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2023 Report224047 Sound Oil R&A 2011 Cover 01/05/2012 07:48 Page iv PLC PLC Sound Oil plc Riverbridge House Guildford Road Leatherhead, Surrey KT22 9AD www.soundoil.co.uk Annual Report 2011 224047 Sound Oil R&A 2011 Cover 01/05/2012 07:48 Page ii Sound Oil plc Sound Oil plc is an independent upstream oil and gas company listed on the AIM market of the London Stock Exchange. Sound Oil plc’s strategy is to achieve significant and sustainable growth in value through an active drill programme and a significant reshaping of its asset portfolio. 1 3 4 6 12 13 14 16 19 20 21 22 23 24 25 26 27 28 29 IBC Highlights Chairman’s Statement Financial Review Technical Review Statement of Proved and Probable Reserves Board of Directors Report of the Directors Report on Directors’ Remuneration Corporate Governance Report Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Income Statement Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements Dealing Information, Financial Calendar and Addresses Dealing Information FT Share Price Index – Telephone 0906 8433711 SEAQ short code – SOU Financial Calendar Announcements Interim – September 2012 Preliminary – May 2013 Addresses Registered Office Sound Oil plc, 55 Gower St, London, WC1E 6HQ Business Address Sound Oil plc, Riverbridge House, Guildford Road, Leatherhead, Surrey, KT22 9AD Website www.soundoil.co.uk Auditors Crowe Clark Whitehill LLP, St Bride’s House, 10 Salisbury Square, London, EC4Y 8EH Solicitors Ronaldsons LLP, 55 Gower St, London, WC1E 6HQ Stockbrokers Investec Bank Plc, 2 Gresham Street, London, EC2V 7QP Nominated Adviser Smith & Williamson Corporate Finance Limited, 25 Moorgate, London, EC2R 6AY Registrars Share Registrars Limited, Suite E, First Floor, 9 Lion and Lamb Yard, Farnham, Surrey, GU9 7LL Perivan Financial Print 224047 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 1 Annual Report 2011 Highlights (cid:129) Independently assessed portfolio of discoveries: 17.5 Mmboe (P50) and US$ 300M NPV10 (cid:129) Two successful Italian acquisitions (cid:129) (cid:129) 8 Key Development Projects 4 Key Exploration Projects (cid:129) Mainly 100% owned and operated (cid:129) Active drilling programme in Italy and Indonesia, including the Nervesa appraisal well which is fully funded Italy (cid:129) (cid:129) (cid:129) 2 Material appraisal wells (Nervesa, Strombone) 1 Discovery for commercial development (Casa Tiberi) 1 Field recommissioning (Rapagnano) Indonesia (cid:129) 2 Exploration wells (cid:129) Strong and focused Executive Team, including a newly appointed Chief Financial Officer and Italy Managing Director 1 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 2 Sound Oil plc 2 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 3 Annual Report 2011 Chairman’s Statement Once again the year has been very active for the Company and we expect to maintain this momentum during the next twelve months. In Italy we have consolidated our Consul Oil & Gas Limited (“Consul”) acquisition by the purchase of Celtique Energie SpA which had been our joint partner in three permits. The consideration of $9 million comprised $4.4 million cash, $0.8 million settlement of an inter-company loan (net of $0.2 million cash held by Celtique) and 91,998,582 Sound Oil plc shares. As a result of this deal Sound Oil plc owns 100% of the permits containing the Nervesa and Strombone discoveries, our core assets. We are now able to move forward at our own pace and will be drilling the key well at Nervesa in mid year and intend to be drilling Strombone by year end. The Company has acquired 3D seismic data over the Badile prospect and an independent expert has confirmed that it has P50 prospective resources of 185 Bscf, making it one of the largest onshore exploration opportunities in Western Europe. Sound Oil plc has begun to offer this ready-to-drill prospect for farmout and already has had an encouraging amount of interest. During the year the Company undertook operations at Marciano (Sound Oil plc 100%) and drilled a farm-in well at Casa Tiberi, both of which encountered gas. The Marciano well was disappointing and the reserves too small for commercialisation. By mid year, the surface facilities will be relocated from Marciano for use at Casa Tiberi and our other permits, and the Marciano site will then be restored. At Casa Tiberi (Sound Oil plc 100%) two separate phases of testing in the early part of 2012 indicated that the reserves are small but commercial and the Company expects to submit a production application in May 2012. In the Citarum PSC Indonesia, where we have a 20% interest, we have identified several drilling opportunities based on the extensive seismic programme shot earlier. We commenced drilling on the attractive prospect at Cataka but unfortunately the operator ran into mechanical problems in the upper part of the hole and the well was abandoned. We expect to return to drill at this location later in 2012. Meanwhile, the rig was moved to Jatayu, another substantial exploration prospect which is now being drilled. The final well in the current drilling schedule is Geulis and this third well will complete the Company's outstanding obligations at Citarum. In the Bangkanai PSC Kalimantan (Sound Oil plc 5%, carried), a gas sales agreement was signed to supply up to 20 BBtud at a price of $4.79/MMBtu from the Kerendan Field with first production anticipated in 2013. This final agreement now allows Sound Oil plc to book reserves for the first time. In addition there are further contingent gas resources in the field which could be commercialised through the local power plant to be built by PLN, the Indonesian electricity utility. Following an extensive refit, a rig is now expected to be ready in June to drill the four development wells at Kerendan. These will be followed by two exploration obligation wells nearby. In December 2011 Sound Oil plc issued 100 million shares at 2p to raise £2 million together with 60 million warrants exercisable at 2p. In the second part of the placement in February 2012, the Company issued 262,587,803 shares at 1.523p to raise £4 million together with 157,552,682 warrants exercisable at 1.86p. Sound Oil plc currently has cash reserves of £7 million and no debt. The increase in assets and activity of the Group following the Consul and Celtique acquisitions led to higher expenditure in the Income Statement and the loss after tax was £6,264,000. The year saw some significant changes in personnel within Sound Oil plc. Tony Heath retired as Chief Financial Officer and joined the Board as a non executive Director. I would like to thank him for his considerable support over many years and for his wise advice. The Board was further strengthened by Andrew Hockey who joined as a non executive director. Andrew has 30 years of experience in the oil industry most recently with Fairfield Energy. James Parsons joined the Company as Chief Financial Officer in September having 17 years experience in the oil industry principally with Shell. Luca Maddedu was appointed Managing Director of the Company’s Italian subsidiary in Rome following a international career with ENI spanning 22 years and Godwin Debono, a founder director of Consul, retired from the Company at the end of March this year. I would like to thank him in particular for his dedication and commitment in building the Italian portfolio. I wish to thank all of the Company staff and also my Board colleagues for their enthusiasm and their continuous efforts on behalf of the Company. Finally I also wish to thank our shareholders for their support. The Company can look forward to a continuous drilling program for the next 18 months on very exciting prospects, on important discoveries and on our hydrocarbon developments which will bring revenue in 2013. Yours sincerely, Gerry Orbell Chairman and Chief Executive 30 April 2012 3 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 4 Sound Oil plc Financial Review Accounting standards The Group has prepared its 2011 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union. Income statement Following the acquisitions of Consul Oil & Gas Limited and Celtique Energie Spa in Italy during 2011, increased exploration and administration costs before impairment of the Marciano well resulted in a trading loss of £4,253,000 compared with £1,932,000 for 2010. Loss before/after tax was £6,264,000 compared with £15,968,000 in 2010 which had included a loss on sale of part of the Bangkanai licence of £14,210,000. The 2011 trading loss of £5,353,000 is £3,421,000 higher than in 2010 principally due to £1,446,000 higher administration costs following the Italian acquisitions (which introduced a Rome office at a total cost of £839,000 in 2011 and £100,000 of transaction related bonus payments in the first quarter). Total exploration costs for the year were £1,975,000 higher which included £1,100,000 impairment costs. Acquisition expenses of £516,000 were incurred in relation to the Italian acquisitions. Due to the strength of sterling there was a foreign exchange loss of £439,000 compared with a gain of £211,000 in 2010. Cash flow/financing During 2011 £12,108,000 was raised from new equity issue whilst some £5,078,000 was spent on the acquisitions of new companies and £3,890,000 was spent on exploration and appraisal. This resulted in a net cash inflow before foreign exchange movements of £2,638,000 (2010: outflow £6,242,000). The Group’s cash balance was £6,286,000 (2010: £4,484,000). The Group continues to have no borrowings. 4 Going concern – Forward cash flow calculations show that the Group has sufficient financial resources for the foreseeable future. The Group’s financial statements have been prepared on the assumption that the Group will be able to realise its assets and discharge its liabilities in the normal course of business. The Group currently has no operating revenues and during the year ended 31 December 2011 recorded a trading loss of £5,353,000 from continuing operations. At 31 December 2011 the Group held cash and cash equivalents of £6,286,000. The directors have considered the Group’s cash flow forecasts for the period to the end of April 2013. Forward cash flow projections show that forecast expenditure (12 months through 30 April 2013) will be less than the funds available as at 31 December 2011 when combined with the new equity raised in early 2012; together with the £5,900,000 undrawn element of the Yorkville facility. As a result, the Group has sufficient cash resources to undertake its work program in the next 12 months. Balance sheet Exploration and evaluation expenditure in 2011 was £3,809,000 (2010: £1,165,000) and principally reflects the cost of drilling in Citarum (Indonesia) and the Montemarciano and Fonte San Damiano licences in Italy. Currency movement increased the balance in sterling terms by £690,000. However the impairment of the Marciano asset by £1,076,000 left the year end balance at £22,725,000 (2010: £9,954,000). The deferred tax liability and the matching goodwill balance arising from the tax provision were both increased by £2,051,000 due to the two Italian acquisitions. 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 5 Annual Report 2011 Post balance sheet event The Company issued a further 262,587,803 shares to raise an additional £4,000,000 in cash on 6 February 2012. 157.6 million warrants were also issued, exercisable at 1.86p. Impairment – Under IFRS 6, the cost carried in the balance sheet may be carried forward if exploration activities have not reached a stage to allow reasonable assessment of economically recoverable reserves. With the exception of Marciano, which has been written off, no impairment charge has been recorded and accordingly an update of the estimated monetary value shows that the value exceeds the carrying value of our intangible evaluation and exploration assets and goodwill. There are extensive prospective areas remaining to be explored in both Italy and Indonesia. Shareholders equity was reduced by the loss for the year, offset by an increase reflecting the new equity issued during 2011, resulting in an increase to £29,866,000 at the end of 2011 (2010: £17,715,000). 5 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 6 Sound Oil plc Technical Review Italian Assets Sound Oil plc currently has interests in 17 licences in Italy (2 production concessions, 9 permits and 6 exclusive permit applications) through its wholly-owned Italian subsidiary company Apennine Energy Srl (Fig. 1). The Apennine portfolio offers multiple opportunities for production, appraisal and development of existing oil and gas discoveries and exploration drilling. It is Sound Oil plc’s intention over the coming 12 months to re- establish production on one concession, drill two new appraisal wells targeting existing discoveries and complete testing of a newly drilled gas discovery to demonstrate its commerciality. In addition several other appraisal and exploration opportunities will be considered for selective farm-out of high equity positions. and its associated production facilities (Fig. 3). This had produced 116 MMscm (~4.1 Bscf) of gas prior to shut- in in 2001 with a rate of 140,000 scfd, but with significant water-cut. Apennine has submitted a plan to re-establish production from the field using on-site electricity generators to export power to the local grid. An Environmental Impact Assessment (EIA) for the proposed re-development has been submitted to the Marche regional authorities and its approval is expected in May 2012. Apennine plans to exploit the previously abandoned Sabbie reservoir which has been estimated by Fugro Robertson1 to contain 1.1-1.5 Bscf of contingent resources. Operations are expected to start soon after approval of the EIA. Figure 1 Production Rapagnano Concession (Apennine 100%) The concession, located in Marche, central Italy (Fig. 2), was awarded to Apennine in July 2011 as part of a marginal fields development programme. It contains the Rapagnano-1 gas discovery made by ENI in 1952 Figure 3 Fonte San Damiano Concession (Apennine 100%) The concession is located in Basilicata, southern Italy (Fig. 4). In June 2011 the Marciano-1 well was re- entered to test two gas-bearing zones identified at 1283-1288 mMD and 1326-1231 mMD (Fig. 5). The lower zone flowed a maximum of 2,180 scmd (77,000 scfd) and the upper zone a maximum of 99,800 scmd (3.5 MMscfd). The upper zone was choked back to a flowing rate of 36,000 scmd (1.3 MMscfd). Subsequent well test analysis established that only a minimal connected volume of gas was seen by the well which could not maintain a commercial level of production. Figure 2 6 Figure 4 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 7 Annual Report 2011 have been estimated by Fugro Robertson to be 20.7 Bscf. Apennine’s strategy is to drill an appraisal well on the structure to validate the resource estimate and establish commercial flow rates. An application to drill the well was submitted in November 2011 and approval is expected to be able to spud the well in mid 2012. Long lead items have been ordered to meet this schedule. Figure 6 Torrente Alvo Permit (Apennine 100% interest) The permit is located in Potenza in southern Italy (Fig. 7). The permit area was initially explored by Italmineraria (now ENI) and a number of wells were drilled between 1965 and 1998. The well Strombone- 2dir found oil in Miocene carbonates at 1508-1562m and tested 750 bopd with variable water-cut. The oil accumulation is also partially overlain by a non- commercial gas pool, located in Pliocene sands; neither of these two discoveries was developed. Fugro Robertson has estimated the P50 contingent resources of the Strombone discovery to be 6.4 MMbo. It is Apennine’s intention to develop the Strombone oil discovery and to this end an application to drill an appraisal well is in preparation. The target to drill the well is late 2012-early 2013. Figure 5 The well is currently suspended prior to abandonment and removal of the surface production facilities and electricity generators Appraisal and Development Carita Permit (Apennine 100%, Operator) The permit is located in Veneto Province, northeast Italy (Fig. 6). The permit contains the Nervesa structure that was drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa-1dir A) and proved gas-bearing in at least 13 sand intervals. The remaining P50 contingent resources Figure 7 7 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 8 Sound Oil plc Technical Review continued Exploration Montemarciano Permit (Apennine 75%, Operator) The permit is located in Marche, Ancona in central Italy (Fig. 8). Apennine Energy farmed-in to the permit in June 2011 by committing to drill the Casa Tiberi-1 exploration well to earn a 75% working interest in the licence. The well was drilled in November Figure 8 2011 to a TD of 715m in the Lower Pliocene Cellino sand objective (Fig. 9). It encountered 14.9 m gross (3.9 m net) hydrocarbon pay. Partner SARP withdrew from the operation after logging and opted not to participate in its completion, and so going forward Apennine holds a 100% interest in the discovery. The well was completed with perforation of a single zone 571-581mMD. During clean- up flow the well tested dry gas at rates of ~26,000 scmd (~0.92 MMscfd). The well was subsequently re-entered in January 2012 and a flow test delivered a final rate of 37,850 scmd (~1.3 MMscfd) on 5/16" choke (Fig. 10). The well was again temporarily suspended pending application for a pending concession in May 2012. Figure 9 8 Figure 10 Badile Permit (Apennine 100%) The Badile permit is situated in the Piedmont Lombard Basin in northern Italy (Fig. 11), where the principal play is oil, gas and condensate in deep Triassic dolomites and limestones. The permit is adjacent to ENI’s Gaggiano oil field and a short distance from the Villafortuna-Trecate and Malossa oil fields with total proven recoverable reserves over 400 MMboe. Two large ready-to-drill prospects have been mapped in the permit area, Badile and Zibido, with gross P50 prospective resources2 estimated by Fugro-Robertson to be 185 Bscf and 130 Bscf respectively. In 2011 Apennine purchased and interpreted legacy 3D seismic data over the Badile prospect to define an optimum drilling location. It is the Company’s intention to submit an application to drill a first well on the prospect. It is expected that when approved the drilling of the well will be offered for farm-out. Figure 11 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 9 Annual Report 2011 Other Opportunities The Apennine portfolio offers several other appraisal and development opportunities for which geological studies and seismic interpretation will be undertaken to mature the projects for future drilling. The immediate focus will be on the following: Sambucheto Permit (Apennine 95% interest, Operator) The permit is located in Ancona and Macerata in central Italy (Fig. 12). Six wells were drilled in the permit area between 1971 and 1994, two of which were gas discoveries (Saletta-1 and Montefano-1dir) that were never developed. Montefano-1dir encountered 5m gas pay at 1190m and Saletta-1 found two 2m gas zones at 1321m and 1368m in the same formation. Gross P50 contingent resources for Montefano have been estimated by Fugro Robertson to be 4.0 Bscf. Costa del Sole Permit (Apennine 100%) The permit, located in southern onshore Sicily (Fig. 14), was provisionally awarded to Apennine in September 2011 and full award is subject to approval of an EIA by the Sicily regional authorities. The permit contains the Manfria-1bis heavy oil (12.26°API) discovery. The well flowed at a rate of 150 bopd with an average water- cut of 20% and produced a total of 6,000 barrels of oil during testing. P50 contingent resources have been estimated by Fugro Robertson to be 2.4 MMbo. On final award, Apennine’s strategy will be to evaluate the resource potential of the Manfria discovery for development and other prospects for drilling. A major refinery of heavy oil is located at Gela some 10 km from the discovery. Figure 12 Villa Gigli Permit (Apennine 50% interest, Operator) The permit is located in Ancona and Macerata on the Adriatic coast in central Italy (Fig. 13). Six wells have been drilled on the permit between 1933 and 1993. Two discoveries were made by Agip (Musone-1dir, oil and Moretti-1, gas), but neither was developed. Musone-1dir tested 15°API oil from the interval 1259- 1295m in the Miocene Scaglia limestone at up to 1170 bpd with variable water content. Moretti-1 encountered 11m gas pay at 358-369m in the Pliocene sands; the zone flowed at 0.7 MMscfd. Gross P50 contingent resources of the Musone discovery have been estimated by Fugro Robertson to be 1.7 MMbo. Figure 13 Figure 14 D503 BR-CS (Apennine 100%) The permit, located in Zone B of the central Adriatic Sea (Fig. 15), is outside the current drilling exclusion zone. The well Dora-1 was drilled in 1972 as a gas- condensate discovery in the Miocene Scaglia limestones, testing 20.2 MMscfd from the interval 1361-1393m. The Dora-2 appraisal well was drilled in 1996 as a gas discovery but the reservoir quality was inferior to that of Dora-1, testing only 0.6 MMscfd from the interval 1397-1410m. Gross P50 contingent resources for the Dora discovery have been estimated by Fugro Robertson to be 17.6 Bscf. Figure 15 9 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 10 Sound Oil plc Technical Review continued Licences Subject to Appeal The Ministry of Economic Development in Italy has withdrawn Apennine’s assigned permits D148 DR-CS and D150 DR-CS (both offshore Calabria) from the application process to full permit status. This is in compliance with the environmental decree 128/1210 enacted in June 2010 which prevents oil and gas activity within 5 nautical miles of the Italian coast. Apennine has appealed against the decisions. Indonesian Assets Sound Oil plc has non-operated interests in two licences in Indonesia through its wholly-owned subsidiary Mitra Energia Ltd. Operators’ plans for the remainder of 2012 include drilling of four exploration commitment wells, two in Java and two in Kalimantan. In addition work will start on the development of the Kerendan gas field in Kalimantan. Citarum PSC (Sound Oil plc 20% interest) At the beginning of the year drilling commenced on the first of 3 exploration commitment wells on the block (Fig. 16). The first well, Cataka-1, experienced difficulties in drilling the upper section and was abandoned following two side-track attempts The Operator intends to undertake a detailed post-drilling evaluation of the operation with a view of returning to the prospect within or at the end of the current drilling campaign. The rig has moved to the second location, Jatayu-1, and will then move to the third well Geulis-1. The Jatayu and Geulis prospects have been estimated by Fugro Robertson to contain gross P50 prospective resources of 288 and 26 Bscf respectively. Bangkanai PSC (Sound Oil plc 5% carried interest) The Bangkanai Operator has made considerable progress throughout the last year to put the exploration and development programme onto a firm basis and secure the PSC in force (Fig. 17). The Operator plans now to commence development drilling for the Kerendan gas field in Q2 2012 with a view to establishing first gas by end of 2013. The four well development programme will be followed by the two exploration commitment wells. Sound Oil plc is carried for all exploration and development costs until first gas. The Kerendan field, first discovered in the 1980s, will be developed to supply gas to a local, new-build integrated power plant. The Plan of Development (POD) calls for the supply of 130 TBtu (133.7 Bscf) over 20 years at a maximum rate of 20.3 BBtud (~20 MMscfd). A Gas Sales Agreement was concluded in June 2011 with PLN3 for an initial price of $4.79/MMBtu. PLN will also build the power plant for the project. In addition to the proved undeveloped gas reserves of 133.7 Bscf, the Kerendan field contains un-drilled contingent resources estimated by the block Operator to be up to 160 Bscf. Figure 17 Figure 16 10 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 11 Annual Report 2011 BPMigas4 have agreed with the Operator that the two outstanding exploration commitment wells should now commence with drilling the West Kerendan-1 well in Q4 2012. This well will target additional potential in the Oligocene limestone reservoir (the producing formation in the Kerendan field) and the deeper Eocene Tanjung sandstones. Fugro Robertson (CPR, October 2011) have estimated the gross P50 prospective resources in all levels of the prospect to be >1900 Bscf. The second exploration commitment well will be drilled in the light of West Kerendan-1 drilling results and the interpretation of a new 2D seismic survey over other prospective areas to be acquired in early 2013. Notes: 1 Fugro Robertson Limited is an independent petroleum consultancy company providing resource and reserve assessments. The figures quoted here are taken from their Competent Person’s Report, October 2011. 2 Contingent and prospective resources, consistent with SPE (The Society of Petroleum Engineers) guidelines, are quantified in terms of the statistical probability to describe a given recoverable hydrocarbon (oil or gas) volume in a subsurface structure considering all the geological variables involved. The P50 figure indicates a 50% chance of finding a given volume and is generally considered as the best or most-likely estimate. Contingent resources refer to already discovered, but not produced, hydrocarbons and prospective resources refer to hydrocarbons yet to be discovered. 3 PLN (PT Perusahaan Listrik Negara) is the Indonesian State electricity company. 4 BPMigas (Badan Pelaksana Kegitan Hulu Minyak Dan Gas Bumi) is the Indonesian Government regulatory authority for petroleum exploration and production activities. Abbreviations: API: BBtud: Bopd: Bscf: Btu: American Petroleum Institute (crude oil gravity is expressed in ºAPI). Billion British Thermal Units per day. Barrels of oil per day. Billion standard cubic feet of gas. British Thermal Unit (~ 1,000 Btu = 1 standard cubic ft of gas, dependent on composition). Measured depth. Million barrels of oil. MD: MMbo: MMboe: Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil). MMBtu: Million British Thermal Units. MMscfd: Million standard cubic feet of gas per day. MMscm: Million standard cubic meters of gas. Mscf: Scfd: Scmd: TBtu: Thousand standard cubic feet. Standard cubic feet per day. standard cubic meters of gas per day. Trillion British Thermal Units. 11 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 12 Sound Oil plc Statement of Proved and Probable Reserves The Group’s proved and probable hydrocarbon reserves as at 31 December 2011 were: As at 31 December 2010 Additions: Kerendan field, Indonesia * As at 31 December 2011 Oil (MMbo) – 0.070 0.070 Gas (Bscf) – 6.685 6.685 MMboe – 1.184 1.184 * Figures are estimated as proved undeveloped reserves (1P) by Fugro Robertson Limited in a Competent Person’s Report, October 2011. Basis to fulfil contract: 972 Btu/Scf, 350 operating days per year. Abbreviations: Bscf: MMbo: MMboe: Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil). Billion standard cubic feet of gas. Million barrels of oil. 12 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 13 Annual Report 2011 Board of Directors The Board of Directors of the Company is currently comprised as follows: Tony Heath Non-executive Director Chairman of Audit Committee Tony Heath has over 30 years financial and general management experience across a variety of roles. Qualifying as a chartered accountant in 1964, Tony joined Burmah Oil’s motor fuels development business in 1968. He eventually became Group Controller of Burmah Oil and was responsible for all financial information and control of the international oil group covering operations in thirty-five countries. Tony joined the board of Premier Oil plc as Group Finance Director in 1990 and was Group Finance Director of Sound Oil plc from 2005 to August 2010. Andrew Hockey Non-executive Director Member of Audit Committee Member of Remuneration Committee Andrew has 30 years technical and managerial experience in the oil and gas industry gained in the UK and internationally with Petrofina, Triton, Monument, Lasmo, Eni and Fairfield Energy. Andrew holds a BA in Geology from Oxford University and an MSc in Petroleum Geology from Imperial College. Gerry Orbell Chairman and Chief Executive Gerry Orbell is a petroleum geologist with over 35 years of technical, managerial and director level experience in the hydrocarbon and utilities sectors. Gerry has previously held the position of executive director of Fina Exploration Ltd, Premier Oil plc and United Utilities plc. Gerry is currently the chairman of Antrim Energy Inc. He is a member of the board of Moorland Energy Ltd, and also of the compliance company Valpak Ltd where he is also chairman of the audit committee. Michael Nobbs Non-executive Director Chairman of Remuneration Committee Member of Audit Committee Michael Nobbs has a 30 year track record in investment banking, with a focus on corporate and project finance. He was a managing director and senior credit officer for Citigroup/Citibank and the group finance director for Tishman International Companies, a major global real estate development and investment business. Ilham Habibie Non-executive Director Member of Remuneration Committee Ilham is a co-founder and shareholder of PT. ILTHABI Rekatama, a private investment company in Indonesia, which he joined as a President Director in 2002. Through ILTHABI he invested in, and is director of, various companies in the fields of energy, mining, manufacturing and transportation. Ilham’s previous professional background is largely with aerospace companies (IPTN, Indonesia; Boeing, USA). He holds a Dr.-Ing. (PhD) in Aeronautical Engineering from Technical University of Munich, and a M.B.A. from the University of Chicago, USA. 13 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 14 Sound Oil plc Report of the Directors Meeting to give to the directors authority for one year to allot shares for cash as if statutory pre-emption did not apply, although at the present time the directors do not have plans for any issue of shares. At the Annual General Meeting, authority will again be sought for the directors to grant options up to 5% of the issued share capital. Directors Directors of Sound Oil plc holding office during the year were: Ilham Habibie Tony Heath Andrew Hockey Michael Nobbs Gerry Orbell (appointed on 5 September 2011) (appointed on 9 May 2011) Substantial Shareholders At 10 April 2012 the Company had received notification of the following interests in excess of 3% of the Company’s issued ordinary shares: TD Direct Investing Nominees (Europe) Limited Barclayshare Nominees Limited Hsdl Nominees Limited Pershing Nominees Limited Investor Nominees Limited L R Nominees Limited James Capel (Nominees) Limited Celtique Energie Petroleum Ltd Notified number of Notified % of voting rights voting rights 257,695,240 203,114,056 164,156,400 150,533,343 128,893,613 116,615,523 102,222,929 91,998,582 12.30% 9.69% 7.83% 7.18% 6.15% 5.56% 4.88% 4.39% Directors’ interests The beneficial interests of the directors and their immediate families in the ordinary share capital of the company are shown below: Name Ilham Habibie 1 Michael Nobbs Gerry Orbell 2 Tony Heath Andrew Hockey 31 December 2011 Date of this report 147,288,696 147,288,696 2,529,545 15,513,124 2,127,586 125,000 1,954,545 14,513,124 827,586 – 1 Shares registered in the name of Ilthabie SDN-BHD, a company jointly owned by Ilham Habibie and his brother Tareq Habibie. 2 This includes 8,016,873 shares registered in the name of Sogdian and 777,000 shares registered in the name of Gerry Orbell's children. The directors submit their report and the audited accounts for the year ended 31 December 2011. Results and dividends The Group’s loss after tax for the year amounted to £6,264,000 (2010 loss: £15,968,000). A dividend is not proposed. Activities The principal activities of the Group are oil and gas exploration, development and production. A review of activities, prospects for the future and key performance indicators is included in the Chairman’s Statement and Technical Review. Key performance indicators 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. Business risk and uncertainties Sound Oil plc, similar to other exploration companies in the oil and gas industry, operates in an environment subject to inherent risks. Many of these risks are beyond the ability of a company to control, particularly those associated with the exploring for and developing of economic quantities of hydrocarbons. Principal risks can be classified into four main categories: operational, commercial, regulatory and financial. Operational risks include drilling complications, delays and cost over-run on major projects, well blowouts, failure to encounter hydrocarbons, construction risks, equipment failure and accidents. Commercial risks include access to markets, access to infrastructure, volatile commodity prices and counterparty risks. Regulatory risks include governmental regulations, licence compliance and environmental risks. Financial risks include access to equity funding and credit. Share capital At the end of the year the number of shares in issue was 1,833,199,548. The authority given to the directors to allot shares at the 2011 Annual General Meeting was granted for a period of one year. A resolution will be proposed at the Annual General Meeting to renew this authority. A resolution will also be proposed at the Annual General 14 224047 Sound Oil R&A 2011 pg01-15 01/05/2012 07:16 Page 15 Annual Report 2011 Report of the Directors continued Charitable contributions During the period the Group made no charitable contributions. Auditors Crowe Clark Whitehill LLP continue as the Company’s auditors until the next Annual General Meeting. A resolution to reappoint them as auditors will be put to shareholders at the forthcoming Annual General Meeting. Provision of information to auditors Each of the persons who is a director at the date of approval of this Annual Report and Financial Statements confirms that: (cid:129) (cid:129) so far as the director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and the director has taken all the steps that he ought to have taken as director in order to make himself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. By order of the Board Stephen Ronaldson Company Secretary 30 April 2012 Details of the remuneration and information on indemnity provisions of all directors who served during the period are shown in the Report on Directors’ Remuneration on page 17. Directors’ interests in share options are shown in the Report on Directors Remuneration on page 18. Financial risk management objectives and policies The Group’s principal financial instruments comprise cash and short term deposits. The main purpose of these financial instruments is to finance the Group’s operations. In addition the Group has various financial liabilities in the form of short term, non interest bearing sundry payables. The main risks arising from the Group’s financial instruments are interest rate risk and currency exchange rate risk. The board reviews and agrees policies for managing these risks. The Group’s exposure to the risk from changes in market interest rates and changes in currency exchange rates relates primarily to the Group’s cash and term deposits which are subject to floating interest rates and are held in the currency which matches the currency of future liabilities. The Group’s exposure to commodity price risk and credit risk is considered minimal at this stage of the Group’s development. Going concern Details of going concern considerations are shown in the Financial Review on page 4. Suppliers and employees The Group’s policy in respect of its suppliers is to establish terms of payment when agreeing the terms of business transactions. As at 31 December 2011 the number of creditor days in relation to trade creditors outstanding at the period end were 30 days (2010: 17 days). The Group places considerable value on the involvement of its employees and keeps them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. 15 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 16 Sound Oil plc Report on Directors’ Remuneration Compliance Remuneration structure The remuneration of all executive directors is The executive team’s remuneration is basic salary with determined by the Remuneration Committee (the possible share options and bonuses awarded ‘Committee’) and ratified by the Board. The Committee dependent on individual and company performance. is composed entirely of non-executive directors, and There are no current pension arrangements, however comprises Mr Michael Nobbs, who chairs the following changes in UK legislation the provision of a Committee Mr Andrew Hockey and Mr Ilham Habibie. pension scheme is under review. None of the executive directors of the Company is involved in determining his own remuneration. Base salary The Committee consults with the executive team as comparable companies in the oil sector and general Base salary is reviewed each year against other required during the year. Remuneration approach market data on the basis of companies in similar industries and those of a similar size. The objective is to ensure that the base salary provides a competitive During the course of 2011 the Company’s remuneration remuneration package. The base salaries of the approach has been updated. A Comprehensive executive team are currently positioned between the Compensation Framework is now in place. median and the upper quartile. While salary is reviewed by reference to market conditions, the performance of The Company’s remuneration policy is to provide the Company and the performance of the individual, the remuneration packages which ensure that directors Committee would not regard this element of and senior management are fairly and responsibly remuneration as directly performance related. rewarded for their contributions. Bonuses The Committee endorses the principle of mitigation of The performance of the Company and the Executives damages on early termination of a service contract. over the year is taken into consideration when assessing any annual cash bonus. Bonuses may be It is the Committee’s current intention to continue awarded up to a maximum of 50% and 100% of base with the above remuneration approach for 2012 and salary depending on the senority of the employee. subsequent years although the Committee will keep the matter under review. The Committee’s current intention with regard to share options is that they form a critical part of the long term incentive scheme for the executive team and are awarded annually. 16 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 17 Annual Report 2011 Report on Directors’ Remuneration continued Contracts of employment The details of the executive director contract of employment and non-executive directors’ letters of appointment are set out below: (cid:129) Gerry Orbell has a contract of employment with a notice period for termination of 12 months. (cid:129) (cid:129) Non-executive directors have letters of appointment with a notice period for termination of 2-3 months. (cid:129) The Company has granted an indemnity to all its directors under which the Company will, to the Summary of actual remuneration of directors fullest extent permitted by applicable law and to the extent provided by the Articles of Association, indemnify them against all costs, charges, losses and liabilities incurred by them in the execution of their duties. In the event of a change of control of the Company, Gerry Orbell and the non-executive directors have the option to give notice and receive a lump sum equivalent to 12 months salary. 2011 Salary and fees £’000’s Salary Bonus (i) Total 2010 2010 2011 Performance Performance Award Award Executive directors Gerry Orbell(i) Tony Heath Jossy Rachmantio Non-executive directors Simon Davies Michael Nobbs Ilham Habibie Tony Heath Andrew Hockey Patrick Alexander 240 – – – 30 30 9(3) 19(4) – 86 – – – – – – – – 60 – – – – – – – – Transaction related 100 – – – – – – – – 486 – – – 30 30 9 19 – Total for all directors (i) Bonus – A bonus of £85,937 was awarded to Gerry Orbell in February 2011 relating to 2010 performance. The Chairman/CEO's bonus was assessed as 46% of base salary and took into consideration a number of KPI's and overall performance for the 2010 full year. 328 574 100 60 86 184 53(1) 57(1) 12(2) 27 27 – – 17(1) 377 Following the decision to routinely consider bonuses at the end of the relevant year the directors addressed the 2011 annual bonuses in December 2011. The Chairman/CEO's bonus was assessed at 25% of base salary (£60,000 of which £30,000 was awarded in shares) and took into consideration a number of KPI’s and overall performance for the 2011 full year. Transaction related – This was awarded to the Chairman/CEO in March 2011 in regard to the transformational acquisition of Consul. The Board took into account the pivotal part undertaken by the individual, the impact of the acquisition on the asset value of the company, the share price at the time and favourable price negotiated for the deal. Gerald Orbell was a non-executive director of Consul at the time of acquisition and stood aside from any negotiations on behalf of Consul and did not benefit from any bonus awards made to other Consul directors which were stated in the shareholder circular dated December 2010. Private healthcare – During the course of the year the company instituted a private healthcare insurance scheme. The value of this benefit was £731, which is included in the salary total. (1) to 30/06/2010 (2) to 12/06/2010 (3) from 05/09/2011 in role as non-executive director (4) from 09/05/2011 17 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 18 Sound Oil plc Report on Directors’ Remuneration continued Share Options At 31 December 2011 the Directors held options over the Ordinary Shares of the Company as follows: Date of Grant Exercisable Acquisition Price per share (pence) Dates Options held at Options held at 1 January 2011 31 December 2011 28.02.07 28.02.07 28.02.07 27.05.10 18.04.11 28.02.07 28.02.07 28.03.07 27.05.10 18.04.11 29.09.11 14.04.11 24.05.11 18.04.11 28.02.08 – 28.02.17 28.02.09 – 28.02.17 28.02.10 – 28.02.17 27.05.10 – 26.05.13 28.03.11 – 27.03.16 28.02.08 – 28.02.17 28.02.09 – 28.02.17 28.02.10 – 28.02.17 27.05.10 – 26.05.13 01.03.11 – 29.02.16 29.09.11 – 28.09.16 28.03.11 – 27.03.16 01.04.11 – 31.03.16 28.03.11 – 27.03.16 4.38 4.38 4.38 1.50 5.60 4.38 4.38 4.38 1.50 2.75 2.20 5.60 4.95 5.60 666,667 666,667 666,666 1,725,000 – 333,333 333,333 333,334 1,035,000 – – – – – 666,667 666,667 666,666 1,725,000 7,500,000 333,333 333,333 333,334 1,035,000 2,000,000 1,000,000 1,000,000 1,000,000 1,000,000 G. Orbell JA Heath I Habibie A Hockey M Nobbs The market price of Sound Oil Plc share at the end of the year was 1.65 pence. The market price of the shares ranged between 1.43 pence and 6.38 pence during the year. 18 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 19 Annual Report 2011 Corporate Governance Report The Board recognises the importance of sound corporate There is close, day-to-day involvement by the executive governance and the guidelines set out in the director in all of the Group’s activities. This includes UK Corporate Governance Code (the “Code”). Companies the comprehensive review of both management and on the AIM market of the London Stock Exchange technical reports, the monitoring of foreign exchange (“AIM”) are not required to comply with the Code, and and interest-rate fluctuations, government and fiscal- due to its size, the Company is not in full compliance. policy issues and cash-control procedures. In this way, However, the Company intends to comply so far as is the key-risk areas can be monitored effectively and practicable and appropriate. specialist expertise applied in a timely and productive In accordance with the Code no director has an manner. employment contract of more than one year. Any system of internal control can provide only reasonable, and not absolute, assurance that the risk of failure to achieve business objectives is eliminated. The directors acknowledge that they are responsible for the Company’s system of internal control and for reviewing its effectiveness. The directors, having reviewed the effectiveness of the system of internal controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date that the financial statements were signed. The Company has less than twenty employees and the directors do not believe the Company is sufficiently complex to warrant the establishment of an internal audit function. The directors will review this policy as and when the Company’s circumstances warrant. The Board has a Remuneration Committee as described in the Report on Directors’ Remuneration. In addition to directors’ remuneration, the Committee is responsible for assessing directors’ performance, planning succession for the Chairman and Chief Executive and for new nominees to the Board. The Board is responsible for overall strategy, acquisition policy, major capital expenditure projects, corporate overhead costs and significant financing matters. No one individual has unfettered powers of decision. There is an experienced chairman and chief-executive and four non-executive directors. 18 board meetings were held during the year, all of which were attended by all directors. The Board has an Audit Committee comprising three of the non-executive directors. The Audit Committee receives and reviews reports from the Executive Team and external auditors relating to the published accounts and the system of internal financial control. The Board has established levels of authorisation of financial commitments and payment approval procedures appropriate to the size of the business. The Board receives monthly reports on income and expenditure and on the Company’s financial position. On the wider aspects of internal control, relating to operational and compliance controls and risk management as included in provision C.2.1 of the Code, the Board, in setting the control environment, now identifies and reviews the key areas of business risk facing the Group. 19 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 20 Sound Oil plc Statement of Directors’ Responsibilities The directors are responsible for preparing the (cid:129) prepare the financial statements on the going Directors' Report and the financial statements in concern basis unless it is inappropriate to presume accordance with applicable law and regulations. that the company will continue in business. Company law requires the directors to prepare The directors are responsible for keeping adequate financial statements for each financial year. Under accounting records that are sufficient to show and that law the directors have elected to prepare the explain the company’s transactions and disclose with financial statements in accordance with International reasonable accuracy at any time the financial position Financial Reporting Standards (IFRSs') as adopted by of the company and enable them to ensure that the the European Union and applicable law. financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the Under company law the directors must not approve assets of the company and hence for taking the financial statements unless they are satisfied that reasonable steps for the prevention and detection of they give a true and fair view of the state of affairs of fraud and other irregularities. the company and the group and of the profit or loss of the group for that period. In preparing these financial They are further responsible for ensuring that the statements, the directors are required to: Report of the Directors and other information included (cid:129) select suitable accounting policies and then apply prepared in accordance with applicable law in the them consistently; United Kingdom. in the Annual Report and Financial Statements is (cid:129) make judgments and accounting estimates that are reasonable and prudent; (cid:129) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; 20 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 21 Annual Report 2011 Independent Auditor’s Report to the members of Sound Oil plc We have audited the financial statements of Sound Oil plc for the year ended 31 December 2011 which comprise Consolidated Income Statement, Consolidated and Company Balance Sheets, Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Cash Flow Statements and the related notes. 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 auditors As explained more fully in the Statement of Directors’ Responsibilities, 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 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 Directors’ Report, the Chairman’s statement, the financial and technical reviews, the statement of proved and probable reserves, the report on directors remuneration and the corporate governance report to identify material inconsistencies with the audited financial statements. 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: (cid:129) 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 2011 and of the groups loss 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 IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. (cid:129) (cid:129) (cid:129) Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: (cid:129) 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 (cid:129) (cid:129) (cid:129) we have not received all the information and explanations we require for our audit. Stephen Bullock (Senior Statutory Auditor) For and on behalf of Crowe Clark Whitehill LLP Statutory Auditor St. Bride’s House 10 Salisbury Square London EC4Y 8EH 30 April 2012 Note: The maintenance and integrity of Sound Oil plc website is the responsibility of the directors. The work carried out by the auditors does not involve consideration of these matters and accordingly the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were originally presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 21 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 22 Sound Oil plc Consolidated Income Statement for the year ended 31 December 2011 Notes 3 6 7 Exploration costs Gross loss Administrative expenses Group trading loss Other income/(loss) Group operating loss from continuing operations Finance revenue Foreign exchange (loss)/gain Expense incurred in acquiring subsidiaries Loss on disposal of farmout interest Loss before income tax Income tax Loss for the period attributable to the equity holders Other comprehensive loss: Foreign currency translation gain Total comprehensive loss for the period Loss for the period attributable to: Owners of the Company Non-controlling interest Total comprehensive loss attributable to: Owners of the Company Non-controlling interest 2011 £’000’s (2,405) (2,405) (2,948) (5,353) – (5,353) 44 (439) (516) – (6,264) – (6,264) 27 (6,237) (6,259) (5) (6,264) (6,232) (5) (6,237) 2010 £’000’s (430) (430) (1,502) (1,932) (58) (1,990) 21 211 – (14,210) (15,968) – (15,968) 711 (15,257) (15,968) – (15,968) (15,257) – (15,257) Loss per share basic and diluted for the period attributable to the equity holders of the parent (pence) 8 (0.39) (2.31) The Company has elected to take the exemption under section 408 of the Companies Act 2006 to not present the parent Company income statement. The result of the parent Company for the year was a loss of £3,266,000 (2010: £3,004,000). 22 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 23 Annual Report 2011 Consolidated Balance Sheet as at 31 December 2011 Company number: 05344804 Notes 2011 £’000’s 2010 £’000’s Group Non-current assets Property, plant and equipment Intangible assets Other debtors Current assets Other debtors Prepayments Current tax receivable Cash and short term deposits Total assets Current liabilities Trade and other payables Current tax payable Non-current liabilities Deferred tax liabilities Provisions Total liabilities Net assets Capital and reserves attributable to equity holders of the Company Issued equity share capital and share premium Foreign currency reserve Accumulated deficit Total equity Approved by the Board on 30 April 2012 G Orbell Director J A Heath Director 9 10 13 13 7 14 15 7 16 17 18 18 1,278 26,302 668 28,248 1,388 119 – 6,286 7,793 36,041 2,233 – 2,233 3,576 366 3,942 6,175 29,866 54,704 3,768 (28,606) 29,866 The accounting policies on pages 29 to 34 and notes on pages 34 to 62 form part of these financial statements . 12 11,479 621 12,112 2,940 65 26 4,484 7,515 19,627 284 – 284 1,525 103 1,628 1,912 17,715 36,456 3,741 (22,482) 17,715 23 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 11:18 Page 24 Sound Oil plc Company Balance Sheet as at 31 December 2011 Company number: 05344804 Company Non-current assets Property, plant and equipment Investment in subsidiaries Other debtors Current assets Other debtors Prepayments Current tax receivable Cash and short term deposits Total assets Current liabilities Trade and other payables Total liabilities Net assets Capital and reserves Issued equity share capital and share premium Accumulated deficit Total equity Approved by the Board on 30 April 2012 G Orbell Director J A Heath Director Notes 9 12 13 13 14 15 18 18 2011 £’000’s 11 41,719 7 41,737 121 37 – 5,092 5,250 46,987 285 285 46,702 54,704 (8,002) 46,702 2010 £’000’s – 24,337 4 24,341 2,891 37 26 4,331 7,285 31,626 166 166 31,460 36,456 (4,996) 31,460 The accounting policies on pages 29 to 34 and notes on pages 34 to 62 form part of these financial statements . 24 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 25 Annual Report 2011 Consolidated Statement of Changes in Equity for the year ended 31 December 2011 Group Share capital £’000’s Share Accumulated deficit £’000’s premium £’000’s Note Foreign currency reserve £’000’s Non controlling interest £’000’s At 1 January 2011 692 35,764 (22,482) 3,741 Total loss for the year Total comprehensive gain/(loss) Total comprehensive income/(loss) Issue of share capital Share issue costs Share based payments Acquisition of non-controlling interests with a change in control Acquisitions of non-controlling interests without a change in control 23 – – – 1,141 – – – – – – – 18,104 (997) – – – (6,259) – (6,259) – – 260 – (125) – 27 27 – – – – – At 31 December 2011 1,833 52,871 (28,606) 3,768 – (5) – (5) – – – 94 (89) – Share capital £’000’s Share Accumulated deficit £’000’s premium £’000’s Note Foreign currency reserve £’000’s Non controlling interest £’000’s At 1 January 2010 Total loss for the year Total comprehensive gain Total comprehensive income/(loss) Share based payments 23 692 35,764 (6,530) 3,030 – – – – – – – – (15,968) – (15,968) 16 – 711 711 – At 31 December 2010 692 35,764 (22,482) 3,741 – – – – – – Total equity £’000’s 17,715 (6,264) 27 (6,237) 19,245 (997) 260 94 (214) 29,866 Total equity £’000’s 32,956 (15,968) 711 (15,257) 16 17,715 25 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 26 Sound Oil plc Company Statement of Changes in Equity for the year ended 31 December 2011 Company At 1 January 2011 Total loss for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Issue of share capital Share issue costs Share based payments At 31 December 2011 At 1 January 2010 Total loss for the year Other comprehensive income/(loss) Total comprehensive income/(loss) Share based payments At 31 December 2010 Share capital £’000’s Share Accumulated deficit £’000’s premium £’000’s Note 692 35,764 – – – 1,141 – – – – – 18,104 (997) – 1,833 52,871 (4,996) (3,266) – (3,266) – – 260 (8,002) Share capital £’000’s Share Accumulated deficit £’000’s premium £’000’s 692 35,764 – – – – – – – – 692 35,764 (2,008) (3,004) – (3,004) 16 (4,996) 23 Note 23 Total equity £’000’s 31,460 (3,266) – (3,266) 19,245 (997) 260 46,702 Total equity £’000’s 34,448 (3,004) – (3,004) 16 31,460 26 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 27 Annual Report 2011 Consolidated Cash Flow Statement for the year ended 31 December 2011 Notes 6 9 Cash flow from operating activities Cash flow from operations Interest received Net cash flow used in operating activities Cash flow from investing activities Capital expenditure and disposals Exploration expenditure Payment in escrow – acquisition of subsidiaries Expense in acquiring subsidiaries Acquisition of subsidiaries Net cash flow used in investing activities Proceeds from equity issue Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 14 Notes to cash flow Cash flow from operations reconciliation Profit/(loss) after tax Finance revenue Loss on disposal of farmout interest Payroll bonuses paid in shares Share options granted and taken up immediately Expense in acquiring subsidiaries Cash taken over on acquisition of subsidiaries Exploration expenditure written off Income tax charge (credit) Increase/(decrease) in accruals and short term creditors Depreciation Share based payments charge Increase/(decrease) in long term provisions (Increase)/decrease in long term debtors Increase in short term debtors Cash flow from operations Notes 6 3 23 2011 £’000’s (3,009) 44 (2,965) (31) (3,809) 2,413 (366) (4,712) (6,505) 12,108 12,108 2,638 (836) 4,484 6,286 2011 £’000’s (6,264) (44) – 98 36 516 170 1,236 – 1,668 11 260 261 (12) (945) (3,009) 2010 £’000’s (2,683) 21 (2,662) (2) (1,165) (2,413) – – (3,580) – – (6,242) 104 10,622 4,484 2010 £’000’s (15,968) (21) 14,210 – – – – 3 – (775) 15 16 (5) 194 (352) (2,683) 27 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 28 Sound Oil plc Company Cash Flow Statement for the year ended 31 December 2011 2011 £’000’s (1,458) 44 (1,414) (11) 2,413 (1,464) (965) (366) (9,097) (9,490) 12,108 12,108 1,204 (443) 4,331 5,092 2011 £’000’s (3,266) – (43) 516 98 36 224 260 720 (3) (1,458) 2010 £’000’s (1,803) 21 (1,782) – (2,413) – – – (1,538) (3,951) – – (5,733) 210 9,854 4,331 2010 £’000’s (3,004) 2,030 (21) – – – (224) 16 (600) – (1,803) Notes 6 9 Cash flow from operating activities Cash flow from operations Interest received Net cash flow used in operating activities Cash flow from investing activities Capital expenditure and disposals Payment in escrow – acquisition of subsidiaries Acquisition of subsidiaries Purchase of Euro loan Cost of acquiring subsidiaries Investment in subsidiary undertakings Net cash flow used in investing activities Cash flow from financing activities Proceeds from equity issue Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange differences Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 14 Notes to cash flow Cash flow from operations reconciliation Profit/(loss) after tax Increase in provisions against investments Finance revenue Cost of acquiring subsidiaries Payroll bonuses paid in shares Share options granted and taken up immediately Increase/(decrease) in accruals and short term creditors Share based payments Decrease/(increase) in short term debtors Decrease/(increase) in other non current assets Cash flow from operations Notes 23 28 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 29 Annual Report 2011 Notes to the Financial Statements 1 Accounting policies Sound Oil plc is a public limited company registered and domiciled in England and Wales under the Companies Act 2006. (a) Basis of preparation The financial statements of the Group and its parent have been prepared in accordance with: plan, management believe that the Group will remain a going concern for the next 12 months from the date of the authorisation of the financial statements on the basis of forecast expenditure (12 months through 30 April 2013) will be less than the funds available as at 31 December 2011 together with the £4.0 million raised in February 2012 from share placings and the £5.8 million undrawn element of the Yorkville facility. Management will also continue to pursue farm-out and financing strategies to reduce/fund Sound’s (1) International Financial Reporting Standards (IFRS) as future obligations. adopted by the European Union (IFRSs, as adopted by the European Union), IFRIC Interpretations and: (2) those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, except to the extent that the following policies require fair value adjustments. Use of 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 The Group and its parent company’s financial statements are period. Actual outcomes could differ from those estimates. presented in sterling (£) and all values are rounded to the nearest thousand (£’000) except when otherwise indicated. The key sources of estimation uncertainty that has a significant risk of causing material adjustment to the The principal accounting policies set out below have been carrying amounts of assets and liabilities within the next consistently applied to all financial reporting periods financial year are the impairment of intangible exploration presented in these consolidated financial statements and and evaluation (E&E), investments and goodwill and the by all Group entities, unless otherwise stated. All amounts estimation of share based payment costs. classified as current are expected to be settled/recovered in less than 12 months unless otherwise stated in the notes to these financial statements. The Group determines whether E&E assets are impaired in cost pools when facts and circumstances suggest that the carrying amount of a cost pool may exceed its recoverable The Group and its parent company’s financial statements amount. As recoverable amounts are determined based for the year ended 31 December 2011 were authorised for upon risked potential, or where relevant, discovered oil and issue by the board of directors on 27 April 2012. gas reserves, this involves estimations and the selection of The financial position of the Group, its cash flows and available debt facilities are described in the Financial Review above. As at 31 December 2011 the Group had £6.3 million of available cash. After the balance sheet date but before the a suitable discount rate. The capitalisation and any write off of E&E assets necessarily involve certain judgements with regard to whether the asset will ultimately prove to be recoverable. date of approval of these financial statements, the Group In determining the treatment of E&E assets and raised a further £4.0 million from equity fundraisings. The investments the directors are required to make estimates Directors are required to consider the availability of resources and assumptions as to future events and circumstances. to meet the Group and Company’s liabilities for the There are uncertainties inherent in making such foreseeable future. As described above, the current business assumptions, especially with regard to oil and gas reserves environment is challenging and access to new equity and and the life of, and title to, an asset; recovery rates; debt remains challenging. Based on current management production costs; commodity prices and exchange rates. 29 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 30 Sound Oil plc Notes to the Financial Statements continued Assumptions that are valid at the time of estimation may The Group uses the purchase method of accounting for change significantly as new information becomes the acquisition of subsidiaries. The cost of an acquisition available and changes in these assumptions may alter the is measured as the fair value of the assets given, equity economic status of an E&E asset and result in resources instruments issued and liabilities incurred or assumed at or reserves being restated. The estimation of recoverable the date of exchange, plus costs directly attributable to amounts, based on risked potential and the application of the acquisition. value in use calculations, are dependent upon finance being available to fund the development of the E&E assets. Goodwill is tested annually and at other times when impairment indications exist. When value in use calculations are undertaken, management estimates the expected future cash-flows from the asset and chooses a suitable discount rate in order to calculate the present value of those cash-flows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in Joint ventures The Group conducts oil and gas exploration and production activities jointly with other venturers who each have direct ownership in and jointly control the assets of the ventures. These are classified as jointly controlled assets and consequently, these financial statements reflect only the Group’s proportionate interest in such activities. Associates Entities, other than subsidiary undertakings or joint the treatment of E&E assets above. Further details are arrangements, in which the Group has a participating given in note 10. The estimation of share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the continuing participation of key employees (see note 23). (b) Basis of consolidation The Group financial statements consolidate the Income Statements and Balance Sheets of the Company and its subsidiary undertakings. Joint venture undertakings are accounted for using the proportionate consolidation method from the date that significant influence or joint control (respectively) commences until the date this ceases. Associates are accounted for using the equity method. Investments in subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies. Such power, generally but not exclusively, accompanies a interest and over whose operating and financial policies the Group exercises a significant influence are treated as associates. In the Group’s financial statements associates are accounted for using the equity method. Separate financial statements Investments in subsidiaries, joint ventures and associates are recorded at cost, subject to impairment testing in the Group’s financial statements. Foreign currency translation (c) The functional currency of the Company is pound sterling. The functional currency of the Indonesian subsidiaries is US$. The functional currency of the Italian subsidiaries is the Euro. Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement. shareholding of more than one half of the voting rights. The assets and liabilities of foreign operations are Subsidiaries are fully consolidated from the date on which translated into sterling at the rate of exchange ruling at control is transferred to the Group, until the date that the balance sheet date. Income and expenses are control ceases. 30 translated at weighted average exchange rates for the 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 31 Annual Report 2011 year. The resulting exchange differences are taken directly (or otherwise) of commercial reserves has been to a separate component of equity. On disposal of a determined subject to certain limitations including review foreign entity, the deferred cumulative amount recognised for indications of impairment. If commercial reserves have in equity relating to that particular foreign operation is been discovered and development has been approved, the recognised in the income statement. carrying value, after any impairment loss, of the relevant (d) Oil and gas assets The Group’s capitalised oil and gas costs principally relate to properties that are in the exploration and evaluation stage. As allowed under IFRS 6 the Group has continued to apply its existing accounting policy to exploration and evaluation activity, subject to the specific requirements of the standard. The Group will continue to monitor the application of these policies in the light of expected future guidance on accounting for oil and gas activities. The Group applies the successful efforts method of accounting for E&E costs. Exploration and evaluation assets Under the successful efforts method of accounting, all E&E assets is then reclassified as development and production assets. If, however, commercial reserves have not been found, the capitalised costs are charged to expense after conclusion of appraisal activities. Development and production assets Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined in the accounting policy above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised, and the cost of recognising provisions for licence acquisition, exploration and appraisal costs are future restoration and decommissioning. initially capitalised in well, field or specific exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed. The useful lives of the assets are considered to be finite. Exploration and evaluation costs Costs are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as exploration and evaluation assets. Treatment of exploration and evaluation expenditure at the end of appraisal activities Intangible E&E assets relating to each exploration licence/prospect are carried forward, until the existence Impairment of development and production assets An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the carrying value of a development or production asset may exceed its recoverable amount. The carrying value is compared against the expected recoverable amount of the asset, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single income generating unit where the cash flows of each field are inter- dependent. 31 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 32 Sound Oil plc Notes to the Financial Statements continued Acquisitions, asset purchases and disposals Acquisitions of oil and gas properties are accounted for under the purchase method where the transaction meets the definition of a business combination or joint venture. Transactions involving the purchase of an individual field interest, or a group of field interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specific transactions involve the transfer of the field interests directly, or the transfer of an incorporated entity. Accordingly, no goodwill arises, and the consideration is allocated to the assets and liabilities purchased on an appropriate basis. (e) Expenses recognition Expenses are recognised on the accruals basis unless otherwise stated. (f) Property, plant and equipment 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, which is estimated to be four years. (g) Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at its original value, less any accumulated impairment losses subsequently incurred. Goodwill is not amortised. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit or group of cash generating units is less than the carrying amount, an impairment loss is recognised. 32 Income tax (h) Current tax The current tax expense is based on the taxable results for the year, using tax rates enacted or substantively enacted at the Balance Sheet date, including any adjustments in respect of prior years. Amounts are charged or credited to the Income Statement or equity as appropriate. Deferred tax Deferred tax is provided using the Balance Sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable results will be available against which the temporary differences can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. Temporary differences arising from investments in subsidiaries give rise to deferred tax in the Company Balance Sheet only to the extent that it is probable that the temporary difference will reverse in the foreseeable future or the Company does not control the timing of the reversal of that difference. Deferred tax is provided on un-remitted earnings of subsidiaries to the extent that the temporary difference created is expected to reverse in the foreseeable future. Deferred tax is recognised in the Income Statement except when it relates to items recognised directly in the Statement of Changes in Equity in which case it is credited or charged directly to Retained Earnings through the Statement of Changes in Equity. (i) Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at call with banks. Financial instruments (j) Financial assets and financial liabilities are recognised on the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables are initially measured at fair value and are subsequently reassessed at the end of each 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 33 Annual Report 2011 accounting period. Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below. Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Shares issued are held at their fair value. (k) Share based payments The Group issues equity-settled share-based payments to certain employees. The fair value of each option at the date of the grant is estimated using the Black Scholes option-pricing model based upon the option price, the share price at the date of issue, volatility and the life of the option. The estimated fair value of the option is amortised to expense over the options’ vesting period with a corresponding increase to equity. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied. (l) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Group The following standards, amendments to standards and interpretations have been identified as those which may impact the group in the period of initial application. They have not been applied in preparing this financial report. (cid:129) IFRS 7 Amendments to Financial Instruments Disclosures for accounting periods beginning on or (cid:129) IFRS 1 Amendments Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters for accounting periods beginning on or after 1st July 2011 (cid:129) IAS 12 Amendments to Deferred tax: Recovery of Underlying Assets for accounting periods beginning on or after 1st January 2012 (cid:129) IAS 1 Amendment – Presentation of items of other comprehensive income for accounting periods beginning on or after 1st July 2012 (cid:129) IAS 19 Amendment – Employee Benefits for accounting periods beginning on or after 1st January 2013 (cid:129) IAS 27 Separate Financial Statements for accounting periods beginning on or after 1st January 2013 (cid:129) IAS 28 Investments in Associates and Joint Ventures for accounting periods beginning on or after 1st January 2013 (cid:129) IFRS 10 Consolidated Financial Statements for accounting periods beginning on or after 1st January 2013 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) IFRS 11 Joint Arrangements for accounting periods beginning on or after 1st January 2013 IFRS 12 Disclosure of Interests in Other Entities for accounting periods beginning on or after 1st January 2013 IFRS 13 Fair Value Measurement for accounting periods beginning on or after 1st January 2013 IFRS 9 Financial Instruments for accounting periods beginning on or after 1st January 2013 IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine for accounting periods beginning on or after 1st January 2013 The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the financial statements in the year of initial after 1st July 2011 application. 33 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 34 Sound Oil plc Notes to the Financial Statements continued Accounting policies – continued 1 (m) Earnings per share Earnings per share are calculated using the weighted average number of ordinary shares outstanding during the period per IAS 33. Diluted earnings per share are 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 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. (n) 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 embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 2 Segment information The Group’s categorises its operations into two business segments based on exploration & appraisal and development & production. The Group’s exploration & appraisal activities are carried out in two geographic areas being; In Indonesia under a Production Sharing Contracts (“PSC”), Citarum, and in Italy under various licences and permits. The development & production activities are based in Indonesia under the Bangkanai PSC. The Group’s reportable segments are based on internal reports about components of the Group which are regularly reviewed and used by the board of directors, being the Chief Operating Decision Maker ("CODM"), for strategic decision making and resource allocation, in order to allocate resources to the segment and to assess its performance. To date the Group has no development activity which has resulted in production and no turnover and have therefore not provided information on revenue, products or services. Details regarding each of the operations of each reportable segment is included in the following tables. 34 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 35 Annual Report 2011 2 Segment information – continued The segment results for the year ended 31 December 2011 are as follows: Corporate 2011 £'000's Development & production 2011 £'000's Exploration & appraisal 2011 £'000's Sales and other operating revenues Other income/(loss) Exploration costs Impairment of exploration and evaluation assets Administration expenses Operating loss segment result Interest receivable Finance costs Costs of acquiring subsidiaries Loss on Farmout disposals – – (936) – (2,948) (3,884) 44 (439) (516) – – – – – – – – – – – – – (233) (1,236) – (1,469) – – – – Total 2011 £'000's – – (1,168) (1,237) (2,948) (5,353) 44 (439) (516) – Loss for the year before taxation (4,795) – (1,469) (6,264) The segments assets and liabilities at 31 December 2011 are as follows: Capital expenditure Other assets Total liabilities Corporate 2011 £'000's 32 8,461 (6,175) Development & production 2011 £'000's Exploration & appraisal 2011 £'000's 1,246 – – 26,302 – – The segment results for the year ended 31 December 2010 are as follows: Sales and other operating revenues Other income/(loss) Exploration costs Impairment of exploration and evaluation assets Administration expenses Operating loss segment result Interest receivable Finance revenue Costs of acquiring subsidiaries Loss on Farmout disposals Loss for the year before taxation Corporate 2010 £'000's – (58) (426) – (1,502) (1,986) 21 211 – – (1,754) Development & production 2010 £'000's Exploration & appraisal 2010 £'000's – – – – – – – – – – – – – – (4) – (4) – – – (14,210) Total 2011 £'000's 27,580 8,461 (6,175) Total 2010 £'000's – (58) (426) (4) (1,502) (1,990) 21 211 – (14,210) (14,214) (15,968) 35 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 36 Sound Oil plc Notes to the Financial Statements continued 2 Segment information – continued The segments assets and liabilities at 31 December 2010 are as follows: Capital expenditure Other assets Total liabilities Corporate 2010 £'000's 12 8,136 (1,912) Development & production 2010 £'000's Exploration & appraisal 2010 £'000's – – – 11,479 – – The geographical split of non–current assets is as follows: U.K. 2011 £'000's – 11 – – 11 U.K. 2010 £'000's – – – – – Indonesia 2011 £'000's 1,246 6 1,526 9,450 12,228 Indonesia 2010 £'000's – 12 1,525 9,954 11,491 2011 £’000’s 95 15 2,137 1,101 Notes 4 9 5 10 Development and production assets Fixtures, fittings & office equipment Goodwill Exploration and evaluation assets Total Development and production assets Fixtures, fittings & office equipment Goodwill Exploration and evaluation assets Total 3 Operating loss Operating loss is stated after charging: Auditors’ remuneration Depreciation Employee costs Impairment charge 36 Total 2010 £'000's 11,491 8,136 (1,912) Italy 2011 £'000's – 15 2,051 13,275 15,341 Italy 2010 £'000's – – – – – 2010 £’000’s 89 15 1,009 3 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 37 4 Auditors’ remuneration Fees payable to the company’s auditor for the audit of the company’s annual accounts Fees payable to the company’s auditor and its associates for other services: – The audit of the company’s subsidiaries pursuant to legislation – Other services pursuant to legislation – Tax services 5 Employee costs Staff costs, including executive directors Share based payments Wages and salaries Social security costs Total Notes 23 3 Number of employees (including executive directors) at the end of the year Technical and operations Management and administration Total Details of the directors’ emoluments are shown in the Report of Directors Remuneration on page 16. 6 Finance revenue Interest on cash at bank and short–term deposits Total 2011 £’000’s 44 44 Annual Report 2011 2011 £’000’s 2010 £’000’s 74 8 – 13 2011 £’000’s 260 1,696 181 2,137 6 10 16 66 18 – 5 2010 £’000’s 16 883 110 1,009 4 10 14 2010 £’000’s 21 21 37 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 38 Sound Oil plc Notes to the Financial Statements continued 2011 £’000’s Group 2010 £’000’s Group – – – – – – – 2011 £’000’s Group (6,264) 1,660 – (866) (794) – 2011 £’000’s Group – – – – – – – – – 2010 £’000’s Group (15,968) 4,471 (3,979) (273) (219) – 2010 £’000’s Group 26 – 7 Taxation (a) Analysis of the tax charge for the year: Current tax United Kingdom corporation tax (charge)/credit Adjustment to tax expense in respect of prior years Overseas tax Total current tax (charge)/credit Deferred tax Deferred tax income arising in the current year Total deferred tax Total tax (charge)/credit (b) Reconciliation of tax charge: (Loss)/profit before tax Tax (charge)/credit at UK corporation tax rate of 26.5% (2010: 28%) Effects of: Expenses not deductible for tax purposes Temporary differences not recognised Differences in overseas tax rates Total tax (charge)/credit (c) Tax account: Current tax receivable Current tax payable 38 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 39 Annual Report 2011 8 Profit/loss per share The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic profit/(loss) per share is calculated as follows: Loss after tax Weighted average shares in issue Loss per share (basic) 2011 £’000’s (6,264) 2011 million 1,600 2011 Pence (0.39) 2010 £’000’s (15,968) 2010 million 692 2010 Pence (2.31) Diluted loss per share has not been disclosed as inclusion of unexercised options would be anti–dilutive. After the balance sheet date, the Company has issued additional shares, details of which are included in note 25, which will not significantly impact on the weighted average number of shares in issue in future periods. 39 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 40 Sound Oil plc Notes to the Financial Statements continued 9 Property plant and equipment Group Development and production assets £'000's Fixtures fittings and office equipment £'000's Note Cost At 1 January 2011 Exchange adjustments Acquisitions Additions Transfers (1) Disposals At 31 December 2011 Depreciation At 1 January 2011 Exchange adjustments Acquisitions Charge for the year Disposals At 31 December 2011 – – – – 1,246 – 1,246 – – – – – – 3 Net book amount at 31 December 2011 1,246 (1) Transfers represent the reclass of assets from Intangible assets (note 10) 139 (1) 35 31 – – 204 127 (1) 31 15 – 172 32 Total £'000's 139 (1) 35 31 1,246 – 1,450 127 (1) 31 15 – 172 1,278 40 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 41 Annual Report 2011 9 Property plant and equipment – continued Cost At 1 January 2010 Exchange adjustments Additions Disposals At 31 December 2010 Depreciation At 1 January 2010 Exchange adjustments Charge for the year Disposals At 31 December 2010 Net book amount at 31 December 2010 Development and production assets £'000's Fixtures fittings and office equipment £'000's Note – – – – – – – – – – – 204 5 2 (72) 139 172 12 15 (72) 127 12 3 Total £'000's 204 5 2 (72) 139 172 12 15 (72) 127 12 During the 2011 period the accumulated cost of the Group’s investment in the Kerendan field of £1,246,000 was reclassified from exploration and evaluation assets to development and production assets following the signature of a gas sales agreement for the field. The Company has no development and production assets. 41 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 42 Sound Oil plc Notes to the Financial Statements continued 9 Property plant and equipment – continued Company Fixtures, fittings and office equipment £’000’s 9 11 20 9 – 9 11 Fixtures, fittings and office equipment £’000’s 9 9 9 – 9 – Total £’000’s 9 11 20 9 – 9 11 Total £’000’s 9 9 9 – 9 – Cost At 1 January 2011 Additions At 31 December 2011 Depreciation At 1 January 2011 Charge for the year At 31 December 2011 Net book amount at 31 December 2011 Cost At 1 January 2010 At 31 December 2010 Depreciation At 1 January 2010 Charge for the year At 31 December 2010 Net book amount at 31 December 2010 42 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 43 Annual Report 2011 10 Intangible assets Cost At 1 January 2011 Exchange adjustments Acquisitions Additions Transfers (1) Disposals At 31 December 2011 Impairment At 1 January 2011 Exchange adjustments Additions At 31 December 2011 Exploration and evaluation assets £'000's 12,982 (50) 11,361 3,809 (1,246) – 26,856 3,028 3 1,100 4,131 Goodwill £'000's 1,525 1 2,051 – – – 3,577 – – – – Total £'000's 14,507 (49) 13,412 3,809 (1,246) – 30,433 3,028 3 1,100 4,131 Net book amount at 31 December 2011 3,577 22,725 26,302 Cost At 1 January 2010 Exchange adjustments Acquisitions Additions Transfers Disposals At 31 December 2010 Impairment At 1 January 2010 Exchange adjustments Additions At 31 December 2010 Exploration and evaluation assets £'000's 25,123 745 – 1,165 – (14,051) 12,982 2,938 87 3 3,028 Goodwill £'000's 4,797 390 – – – (3,662) 1,525 – – – – Total £'000's 29,920 1,135 – 1,165 – (17,713) 14,507 2,938 87 3 3,028 Net book amount at 31 December 2010 1,525 9,954 11,479 (1) Transfers represent the reclass of assets to PP&E (note 9) 43 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 44 Sound Oil plc Notes to the Financial Statements continued 10 Intangible assets - continued Group Goodwill arises on acquisitions accounted for at fair value and consists largely of the synergies expected from combining acquired operations with those of the Group. The Company has no goodwill. Exploration and evaluation assets Exploration and evaluation assets represent the capitalised cost of payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing. During the period the accumulated carrying amount of the Group’s investment in the Kerendan field of £1,246,000 was reclassified from exploration and evaluation assets to tangible fixed assets following the signature of a gas sales agreement for the field. The Company has no exploration and evaluation assets. Impairment Intangible assets are allocated to the cash generating unit (‘CGU’) identified according to business segment. In assessing whether impairment indications exist in relation to intangible assets the directors have regard to the results of the Group’s exploration and evaluation programme and to the most recent review and valuation of the Group’s assets prepared independently by its geoscience advisers in competent persons’ reports (‘CPRs’). CPRs were last prepared for Italy in October 2011 and for Indonesia in September 2011. The values attributed to the Group’s assets in the most recent CPRs are very significantly in excess of the carrying amounts of the CGUs, including goodwill. The directors do not therefore consider that any impairment indications exist in relation to the CGUs. However, during the year impairment losses of £1.1 million (2010: £3,000) were recognised in relation to exploration and evaluation assets specifically in relation to the Marciano well. Impairment losses are included under “Exploration Costs” in the Consolidated Income Statement. The valuation calculations included in the CPRs are entirely dependent on the availability of finance to fund capital expenditure on the development of exploration and evaluation assets. Should such finance not be available the carrying amounts of the Group’s exploration and evaluation assets are likely to be impaired to their market value in a distressed sale. The methodology to arrive at the values attributed to the Group’s assets in the CPRs was as follows: (cid:129) (cid:129) Net Present Value (‘NPV’) calculations were prepared for proven contingent resources, including all the Italian licences and the Kerendan Field Estimated Monetary Value (‘EMV’) calculations were prepared for prospective resources, including the Bangkanai and Citarum PSCs. EMV includes an assessment of risk for the geological uncertainties of undrilled prospects as indicated in the CPRs on the Group’s assets. Estimates of the NPV of any project are always subject to many factors and wide margins of error. NPV calculations have been prepared over the period of the PSC/expected production profile and duration of the sales contract. The principal assumptions on which the NPV calculations are based are as follows: The Indonesian CPR is based on the assumptions as defined in the plan of development for the Kerendan gas field and a gas price of $4.79/MMBtu, derived from the gas sales agreement for the Kerendan field The Italian CPR is based on an oil price of $109/bbl in 2012 with the Brent future curve for 5 years then $80/bbl real, whilst the gas price forecast assumes 80% of the Brent price on an energy equivalent basis A discount rate of 10% has been used (2010:10%) which the directors believe to be standard industry practice and approximate to the Group’s weighted average cost of capital The NPV calculations are most sensitive to the assumptions for production and operating expenditure. (cid:129) (cid:129) (cid:129) (cid:129) 44 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 45 Annual Report 2011 10 Intangible assets - continued The impairment losses relate to costs of drilling on wells now considered to be non-commercial are detailed in the table below: Indonesia Italy 11 Acquisitions 2011 £’000’s 24 1,076 2010 £’000’s 3 – Acquisition of Consul Oil and Gas Ltd (“Consul”) On 4 January 2011, the Group completed the acquisition of 96% of the issued share capital of Consul, an unquoted company with interests in Italy, for a total consideration of £4.64 million and made an offer to acquire the remaining 4%. The consideration was satisfied by the payment in cash of approximately US$2.19 million (£1.41 million) and the issue of 269,127,983 ordinary shares to the vendors at 1.2p each. In addition the Company purchased an existing loan from RAB to Consul of €1.15 million. On 29 March 2011 the Company acquired a further 2% of the issued share capital of Consul, satisfied by the payment in cash of US$46,667 and the issue of 5,555,555 ordinary shares at 1.2p each. On 22 August 2011, the remaining 2% of shares in Consul were acquired under compulsory purchase powers, satisfied by the payment in cash of US$46,667 and the issue of 5,555,555 ordinary shares at 1.2p each. The fair value of the ordinary shares issued as part of the consideration paid was measured using the closing market price of the Company’s ordinary shares on the acquisition date. The fair value of 96% of the assets of Consul is as follows: Intangible exploration & evaluation costs Tangible fixed assets Current debtors Non-current debtors Cash Current creditors Non-current creditors Deferred tax liabilities Net assets Book value £'000's 3,303 4 244 28 42 (432) (944) – 2,245 Adjustments and/or revaluation £'000's 2,391 – – – – – – (658) 1,733 Fair value to the Company £'000's 5,694 4 244 28 42 (432) (944) (658) 3,978 The directors consider that goodwill of £658,000 will arise on the acquisition, consisting largely of the synergies expected from combining the operations of the Group and Consul. 45 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 46 Sound Oil plc Notes to the Financial Statements continued 11 Acquisitions (continued) Cash flow effect of acquisitions On 4 January 2011, the Group obtained control of the Consul Oil & Gas group by acquiring 96% of its issued share capital. The values of assets acquired and liabilities assumed, relating to that 96%, were as follows: £'000's 3,303 4 244 28 42 (321) (111) (935) (9) 2,245 (42) 2,203 £'000's 4,636 (3,230) 1,406 983 2,389 Exploration and evaluation assets Property, plant and equipment Long term receivables Accounts receivable Cash Accounts payable Accruals Long term creditors - Euro loan Long term provisions less: cash acquired in the Consul group The cash consideration paid to obtain control was: Total paid to Vendors less: share element therein plus: amount to settle Euroloan (in full) Total cash consideration made 46 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 47 Annual Report 2011 11 Acquisitions (continued) Acquisition of Celtique Energie SpA (“Celtique”) On 18 November 2011, the Group completed the acquisition of the issued share capital and voting rights of Celtique, an unquoted company with interests in Italy, for a total consideration of £5,669 million. The consideration was satisfied by the payment in cash of approximately £3,236 million and the issue of 91,998,582 ordinary shares to the vendors at an average price of 2.71p each. The fair value of 100% of the assets of Celtique is as follows: Intangible exploration & evaluation costs Current debtors Cash Current creditors Intercompany payable Deferred tax liabilities Net assets Book value IFRS £'000's 365 125 128 (13) (452) – 153 Adjustments and/or revaluation £'000's 5,065 – – – – (1,393) 3,672 Fair value to the Company £'000's 5,430 125 128 (13) (452) (1,393) 3,825 The directors consider that goodwill of £1,393,000 will arise on the acquisition, consisting largely of the synergies expected from combining the operations of the Group and Celtique. Cash flow effect of acquisitions On 18 November 2011, the Group obtained control of Celtique by acquiring 100% of its issued share capital. The fair values of assets acquired and liabilities assumed, relating to that 100%, were as follows: Exploration and evaluation assets Long term receivables Cash Accounts payable less: cash acquired in Celtique The cash consideration to obtain control was: Total paid to vendors less: share element therein Total cash consideration made £'000's 365 125 128 (13) 605 (128) 477 £'000's 5,669 (2,432) 3,236 Impact on acquiree of amount paid in the statement of comprehensive income The values included in the consolidated income statement since 4th January 2011 contributed by Consul was a £10,000 gain and contributed by Apennine Energy Group was a loss of £2.92 million. Had Apennine Oil & Gas SpA (previously known as Celtique) been consolidated from 1st January 2011 the consolidated income statement would have included a loss of £2.92 million. 47 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 48 Sound Oil plc Notes to the Financial Statements continued 12 Investment in subsidiaries Company At 1 January Advances to Group Companies Write off on disposals Euro loan to Group Companies Acquisition of subsidiaries At 31 December 2011 £’000’s 24,337 11,590 – 965 4,827 41,719 2010 £’000’s 24,833 1,534 (2,030) – – 24,337 The subsidiary undertakings of the Company at 31 December 2011 which are all 100% owned by the Company are: Name Incorporated Principal activity Sound Oil International Limited Sound Oil Asia Limited* Mitra Energia Limited* Mitra Energia Citarum Limited* Mitra Energia Bangkanai Limited* Consul Oil & Gas Limited Apennine Energy SrL* Apennine Oil and Gas SpA* (formerly known as Celtique Energie SpA) British Virgin Islands British Virgin Islands Mauritius Mauritius Mauritius UK Italy Italy Holding company Holding company Holding and services company Exploration company Exploration company Holding Company Exploration company Exploration company *The investments in Mitra Energia Limited, Mitra Energia Citarum Limited, Mitra Energia Bangkanai Limited. Sound Oil Asia Limited, Apennine Energy SrL and Apennine Oil and Gas SpA, held indirectly via Sound Oil International Limited and Consul Oil & Gas Limited through non-current, non-interest bearing loans from Sound Oil plc. Given that Sound Oil plc has no intention to call on the loans in the foreseeable future, the loans are treated as “permanent as equity”. As a result, Sound Oil plc has classified these loans as investments which represent the carrying value of the investment in the Mitra and Consul group of companies. 48 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 49 Annual Report 2011 13 Other debtors Group Indonesian VAT Italian VAT UK VAT Deferred expenditure Other receivables Total Currency analysis US Dollar Euro GBP Sterling Total Company UK VAT recoverable Deferred expenditure Other receivables Total Currency analysis US Dollar GBP Sterling Total 2011 2010 Current £’000’s Non-current £’000’s Current £’000’s Non-current £’000’s – 763 57 – 568 1,388 613 – – – 55 668 – – 29 2,861 50 2,940 591 – – – 30 621 2011 2010 Current £’000’s Non-current £’000’s Current £’000’s Non-current £’000’s 228 1,039 121 1,388 661 – 7 668 26 – 2,914 2,940 617 – 4 621 2011 2010 Current £’000’s Non-current £’000’s Current £’000’s Non-current £’000’s 57 – 64 121 – – 7 7 29 2,861 1 2,891 – – 4 4 2011 2010 Current £’000’s Non-current £’000’s Current £’000’s Non-current £’000’s – 121 121 – 7 7 – 2,891 2,891 – 4 4 49 Indonesian VAT is recoverable on commencement of production and forms part of the overall asset impairment test. Other current receivables are due within thirty days and non-current receivables are due within one to two years. 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 50 Sound Oil plc Notes to the Financial Statements continued 2011 £’000’s 1,230 5,056 6,286 1,119 4,016 1,151 2011 £’000’s 36 5,056 5,092 638 3,303 1,151 2010 £’000’s 870 3,614 4,484 3,773 – 711 2010 £’000’s 717 3,614 4,331 3,620 – 711 14 Cash and cash equivalents Group Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount at 31 December being in US Dollars in Euros in Sterling Company Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount at 31 December being in US Dollars in Euros in Sterling 50 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 51 Annual Report 2011 15 Trade and other payables Group Trade payable Payroll taxes and social security Accruals Other payables Total Currency analysis US Dollar Euro GBP Sterling Total Company Trade payables Payroll taxes and social security Accruals Total Currency analysis US Dollar GBP Sterling Total All current liabilities are due within thirty days and are carried at amortised cost. 2011 Current £’000’s 1,761 50 128 294 2,233 2011 Current £’000’s 270 1,902 285 2,457 2011 Current £’000’s 148 9 128 285 2011 Current £’000’s – 285 285 2010 Current £’000’s 60 32 154 38 284 2010 Current £’000’s 118 – 166 284 2010 Current £’000’s 34 20 112 166 2010 Current £’000’s – 166 166 51 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 52 Sound Oil plc Notes to the Financial Statements continued 16 Deferred tax assets and liabilities 1 January Acquisitions Released on disposals Unrealised foreign exchange (decrease)/increase 31 December 2011 £’000’s 1,525 2,051 – – 3,576 2010 £’000’s 4,797 – (3,662) 249 1,525 The deferred tax liability arose on the tax difference between the carrying value of the exploration and evaluation assets and the tax value of those assets. Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Tax losses 2011 £’000’s 1,637 2010 £’000’s 772 Deferred tax assets have not been recognised in respect of the losses due to uncertainty of utilisation of these losses. 17 Provisions At 1 January 2011 Provisions made during the year Provisions used during the year Unrealised foreign exchange increase At 31 December 2011 Non-current Current Employee post employment benefits £’000’s 103 37 – 1 141 141 – 141 Abandonment £’000’s Total £’000’s – 225 – – 225 – 225 225 103 262 – 1 366 142 224 366 Employee post employment benefits The Group’s Indonesian subsidiary provides employee post employment benefits in accordance with Indonesian law. This provision is measured using a projected unit credit method. The liability for long service and annual leave is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. 52 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 53 Annual Report 2011 Abandonment The provision amount of £225,000 (€268,000) relates to abandonment of the Marciano Well which was classified as non commercial. The costs are likely to be incurred during 2012. There are no provisions in the parent Company. 18 Capital and reserves Group Ordinary shares – 0.1p Issued Company Ordinary shares – 0.1p Issued Number of shares 1,833,199,548 Number of shares 1,833,199,548 2011 £’000s 1,833 2011 £’000s 1,833 Number of shares 692,427,348 Number of shares 692,427,348 Share option schemes Options to subscribe for the Company’s shares were granted to certain executives in 2010 and 2011 (note 23). Reserves Group At 1 January 2011 (Loss) for the year Foreign currency translation Shares issued Acquisitions of non-controlling interests without a change in control Share based payments At 31 December 2011 At 1 January 2010 (Loss) for the year Foreign currency translation Share based payments At 31 December 2010 Foreign currency reserve £’000’s 3,741 – 27 – – – 3,768 3,030 – 711 – 3,741 Share capital £’000’s 692 – – 1,141 – – Share premium £’000’s 35,764 – - 17,107 Accumulated deficit £’000’s (22,482) (6,259) – – – – (125) 260 1,833 52,871 (28,606) 29,866 692 – – – 692 35,764 – – – 35,764 (6,530) (15,968) – 16 (22,482) 32,956 (15,968) 711 16 17,715 53 2010 £’000s 692 2010 £’000s 692 Total £’000’s 17,715 (6,259) 27 18,248 (125) 260 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 54 Sound Oil plc Notes to the Financial Statements continued 18 Capital and reserves - continued The foreign currency reserve represents accumulated exchange differences relating to the translation of net assets of the Group’s foreign operations from their functional currency to the Group’s presentational currency which are recognised directly in other comprehensive income and accumulated in the foreign currency reserve. Company At 1 January 2011 (Loss) for the year Shares issued Share based payments At 31 December 2011 At 1 January 2010 (Loss) for the year Share based payments At 31 December 2010 Share capital £’000’s 692 – 1,141 – 1,833 692 – – 692 Share premium £’000’s Accumulated deficit £’000’s 35,764 – 17,107 – 52,871 35,764 – – 35,764 (4,996) (3,266) – 260 (8,002) (2,008) (3,004) 16 (4,996) Total £’000’s 31,460 (3,266) 18,248 260 46,702 34,448 (3,004) 16 31,460 Share issues On 4 January 2011, the Company placed 311,251,000 new ordinary shares at 1.2p per share, raising approximately £3,735 million and entered into a £10 million SEDA equity placing facility which can be drawn down at the discretion of the Company. On 4 January 2011, the Company issued 269,127,983 new ordinary shares at 1.2p per share, equating to £3,230 million in part consideration to acquire 96% of the Consul Oil & Gas Group. On 11 January 2011, the Company issued 12,500,000 new ordinary shares at 1.2p per share, equating to £0.150 million as compensation to past employees following acquisition of the Consul Oil & Gas Group. On 17 January 2011, the Company placed 230,000,000 new ordinary shares at 1.4p per share, raising approximately £3,220 million. On 28 February 2011, the Company drew down £1.0 million of the SEDA equity placing facility by way of issuing 38,800,485 new ordinary shares at an average of 2.557p per share. On 29 March 2011, the Company issued 5,555,555 new ordinary shares at 1.2p per share, equating to £0.067 million in part consideration to acquire a further 2% of the Consul Oil & Gas Group. On 18 April 2011, the Company drew down £2.8 million of the SEDA equity placing facility by way of issuing 54,337,384 new ordinary shares at an average of 5.153p per share. On 21 April 2011, the Company issued 2,390,000 new ordinary shares at 1.5p per share to cover the exercise of share options issued to various Indonesian employees. These were evaluated at £0.036 million, and options were immediately exercised. 54 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 55 Annual Report 2011 18 Capital and reserves - continued On 22 August 2011, the Company issued 5,555,555 new ordinary shares at 1.2p per share, equating to £0.067 million in part consideration to acquire the final 2% of the Consul Oil & Gas Group. On 9 November 2011, the Company issued 91,998,582 new ordinary shares at an average of 2.71p per share, equating to £2,493 million in part consideration of the purchase price of Celtique Energie SpA. On 17 November 2011, the Company drew down a further £0.35 million of the SEDA equity placing facility by way of issuing 13,461,538 new ordinary shares at 2.6p per share. On 9 December 2011, the Company placed 100,000,000 new ordinary shares at 2p per share and 60,000,000 associated warrants exerciseable at 2p, raising £2 million, with funds managed by Astin Capital Management Limited. On 30 December 2011, the Company granted options on 5,794,118 new ordinary shares at an average of 1.69p per share to various senior employees. These were evaluated at £0.098 million, and were described as immediately tradeable. The proceeds of the various placings and drawdowns will be used to fund the enlarged group’s combined work programme and ongoing costs. 19 Related party disclosures For the year ended 31 December 2011 The financial statements include the financial statements of Sound Oil plc (the parent) and the subsidiaries listed in the following table: Name Sound Oil International Limited Sound Oil Asia Limited Consul Oil and Gas Limited Apennine Energy SrL Apennine Oil & Gas SpA formerly Celtique Energie SpA Mitra Energia Limited Mitra Energia Bangkanai Limited Mitra Energia Citarum Limited Country of incorporation % equity interest 2011 2010 British Virgin Islands British Virgin Islands UK Italy Italy Mauritius Mauritius Mauritius 100 100 100 100 100 100 100 100 100 100 0 0 0 100 100 100 The Group has investments in joint venture undertakings which operate the Bangkanai PSC (5% working interest) and the Citarum PSC (20% working interest) in Indonesia and in two development licences (95% in Sambucheto and 50% in Villa Gigli) and three exploration licences (95% in Monteluro and 50% in Convento and Posta Del Giudice) in Italy. 55 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 56 Sound Oil plc Notes to the Financial Statements continued 19 Related party disclosures - continued Terms and conditions of transactions with related parties There were no sales or purchases to or from related parties (2010: none). There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2011, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2010: none). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which it operates. There were no transactions with other related parties, directors’ loans and other directors’ interests. Key Management There are three key management personnel other than directors of the Company (three in 2010). Details of the remuneration of the Directors are set out in the Report of Directors’ Remuneration (page 16). The tables below sets out details of the emoluments of the Group's key management personnel including directors. Salaries & employee benefits Share based payments Total Note 23 2011 £’000’s 1,062 260 1,322 2010 £’000’s 598 16 614 Directors’ interest in employee share options Share options held by the executive member of the Board of Directors have the following expiry dates and exercise prices: Issue date 2007 2007 2007 2010 2011 Expiry Exercise price pence date 2018 2019 2020 2013 2016 4.38 4.38 4.38 1.50 5.60 Number 2011 – – – – 7,500,000 Number 2010 – – – 1,725,000 – Key management’s interest in employee share options Issue date Expiry Exercise price pence date 2012 2018 2019 2020 2013 2013 2016 2016 2016 4.75 4.38 4.38 4.38 1.50 1.50 2.75 2.18 2.75 2006 2007 2007 2007 2010 2010 2011 2011 2011 56 Number 2011 Number 2010 - – – – – – 5,800,000 3,300,000 1,820,000 - – – – 1,035,000 1,035,000 – – – Number 2007 666,666 666,666 666,666 – – Number 2007 – 416,667 416,667 416,667 – – – – – Number 2006 – – – – – Number 2006 500,000 – – – – – – – – 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 57 Annual Report 2011 20 Financial instruments risk management objectives and policies A financial instrument is defined as any contract that gives rise to a financial asset of one equity and a financial liability or equity instrument of another entity. The Group's financial instruments comprise of trade payables, receivables, cash and short term deposits. The Group has no borrowings. The main purpose of the financial instruments is to finance the Group's operations. The fair value of the financial instruments is their carrying value, with the carrying value amounts included in the Group Balance Sheet with further analysis in note 13 (Other debtors) note 14 (Cash and cash equivalents) and note 15 (Trade and other payables). The main risks arising from the Group's financial instruments are interest rate risk and foreign currency risk. The Board of directors reviews and agrees policies for managing each of these risks which are summarised below: Interest rate risk The Group’s exposure to the risk of changes in market interest rate risks relates primarily to the Group’s deposit accounts and short term debt instruments. The Group’s policy is to manage this exposure by investing in short term low risk bank deposits. Interest rate risk table The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax. There is no impact on the Group’s equity. Increase/ (decrease) (%) Effect on profit before tax £’000’s 2011 Sterling US Dollar Euro Sterling US Dollar Euro 2010 Sterling US Dollar Sterling US Dollar 10 10 10 (10) (10) (10) 10 10 (10) (10) 2 – – (2) – – 1 1 (1) (1) 57 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 58 Sound Oil Notes to the Financial Statements continued 20 Financial instruments risk management objectives and policies - continued Capital management The Group's objective when managing capital is to safeguard the Group's ability to continue as a going concern in order to provide return for shareholders, benefit for other stakeholders and to maintain optimal capital structure and to reduce the cost of capital. Management considers as part of its capital, the financial sources of funding from shareholders and third parties. In order to ensure an appropriate return for shareholder capital invested in the Group, management thoroughly evaluates all material projects and potential acquisitions and has them approved by the Board of Directors where applicable. The Group monitors capital on a short and medium term view. During 2011 the Group's strategy was to operate with no borrowings and to raise capital funding through the issuing of new shares. Management continue to review this policy. The table below illustrates the changes in capital during the year. Borrowings Cash and cash equivalents Net cash excluding borrowings Total capital excluding reserves: Equity share capital Equity share premium Notes 14 18 2011 £’000’s – 6,286 6,286 1,833 52,871 2010 £’000’s – 4,484 4,484 692 35,764 Shareholders equity 29,866 17,715 58 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 59 Annual Report 2011 21 Foreign currency risk As a result of the bulk of the Group’s operations being denominated in Euros and US Dollars, the Group’s balance sheet can be impacted by movements in these exchange rates against GBP. Such movements will result in book gains or losses which are unrealised and will be offset if the currencies involved move in the opposite direction. The sterling cost of the assets being acquired with the Euro or US dollar deposits rises or falls pro rata to the currency movements, so the purchasing power of the respective currency remains the same. The following table demonstrates the sensitivity to a reasonably possible change in the US dollar or euro exchange rates, with all other variables held constant, of the Group’s profit or loss before tax. 2011 2010 Increase/ (decrease) in Euro rate Effect on profit or loss before tax £’000’s Increase/ (decrease) in US dollar rate Effect on profit or loss before tax £’000’s 5% (5%) (692) 763 No exposure to Euro 5% (5%) 5% (5%) (30) 34 (315) 350 Credit risk The Group currently has no sales or customers. The maximum credit exposure at the reporting date of each category of financial assets above is the carrying value as detailed in the relevant notes. The Group’s management considers that the financial assets that are not impaired for each of the reporting dates are of good credit quality. The credit risk is considered negligible because the counterparties are financial institutions with high credit ratings. Liquidity risk The Group and Company have significant liquid assets and are not materially exposed to liquidity risk. All financial liabilities are expected to mature within one year. 59 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 60 Sound Oil Notes to the Financial Statements continued 22 Financial instruments Interest rate risk and currency risk profiles The interest rate risk profile and the currency risk profile of the financial assets of the Group as at 31 December were: Currency 2011 Cash and short term deposits GBP Sterling Euro US$ Total 2010 Cash and short term deposits GBP Sterling US$ Total Floating rate £’000’s Interest-free £’000’s Total Weighted average interest rate £’000’s 1,151 3,303 602 5,056 711 2,903 3,614 – 713 517 1,230 – 870 870 1,151 4,016 1,119 6,286 711 3,773 4,484 0.53% 0.89% 0.15% 0.53% 0.15% US$ cash balances have been converted at the exchange rate on 31 December 2011 of US$1.5456/£1.00 (2010: US$1.5471/£1.00) Euro cash balances have been converted at the exchange rate on 31 December 2011 of Euro 1.1936/£1.00. There were no holdings of Euro in 2010. The floating rate cash and short-term deposits comprise of cash held in interest bearing accounts and deposits placed on the money markets for periods ranging from overnight to three months. Financial instruments exposed to interest rate risk represent floating rate cash assets maturing within 3 months amount to £5,056,000 (2010: £3,614,000). Cash on which no interest is received is £1,230,000 (2010: £870,000) and relates to balances available to meet immediate operating payments and was therefore only held for short periods interest-free. 60 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 61 Annual Report 2011 23 Share based payments The Group has a Long Term Incentive Plan under which share options have been granted to the executive team. The expense recognised for employee services received in the Consolidated Income Statement is as follows: Group Expense arising from equity settled share options Company Expense arising from equity settled share options 2011 £’000’s 260 2011 £’000’s 260 2010 £’000’s 16 2010 £’000’s 16 The fair value of equity-settled share options granted is estimated at the date of grant using a Black Scholes model, taking into account the terms and conditions upon which the options were granted. 2011 Total 2010 Granted Period (years) Price (pence) 9,500,000 1,000,000 13,260,000 1,000,000 3,300,000 28,060,000 7,220,000 5 5 5 5 5 3 5.60 4.95 2.75 2.20 2.175 1.50 The expected life of the options is based on the maximum option period and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that historical volatility is indicative of future trends, which may not necessarily be the actual outcome. No other features of options grant were incorporated into the measurement of fair value. Share Options outstanding at the start of the year Share options granted Share options forfeited Share options expired Share options exercised Share options outstanding at the end of the year 2011 14,070,000 28,060,000 – (2,100,000) (2,390,000) 37,640,000 2010 6,850,000 7,220,000 – – – 14,070,000 61 224047 Sound Oil R&A 2011 pg16-end 01/05/2012 07:50 Page 62 Sound Oil Notes to the Financial Statements continued 24 Commitments and guarantees At 31 December 2011 the Group had capital commitments of £1,889,000 (2010: £1,820,000). These relate to the Citarum PSC obligations in Indonesia. The Company had no capital commitments in 2011 (2010: None). The Company has granted RAB Octane (Master) Fund Limited (“RAB”) the option to put to the Company the entire issued and allotted share capital, namely two ordinary shares, of Sound Oil Bangladesh Limited at any time up to 17 May 2086. If the put option is exercised, the maximum price payable by the Company will be 2,195,222 Ordinary Shares of the Company or, with the consent of both the Company and RAB, US$300,000 in cash. 25 Post balance sheet events Share issues On 6 February 2012, the Company placed 262,587,803 new ordinary shares at 1.5233p per share, raising approximately £4 million, and issued 157,552,682 three year warrants. The proceeds of the above share issues will be used to fund the enlarged group’s combined work programme and ongoing costs. 62 224047 Sound Oil R&A 2011 Cover 01/05/2012 07:48 Page ii Sound Oil plc Sound Oil plc is an independent upstream oil and gas company listed on the AIM market of the London Stock Exchange. Sound Oil plc’s strategy is to achieve significant and sustainable growth in value through an active drill programme and a significant reshaping of its asset portfolio. 1 3 4 6 12 13 14 16 19 20 21 22 23 24 25 26 27 28 29 IBC Highlights Chairman’s Statement Financial Review Technical Review Statement of Proved and Probable Reserves Board of Directors Report of the Directors Report on Directors’ Remuneration Corporate Governance Report Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Income Statement Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements Dealing Information, Financial Calendar and Addresses Dealing Information FT Share Price Index – Telephone 0906 8433711 SEAQ short code – SOU Financial Calendar Announcements Interim – September 2012 Preliminary – May 2013 Addresses Registered Office Sound Oil plc, 55 Gower St, London, WC1E 6HQ Business Address Sound Oil plc, Riverbridge House, Guildford Road, Leatherhead, Surrey, KT22 9AD Website www.soundoil.co.uk Auditors Crowe Clark Whitehill LLP, St Bride’s House, 10 Salisbury Square, London, EC4Y 8EH Solicitors Ronaldsons LLP, 55 Gower St, London, WC1E 6HQ Stockbrokers Investec Bank Plc, 2 Gresham Street, London, EC2V 7QP Nominated Adviser Smith & Williamson Corporate Finance Limited, 25 Moorgate, London, EC2R 6AY Registrars Share Registrars Limited, Suite E, First Floor, 9 Lion and Lamb Yard, Farnham, Surrey, GU9 7LL Perivan Financial Print 224047 224047 Sound Oil R&A 2011 Cover 01/05/2012 07:48 Page iv PLC PLC Sound Oil plc Riverbridge House Guildford Road Leatherhead, Surrey KT22 9AD www.soundoil.co.uk Annual Report 2011
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