the transaction, and the completion date. This cash will be
available to cover certain operational liabilities as they fall due.
The Consideration Shares to be allotted to BP on completion of the transaction will rank
pari passu with existing Serica Ordinary Shares. BP has agreed to hold the shares as an
investment for a period not less than one year with any subsequent sales subject to
standard orderly market provisions.
The transaction provides Serica with an immediate and long term cash flow stream. Net
production for the year 2014 accruing to the interest acquired was 317,000 boe given
significant periods of shutdown to meet planned maintenance programmes.
Provision for decommissioning at the end of field life has been provided for on the basis
that Serica’s estimate of decommissioning costs relating to the asset acquired will be
met by BP, on an inflation adjusted basis, with Serica being responsible for any costs
above this level. The terms of the Sale and Purchase Agreement also provide for certain
future contingent payments to be made by Serica in the event that operating costs for
the field fall below current projections.
The transaction is tax efficient for Serica, accelerating recovery of both past and future
tax losses in the UK, and is in line with Serica's strategy to unlock the value of its
existing assets and build a platform from which it can generate future growth.
The Erskine Field is a producing gas and gas condensate field operated by Chevron and
is estimated by the Company to have remaining reserves net to the interest acquired of
approximately 3.6 mmboe, effective 1 January 2014. Fluids from the field are
transported from the Erskine platform (a normally unmanned wellhead platform) to the
BG-operated Lomond platform where they are processed and gas is delivered via the
CATS pipeline system to the terminal at Teeside. Up to 60% of the gas is purchased by
SSE on formula contract prices and the balance is sold in the market at spot prices. The
condensate separated at the Lomond platform is delivered via the Forties pipeline to
Cruden Bay.
The field recommenced production in late May 2015 following an extended period of
shut-in for maintenance.
Cash balances and future commitments
Current cash position, capital expenditure commitments and other obligations
At 31 December 2014, the Group held cash and cash equivalents of US$9.9 million.
Following the completion of the Erskine interest acquisition in early June 2015, cash and
cash equivalents held are expected to increase to US$14.5 million, after the cash receipt
by Serica under the final SPA terms for settlement.
Erskine field commitments
Net revenues from the Erskine field are expected to assist Serica in building its cash
resources over the coming months and years. The Group will have obligations to pay to
BP the three remaining 25% tranches of US$2.775 million (excluding interest) cash
consideration on 1 July 2016, 1 July 2017 and 1 July 2018 respectively. In addition the
Group is likely to fund further significant expenditure later in 2015 for its share of
remedial and upgrade work on the Lomond processing facilities.
Management believe these are sufficient resources to meet the current committed
programme for 2015 and 2016 but remains conscious that a single field income stream
exposes it to operational and infrastructure risks and the consequent need for adequate
- 17 -
working capital to cover associated fluctuations in revenue. The field has a history of
intermittent production performance and operational expenditure continues during
periods of field shut-down when no revenue is earned.
Non-Erskine commitments
The Group has no significant exploration commitments. The two exploration commitment
wells on the Morocco licences have now been drilled. On the Company’s Namibian
licence, the value of work performed to date by the JV partners on the 3D Seismic
acquisition programme has exceeded the minimum obligation expenditure on exploration
work of US$15.0 million covering the entire initial four-year period of the licence, ending
in December 2015.
In the UK East Irish Sea, the Group’s carry on the exploration well on the Doyle prospect
is subject to a cap although no overrun is currently forecast. The Group has no
significant commitments on its other exploration licences.
The Company will continue to give priority to the careful management of existing
financial resources. Although a key objective for the Group is to get the Columbus
development back on track, the Group would seek to use alternative means of finance to
fund its share of development costs.
Other
Asset values and Impairment
At 31 December 2014 Serica’s market capitalisation stood at US$19.4 million (£12.5
million), based upon a share price of £0.0499, which was exceeded by the net asset
value at that date of US$66.3 million. By 28 May 2015 the Company’s market
capitalisation had decreased to US$18.0 million. Management conducted a thorough
review of the carrying value of the Group’s assets and determined that no significant
write-downs were required other than those noted above.
- 18 -
Business Risk and Uncertainties
Serica, like all companies in the oil and gas industry, operates in an environment subject
to inherent risks and uncertainties. The Board regularly considers the principal risks to
which the Company is exposed and monitors any agreed mitigating actions. The overall
strategy for the protection of shareholder value against these risks is to retain a broad
portfolio of assets with varied risk/reward profiles, to apply prudent industry practice in
all operations, to carry insurance where available and cost effective, and to retain
adequate working capital.
The principal risks currently recognised and the mitigating actions taken by the
management are as follows:
Investment Returns: Management seeks to raise funds and then to generate
shareholder returns though investment in a portfolio of exploration acreage leading to
the drilling of wells and discovery of commercial reserves. Delivery of this business
model carries a number of key risks.
Risk
Mitigation
Market support may be eroded
obstructing fundraising and lowering the
share price
Management regularly
communicates its strategy to
shareholders
General market conditions may fluctuate
hindering delivery of the Company’s
business plan
Management’s decisions on capital
allocation may not deliver the expected
successful outcomes
Each asset carries its own risk profile and
no outcome can be certain
Focus is placed on building an asset
portfolio capable of delivering
regular news flow and offering
continuing prospectivity
Management aims to retain
adequate working capital to ride out
downturns should they arise
Rigorous analysis is conducted of all
investment proposals
Operations are spread over a range
of areas and risk profiles
Management aims to avoid over-
exposure to individual assets and to
identify the associated risks
objectively
Operations: Operations may not go according to plan leading to damage, pollution,
cost overruns or poor outcomes.
Risk
Individual wells may not deliver
recoverable oil and gas reserves
Thorough pre-drill evaluations are
Mitigation
conducted to identify the
risk/reward balance
Wells may blow out or equipment may fail
causing environmental damage and delays
Operations may take far longer or cost
more than expected
Exposure is selectively mitigated
through farm-out
The Group retains fully trained and
experienced personnel
The planning process involves risk
identification and establishment of
mitigation measures
Emphasis is placed on engaging
experienced contractors
Appropriate insurances are retained
Management applies rigorous
budget control
Adequate working capital is retained
to cover reasonable eventualities
Production may be interrupted generating
Business interruption cover will be
- 19 -
significant revenue loss
Resource estimates may be misleading and
exceed actual reserves recovered
considered when appropriate
The Group deploys qualified
personnel
Regular third-party reports are
commissioned
A prudent range of possible
outcomes are considered within the
planning process
Personnel: The company relies upon a pool of experienced and motivated personnel to
identify and execute successful investment strategies
Risks
Key personnel may be lost to other
companies
The Remuneration Committee
Mitigation
regularly evaluates incentivisation
schemes to ensure they remain
competitive
Personal safety may be at risk in
demanding operating environments,
typically offshore
Staff and representatives may find
themselves exposed to bribery and corrupt
practices
The Company seeks to build depth
of experience in all key functions to
ensure continuity
A culture of safety is encouraged
throughout the organisation
Responsible personnel are
designated at all appropriate levels
The Group maintains up-to-date
emergency response resources and
procedures
Insurance cover is carried in
accordance with industry best
practice
Company policies and procedures
are communicated to personnel
regularly
Management reviews all significant
contracts and relationships with
agents and governments
Commercial environment: World and regional markets continue to be volatile with
fluctuations and infrastructure access issues that might hinder the company’s business
success
Risk
Volatile commodity prices mean that the
company cannot be certain of the future
sales value of its products
Price mitigation strategies may be
employed at the point of major
capital commitment
Mitigation
Gas may be sold under long-term
contracts reducing exposure to
short term fluctuations
Oil and gas price hedging contracts
may be utilised where viable
Budget planning considers a range
of commodity pricing
A range of different off-take options
are pursued wherever possible
Serica seeks to build and maintain
strong banking relationships and
initiates funding discussions at as
early a stage as practicable
Operations are currently spread
- 20 -
The Company may not be able to get
access, at reasonable cost, to
infrastructure and product markets when
required
Credit to support field development
programmes may not be available at
reasonable cost
Fiscal regimes may vary, increasing
effective tax rates and reducing the
expected value of reserves
over a range of different fiscal
regimes in Western Europe and
Africa
Before committing to a significant
investment the likelihood of fiscal
term changes is considered when
evaluating the risk/reward balance
In addition to the principal risks and uncertainties described herein, the Company is
subject to a number of other risk factors generally, a description of which is set out in
our latest annual information form available on www.sedar.com.
Key Performance Indicators (“KPIs”)
The Company’s main business is the acquisition of interests in prospective exploration
acreage, the discovery of hydrocarbons in commercial quantities and the crystallisation
of value whether through production or disposal of reserves. The Company tracks its
non-financial performance through the accumulation of licence interests in proven and
prospective hydrocarbon producing regions, the level of success in encountering
hydrocarbons and the development of production facilities. In parallel, the Company
tracks its financial performance through management of expenditures within resources
available, the cost-effective exploitation of reserves and the crystallisation of value at
the optimum point. A review of the Company’s progress against these KPIs is covered in
the operations and financial review within this Strategic Report.
Additional Information
Additional information relating to Serica, can be found on the Company’s website at
www.serica-energy.com and on SEDAR at www.sedar.com
The Strategic Report has been approved by the Board of Directors.
On behalf of the Board
Christopher Hearne
Finance Director
29 May 2015
Forward Looking Statements
This disclosure contains certain forward looking statements that involve substantial
known and unknown risks and uncertainties, some of which are beyond Serica Energy
plc’s control, including: the impact of general economic conditions where Serica Energy
plc operates, industry conditions, changes in laws and regulations including the adoption
of new environmental laws and regulations and changes in how they are interpreted and
enforced, increased competition, the lack of availability of qualified personnel or
management, fluctuations in foreign exchange or interest rates, stock market volatility
and market valuations of companies with respect to announced transactions and the final
valuations thereof, and obtaining required approvals of regulatory authorities. Serica
Energy plc’s actual results, performance or achievement could differ materially from
those expressed in, or implied by, these forward looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the forward looking
statements will transpire or occur, or if any of them do so, what benefits, including the
amount of proceeds, that Serica Energy plc will derive therefrom.
- 21 -
DIRECTORS’ REPORT
The Directors of the Company present their report and the Group financial statements of
Serica Energy plc (“Serica” or the “Company”) for the year ended 31 December 2014.
Principal Activities
The principal activity of the Company and its subsidiary undertakings (the “Group”) is to
identify, acquire, explore and subsequently exploit oil and gas reserves. Its current
activities are located in the United Kingdom, Ireland, Namibia and Morocco.
Business Review and Future Developments
A review of the business and the future developments of the Group is presented in the
Strategic Report (including a Review of Operations and Financial Review) and Chairman’s
Statement (all of which, together with the Corporate Governance Statement, are
incorporated by reference into this Directors’ Report).
Results and Dividends
The loss for the year was US$36,076,000 (2013: loss US$5,008,000).
The Directors do not recommend the payment of a dividend (2013: US$nil).
Financial Instruments
The Group’s financial risk management objectives and policies are discussed in note 22.
Events Since Balance Sheet Date
Events since the balance sheet date are included in note 29.
Directors and their Interests
The following Directors have held office in the Company since 1 January 2014:
Antony Craven Walker
Christopher Hearne
Neil Pike
Mitchell Flegg
Ian Vann
Steven Theede
Jeffrey Harris
The Directors who held office at the end of the financial year had the following interests
in the ordinary shares of the Company according to the register of Directors’ interests:
Antony Craven Walker (1)
Christopher Hearne
Mitchell Flegg
Neil Pike (2)
Ian Vann
Steven Theede
Jeffrey Harris (3)
Class
of
share
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Interest at
end of year
Interest at
start of year
7,829,916
1,135,986
385,833
505,000
267,935
749,485
46,090,576
7,829,916
1,051,613
301,463
505,000
267,935
749,485
46,090,576
- 22 -
1. 4,207,078 ordinary shares were held by Antony Craven Walker, 2,241,732 ordinary shares were
held by Christine Elizabeth Walker and 1,381,106 by Rathbones (pension funds).
2. 190,000 ordinary shares are held by Romayne Pike and 185,000 ordinary shares by Luska
Limited.
3. 46,090,576 ordinary shares are held by GRG UK Oil LLC who are represented on the Board by
Jeffrey Harris.
None of the Directors who held office at the end of the financial year had any disclosable
interest in the shares of other Group companies.
No rights to subscribe for shares in or debentures of Group companies were granted to
any of the Directors or their immediate families, or exercised by them, during the
financial year except as indicated below:
The Directors are interested in share options held by them pursuant to the terms of the
Serica Energy Corporation option plan (a summary of which is set out in note 25) as
follows:
C Hearne
1/1/14 Granted
600,000
100,000
-
-
Expired 31/12/14
600,000
100,000
-
-
Exercise
Price Cdn$
Expiry
Date of
date
grant
1.00 17/01/05 16/01/15
1.80 15/06/05 14/06/15
The options above have fully vested.
The following Directors are also interested in share options held by them pursuant to the
terms of the Serica Energy plc Share Option Plan 2005 (“Serica 2005 Option Plan”) (a
summary of which is set out in note 25) as follows:
C Hearne
M Flegg
1/1/14 Granted
103,000
7,000
350,000
675,000
200,000
402,190
400,000
-
-
-
-
-
-
-
- 600,000
270,000
150,000
210,000
66,000
225,000
200,000
326,750
400,000
-
-
-
-
-
-
-
-
- 600,000
Expired 31/12/14
103,000
7,000
350,000
675,000
200,000
402,190
400,000
600,000
270,000
150,000
210,000
-
225,000
200,000
326,750
400,000
600,000
-
-
-
-
-
-
-
-
-
-
-
(66,000)
-
-
-
-
-
Exercise
Price £
0.97
0.97
0.82
0.68
0.314
0.214
0.29
0.13
0.96
1.02
0.75
0.32
0.68
0.314
0.214
0.29
0.13
Date of
grant
23/11/05
23/11/05
31/03/08
11/01/10
05/04/11
11/01/12
08/10/12
30/01/14
12/06/06
11/01/07
14/03/08
05/01/09
11/01/10
05/04/11
11/01/12
08/10/12
30/01/14
Expiry
date
22/11/15
22/11/15
30/03/18
10/01/20
04/04/21
10/01/22
07/10/22
29/01/24
11/06/16
10/01/17
13/03/18
04/01/14
10/01/20
04/04/21
10/01/22
07/10/22
29/01/24
Options granted prior to December 2009 vest as to one third on each of the first, second
and third anniversaries of grant in line with the practice for companies listed in Toronto
which applied at the date of grant. Options awarded since December 2009 have a three
year vesting period.
Under the Serica 2005 Option Plan, when awarding options to directors, the
Remuneration Committee is required to set Performance Conditions, in addition to the
vesting provisions, before vesting can take place. In summary the Performance
Conditions are as follows:
- 23 -
In respect of the options granted in November 2005, the director may only exercise
those options on condition that the Serica share price on a 30 day moving average basis
prior to 23 November 2015 has reached at least 200p.
In respect of the options granted in March 2008, the director may only exercise those
options on condition that the Serica share price on a 30 day moving average basis prior
to 30 March 2018 has reached at least 200p.
In respect of the options granted in January 2010, the vesting of the options is subject
to Serica share price Performance Conditions measured against a selected peer group
initially consisting of Antrim Energy Inc., Aurelian Oil & Gas plc (Aurelian), Bowleven plc,
Falkland Oil & Gas Limited, Faroe Petroleum plc, Gulfsands Petroleum plc, Ithaca Energy
Inc, Northern Petroleum plc, Petroceltic International plc, Providence Resources plc,
Regal Petroleum plc and Valiant Petroleum plc (Valiant). The Performance Conditions are
as follows:
- 40% of options to vest in the event that the Company outperforms the 25th
percentile of peer group performance over any 1 year period
- 80% of options to vest in the event that the Company outperforms the 50th
percentile of peer group performance over any 1 year period
- 100% of options to vest in the event that the Company outperforms the 75th
percentile of peer group performance over any 1 year period
The peer group of comparator companies is subject to change by the Remuneration
Committee should the Remuneration Committee feel that the group no longer comprises
a meaningful peer group comparator as the result, for example, of a significant change
in the Company or one or more of the peer group companies ceasing to be quoted on a
recognised exchange. Regal Petroleum plc (Regal) was replaced by Dominion Petroleum
plc (Dominion) following Regal’s acquisition by Energees Management Limited and
Dominion was replaced by Chariot Oil and Gas Limited (Chariot) following Dominion’s
acquisition by Ophir Energy plc. Aurelian ceased to be quoted on a recognised exchange
in January 2013 and Valiant merged with Ithaca Energy Inc in April 2013. Following
these events Aurelian and Valiant are no longer included in the peer group of comparator
companies and have not been replaced.
In respect of the options granted in April 2011, the director may only exercise those
options on condition that either of the following Performance Conditions is satisfied:
- Achievement of full year post-tax, audited profit for the Serica Energy group of
companies; and/or
- Successful achievement of a merger or acquisition or other similar corporate
event approved by the Board of Directors of the Company which, in the view of
the Remuneration Committee, would create greater diversity and scope for the
Company.
In respect of the options granted in January 2012 and October 2012, the vesting of the
options is subject to Serica share price Performance Conditions measured against a
selected peer group initially consisting of Antrim Energy Inc., Aurelian Oil & Gas plc,
Bowleven plc, Chariot Oil and Gas Limited, Falkland Oil & Gas Limited, Faroe Petroleum
plc, Gulfsands Petroleum plc, Ithaca Energy Inc, Northern Petroleum plc, Petroceltic
International plc, Providence Resources plc and Valiant Petroleum plc. The Performance
Conditions are as follows:
- 40% of options to vest in the event that the Company outperforms the 25th
percentile of peer group performance over any 1 year period
- 80% of options to vest in the event that the Company outperforms the 50th
percentile of peer group performance over any 1 year period
- 100% of options to vest in the event that the Company outperforms the 75th
percentile of peer group performance over any 1 year period
- 24 -
The peer group of comparator companies is subject to change by the Remuneration
Committee should the Remuneration Committee feel that the group no longer comprises
a meaningful peer group comparator as the result, for example, of a significant change
in the Company or one or more of the peer group companies ceasing to be quoted on a
recognised exchange. Aurelian ceased to be quoted on a recognised exchange in January
2013 and Valiant merged with Ithaca Energy Inc in April 2013. Following these events
Aurelian and Valiant are no longer included in the peer group of comparator companies
and have not been replaced.
Auditor
A resolution to reappoint Ernst & Young LLP, as auditor will be put to the members at the
annual general meeting.
Disclosure of information to auditors
The directors who were members of the Board at the time of approving the Directors’
Report are listed above. So far as each person who was a director at the date of
approving this report is aware, there is no relevant audit information, being information
needed by the auditor in connection with preparing its report, of which the auditor is
unaware. Having made enquiries of fellow directors and the Group’s auditor, each
director has taken all the steps that he is obliged to take as a director in order to made
himself aware of any relevant audit information and to establish that the auditor is aware
of that information.
On behalf of the Board
Christopher Hearne
Director
29 May 2015
- 25 -
CORPORATE GOVERNANCE STATEMENT
The Board of Directors fully endorses the importance of sound corporate governance.
Serica is incorporated in the United Kingdom. During 2014 its shares were traded on
both the AIM market of the London Stock Exchange (“AIM”) and on the Toronto Stock
Exchange in Canada (“TSX”). On 17 March 2015, the Company announced that it had
applied for voluntary delisting of its ordinary shares from the TSX. This was because the
directors believed that the minimal trading activity of Serica’s shares on the TSX no
longer justified the expenses and administrative efforts associated with maintaining its
dual listing, with Serica’s AIM listing providing its shareholders with sufficient liquidity.
The Company’s shares were formally delisted from the TSX at the close of trading on 31
March 2015. After this date Serica’s shares continue to trade solely on AIM under its
ticker SQZ.
The code of practice followed for companies incorporated in the United Kingdom and
listed on the premium sector of the Main Market of the London Stock Exchange is set out
in the UK Corporate Governance Code (the “UK Code”). It is not compulsory for
companies whose shares are traded on the AIM market but the Board applies those
principles of the UK Code to the extent that it considers it reasonable and practical to do
so given the size and nature of the Company.
Although the Company has now delisted from the TSX, the Company is still considered to
be a reporting issuer in a number of Canadian provinces. The corporate governance
guidelines applying to reporting issuers in Canada are set out under Ontario Securities
Commission National Policy 58-201 (the “Corporate Governance Guidelines”). The
Company is a ‘designated foreign issuer’ as defined under National Instrument 71-1-2-
Continuous Disclosure and Other Exemptions Relating to Foreign Issuers. The Company
is subject to the foreign regulatory requirements of the AIM Market of the London Stock
Exchange.
The disclosures below explain the composition of, role and responsibilities of the Board
and the Board Committees.
The Board and its Committees
The Board of the Company currently consists of two Executive Directors, four non-
Executive Directors and the Chairman of the Board who has been acting as Interim CEO
since April 2011. With effect from 1 June 2015, the Chairman will take the role of
Executive Chairman following the departure of the two Executive directors. One of the
non-Executive Directors will be stepping down at the conclusion of the 2015 annual
General Meeting. With effect from 1 July 2015, the Board will therefore comprise the
Executive Chairman and three non-Executive Directors, one of whom holds the position
of Senior Independent Director. It is recognised that further Board restructuring will be
required in due course once the Company has achieved its short term strategic goals. All
the non-Executive Directors and the Chairman are independent in character and
judgement and have the range of experience and calibre to bring independent
judgement on issues of strategy, performance, resources and standards of conduct
which is vital to the success of the Group.
The Board retains full and effective control over the Company. The Company holds
regular Board meetings at which financial, operational and other reports are considered
and, where appropriate, voted on. The Board is responsible for the Group’s strategy,
performance, key financial and compliance issues, approval of any major capital
expenditure and the framework of internal controls. The matters reserved for the Board
include, amongst others, approval of the Group’s long term objectives, policies and
budgets, changes relating to the Group’s management structure, approval of the Group’s
annual report and accounts and ensuring maintenance of sound systems of internal
control.
- 26 -
There is a clearly defined organisational structure with lines of responsibility and
delegation of authority to executive management. The Board is responsible for
monitoring the activities of the executive management. The Chairman has the
responsibility of ensuring that the Board discharges its responsibilities. In the event of an
equality of votes at a meeting of the Board, the Chairman has a second or casting vote.
The Board believes that there has been an adequate balance between the non-Executive
and Executive Directors, both in number and in experience and expertise, to ensure that
the Board operates independently of executive management. Details of the recent Board
changes are disclosed in the Chairman’s Report. There is no formal Board performance
appraisal system in place but the Corporate Governance and Nomination Committee
considers this as part of its remit.
Other than Jeffrey Harris who represents Global Reserve Group, the Company’s largest
shareholder, all of the non-Executive Directors meet the requirements of independence
prescribed in the UK Code.
The chairman was independent on appointment but has not been independent for the
whole of his tenure due to holding share options (which have now expired) and his
executive responsibilities.
Individual Directors may engage outside advisors at the expense of the Company upon
approval by the Board in appropriate circumstances.
The Board has established a Corporate Governance and Nomination Committee, an Audit
Committee, a Reserves Committee, a Remuneration and Compensation Committee and a
Health, Safety and Environmental Committee. The terms of reference of the Corporate
Governance and Nomination, Audit and Remuneration and Compensation Committees
can be found on the Company’s website www.serica-energy.com
Corporate Governance and Nomination Committee
The Corporate Governance and Nomination Committee is responsible for the Company's
observance of the UK Code and the Corporate Governance Guidelines where they apply
to the Company, for compliance with the rules of AIM, the rules applicable to designated
foreign issuers in Canada and for other corporate governance matters, including
compliance with the Company’s Share Dealing Code and with AIM in respect of dealings
by directors or employees in the Company’s shares. The committee is responsible for
monitoring the effectiveness of the Board and its Committees, proposing to the Board
new nominees for election as directors to the Board, determining successor plans and for
assessing directors on an ongoing basis.
The committee met three times during 2014 and will meet as required during the next
financial year.
The Corporate Governance and Nomination Committee is comprised of the Chairman and
two non-Executive Directors all of whom are independent (other than as described in
“The Board and its Committees” above). The committee is chaired by Neil Pike and its
other members are Antony Craven Walker and Ian Vann.
Audit Committee
The Audit Committee meets regularly and consists of three members, all of whom are
non-Executive Directors and two of whom are independent including the chairman of the
committee. The committee's purpose is to assist the Board's oversight of the integrity of
the
independence and
performance of the auditors, the regulation and risk profile of the Group and the review
and approval of any related party transactions. The Audit Committee may hold private
sessions with management and the external auditor.
financial statements and other
financial reporting, the
- 27 -
The Audit Committee met three times in 2014 and proposes to meet at least three times
during the next financial year. The committee is chaired by Neil Pike and its other
members are Steven Theede and Jeffrey Harris.
The responsibilities and operation of the Audit Committee are more particularly set out in
the Company’s Audit Committee Charter, a copy of which is available on the Company’s
website at www.serica-energy.com.
Reserves Committee
The Reserves Committee is a sub-committee of the Audit Committee. The committee’s
purpose is to review the reports of the independent reserves auditors pursuant to
Canadian regulations which require that the Board discuss the reserves reports with the
independent reserves auditors or delegate authority to a reserves committee comprised
of at least two non-Executive Directors. The committee is chaired by Steven Theede and
its other member is Ian Vann. The committee meets at least once a year prior to
publication of the annual results.
Remuneration and Compensation Committee
The Remuneration and Compensation Committee meets regularly to consider all material
elements of remuneration policy, the remuneration and incentivisation of Executive
Directors and senior management and to make recommendations to the Board on the
framework for executive remuneration and its cost. The role of the Remuneration and
Compensation Committee is to keep under review the remuneration policies to ensure
that Serica attracts, retains and motivates the most qualified talent who will contribute
to the long-term success of the Company.
The committee met three times in 2014 and proposes to meet at least twice during the
next financial year. In addition, written resolutions of the committee are passed from
time to time particularly in relation to routine matters such as the allotment of shares
pursuant to share option exercises as well as to record formally decisions of the
committee reached outside the scheduled meetings.
The committee is composed of the Chairman and two non-Executive Directors all of
whom are independent (other than as described in “The Board and its Committees”
above). The Remuneration and Compensation Committee is chaired by Steve Theede
and its other members are Neil Pike and Antony Craven Walker.
Health, Safety and Environmental Committee
The Health, Safety and Environmental Committee is responsible for matters affecting
occupational health, safety and the environment, including the formulation of a health,
safety and environmental policy.
The committee met four times in 2014 and proposes to meet at least three times during
the next financial year. The committee is chaired by Ian Vann and its other members are
Mitch Flegg and Antony Craven Walker.
Directors’ attendance at meetings
The Board generally has one scheduled Board meeting every two months over the
course of the financial year with informal discussions scheduled as required. Additional
meetings are held depending upon opportunities or issues to be dealt with by the
Company from time to time. The non-Executive Directors hold informal meetings during
the course of the year at which members of management are not in attendance.
- 28 -
The directors’ attendance at scheduled Board meetings and Board committees during
2014 is detailed in the table below:
Director
Board Audit Remuneration
and
Compensation
A Craven Walker
(Chairman)
CJ Hearne (CFO)
M Flegg (COO)
N Pike
S Theede
I Vann
J Harris
Total meetings
Notes:
8*
8
7
8
8
8
7
8
1^
3^
-
3*
3
-
3
3
3
-
-
3
3*
-
-
3
Corporate
Governance
and
Nomination
3
-
-
3*
1^
3
-
3
HSE
Reserves
4
-
4
-
-
4*
-
4
-
-
-
-
1*
1
-
1
1. The Chairman and non-executive directors attended a number of meetings of committees of which they
were not members during the course of the year at the invitation of the committee chairman.
* Chairman
^ Invitee
Janette Davies
Company Secretary
29 May 2015
- 29 -
DIRECTORS’ BIOGRAPHIES
Antony Craven Walker
Chairman and interim Chief Executive
Tony Craven Walker started his career with BP and has been a leading figure in the
British independent oil industry since the early 1970s. He founded two British
independent oil companies, Charterhouse Petroleum, where he held the post of Chief
Executive, and Monument Oil and Gas, where he held the post of Chief Executive and
later became Chairman. He was also a founder member of BRINDEX (Association of
British Independent Oil Exploration Companies). He was appointed Chairman of Serica in
2004 and following the retirement of Paul Ellis in April 2011, is currently acting as
interim Chief Executive.
Christopher Hearne
Finance Director
Chris Hearne joined Serica from Intrepid Energy, a leading independent exploration and
production company in the North Sea, where he was responsible for corporate finance
for eight years. In this capacity, he contributed to the growth of Intrepid Energy from a
start-up company to its sale for over US$1 billion. Prior to joining Serica he worked as
an investment banker with Lehman Brothers and Robert Fleming. He was appointed to
the Board as Finance Director of Serica in 2005.
Mitchell Flegg
Chief Operating Officer
Mitch Flegg has over 32 years of industry experience starting with Schlumberger and
then with Enterprise Oil, (initially as a Petrophysicist) where he became responsible for
drilling related operations for wells drilled in UK, Australia, Cambodia, Vietnam, Ireland,
Romania and Bulgaria. After the takeover by Shell he worked on the implementation of
new technology in well engineering before moving into asset management. Mitch joined
Serica in 2006 and has been responsible for all drilling and development operations. He
was promoted to the position of Chief Operating Officer in March 2011 and appointed to
the Board of Serica in September 2012.
Neil Pike
Non-Executive Director and Senior Independent Director
Neil Pike has been involved in the global petroleum business as a financier since joining
the energy department at Citibank in 1975 until joining the board of Serica. Neil
remained an industry specialist with Citibank throughout his career and was closely
involved in the development of specialised oil field finance. Latterly he was responsible
for Citibank’s relationships with the oil and gas industry worldwide. He was appointed to
the Board of Serica in 2004.
- 30 -
Ian Vann
Non-Executive Director
Ian Vann was employed by BP from 1976, and directed and led BP’s global exploration
efforts from 1996 until his retirement in January 2007. He was appointed to the
executive leadership team of the Exploration & Production Division of BP in 2001, initially
as Group Vice President, Technology and later as Group Vice President, Exploration and
Business Development. He was appointed to the Board of Serica in 2007.
Steven Theede
Non-Executive Director
Steven Theede held senior management positions with Conoco, later ConocoPhillips, and
in 2000 was appointed President, Exploration and Production for Europe, Russia and the
Caspian region. In 2003 he joined Yukos Oil Company and became its Chief Executive
Officer in July 2004, a position he held until August 2006. He was appointed to the Board
of Serica in 2007.
Jeffrey Harris
Non-Executive Director
Jeffrey Harris founded Global Reserve Group LLC in 2012 following a twenty-nine year
career with Warburg Pincus, during which period he invested in and advised companies
in the industrial, consumer, technology and energy sectors. Jeffrey has served on the
board of directors of over thirty companies, including twelve publicly-traded entities. He
is past chairman of the National Venture Capital Association and an adjunct professor at
the Columbia University Graduate School of Business where he teaches courses on
venture capital, and entrepreneurship and innovation. He was appointed to the Board of
Serica in December 2012.
- 31 -
Directors’ responsibilities statement in relation to the Group and Company
financial statements
The Directors are responsible for preparing the Strategic Report, the Director’s Report
and financial statements in accordance with applicable United Kingdom law and
regulations and those International Financial Reporting Standards as adopted by the
European Union.
Company law requires the directors to prepare financial statements for each financial
year. As required by the AIM Rules of the London Stock Exchange they are required to
prepare the Group financial statements in accordance with International Financial
Reporting Standards as adopted by the European Union. Under United Kingdom company
law the directors have elected to prepare the Parent Company financial statements in
accordance with International Financial Reporting Standards as adopted by the European
Union. Under company law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of affairs of the
Group and the Company and the profit or loss of the company for that period.
In preparing those Group and Company financial statements the Directors are required
to:
present fairly the financial position, financial performance and cash flows of the
Group;
select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state that the Group and Company has complied with IFRSs, subject to any
material departures disclosed and explained in the financial statements;
present information, including accounting policies, in a manner that provides
relevant, reliable, comparable and understandable information
provide additional disclosures when compliance with the specific requirements in
IFRSs is insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the Group’s and Company’s financial
position and financial performance; and
state whether the Group financial statements have been prepared in accordance
with IFRSs as adopted by the European Union, subject to any material departures
disclosed and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient
to show and explain the Group’s transactions and disclose with reasonable accuracy at
any time the financial position of the Group and Company and enable them to ensure
that the Group and Company financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Group and Company and
hence for taking reasonable steps for the prevention and detection of fraud and other
irregularities.
The Directors confirm that they have complied with these requirements and, having a
reasonable expectation that the Company and the Group have adequate resources to
continue in operational existence for the foreseeable future, will continue to adopt the
going concern basis in preparing the accounts.
- 32 -
Independent Auditor’s report to the members of Serica Energy plc
We have audited the financial statements of Serica Energy plc for the year ended 31
December 2014 which comprise the Group Income Statement, the Group Statement of
Comprehensive Income, the Group and Parent Company Balance Sheets, the Group and
Parent Company Statements of Changes in Equity, the Group and Parent Company Cash
Flow Statements and the related notes 1 to 29. The financial reporting framework that
has been applied in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union and International
Accounting standards Board (IASB), as regards the parent company
financial
statements, as applied in accordance with the provisions of the Companies Act 2006.
This report is made solely to the company’s members, as a body, in accordance with
Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken
so that we might state to the company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the
company and the company’s members as a body, for our audit work, for this report, or
for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement, the directors are
responsible for the preparation of the financial statements and for being satisfied that
they give a true and fair view. Our responsibility is to audit and express an opinion on
the financial statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial
statements sufficient to give reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the group’s and the
parent company’s circumstances and have been consistently applied and adequately
disclosed; the reasonableness of significant accounting estimates made by the directors;
and the overall presentation of the financial statements. In addition, we read all the
financial and non-financial information in the Annual Report and Accounts to identify
material inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the audit. If we become
aware of any apparent material misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion:
the financial statements give a true and fair view of the state of the group’s and
of the parent company’s affairs as at 31 December 2014 and of the group’s loss
for the year then ended;
the group financial statements have been properly prepared in accordance with
IFRSs as adopted by the European Union and IFRS as adopted by International
Accounting standards Board (IASB);and
the parent company financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union and IFRS as adopted
by International Accounting Standards Board (IASB) and as applied in
accordance with the provisions of the Companies Act 2006; and
- 33 -
The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
Emphasis of matter – Going Concern
In forming our opinion on the financial statements, which is not modified, we have
considered the adequacy of the disclosure made in note 2 to the financial statements
concerning the company’s ability to continue as a going concern. The conditions
explained on note 2 to the financial statements, indicate the existence of a material
uncertainty which may cast significant doubt about the company’s ability to continue as
a going concern. The financial statements do not include the adjustments that would
result if the company was unable to continue as a going concern.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in Note 1 to the financial statements, the group in addition to complying
with its legal obligation to apply IFRSs as adopted by the European Union, has also
applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion the financial statements comply with IFRSs as issued by the IASB.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic Report and the Directors’ Report for
the financial year for which the financial statements are prepared is consistent with the
financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters where the Companies Act
2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the parent company, or
returns adequate for our audit have not been received from branches not visited
by us; or
the parent company financial statements are not in agreement with the
accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our
audit.
Paul Wallek, (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
29 May 2015
1. The maintenance and integrity of the Serica Energy plc web site is the responsibility of the directors; the work carried
out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the financial statements since they were initially presented
on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
- 34 -
Serica Energy plc
Group Income Statement
for the year ended 31 December
Continuing operations
Sales revenue
Cost of sales
Gross profit
Pre-licence costs
Impairment and write-offs of E&E assets
Other asset write-offs
Administrative expenses
Foreign exchange (loss)/gain
Share-based payments
Depreciation
Operating loss before net finance revenue and tax
Finance revenue
Finance costs
2014
Notes US$000
2013
US$000
-
-
-
-
-
-
(512)
(30,019)
(250)
(4,296)
(235)
(337)
-
(330)
(131)
(168)
(4,458)
341
(252)
(109)
(35,649)
(5,107)
26
-
16
(38)
13
13
25
6
9
10
Loss before taxation
(35,623)
(5,129)
Taxation charge for the year
11 a)
-
-
Loss for the year from continuing operations
(35,623)
(5,129)
Discontinued operations
(Loss)/profit for the year from discontinued operations
Loss for the year
4
(453)
121
(36,076)
(5,008)
Loss per ordinary share - EPS
Basic and diluted EPS on continuing operations (US$)
Basic and diluted EPS on loss for the year (US$)
12
12
(0.14)
(0.14)
(0.03)
(0.03)
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the
income statement.
- 35 -
Serica Energy plc
Registered Number: 5450950
Balance Sheet
As at 31 December
Non-current assets
Note
s
Exploration & evaluation assets 13
14
Property, plant and equipment
15
Investments in subsidiaries
16
Other receivables
Current assets
Inventories
Trade and other receivables
Financial assets
Cash and cash equivalents
17
18
18
19
Group
2014
US$000
2013
US$000
Company
2014
US$000
2013
US$000
57,843
-
-
247
58,090
-
2,352
-
9,893
12,245
74,609
-
-
1,293
75,902
258
3,851
420
26,062
30,591
-
-
-
-
-
-
-
-
-
-
-
58,057
-
9,447
67,504
-
98,148
420
25,459
124,027
TOTAL ASSETS
70,335
106,493
67,504
124,027
Current liabilities
Trade and other payables
Provisions
20
21
(3,998)
-
(4,417)
-
(1,167)
-
(959)
-
TOTAL LIABILITIES
(3,998)
(4,417)
(1,167)
(959)
NET ASSETS
66,337
102,076
66,337
123,068
Share capital
Merger reserve
Other reserve
Accumulated deficit
23
15
227,958
-
20,634
227,958
-
20,297
(182,255) (146,179)
192,686
-
20,634
(146,983)
192,686
-
20,297
(89,915)
TOTAL EQUITY
66,337
102,076
66,337
123,068
Approved by the Board on 29 May 2015
Antony Craven Walker
Chief Executive Officer
________________________________ _____________________________________
Christopher Hearne
Finance Director
- 36 -
Serica Energy plc
Statement of Changes in Equity
For the year ended 31 December 2014
Group
Share
capital
US$000
Other
reserve
US$000
Accum’d
deficit
US$000
Total
US$000
At 1 January 2013
209,758
20,045
(141,171)
88,632
Loss for the year
Total comprehensive income
Share-based payments
Issue of ordinary shares
Fees from issue of shares
-
-
-
19,525
(1,325)
-
-
252
-
-
(5,008)
(5,008)
-
-
-
(5,008)
(5,008)
252
19,525
(1,325)
At 31 December 2013
227,958
20,297
(146,179)
102,076
Loss for the year
Total comprehensive income
Share-based payments
-
-
-
-
-
337
(36,076)
(36,076)
-
(36,076)
(36,076)
337
At 31 December 2014
227,958
20,634
(182,255)
66,337
Company
Share
capital
US$000
Other
Merger
reserve
reserve
US$000 US$000
Accum’d
deficit
US$000
Total
US$000
At 1 January 2013
174,486
4,322
20,045
(52,499)
146,354
Loss for the year
Total comprehensive income
Share-based payments
Issue of ordinary shares
Fees from issue of shares
Transfers
-
-
-
19,525
(1,325)
-
-
-
-
-
-
(4,322)
-
-
252
-
-
-
(41,738)
(41,738)
-
-
-
4,322
(41,738)
(41,738)
252
19,525
(1,325)
-
At 31 December 2013
192,686
Loss for the year
Total comprehensive income
Share-based payments
-
-
-
At 31 December 2014
192,686
-
-
-
-
-
20,297
(89,915)
123,068
-
-
337
(57,068)
(57,068)
-
(57,068)
(57,068)
337
20,634
(146,983)
66,337
- 37 -
Serica Energy plc
Cash Flow Statement
For the year ended 31 December
Operating activities:
Loss for the year
Adjustments to reconcile loss for the year
to net cash flow from operating activities:
Net finance (income)/costs
Depreciation
Depletion and amortisation
Other asset write-offs
Impairment of E&E assets
Impairment of loans and investments
Share-based payments
Other non-cash movements
Decrease in trade and other receivables
Decrease in inventories
(Decrease)/increase in trade and other
payables
payables
Use of provisions
Group
2014
US$000
2013
US$000
Company
2014
US$000
2013
US$000
(36,076)
(5,008)
(57,068)
(41,738)
(26)
-
-
250
30,019
-
337
235
2,856
42
(688)
28
109
1,036
168
131
-
252
(310)
4,570
24
(2,108)
(26)
-
-
-
-
54,521
337
165
608
-
208
22
-
-
-
-
40,000
252
(345)
204
-
(212)
-
(1,607)
-
-
Cash utilised in operations
(3,051)
(2,715)
(1,255)
(1,817)
Taxation paid
-
-
-
-
Net cash outflow from operations
(3,051)
(2,715)
(1,255)
(1,817)
Investing activities:
Interest received
Purchase of E&E assets
Cash inflow from disposals
Funding provided to Group subsidiaries
Net cash flow from investing activities
Financing activities:
Gross proceeds from issue of shares
Fees from issue of shares
Finance costs paid
Net cash flow from financing activities
Net (decrease)/increase in cash and
cash equivalents
Effect of exchange rates on cash and cash
equivalents
Cash and cash equivalents at 1 January
26
(12,967)
-
-
16
(13,094)
933
-
26
-
-
(14,618)
16
-
-
(12,762)
(12,941)
(12,145)
(14,592)
(12,746)
-
-
-
-
19,525
(1,325)
(38)
18,162
-
-
-
-
19,525
(1,325)
(38)
18,162
(15,992)
3,302
(15,847)
3,599
(177)
26,062
415
22,345
(165)
25,459
436
21,424
Cash and cash equivalents at 31 December
9,893
26,062
9,447
25,459
- 38 -
Serica Energy plc
Notes to the Financial Statements
1. Authorisation of the Financial Statements and Statement of Compliance with
IFRS
The Group’s and Company’s financial statements for the year ended 31 December 2014
were authorised for issue by the Board of Directors on 29 May 2015 and the balance
sheets were signed on the Board’s behalf by Antony Craven Walker and Christopher
Hearne. Serica Energy plc is a public limited company incorporated and domiciled in
England & Wales. The principal activity of the Company and the Group is to identify,
acquire and subsequently exploit oil and gas reserves. Its current activities are located in
the United Kingdom, Ireland, Namibia and Morocco. The Company’s ordinary shares are
traded on AIM.
The Group’s financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as adopted by the EU as they apply to the
financial statements of the Group for the year ended 31 December 2014. The Company’s
financial statements have been prepared in accordance with IFRS as adopted by the EU
as they apply to the financial statements of the Company for the year ended 31
December 2014 and as applied in accordance with the provisions of the Companies Act
2006. The Group’s financial statements are also prepared in accordance with IFRS as
issued by the IASB. The principal accounting policies adopted by the Group and by the
Company are set out in note 2.
The Company has taken advantage of the exemption provided under section 408 of the
Companies Act 2006 not to publish its individual income statement and related notes.
The deficit dealt with in the financial statements of the parent Company was
US$57,068,000 (2013: US$41,738,000).
On 1 September 2005, the Company completed a reorganisation (the “Reorganisation”).
whereby the common shares of Serica Energy Corporation were automatically exchanged
on a one-for-one basis for ordinary shares of Serica Energy plc, a newly formed company
incorporated under the laws of the United Kingdom. In addition, each shareholder of the
Corporation received beneficial ownership of part of the ‘A’ share of Serica Energy plc
issued to meet the requirements of public companies under the United Kingdom
jurisdiction. Under IFRS this reorganisation was considered to be a reverse takeover by
Serica Energy Corporation and as such the financial statements of the Group represent a
continuation of Serica Energy Corporation.
2. Accounting Policies
Basis of Preparation
The accounting policies which follow set out those policies which apply in preparing the
financial statements for the year ended 31 December 2014.
The Group and Company financial statements have been prepared on a historical cost
basis and are presented in US dollars. All values are rounded to the nearest thousand
dollars (US$000) except when otherwise indicated.
Going Concern
The financial statements have been prepared on a going concern basis which
contemplates the continuity of normal business activities and the realisation of assets
and the settlement of liabilities in the ordinary course of business.
The financial position of the Group, its cash flows and capital commitments are described
- 39 -
in the Financial Review above. Following the cessation of production from the Kambuna
field in 2013, the Group had no production revenues up to the end of 2014. As at 31
December 2014, the Group had net current assets of US$8.2 million (2013: US$26.2
million), including cash & cash equivalents of US$9.9 million (2013: US$26.1 million).
The Directors are required to consider the availability of resources to meet the Group’s
and Company’s liabilities for the foreseeable future. Following the recent severe drop in
oil prices and consequent impact upon the financial resources available to companies
such as Serica, management has reviewed all of its expenditure commitments and has
reduced its personnel, office and other costs substantially effective 1H 2015. The Group
currently has no exploration drilling commitments and therefore any such future
programmes are discretionary depending upon the availability of finance amongst other
things.
The completion of the Erskine acquisition is expected imminently with only the final
execution of certain required documents outstanding. This will bring a significant new
revenue stream to the Group comprising sales of oil, gas and other liquids. Net revenues
from the field are expected to assist Serica in building its cash resources over coming
months and years. However, management remains conscious that a single field income
stream exposes it to operational and infrastructure risks and consequent need for
adequate working capital to cover associated fluctuations in revenue. The field has a
history of intermittent production performance and operational expenditure continues
during periods of field shut-down when no revenue is earned. However the recent field
and system shut-down was designed to improve future production performance and field
uptime.
The Company has no debt or major commitments other than those that will arise
following completion of the Erskine acquisition. The cash in place is considered adequate
to cover geological and geophysical, exploration, technical and administrative costs
associated with its ongoing business over the coming twelve months though new funding
may be required thereafter.
Management is conscious that to further develop the business and offer attractive
returns to shareholders, new sources of funds may be required. These include finance to
develop the Group’s Columbus field interest and for new programmes to add oil and gas
reserves. The Group has a record of raising of capital through farm down and will seek to
continue this strategy whilst it seeks other sources of funding. Other strategic and
capital raising alternatives open to Serica include the issue of equity or other financial
instruments, the forward sale of production and corporate transactions.
After making enquiries and having taken into consideration the above factors, the
Directors have reasonable expectations that the Group has adequate cash resources to
continue in operational existence for the foreseeable future. The successful conclusion of
the Erskine transaction is expected to bring significant new cash flows albeit from a
single asset with associated performance and commodity price risks. Such risks and the
potential need to raise additional funds to cover any working capital needs arising
indicate the existence of material uncertainties which may cast significant doubt about
the consolidated entity’s ability to continue as a going concern and therefore whether it
would realise its assets and extinguish its liabilities in the normal course of the business
and at the amount stated in this financial report.
These financial statements do not include any adjustment relating to the recoverability
or classification of the recorded asset amounts or to the amounts or classifications of
liabilities that might be necessary should the consolidated entity not be able to continue
as a going concern.
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires management to
- 40 -
make estimates and assumptions that affect the reported amounts of assets and
liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet
date and the reported amounts of revenues and expenses during the reporting period.
Estimates and judgments are continuously evaluated and are based on management’s
experience and other factors, including expectations of future events that are believed to
be reasonable under the circumstances. Actual outcomes could differ from these
estimates.
The key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the amounts recognised in the financial statements are: the assessment
of commercial reserves, the impairment of the Group and Company’s assets (including
oil & gas development assets and Exploration and Evaluation “E&E” assets) and share-
based payment costs.
Assessment of commercial reserves
Management is required to assess the level of the Group’s commercial reserves together
with the future expenditures to access those reserves, which are utilised in determining
the amortisation and depletion charge for the period and assessing whether any
impairment charge is required. The Group employs independent reserves specialists who
periodically assess the Group’s level of commercial reserves by reference to data sets
including geological, geophysical and engineering data
together with reports,
presentation and financial information pertaining to the contractual and fiscal terms
applicable to the Group’s assets. In addition the Group undertakes its own assessment of
commercial reserves and related future capital expenditure by reference to the same
datasets using its own internal expertise.
Impairment
The Group monitors internal and external indicators of impairment relating to its
intangible and tangible assets, which may indicate that the carrying value of the assets
may not be recoverable. The assessment of the existence of indicators of impairment in
E&E assets involves judgement, which includes whether management expects to fund
significant further expenditure in respect of a licence and whether the recoverable
amount may not cover the carrying value of the assets. For development and production
assets judgement is involved when determining whether there have been any significant
changes in the Group’s oil and gas reserves.
The Group determines whether E&E assets are impaired at an asset level and in regional
cash generating units (‘CGUs’) when facts and circumstances suggest that the carrying
amount of a regional CGU may exceed its recoverable amount. As recoverable amounts
are determined based upon risked potential, or where relevant, discovered oil and gas
reserves, this involves estimations and the selection of a suitable pre-tax discount rate
relevant to the asset in question. The calculation of the recoverable amount of oil and
gas development properties involves estimating the net present value of cash flows
expected to be generated from the asset in question. Future cash flows are based on
assumptions on matters such as estimated oil and gas reserve quantities and commodity
prices. The discount rate applied is a pre-tax rate which reflects the specific risks of the
country in which the asset is located.
Management is required to assess the carrying value of investments in subsidiaries in
the parent company balance sheet for impairment by reference to the recoverable
amount. This requires an estimate of amounts recoverable from oil and gas assets within
the underlying subsidiaries (see note 15).
Share-based payment costs
The estimation of share-based payment costs requires the selection of an appropriate
valuation model, consideration as to the inputs necessary for the valuation model chosen
and the estimation of the number of awards that will ultimately vest, inputs for which
arise from judgments relating to the continuing participation of employees (see note 25).
- 41 -
Basis of Consolidation
The consolidated financial statements include the accounts of Serica Energy plc (the
“Company”) and its wholly owned subsidiaries Serica Holdings UK Limited, Serica Energy
Holdings B.V., Serica Energy (UK) Limited, Serica Glagah Kambuna B.V., Serica Sidi
Moussa B.V., Serica Foum Draa B.V., Serica Energy Slyne B.V., Serica Energy Rockall
B.V., Serica Namibia B.V., Serica Energy Corporation, Asia Petroleum Development
Limited, Petroleum Development Associates (Asia) Limited and Petroleum Development
Associates Lematang Limited. Together these comprise the "Group".
All inter-company balances and transactions have been eliminated upon consolidation.
Foreign Currency Translation
The functional and presentational currency of Serica Energy plc and all its subsidiaries is
US dollars.
Transactions in foreign currencies are initially recorded at the functional currency rate
ruling at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the foreign currency rate of exchange ruling at the
balance sheet date and differences are taken to the income statement. Non-monetary
items that are measured in terms of historical cost in a foreign currency are translated
using the exchange rate as at the date of initial transaction. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rate at
the date when the fair value was determined. Exchange gains and losses arising from
translation are charged to the income statement as an operating item.
Business Combinations and Goodwill
Business combinations from 1 January 2010
Business combinations are accounted for using the acquisition method. The cost of an
acquisition is measured as the aggregate of consideration transferred, measured at
acquisition date fair value and the amount of any non-controlling interest in the
acquiree. Acquisition costs incurred are expensed and included in administrative
expenses.
Goodwill on acquisition is initially measured at cost being the excess of purchase price
over the fair market value of identifiable assets, liabilities and contingent liabilities
acquired. Following initial acquisition it is measured at cost less any accumulated
impairment losses. Goodwill is not amortised but is subject to an impairment test at
least annually and more frequently if events or changes in circumstances indicate that
the carrying value may be impaired.
At the acquisition date, any goodwill acquired is allocated to each of the cash-generating
units, or groups of cash generating units expected to benefit from the combination's
synergies. Impairment is determined by assessing the recoverable amount of the cash-
generating unit, or groups of cash generating units to which the goodwill relates. Where
the recoverable amount of the cash-generating unit is less than the carrying amount, an
impairment loss is recognised.
Joint Arrangements
A joint operation is a type of joint arrangement whereby the parties that have joint
control of the arrangement have the rights to the assets and obligations for the
liabilities, relating to the arrangement.
- 42 -
The Group conducts petroleum and natural gas exploration and production activities
jointly with other venturers who each have direct ownership in and jointly control the
operations of the ventures. These are classified as jointly controlled operations and the
financial statements reflect the Group's share of assets and liabilities in such activities.
Income from the sale or use of the Group’s share of the output of jointly controlled
operations, and its share of joint venture expenses, are recognised when it is probable
that the economic benefits associated with the transaction will flow to/from the Group
and their amount can be measured reliably.
Full details of Serica’s working interests in those petroleum and natural gas exploration
and production activities classified as jointly controlled operations are included in the
Review of Operations.
Exploration and Evaluation Assets
As allowed under IFRS 6 and in accordance with clarification issued by the International
Financial Reporting Interpretations Committee, the Group has continued to apply its
existing accounting policy to exploration and evaluation activity, subject to the specific
requirements of IFRS 6. The Group will continue to monitor the application of these
policies in light of expected future guidance on accounting for oil and gas activities.
Pre-licence Award Costs
Costs incurred prior to the award of oil and gas licences, concessions and other
exploration rights are expensed in the income statement.
Exploration and Evaluation (E&E)
The costs of exploring for and evaluating oil and gas properties, including the costs of
acquiring rights to explore, geological and geophysical studies, exploratory drilling and
directly related overheads, are capitalised and classified as intangible E&E assets. These
costs are directly attributed to regional CGUs for the purposes of impairment testing; UK
& Ireland and Africa.
E&E assets are not amortised prior to the conclusion of appraisal activities but are
assessed for impairment at an asset level and in regional CGUs when facts and
circumstances suggest that the carrying amount of a regional cost centre may exceed its
recoverable amount. Recoverable amounts are determined based upon risked potential,
and where relevant, discovered oil and gas reserves. When an impairment test indicates
an excess of carrying value compared to the recoverable amount, the carrying value of
the regional CGU is written down to the recoverable amount in accordance with IAS 36.
Such excess is expensed in the income statement.
Costs of licences and associated E&E expenditure are expensed in the income statement
if licences are relinquished, or if management do not expect to fund significant future
expenditure in relation to the licence.
The E&E phase is completed when either the technical feasibility and commercial viability
of extracting a mineral resource are demonstrable or no further prospectivity is
recognised. At that point, if commercial reserves have been discovered, the carrying
value of the relevant assets, net of any impairment write-down, is classified as an oil and
gas property within property, plant and equipment, and tested for impairment. If
commercial reserves have not been discovered then the costs of such assets will be
written off.
Asset Purchases and Disposals
When a commercial transaction involves the exchange of E&E assets of similar size and
characteristics, no fair value calculation is performed. The capitalised costs of the asset
- 43 -
being sold are transferred to the asset being acquired. Proceeds from a part disposal of
an E&E asset, including back-cost contributions are credited against the capitalised cost
of the asset, with any excess being taken to the income statement as a gain on disposal.
Farm-ins
In accordance with industry practice, the Group does not record its share of costs that
are ‘carried’ by third parties in relation to its farm-in agreements in the E&E phase.
Similarly, while the Group has agreed to carry the costs of another party to a Joint
Operating Agreement ("JOA") in order to earn additional equity, it records its paying
interest that incorporates the additional contribution over its equity share.
Property, Plant and Equipment – Oil and gas properties
Capitalisation
Oil and gas properties are stated at cost, less any accumulated depreciation and
accumulated impairment losses. Oil and gas properties are accumulated into single field
cost centres and represent the cost of developing the commercial reserves and bringing
them into production together with the E&E expenditures incurred in finding commercial
reserves previously transferred from E&E assets as outlined in the policy above. The cost
will include, for qualifying assets, borrowing costs.
Depletion
Oil and gas properties are not depleted until production commences. Costs relating to
each single field cost centre are depleted on a unit of production method based on the
commercial proved and probable reserves for that cost centre. The depletion calculation
takes account of the estimated future costs of development of recognised proved and
probable reserves. Changes in reserve quantities and cost estimates are recognised
prospectively from the last reporting date.
Impairment
A review is performed for any indication that the value of the Group’s development and
production assets may be impaired.
For oil and gas properties when there are such indications, an impairment test is carried
out on the cash generating unit. Each cash generating unit is identified in accordance
with IAS 36. Serica’s cash generating units are those assets which generate largely
independent cash flows and are normally, but not always, single development or
production areas. If necessary, impairment is charged through the income statement if
the capitalised costs of the cash generating unit exceed the recoverable amount of the
related commercial oil and gas reserves.
Asset Disposals
Proceeds from the entire disposal of a development and production asset, or any part
thereof, are taken to the income statement together with the requisite proportional net
book value of the asset, or part thereof, being sold.
Decommissioning
Liabilities for decommissioning costs are recognised when the Group has an obligation to
dismantle and remove a production, transportation or processing facility and to restore
the site on which it is located. Liabilities may arise upon construction of such facilities,
upon acquisition or through a subsequent change in legislation or regulations. The
amount recognised is the estimated present value of future expenditure determined in
- 44 -
accordance with local conditions and requirements. A corresponding tangible item of
property, plant and equipment equivalent to the provision is also created.
Any changes in the present value of the estimated expenditure is added to or deducted
from the cost of the assets to which it relates. The adjusted depreciable amount of the
asset is then depreciated prospectively over its remaining useful life. The unwinding of
the discount on the decommissioning provision is included as a finance cost.
Property, Plant and Equipment - Other
Computer equipment and fixtures, fittings and equipment are recorded at cost as
tangible assets. The straight-line method of depreciation is used to depreciate the cost of
these assets over their estimated useful lives. Computer equipment is depreciated over
three years and fixtures, fittings and equipment over four years.
Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is determined
by the first-in first-out method and comprises direct purchase costs and transportation
expenses.
Investments
In its separate financial statements the Company recognises its investments in subsidiaries
at cost less any provision for impairment.
Financial Instruments
Financial instruments comprise financial assets, cash and cash equivalents, financial
liabilities and equity instruments.
Financial assets
Financial assets within the scope of IAS 39 are classified as either financial assets at fair
value through profit or loss, or loans and receivables, as appropriate. When financial
assets are recognised initially, they are measured at fair value. Transaction costs that
are directly attributable to the acquisition or issue of the financial asset are capitalised
unless they relate to a financial asset classified at fair value through profit and loss in
which case transaction costs are expensed in the income statement.
The Group determines the classification of its financial assets at initial recognition and,
where allowed and appropriate, re-evaluates this designation at each financial year end.
Financial assets at fair value through profit or loss include financial assets held for
trading and derivatives. Financial assets are classified as held for trading if they are
acquired for the purpose of selling in the near term.
Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. After initial measurement loans and
receivables are subsequently carried at amortised cost, using the effective interest rate
method, less any allowance for impairment. Amortised cost is calculated by taking into
account any discount or premium on acquisition over the period to maturity. Gains and
losses are recognised in the income statement when the loans and receivables are de-
recognised or impaired, as well as through the amortisation process.
Cash and cash equivalents
Cash and cash equivalents include balances with banks and short-term investments with
original maturities of three months or less at the date acquired.
- 45 -
Financial liabilities
Financial liabilities include interest bearing loans and borrowings, and trade and other
payables.
Obligations for loans and borrowings are recognised when the Group becomes party to
the related contracts and are measured initially at the fair value of consideration
received less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are subsequently
measured at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the liabilities are
derecognised as well as through the amortisation process.
Equity
Equity instruments issued by the Company are recorded in equity at the proceeds
received, net of direct issue costs.
Leases
Operating lease payments are recognised as an operating expense in the income
statement on a straight line basis over the lease term.
Revenue Recognition
Revenue is recognised to the extent that it is probable that the economic benefits will
flow to the Group and the revenue can be reliably measured. Revenue from oil and
natural gas production is recognised on an entitlement basis for the Group’s net working
interest.
Finance Revenue
Finance revenue chiefly comprises interest income from cash deposits on the basis of the
effective interest rate method and is disclosed separately on the face of the income
statement.
Finance Costs
Finance costs of debt are allocated to periods over the term of the related debt using the
effective interest method. Arrangement fees and issue costs are amortised and charged
to the income statement as finance costs over the term of the debt.
Borrowing costs
Borrowing costs directly relating to the acquisition, construction or production of a
qualifying capital project under construction are capitalised and added to the project cost
during construction until such time the assets are substantially ready for their intended
use i.e when they are capable of commercial production. Where funds are borrowed
specifically to finance a project, the amounts capitalised represent the actual borrowing
costs incurred. All other borrowing costs are recognised in the income statement in the
period in which they are incurred.
Share-Based Payment Transactions
Employees (including directors) of the Group receive remuneration in the form of share-
based payment transactions, whereby employees render services in exchange for shares
- 46 -
or rights over shares (‘equity-settled transactions’).
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the
fair value at the date on which they are granted. In valuing equity-settled transactions,
no account is taken of any service or performance conditions, other than conditions
linked to the price of the shares of Serica Energy plc (‘market conditions’), if applicable.
The cost of equity-settled transactions is recognised, together with a corresponding
increase in equity, over the period in which the relevant employees become fully entitled
to the award (the ‘vesting period’). The cumulative expense recognised for equity-settled
transactions at each reporting date until the vesting date reflects the extent to which the
vesting period has expired and the Group’s best estimate of the number of equity
instruments that will ultimately vest. The income statement charge or credit for a period
represents the movement in cumulative expense recognised as at the beginning and end
of that period.
No expense is recognised for awards that do not ultimately vest, except for awards
where vesting is conditional upon a market or non-vesting condition, which are treated
as vesting irrespective of whether or not the market or non-vesting condition is satisfied,
provided that all other performance conditions are satisfied. Equity awards cancelled are
treated as vesting immediately on the date of cancellation, and any expense not
recognised for the award at that date is recognised in the income statement. Estimated
associated national insurance charges are expensed in the income statement on an
accruals basis.
Where the terms of an equity-settled award are modified or a new award is designated
as replacing a cancelled or settled award, the cost based on the original award terms
continues to be recognised over the original vesting period. In addition, an expense is
recognised over the remainder of the new vesting period for the incremental fair value of
any modification, based on the difference between the fair value of the original award
and the fair value of the modified award, both as measured on the date of the
modification. No reduction is recognised if this difference is negative.
Income Taxes
Current tax, including UK corporation tax and overseas corporation tax, is provided at
amounts expected to be paid using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
Deferred tax is provided using the liability method and tax rates and laws that have been
enacted or substantively enacted at the balance sheet date. Provision is made for
temporary differences at the balance sheet date between the tax bases of the assets and
liabilities and their carrying amounts for financial reporting purposes. Deferred tax is
provided on all temporary differences except for:
temporary differences associated with investments in subsidiaries, where the timing
of the reversal of the temporary differences can be controlled by the Group and it is
probable that the temporary differences will not reverse in the foreseeable future;
and
temporary differences arising from the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the transaction,
affects neither the income statement nor taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary differences, to the extent
that it is probable that taxable profits will be available against which the deductible
temporary differences can be utilised. Deferred tax assets and liabilities are presented
net only if there is a legally enforceable right to set off current tax assets against current
- 47 -
tax liabilities and if the deferred tax assets and liabilities relate to income taxes levied by
the same taxation authority.
Earnings Per Share
Earnings per share is calculated using the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share is calculated based on the
weighted average number of ordinary shares outstanding during the period plus the
weighted average number of shares that would be issued on the conversion of all
relevant potentially dilutive shares to ordinary shares. It is assumed that any proceeds
obtained on the exercise of any options and warrants would be used to purchase
ordinary shares at the average price during the period. Where the impact of converted
shares would be anti-dilutive, these are excluded from the calculation of diluted
earnings.
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous financial year,
except for the following new and amended IFRS and IFRIC interpretations effective as of
1 January 2014 unless otherwise stated. The adoption of the standards or interpretations
is described below:
i) Amendment to IAS 32: Offsetting Financial Assets and Financial Liabilities
The amendment is effective for annual periods beginning on or after 1 January 2014.
The application of the amendment did not impact on the financial position or
performance of the Group or Company.
ii) Amendment to IAS 36: Recoverable Amount Disclosures for Non-Financial Assets
The amendment addressed certain unintended consequences arising from consequential
amendments made to IAS 36 when IFRS 13 was issued. The amendment is effective for
annual periods beginning on or after 1 January 2014. The application of the amendment
did not impact on the financial position or performance of the Group or Company.
Standards issued but not yet effective
Certain standards or interpretations issued but not yet effective up to the date of
issuance of the Group’s financial statements are listed below. This listing of standards
and interpretations issued are those that the Group reasonably expects to have an
impact on disclosures, financial position or performance when applied at a future date.
The Group intends to adopt these standards when they become effective.
Standard
Effective year
commencing on or after
IFRS 9 – Financial Instruments
Amendments to IAS 16 and IAS 38 – Clarification of
Accountable Methods of Depreciation and Amortisation
Amendments to IFRS 11 – Accounting for Acquisition of
Interests in Joint Operations
Annual Improvements to IFRSs 2010-2012 Cycle
Annual Improvements to IFRSs 2011-2013 Cycle
1 January 2018 *
1 January 2016
1 January 2016
1 July 2014
1 July 2014
*Not yet endorsed by the EU
- 48 -
3.
Segment Information
The Group’s business is that of oil & gas exploration, development and production. The
Group’s reportable segments are based on the location of the Group’s assets.
The following tables present revenue, profit and certain asset and liability information
regarding the Group’s geographical reportable segments for the years ended 31
December 2014 and 2013. Costs associated with the UK corporate centre are included in
the UK & Ireland reportable segment. Reportable information in respect of the Group’s
interest in the producing Kambuna field in Indonesia is disclosed as a separate segment,
with income statement information for the Kambuna field in Indonesia additionally
classified as ‘discontinued’.
Year ended 31 December 2014
Revenue
Continuing operations
Other expenses
Pre-licence costs
Other asset write-offs
E&E asset impairment/write-offs
Operating loss and segment loss
Finance revenue
Loss before taxation
Taxation charge for the year
Loss after taxation
UK &
Ireland
US$000
Africa
US$000
Continuing Discontinued
Total
US$000
US$000
-
-
-
-
(4,868)
(254)
(34)
-
(258)
(216)
(17,559) (12,460)
(22,715) (12,934)
(4,868)
(512)
(250)
(30,019)
(35,649)
26
(35,623)
-
(35,623)
(453)
-
-
-
(453)
-
(453)
-
(453)
UK &
Total
Ireland
US$000 US$000 US$000 US$000
Africa Kambuna
Other segment information:
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
55,207
9,718
2,636
138
-
636
64,925
2,774
636
57,843
10,492
2,000
70,335
Segment liabilities
Total liabilities
(1,642)
(1,642)
(2,354)
(2,354)
(2)
(2)
(3,998)
(3,998)
Capital expenditure 2014:
Exploration and evaluation assets
2,395
10,858
-
13,253
- 49 -
Year ended 31 December 2013
UK &
Ireland Africa
Continuing Discontinued
Total
US$000 US$000
US$000
US$000
Revenue
-
-
-
4,032
Other expenses
Pre-licence costs
Asset write-offs
Depletion
Depreciation
Operating and segment (loss)/profit
(4,369)
(57)
(299)
-
(109)
(4,834)
-
(273)
-
-
-
(273)
Finance revenue
Finance costs
Loss before taxation
Taxation charge for the year
Loss after taxation
(4,369)
(330)
(299)
-
(109)
(5,107)
16
(38)
(5,129)
-
(5,129)
(2,869)
-
-
(1,036)
-
127
-
(6)
121
-
121
UK &
Total
Ireland
Africa Kambuna
US$000 US$000 US$000 US$000
Other segment information:
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
70,372
12,403
4,237
89
82,775
4,326
-
3,508
74,609
16,000
15,884
3,508 106,493
Segment liabilities
Total liabilities
(1,529) (1,864) (1,024)
(1,529) (1,864) (1,024)
(4,417)
(4,417)
Capital expenditure 2013:
Exploration and evaluation assets
4,429
3,431
-
7,860
Unallocated assets and liabilities comprise financing items (including cash on deposit).
Information on major customers is provided in note 4.
- 50 -
4. Discontinued Operation
During 2013, Serica’s sole remaining interest in Indonesia was its 25% interest in the
Glagah Kambuna Technical Assistance Contract (“TAC”). The TAC covers an area of
approximately 380 square kilometres offshore North Sumatra and contains the Kambuna
gas field. Throughout the first half of 2013 the Company continued to benefit from cash
flows from field production but, in July 2013, the field reached the end of its economic
life and was shut-in. The partnership agreed handover arrangements with the
Indonesian authorities which involved securing the three wells and wellhead structure.
Following the completion of the agreed decommissioning procedures in Q4 2013, the
TAC was formally terminated on 31 December 2013 and the facilities handed over to
Pertamina.
Following the developments of the Kambuna business segment in the second half of
2013, the financial results of the Kambuna field are now disclosed as ‘discontinued’
operations and separate from the results of the continuing business segments.
Results of discontinued operations
The results of the discontinued operations are presented below:
Year ended
Year ended
31 December 31 December
2013
US$000
2014
US$000
Sales revenue
Cost of sales
Gross profit
Other operating expenses
Operating (loss)/profit
Finance costs
(Loss)/profit before taxation
Taxation charge for the year
(Loss)/profit for the year
Earnings per ordinary share (EPS)
Basic and diluted EPS on result in year
-
-
-
(453)
(453)
-
(453)
-
(453)
US$
(0.00)
4,032
(3,905)
127
-
127
(6)
121
-
121
US$
(0.00)
The loss for 2014 comprised a final assessment for asset write offs and minor operator
expense as residual matters are closed out.
The earnings per ordinary share for the discontinued operations is derived from the net
loss attributable to equity holders of the parent from discontinued operations of
US$453,000 (2013: profit of US$121,000), divided by the weighted average number of
ordinary shares for both basic and diluted amounts as disclosed in note 12.
- 51 -
Sales Revenue
Gas sales
Condensate sales
2014
US$000
2013
US$000
-
-
-
1,653
2,379
4,032
Gas sales revenue in 2013 arose from three customers, the most significant being PLN
(2013: US$1,071,000) and Pertiwi (2013: US$582,000). All condensate sales revenue in
2013 was from one customer, PLN.
Cost of Sales
Operating costs
Depletion (see note 14)
Movement in inventories of oil
Finance Costs
2014
US$000
2013
US$000
-
-
-
-
2,587
1,036
282
3,905
Finance costs consist entirely of the unwinding of a discount on the Kambuna
decommissioning provision (see note 21).
Other
There are no taxation components within discontinued operations.
The net cash flows attributable to the disposal group in discontinued operations are as
follows:
Year ended 31 December:
Operating cash inflows
Investing cash outflows
Financing cash outflows
Net cash inflow
2014
US$000
2013
US$000
1,404
-
-
1,404
2,351
-
-
2,351
- 52 -
5. Analysis of Expenses by Function
Administrative
Impairment of E&E assets
Other asset write-offs
Other
6. Group Operating Loss
This is stated after charging:
2014
US$000
2013
US$000
4,296
30,019
250
1,084
4,458
131
168
350
35,649
5,107
2014
US$000
2013
US$000
Depreciation of other property, plant and equipment
Total depreciation, depletion and amortisation expense
-
-
109
109
Depletion of oil and gas properties is classified with cost of sales under discontinued
operations.
Operating lease rentals (minimum lease payments):
- Land and buildings
- Other
Total lease payments recognised as an expense
552
22
574
524
21
545
Operating sublease agreements where the Group is lessor
In the year ended 31 December 2014, the Group received US$140,000 (2013:
US$127,000) of rental income receivable under a sub-lease of its office premises.
7. Auditor’s Remuneration
Audit of the Group accounts
Audit of the Company’s accounts
Audit of accounts of Company’s subsidiaries
Total audit fees
Other fees to auditor:
Taxation advisory services
2014
US$000
2013
US$000
86
28
10
124
102
34
20
156
US$000
US$000
-
-
-
-
Fees paid to Ernst & Young LLP and its associates for non-audit services are not
disclosed in the individual accounts of the Company as Group financial statements are
prepared which are required to disclose such fees on a consolidated basis.
- 53 -
8. Staff Costs and Directors’ Emoluments
a) Staff Costs
The average monthly number of persons
employed by the Group during the year was:
Management
Technical
Finance and administration
Staff costs for the above persons:
Wages and salaries
Social security costs
Other pension costs
Share-based long-term incentives (including related NI cost)
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
2014
No.
2013
No.
3
3
4
3
3
4
10
10
US$000 US$000
2,468
309
176
337
2,630
347
170
234
3,290
3,381
1,934
86
134
2,092
88
128
2,154
2,308
b) Directors’ Emoluments
The emoluments of the individual Directors were as follows. Other than fees paid to Jeffrey
Harris in US$, all sums are paid in £ sterling but are converted at an exchange rate of
£1=US$1.648 (2013: £1=US$1.564) to US$ being the reporting currency for the purposes of
the Company’s accounts.
A Craven Walker (1)
C Hearne
P Sadler (2)
M Flegg
N Pike
I Vann
S Theede
J Harris
2014
Salary and
2014
Bonus
2014
Pension
fees
2014
Benefits
in kind
2014
Total
2013
Total
US$000 US$000 US$000
US$000 US$000 US$000
511
425
-
425
91
74
74
66
1,666
-
-
-
-
-
-
-
-
-
-
43
-
43
-
-
-
-
86
35
8
-
11
-
-
-
-
546
476
-
479
91
74
74
66
519
522
119
524
86
70
70
64
54
1,806
1,974
- 54 -
Note (1) Mr Craven Walker has acted as Interim CEO since 10 April 2011. Since 1 May 2012, Mr Craven
Walker has received a combined fee in respect of services as Chairman and Interim CEO pending the
appointment of a successor to the CEO position. Since 1 January 2013 this fee has included a provision for
travel allowance. He is not entitled to any other award such as share options, share scheme, bonus, pension
or medical insurance.
Note (2) Peter Sadler resigned on 27 June 2013
Number of Directors securing benefits under defined
contribution schemes during the year
Number of Directors who exercised share options
Aggregate gains made by Directors on the exercise of options
2014
2013
2
-
3
-
US$000 US$000
-
-
The Group defines key management personnel as the Directors of the Company. There
are no transactions with Directors other than their remuneration as disclosed above and
those described in Note 28.
9. Finance Revenue
Bank interest receivable
Total finance revenue
10. Finance Costs
Bank loans
Other interest payable
Total finance costs
2014
US$000
26
2013
US$000
16
26
16
2014
US$000
-
-
2013
US$000
37
1
-
38
Bank loan finance costs include interest payable, unutilised facility fees and an
amortisation charge of associated issue costs. The unwinding of a discount on
decommissioning provisions is classified within finance costs under ‘discontinued’
operations.
- 55 -
11. Taxation
a) Tax charged/(credited) in the income statement
Charge for the year
Adjustment in respect of prior years
Total current income tax charge
Deferred tax
Origination and reversal of temporary differences in the
current year
Adjustment in respect of prior years
Adjustment to reflect tax rate changes in recognition of
deferred tax
Total deferred tax (credit)
Tax charge in the income statement
2014
US$000
2013
US$000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
b) Reconciliation of the total tax charge/(credit)
The tax in the income statement for the year differs from the amount that would be
expected by applying the standard UK corporation tax rate for the following reasons:
corporation tax in the UK of
2014
US$000
2013
US$000
Accounting loss before taxation – continuing operations
(35,623)
(5,129)
Accounting (loss)/profit before taxation – discontinued ops
(453)
121
Accounting loss before taxation
(36,076)
(5,008)
Expected tax credit at standard UK corporation tax rate of
21.5% (2013 – 23.25%)
Expenses not deductible for tax purposes
Write-off of exploration assets
Unrecognised tax losses
Accelerated Capital Allowances
Different foreign tax rates
(7,756)
264
7,016
1,246
(298)
(472)
(1,164)
426
-
733
-
5
Tax charge reported in the income statement
-
-
- 56 -
c) Unrecognised tax losses
The benefit of approximately US$168.1 million (2013: US$114.7 million) of tax losses
has not been recognised in these consolidated statements which reflects the extent of
the total available UK tax losses that have not been set against a deferred tax liability
arising. The Group has UK ring fence tax losses of US$186.3 million available as at 31
December 2014 which form part of total UK tax losses of approximately US$212.2
million (2013: US$175.0 million) that are available indefinitely for offset against future
trading profits of the companies in which the losses arose. Of this amount US$44.1
million (2013: US$60.3 million) has been set off against taxable temporary differences.
d) Deferred tax
The deferred tax included in the balance sheet is as follows:
Deferred tax liability:
Temporary differences on capital expenditure
Deferred tax liability
Deferred tax asset:
Temporary difference on future recoverable costs
Tax losses carried forward
Deferred tax asset
Net deferred tax liability
The deferred tax in the Group income statement is as follows:
Deferred tax in the income statement:
Temporary differences on capital expenditure
Temporary difference on future recoverable costs
Tax losses carried forward
2014
US$000
2013
US$000
(27,345)
(37,372)
(27,345)
(37,372)
-
27,345
-
37,372
27,345
37,372
-
-
2014
US$000
2013
US$000
(10,027)
-
10,027
2,036
-
(2,036)
Deferred income tax (credit)
-
-
e) Changes to UK corporation tax legislation
Legislation to reduce the main rate of UK corporation tax to 21% for the year
commencing 1 April 2014 and 20% for the year from 1 April 2015 and beyond was
enacted in July 2013. From 1 January 2015, the rate of Supplementary Charge (SC)
will be 20%, a further reduction of 10 percentage points in addition to the 2 percentage
point cut announced in the Chancellor’s Autumn Statement. This reduces the headline
rate of tax from 62% to 50% for ring-fenced trading profits.
The UK Government proposals to increase the extent to which the Small Field Allowance
("SFA") is available in respect of small developments were enacted in July 2013. The
allowance is now extended to fields with reserves of 6.25 million tonnes from the
previous threshold of 3.5 million tonnes and the allowance available in respect of a
qualifying field is increased from £75m (US$120m) to £150m (US$240m).
- 57 -
f) Unrecognised deferred tax liability
In 2014 and 2013 there are no material temporary differences associated with
investments withbsidiaries forhich
subsidiaries for which deferred tax liabilities have not been recognised.
g) Company
The Company has US$25.4 million (2013: US$ 23.5 million) of UK corporation tax
losses which are not recognised as deferred tax assets.
12. Earnings Per Share
Basic earnings or loss per ordinary share amounts are calculated by dividing net profit or
loss for the year attributable to ordinary equity holders of the parent by the weighted
average number of ordinary shares outstanding during the year.
Diluted earnings per share amounts are calculated by dividing the net profit attributable
to ordinary equity holders of the Company by the weighted average number of ordinary
shares outstanding during the year plus the weighted average number of ordinary shares
that would be issued on the conversion of dilutive potential ordinary shares into ordinary
shares. As a result of the net loss for the years ended 31 December 2013 and 2014,
there is no dilutive effect of the share options in these years.
The following reflects the income and share data used in the basic and diluted earnings
per share computations:
Net loss from continuing operations
2014
US$000
2013
US$000
(35,623)
(5,129)
Net loss attributable to equity holders of the parent
(36,076)
(5,008)
2014
’000
2013
’000
Basic weighted average number of shares
250,179
191,266
Diluted weighted average number of shares
250,179
191,266
Basic and diluted EPS on loss on continuing operations (US$)
Basic and diluted EPS on loss for the year (US$)
2014
US$
(0.14)
(0.14)
2013
US$
(0.03)
(0.03)
On completion of the acquisition of an 18% interest in the Erskine field, 13,500,000
ordinary shares will be issued to BP as part of the consideration. These will represent
approximately 5.1% of Serica’s enlarged issued share capital.
- 58 -
13. Exploration and Evaluation Assets
Group
Cost:
1 January 2013
Additions
Write offs
31 December 2013
Additions
Write offs
31 December 2014
Provision for impairment:
1 January 2013 and 1 January 2014
Impairment charge for the year
31 December 2014
Net book value:
31 December 2014
31 December 2013
1 January 2013
Total
US$000
66,880
7,860
(131)
74,609
13,253
(12,519)
75,343
-
(17,500)
(17,500)
57,843
74,609
66,880
The aggregate impairment and write-off charge against E&E assets in 2014 was US$30.0
million (2013: US$0.1 million) and comprised an impairment charge of US$17.5 million
against the Columbus asset in the UK & Ireland cash generating unit, and E&E asset
write-offs of US$12.5 million (2013: US$0.1 million) of which US$7.4 million related to
the costs incurred on the Sidi Moussa block in Morocco, US$5.0 million from the adjacent
Foum Draa block and US$0.1 million in the UK.
Management currently sees limited prospectivity on the Foum Draa block and given it
will not be funding any significant work on the licence has writen off the costs incurred.
Whilst interpretation of the Sidi Moussa well data is ongoing, there are no plans to fund
significant future expenditure on this block and the costs have also been written off.
The partial impairment recorded against Columbus book amounts has arisen from
revised economic evaluations, the primary factor being the use of lower hydrocarbon
prices in management’s estimation of future discounted cash flows of the asset.
The recoverable amount of US$34.5 million for the Columbus asset was determined on a
fair value less costs of disposal basis using a discounted cash flow model. The projected
cash flows are extrapolated until 2029 using a 2.5% growth rate and were adjusted for
risks specific to the asset and discounted using a pre-tax discount rate of 10.57%. This
discount rate is derived from the Group’s post-tax weighted average cost of capital and
is adjusted where applicable to take into account any specific risks relating to the region
where the cash generating unit is located.
- 59 -
In determining FVLCD it is necessary to make a series of assumptions to estimate future
cash flows including volumes, price assumptions and cost estimates. Accordingly, the fair
value is categorised as Level 3 in the fair value hierarchy.
The calculation is most sensitive to the following assumptions; discount rates, oil prices,
reserves estimates and project risk. Changes in these assumptions, or the status of
negotiations on the infrastructure access for the asset, could lead to a material change
to the recoverable amount in future periods.
Other asset write offs in the Income Statement consisted of a US$0.2 million charge
against obsolete inventory (2013: US$0.2 million).
Company
The Company has no E&E assets.
- 60 -
Oil and gas
properties
Computer/IT
Equipment
US$000
US$000
Fixtures,
Fittings &
Equipment
US$000
14. Property, Plant and Equipment
Group
Cost
1 January 2013
Disposals *
31 December 2013
Additions
31 December 2014
62,842
(62,842)
-
-
-
Depreciation and depletion
1 January 2013
Charge for the year
Disposals *
31 December 2013
61,806
1,036
(62,842)
-
Charge for the year
31 December 2014
Net book amount
31 December 2014
31 December 2013
-
-
-
-
1 January 2013
1,036
Total
US$000
63,932
(62,842)
1,090
-
1,090
62,787
1,145
(62,842)
1,090
-
1,090
-
-
901
-
901
-
901
800
101
-
901
-
901
-
-
189
-
189
-
189
181
8
-
189
-
189
-
-
8
101
1,145
*The Kambuna field oil and gas properties were handed over to the Indonesian
authorities on 31 December 2013.
Impairment of oil and gas properties
The net book amount of the Group’s only producing asset was fully depleted in July 2013
following the cessation of production from the Kambuna field. No annual impairment test
on the Group’s property, plant and equipment was therefore required as at 31 December
2013.
Other
Depletion charges on oil and gas properties are classified within ‘cost of sales’.
Borrowing interest payable costs relating to drilling of development wells, that have been
capitalised within oil and gas properties during 2009, prior to the commencement of
production, amounted to US$1,200,000, at a weighted average interest of 4.6%.
Company
The Company has no property, plant and equipment.
- 61 -
15. Investments
Company – Investment in subsidiaries
Cost:
1 January 2013
Increase in investment
31 December 2013
Increase in investment
31 December 2014
Provision for impairment:
1 January 2013
Impairment charge for the year
31 December 2013
Impairment charge for the year
31 December 2014
Net book amount:
31 December 2014
31 December 2013
1 January 2013
Total
US$000
132,684
-
132,684
-
132,684
(118,854)
(13,830)
(132,684)
-
(132,684)
-
-
13,830
In the Company financial statements, the cost of the investment acquired on the
Reorganisation (see note 1) was calculated with reference to the market value of Serica
Energy Corporation as at the date of the Reorganisation. As a UK company, under
Section 612 of the Companies Act 2006, the Company is entitled to merger relief on its
share reorganisation with Serica Energy Corporation, and the excess of US$112,174,000
over the nominal value of shares issued (US$7,475,000) has been credited to a merger
reserve. Following the impairment charges recorded in 2010 and 2013 against the
Company’s investment in subsidiary undertakings, all amounts initially credited to the
merger reserve have been eliminated.
Management has assessed the carrying value of investments in subsidiaries in the parent
company balance sheet for impairment by reference to the recoverable amount.
The incremental provisions for impairment arising in 2013 of US$13,830,000 against the
investment in subsidiaries, and US$26,170,000 against amounts owed by Group
undertakings (see note 18) have been made following a fall in value in certain of the oil
and gas assets held by the Company’s subsidiary undertakings.
- 62 -
Details of the investments in which the Group and the Company (unless indicated) hold
20% or more of the nominal value of any class of share capital are as follows:
Name of company:
Holding
Nature of
business
Serica Holdings UK Ltd
Ordinary
Serica Energy Holdings B.V. (i & iii) Ordinary
Ordinary
Serica Energy (UK) Ltd (i)
Ordinary
Serica Sidi Moussa BV (i & iii)
Ordinary
Serica Foum Draa BV (i & iii)
Ordinary
Serica Energy Slyne BV (i & iii)
Ordinary
Serica Energy Rockall BV (i & iii)
Serica Energy Namibia BV (i & iii)
Ordinary
Serica Glagah Kambuna BV (i & iii) Ordinary Development
Serica Energy Corporation (i & ii)
APD Ltd (i & ii)
PDA Asia Ltd (i & ii)
PDA (Lematang) Ltd (i)
Holding
Holding
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Dormant
Dormant
Dormant
Dormant
Ordinary
Ordinary
Ordinary
Ordinary
% voting
rights
and
shares
held
2014
% voting
rights
and
shares
held
2013
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(i) Held by a subsidiary undertaking
(ii) Incorporated in the British Virgin Islands
(iii) Incorporated in the Netherlands
16. Other Non-current Assets
Group
2014
US$000
Company
2014
US$000 US$000
2013
2013
US$000
Other receivables
247
1,293
-
-
Other receivables are represented by amounts recoverable from the Indonesian
authorities relating to the Kambuna asset. Amounts at 31 December 2013 were disclosed
net of an impairment of US$427,000.
- 63 -
17. Inventories
Materials and spare parts
Group
2014
US$000
Company
2014
US$000 US$000
2013
2013
US$000
-
-
258
258
-
-
-
-
Inventories are valued at the lower of cost and net realisable value. Cost is determined
by the first-in first-out method and comprises direct purchase costs and transportation
expenses. US$216,000 was expensed in the income statement as an asset write-off
against materials and spare parts in 2014 (2013: US$168,000).
18. Other Current Receivables
Due within one year:
Amounts owed by Group undertakings
Trade receivables
Amounts recoverable from JV partners
Other receivables
Prepayments and accrued income
Group
2014
US$000
Company
2014
US$000 US$000
2013
-
-
531
1,293
528
-
1,428
1,334
597
492
57,513
-
-
193
351
2013
US$000
97,416
-
-
395
337
Trade and other receivables
2,352
3,851
58,057
98,148
Financial assets
-
420
-
420
Trade receivables at 31 December 2013 arose from one customer, PLN.
None of the Group’s receivables are considered impaired. The Directors consider the
carrying amount of trade and other receivables approximates to their fair value.
Financial assets entirely relate to restricted cash on deposit with financial institutions
securing various guarantees and performance bonds associated with the Group’s trading
activities. Management considers that there are no unreasonable concentrations of credit
risk within the Group or Company. The financial assets disclosed above are not
considered past due nor impaired.
At the reporting date the amounts owed by Group undertakings to the Company are
disclosed net of an impairment of US$88,030,000 (2013: US$33,509,000) – see note
15.
- 64 -
19. Cash and Short-Term Deposits
Group
2014
US$000
2013
US$000
Company
2014
US$000
2013
US$000
Cash at bank and in hand
Short-term deposits
7,893
2,000
10,178
15,884
7,447
2,000
9,575
15,884
9,893
26,062
9,447
25,459
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-
term deposits are made for varying periods of between one day and six months
depending on the immediate cash requirements of the Group, and earn interest at the
respective short to medium term deposit rates. The Group’s exposure to credit risk
arises from potential default of a counterparty, with a maximum exposure equal to the
carrying amount. The Group seeks to minimise counterparty credit risks by only
depositing cash surpluses with major banks of high quality credit standing, and
spreading the placement of funds over a range of institutions.
Financial institutions, and their credit ratings, which held greater than 10% of the
Group’s cash and short-term deposits at the balance sheet date were as follows:
S&P credit
rating
Group
2014
US$000
Company
2014
US$000 US$000
2013
HSBC Bank plc
J.P. Morgan Chase
Barclays Bank plc
A-1+
A-1
A-1
2,476
-
7,408
8,358
8,827
8,760
2,476
-
6,971
2013
US$000
8,358
8,827
8,273
For the purposes of the consolidated and Company cash flow statement, cash and cash
equivalents comprise the above amounts at 31 December.
- 65 -
20. Trade and Other Payables
Current:
Trade payables
Other payables
21. Provisions
Group
2014
US$000
Company
2014
US$000 US$000
2013
2013
US$000
1,119
2,879
958
3,459
847
320
575
384
3,998
4,417
1,167
959
Provisions for decommissioning and restoration of oil and gas assets are:
At 1 January
Unwinding of discount (see note 4)
Payments and utilisation of provision
At 31 December
2014
US$000
2013
US$000
-
-
-
-
1,601
6
(1,607)
-
The Kambuna field ceased production in July 2013 and the field decommissioning work
programme was completed in November 2013. Although no decommissioning provision
is recorded as at 31 December 2013 as the work had been completed, certain liabilities
arising from the work programme had not been paid at that date and are recorded within
trade and other payables.
Any payments made in prior periods into a restricted fund were recognised at the
relevant Balance Sheet date as a separate asset within other receivables and not
deducted from the gross liability.
22. Financial Instruments
The Group’s financial instruments comprise cash and cash equivalents, bank loans and
borrowings, accounts payable and accounts receivable. It is management’s opinion that
the Group is not exposed to significant interest, credit or currency risks arising from its
financial instruments other than as discussed below:
Serica has exposure to interest rate fluctuations on its cash deposits and bank loans;
given the level of expenditure plans over 2015/16 this is managed in the short-term
through selecting treasury deposit periods of one to six months. Cash and treasury
credit risks are mitigated through spreading the placement of funds over a range of
institutions each carrying acceptable published credit ratings
to minimise
concentration and counterparty risk.
Where Serica operates joint ventures on behalf of partners it seeks to recover the
appropriate share of costs from these third parties. The majority of partners in these
ventures are well established oil and gas companies. In the event of non payment,
operating agreements typically provide recourse through increased venture shares.
Serica retains certain non US$ cash holdings and other financial instruments relating
to its operations. The US$ reporting currency value of these may fluctuate from time
to time causing reported foreign exchange gains and losses. Serica maintains a broad
strategy of matching the currency of funds held on deposit with the expected
- 66 -
expenditures in those currencies. Management believes that this mitigates most of
any actual potential currency risk from financial instruments.
It is management’s opinion that the fair value of its financial instruments approximate to
their carrying values, unless otherwise noted.
Interest Rate Risk Profile of Financial Assets and Liabilities
The interest rate profile of the financial assets and liabilities of the Group as at 31 December is
as follows:
Group
Year ended 31 December 2014
Fixed rate
Short-term deposits
Floating rate
Cash
Within 1 year
US$000
2,000
1-2 years 2-5 years
US$000
-
US$000
-
Within 1 year
US$000
7,893
1-2 years
US$000
-
2-5 years
US$000
-
Year ended 31 December 2013
2008
Fixed rate
Short-term deposits
Short-term financial assets
Within 1 year
US$000
15,884
420
1-2 years
US$000
-
-
2-5 years
US$000
-
-
Floating rate
Cash
Within 1 year
US$000
10,178
1-2 years
US$000
-
2-5 years
US$000
-
Total
US$000
2,000
2,000
Total
US$000
7,893
7,893
Total
US$000
15,884
420
16,304
Total
US$000
10,178
10,178
The following table demonstrates the sensitivity of finance revenue and finance costs to
a reasonably possible change in interest rates, with all other variables held constant, of
the Group’s loss before tax (through the impact on fixed rate short-term deposits and
applicable bank loans).
Increase/decrease in interest rate
+0.75%
-0.75%
Effect on (loss) Effect on (loss)
before tax
2013
US$000
143
(143)
before tax
2014
US$000
138
(138)
The other financial instruments of the Group that are not included in the above tables
are non-interest bearing and are therefore not subject to interest rate risk.
- 67 -
The interest rate profile of the financial assets and liabilities of the Company as at 31
December is as follows:
Company
Year ended 31 December 2014
Fixed rate
Short-term deposits
Within 1 year
US$000
2,000
1-2 years 2-5 years
US$000
-
US$000
-
Total
US$000
2,000
2,000
Total
US$000
7,447
7,447
Total
US$000
15,884
420
16,304
Within 1 year 1-2 years 2-5 years
US$000
-
US$000
7,447
US$000
-
Within 1 year 1-2 years 2-5 years
US$000
US$000
US$000
15,884
420
-
-
-
-
Within 1 year 1-2 years
US$000
US$000
2-5 years
US$000
Total
US$000
9,575
-
-
9,575
9,575
Floating rate
Cash
Year ended 31 December 2013
Fixed rate
Short-term deposits
Short-term financial assets
Floating rate
Cash
Credit risk
The Group’s and Company’s exposure to credit risk relating to financial assets arises
from the default of a counterparty with a maximum exposure equal to the carrying value
as at the balance sheet date. Where Serica operates joint ventures on behalf of partners
it seeks to recover the appropriate share of costs from these third parties. The majority
of partners in these ventures are well established oil and gas companies. In the event of
non payment, operating agreements typically provide recourse through increased
venture shares. Cash and treasury credit risks are mitigated through spreading the
placement of funds over a range of institutions each carrying acceptable published credit
ratings to minimise counterparty risk.
Foreign currency risk
The Group enters into transactions denominated in currencies other than its US dollar
reporting currency. Non US$ denominated balances, subject to exchange rate
fluctuations, at year-end were as follows:
Cash and cash equivalents:
Pounds sterling
Canadian dollars
Norwegian kroner
Euros
Group
2014
US$000
2013
US$000
Company
2014
US$000
8,386
1
12
296
4,362
-
-
-
4,663
-
9
125
- 68 -
2013
US$000
8,100
1
-
-
Accounts receivable:
Pounds sterling
Trade payables:
Pounds sterling
Canadian dollars
Euros
451
931
177
354
1,343
-
157
1,260
41
103
776
-
40
1,185
41
20
The following table demonstrates the Group’s sensitivity to a 10% increase or decrease
in the US Dollar against the Pound sterling. The sensitivity analysis includes only foreign
currency denominated monetary items and adjusts their translation at the year end for a
10% change in the foreign currency rate.
Increase/decrease in foreign exchange rate
10% strengthening of US$ against £GBP
10% weakening of US$ against £GBP
Liquidity risk
Effect on (loss)
before tax
2014
US$000
377
(377)
Effect on (loss)
before tax
2013
US$000
806
(806)
The table below summarises the maturity profile of the Group and Company’s financial
liabilities at 31 December 2014 based on contractual undiscounted payments. The Group
monitors its risk to a potential shortage of funds by monitoring the maturity dates of
existing debt.
Group
Year ended 31 December 2014 Within
1 year
1 to 2 years
2 to 5 years
Total
US$000
US$000
US$000 US$000
Trade and other payables
3,998
-
-
3,998
Year ended 31 December 2013
Within
1 Year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
4,417
-
-
4,417
Company
Year ended 31 December 2014 Within
1 year
1 to 2 years
2 to 5 years
Total
US$000
US$000
US$000 US$000
Trade and other payables
1,167
-
-
1,167
- 69 -
Year ended 31 December 2013
Within
1 Year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
959
-
-
959
Commodity price risk
During 2013, all of the Group’s gas production was sold at fixed contracted prices.
All condensate production was sold at prices linked to the spot market. During much of
the Kambuna field production period, fluctuations in condensate price were largely offset
by variations in cost recovery.
The Group had no gas or liquid sales in 2014.
Fair values of financial assets and liabilities
Management assessed that the fair values of cash and short-term deposits, trade
receivables, trade payables and other current liabilities approximate their carrying
amounts largely due to the short-term maturities of these instruments. As such the fair
value hierarchy is not provided.
Capital management
The primary objective of the Group’s capital management is to maintain appropriate
levels of funding to meet the commitments of its forward programme of exploration and
development expenditure, and to safeguard the entity’s ability to continue as a going
concern and create shareholder value. At 31 December 2014, capital employed of the
Group amounted to US$66.3 million (comprised of US$66.3 million of equity
shareholders’ funds and US$nil million of borrowings), compared to US$102.1 million at
31 December 2013 (comprised of US$102.1 million of equity shareholders’ funds and
US$nil of borrowings).
At 31 December 2014, capital employed of the Company amounted to US$66.3 million
(comprised of US$66.3 million of equity shareholders’ funds and US$nil million of
borrowings), compared to US$123.1 million at 31 December 2013 (comprised of
US$123.1 million of equity shareholders’ funds and US$nil million of borrowings).
- 70 -
23. Equity Share Capital
The concept of authorised share capital was abolished under the Companies Act 2006
and shareholders approved the adoption of new Articles of Association at the 2010
Annual General Meeting which do not contain any reference to authorised share capital.
The share capital of the Company comprises one “A” share of £50,000 and 250,179,039
ordinary shares of US$0.10 each. The “A” share has no special rights.
The balance classified as total share capital includes the total net proceeds (both nominal
value and share premium) on issue of the Group and Company’s equity share capital,
comprising US$0.10 ordinary shares and one ‘A’ share.
Allotted, issued and fully paid:
Group
Share
Share
Total
capital premium Share capital
US$000
Number US$000 US$000
As at 1 January 2013
182,770,311
18,367 191,391
209,758
Shares issued (i)
67,408,729
6,741
11,459
18,200
As at 31 December 2013
250,179,040
25,108 202,850
227,958
Shares issued
-
-
-
-
As at 31 December 2014
250,179,040
25,108 202,850
227,958
Allotted, issued and fully paid:
Company
Share
Share
Total
capital premium Share capital
US$000
capital
Number US$000 US$000
As at 1 January 2013
182,770,311
18,367 156,119
174,486
Shares issued (i)
67,408,729
6,741
11,459
18,200
As at 31 December 2013
250,179,040
25,108 167,578
192,686
Shares issued
-
-
-
-
As at 31 December 2014
250,179,040
25,108 167,578
192,686
i)
In November 2013, the Company raised US$18.2 million (net of expenses)
through the issue of 67,408,729 ordinary shares at 18 pence each. The issue
price represented a discount of 1.4% to the mid-market price of 18.25 pence
per ordinary share on 21 October 2013, the announcement date of the share
placing and open offer being 22 October 2013.
- 71 -
24. Additional Cash Flow Information
Analysis of Group net cash
Year ended 31 December 2014
1 January
2014 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2014
US$000
Cash
Short-term deposits
10,178
15,884
(2,246)
(13,746)
(39)
(138)
7,893
2,000
26,062
(15,992)
(177)
9,893
Year ended 31 December 2013
1 January
2013 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2013
US$000
Cash
Short-term deposits
14,595
7,750
(4,570)
7,872
153
262
10,178
15,884
22,345
3,302
415
26,062
Analysis of Company net cash
Year ended 31 December 2014
1 January
2014 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2014
US$000
Cash
Short-term deposits
9,575
15,884
(2,101)
(13,746)
(27)
(138)
7,447
2,000
25,459
(15,847)
(165)
9,447
Year ended 31 December 2013
Cash
Short-term deposits
1 January
2013 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2013
US$000
13,674
7,750
(4,247)
7,846
21,424
3,599
148
288
436
9,575
15,884
25,459
- 72 -
25. Share-Based Payments
Share Option Plans
Following a Reorganisation in 2005 (see note 1), the Company established an option
plan (the “Serica 2005 Option Plan”) to replace the Serica Energy Corporation Share
Option Plan (the “Serica BVI Option Plan”). The objective of these plans is to develop the
interest of Directors, officers, key employees and certain consultants of the Group in the
growth and development of the Group by providing them with the opportunity to acquire
an interest in the Company and to assist the Company in retaining and attracting
executives with experience and ability.
Serica Energy Corporation (“Serica BVI”) was previously the holding company of the
Group but, following the Reorganisation, is now a wholly owned subsidiary of the
Company. Prior to the Reorganisation, Serica BVI issued options under the Serica BVI
Option Plan and following the Reorganisation the Company has agreed to issue ordinary
shares to holders of Serica BVI Options already awarded upon exercise of such options in
place of the shares in Serica BVI to which they would be entitled. At 31 December 2014
there were options outstanding under the Serica BVI Option Plan entitling holders to
acquire up to an aggregate of 700,000 ordinary shares of the Company. No further
options will be granted under the Serica BVI option plan.
As at 31 December 2014, the Company has granted 20,332,460 options under the
Serica 2005 Option Plan, 10,680,460 of which are currently outstanding. The Serica
2005 Option Plan will govern all future grants of options by the Company to Directors,
officers, key employees and certain consultants of the Group.
The Serica 2005 Option Plan is comprised of two parts, the basic share option plan and a
part which constitutes an Enterprise Management Incentive Plan (“EMI Plan”) under rules
set out by the H.M. Revenue & Customs in the United Kingdom. Options granted under
the Serica 2005 Option Plan can be granted, at the discretion of the Board, under one or
other of the two parts but, apart from certain tax benefits which can accrue to the
Company and its UK employees if options are granted under the part relating to the EMI
Plan meeting the conditions of that part of the Serica 2005 Option Plan, all other terms
under which options can be awarded under either part are substantially identical.
The Directors intend that the maximum number of ordinary shares which may be utilised
pursuant to the Serica 2005 Option Plan will not exceed 10% of the issued ordinary
shares of the Company from time to time in line with the recommendations of the
Association of British Insurers.
5,944,690 of the 10,680,460 options outstanding under the Serica 2005 Option Plan are
exercisable only if certain performance targets being met. These include the following
options subject to market conditions; 110,000 options awarded to an executive director
in December 2005, 350,000 options awarded to an executive director in March 2008 and
1,425,000 options awarded to executive directors in January 2010. In April 2011,
200,000 options were awarded to an executive director and 200,000 options were
awarded to an employee exercisable only if certain operational performance targets are
met. In October 2012 a further 800,000 share options under the Serica 2005 Option Plan
were granted to two current executive directors, all of these options are subject to
performance conditions. Details of the performance conditions attached are provided in
the Directors’ Report. In November 2012, 400,000 options were granted to a consultant
subject to performance conditions. In January 2014 a further 1,200,000 share options
under the Serica 2005 Option Plan were granted to two current executive directors, all of
these options are subject to performance conditions. Details of the performance
conditions attached are provided in the Directors’ Report.
The Company calculates the value of share-based compensation using a Black-Scholes
option pricing model (or other appropriate model for those Directors’ options subject to
- 73 -
certain market conditions) to estimate the fair value of share options at the date of
grant. There are no cash settlement alternatives. The estimated fair value of options is
amortised to expense over the options' vesting period. US$337,000 has been charged to
the income statement in continuing operations for the year ended 31 December 2014
(2013 – US$252,000) and a similar amount credited to the share-based payments
reserve, classified as ‘Other reserve’ in the Balance Sheet. US$134,000 (2013 –
US$128,000) of the total continuing operations charge was in respect of key
management personnel (defined in note 8).
The options granted in 2014 and 2013 were consistently valued in line with the
Company’s valuation policy. Assumptions made included a weighted average risk-free
interest rate of 3%, no dividend yield, a weighted average expected life of three years,
and a volatility factor of expected market price of in a range from 50-70%. The weighted
fair value of options granted during the year was £0.07 (2013:£0.15).
The following table illustrates the number and weighted average exercise prices (WAEP)
of, and movements in, share options during the year:
Serica BVI option plan
Outstanding as at 1 January
Expired during the year
2014
Number
1,900,000
(1,200,000)
2014
WAEP
Cdn$
1.46
1.67
2013
Number
1,900,000
-
2013
WAEP
Cdn$
1.46
-
Outstanding as at 31 December
700,000
1.11
1,900,000
1.46
Exercisable as at 31 December
700,000
1.11
1,900,000
1.46
Serica 2005 option plan
Outstanding as at 1 January
Granted during the year
Expired during the year
9,108,460
1,800,000
(228,000)
£
0.50
0.13
0.32
9,058,460
800,000
(750,000)
£
0.52
0.23
0.40
Outstanding as at 31 December
10,680,460
0.44
9,108,460
0.50
Exercisable as at 31 December
4,735,500
0.74
4,513,500
0.76
The weighted average remaining contractual life of options outstanding as at 31
December 2014 is 5.8 years (2013: 5.5 years).
For the Serica BVI option plan, the exercise price for outstanding options at the 2014
year end ranges from Cdn$1.00 to Cdn$1.80 (2013: Cdn$1.00 to Cdn$1.80). For the
Serica 2005 option plan, the exercise price for outstanding options at the 2014 year end
ranges from £0.13 to £1.04 (2013: £0.18 to £1.04).
- 74 -
As at 31 December 2014, the following director and employee share options were
outstanding:
Expiry Date
Amount
January 2015
June 2015
600,000
100,000
November 2015
January 2016
June 2016
January 2017
May 2017
March 2018
March 2018
January 2020
April 2021
January 2022
October 2022
January 2023
November 2023
January 2024
280,000
135,000
270,000
243,000
210,000
594,000
350,000
2,203,500
450,000
2,144,960
1,200,000
400,000
400,000
1,800,000
Exercise cost
Cdn$
600,000
180,000
Exercise cost
£
271,600
139,725
259,200
247,860
218,400
445,500
287,000
1,498,380
141,188
458,485
348,000
109,000
72,000
234,000
On 16 January 2015, 600,000 share options under the Serica BVI Option Plan expired.
26. Commitments under Operating Leases
Operating lease agreements where the Group is lessee
At 31 December 2014 the Group has entered into commercial leases in respect of rental
of office premises and office equipment.
Future minimum rentals payable under non-cancellable operating leases are as follows:
Not later than one year
Later than one year and not later
than five years
Group
2014
US$000
129
-
Company
2014
US$000
-
-
2013
US$000
137
-
2013
US$000
-
-
129
137
-
-
In March 2015, the Group entered into a new two year office operating lease on smaller
premises with a minimum commitment period until February 2016, expiring in March
2017.
Operating sublease agreements where the Group is lessor
In January 2013 the Group entered into an operating sublease for part of its UK office,
initially expiring in March 2014 but extended until March 2015. At 31 December 2014,
future minimum rentals receivable under this sublease for a period not later than one
year were US$30,000.
27. Capital Commitments and Contingencies
At 31 December 2014, other amounts contracted for but not provided in the financial
statements for the acquisition of exploration and evaluation assets amounted to US$nil
for the Group and US$nil for the Company (2013: US$1.2 million and US$nil
- 75 -
respectively). The 2013 amounts related to costs incurred on Foum Draa drilling in
Morocco in January 2014.
The Company also has obligations to carry out defined work programmes on its oil and
gas properties, under the terms of the award of rights to these properties. The Company
is not obliged to meet other joint venture partner shares of these programmes.
Non-Erskine commitments
The Group has no significant exploration commitments. The two exploration commitment
wells on the Morocco licences have now been drilled. On the Company’s Namibian
licence, the value of work performed to date by the JV partners on the 3D Seismic
acquisition programme has exceeded the minimum obligation expenditure on exploration
work of US$15.0 million covering the entire initial four year period of the licence, ending
in December 2015.
In the UK East Irish Sea, the Group’s carry on the exploration well on the Doyle prospect
is subject to a cap although no overrun is currently forecast. The Group has no
significant commitments on its other exploration licences.
Other less material minimum obligations include G&G, seismic work and ongoing licence
fees in the UK and Ireland.
Erskine field commitments
The completion of the Erskine field acquisition will bring certain financial commitments.
Net revenues from the Erskine field are expected to assist Serica in building its cash
resources over coming months and years, but the Group has obligations to pay to BP the
three remaining 25% tranches of US$2.775 million (excluding
interest) cash
consideration on 1 July 2016, 1 July 2017 and 1 July 2018 respectively. In addition the
Group is likely to fund further significant expenditure later in 2015 for its share of
remedial and upgrade work on the Lomond processing facilities.
Other
The Group occasionally has to provide security for a proportion of its future obligations to
defined work programmes or other commitments. As at 31 December 2013 it fulfilled
this obligation through the Company providing US$0.4 million of cash collateral included
as a financial asset (restricted cash). No such obligations and cash collateral existed as
at 31 December 2014.
Where the Company enters into financial guarantee contracts and guarantees the
indebtedness of other companies within the Group, the Company considers these to be
insurance arrangements, and accounts for them as such. In this respect, the Company
treats the guarantee contract as a contingent liability until such time that it becomes
probable that the Company will be required to make a payment under the guarantee.
28. Related Party Transactions and Transactions with Directors
During the year ended 31 December 2014, a total sum of £122,500 was paid by the
Company for consultancy services provided on behalf of Antony Craven Walker. All sums
paid by the Company were promptly reimbursed by Antony Craven Walker and no net
expense therefore incurred. The maximum amount outstanding at any one time was
£12,375.
There are no other related party transactions, or transactions with Directors that require
disclosure except for the remuneration items disclosed in the Directors Report and note
8 above. These disclosures include the compensation of key management personnel.
The Company’s related parties consist of its subsidiaries and the transactions and
amounts due to/due from them are disclosed in the accompanying notes to the Company
financial statements.
- 76 -
29. Post Balance Sheet Events
As noted in the Financial Review, the Company expects to complete imminently the
acquisition of an 18% interest in UK blocks 23/26a (Area B) and 23/26b (Area B)
containing the Erskine Field, from BP.
- 77 -
Group Proved plus Probable Reserves – Unaudited
Western Europe
Oil
Gas
bcf mmbbl
Oil
mmbbl
Total
Indonesia
Oil
Gas
bcf mmbbl
Total
Total
Gas Oil & gas
bcf
mmboe
At 1 January 2014
1.5
21.9
0.0
0.0
1.5
21.9
5.2
Revisions to
Contingent Resources
(1.5)
(21.9)
At 31 December 2014
-
-
Proved developed
Proved undeveloped
Probable developed
Probable undeveloped
-
0.8
-
0.7
-
12.1
-
9.8
At 31 December 2013
1.5
21.9
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1.5)
(21.9)
(5.2)
-
-
-
-
0.8
-
0.7
-
12.1
-
9.8
1.5
21.9
-
2.9
-
2.3
5.2
Proved and probable reserves are based on independent reports prepared by consultants
Netherland, Sewell & Associates (for the Columbus Field in the UK North Sea) in
accordance with the reserve definitions of the Canadian Oil and Gas Evaluation
Handbook. Gas reserves at 31 December 2013 have been converted to barrels of oil
equivalent using a factor of 6.0 bcf per mmboe for Western Europe (Columbus field
reserves) on the basis of a nominal gas calorific value of 1,000 BTU per cubic foot.
The directors of Serica believe that in the current oil price environment, it is appropriate
for these to now be properly considered as Contingent Resources rather than the
previous categorisation as Reserves. In view of the reclassification, and since no new
information relating to the field was obtained in 2014, it was not considered cost
effective or necessary to obtain an updated report at the end of 2014.
In view of the field shut-in in July 2013 and subsequent handover to Pertamina,
remaining economic hydrocarbon reserves as at 31 December 2012 were of an
immaterial level, equating to the estimated levels of declining production in the
remaining months of 2013 prior to handover. Accordingly no independent reserves audit
was performed in 2012.
- 78 -