SERICA ENERGY PLC
2016
ANNUAL REPORT AND ACCOUNTS
Company Number: 5450950
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EXECUTIVE CHAIRMAN’S STATEMENT
Dear Shareholder
I am pleased to report strong underlying performance from Serica’s assets. Gross profit
for 2016 of US$6.6 million was achieved in spite of a six-month production shut-in
earlier in the year to resolve pipeline issues and during a difficult period for oil and gas
prices. This robust performance puts Serica in a very strong position within the sector.
We ended the year with no borrowings or material commitments and with cash balances
growing significantly. This performance has continued post the year-end.
This strong financial position enables us to look for new opportunities to add further
value for shareholders and we are reviewing a number of such opportunities. These will
be aimed at increasing and diversifying our production streams as well as balancing risk.
We are also looking at utilising our tax loss position to the full and acquiring assets
where we have some degree of control and believe we can add value through applying
our expertise.
The Erskine field has performed well since production was restarted on 29 August 2016,
averaging over 3,150 boe per day net to Serica to end March 2017. This was despite a
ten-day shut-in in late February 2017 for maintenance and installation of a back-up
export pump, and we have achieved production efficiencies averaging as much as 90%
in recent months. Serica’s operating and transportation costs have also been maintained
at low levels below US$14 per boe at current production rates. The combined effect of
this performance has been a significant increase in cash balances, from US$16.6 million
at the year end, to US$25.7 million by end March 2017, an increase of US$9.1 million
during the three month period. With administration costs for the year standing at US$2.1
million, we continue to contain corporate overhead at minimal levels.
Production resumption has also taken place against a backdrop of improved commodity
prices. Oil sales prices rose to an average US$49 per barrel during the second half of
2016 whilst gas sales prices showed an even stronger rise, averaging over 40 pence per
therm during the same period. A gas sales contract, under which Serica supplied
approximately one quarter of its Erskine gas production at relatively low contract prices
(approximately 30 pence per therm in the 2015/6 contract year), was terminated by
Serica on 30 September 2016 coinciding with the upsurge in gas prices and allowing
Serica the full benefit since then. Since the turn of the year oil prices have averaged
US$54 per barrel with UK gas prices averaging 48 pence per therm.
Serica’s current operating and transportation cost of below US$14 per boe reflects
overall cost reductions, sustained production rates and also the impact of the lower
sterling to dollar exchange rate. In addition to maintaining focus on cost control and
improved production uptime, future costs per barrel can also be reduced through the
introduction of new third party throughput to Lomond including production from the
Columbus field whose progress is described in more detail in the Operations Review.
With the sale by Shell of the Lomond platform to Chrysaor as part of a bigger package
and Chrysaor committed to extending production life and maximising economic recovery,
we believe that the incentives are now in place for all parties to find a solution to
Columbus’s export needs.
We are looking at various solutions for the development of Columbus, including the
option of drilling into the field directly from the Lomond platform as well as the
possibility of connecting a subsea well to an Arran-to-Shearwater pipeline, planned by
the operator of the Arran field located to the north. The potential advantages of an
extended-reach well from Lomond include no pipeline or associated subsea equipment,
faster hook up time, easier well maintenance access and lower-cost abandonment. It
would also reduce unit operating costs for the hub users overall, including Erskine, and
help to attract further third party business and defer Lomond platform abandonment,
thus increasing overall reserves recovery in the area. It is our objective to compare the
costs and risks of the different solutions, as well as potential benefits such as these, in
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order to reach a decision on Columbus development with our partners and infrastructure
owners and finalise a field development plan during 2017.
We continue to seek ways to unlock the value in our exploration assets. We hold
significant interests in acreage offering a balance of lower risk, mature basins and high
risk, high reward frontier areas. We have mitigated drilling expenditure during the
industry downturn through farm-outs and have constrained costs in our more frontier
acreage but will be looking to expand this programme as our financial position
strengthens.
Offshore Namibia and Ireland we have been granted two-year extensions with low cost
exploration commitments and we are receiving expressions of interest from third parties
for possible joint ventures as the exploration market slowly recovers buoyancy. In the
UK we have a fully carried 15% interest in the Rowallan prospect in Central North Sea
block 22/19c and, in East Irish Sea block 113/27c, we have a 20% carried interest in the
Doyle prospect. Rowallan has a P50 potential resource estimate of 20 million boe net to
Serica. It is one of three large, high pressure, high temperature prospects located on
block 22/19c which lies close to our Columbus and Erskine interests. Plans to drill a well
were delayed last year pending greater clarity on the outlook for oil and gas prices but
partners have now agreed to place advance orders for long-lead items and proceed with
site surveying this year in preparation for drilling of the Rowallan exploration well in
2018. A successful well would be material to Serica and highlight further potential on
the block.
In the Doyle block we await the outcome of decisions from our operator Zennor
Petroleum who have an 80% interest in the block following the withdrawal of Centrica,
our previous operator, in 2016. Zennor have been seeking a partner to share in their
80% interest. In the absence of securing such a partner they may elect to relinquish the
block. The licence authority, OGA, have granted an extension until 30 April 2017.
Outlook
With our strong balance sheet, growing cash resources and opportunities to add value
from our existing oil and gas resources, Serica is extremely well positioned to execute its
growth strategy. We recognise our dependence upon Erskine as our only current source
of income. Whilst this is generating material cash flows for the Company and we are
expecting this to continue, we are looking to see how we can use our financial strength
to diversify and enhance our cash generative capacity through the acquisition of
additional production where we believe we can also add value. We see this as an
essential part of our risk management strategy but a successful outcome would also
increase the scale and spread of the Company’s operations and create greater visibility,
financial capacity and liquidity for the Company to the benefit of shareholders.
In view of the strategic benefits, synergies and tax efficiencies our immediate focus
remains on the UK North Sea where there are opportunities on offer as the oil majors
restructure their asset portfolios and make way for smaller, more cost efficient
operators. The market is, as ever, competitive, particularly from new sources of private
equity, and the vibrancy of the market has been demonstrated by a number of recently
announced transactions. We are cautious in our approach and remain fully cognisant of
the need to high grade the number of opportunities available but believe that such a
strategy will also help us in bringing forward the clear potential of our existing portfolio.
In summary, we are extremely positive on the opportunities open to Serica and on our
ability to execute them. We are looking forward to an interesting and potentially
exciting year ahead.
Antony Craven Walker
Executive Chairman
5 April 2017
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STRATEGIC REPORT
The following Strategic Report of the operations and financial results of Serica Energy plc
(“Serica”) and its subsidiaries (the “Group”) should be read in conjunction with Serica’s
consolidated financial statements for the year ended 31 December 2016.
References to the “Company” include Serica and its subsidiaries where relevant. All
figures are reported in US dollars (“US$”) unless otherwise stated. The Company is
subject to the regulatory requirements of the AIM market (“AIM”) of the London Stock
Exchange in the United Kingdom. Although the Company delisted from the Toronto
Stock Exchange (“TSX”) in March 2015, the Company is a “designated foreign issuer” as
that term is defined under Canadian National Instrument 71-102 - Continuous Disclosure
and Other Exemptions Relating to Foreign Issuers.
Serica is an independent oil and gas company with production, development and
exploration licence interests in the UK Continental Shelf and exploration interests in
Ireland, Morocco and Namibia.
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REVIEW OF OPERATIONS
Production
Central North Sea: Erskine Field – Blocks 23/26a (Area B) and 23/26b (Area B), Serica
18%
All of Serica’s production comes from its 18% interest in Erskine, a gas and condensate
producing field located in the UK Central North Sea and acquired from BP in June 2015.
Serica’s co-venturers are Chevron 50% (operator) and Shell 32%. Erskine fluids are
processed and exported via the Lomond platform, which is 100% owned and operated by
Shell, who acquired Lomond and a share in Erskine through the acquisition of BG in
February 2016. Serica’s condensate allocation is delivered and sold as Forties crude oil at
the Cruden Bay terminal and gas is sold at the CATS terminal on Teeside. Shell has
recently announced a sale of its interests in Erskine and Lomond, subject to certain
consents, to Chrysaor Holdings Limited, a private equity-backed oil and gas company.
An updated independent audit of the Erskine field confirmed Serica’s share of estimated
proven plus probable reserves at 3.8 million boe as of 1 January 2017, in line with
previous estimates.
Following a strong January and February 2016 when production averaged over 3,200
boe per day net to Serica, the field was subject to an extended shut-in. On 27 February
2016 a cleaning device known as a pig became stuck in the condensate export pipeline
that runs between Lomond and the Everest platform, causing a blockage. The blockage
was caused by the pig encountering a build-up of wax in the line that had been
deposited over time by the export fluids. The operation to clear the line took ten weeks
due to the engineering requirements to gain access to the blockage with wax solvent and
then to allow for optimal time to soak and dissolve the wax. Rather than restarting in
mid-May, the planned June shut-in for maintenance work on the Lomond platform was
brought forward with the eventual full restart of Erskine occurring on 29 August 2016.
Erskine field production since the 29 August restart has delivered strong and consistent
volumes, averaging approximately 3,150 boe per day net to Serica to year-end despite a
series of capacity restrictions on the Forties Pipeline, through which Erskine liquids are
exported, and some minor system trips on the Lomond offtake facilities. This
performance has continued into 2017, averaging over 3,200 boe per day net to Serica
over the first three months despite a ten-day shut-in for further treatment of wax build-
up in the condensate export line and installation of a back-up pump. The strong
performance of the Erskine wells over the last 21 months, when unconstrained by
offtake restrictions, fully supports current estimates of ultimate reserves recovery and
may leave scope for further upside.
Improved planning and communication between the Erskine and Lomond facility
operators, supported by Serica, has resulted in reducing production interruptions. This
has been achieved by identifying system vulnerabilities and planning more efficient
maintenance programmes. Production efficiency exceeded 80% from the end of August
2016 to the end of the year and has averaged around 90% in recent months,
demonstrating continued performance improvement.
Having assessed the lessons from the blockage of the Lomond to Everest condensate
export pipeline last year, the Lomond facilities operator is implementing a number of
changes to reduce the chance of a reoccurrence. These include improved pipeline
monitoring, more regular pigging programmes and intermittent shut-ins for the injection
of wax solvents when required.
Ongoing reductions to the Erskine/Lomond cost-base have combined with increased
throughput volumes to lower Erskine operating costs per boe. Though Serica’s average
operating cost for 2016 was US$23 per boe including transportation costs, this falls
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below US$14 per boe after excluding the effects of the export line blockage, illustrating
that maintaining production volumes is as important as cutting costs in the drive to
minimise costs per barrel.
This also drives the strategy to bring other fields, such as Columbus, through the
Lomond hub as soon as practicable to the benefit of all hub owners. Recent analysis by
Oil & Gas UK suggests that average operating costs of US$15 per barrel are now being
achieved through the UK North Sea as a whole, setting a benchmark for all operators
which should sustain profitable North Sea operations even during future periods of low
commodity prices.
No significant capital investment is planned for Erskine in 2017.
Development
Central North Sea: Columbus Field – Blocks 23/16f and 23/21a, Serica 50%
The Columbus gas condensate field is located in close proximity to the Lomond platform,
which is the offtake route for production from Serica’s Erskine producing interest. Serica
as Columbus field operator is working towards a full Field Development Plan by the end
of 2017 with a view to commencing development work in 2018. First gas is targeted for
late 2019 or 2020.
The Columbus field has been fully appraised with four wells and will be developed with a
single production well. Serica is progressing two potential development options for
Columbus. The first option is an extended-reach development well drilled into Columbus
from the Lomond platform, located 5 kilometres away. This technology has been
extensively used in the North Sea, especially in Norway. Alternatively a well could be
drilled as a subsea completion and tied into a proposed third-party pipeline to the
Shearwater platform, with either option delivering similar levels of reserves recovery.
The Lomond platform has spare well slots and a jack–up rig can be utilised to drill a well
into Columbus from the platform. The advantage of this route is that there is no pipeline
or associated subsea equipment required and consequently time to hook up the well and
bring it on production should be much shorter than would be required for a subsea well.
A platform well also has the advantages of easy access for future well maintenance
interventions and lower-cost abandonment. Columbus production into the Lomond
platform is likely to benefit the Erskine and Lomond fields by reducing unit operating
costs whilst improving the product mix and could result in deferring the date of platform
abandonment thus increasing reserves recovery. Deferment of Lomond platform
abandonment would also increase its attraction for other potential third party business to
mutual benefit.
In parallel, Serica is working with the Arran field operator to appraise the option of tying
Columbus into a proposed new pipeline into the Shearwater platform. This would be a
longer offtake route and the Columbus development well would be drilled as a subsea
completion. The advantages of this option are shorter drilling time and the potential for
lower unit operating costs. However, there would be an overall increase in development
costs and there would be greater complexity involved in coordinating with a separate
field development, which is expected to result in a longer development timeline.
Whichever option is selected, Serica plans to take full advantage of current market
conditions and latest drilling and subsea technology to ensure a low cost, efficient and
reliable plan for development. Serica is undertaking studies on both options in order to
make an informed decision, based on risks and economics, during the course of 2017,
following which a field development plan will be submitted to the Oil and Gas Authority.
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Exploration
Central North Sea: Rowallan Prospect - Block 22/19c, Serica 15%
Detailed well planning for the Rowallan prospect is underway, with spending on a site
survey and long-lead items approved by partners for 2017. A vessel will be deployed in
the summer to perform a site survey and drill geotechnical boreholes in preparation for
drilling in 2018. The prospect is located within Serica’s core Central North Sea area,
close to Erskine and Columbus. Serica is fully carried on all costs for a well on this high
pressure high temperature prospect. There are similarities to the nearby Culzean field,
with the well targeting the same age Jurassic/Triassic reservoir sands and a fault-and-
dip closed trap.
A discovery could deliver 20 million boe net to Serica (P50 resource estimate), with
further upside in the form of two similar prospects, Dundonald and Sundrum, also
identified on the block.
East Irish Sea: Doyle Prospect - Blocks 113/22a, 113/26b and 113/27c, Serica 20%
The Doyle gas prospect lies in close proximity, and is analogous, to the producing Rhyl
field. Serica is carried for costs on an exploration well on the prospect up to a gross cap
of £11 million. The operator has been seeking a partner to share in its drilling costs
following the withdrawal of Centrica, our previous operator, in 2016. In the absence of
securing such a partner the block may be relinquished. The licence authority, OGA, have
granted an extension until 30 April 2017.
Ireland
Offshore Ireland is currently experiencing renewed interest including the entry of a
number of oil and gas majors. This is demonstrated through significantly increased
licence applications, farm-ins and seismic data acquisition programmes expected to lead
to renewed drilling in the region.
Rockall Basin: Frontier Exploration Licences 1/09 and 4/13, Serica 100%
Serica has secured a two-year extension on licence 4/13 in order to bring in a partner to
join in drilling an exploration well. The well is designed to test two prospects, the
shallower prospect being a Cretaceous fan defined by seismic anomaly and analogous to
prospects identified in the Porcupine basin. This overlies a deeper target, a structural
fault block of Permian/Triassic age, analogous to the nearby Dooish discovery. Serica
estimates P50 resources for these stacked prospects to be in the order of 4tcf of gas and
250 million barrels of condensate, which would result in a major development.
Licence 1/09 contains a large structural prospect, also a Dooish analogue, and Serica is
seeking a partner to drill a well to prove the concept, ideally as part of the same drilling
programme as 4/13.
In 2017, further work is planned on the licences to investigate the potential for
productive fractured basement. The recent well test on the Lancaster discovery by
Hurricane in the West of Shetlands area has proved the production capability of fractured
basement.
Slyne Basin: Frontier Exploration Licence 01/06, Serica 100%
Serica has increased its equity from 50% to 100% following the withdrawal of DEA from
the licence and has secured a two-year extension to further explore the potential first
identified through the Bandon oil discovery drilled in 2009. In that time, Serica plans to
further de-risk the Boyne prospect, down-dip of the Bandon discovery, by detailed
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analysis to better predict the oil type likely to be found in the deeper Jurassic and
Triassic sandstone formations.
Serica is seeking to identify a farm-in partner to take advantage of low drilling and
development costs and, in the event of a commercial discovery, to follow with a swift
development to get to first oil/gas. The P50 resource estimate of 115 million barrels of
oil is expected to result in an attractive economic development at current oil prices.
Namibia
Luderitz Basin: Blocks 2512A, 2513A, 2513B and 2612A (part), Serica 85%
Serica has progressed to the first renewal period of the licence, running until the end of
2018. This licence period does not include a commitment to drill a well. However, the
prospectivity, identified by a major seismic programme operated by Serica, is such that
Serica would wish to drill a well within this time-frame, subject to the introduction of a
new partner. The excellent 3D seismic data has identified giant carbonate prospects as
well as large, more conventional Cretaceous fan prospects supported by seismic
anomalies. Serica plans to work on identifying more prospects supported by the latest
seismic visualisation techniques as well as seeking a partner to drill the main carbonate
prospect (gross P90 to P10 range of 138 million to 2.8 billion barrels of oil).
Morocco
Sidi Moussa Licence: Serica 5%
The Sidi Moussa licence has been extended until August 2017 to allow the operator,
Genel, time to consider further exploration activity. Serica has elected not to participate
in any further drilling but has an option to buy back in should a well be drilled.
Norway
The operator of the Vette field, in which Serica held an economic interest dependent
upon the level of oil prices prevailing at first production, determined that the potential
development was uncommercial at current oil and gas prices and the licence has been
relinquished.
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LICENCE HOLDINGS
The following table summarises the Group's licences as at 31 December 2016.
Block(s)
Description
Role
% at
31/12/16
Location
Exploration
Non-operator
15%
UK
22/19c
23/16f, 23/21a (part)
23/26a, 23/26b
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
Columbus Field -
Development planned
Erskine Field -
Production
Exploration
Operator
Non-operator
Non-operator
Exploration
Non-operator
Exploration
Non-operator
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Exploration
Operator (1)
Operator (1)
Operator (1)
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Operator
Exploration
Operator
Exploration
Operator
Exploration
Operator
50%
18%
20%
20%
20%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
85%
85%
85%
85%
Central North
Sea
Central North
Sea
Central North
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
Tarfaya-Ifni
Basin
2612A (part)
Exploration
Operator
Morocco
Sidi Moussa
Exploration
Non-operator
5%
(1)
Interest increased from 50% to 100% effective 1 December 2016 following
confirmation of licence extension in March 2017.
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GLOSSARY
bbl
bcf
boe
CPR
FEED
HPHT
mscf
mmbbl
mmboe
mmscf
mmscfd
NGLs
OGA
Overlift
Underlift
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)
Competent Persons Report
Front End Engineering Design
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
Natural gas liquids extracted from gas streams
Oil and Gas Authority
Volumes of oil or NGLs sold in excess of volumes produced
Volumes of oil or NGLs produced but not yet sold
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
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FINANCIAL REVIEW
The completion of the Erskine acquisition on 4 June 2015 brought significant oil and gas
revenue streams, accelerating the utilisation of Serica’s past UK tax losses. The
Company accounts for its share of field revenues and costs post acquisition, hence the
comparative figures for 2015 include Erskine revenues and costs only for the period from
4 June to 31 December 2015.
Group profit after tax of US$10.8 million for 2016 compares to a profit after tax of
US$6.5 million for 2015 with the six-month Erskine field shut-in, running to late August
2016, significantly restricting 2016 sales revenues whilst operating costs continued to be
incurred. Following the restart, rising commodity prices, allied to strong well
performance, improved off-take facility uptime and lower opex per barrel costs,
delivered a particularly strong Q4 2016.
Erskine asset overview
Although the impact of the extended Erskine field shut-in on 2016 results was
substantial, field production performance during January and February and then from the
29 August restart to year-end demonstrated the true capability of the field with
production net to Serica averaging over 3,150 boepd in the latter period, generating
good cash flow throughout Q4 2016 as both oil and gas prices rose. All of the oil is sold
at monthly average spot prices and from 1 October 2016 all of the gas is sold in the
market at monthly average spot prices. NGL’s derived from gas production are also sold
at monthly average spot prices for the respective products.
Field production has continued at similar levels in 2017 to date, averaging over 3,200
boe per day net to Serica in Q1 2017. The Brent oil benchmark has averaged over
US$54 per barrel in Q1 2017 (2016 average of US$45 per barrel) whilst UK gas prices
rose to over 60 pence per therm in January and have averaged over 48 pence across the
Q1 2017 period (2016 average of 35 pence per therm).
Serica’s operating costs including transportation and processing were US$23 per boe
during 2016 reflecting the six-month shut-in, but are now averaging well below these
levels and, assuming steady ongoing production, we expect operating costs to be below
US$14 per boe in 2017.
Strong net income from Erskine since the re-start of production in late August has
allowed Serica to continue to rebuild cash resources. As at 31 March 2017, cash balances
had increased from the year-end balance of US$16.6 million to US$25.7 million, before
receipt of March sales which are expected to add approximately US$3.5 million net of
operating costs.
Serica’s significant tax losses brought forward from prior periods have been applied to
fully shelter Erskine 2016 net income from tax payments and are expected to be
sufficient to cover future income from the field leaving a surplus available to cover new
United Kingdom Continental Shelf sources of income.
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Results from operations
Income statement – continuing operations
Serica generated a gross profit of US$6.6 million in 2016 from its Erskine field operations
after the effect of the six-month field shut-in. The reported 2015 comparative gross
profit of US$16.1 million reflected performance from the date of completion, 4 June
2015, to the year end, 31 December 2015. Serica’s 18% field interest generated net
combined oil and gas production of 597,000 boe in 2016 compared to 606,000 boe for
the reported 2015 period.
Sales revenues
The Company currently generates all its sales revenue from the Erskine field in the UK
North Sea. Revenue is earned from oil, gas and NGL product streams. Serica’s
condensate allocation is sold as Forties crude oil.
Net Erskine field gas production averaged 5.0 mmscf per day during 2016, whilst
condensate production averaged 800 barrels per day reflecting the six-month shut-in. In
the 2015 seven month comparative period, net Erskine field gas production averaged 8.6
mmscf per day together with average condensate production of 1,462 barrels per day.
Sales revenues in 2016 from lifted barrels of oil were US$11.1 million (2015: US$10.4
million) at an average realised price of US$42.10/bbl (2015: US$44.50/bbl). Associated
NGL products earned additional revenue of US$0.3 million (2015: US$0.3 million).
Sales revenues in 2016 also include US$0.5 million (2015: US$3.4 million) reflecting the
movement from a combined liquids overlift position at 31 December 2015 to an underlift
position at 31 December 2016.
The 2016 gas production was sold at prices averaging US$4.6 per mscf (2015: US$5.1
per mscf) and generated US$8.4 million (2015: US$9.1 million) of revenue net to Serica.
A gas sales contract, under which Serica supplied approximately one quarter of its
Erskine gas production at relatively low contract prices (approximately 30 pence per
therm in the 2015/6 contract year), terminated on 30 September 2016.
Three NGL products (Propane, Butane and Naphtha) are derived from associated gas
production and contributed revenue of US$1.2 million (2015: US$0.8 million) net to
Serica.
Cost of sales and depletion charges
Cost of sales is driven by production from the Erskine field and comprises field operating
costs and a depletion charge against the asset’s net book amount.
The overall 2016 charge of US$14.9 million (2015: US$7.9 million) comprised direct field
operating costs of US$13.6 million (2015: US$6.6 million) and non-cash depletion of
US$1.3 million (2015: US$1.3 million). The most significant elements of the field
operating costs are as follows: Erskine’s contribution to the running costs of the Lomond
facilities, standalone Erskine field operating costs, other transportation costs for use of
the FPS and CATS pipelines, and charges for any necessary surface or sub-surface
maintenance work. Significant operational expenditure continues during periods of field
shut-in when no revenue is earned.
The US$7.0 million increase in field operating costs from 2015 to 2016 is largely due to
the full year 2016 reporting period compared to seven months of post-acquisition
Erskine operations in 2015. The 2016 expense also includes an agreed level of
contribution from the Erskine partners to the exceptional costs incurred by the Lomond
operator to resolve the Lomond/Everest pipeline blockage. Operating costs are billed in
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GB£ and, following the decline in the strength of GB£ against the US$ in June 2016, the
reported US$ equivalent figures have reduced during 2H 2016 compared to US$ oil
revenue streams.
Depletion charges principally represent the costs of Erskine acquisition spread over the
estimated remaining commercial life of the field on a unit of production basis.
Other expenses and income
The Company generated a profit before tax from continuing operations of US$3.3 million
for 2016 compared to a profit before tax of US$4.3 million for 2015.
Other expenditure of US$0.1 million in 2016 represented hedging premium net of gains.
Pre-licence expenditure of US$0.2 million for 2016 has increased from the 2015 charge
of US$0.1 million due to an increased level of activity on new business in the second half
of the year as the Company has increased its focus on adding to its existing UK North
Sea asset portfolio. 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.
The Exploration and Evaluation (‘E&E’) asset impairment charge of US$0.1 million in
2016 comprised minor asset write-offs from licences in Morocco and the UK. The
aggregate 2015 impairment charge of US$8.2 million comprised US$13.1 million of asset
write-offs from relinquished licences and historic wells not considered to hold remaining
economic potential, offset by a US$4.9 million pre-tax impairment reversal recorded
against the Columbus field asset.
Administrative expenses of US$2.1 million for 2016 decreased from US$2.7 million in
2015 as the Company’s cost-cutting efforts continued and the largely GB£-based
overheads benefitted from the weaker average GB£ exchange rate compared to US$.
Foreign exchange
Serica retains certain non-US$ cash holdings and other financial instruments relating to
its operations. The US$ 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 to the expected expenditures in those currencies.
Management believes that this mitigates most of any actual potential currency risk from
financial instruments.
Foreign exchange charges of US$0.6 million for 2016 (2015: US$0.4 million) largely
reflect a reduction in the reported US$ equivalent of GB£ cash balances caused by the
weakening of GB£ against the US$ after the EU referendum result. Unrealised losses on
the revaluation of GB£ cash balances have been partially offset by realised gains on
settlement of significant GB£ creditors.
Finance costs of US$0.2 million were incurred in 2016 (2015: US$0.2 million) largely
comprising the interest accruing on the liability payable to BP relating to the Erskine
acquisition.
The deferred taxation credit of US$7.5 million (2015: US$2.4 million) arose from the
recognition of a corresponding deferred tax asset on the Erskine field interest.
Income statement - discontinued operations
Following the cessation of production and the decommissioning of the Kambuna field
facilities in Indonesia in the second half of 2013, the financial results of the Kambuna
- 13 -
field business segment are disclosed within ‘discontinued operations’ in the financial
statements and separate from the results of the retained core business segments.
This discontinued operation loss of US$0.3 million in 2015 comprised a final assessment
for asset write-offs and minor operator expense as residual matters were closed out with
one final charge of US$8,000 recorded in 2016.
Balance Sheet
During 2016, the total carrying value of investments in E&E assets increased by US$1.4
million from US$51.8 million to US$53.2 million. This increase consisted of additions in
the year on the following assets. In Africa, US$0.4 million was incurred in respect of the
Luderitz basin licence interests in Namibia. In the UK, US$0.4 million was incurred on the
Columbus development and other exploration licences. In Ireland, US$0.4 million was
incurred on exploration work on the Rockall licences and US$0.2 million on the Slyne
interest.
The property, plant and equipment balance of US$9.1 million as at 31 December 2016
comprises the net book amount of the Erskine asset acquisition costs capitalised on
completion of the transaction net of depletion charges to-date.
Trade and other receivables at 31 December 2016 totalled US$6.8 million, an increase of
US$2.6 million from the 2015 balance of US$4.2 million. The 2016 balance includes
US$4.3 million (2015: US$3.2 million) from December oil, gas and NGL sales earned
from the Erskine field, and a US$0.4 million non-cash underlift asset reflecting the
combined year end liquids underlift position (2015: US$0.2 million overlift classified as a
liability within trade and other payables.
Cash and cash equivalents decreased from US$21.6 million to US$16.6 million during the
year. Operating cash inflows from net Erskine field sales were adversely impacted by the
six-month field shut-in during which operating expenditure continued to be incurred. The
Company also paid the second US$2.8 million tranche of Erskine consideration to BP and
has significantly reduced other Erskine field liabilities in the year. Other cash outflows
were incurred on E&E assets across the portfolio in the UK, Ireland and Namibia, ongoing
administrative costs and corporate activity.
Short-term trade and other payables totalled US$5.9 million at 31 December 2016
(2015: US$9.6 million). This balance comprises capital and operational liabilities for the
Erskine interest, which have been significantly reduced, the US$2.9 million (including
accrued interest) third tranche of Erskine consideration payable to BP on 1 July 2017,
and other creditors and accruals for E&E asset, corporate and administrative
expenditure.
Provisions of US$2.2 million relate to an estimate for certain contingent payments
related to savings in field operating costs that may be made to BP under the terms of the
Erskine acquisition.
Long-term liabilities of US$2.9 million as at 31 December 2016 comprise the final
tranche of Erskine consideration payable to BP on 1 July 2018.
Serica’s share of estimated decommissioning costs relating to its 18% Erskine field
interest will be met by BP up to a level of GB£31.3 million, adjusted for inflation, with
Serica being responsible for any costs beyond that. No provision for decommissioning
liabilities for the Erskine field is recorded at 31 December 2016 as the Company’s current
estimate for such costs is under the level to be funded by BP.
- 14 -
Cash balances and future commitments
Current cash position, capital expenditure commitments and other obligations
At 31 December 2016, the Group held cash and cash equivalents of US$16.6 million
growing to US$25.7 million by 31 March 2017.
At 31 December 2016, the Group held put options covering Q1 2017 daily volumes of
750 barrels of oil and 40,000 therms per day (4,000 mscf/day) of gas at average floor
prices of US$35 per barrel and 38 pence per therm.
In January 2017, the Group acquired gas put options covering Q2 and Q3 2017, and oil
put options covering Q2 2017. Gas is covered for 40,000 therms a day at a 40p per
therm floor throughout Q2 2017, and 38p per therm for an average of 31,000 therms a
day for Q3. Q2 2017 oil cover is in place for 750 barrels a day at a US$50 per barrel
floor.
Erskine field commitments
Net revenues from the Erskine field are expected to cover ongoing field expenditures as
well as the two remaining tranches of US$2.8 million (before interest) cash consideration
payable to BP on 1 July 2017 and 2018 respectively.
Management believe there are sufficient resources to meet the current committed
programme for 2017 but remains conscious that a single field income stream exposes it
to operational and infrastructure risks and the consequent need for adequate working
capital to cover associated fluctuations in revenue. The field has a history of intermittent
production performance prior to the remedial work undertaken 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.
Progress towards the Columbus development continues with a target to compile a Field
Development Plan before the end of the year. Financing plans for the project will be
worked in conjunction with the FDP submission.
Other
Asset values and Impairment
At 31 December 2016, Serica’s market capitalisation stood at US$47.2 million (£38.2
million), based upon a share price of £0.145, which was exceeded by the net asset value
at that date of US$85.1 million. By 4 April 2017 the Company’s market capitalisation had
increased to US$87.8 million (£70.5 million). Management has conducted a thorough
review of the carrying value of the Group’s assets and determined that no significant
write-downs were required.
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 Group 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.
- 15 -
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, development and
producing acreage leading to the discovery and exploitation 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
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
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
The Group’s income is currently derived
from a single producing field
Efforts are underway to add to
producing assets
Mitigation
Individual wells may not deliver
recoverable oil and gas reserves
Wells may blow out or equipment may fail
causing environmental damage and delays
Operations may take far longer or cost
more than expected
Production may be interrupted generating
significant revenue loss
Offtake routes may depend upon a series
of facilities and pipelines requiring a
balance of throughput from a number of
different fields
Resource estimates may be misleading and
- 16 -
Management places a priority on
building and retaining sufficient
working capital
Thorough pre-drill evaluations are
conducted to identify the
risk/reward balance
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
Business interruption cover will be
considered when appropriate
The Group aims to diversify its
sources of income when suitable
opportunities can be identified
The Group deploys qualified
exceed actual reserves recovered
personnel
Regular third-party reports are
commissioned
A prudent range of possible
outcomes are considered within the
planning process
Personnel: The Group 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 Group 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
Group 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 Group’s business
success
Risk
Volatile commodity prices mean that the
Group cannot be certain of the future sales
value of its products
of commodity prices
Budget planning considers a range
Mitigation
Price mitigation strategies may be
employed at the point of major
capital commitment
The Group 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
- 17 -
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
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
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 Group 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
Antony Craven Walker
Executive Chairman
5 April 2017
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.
- 18 -
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 2016.
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 profit for the year was US$10,838,000 (2015: US$6,489,000).
The Directors do not recommend the payment of a dividend (2015: US$nil).
Financial Instruments
The Group’s financial risk management objectives and policies are discussed in note 24.
Events Since Balance Sheet Date
There have been no events since the balance sheet date that require disclosure.
Directors and their Interests
The following Directors have held office in the Company since 1 January 2016:
Antony Craven Walker
Neil Pike
Ian Vann
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)
Neil Pike (2)
Ian Vann
Jeffrey Harris (3)
Class
of
share
Ordinary
Ordinary
Ordinary
Ordinary
Interest at
end of year
Interest at
start of year
7,357,694
505,000
267,935
46,090,576
7,829,916
505,000
267,935
46,090,576
1. 6,448,810 ordinary shares were held by Antony Craven Walker and 908,884 by Rathbones
(pension funds). As a result of the death in 2015 of his wife, Christine Elizabeth Walker, the
beneficial interest in her pension plan was ceded in 2016 by the Trustees of the pension plan to
their son in accordance with his late wife’s wishes. Accordingly, Antony Craven Walker no longer
has an interest in 472,222 ordinary shares of US$0.10 each in the Company which were previously
recorded as being held in the pension plan of his wife and aggregated with his own holdings.
- 19 -
2. 190,000 ordinary shares were held by Romayne Pike and 185,000 ordinary shares by Luska
Limited as at 31 December 2015. In January 2016, Neil Pike notified the Company that he had
transferred 130,000 ordinary shares in the Company to his ISA, and his wife also transferred
190,000 ordinary shares in the Company to her ISA. Following these transfers, Mr Pike’s beneficial
interest in the Company (which includes that of his wife) remains unchanged at 505,000 ordinary
shares.
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 following Director is 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 27) as follows:
A Craven Walker
A Craven Walker
A Craven Walker
1/1/16 Granted
-
-
-
1,000,000
1,000,000
500,000
31/12/16
1,000,000
1,000,000
500,000
Exercise
Price £
0.12
0.18
0.24
Date of
grant
17/7/15
17/7/15
17/7/15
Expiry
date
16/7/25
16/7/25
16/7/25
All 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. The options granted in July 2015 were all
awarded at prices higher than the market price at the time of the grant to establish firm
performance targets.
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
Antony Craven Walker
Director
5 April 2017
- 20 -
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 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
At 1 January 2015, the Board of the Company consisted of two Executive Directors, four
non-Executive Directors and the Chairman of the Board who had been acting as Interim
CEO since April 2011. With effect from 1 June 2015, the Chairman has taken the role of
Executive Chairman following the departure of the two Executive directors. One of the
non-Executive Directors also stepped down at the conclusion of the 2015 annual General
Meeting. With effect from 1 July 2015, the Board therefore comprised 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 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.
- 21 -
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 Executive 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 Executive 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. 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 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 did not meet during 2016 and will meet as required during the next
financial year.
The Corporate Governance and Nomination Committee is comprised of the Executive
Chairman and two independent non-Executive Directors. 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 without management present.
financial statements and other
financial reporting, the
The Audit Committee met three times in 2016 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 Jeffrey Harris and Ian Vann.
- 22 -
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 Ian Vann and its
other member is Neil Pike. The committee met once in 2016 and typically 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 2016 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 two non-Executive Directors both of whom are
independent. The committee is chaired by Ian Vann and its other member is Neil Pike.
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 2016 and proposes to meet at least three times during
the next financial year. The committee is chaired by Ian Vann and its other member is
Antony Craven Walker.
Directors’ attendance at meetings
The Board generally has one scheduled Board meeting every month 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.
- 23 -
The Directors’ attendance at scheduled Board meetings and Board committees during
2016 is detailed in the table below:
Director
Board Audit Remuneration
and
Compensation
A Craven Walker
(Chairman)
N Pike
I Vann
J Harris
Total meetings
11*
3^
10
10
11
11
3*
3
3
3
Notes:
3^
3
3*
-
3
Corporate
Governance
and
Nomination
-
-*
-
-
-
HSE
Reserves
4
-
4*
-
4
-
-
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
Amanda Bateman
Company Secretary
5 April 2017
- 24 -
DIRECTORS’ BIOGRAPHIES
Antony Craven Walker
Executive Chairman
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 the then Chief Executive in April 2011, initially
acted as interim Chief Executive. With effect from 1 June 2015, he took the role of
Executive Chairman following the departure of the two Executive directors.
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.
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.
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.
- 25 -
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.
- 26 -
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 2016 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 30. 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, 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 2016 and of the group’s
profit for the year then ended;
the group financial statements have been properly prepared in accordance with
IFRSs as adopted by the European Union;
the parent company financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union as applied in
accordance with the provisions of the Companies Act 2006; and
- 27 -
The financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
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:
based on the work undertaken in the course of the audit
the information given in the Strategic Report and the Directors’ Report for the
financial year for which the financial statements are prepared is consistent with
the financial statements;
the Strategic Report and the Directors’ Report have been prepared in
accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Company and its environment
obtained in the course of the audit, we have identified no material misstatements in the
Strategic Report or Directors’ Report.
We have nothing to report in respect of the following matters where the Companies Act
2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the 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
5 April 2017
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.
- 28 -
Serica Energy plc
Group Income Statement
for the year ended 31 December
Continuing operations
Sales revenue
Cost of sales
Gross profit
Other expense
Pre-licence costs
Impairment and write-offs of E&E assets
Other asset write-offs
Administrative expenses
Foreign exchange loss
Share-based payments
Operating profit before net finance revenue and tax
Finance revenue
Finance costs
Profit before taxation
2016
Note US$000
2015
US$000
4
21,432
24,017
5
(14,860)
(7,934)
6,572
16,083
(113)
(240)
(62)
-
(2,062)
(556)
(90)
-
(117)
(8,186)
(170)
(2,705)
(430)
9
3,449
4,484
61
(185)
38
(202)
3,325
4,320
15
15
27
11
12
Taxation credit for the year
13a)
7,521
2,433
Profit for the year from continuing operations
10,846
6,753
Discontinued operations
Loss for the year from discontinued operations
Profit for the year
7
(8)
(264)
10,838
6,489
Earnings per ordinary share - EPS
Basic and diluted EPS on continuing operations (US$)
Basic and diluted EPS on profit for the year (US$)
14
14
0.04
0.04
0.03
0.03
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through the
income statement.
- 29 -
Serica Energy plc
Registered Number: 5450950
Balance Sheet
As at 31 December
Group
2016
Note US$000
2015
US$000
Company
2016
US$000
Non-current assets
Exploration & evaluation assets 15
16
Property, plant and equipment
17
Investments in subsidiaries
13d)
Deferred tax asset
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
18
19
20
53,170
9,078
-
9,954
72,202
401
6,849
16,593
23,843
51,814
8,894
-
2,433
63,141
453
4,165
21,602
26,220
-
-
1,350
-
1,350
-
70,141
14,066
84,207
2015
US$000
-
-
1,350
-
1,350
-
59,635
13,730
73,365
TOTAL ASSETS
96,045
89,361
85,557
74,715
Current liabilities
Trade and other payables
Non-current liabilities
Trade and other payables
Provisions
21
(5,877)
(9,573)
(462)
(548)
22
23
(2,883)
(2,190)
(5,621)
-
-
-
-
-
TOTAL LIABILITIES
(10,950)
(15,194)
(462)
(548)
NET ASSETS
85,095
74,167
85,095
74,167
Share capital
Merger reserve
Other reserve
Accumulated deficit
25
17
229,308
-
20,715
229,308
-
20,625
(164,928) (175,766)
194,036
-
20,715
(129,656)
194,036
-
20,625
(140,494)
TOTAL EQUITY
85,095
74,167
85,095
74,167
The profit for the Company is US$10,838,000 for the year ended 31 December 2016
(2015: profit of US$6,489,000). In accordance with the exemption granted under section
408 of the Companies Act 2006 a separate income statement for the Company has not
been presented.
Approved by the Board on 5 April 2017
Antony Craven Walker
Executive Chairman
________________________________ _____________________________________
Neil Pike
Non-Executive Director
- 30 -
Serica Energy plc
Statement of Changes in Equity
For the year ended 31 December
Group
Note
Share
capital
Other
reserve
US$000 US$000
Accum’d
deficit
US$000
Total
US$000
At 1 January 2015
227,958
20,634
(182,255)
66,337
Profit for the year
Total comprehensive income
Share-based payments
Issue of ordinary shares
At 31 December 2015
Profit for the year
Total comprehensive income
Share-based payments
-
-
-
1,350
-
-
(9)
-
6,489
6,489
-
-
6,489
6,489
(9)
1,350
229,308
20,625
(175,766)
74,167
-
-
-
-
-
90
10,838
10,838
-
10,838
10,838
90
27
25
27
At 31 December 2016
229,308
20,715
(164,928)
85,095
Company
Share
capital
Other
reserve
US$000 US$000
Accum’d
deficit
US$000
Total
US$000
At 1 January 2015
192,686
20,634
(146,983)
66,337
Profit for the year
Total comprehensive income
Share-based payments
Issue of ordinary shares
At 31 December 2015
Profit for the year
Total comprehensive income
Share-based payments
-
-
-
1,350
-
-
(9)
-
6,489
6,489
-
-
6,489
6,489
(9)
1,350
194,036
20,625
(140,494)
74,167
-
-
-
-
-
90
10,838
10,838
-
10,838
10,838
90
27
25
27
At 31 December 2016
194,036
20,715
(129,656)
85,095
- 31 -
Serica Energy plc
Cash Flow Statement
For the year ended 31 December
Operating activities:
Profit for the year
Adjustments to reconcile profit for the year
to net cash flow from operating activities:
Taxation credit
Net finance costs/(income)
Depreciation and depletion
Oil and NGL overlift reduction
Other asset write-offs
Impairment and write-offs of E&E assets
Impairment of loans and investments
Share-based payments
Other non-cash movements
(Increase)/decrease in trade and other
receivables
Decrease/(increase) in inventories
Decrease in trade and other payables
Group
2016
US$000
2015
US$000
Company
2016
US$000
Note
2015
US$000
10,838
6,489
10,838
6,489
(7,521)
124
1,274
(516)
-
62
-
90
866
(1,862)
(2,433)
164
1,341
(3,407)
170
8,186
-
(9)
431
(2,137)
-
(56)
-
-
-
-
(12,954)
90
1,100
(197)
-
53
-
-
-
-
(8,043)
(9)
443
273
52
(3,270)
(369)
(865)
-
(109)
-
(586)
Net cash in/(out)flow from operations
137
7,561
(1,288)
(1,380)
Investing activities:
Interest received
Purchase of E&E assets
Cash (out)/inflow arising on asset acquisition
Funding provided from/(to) Group subsidiaries
Net cash flow from investing activities
Financing activities:
Gross proceeds 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
Cash and cash equivalents at 31 December
16
25
26
26
26
26
61
(1,418)
(2,775)
-
11
(3,957)
8,874
-
(4,132)
4,928
61
-
-
2,336
2,397
10
-
-
6,345
6,355
-
(77)
(77)
-
(254)
(254)
-
(5)
(5)
-
(249)
(249)
(4,072)
12,235
1,104
4,726
(937)
21,602
(526)
9,893
(768)
13,730
(443)
9,447
16,593
21,602
14,066
13,730
- 32 -
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 2016
were authorised for issue by the Board of Directors on 5 April 2017 and the balance
sheets were signed on the Board’s behalf by Antony Craven Walker and Neil Pike. Serica
Energy plc is a public limited company incorporated and domiciled in England & Wales
with its registered office at 52 George Street, London, W1U 7EA. 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 2016. 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 2016 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 profit dealt with in the financial statements of the parent Company was
US$10,838,000 (2015: profit US$6,489,000).
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 2016.
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 Directors are required to consider the availability of resources to meet the Group’s
liabilities for the foreseeable future. The financial position of the Group, its cash flows
and capital commitments are described in the Financial Review above.
At 31 December 2016 the Company held net current assets of US$18.0 million including
cash resources of US$16.6 million with no borrowings outstanding. The Erskine asset
acquisition, completed in early June 2015 brought to Serica a producing interest capable
of generating robust continuing cash flow at current oil and gas prices. Existing
resources plus Erskine revenues are expected to be sufficient to cover ongoing Erskine
costs and the outstanding instalments of the acquisition price plus other operational,
technical and administrative costs in the short-to-medium term.
Mindful of the risks of reliance on revenues from a single field, which are underlined by
the shutdown in 2016 caused by wax build-up, management will seek to continue
building Group cash reserves so as to improve its financial resilience. The strategy is to
- 33 -
restrict near-term spend on administrative costs and exploration licences, only
committing to exploration drilling where the costs are substantially carried by third
parties.
Management continues to seek new business opportunities to add shareholder value
and, where these can offer attractive returns, appropriate financing structures will be
investigated. When the final decision to proceed with the Columbus development is
made, the Group would consider a range of alternative means of finance to fund its
share of development costs.
After making enquiries and having taken into consideration the above factors, the
Directors have reasonable expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future. Accordingly they continue to
adopt the going concern basis in preparing the financial statements.
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires management to
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 judgements 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 the
recoverability of deferred tax assets.
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
data sets using its own internal expertise. There has been no significant change to the
management estimates and assumptions during the year that may impact the
assessment of commercial reserves.
Assessment of the recoverable amount of intangible and tangible assets
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
- 34 -
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 and production 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 17).
Deferred tax assets
Deferred tax assets, including those arising from unutilised tax losses, require
management to assess the likelihood that the Group will generate sufficient taxable
profits in future periods, in order to utilise recognised deferred tax assets. Assumptions
about the generation of future taxable profits depend on management’s estimates of
future cash flows. These estimates are based on forecast cash flows from operations
(which are impacted by production and sales volumes, oil and natural gas prices,
reserves, operating costs, decommissioning costs, capital expenditure, dividends and
other capital management transactions) and judgement about the application of existing
tax laws. The most significant variables behind the increased deferred tax asset
recognised in 2016 from 2015 are the increase in management’s estimate of short-term
forward commodity prices and production volumes from prior year. To the extent that
future cash flows and taxable income differ significantly from estimates, the ability of the
Group to realise deferred tax assets could be impacted.
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 Energy 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.
- 35 -
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.
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 joint 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.
- 36 -
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. Where conditions giving rise to
impairment subsequently reverse, the effect of the impairment charge is reversed as a
credit to 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
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.
- 37 -
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.
Acquisitions, Asset Purchases and Disposals
Acquisitions of oil and gas properties are accounted for under the acquisition method
when the assets acquired and liabilities assumed constitute a business.
Transactions involving the purchase of an individual field interest, or a group of field
interests, that do not constitute a business, are treated as asset purchases. Accordingly,
no goodwill and no deferred tax gross up arises, and the consideration is allocated to the
assets and liabilities purchased on an appropriate basis. 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
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.
Underlift/Overlift
Lifting arrangements for oil and gas produced in certain fields are such that each
participant may not receive its share of the overall production in each period. The
difference between cumulative entitlement and cumulative production less stock is
‘underlift’ or ‘overlift’. Underlift and overlift are valued at market value and included
within debtors (‘underlift’) or creditors (‘overlift’). Movements during an accounting
period are adjusted through revenue, such that gross profit is recognised on an
entitlement basis.
- 38 -
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.
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
- 39 -
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.
Provisions
Provisions are recognised when the Group has a present legal or constructive obligation
as a result of past events, it is probable that an outflow of resources will be required to
settle the obligation and a reliable estimate can be made of the amount of the obligation.
The Group’s fair value estimate in respect of contingent consideration that may be
payable following the acquisition of its interest in the Erskine Field is capitalised as an
asset acquisition cost. In determining fair value it is necessary to make a series of
assumptions to estimate future operating costs and other variables. Accordingly, the fair
value is categorised as Level 3 in the fair value hierarchy.
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 is measured at
the fair value of the consideration received or receivable and represents amounts
receivable for goods provided in the normal course of business, net of discounts,
customs duties and sales taxes. 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.
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
or rights over shares (‘equity-settled transactions’).
- 40 -
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. For equity awards cancelled
by forfeiture when vesting conditions are not met, any expense previously recognised is
reversed and recognised as a credit in the income statement. 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
- 41 -
net only if there is a legally enforceable right to set off current tax assets against current
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,
there are no new or amended standards or interpretations adopted during the year that
have a significant impact on the financial statements.
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 is currently assessing the impact of these standards and intends to adopt
them when they become effective.
Standard
Effective year
commencing on or after
IFRS 9 – Financial Instruments
IFRS 15 – Revenue from Contracts with Customers
IFRS 16 - Leases
1 January 2018
1 January 2018
1 January 2019 *
*Not yet endorsed by the EU
- 42 -
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 2016 and 2015. Costs associated with the UK corporate centre are included in
the UK 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 2016
Continuing Discontinued
UK
Total
US$000 US$000 US$000 US$000
Ireland
Africa
Revenue
Continuing operations
Other expenses
Pre-licence costs
E&E asset impairment/write-offs
Operating and segment profit/loss
Finance costs
Finance revenue
Profit/(loss) before taxation
Taxation credit for the year
Profit/(loss) after taxation
21,432
-
-
21,432
(17,681)
(237)
(7)
3,507
61
(185)
3,383
7,521
10,904
-
(3)
-
(3)
-
-
(3)
-
(3)
- (17,681)
-
(240)
(55)
(62)
3,449
(55)
61
-
(185)
-
3,325
(55)
7,521
-
10,846
(55)
UK
Kambuna
US$000 US$000 US$000 US$000
Ireland
Africa
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
9,078
41,648
19,994
-
8,204
57
-
3,318
-
70,270
8,261
3,318
-
-
12
12
US$000
-
(8)
-
-
(8)
-
-
(8)
-
(8)
Total
US$000
9,078
53,170
20,063
13,734
96,045
Segment liabilities
Total liabilities
(10,508)
(10,508)
(338)
(338)
(91)
(91)
(13)
(13)
(10,950)
(10,950)
Capital expenditure 2016:
Exploration and evaluation assets
Property, plant & equipment
407
1,458
581
-
430
-
-
-
1,418
1,458
- 43 -
(264)
-
-
-
(264)
-
-
(264)
-
(264)
Total
US$000
8,894
51,814
21,210
7,443
89,361
Year ended 31 December 2015
Continuing Discontinued
UK
US$000
Total
Ireland
Africa
US$000 US$000 US$000
US$000
24,017
-
-
24,017
-
Revenue
Continuing operations
Depletion
Other expenses
Pre-licence costs
Other asset write-offs
E&E asset impairment/write-offs
Operating and segment profit/loss
Finance costs
Finance revenue
Profit/(loss) before taxation
Taxation credit for the year
Profit/(loss) after taxation
(1,341)
(9,719)
(59)
-
(4,385)
8,513
(202)
38
8,349
2,433
10,782
-
-
(52)
-
(3,737)
(3,789)
-
-
(3,789)
-
(3,789)
-
-
(6)
(170)
(64)
(240)
-
-
(240)
-
(240)
(1,341)
(9,719)
(117)
(170)
(8,186)
4,484
(202)
38
4,320
2,433
6,753
UK
Kambuna
US$000 US$000 US$000 US$000
Ireland
Africa
Other segment information:
Property, plant & equipment
Exploration and evaluation assets
Other assets
Unallocated assets
Total assets
8,894
41,248
20,891
-
7,623
86
-
2,943
231
71,033
7,709
3,174
-
-
2
2
Segment liabilities
Total liabilities
(14,770)
(14,770)
(124)
(124)
(297)
(297)
(3)
(3)
(15,194)
(15,194)
Capital expenditure 2015:
Property, plant & equipment
Exploration and evaluation assets
10,235
927
-
859
-
371
-
-
10,235
2,157
Unallocated assets and liabilities comprise financing items (including cash on deposit).
Information on major customers is provided in note 4.
- 44 -
4. Sales Revenue
Gas sales
Oil sales
NGL sales
Movement in liquids overlift/underlift
2016
US$000
2015
US$000
8,374
11,090
1,451
517
9,137
10,377
1,096
3,407
21,432
24,017
Gas sales revenue in 2015 and 2016 arose entirely from two key customers paying
(2015: US$2,547,000)
US$7,581,000
respectively which individually represented more than 10% of total sales in either or
both of the current and prior year. All oil sales revenue in 2015 and 2016 was from one
key customer.
(2015: US$6,590,000) and US$793,000
5. Cost of Sales
Operating costs
Depletion (see note 16)
6. Analysis of Expenses by Function
Administrative
Impairment and write-offs of E&E assets (see note 15)
Other asset write-offs
Other
2016
US$000
2015
US$000
13,586
1,274
6,593
1,341
14,860
7,934
2016
US$000
2015
US$000
2,062
62
-
999
2,705
8,186
170
538
3,123
11,599
- 45 -
7. 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 covered an area
offshore North Sumatra and contained the Kambuna gas field. 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
2015
US$000
2016
US$000
Sales revenue
Cost of sales
Gross profit
Other operating expenses
Operating loss and loss before tax
Taxation charge for the year
Loss for the year
Earnings per ordinary share (EPS)
Basic and diluted EPS on result in year
-
-
-
(8)
(8)
-
(8)
US$
(0.00)
-
-
-
(264)
(264)
-
(264)
US$
(0.00)
The loss for 2015 comprised a final assessment for asset write offs and minor operator
expense as residual matters were closed out with one final charge of US$8,000 in 2016.
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$8,000 (2015: loss of US$264,000), divided by the weighted average number of
ordinary shares for both basic and diluted amounts as disclosed in note 14.
Other
There are no taxation components within discontinued operations.
The net cash flows attributable to the disposal group in discontinued operations in 2016
are operating cash outflows of US$7,000 (2015: cash inflow US$370,000).
- 46 -
8. Group Operating Profit
This is stated after charging:
Operating lease rentals (minimum lease payments):
- Land and buildings
- Other
Total lease payments recognised as an expense
2016
US$000
2015
US$000
70
-
70
172
10
182
Operating sublease agreements where the Group is lessor
In the year ended 31 December 2015, the Group received US$30,000 of rental income
receivable under a sub-lease of its office premises which expired in March 2015.
Depreciation, depletion and amortisation expense
There was no charge for depreciation of other property, plant and equipment in 2015 or
2016.
Depletion of oil and gas properties is classified within cost of sales.
9. 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
2016
US$000
2015
US$000
86
27
10
123
101
32
12
145
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.
- 47 -
10. Staff Costs and Directors’ Emoluments
a) Staff Costs
The average monthly number of persons
employed by the Group and Company during the year was:
2016
No.
2015
No.
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
Staff costs for key management personnel:
Short-term employee benefits
Post-employment benefits
Share-based payments
3
1
1
5
2
2
2
6
US$000 US$000
1,146
143
55
90
1,832
215
98
(9)
1,434
2,136
667
-
22
1,054
32
(136)
689
950
b) Directors’ Emoluments
The emoluments of the individual Directors were as follows. Other than fees paid to Jeffrey
Harris in US$, all sums are paid in £ sterling but are converted at an exchange rate of
£1=US$1.355 (2015: £1=US$1.528) to US$ being the reporting currency for the purposes of
the Company’s accounts.
A Craven Walker (1)
N Pike
I Vann
J Harris
C Hearne (2)
M Flegg (3)
S Theede (4)
2016
Salary and
2016
Bonus
2016
Pension
fees
2016
Benefits
in kind
2016
Total
2015
Total
US$000 US$000 US$000
US$000 US$000 US$000
407
54
54
54
-
-
-
569
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
28
-
-
-
-
-
-
28
435
54
54
54
-
-
-
438
52
48
48
184
185
17
597
972
- 48 -
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 his combined fee for services as
Chairman and Interim CEO has included a provision for travel allowance but he was not entitled to any other
award such as share options, share scheme, bonus, pension or medical insurance. With effect from 1 June
2015, he took the role of Executive Chairman following the departure of the two Executive directors. Under
his new contract as Executive Chairman he is entitled to the award of share options, share schemes and
bonus.
Note (2) Chris Hearne resigned on 31 May 2015
Note (3) Mitch Flegg resigned on 31 May 2015
Note (4) Steve Theede resigned on 30 June 2015
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
2016
2015
-
-
2
-
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 30.
11. Finance Revenue
Bank interest receivable
Other finance revenue
Total finance revenue
12. Finance Costs
Interest payable on Erskine acquisition consideration
Other interest payable
Other finance costs
Total finance costs
2016
US$000
61
-
2015
US$000
11
27
61
38
2016
US$000
179
6
-
2015
US$000
107
5
90
185
202
- 49 -
13. 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
2016
US$000
2015
US$000
-
-
-
-
-
-
-
(8,008)
(2,433)
-
487
-
(7,521)
(2,433)
Tax credit in the income statement
(7,521)
(2,433)
b) Reconciliation of the total tax (credit)/charge
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
2016
US$000
2015
US$000
Accounting profit/(loss) before taxation – continuing ops
3,325
4,320
Accounting loss before taxation – discontinued ops
(8)
(264)
Accounting profit/(loss) before taxation
3,317
4,056
Expected tax charge/(credit) at standard UK corporation tax
rate of 20% (2015 – 20.25%)
Impact of higher tax rates on ring fence profits
Expenses not deductible for tax purposes
Write-off of exploration assets
Unrecognised tax losses
Utilisation of tax losses not previously recognised
Different foreign tax rates
Adjustment to reflect tax rate changes
Recognition of losses not previously recognised
Tax credit reported in the income statement
663
1,112
72
16
373
(2,229)
(7)
487
(8,008)
(7,521)
821
-
140
1,899
304
(2,926)
(238)
-
(2,433)
(2,433)
- 50 -
c) Recognised and unrecognised tax losses
Following the acquisition of a producing UK asset in 2015, the Group has recognised a
deferred tax asset of US$10.0 million (2015: US$2.4 million) in respect of certain
carried forward losses that are expected to be utilised in the foreseeable future to offset
the taxable profits that the acquired asset is expected to generate.
The benefit of approximately US$119.5 million (2015: US$144.2 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 either been recognised in the net
deferred tax asset or set against a deferred tax liability arising. The Group has UK ring
fence tax losses of US$165.6 million available as at 31 December 2016 (2015:
US$171.3 million) which form part of total UK tax losses of approximately US$194.6
million (2015: US$198.7 million) that are available indefinitely for offset against future
trading profits of the companies in which the losses arose. Of this amount US$50.3
million (2015: US$49.6 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 asset
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
Deferred income tax credit
e) Changes to UK corporation tax legislation
2016
US$000
2015
US$000
(20,104)
(24,806)
(20,104)
(24,806)
-
30,058
-
27,239
30,058
27,239
9,954
2,433
2016
US$000
2015
US$000
(4,702)
-
(2,819)
(2,539)
-
106
(7,521)
(2,433)
The main rate of UK corporation tax changed from 20% to 19% on 1 April 2017 and will
change to 18% on 1 April 2020. The UK Finance Bill 2016 includes a reduction of the UK
corporation tax rate to 17% on April 2020. This will replace the 18% UK corporation tax
rate that is currently legislated to take effect.
- 51 -
From 1 January 2015, the rate of Supplementary Charge (SC) was 20%, which reduced
the headline rate of tax from 62% to 50% for ring-fenced trading profits. In March 2016
it was announced that the rate of SC would be reduced from 20% to 10% with effect
from 1 January 2016. This was substantively enacted on 6 September 2016 and further
reduces the headline rate of tax to 40% for ring-fenced trading profits.
f) Unrecognised deferred tax liability
In 2016 and 2015 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$28.7 million (2015: US$ 26.8 million) of UK corporation tax
losses which are not recognised as deferred tax assets.
14. 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.
The following reflects the income and share data used in the basic and diluted earnings
per share computations:
Net profit from continuing operations
10,846
6,753
Net profit attributable to equity holders of the parent
10,838
6,489
2016
US$000
2015
US$000
Basic weighted average number of shares
263,679
257,946
Diluted weighted average number of shares
264,358
257,946
2016
’000
2015
’000
Basic EPS on profit on continuing operations (US$)
Diluted EPS on profit on continuing operations (US$)
Basic EPS on profit for the year (US$)
Diluted EPS on profit for the year (US$)
2016
US$
0.04
0.04
0.04
0.04
2015
US$
0.03
0.03
0.03
0.03
On completion of the acquisition of an 18% interest in the Erskine field, 13,500,000
ordinary shares were issued to BP as part of the consideration (see note 16).
- 52 -
15. Exploration and Evaluation Assets
Group
Cost:
1 January 2015
Additions
Write-offs
31 December 2015
Additions
Write-offs
31 December 2016
Provision for impairment:
1 January 2015
Impairment reversal for the year
31 December 2015
Impairment reversal for the year
31 December 2016
Net book amount:
31 December 2016
31 December 2015
1 January 2015
Total
US$000
75,343
2,157
(13,122)
64,378
1,418
(62)
65,734
(17,500)
4,936
(12,564)
-
(12,564)
53,170
51,814
57,843
The aggregate impairment and write-off charge against E&E assets in 2016 was US$0.1
million (2015: US$8.2 million). The 2015 comparative charge comprised E&E asset
write-offs of US$13.1 million and an impairment reversal of US$4.9 million against the
Columbus asset in the UK. The 2015 E&E asset write-offs of US$13.1 million related to
the costs incurred on relinquished UK licences (US$3.5 million), a charge of US$5.8
million on the UK P1482 licence, a US$3.7 million charge against the Slyne asset in
Ireland, and a US$0.1 million charge in Morocco.
The partial impairment reversal recorded against Columbus book amounts in 2015 arose
from revised economic evaluations. The Company increased its interest in the asset in
2015 from 33.2% to 50% for nominal consideration. Incremental economic value
attributed to the increased holding in the asset more than offset the use of lower
hydrocarbon prices in management’s estimation of future discounted cash flows of the
asset leading to an overall gain. In 2016, management has not identified any indicators
suggesting further impairment or reversal of impairment.
The recoverable amount of US$39.8 million for the Columbus asset in 2015 was
determined on a fair value less costs of disposal basis (‘FVLCD’) using a discounted cash
flow model. The projected cash flows were extrapolated until 2029 using a 2.5% growth
rate and were adjusted for risks specific to the asset and discounted using a discount
- 53 -
rate of 10.5%. This discount rate is derived from the Group’s estimates of discount rates
that might be applied by active market participants and is adjusted where applicable to
take into account any specific risks relating to the region where the cash generating unit
is located.
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 in 2015 consisted of a US$0.2 million
charge against obsolete inventory.
Company
The Company has no E&E assets.
- 54 -
Oil and gas
properties
Computer/IT
Equipment
US$000
US$000
Fixtures,
Fittings &
Equipment
US$000
Total
US$000
-
189
901
1,090
16. Property, Plant and Equipment
Group
Cost:
1 January 2015
Additions
Disposals
31 December 2015
Additions
31 December 2016
Depreciation and depletion:
1 January 2015
Charge for the year (note 5)
Disposals
31 December 2015
10,235
-
10,235
1,458
11,693
-
1,341
-
1,341
Charge for the year (note 5)
1,274
31 December 2016
2,615
Net book amount:
31 December 2016
31 December 2015
1 January 2015
9,078
8,894
-
-
(189)
-
(901)
10,235
(1,090)
-
-
-
-
-
-
10,235
1,458
11,693
189
901
1,090
-
(189)
-
-
(901)
-
-
-
-
-
-
-
-
-
-
-
1,341
(1,090)
1,341
1,274
2,615
9,078
8,894
-
In June 2015, Serica Energy (UK) Limited acquired an 18% non-operated interest in the
Erskine field located in the UK Central North Sea. This was treated as an asset
acquisition. The total acquisition cost initially recorded was US$10.2 million (comprising
cash consideration of US$8.885 million and non-cash consideration of US$1.35 million)
which reflects the headline price plus internal transition costs less net income
attributable to the interest from the effective date of 1 January 2014. Additions of
US$1.5 million during 2016 comprise US$2.2 million relating to the Company’s estimate
of contingent payments due to BP (see note 23) partially offset by other pre-completion
date adjustments and revisions.
Other
Depletion charges on oil and gas properties are classified within ‘cost of sales’.
Company
The Company has no property, plant and equipment.
- 55 -
17. Investments
Company – Investment in subsidiaries
Cost:
As at 1 January 2015
Increase in investment
As at 31 December 2015 and 2016
Provision for impairment:
As at 1 January 2015
Impairment charge for the year
As at 31 December 2015 and 2016
Net book amount:
31 December 2016
31 December 2015
1 January 2015
Total
US$000
132,684
1,350
134,034
(132,684)
-
(132,684)
1,350
1,350
-
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. In 2016,
the reduction of US$12,954,000 (2015: US$8,043,000) in provision for impairment
against amounts owed by Group undertakings (see note 19) has been made following an
increase in value attributed to certain of the oil and gas assets held by the Company’s
subsidiary undertakings. The increase in value recognised in 2015 arose following the
acquisition of the Erskine field interest and increased holding in Columbus asset.
- 56 -
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
Holding
Holding
E&P
Exploration
Dormant
Exploration
Exploration
Exploration
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Serica Holdings UK Ltd
Serica Energy Holdings BV (i & iii)
Serica Energy (UK) Ltd (i)
Serica Sidi Moussa BV (i & iii)
Serica Foum Draa BV (i & iii)
Serica Energy Slyne BV (i & iii)
Serica Energy Rockall BV (i & iii)
Serica Energy Namibia BV (i & iii)
Serica Glagah Kambuna BV (i & iii) Ordinary Dormant
Dormant
Serica Energy Corporation (i & ii)
Dormant
APD Ltd (i & ii)
Dormant
PDA Asia Ltd (i & ii)
Dormant
PDA (Lematang) Ltd (i)
Dormant
Serica UK Exploration Ltd (i)
Dormant
Serica Walvis Namibia BV (i & iii)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
% voting
rights
and
shares
held
2016
% voting
rights and
shares
held
2015
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
100
100
100
100
(i) Held by a subsidiary undertaking
(ii) Incorporated in the British Virgin Islands
(iii) Incorporated in the Netherlands
The registered office of the Company’s subsidiaries incorporated in the UK is 52 George
Street, London, W1U 7EA.
The registered office of the Company’s subsidiaries incorporated in the Netherlands is
Weena 327, 3013AL Rotterdam.
The registered office of APD Ltd and PDA Asia Ltd is P.O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin Islands. The registered office of
Serica Energy Corporation is P.O. Box 71, Road Town, Tortola, British Virgin Islands.
- 57 -
18. Inventories
Materials and spare parts
Group
2016
US$000
Company
2016
US$000 US$000
2015
2015
US$000
401
401
453
453
-
-
-
-
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$170,000 was expensed in the income statement as an asset write-off
against materials and spare parts in 2015.
19. Trade and Other receivables
Due within one year:
Amounts owed by Group undertakings
Trade receivables
Amounts recoverable from JV partners
Other receivables
Prepayments and accrued income
Liquids underlift
Group
2016
US$000
Company
2016
US$000 US$000
2015
-
4,265
1,909
143
182
350
-
3,188
401
216
360
-
69,829
-
-
138
174
-
2015
US$000
59,211
-
-
215
209
-
Trade and other receivables
6,849
4,165
70,141
59,635
Trade receivables at 31 December 2016 arose from four (2015: four) customers.
None of the Group’s receivables are considered impaired and there are no financial
assets past due but not impaired at the year end. The Directors consider the carrying
amount of trade and other receivables approximates to their fair value.
Management considers that there are no unreasonable concentrations of credit risk
within the Group or Company.
At the reporting date the amounts owed by Group undertakings to the Company are
disclosed net of an impairment of US$67,033,000 (2015: US$79,987,000) – see note
17.
- 58 -
20. Cash and Short-Term Deposits
Group
2016
US$000
2015
US$000
Company
2016
US$000
2015
US$000
Cash at bank and in hand
Short-term deposits
2,859
13,734
14,159
7,443
332
13,734
6,287
7,443
16,593
21,602
14,066
13,730
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 three 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
2016
US$000
Company
2016
US$000 US$000
2015
Barclays Bank plc
HSBC Bank plc
Lloyds Bank plc
A-2
A-1+
A-1
8,835
-
7,738
10,719
4,909
5,963
6,328
-
7,738
2015
US$000
2,858
4,909
5,963
For the purposes of the consolidated and Company cash flow statement, cash and cash
equivalents comprise the above amounts at 31 December.
- 59 -
21. Trade and Other Payables
Current:
Trade payables
Other payables
Liquids overlift
BP consideration liability (see note 22)
Group
2016
US$000
Company
2016
US$000 US$000
2015
2015
US$000
246
2,749
-
2,882
1,909
4,687
166
2,811
194
268
-
-
277
271
-
-
5,877
9,573
462
548
22. Trade and Other Payables – Non current
Group
2016
US$000
Company
2016
US$000 US$000
2015
2015
US$000
BP consideration liability
2,883
5,621
2,883
5,621
-
-
-
-
Long term liabilities of US$2.9 million as at 31 December 2016 comprise the final
tranche of outstanding consideration payable to BP following the acquisition of the
Erskine producing asset in June 2015. The aggregate outstanding sum is payable in two
tranches of US$2.8 million plus accrued interest on 1 July 2017 (see note 21) and 1 July
2018 respectively.
23. Provisions
Group
As at 1 January
Unwinding of discount
Additions
As at 31 December
2016
US$000
2015
US$000
-
-
2,190
2,190
-
-
-
-
Under the terms of the Erskine acquisition, certain contingent payments may be made
by Serica related to savings in field operating costs. The current fair value estimated
provision for these amounts is US$2.2 million which has been capitalised as an asset
acquisition cost (see note 16). Uncertainties currently exist as to the quantification of
any final payment, likely to be payable in 2019, that might be due in the longer term.
No provision for decommissioning liabilities for the Erskine field is recorded as at 31
December 2015 or 2016 as the Group’s current estimate for such costs is under the
agreed capped level to be funded by BP. This has been fixed at a gross £174.0 million
(£31.32 million net to Serica) with this figure adjusted for inflation.
Company
The Company has no provisions.
- 60 -
24. Financial Instruments
The Group’s financial instruments comprise cash and cash equivalents, bank loans and
borrowings, accounts payable and accounts receivable. It is management’s opinion that
the Group is not exposed to significant interest, credit or currency risks arising from its
financial instruments other than as discussed below:
Serica has exposure to interest rate fluctuations on its cash deposits and the BP
consideration liability; given the level of expenditure plans over 2017/18 this is
managed in the short-term through selecting treasury deposit periods of one to three
months. Cash and treasury credit risks are mitigated through spreading the
placement of funds over a range of institutions each carrying acceptable published
credit ratings to minimise concentration and counterparty risk.
Where Serica operates joint ventures on behalf of partners it seeks to recover the
appropriate share of costs from these third parties. The majority of partners in these
ventures are well established oil and gas companies. In the event of non payment,
operating agreements typically provide recourse through increased venture shares.
Serica retains certain non US$ 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
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 2016
Fixed rate
Short-term deposits
Floating rate
Cash
BP consideration liability
Within 1 year
US$000
13,734
1-2 years 2-5 years
US$000
-
US$000
-
Within 1 year
US$000
2,859
(2,882)
1-2 years
US$000
-
(2,883)
2-5 years
US$000
-
-
Year ended 31 December 2015
2008
Fixed rate
Short-term deposits
Within 1 year
US$000
7,443
1-2 years
US$000
-
2-5 years
US$000
-
Floating rate
Cash
BP consideration liability
Within 1 year
US$000
14,159
(2,811)
1-2 years
US$000
-
(2,811)
2-5 years
US$000
-
(2,810)
Total
US$000
13,734
13,734
Total
US$000
2,859
(5,765)
(2,906)
Total
US$000
7,443
7,443
Total
US$000
14,159
(8,432)
5,727
- 61 -
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 profit 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 profit Effect on profit
before tax
2015
US$000
59
(59)
before tax
2016
US$000
88
(88)
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.
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 2016
Fixed rate
Short-term deposits
Within 1 year
US$000
13,734
1-2 years 2-5 years
US$000
-
US$000
-
Total
US$000
13,734
13,734
Total
US$000
332
332
Total
US$000
7,443
7,443
Within 1 year 1-2 years 2-5 years
US$000
-
US$000
332
US$000
-
Within 1 year 1-2 years 2-5 years
US$000
US$000
US$000
7,443
-
-
Within 1 year 1-2 years
US$000
US$000
2-5 years
US$000
Total
US$000
6,287
-
-
6,287
6,287
Floating rate
Cash
Year ended 31 December 2015
Fixed rate
Short-term deposits
Floating rate
Cash
Credit risk
The Group’s and Company’s exposure to credit risk relating to financial assets arises
from the default of a counterparty with a maximum exposure equal to the carrying value
as at the balance sheet date. The Group’s oil and gas sales are all contracted with well
established oil and gas or energy companies. Also, where Serica operates joint ventures
on behalf of partners it seeks to recover the appropriate share of costs from the third
party counterparties. The majority of partners in these ventures are well established oil
and gas companies. In the event of non payment, operating agreements typically
provide recourse through increased venture shares. Cash and treasury credit risks are
mitigated through spreading the placement of funds over a range of institutions each
carrying acceptable published credit ratings to minimise counterparty risk.
- 62 -
Foreign currency risk
The Group enters into transactions denominated in currencies other than its US dollar
reporting currency. Non US$ denominated balances, subject to exchange rate
fluctuations, at year-end were as follows:
Cash and cash equivalents:
Pounds sterling
Norwegian kroner
Euros
Accounts receivable:
Pounds sterling
Trade and other payables:
Pounds sterling
Euros
Group
2016
US$000
2015
US$000
Company
2016
US$000
3,368
8
19
7,886
8
47
1,377
-
-
2015
US$000
5,857
-
-
4,017
1,065
29
28
2,457
377
6,071
116
421
58
642
39
The following table demonstrates the Group’s sensitivity to a 10% increase or decrease
in the US Dollar against the Pound sterling. The sensitivity analysis includes only foreign
currency denominated monetary items and adjusts their translation at the year end for a
10% change in the foreign currency rate.
Increase/decrease in foreign exchange rate
10% strengthening of US$ against £GBP
10% weakening of US$ against £GBP
Liquidity risk
Effect on profit
before tax
2016
US$000
493
(493)
Effect on profit
before tax
2015
US$000
288
(288)
The table below summarises the maturity profile of the Group and Company’s financial
liabilities at 31 December 2016 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 2016 Within
1 year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
5,877
2,883
-
8,760
Year ended 31 December 2015
Within
1 Year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
9,573
2,811
2,810
15,194
- 63 -
Company
Year ended 31 December 2016 Within
1 year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
462
-
-
462
Year ended 31 December 2015
Within
1 Year
US$000
1 to 2 years
US$000
2 to 5 years
Total
US$000 US$000
Trade and other payables
548
-
-
548
Commodity price risk
The Group is exposed to commodity price risk. Where and when appropriate the Group
will put in place suitable hedging arrangements to mitigate the risk of a fall in commodity
prices.
During 2016, 9% (2015: 32%) of the Group’s gas production was sold at fixed prices
under a contract which expired on 30 September 2016. All gas production is now sold at
prices linked to the spot market. All oil and NGL production was sold at prices linked to
the spot market.
At 31 December 2016, the Group held put options, which place no ceiling on sales prices,
giving coverage for daily volumes of 750 barrels of oil and 40,000 therms per day (4,000
mscf/day) of gas at average floor prices of US$35 per barrel and 38 pence per therm
respectively to end Q1 2017.
In January 2017, the Group acquired gas put options giving cover across Q2 and Q3
2017, and oil put options for Q2 2017. Gas is covered for 40,000 therms a day at
40p/therm throughout Q2 2017, and 38p/therm for Q3 2017 for an average of 31,000
therms a day. Q2 2017 oil cover is in place at 750 barrels a day for US$50/bbl.
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 2016, capital employed of the
Group amounted to US$85.1 million (comprised of US$85.1 million of equity
shareholders’ funds and US$nil million of borrowings), compared to US$74.2 million at
31 December 2015 (comprised of US$74.2 million of equity shareholders’ funds and
US$nil of borrowings).
- 64 -
At 31 December 2016, capital employed of the Company amounted to US$85.1 million
(comprised of US$85.1 million of equity shareholders’ funds and US$nil million of
borrowings), compared to US$74.2 million at 31 December 2015 (comprised of US$74.2
million of equity shareholders’ funds and US$nil million of borrowings).
25. 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 263,679,039
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 2015
250,179,040
25,108 202,850
227,958
Shares issued (i)
13,500,000
1,350
-
1,350
As at 31 December 2015 and 2016
263,679,040
26,458 202,850
229,308
Allotted, issued and fully paid:
Company
Share
Share
Total
capital premium Share capital
US$000
Number US$000 US$000
As at 1 January 2015
250,179,040
25,108 167,578
192,686
Shares issued (i)
13,500,000
1,350
-
1,350
As at 31 December 2015 and 2016
263,679,040
26,458 167,578
194,036
i)
On 4 June 2015, the Company issued 13,500,000 ordinary shares at nominal
value of US$0.10 each to BP as part of the acquisition of an 18% interest in UK
blocks 23/26a (Area B) and 23/26b (Area B) containing the Erskine field. No cash
proceeds were received by the Company in respect of the ordinary shares issued.
As at 5 April 2017 the issued voting share capital of the Company is 263,679,039
ordinary shares and one “A” share.
- 65 -
26. Additional Cash Flow Information
Analysis of Group net cash
Year ended 31 December 2016
1 January
2016 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2016
US$000
Cash
Short-term deposits
14,159
7,443
(11,103)
7,031
(197)
(740)
2,859
13,734
21,602
(4,072)
(937)
16,593
Year ended 31 December 2015
1 January
2015 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2015
US$000
Cash
Short-term deposits
7,893
2,000
6,583
5,652
(317)
(209)
14,159
7,443
9,893
12,235
(526)
21,602
Analysis of Company net cash
Year ended 31 December 2016
1 January
2016 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2016
US$000
Cash
Short-term deposits
6,287
7,443
(5,927)
7,031
(28)
(740)
332
13,734
13,730
1,104
(768)
14,066
Year ended 31 December 2015
1 January
2015 Cash flow
US$000
US$000
Non-cash
movements
US$000
31
December
2015
US$000
Cash
Short-term deposits
7,447
2,000
(926)
5,652
(234)
(209)
6,287
7,443
9,447
4,726
(443)
13,730
- 66 -
27. Share-Based Payments
Share Option Plans
Following a group reorganisation in 2005, 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”). There are no options outstanding under the Serica BVI
Option Plan, nor can further options be granted under the Serica BVI Option Plan. No
further options will be granted under the Serica 2005 Option Plan as the ability to do this
expired on this plan’s 10th anniversary in November 2015.
A new plan, the Serica Energy plc Company Share Option Plan (“Serica CSOP”), was
approved for adoption at the Company’s AGM in June 2016. This will govern all future
grants of options by the Company to Directors, officers, key employees and certain
consultants of the Group. The Directors intend that the maximum number of ordinary
shares which may be utilised pursuant to the Serica CSOP 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.
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.
As at 31 December 2016, the Company has granted 24,332,460 options under the
Serica 2005 Option Plan, 8,466,330 of which are currently outstanding. 400,000 of these
options were granted to a consultant subject to performance conditions, and the
2,500,000 options granted to a director in July 2015 were all awarded at prices higher
than the current market price at the time of the grant to establish firm performance
targets.
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
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$90,000 has been charged to
the income statement in continuing operations for the year ended 31 December 2016
(2015 – credit of US$9,000) and a similar amount credited (2015 debited) to the share-
based payments reserve, classified as ‘Other reserve’ in the Balance Sheet. The income
statement credit of US$9,000 in 2015 consisted of a charge of US$174,000 offset by a
credit of US$183,000 which arose following the forfeiture by two executive directors of
certain share options that had not fully vested. A charge of US$22,000 (2015 – credit of
US$136,000) of the total continuing operations charge was in respect of key
management personnel (defined in note 10).
No options were granted in 2016. The options granted in 2015 were consistently valued
in line with the Company’s valuation policy. Assumptions made included a weighted
average risk-free interest rate of 3%, no dividend yield, a weighted average expected
life of three years, and a volatility factor of expected market price of in a range from 50-
70%. The expected volatility reflects the assumption that the historical volatility is
indicative of future trends, which may not necessarily be the actual outcome. The
weighted fair value of options granted during 2015 was £0.03.
The following table illustrates the number and weighted average exercise prices (WAEP)
of, and movements in, share options during the year:
- 67 -
Serica BVI option plan
Outstanding as at 1 January
Expired during the year
Forfeited during the year
Outstanding as at 31 December
Exercisable as at 31 December
Serica 2005 option plan
Outstanding as at 1 January
Granted during the year
Forfeited during the year
Expired during the year
2016
Number
-
-
-
-
-
8,601,330
-
-
(135,000)
2016
WAEP
Cdn$
-
-
-
-
-
£
0.30
-
-
1.035
2015
Number
700,000
(600,000)
(100,000)
2015
WAEP
Cdn$
1.11
1.00
1.80
-
-
-
-
10,680,460
4,000,000
(5,193,940)
(885,190)
£
0.44
0.13
0.44
0.50
Outstanding as at 31 December
8,466,330
0.28
8,601,330
0.30
Exercisable as at 31 December
4,016,330
0.33
3,451,330
0.42
The weighted average remaining contractual life of options outstanding as at 31
December 2016 is 6.4 years (2015: 7.3 years).
There are no outstanding options for the Serica BVI option plan. For the Serica 2005
option plan, the exercise price for outstanding options at the 2016 year end ranges from
£0.07 to £1.04 (2015: £0.07 to £1.04).
As at 31 December 2016, the following director and employee share options were
outstanding:
Expiry Date
Amount
January 2017
May 2017
March 2018
January 2020
April 2021
January 2022
October 2022
January 2023
November 2023
January 2024
June 2025
July 2025
July 2025
July 2025
60,000
210,000
318,000
1,155,000
50,000
1,123,330
400,000
300,000
400,000
450,000
1,500,000
1,000,000
1,000,000
500,000
Exercise cost
£
61,200
218,400
238,500
785,400
15,685
240,112
116,000
81,750
72,000
58,500
99,000
120,000
180,000
120,000
In January 2017, 60,000 share options under the Serica 2005 Option Plan expired.
- 68 -
28. Commitments under Operating Leases
Operating lease agreements where the Group is lessee
At 31 December 2016 the Group has entered into commercial leases in respect of the
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
2016
US$000
14
-
Company
2016
US$000
-
-
2015
US$000
13
-
2015
US$000
-
-
14
13
-
-
In March 2015, the Group entered into a new two-year office operating lease on smaller
premises with a minimum commitment period until February 2016, which expired in
March 2017. In March 2017, the Group entered into an extension of this operating lease
with a minimum commitment of a rolling three-month period.
Operating sublease agreements where the Group is lessor
In January 2013 the Group entered into an operating sublease for part of its UK office,
initially to March 2014 but extended until March 2015 when it expired.
29. Capital Commitments and Contingencies
At 31 December 2016, other amounts contracted for but not provided in the financial
statements for the acquisition of exploration and evaluation assets amounted to US$nil
for the Group and US$nil for the Company (2015: US$nil and US$nil respectively).
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.
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 Erskine field acquisition has brought 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 two remaining
tranches of US$2.775 million (excluding interest) cash consideration on 1 July 2017 and
1 July 2018 respectively.
Other
The Group occasionally has to provide security for a proportion of its future obligations to
defined work programmes or other commitments. No such obligations and cash collateral
existed as at 31 December 2015 or 2016.
- 69 -
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.
30. Related Party Transactions and Transactions with Directors
During the prior year ended 31 December 2015, a total sum of £77,785 was paid by the
Company for consultancy services provided on behalf of Antony Craven Walker. All sums
paid by the Company were reimbursed by Antony Craven Walker and no net expense
therefore incurred.
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.
- 70 -
Group Proved plus Probable Reserves – Unaudited
United Kingdom
Oil
mmbbl
Total
Gas
Oil
bcf mmbbl
Total
Total
Gas Oil & gas
bcf
mmboe
At 1 January 2015
-
-
-
-
-
Acquisitions
Production
2.7
(0.3)
12.6
(1.8)
2.7
(0.3)
12.6
(1.8)
4.8
(0.6)
At 31 December 2015
2.4
10.8
2.4
10.8
4.2
Revisions
Production
-
(0.3)
1.4
(1.8)
-
(0.3)
1.4
(1.8)
0.2
(0.6)
At 31 December 2016
2.1
10.4
2.1
10.4
3.8
Proved developed
Probable developed
At 31 December 2016
1.0
1.1
2.1
5.3
5.1
1.0
1.1
5.3
5.1
10.4
2.1
10.4
1.9
1.9
3.8
Proved and probable reserves are based on independent reports prepared by consultants
Netherland, Sewell & Associates (for the Erskine 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 2015 and 2016 have been converted to barrels
of oil equivalent using a factor of 6.0 bcf per mmboe for Western Europe (Erskine field
reserves) on the basis of a nominal gas calorific value of 1,000 BTU per cubic foot.
In 2014, the directors of Serica believed that in the oil price environment at that time, it
was appropriate for Columbus field reserves to be properly considered as Contingent
Resources rather than the previous categorisation as Reserves. It was therefore not
considered cost effective or necessary to obtain an updated report for Columbus at the
end of 2014. The directors continue to believe the categorisation of Contingent
Resources is still appropriate as at 31 December 2015 and 2016.
- 71 -