Sound Energy Plc Annual Report 2012

Plain-text annual report

ANNUAL REPORT 201 2 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 substantial and sustainable growth in value through an active drill programme and a signiﬁ cant reshaping of its asset portfolio. Sound Oil plc 3 4 6 8 11 12 13 16 19 20 21 22 23 24 25 26 27 29 30 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 IBC Dealing Information, Financial Calendar and Addresses Annual Report 2012 Highlights EXCITING EXPLORATION UPSIDE CONFIRMED AT BADILE (PO VALLEY, ITALY) US$400m NPV10 175 Bscf (P50) prospect with further upside potential 100% working interest THREE OTHER GAME CHANGING PROJECTS SPANNING 2013 TO 2015 Nervesa (100%) – US$57m NPV10 Laura (100%) – US$86m NPV10 Zibido (100%) – US$265m NPV10 HIGH UPSIDE ITALIAN PORTFOLIO ( 18 LICEN CES WITH ONE PENDING APPLICATION) STRONG RECENT PROG RESS First production and revenue from Rapagnano achieved on 15 May 2013 17.5 MMboe (P 5 0) discoveries with NPV10 of US$300m 96 MMboe (P 5 0) exploration portfolio Nervesa rig arrived on site in anticipation of appraisal drilling REORGANISED BOARD AND EXECUTIVE TEAM EUROPEAN AND MEDITERRANEAN STRATEGY FOCUSED ON OPERATED AND ACCRETIVE GROWTH 3 Sound Oil plc Chairman’s Statement It is a pleasure and a privilege to be writing this introduction to the Sound Oil plc 2012 annual report as your new Chairman following the retirement of Dr Gerry Orbell as Chairman and Chief Executive last October. On behalf of the Board and shareholders, I would like to thank Gerry for his contribution to Sound Oil and wish him well for the future. Last year Sound Oil embarked upon an exciting journey, which commenced with the divestment of our non-operated Indonesian assets. This has resulted in the re-focusing of the Company’s strategy toward the European and Mediterranean region and has recently seen ﬁ rst gas from Rapagnano, giving Sound Oil its ﬁ rst revenue since its IPO in 2005. On the organisational side, the year has also been one of signiﬁ cant positive change for the Company with renewed focus on its cost structure, its portfolio of assets and the search for other opportunities in its chosen geography. From a corporate point of view I am very pleased to report that the new Executive Team under CEO James Parsons is driving the business of the Company forward with energy and is focused on meeting our immediate goals and implementing our plan for growth. In all of our activities our prime concern is the health and safety of our employees, contractors and stakeholders and the protection of the environment in which we operate. This approach has resulted in all our 2011 and 2012 activities having been executed without a lost time incident. 2012 The sale of the Company’s Indonesian portfolio for a mixture of cash and deferred consideration has been transformational in reducing our cost exposure. This major strategic move was initiated when it became clear that the operator of the Citarum Production Sharing Contract (“Citarum PSC”) was experiencing serious difﬁ culties in drilling two commitment wells, making substantial unpredictable cost overruns likely, which would have put unacceptable pressure on the Company’s cash resources without delivering positive subsurface results. The divestment was achieved in two phases. On the 18th 4 October, the Company announced the sale of its 20% working interest in the Citarum PSC to the operator Pan Orient Energy (Citarum) PTE Limited in return for the waiving of $2.4m (£1.5m) of the Company’s immediate cash obligation and a possible further consideration of $5m (£3.1m) and $16m (£10m) in cash, contingent on revenues from the ﬁ rst two discoveries on the PSC. The second transaction followed on 12th December when the Company sold its subsidiary Mitra Energia Bangkanai Ltd (“MEB”) to Salamander Energy Plc. MEB’s only asset was a 5% carried interest in the Bangkanai Production Sharing Contract (“Bangkanai PSC”) containing the Kerendan gas ﬁ eld. The total consideration of up to $7.1m (£4.4m) was structured as $4.5m (£2.8m) cash payable immediately, $1.1m (£0.7m) cash payable on the later of ﬁ rst gas from Kerendan or the signature of a new gas sales agreement for the currently unsold Kerendan gas and up to $1.5m (£0.9m) cash payable as a royalty from revenues on any future discovery on the Bangkanai PSC. Our cost exposure was further reduced through the closure of our Indonesian ofﬁ ce. In the middle of the year, with a view to funding the ongoing cash requirements on the Indonesian assets, the Company announced a private placement with Manxdale Holdings Limited in combination with an open offer to existing shareholders. The placement, which involved the Company issuing 774,341,464 new ordinary shares, raised a gross consideration of £5.63m in instalments over seven months to February 2013 at an average Volume Weighted Average Price of 8.073p per share (adjusted for the January 2013 share consolidation). At the end of the drawdown period the open offer was made in the ﬁ rst quarter of 2013, raising a further approximately £50,000. Later in 2012, two asset- speciﬁ c funding arrangements were put in place to support the maturing of our Italian portfolio. The ﬁ rst of these, in August, involved the Milan- based engineering company CSTI Srl (“CSTI”) funding part of the development cost of the Rapagnano gas ﬁ eld. The second, in October 2012, also involved CSTI, this time in funding part of the Nervesa appraisal well cost. These arrangements have signiﬁ cantly reduced the Company’s cash exposure whilst leaving us in full operational control and owning the major proportion of the value of the assets. In addition, on 4th January 2013, the Company executed a ten for one share consolidation. The consolidation is expected to assist in reducing the volatility in our share price and to enable a more consistent valuation of the Company. 2013 As a result of these transactions the Company is now focused ﬁ rmly on growth ﬁ rstly through developing its exciting Italian assets, including the Nervesa and Laura discoveries and the Badile and Zibido exploration prospects, and secondly by seeking to grow both the size and diversity of the portfolio, and thus our value per share, by acquiring companies and assets in the Mediterranean region that meet our strict criteria for operated and accretive growth. To support the Chief Executive, we are actively seeking to expand the Executive Team with the addition of an experienced Business Development Ofﬁ cer and a Chief Financial Ofﬁ cer. Under the excellent leadership of Luca Madeddu, our Managing Director in Italy, we have relocated our Italian ofﬁ ce to Milan to improve our access to the Italian market for skilled oil and gas industry professionals and oilﬁ eld services. Luca has already succeeded in putting a local core team in place all of whom have ﬁ rst-hand experience of operating in the Italian oil and gas industry. In short, the Company is now well positioned with a clear growth strategy, strong ﬁ nancial and operational discipline, some £6.9m cash in the bank and an attractive Italian portfolio with game-changing potential across which we control our own destiny. As I write, 2013 already promises to be a signiﬁ cant year for the Company, having reached the strategic milestone of delivering ﬁ rst gas at the Rapagnano Field so earning the Company’s ﬁ rst revenue since our listing in 2005. The Company is about to begin drilling our ﬁ rst appraisal well on the Nervesa gas discovery. Assuming a successful appraisal well, we will prepare for a second appraisal well and commence development planning to move this ﬂ agship project into production as soon as possible. We are also pressing ahead with plans to appraise Laura, a signiﬁ cant offshore discovery, and with our exciting onshore exploration prospects Badile and Zibido, we are preparing for an ambitious drilling programme in 2014. In closing, I would like to thank the Board and all the Company’s staff for their hard work , commitment and enthusiasm throughout 2012 and to thank our shareholders for their continued support . Andrew Hockey Chairman 29 May 2013 Annual Report 2012 5 Sound Oil plc Financial Review Accounting Standards Cash ﬂ ow/ﬁ nancing The Group has prepared its 2012 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union. During 2012, £6,804,000 net cash proceeds were raised from new equity and £3,913,000 was spent on exploration and development costs. Income Statement Following the disp osal of the Group’s interests in Indonesia, impairments of £1 , 453,000 in Italy resulted in a loss before tax of continuing operations of £4, 80 4,000 compared with £5,551,000 in 2011. This resulted in a net cash inﬂ ow before foreign exchange movements of £1, 0 10,000 (2011: inﬂ ow £2,638,000). The Group’s year end cash balance was £6,909,000 (2011: £6,286,000). At 22 April 2013, Sound Oil had a cash balance of £6 ,900,000. The signiﬁ cant impairment related primarily to the Montemarciano well which was tested and found to have smaller than originally envisaged commercial qua ntities of gas. Administrative expenses incurred as part of continuing operations during the year were £ 3,176,000, an increase from £2,259,000 in 2011. In the year, Sound Oil incurred signiﬁ cant one-off expenditures relating to the exit from Indonesia and the departure of Gerry Orbell. 2013 administrative expenditures are expected to reduce to close to 2011 levels. The loss for the period from discontinued operations of £ 8,934,000 consisted primarily of write-downs relating to the disposal of the Group’s interest in the Citarum PSC in Indonesia, partially offset by the recognition of foreign exchange gains on Sound Oil’s Indonesian investments which had previously been carried in the foreign exchange reserve. The loss on disposal on discontinued operations arose primarily as no value has been recognised in the ﬁ nancial statements in respect of contingent cash consideration of up to $18 ,600,000 in aggregate which may be receivable by the Group in the event of ﬁ rst gas from the Kerendan ﬁ eld and/or future discoveries. The Group continues to have no long term borrowings. Going concern – Forward cash ﬂ ow calculations show that the Group has sufﬁ cient ﬁ nancial resources for the foreseeable future. The Group’s ﬁ nancial 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 revenues from the Rapagnano gas ﬁ eld, onshore Italy, which part funds the cost of the Italian ofﬁ ce. The directors have considered the Group’s cash ﬂ ow forecasts for the period to the end of June 2014. Forward cash ﬂ ow projections show that forecast commitments will be less than the funds available as at 31 December 2012. As a result, the Group has sufﬁ cient cash resources to undertake its work programme over the next twelve months. 6 Annual Report 2012 Balance Sheet Exploration and evaluation expenditure in 2012 was £4,247,000 of which £1,289,000 was in Italy with the balance being incurred in Indonesia prior to the disposal of the Company’s interests in Citarum. Gross disposals of £15,970,000 were incurred during the year as the Group disposed of its interests in the Citarum and Bangkanai PSCs in Indonesia. Of this, £3,055,000 had been impaired in previous years. The carrying value of the Rapagnano and Montemarciano developments were reviewed for transfer to development assets in 2012. The review resulted in a write-down of £1,453,000. Abandonment provisions against both these licences and also Marciano were also reviewed with an increase of £341,000 being booked against the three licences. In 2011, £1,246,000 of Bangkanai expenditure was transferred to development expenditure from exploration and evaluation. This balance was written off in 2012 following the disposal of the Group’s interest in the Bangkanai PSC. Goodwill of £1,52 5,000 and related deferred tax liabilities were also written off during the year following the Indonesian disposals. Shareholders’ equity was reduced by the loss for the year, offset by an increase reﬂ ecting the new equity issued during 2012, resulting in a decrease to £ 21,51 4,000 (2011: £29,866,000). 7 Sound Oil plc Technical Review Sound Oil currently has interests in 18 licences in Italy: 2 production concessions, 8 permits and 8 exclusive permit Fig 1 applications. In addition one concession application is pending on an existing permit. The Company’s interests are held through its wholly-owned Italian subsidiary companies Apennine Energy SpA and Apennine Oil & Gas SpA (Fig. 1). Fig 2 Production Rapagnano Concession ( Sound Oil 100%) The concession, located in Marche Region, central Italy (Fig. 2), was awarded in July 2011 as part of a marginal ﬁ elds development programme subject to Environmental Impact Assessment. It contains the Rapagnano-1 gas discovery made by ENI in 1952 and its associated production facilities. The re -development plan included re-establishing production from a lower shut-in 8 reservoir zone and the re-vamping of surface facilities. In May 2012 the Company submitted a ﬁ eld re-development programme to UNMIG1 and an associated EIA to the Marche regional authorities. The concession was ﬁ nally awarded in November 2012 and a gas sales agreement was signed with the local provider STECA. Fig 3 In January 2013 the Company successfully re-entered the well using coiled tubing, isolated the upper perforated interval (1,418-1,430 m, A2 reservoir) and re-opened the lower perforated interval (1,652.5-1,658.5 m, Sabbie reservoir). The Sabbie reservoir was tested for two three- hour drawdown periods (Fig. 3). The ﬁ rst period on 1/8” choke established a commercial stabilized rate of 9,500 Scmd (0.34 MMscfd) with a ﬂ owing well head pressure of 79.2 Bar (1148 psi). No water was produced during the test. The second period on 3/16” choke conﬁ rmed an increased stabilized rate of 13,600 Scmd (0.48 MMscfd) with a ﬂ owing well head pressure of 44.5 Bar (645 psi). The gas was also conﬁ rmed as dry, with no trace of water from the reservoir. All the rate and pressure data obtained from the ﬂ ow periods were consistent with the Company’s reservoir model for production of 1.3 Bscf from the ﬁ eld over thirteen years. Fig 4 In June 2012 Sound Oil entered into a contract with local oilﬁ eld services company CSTI for part-funding of approximately 50% of the project capital expenditure to include the facilities Annual Report 2012 re-vamping, construction and production commissioning (Fig 4). Work on the surface engineering was started immediately after conclusion of the well operations and ﬁ rst gas was delivered on 15 May 2013 . San Lorenzo Concession (Montemarciano Permit, Sound Oil 100%) The permit is located in Marche Region, central Italy (Fig. 5). Sound Oil 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. Fig 5 The well was drilled in November 2011 to a target depth (“TD”) of 715 m in the Lower Pliocene Cellino sand objective. 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 the perforation of a single zone 571-581 m measured depth (“MD”). During clean- up ﬂ ow 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 ﬂ ow test delivered a ﬁ nal rate of 37,850 Scmd (~1.3 MMscfd) on 5/16” choke. A further re- entry of the well was undertaken in March 2012 in order to conduct a commercial rate test. The well ﬂ owed as planned at a stabilized rate of 8,000 Scmd (0.28 MMscfd) on 8/64” choke with a ﬂ owing tubing head pressure of 54 bar. Following this successful test program an application for a production concession was submitted in May 2012 to UNMIG together with an associated EIA to the Marche regional authorities. Final approvals are expected in 2013. The development is a candidate for possible re-use of redundant Marciano production facilities. Appraisal and Development Nervesa Field, Carita Permit ( Sound Oil 100%) The permit is located in Veneto Region, northeast Italy (Fig.6). The permit contains the Nervesa gas discovery that was drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa- 1dir A) proven gas-bearing in several Miocene sand intervals. One interval, designated Level 9a, was tested in the Nervesa- 1dir A well over the interval 1,822-1,827 mMD and ﬂ owed after acidiﬁ cation at a rate of 97,100 Scmd (~3.3 MMscfd) on ¼” choke. This reservoir zone was put into production and produced 18.2 MMscm (~0.6 Bscf) during 1989-1990. Remaining P50 contingent resources2 for the ﬁ eld have been estimated by Fugro-Robertson3 to be 20.7 Bscf. Fig 6 In May 2012 the Company submitted an application to drill an appraisal well on the ﬁ eld to UNMIG and in July 2012 submitted an EIA to the Treviso provincial authorities, revised for the use of a new generation hydraulic rig with reduced environmental footprint (Fig. 7). The EIA was approved in November 201 2. Subsequently ﬁ nal approvals from the Veneto regional authorities and UNMIG were received in March 2013. The well, designated Sant’Andrea-1, is expected to spud in June 2013. Fig 7 Sant’Andrea-1, will target the crest of the structure in a location approximately 1 km north of the original discovery wells. In this position the well will also encounter additional higher reservoir objectives which are prospective for P50 resources of 9.5 Bscf. Dependent on results the Company will plan to drill additional appraisal wells and/ or ﬁ le an application for a production concession. 9 Sound Oil plc Technical Review (continued) D150 DR-CS ( Sound Oil 100%) The permit is located in the Gulf of Taranto, offshore southern Italy (Fig. 8). It contains the Laura gas discovery, with P50 contingent resources estimated by Fugro Robertson of 30 Bscf. The ﬁ eld was discovered in 1980 by ENI/Agip and is located in 197 m water depth approximately 4 km from the shore. The permit award for this project is pending and expected in 2013. Fig 8 Sound Oil’s strategy is to drill an appraisal well on the discovery. In order to reduce potential drilling, development and operational costs the Company intends to drill the discovery from an onshore location with a long reach deviated well similar to the Wytch Farm oil ﬁ eld development in the English Channel, UK. The company has commenced feasibility studies for this strategy and intends to apply to drill the well immediately on award of the permit, expected in 2Q 2013, in order to drill in 2014. Other Projects An application to drill an appraisal well on the Strombone oil discovery (Torrente Alvo Permit) was submitted to UNMIG and the Basilicata regional authorities in June 2012. Exploration Fig 9 Badile Permit ( Sound Oil 100%) The Badile permit is situated in Lombardy Region, northern Italy (Fig. 8). The principal play is gas, condensate and oil, in deep Triassic dolomites and limestones. The permit is adjacent to the Gaggiano oil ﬁ eld, 30 km southeast from the Villafortuna-Trecate oil and gas ﬁ elds (estimated reserves 275 MMboe) and 40 km southwest of the Malossa gas ﬁ eld (cumulative production 177 Bscf with associated light condensate). 10 Two large prospects have been identiﬁ ed in the permit area, Badile and Zibido. Badile, structurally similar to Malossa, has P50 prospective resources2 estimated by ERC-Equipoise4 to be 175 Bscf in the main Upper Triassic reservoir. In 2011 Apennine purchased and interpreted legacy 3D seismic data over the Badile prospect to deﬁ ne an optimum drilling location. It is the Company’s intention to submit an application to drill a ﬁ rst well on the prospect in 2Q 2013 with a target to drill the well in 2014. Zibido, structurally similar to Gaggiano, has P50 prospective resources2 estimated by Fugro Robertson3 to be 130 Bscf (or 16 MMbo oil case) in the deeper Middle Triassic reservoir. Additional 3D seismic data will be purchased over the Zibido prospect with the aim to deﬁ ne a suitable drilling location and submit a further drilling application by year-end. Notes: 1 UNMIG (Ufﬁ cio Nazionale Minerario per gli Idrocarburi e le Georisorse) the responsible body for petroleum exploration and production activities in Italy, a division of the Ministry of Economic Development Department of Energy. 2 Contingent and prospective resources, consistent with SPE (The Society of Petroleum Engineers) guidelines, are quantiﬁ ed 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 ﬁ gure indicates a 50% chance of ﬁ nding 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 Fugro-Robertson Limited is an independent petroleum consultancy company providing resource and reserve assessments. The ﬁ gures quoted here are taken from their Competent Person’s Reports of July 2010 and October 2011. 4 ERC-Equipoise Limited is an independent petroleum consultancy company providing resource and reserve assessments. The ﬁ gures quoted here are taken from their interpretation report of December 2011. Abbreviations: Bopd: Bscf: MMbo: MMboe: Barrels of oil per day. Billion standard cubic feet of gas. Million barrels of oil. Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil). MMscfd: Million standard cubic feet of gas per day MMscm: Million standard cubic meters of gas. Thousand standard cubic feet of gas. Mscf: Standard cubic feet of gas per day. Scfd: Standard cubic meters of gas per day. Scmd: Annual Report 2012 Statement of Proved and Probable Reserves The Group’s prove d and probable hydrocarbon reserves as at 31 December 201 2 were: As at 31 December 2011 Additions: Rapagnano Field, Italy Disposals: Kerendan ﬁ eld, Indonesia As at 31 December 2012 Abbreviations: Bscf: Billion standard cubic feet of gas. MMbo: Million barrels of oil. Oil (MMbo) 0.070 – (0.070) – Gas (Bscf) 6.685 1.3 (6.685) 1.3 MMboe 1.184 0.217 (1.184) 0.217 MMboe: Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil). 11 Sound Oil plc Board of Directors Andrew Hockey, Chairman Chairman of Exploration and Production Technical Committee Chairman of Health , Safety and Environment Committee Andrew has 30 years technical and managerial experience in the oil and gas industry gained in the UK and internationally with Petroﬁ na, Triton, Monument, Lasmo, Eni and Fairﬁ eld Energy. Andrew holds a BA in Geology from Oxford University and an MSc in Petroleum Geology from Imperial College. James Parsons, Chief Executive James Parsons has 20 years’ experience in the ﬁ elds of strategy, management, ﬁ nance and corporate development in the energy industry. James Parsons was appointed Chief Executive Ofﬁ cer in October 2012. James started his career with the Royal Dutch Shell group in 1994 and spent 12 years with Shell working in Brazil, the Dominican Republic, Scandinavia, Holland and London. Leading up to 2006 (when he left Shell to join Inter Pipeline Fund), James held various positions in Shell’s exploration and production business, latterly as Vice President, Finance, of New Business. James joined Sound Oil initially as Chief Financial Ofﬁ cer in 2011 from the European division of Inter Pipeline Fund, a Toronto-listed resources business, where he held the position of Finance and Corporate Development Director of Inter Pipeline Europe. James is a qualiﬁ ed accountant and has a BA Honours in Business Economics Michael Nobbs, Non-Executive Director Chairman of Remuneration and Nominations Committee Member of Audit Committee Michael Nobbs has acted as a professional Independent Public Company Director across the Oil / Gas and Alternative Energy sectors for the past 10 years. Michael is a founding Director of Sound Oil and has 35 years’ experience in investment banking, with a speciﬁ c focus on project ﬁ nance and mergers and acquisitions. He was managing director and senior credit ofﬁ cer for Citigroup and the group ﬁ nance director for Tishman International Companies, and has held positions in London, New York and Los Angeles. Present and recent Companies served include Caspian Energy, Ithaca Energy, GTL Resources, Plasco Energy, Mart Resources and Illinois River Energy. Michael serves on a variety of Board Committees, including Audit, Nominations, Remuneration, Investment and Special Situations, and has experience across AIM , TSX and TVX listed Companies. In addition, Michael provides ﬁ nancial advisory services to private equity funds. He is a graduate of Trinity College, USA. Tony Heath, Non-Executive Director Chairman of Audit Committee Member of Remuneration and Nominations Committee Tony Heath has over 30 years ﬁ nancial and general management experience in the oil and gas industry across a variety of roles, specialising in oil and gas exploration. 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 ﬁ nancial information and control of the international oil group covering operations in thirty-ﬁ ve 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. 12 Report of the Directors The directors submit their report and the audited accounts for the year ended 31 December 201 2. Results and dividends The Group’s loss after tax for the year amounted to £13, 738,000 (2011 loss: £6,264,000). 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- ﬁ nancial 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 ﬁ nancial 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 classiﬁ ed into four main categories: operational, commercial, regulatory and ﬁ nancial. 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. Annual Report 2012 Share capital At the end of the year the number of shares in issue was 2,870,128,815. The authority given to the directors to allot shares at the 2012 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 Meeting to give to the directors authority for one year to allot shares for cash as if statutory pre-emption rights 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 10% of the issued share capital. Directors Directors of Sound Oil plc holding ofﬁ ce during the year were: lham Habibie (resigned 12 December 2012) Tony Heath Andrew Hockey Michael Nobbs Gerry Orbell (resigned 10 October 2012) James Parsons (appointed 10 October 2012) Substantial Shareholders At 30 April 2013 the Company had received notiﬁ cation of the following interests in excess of 3% of the Company’s issued ordinary shares: Notiﬁ ed number of voting rights Notiﬁ ed % of voting rights HSDL Nominees Limited 54,187,280 18.84% TD Direct Investing Nominees (Europe) Limited Barclayshare Nominees Limited Investor Nominees Limited L R Nominees Limited HSBC Client Holdings Nominee (UK) Limited BBHISL Nominees Limited 45,690,499 38,146,202 20,377,358 17,473,814 16,614,397 8,650,000 15.89% 13.26% 7.08% 6.08% 5.78% 3.01% 13 Sound Oil plc Report of the Directors (continued) Directors’ interests The beneﬁ cial interests of the directors and their immediate families in the ordinary share capital of the company are shown below: Name Michael Nobbs Tony Heath James Parsons And rew Hockey 31 December 201 2 Date of this report 252,954 212,758 199,537 12,500 252,954 212,758 199,537 12,500 creditor days in relation to trade creditors outstanding at the period end were 30 days (2011: 30 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. 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 1 7. 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 conﬁ rms 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 conﬁ rmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Directors’ interests in share options are shown in the Report on Directors Remuneration on page 1 8. Financial risk management objectives and policies The Group’s principal ﬁ nancial instruments comprise cash and short term deposits. The main purpose of these ﬁ nancial instruments is to ﬁ nance the Group’s operations. In addition the Group has various ﬁ nancial liabilities in the form of short term, non interest bearing sundry payables. The main risks arising from the Group’s ﬁ nancial 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 ﬂ oating 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 6. 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 2012 the number of 14 Annual Report 2012 Health and Safety The Board of Sound Oil plc considers the health and safety of its employees, contractors and all stakeholders to be paramount and is determined to protect the environment in which it works. In 2011 Sound Oil convened a Board Committee dedicated to ensuring the application of our HSE policies across the company. This Committee has continued to work through 2012. The table below sets out our operational HSE performance for 201 1 and 2012, showing us continuing to execute our operations without a Lost Time Incident occurring. We are pleased with this performance and look forward to maintaining these standards through 2013. 2012 Lost time Incidents* Operations Type Site Construction Drilling Well Testing Facilities Construction Production Operations Totals Operations (Hours) – – 133 24 – 157 (Number) – – – – – – Operations (Hours) (Hours) – – – – – – 179 599 356 – – 1,1 34 2011 Lost time Incidents* (Number) (Hours) – – – – – – – – – – – – * Lost Time Incident: any work related injury or illness which prevents that person from doing any work the day after the accident (as deﬁ ned by the International Association of Oil and Gas Producers Glossary of HSE Terms,1999) Exploration and Production Technical Committee During 2012 a board level Exploration and Production Technical Committee (“EPTC”) was created to provide subsurface, technical, and operational oversight of and support to the Company’s executive as Sound Oil moves its existing asset base from exploration, appraisal and development to ﬁ rst production as an active operator. The EPTC is also routinely involved in the technical, geological and operational screening of growth opportunities. The CEO attends all EPTC meetings along with other Executive Team members who are invited from time to time depending on the requirement for specialist input. The EPTC has formal monthly meetings which are minuted and has access to an annual budget for use in securing relevant professional assistance. The CEO makes recommendations to the Board on all relevant matters through the EPTC which is headed by the Chairman of the Board, and may include up to two further appropriately qualiﬁ ed Board level members or consultant professionals. By order of the Board Stephen Ronaldson Company Secretary 29 May 2013 15 Sound Oil plc Report on Directors Remuneration Compliance The remuneration of all executive directors and the Executive Team is determined by the Remuneration and Nominations Committee (the ‘Committee’) and ratiﬁ ed by the Board. The Committee is composed entirely of non-executive directors, and comprises Mr Michael Nobbs, who chairs the Committee, and Tony Heath. None of the executive directors of the Company is involved in determining his own remuneration. 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 remuneration package. The base salaries of the executive team are currently positioned between the median and the upper quartile. While salary is reviewed by reference to market conditions, the performance of the Company and the performance of the individual, the Committee would not regard this element of remuneration as directly performance related. Bonuses The performance of the Company and the Executives over the year is taken into consideration when assessing any annual cash bonus. Both Corporate and Individual key performance indicators (KPIs) are set at the beginning of each year’s budget process. Bonuses may be awarded up to a maximum of 50% and 100% of base salary depending on the seniority of the employee and following a review of corporate and individual performance against the KPIs. 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) (cid:129) (cid:129) (cid:129) James Parsons has a contract of employment with a notice period for termination of 6 months. Non-executive directors have letters of appointment with a notice period for termination of 2-3 months. The Company has granted an indemnity to all its directors under which the Company will, to the 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, James Parsons and each of the non-executive directors has the option to give notice and receive a lump sum equivalent to 12 months salary. The Committee has the authority to seek independent advice as required. The Committee consults with the executive team as required during the year. Remuneration approach A Comprehensive Compensation Framework was put in place in 2011. The Company’s remuneration policy is to provide remuneration packages which ensure that directors and senior management are fairly and responsibly rewarded for their contributions. The Committee endorses the principle of mitigation of damages on early termination of a service contract. It is the Committee’s current intention to continue with the above remuneration approach for 201 3 and 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 maybe awarded annually. Remuneration structure The executive team’s remuneration is basic salary with possible share options and bonuses awarded dependent on individual and company performance. A contributory pension scheme, compliant with UK legislation, was established in 2012 for UK employees. Base salary Base salary is reviewed each year against other comparable companies in the oil sector and general market data on 16 Summary of actual remuneration of directors 2011 2012 Contract ual Performance Performance Severance Payment Award Award Salary Executive directors James Parsons (ii) Gerry Orbell (i) Non-executive Directors and Chairman Andrew Hockey (iii) Michael Nobbs Tony Heath Ilham Habibie (iv) Total for all directors 52 20 0 40 31 31 29 383 – 75 – – – – 75 – – – – – – – – 221 – – – – 221 Annual Report 2012 Total 2011 52 496 40 31 31 29 679 – 486 19 30 9 30 574 (i) Left the Company on 11 October 2012. (ii) From 1 0 October 2012 in role as Chief Executive Ofﬁ cer (annual salary as Chief Executive Ofﬁ cer is £225,000 with a 4% pension contribution). (iii) Non-executive director from 1 January 2012 to 10 October 2012 and Chairman from 11 October 2012 (annual salary as Chairman is £ 50,000) plus a further £20,000 as Chairman of Exploration and Production Technical Committee. (iv) Left the Company on 12 December 2012. 17 Sound Oil plc Report on Directors Remuneration (continued) Share Options At 31 December 2012 the Directors held options over the Ordinary Shares of the Company as follows: Date of Grant Exercisable Acquisition price Options held at Options held at Dates per share (pence) 1 January 2012 31 December 2012 J. Parsons 5.09.2011 05.09.2012-04.09.2016 5.09.2011 05.09.2013-04.09.2016 5.09.2011 05.09.2014-04.09.2016 1.03.2012 01.03.2013-28.02.2018 1.03.2012 01.03.2014-28.02.2018 1.03.2012 01.03.2015-28.02.2018 2 6.10.2012 26.10.2012-25.10.2016 2 6.10.2012 26.10.2013-25.10.2016 2 6.10.2012 26.10.2014-25.10.2016 J A.Heath 28.02.2007 28.02.2008-28.02.2017 28.02.2007 28.02.2009-28.02.2017 28.02.2007 28.02.2010-28.02.2017 27.05.2010 27.05.2010-26.05.2013 18.04.2011 01.03.2011-29.02.2016 29.09.2011 29.09.2011-28.09.2016 A.Hockey 24.05.2011 01.04.2011-31.03.2016 26.10.2012 26.10.2012-25.10.2016 26.10.2012 26.10.2013-25.10.2016 26.10.2012 26.10.2014-25.10.2016 M.Nobbs 18.04.2011 28.03.2011-27.03.2016 21. 75 21. 75 21. 75 25. 00 2 5.0 0 25. 00 16.50 16.50 16.50 43. 75 43. 75 43. 75 15. 00 27. 50 22. 00 49. 50 16. 50 16. 50 16. 50 56. 00 1 10,0 00 1 10,0 00 1 10,0 00 – – – – – – 33 ,333 33 ,333 33 ,334 1 03,5 00 2 00,0 00 1 00,0 00 1 00,0 00 – – – 1 00,0 00 1 10,0 00 1 10,0 00 1 10,0 00 1 50,0 00 1 50,0 00 1 50,0 00 333,333 333,333 333,33 4 33,333 33,333 33,334 1 03,5 00 2 00,0 00 1 00,0 00 1 00,0 00 1 00,0 00 1 00,0 00 1 00,0 00 1 00,0 00 The granting of share options under the Long Term Incentive Plan (LTIP) is designed to align Executive remuneration with the long-term interest of shareholders. Only Key Personnel, whom the Group wishes to retain over the long term, are invited to join the LTIP. The exercise price of any share options awarded is always set at signiﬁ cantly above the then current market price in order to ensure that management are only rewarded for strong increases in total shareholder value over an extended period of time. The current option coverage is relatively limited (some 1.7% of issued share capital). Over the long term the Board wish to move towards the 10% approved cap. 18 Corporate Governance Report The Board recognises the importance of sound corporate governance and the guidelines set out in the UK Corporate Governance Code (the “Code”). Companies on the AIM market of the London Stock Exchange (“AIM”) are not required to comply with the Code, and due to its size, the Company is not in full compliance. However, the Company intends to comply so far as is practicable and appropriate. In accordance with the Code no director has an employment contract of more than one year. The Board is responsible for overall strategy, acquisition policy, major capital expenditure projects, corporate overhead costs and signiﬁ cant ﬁ nancing matters. No one individual has unfettered powers of decision. The roles of Chairman and Chief Executive Ofﬁ cer were split during the year in accordance with best practice. Consequently, the Group now has a Chairman, a Chief Executive Ofﬁ cer and two non-Executive directors. 1 5 board meetings were held during the year, all of which were attended by all directors. The Board has an Audit Committee comprising t wo of the non-executive directors. Its role is to monitor the integrity of the Company’s ﬁ nancial statements and other formal announcements relating to the Company’s ﬁ nancial performance. Its role includes reviewing: (cid:129) (cid:129) (cid:129) the effectiveness of the risk management and internal control systems including the result of reviews of the system and management’s response to review ﬁ ndings. the appropriateness of the Company’s relationship with the external auditors and the objectivity of the audit process. the enforcement of the Company’s code of conduct and the adequacy and security of the whistleblowing procedure. T he Committee met twice during 2012. Annual Report 2012 The Board has established levels of authorisation of ﬁ nancial 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 ﬁ nancial 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 identiﬁ es and reviews the key areas of business risk facing the Group. There is close, day-to-day involvement by the executive director in all of the Group’s activities. This includes the comprehensive review of both management and technical reports, the monitoring of foreign exchange and interest- rate ﬂ uctuations, government and ﬁ scal-policy issues and cash-control procedures. In this way, the key-risk areas can be monitored effectively and specialist expertise applied in a timely and productive manner. 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 ﬁ nancial year and up to the date that the ﬁ nancial statements were signed. The Company has less than twenty employees and the directors do not believe the Company is sufﬁ ciently 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. 19 Sound Oil plc Statement of Directors’ Responsibilities The directors are responsible for preparing the Directors’ Report and the ﬁ nancial statements in accordance with applicable law and regulations. Company law requires the directors to prepare ﬁ nancial statements for each ﬁ nancial year. Under that law the directors have elected to prepare the ﬁ nancial statements in accordance with International Financial Reporting Standards (IFRSs’) as adopted by the European Union and applicable law. Under company law the directors must not approve the ﬁ nancial statements unless they are satisﬁ ed that they give a true and fair view of the state of affairs of the company and the group and of the proﬁ t or loss of the group for that period. In preparing these ﬁ nancial statements, the directors are required to: (cid:129) (cid:129) select suitable accounting policies and then apply them consistently; make judgments and accounting estimates that are reasonable and prudent; (cid:129) (cid:129) state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the ﬁ nancial statements; prepare the ﬁ nancial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁ nancial position of the company and enable them to ensure that the ﬁ nancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are further responsible for ensuring that the Report of the Directors and other information included in the Annual Report and Financial Statements is prepared in accordance with applicable law in the United Kingdom. 20 Independent Auditor’s Report to the members of Sound Oil plc We have audited the ﬁ nancial statements of Sound Oil plc for the year ended 31 December 201 2 which comprise Consolidated Income Statement, Consolidated and Company Balance Sheets, Consolidated and Company Statements of Changes in Equity, the Consolidated and Company Cash Flow Statements and the related notes. The ﬁ nancial 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 ﬁ nancial 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 ﬁ nancial statements and for being satisﬁ ed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁ nancial 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 ﬁ nancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁ nancial statements sufﬁ cient to give reasonable assurance that the ﬁ nancial 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 signiﬁ cant accounting estimates made by the directors; and the overall presentation of the ﬁ nancial statements. In addition, we read all the ﬁ nancial and non-ﬁ nancial information in the Directors’ Report, the Chairman’s statement, the ﬁ nancial 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 ﬁ nancial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Annual Report 2012 Opinion on ﬁ nancial statements In our opinion: (cid:129) the ﬁ nancial 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 201 2 and of the Group’s loss for the year then ended; the Group ﬁ nancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company ﬁ nancial 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 ﬁ nancial 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 ﬁ nancial year for which the ﬁ nancial statements are prepared is consistent with the ﬁ nancial 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 ﬁ nancial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration speciﬁ ed by law are not made; or we have not received all the information and explanations we require for our audit. (cid:129) (cid:129) (cid:129) 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 29 May 201 3 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 ﬁ nancial statements since they were originally presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁ nancial statements may differ from legislation in other jurisdictions. 21 Sound Oil plc Consolidated Income Statement for the year ended 31 December 2012 Exploration and development costs Gross loss Administrative expenses Group trading loss from continuing operations Finance revenue Foreign exchange (loss)/gain Expense incurred in acquiring subsidiaries External interest costs Loss before income tax Income tax Loss for the period attributable to continuing operations Loss on disposal from discontinued operations Loss for the period attributable to owners of the parent Other comprehensive income: Foreign currency translation gain Total comprehensive income for the year Attributable to: Owners of the company Loss per share (basic) from continuing operations Loss per share (basic) from discontinued operations Notes 3 6 7 8 Notes 9 9 2012 £’000 s (1,455) (1,455) (3,176) (4,631) 11 (174) – (1 0) (4,804) – (4,804) ( 8,934) (13,738) 427 ( 13,311) ( 13,311) 2012 Pence (0.20) (0. 37) 2011 £’000 s restated (2,381) (2,381) (2,259) (4,640) 44 (439) (516) – (5,551) – (5,551) (713) (6,264) 27 (6,237) (6,23 7) 2011 Pence (0.35) (0.04) 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 £ 28, 647,000 (2011: £3,266,000). 22 Annual Report 2012 Consolidated Balance Sheet as at 31 December 2012 Group Non-current assets Property, plant and equipment Intangible assets Other debtors Current assets Other debtors Prepayments Cash and short term deposits Total assets Current liabilities Trade and other payables Loans repayable in under one year 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 Accumulated deﬁ cit F oreign currency reserve Total equity Approved by the Board on 29 May 2013 J Parsons Director A H ockey Director Notes 10 1 1 1 3 1 3 1 4 1 5 1 6 1 7 1 8 2012 £’000 s 853 14,546 – 15,399 2,774 38 6,909 9,721 25,120 719 82 801 2,125 680 2,805 3,606 21,514 63,083 ( 42,273) 704 21,514 The accounting policies on pages 30 to 35 and notes on pages 35 to 60 form part of these ﬁ nancial statements . 2011 £’000 s 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 (28,606) 3,768 29,866 23 Sound Oil plc Company Balance Sheet as at 31 December 2012 Company number: 05344804 Company Non-current assets Property, plant and equipment Investments in subsidiaries Other debtors Current assets Other debtors Prepayments Cash and short term deposits Total assets Current liabilities Trade and other payables Net assets Capital and reserves attributable to equity holders of the company Issued equity share capital and share premium Accumulated deﬁ cit Total equity Approved by the Board on 29 May 2013 J Parsons Director A H ockey Director Notes 10 1 2 13 1 3 1 4 1 5 1 8 2012 £’000 s 7 22,880 – 22,887 1,698 38 2,141 3,877 26,764 259 26,505 63, 083 ( 36, 578 ) 26,505 2011 £’000 s 11 41,719 7 41,737 121 37 5,092 5,250 46,987 285 46,702 54,704 (8,002) 46,702 The accounting policies on pages 30 to 35 and notes on pages 35 to 60 form part of these ﬁ nancial statements . 24 Annual Report 2012 Consolidated Statement of Changes in Equity for the year ended 31 December 2012 Group Share capital £’000 s Share Accumulated deﬁ cit £’000 s premium £’000 s Notes Foreign currency reserve £’000 s Total equity £’000 s At 1 January 2012 1,833 52,871 (28,606) 3,768 29,866 Total loss for the period excluding exchange gain recycled to the income statement Transfer from foreign currency reserve on disposal Other comprehensive gain/(loss) Total comprehensive income/(loss) Issue of share capital Transaction costs Share based payments At 31 December 2012 – – – – – – – 1,037 – – – 8,589 (1,24 7) – 2 3 ( 17,229) 3,491 – (13,738) – – 71 – (3,491) 427 (3,064) – – – ( 17,229) – 427 (16,802) 9,626 (1,24 7) 71 2,870 60,21 3 (42,273) 704 21,51 4 Share capital £’000 s Share Accumulated deﬁ cit £’000 s premium £’000 s Note Foreign currency reserve £’000 s Non controlling interest £’000 s At 1 January 2011 Total loss for the year Other 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 692 35,764 (22,482) 3,741 – – – 1,141 – – – – – – – 18,104 (997) – – – (6,259) – (6,259) – – 260 – (125) – 27 27 – – – – – 2 3 Total equity £’000 s 17,715 (6,264) 27 (6,237) 19,245 (997) 260 – (5) – (5) – – – 94 94 (89) (214) At 31 December 2011 1,833 52,871 (28,606) 3,768 – 29,866 25 Sound Oil plc Company Statement of Changes in Equity for the year ended 31 December 2012 Company At 1 January 2012 (Loss) for the year Shares issued Share based payments At 31 December 2012 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 Share capital £’000 s Share Accumulated deﬁ cit £’000 s premium £’000 s Total equity £’000 s Notes 1,833 52,871 (8,002) 46,702 – 1,037 – – 7,34 2 – (28,64 7) – 71 (28,64 7) 8,37 9 71 2 3 2,870 60,21 3 (36,57 8) 26,505 Share capital £’000 s Share Accumulated deﬁ cit £’000 s premium £’000 s Total equity £’000 s Notes 692 35,764 (4,996) 31,460 – – – 1,141 – – – – – 18,104 (997) – (3,266) – (3,266) – – 260 (3,266) – (3,266) 19,245 (997) 260 1,833 52,871 (8,002) 46,702 2 3 26 Annual Report 2012 Consolidated Cash Flow Statement for the year ended 31 December 2012 Cash ﬂ ow from operating activities Cash ﬂ ow from operations Interest received Net cash ﬂ ow used in operating activities Cash ﬂ ow from investing activities Capital expenditure and disposals Exploration expenditure Payment in escrow – acquisition of subsidiaries Expense in acquiring subsidiaries Acquisition of subsidiaries Net cash inﬂ ow on disposal of subsidiary Net cash ﬂ ow used in investing activities Net proceeds from equity issues Net cash ﬂ ow from ﬁ nancing activities Notes 6 10 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 1 4 2012 £’000 s ( 4,327) 11 ( 4,316) (80) (3,913) – – – 2,515 ( 1,478) 6,804 6,804 1,010 (387) 6,286 6,909 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 27 Sound Oil plc Notes to cash ﬂ ow Cash ﬂ ow from operations reconciliation Proﬁ t/(loss) after tax Finance revenue 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 Increase/(decrease) in accruals and short term creditors Depreciation Share based payments charge Increase in short term debtors Reduction in long term debtors Reduction in trade and other payables Decrease in long term provisions Proﬁ t on disposal of subsidiaries Cash ﬂ ow from operations Cash ﬂ ow from discontinued operations Cashﬂ ow from investing activities Cashﬂ ow from operating activities Total cash outﬂ ow from discontinued operations Notes 6 3 2 3 2012 £’000 s (13, 738) (11) – – – – 13,538 – 24 71 393 668 (1,432) (20) (3,820) (4,327) 2012 £’000 s (2,184) (805) (2,989) 2011 £’000 s (6,264) (44) 98 36 516 170 1,236 1,668 11 260 (945) (12) – 261 – (3,009) 2011 £’000 s (1,248) (551) (1,799) 28 Company Cash Flow Statement for the year ended 31 December 2012 Cash ﬂ ow from operating activities Cash ﬂ ow from operations Interest received Net cash ﬂ ow used in operating 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 Advances made to subsidiary undertakings Net cash ﬂ ow used in investing activities Cash ﬂ ow from ﬁ nancing activities Proceeds from equity issues Net cash ﬂ ow from ﬁ nancing activities Notes 6 10 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Net foreign exchange differences Cash and cash equivalents at 31 December 1 4 Notes to cash ﬂ ow Cash ﬂ ow from operations reconciliation Proﬁ t/(loss) after tax Finance revenue Cost of acquiring subsidiaries Payroll bonuses paid in shares Share options granted and taken up immediately Share based payments Intercompany loans written off (including realised exchange gain on disposals) (Decrease)/ increase in accruals and short term creditors Decrease/(increase) in other non-current assets Decrease/(increase) in short term debtors Depreciation Cash ﬂ ow from operations Notes 2 3 Annual Report 2012 2012 £’000 s (2,453) 11 (2,442) (2) – – – – – (7,317) (7,319) 6,804 6,804 (2,95 7) 5,092 6 2,141 2012 £’000 s (28, 646) (11) – – – 71 26,156 (26) (3) – 6 (2,453) 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 4,331 (443) 5,092 2011 £’000 s (3,266) (43) 516 98 36 260 – 224 (3) 720 – (1,458) 29 Sound Oil plc 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 ﬁ nancial statements of the Group and its parent have been prepared in accordance with: (1) International Financial Reporting Standards (IFRS) as 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 ﬁ nancial statements have been prepared under the historical cost convention, except to the extent that the following policies require fair value adjustments. The Group and its parent company’s ﬁ nancial statements are presented in sterling (£) and all values are rounded to the nearest thousand (£’000) except when otherwise indicated. The principal accounting policies set out below have been consistently applied to all ﬁ nancial reporting periods presented in these consolidated ﬁ nancial statements and by all Group entities, unless otherwise stated. All amounts classiﬁ ed as current are expected to be settled/recovered in less than 12 months unless otherwise stated in the notes to these ﬁ nancial statements. The Group and its parent company’s ﬁ nancial statements for the year ended 31 December 201 2 were authorised for issue by the board of directors on 2 9 May 2013. The ﬁ nancial position of the Group, its cash ﬂ ows and available debt facilities are described in the Financial Review above. As at 31 December 201 2 the Group had £6. 9 million of available cash. Based on the current management plan, management believe that the Group will remain a going concern for the next 12 months from the date of the authorisation of the ﬁ nancial statements on the basis that forecast expenditure (12 months through 30 May 201 4) will be less than the funds available as at 31 December 201 2 Use of estimates and key sources of estimation uncertainty The preparation of ﬁ nancial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates. The key sources of estimation uncertainty that ha ve a signiﬁ cant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are the impairment of intangible exploration and evaluation (E&E), investments and goodwill and the estimation of share based payment costs. 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 amount. As recoverable amounts are determined based upon risked potential, or where relevant, discovered oil and gas reserves, this involves estimations and the selection of a suitable 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. In determining the treatment of E&E assets and investments the directors are required to make estimates and assumptions as to future events and circumstances. There are uncertainties inherent in making such assumptions, especially with regard to oil and gas reserves and the life of, and title to, an asset; recovery rates; production costs; commodity prices and exchange rates. Assumptions that are valid at the time of estimation may change signiﬁ cantly as new information becomes available and changes in these assumptions may alter the economic status of an E&E asset and result in resources or reserves being restated. The estimation of recoverable amounts, based on risked potential and the application of value in use calculations, are dependent upon ﬁ nance 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 30 Annual Report 2012 are undertaken, management estimates the expected future cash-ﬂ ows from the asset and chooses a suitable discount rate in order to calculate the present value of those cash-ﬂ ows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in the treatment of E&E assets above. Further details are given in note 1 1. 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 1 9). (b) Basis of consolidation The Group ﬁ nancial 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 signiﬁ cant inﬂ uence 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 ﬁ nancial and operating policies. Such power, generally but not exclusively, accompanies a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, until the date that control ceases. The Group uses the purchase method of accounting for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. 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 classiﬁ ed as jointly controlled assets and consequently, these ﬁ nancial statements reﬂ ect only the Group’s proportionate interest in such activities. Associates Entities, other than subsidiary undertakings or joint arrangements, in which the Group has a participating interest and over whose operating and ﬁ nancial policies the Group exercises a signiﬁ cant inﬂ uence are treated as associates. In the Group’s ﬁ nancial statements associates are accounted for using the equity method. Separate ﬁ nancial statements Investments in subsidiaries, joint ventures and associates are recorded at cost, subject to impairment testing in the Group’s ﬁ nancial statements. (c) Foreign currency translation The functional currency of the Company is pound sterling. 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. The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the year. The resulting exchange differences are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. (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 speciﬁ c requirements of the standard. 31 Sound Oil plc Notes to the Financial Statements (continued) 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 licence acquisition, exploration and appraisal costs are initially capitalised in well, ﬁ eld or speciﬁ c 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 ﬁ nite. 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 (or otherwise) of commercial reserves has been determined subject to certain limitations including review for indications of impairment. If commercial reserves have been discovered and development has been approved, the carrying value, after any impairment loss, of the relevant E&E assets is then reclassiﬁ ed 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 ﬁ eld-by-ﬁ eld basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in ﬁ nding 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, ﬁ nance costs capitalised, and the cost of recognising provisions for future restoration and decommissioning. 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 with the expected recoverable amount of the asset, generally by reference to the present value of the future net cash ﬂ ows expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the ﬁ eld, except that a number of ﬁ eld interests may be grouped as a single income generating unit where the cash ﬂ ows of each ﬁ eld are inter-dependent. Acquisitions, asset purchases and disposals Acquisitions of oil and gas properties are accounted for under the purchase method where the transaction meets the deﬁ nition of a business combination or joint venture. Transactions involving the purchase of an individual ﬁ eld interest, or a group of ﬁ eld interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the speciﬁ c transactions involve the transfer of the ﬁ eld 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, ﬁ ttings and equipment are recorded at cost as tangible assets. 32 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 identiﬁ able 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. 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 ﬁ nancial 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. Annual Report 2012 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. (j) Financial instruments Financial assets and ﬁ nancial 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 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 insigniﬁ cant risk of changes in value. Financial liabilities and equity instruments issued by the Group are classiﬁ ed according to the substance of the contractual arrangements entered into and the deﬁ nitions of a ﬁ nancial 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 speciﬁ c ﬁ nancial 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. 33 Sound Oil plc Notes to the Financial Statements (continued) • • • • • • • • • IAS 27 Separate Financial Statements for accounting periods beginning on or after 1 January 2013 IAS 28 Investments in Associates and Joint Ventures for accounting periods beginning on or after 1 January 2013 IFRS 10 Consolidated Financial Statements for accounting periods beginning on or after 1 January 2013 IFRS 11 Joint Arrangements for accounting periods beginning on or after 1 January 2013 IFRS 12 Disclosure of Interests in Other Entities for accounting periods beginning on or after 1 January 2013 IFRS 13 Fair Value Measurement for accounting periods beginning on or after 1 January 2013 IFRS 9 (not yet adopted by the EU) Financial Instruments for accounting periods beginning on or after 1 January 2013 IFRIC 20: Stripping Costs in the Production Phase of a Surface Mine for accounting periods beginning on or after 1 January 2013 IFRS 1 Amendments – Government loans for accounting periods beginning on or after 1 January 2013 The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the ﬁ nancial statements in the year of initial application. (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 satisﬁ ed, provided that all other performance and/or service conditions are satisﬁ ed. (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 identiﬁ ed as those which may impact the Group in the period of initial application. They have not been applied in preparing this ﬁ nancial report. IAS 12 Amendments to Deferred tax: Recovery of Underlying Assets for accounting periods beginning on or after 1 January 2012 IAS 1 Amendment – Presentation of items of other comprehensive income for accounting periods beginning on or after 1 July 2012 IAS 19 Amendment – Employee Beneﬁ ts for accounting periods beginning on or after 1 January 2013 • • • 34 (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 outﬂ ow of resources embodying economic beneﬁ ts will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Annual Report 2012 2 Segment information The Group categorises its operations into two business segments based on exploration and appraisal and development and production. In the year ended 31 December 2012 the Group’s exploration and appraisal activities were carried out in two geographic areas being; In Indonesia under Production Sharing Contracts (“PSC”), Citarum, and in Italy under various licences and permits. The development and production activities were based in Indonesia under the Bangkanai PSC. The Group’s activities in Indonesia were discontinued in the year . All continuing activities are carried out in the UK and Italy. 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. 35 Sound Oil plc Notes to the Financial Statements (continued) 2 Segment information (continued) The segment results for the year ended 31 December 2012 are as follows: Development and Production 2012 £’000s – – – (1,45 5) – Corporate 2012 £’000s – – – – ( 3, 176) Total 2012 £’000s – – – (1,45 5) ( 3, 176) (3, 176) (1,45 5) ( 4,631) 11 (10) (174) – – – – – 11 (10) (174) 3,820 ( 3,349 ) (1,45 5) ( 4,804) Development and Production 2012 £’000s 764 – – Corporate 2012 £’000s 88 9,721 (3,606) Exploration and Appraisal 2012 £’000s 14,546 – – UK £’000s – 7 – – 7 Total 2012 £’000s 15,39 8 9,721 (3,606) Italy £’000s 76 5 81 2,126 12,420 15,39 2 Sales and other operating revenue Other income/(loss) Exploration costs Impairment of exploration and evaluation assets Administration expenses Operating loss segment result Interest receivable Interest payable Finance costs Gain on disposal of subsidiary Loss for the year before taxation The segment assets and liabilities at 31 December 2012 are as follows: Capital expenditure Other assets Total liabilities The geographical split of non-current assets is as follows: Development and production assets Fixtures, ﬁ ttings and ofﬁ ce equipment Goodwill Exploration and evaluation assets Total 36 Annual Report 2012 2 Segment information (continued) The segment results for the year ended 31 December 2011 were 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 costs Costs of acquiring subsidiaries Loss for the year before taxation Development and Production 2011 £’000s – – – – – Corporate 2011 £’000s – – (936) – (2, 259) Exploration and Appraisal 2011 £’000s – – (2 09) (1,236) – Total 2011 Restated £’000s – – (1,1 45) (1,23 6) (2, 259) ( 3,195) 44 (439) (516) (4, 106) – – – – – (1,4 45) ( 4,640) – – – 44 (439) (516) (1,4 45) ( 5,551) The segment assets and liabilities at 31 December 2011 were as follows: Capital expenditure Other assets Total liabilities 3 Operating loss Operating loss is stated after charging: Auditors’s remuneration Depreciation Employee costs Impairment charge Development and Production 2011 £’000s Corporate 2011 £’000s Exploration and Appraisal 2011 £’000s 32 8,461 (6,175) 1,246 – – 26,302 – – Notes 4 10 5 11 2012 £’000s 9 8 24 2,357 1,453 Total 2011 £’000s 27,580 8,461 (6,175) 2011 £’000s 95 15 2,137 1,101 37 Sound Oil plc Notes to the Financial Statements (continued) 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 – Tax services 5 Employee costs Staff costs, including executive directors Share based payments Wages and salaries Social security costs Employee beneﬁ ts Total Number of employees (including executive directors) at the end of the year Technical and operations Management and administration Total 2012 £’000s 73 6 19 98 2011 £’000s 74 8 13 95 Notes 2012 £’000s 2011 £’000s 2 3 3 71 2,015 265 6 2,357 2012 4 12 16 260 1,696 181 – 2,137 2011 6 10 16 All members of the Group Board and the Group Executive team are included as part of “Management and Administration”. 6 Finance revenue Interest on cash at bank and short–term deposits Total 2012 £’000s 11 11 2011 £’000s 44 44 38 Annual Report 2012 2012 £’000s Group 2011 £’000s Group – – – – – – – 2012 £’000s Group (13, 738) 3, 366 ( 7,019) 3,65 3 – 2012 £’000s Group – – – – – – – – – 2011 £’000s Group (6,264) 1,660 (866) (794) – 2011 £’000s Group – – Taxation 7 (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)/proﬁ t before tax Tax (charge)/credit at UK corporation tax of 24.5% (2011: 26.5%) Temporary differences not recognised Differences in overseas tax rates Total tax (charge)/credit (c) Tax account: Current tax receivable Current tax payable 8. Discontinued activities On 18 October 2012 the Company announced the sale of its 20% working interest in the Citarum PSC to Pan Orient Energy (Citarum) PTE for cash consideration of $16 million, contingent on revenues from the ﬁ rst two discoveries on the PSC. On 12 December 2012 the Company sold its subsidiary, Mitra Energia Bangkanai Ltd (‘MEB’) to Salamander Energy Plc for cash consideration of $4.5 million payable immediately but subject to deduction of local taxes and further cash consideration of up to $2.6 million contingent on ﬁ rst gas from the Kerenden gas ﬁ eld and/or future discoveries subject to regulatory approval. The only asset of MEB was a 5% carried interest in the Bangkanai PSC containing the Kerendan gas ﬁ eld. As a consequence of the disposals the ofﬁ ce in Indonesia was closed. 39 Sound Oil plc Notes to the Financial Statements (continued) 8. Discontinued activities (continued) Both of the above transactions have been classiﬁ ed and accounted for as disposals in the year and presented as discontinued activities in the ﬁ nancial statements. The comparative income statement has been re-presented to include those operations classiﬁ ed as discontinued in the current year as follows: Exploration and development costs Administration expenses Gain on disposal of subsidiary Loss on disposal of intangible assets Cumulative exchange gain reclassiﬁ ed from foreign currency reserve to income statement Loss from discontinued operations 2012 £’000s – 671 (329) 12,083 (3,491) 8,934 2011 £’000s 24 689 – – – 713 In arriving at the net loss on disposal of the Citarum and Bangkanai assets no value has been attributed to contingent cash consideration of up to £12.2 million ($18.6 million) receivable by the Group in the event of revenues from future discoveries in the Citarum and Bangkanai PSC’s and ﬁ rst gas from Kerendan. In the opinion of the directors the likelihood of realisation of economic beneﬁ t from the contingent consideration is not sufﬁ ciently assured to recognise the amounts as assets in the ﬁ nancial statements. Cash ﬂ ows from discontinued activities are set out on page 28. Earnings per share 9 The calculation of basic proﬁ t/(loss) per Ordinary Share is based on the proﬁ t/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic proﬁ t/(loss) per share is calculated as follows: Loss after tax from continuing operations Weighted average shares in issue Loss per share (basic) from continuing operations Loss after tax from discontinued operations Loss per share (basic) from discontinued operations 2012 £’000s (4, 804) 2012 million 2,424 2012 Pence (0. 20) 2012 £’000s ( 8,934) 2012 Pence ( 0.37) 2011 £’000s (5,551) 2011 million 1,600 2011 Pence (0.35) 2011 £’000s (713) 2011 Pence (0.04) Diluted loss per share has not been disclosed as inclusion of unexercised options (see note 23) would be anti-dilutive. In accordance with IA S33, calculations of earnings per share have been adjusted retrospectively to reﬂ ect the Share Consolidation approved in general meeting on 4 January 2013. 40 Annual Report 2012 10 Property, Plant and Equipment Group Cost At 1 January 2012 Exchange adjustments Additions Decommissioning provisions Transfers Disposals As at 31 December 2012 Depreciation At 1 January 2012 Exchange adjustments Transfers Charge for the year Disposals As at 31 December 2012 Development and production assets Fixtures, ﬁ ttings and ofﬁ ce equipment Note £’000s £’000s 1,246 – – 341 1,87 7 (1,246) 2,2 18 – – 1,45 3 – – 1,45 3 204 (5) 80 – – (88) 191 172 (5) – 24 (88) 103 3 Total £’000s 1,450 (5) 80 341 1,87 7 (1,334) 2,4 09 172 (5) 1,45 3 24 (88) 1,55 6 Net book amount at 31 December 2012 76 5 88 85 3 41 Sound Oil plc Notes to the Financial Statements (continued) 10 Property, Plant and Equipment (continued) 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 Development and production assets Fixtures, ﬁ ttings and ofﬁ ce equipment Notes £’000s £’000s – – – – 1,246 – 1,246 – – – – – – 139 (1) 35 31 – – 204 127 (1) 31 15 – 172 3 Total £’000s 139 (1) 35 31 1,246 – 1,450 127 (1) 31 15 – 172 Net book amount at 31 December 2011 1,246 32 1,278 (1) Transfers represent the reclassiﬁ cation of assets from intangible assets (note 1 1) During the 2011 period the accumulated cost of the Group’s investment in the Kerendan ﬁ eld of £1,246,000 was reclassiﬁ ed from exploration and evaluation assets to development and production assets following the signature of a gas sales agreement for the ﬁ eld. This investment was disposed of in 2012 . During 2012, the Group’s net investment in the Rampagnano license was reclassiﬁ ed from exploration and evaluation to production assets. The Company has no development and production assets. 42 10 Property, Plant and Equipment (continued) Company Cost At 1 January 2012 Additions As at 31 December 2012 Depreciation At 1 January 2012 Charge for the year As at 31 December 2012 Net book amount at 31 December 2012 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 Annual Report 2012 Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s 20 2 22 9 6 15 7 Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s 9 11 20 9 – 9 11 Total £’000s 20 2 22 9 6 15 7 Total £’000s 9 11 20 9 – 9 11 43 Sound Oil plc Notes to the Financial Statements (continued) 1 1 Intangible Assets Cost At 1 January 2012 Exchange adjustments Additions Transfers(1) Disposals At 31 December 2012 Impairment At 1 January 2012 Additions Transfers Disposals At 31 December 2012 Exploration and evaluation assets Goodwill £’000s £’000s 3,577 7 4 – – (1,525) 26,856 240 4,247 (1,87 9) ( 15,970) Total £’000s 30,433 31 4 4,247 (1,87 9) ( 17,495) 2,126 13,49 4 15,62 0 – – – – – (4,131) (1,45 5) 1,45 5 3,055 (4,131) ( 1,45 5) 1,45 5 3,055 (1,076) (1,076) Net book amount at 31 December 2012 2,126 12,420 14,546 Cost At 1 January 2011 Exchange adjustments Acquisitions Additions Transfers (1) At 31 December 2011 Impairment At 1 January 2011 Exchange adjustments Additions At 31 December 2011 Exploration and evaluation assets Goodwill £’000s £’000s 1,525 1 2,051 – – 3,577 – – – – 12,982 (50) 11,361 3,809 (1,246) 26,856 3,028 3 1,100 4,131 Total £’000s 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 (1) Transfers represent the reclassiﬁ cation of assets to PP&E (note 10) 44 Annual Report 2012 Intangible Assets (continued) 1 1 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 Intangible assets are allocated to the cash generating unit (“CGU”) identiﬁ ed 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’ report (“CPRs”). CPRs were last prepared for Italy in October 2011. The values attributed to the Group’s assets in the most recent CPRs are very signiﬁ cantly in excess of the carrying amounts of the Italian CGU, including goodwill. The Board of Directors believe the data held in the CPRs is still relevant and up to date and remains valid for use in the annual impairment review. Consequently, the directors do not therefore consider that any impairment indications exist in relation to the remaining Italian CGU. In the year, the Group disposed of its Indonesian interests in the Citarum and Bangkanai PSCs. This resulted in a disposal of £1.5m of goodwill on the acquisition of its Indonesian interests and a write-down of their respective carrying values. The valuation calculations included in the CPRs are entirely dependent on the availability of ﬁ nance to fund capital expenditure on the development of exploration and evaluation assets. Should ﬁ nance 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: • Net present value (“NPV”) calculations were prepared for proven contingent resources, including all the Italian licences. 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 expected production proﬁ le and duration of sales contracts. The principal assumptions on which the NPV calculations are based are as follows:- • • The Italian CPR is based on an oil price of $109/bbl as per 2012 with the Brent forward curve for ﬁ ve 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% (2011: 10%) has been used which the directors believe to be standard industry practice and approximate to the Groups’ weighted average cost of capital. • The NPV calculations are most sensitive to the assumptions for production and operating expenditure. 45 Sound Oil plc Notes to the Financial Statements (continued) Intangible Assets (continued) 1 1 In 201 2, the impairment costs related to the costs of drilling on wells now considered to have smaller than originally envisaged commercial quantities of gas. Indonesia Italy Total Investment in Subsidiaries 1 2 Company At 1 January Advances to group companies Write-off on disposals (net of foreign exchange gains on disposals) Euro loan to group companies Acquisition of subsidiaries At 31 December 2012 £’000s – 1,453 1,453 2012 £’000s 41,719 7,317 (26,156) – – 22,880 2011 £’000s 24 1,076 1,100 2011 £’000s 24,337 11,590 – 965 4,827 41,719 The subsidiary companies of the Company at 31 December 2012 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* Consul Oil and Gas Limited Apennine Energy SpA Apennine Oil and Gas SpA (formerly known as Celtique Energy SpA) British Virgin Islands British Virgin Islands Mauritius Mauritius UK Italy Italy Holding Company Holding Company Holding and services company Exploration company Holding Company Exploration company Exploration company * The investments in Mitra Energia Limited, Mitra Energia Citarum Limited are held indirectly via Sound Oil International Limited. The investments in Apennine Energy SpA and Apennine Oil and Gas SpA are held indirectly via Consul Oil and Gas Limited. Consul Oil and Gas Limited is directly funded through non-current, non-interest bearing loans from Sound Oil Plc. Given that Sound Oil Plc has no intention to call the loans in the foreseeable future, the loans are treated as “permanent as equity”. As a result, Sound Oil Plc has classiﬁ ed these loans as investments which represent the carrying value of the investment in the Mitra and Consul group of companies. 46 1 3 Other Debtors Gro up Indonesian VAT Italian VAT UK VAT Other receivables Currency analysis US Dollar Euro GBP Sterling Total Company UK VAT recoverable Other receivables Total Currency analysis GBP Sterling Total Annual Report 2012 2012 2011 Current £’000s – 963 19 1,792 2,774 Non Current £’000s – – – – – Current £’000s – 763 57 568 1,388 2012 2011 Current £’000s 21 1,054 1,699 2,774 Non Current £’000s – – – – Current £’000s 228 1,039 121 1,388 2012 2011 Current £’000s 1 8 1,680 1,69 8 Non Current £’000s – – – Current £’000s 57 64 121 2012 2011 Current £’000s 1,69 8 1,69 8 Non Current £’000s – – Current £’000s 121 121 Non Current £’000s 613 – – 55 668 Non Current £’000s 661 – 7 668 Non Current £’000s – 7 7 Non Current £’000s 7 7 47 Sound Oil plc Notes to the Financial Statements (continued) 1 4 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 in Indonesian Rupiah Total Company Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount at 31 December being in US Dollar in Euros in Sterling Total 48 2012 £’000s 5,418 1,491 6,909 2,664 2,762 1,480 3 6,909 2012 £’000s 650 1,491 2,141 100 561 1,480 2,141 2011 £’000s 1,230 5,056 6,286 1,119 4,016 1,151 – 6,286 2011 £’000s 36 5,056 5,092 638 3,303 1,151 5,092 1 5 Trade and other payables Group Trade payable Payroll taxes and social security Accruals Other payables Total Currency Analysis US Dollar Euro Sterling Total Company Trade payables Payroll taxes and social security Accruals Total Currency Analysis US Dollar Sterling Total Annual Report 2012 2012 Current £’000s 461 121 137 – 719 2012 Current £’000s 101 393 225 719 2012 Current £’000s 120 28 111 259 2012 Current £’000s 34 225 259 2011 Current £’000s 1,761 50 128 294 2,233 2011 Current £’000s 270 1, 678 285 2, 233 2011 Current £’000s 148 9 128 285 2011 Current £’000s – 285 285 49 Sound Oil plc Notes to the Financial Statements (continued) 1 6 Deferred tax assets and liabilities 1 January Acquisitions Released on disposal Unrealised foreign exchange (decrease)/increase 31 December 2012 £’000s 3,576 – (1,52 5) 7 4 2,125 2011 £’000s 1,525 2,051 – – 3,576 £1,52 5k of goodwill and its related deferred tax on the acquisition of Mitra Energia Limited was dispos ed of as part of the sale of Mitra Energia Bangkanai Limited to Salamander Energy on 31st December 2012. Deferred tax assets have not been recognised in respect of the losses due to the uncertainty of utilisation of these losses. 1 7 Provisions Employee post employment Abandon- At 1 January 2012 Additions in 2012 Released during the year Unrealised foreign exchange increase As at 31 December 2012 Current Non-current Total beneﬁ ts £’000s 141 – (141) – – – – – Other ment provisions £’000s £’000s 225 341 – (7) 559 43 7 12 2 559 – 121 – – 121 121 – 121 Total £’000s 366 462 (141) (7) 680 55 8 12 2 680 Employee post employment beneﬁ ts The Group’s Indonesian subsidiary provided employee post employment beneﬁ ts in accordance with Indonesian law. By 31st December 2012, the Indonesian subsidiary no longer had any employees and the Group believes it has satisﬁ ed all legal requirements with regards to post employment beneﬁ ts in Indonesia and therefore the provision was released in 2012. Abandonment The provision of £55 9,0 00 relates to the following licences:- Rapagnano Montemarciano Marciano £’000s 12 2 19 4 24 3 Abandonments costs relating to Marciano and Montemarciano are likely to be incurred during 2013 and 2014. There are no provisions in the parent Company. 50 Annual Report 2012 1 8 Capital and Reserves Group Ordinary shares - 0.1p 2,870,128,815 2,870 1,833,199,548 Number of shares 2012 Number of shares £’000s Company Number of shares 2012 Number of shares £’000s Ordinary shares - 0.1p 2,870,128,815 2,870 1,833,199,548 Share option schemes Options to subscribe for the Company’s shares were granted to certain executives in 2011 and 2012 (note 1 9). Group Share capital £’000s Share Accumulated deﬁ cit £’000s premium £’000s Foreign currency reserve £’000s At 1 January 2012 1,833 52,871 (28,606) 3,768 2011 £’000s 1,833 2011 £’000s 1,833 Total equity £’000s 29,866 Total loss for the period excluding foreign e xchange recycled to the income statement Foreign exchange recycled from foreign currency reserve on disposal Other comprehensive income Issue of share capital Transaction costs Share based payments At 31 December 2012 – – ( 17,229) – ( 17,229) – – 1,037 – – 2,870 – – 8,589 (1,24 7) – 3,491 – – – 71 (3,491) 427 – – – – 427 9,626 (1,24 7) 71 60,21 3 (42,273) 704 21,51 4 51 Sound Oil plc Notes to the Financial Statements (continued) 1 8 Capital and Reserves (continued) 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 Share capital £’000s 3,741 – 27 – – – Share Accumulated deﬁ cit £’000s premium £’000s Foreign currency reserve £’000s (22,482) (6,259) – – 35,764 – - 17,107 – – (125) 260 Total equity £’000s 17,715 (6,259) 27 18,248 (125) 260 692 – – 1,141 – – At 31 December 2011 3,768 1,833 52,871 (28,606) 29,866 The foreign currency reserve reﬂ ects 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 2012 ( Loss) for the year Shares issued Share based payments At 31 December 2012 Share capital £’000s Share Accumulated deﬁ cit £’000s premium £’000s 1,833 – 1,037 – 2,870 52,871 (8,002) – 7,34 2 – ( 28,64 7) – 71 Total equity £’000s 46,702 ( 28,64 7) 8,37 9 71 60,21 3 (36,57 8) 26,505 Share Issues On 6 February 2012, the Company placed 262,587,803 new ordinary shares at 1.5233p per share, raising £4 million and issued 157,552,682 three year warrants. On 16 July 2012, the Company placed 774,341,464 new shares in a placement through Astin Capital Management in consideration for redeemable subscription notes and the cancellation of 217 million exis ting war rants. The subscription notes were redeemable in seven equal tranches for cash consideration at the end of seven separate trading periods, commencing July 2012 and terminating in February 2013. By the end of December 2012, ﬁ ve of the seven tranches had been redeemed for net consideration of £2.8m with a further £1.6m due from Astin upon redemption of the remaining tranches. The ﬁ nal £1.6m due was received in January and Fe bruary 2013. The proceeds of the various placings and drawdowns will be used to fund the Group’s work programme and ongoing costs. 52 Annual Report 2012 1 9 Related party disclosures The ﬁ nancial statements include the ﬁ nancial statements of Sound Oil Plc (the parent) and the subsidiaries listed in the following table: Name Country of Incorporation % equity interest 2012 2011 Sound Oil International Limited Sound Oil Asia Limited Consul Oil and Gas Limited Apennine Energy SpA Apennine Oil and Gas SpA Mitra Energia Limited Mitra Energia Citarum Mitra Energia Bangkanai British Virgin Islands British Virgin Islands UK Italy Italy Mauritius Mauritius Mauritius 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 In 2012 the Group disposed of its investments in the joint ventures which operate the Bangkanai PSC (5% carried interest) and the Citarum PSC (20% working interest). During 2012, the Group changed the legal status of Apennine Energy SrL to Apennine Energy SpA. Terms and conditions of transactions with related parties There were no sales or purchases to or from related parties (2011: none). There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2012, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2011: none). This assessment is undertaken each ﬁ nancial year through examining the ﬁ nancial 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 currently two key management personnel other than directors of the Company (2011: three). Details of the remuneration of the Directors are set out in the Report of Directors’ Remuneration. The tables below sets out details of the emoluments of the Group’s key management personnel including directors: Salaries and employee beneﬁ ts Share based payments Total 2012 £’000s 1,373 71 1,444 2011 £’000s 1,062 260 1,322 Salaries and employee beneﬁ ts increased in 2012 due to Gerry Orbell’s one-off termination payment of £221,000 and also a full year’s salary cost for the Italian Managing Director who was appointed 2 January 2012. 53 Sound Oil plc Notes to the Financial Statements (continued) 1 9 Related party disclosures (continued) Directors’ interest in employee share options Share options held by the Chairman of the Board of Directors have the following expiry dates and exercise prices: Issue Date Exercise price Number Expiry Date Number 2012 2011 2012 2016 2016 4 9.5 1 6.5 – 3 00 ,000 Number 2011 1 00 ,000 – Share options held by the executive member of the Board of Directors have the following expiry dates and exercise prices: Issue Date 2011 2012 2012 Expiry Date 2016 2018 2016 Exercise price Number 2 1.75 2 5.0 1 6.5 Key management’s interest in employee share options Issue Date 2010 2011 2012 2012 Expiry Date 2013 2016 2017 2018 Exercise price Number 1 5.0 2 7.5 1 6.5 2 5.0 Number 2012 – – 3 30, 000 9 00 ,000 Number 2012 – 4 50 ,000 1 ,000,000 Number 2011 – 5 80, 000 – – Number 2011 3 30 ,000 – – Number 2010 1 03,5 00 – – – 54 Annual Report 2012 20 Financial Instruments risk management objectives and policies A ﬁ nancial instrument is deﬁ ned as any contract that gives rise to a ﬁ nancial asset of one equity and a ﬁ nancial liability or equity instrument of another entity. The Group’s ﬁ nancial instruments comprise trade payables, receivables, cash and short term deposits. The Group has no long term borrowings. The main purpose of the ﬁ nancial instruments is to ﬁ nance the Group’s operations. The fair value of the ﬁ nancial instruments is their carrying value, with the carrying value amounts included in the Group Balance Sheet with further analysis in note 1 3 (other debtors), note 1 4 (cash and cash equivalents) and note 1 5 (trade and other payables). The main risks arising from the Group’s ﬁ nancial 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 rates 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 Increase/ (decrease) % Effect on proﬁ t before tax £’000s 2012 Sterling US Dollar Euro Sterling US Dollar Euro 2011 Sterling US Dollar Euro Sterling US Dollar Euro 10 10 10 (10) (10) (10) 10 10 10 (10) (10) (10) 1 – – (1) – – 2 – – (2) – – 55 Sound Oil plc 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, beneﬁ t for other stakeholders and to maintain optimal capital structure and to reduce the cost of capital. Management considers as part of its capital, the ﬁ nancial 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 2012 the Group’s strategy was to operate with minimal 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. 2012 £’000s ( 82 ) 6,909 6,827 2,870 60,21 3 21,514 2011 £’000s – 6,286 6,286 1,833 52,871 29,866 Borrowings Cash and cash equivalents Net cash excluding borrowings Total capital excluding reserves: Equity Share capital Equity share premium Shareholders equity 56 Annual Report 2012 2 1 Foreign Currency Risk As a result of the bulk of the Group’s operations being denominated in Euros, the Group’s balance sheet can be impacted by movements in these exchange rates against Sterling. 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. As the Group also holds signiﬁ cant US Dollar assets at the end of the year, 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 proﬁ t or loss before tax. Increase/ (decrease) in Euro rate Effect on proﬁ t or loss before tax £’000s Increase/ (decrease) in US Dollar rate Effect on proﬁ t or loss before tax £’000s 5% (5%) 5% (5%) (456) 480 (692) 763 5% (5%) 5% (5%) (136) 143 (30) 34 2012 2011 Credit risk The Group currently has no sales or customers. The maximum credit exposure at the reporting date of each category of ﬁ nancial assets above is the carrying value as detailed in the relevant notes. The Group’s management considers that the ﬁ nancial assets are not past due or impaired for each of the reporting dates and are of good credit quality. The credit risk is considered negligible because the counterparties are ﬁ nancial institutions with high credit ratings. Liquidity Risk The Group and Company have signiﬁ cant liquid assets and are not materially exposed to liquidity risk. All ﬁ nancial liabilities are expected to mature within one year. 57 Sound Oil plc Notes to the Financial Statements (continued) 2 2 Financial Instruments 2012 Cash and short term deposits GBP Sterling Euro US$ Indonesian Rupiah Total 2011 Cash and short term deposits GBP Sterling Euro US$ Total Floating Rate £’000s Interest- free £’000s Weighted average Total interest rate % £’000s 1,45 1 2,76 2 42 3 4,25 8 1,151 3,303 602 5,056 29 – 2,622 – 2,651 – 713 517 1,230 1,48 0 2,76 2 2,66 4 3 6,90 9 1,151 4,016 1,119 6,286 0.45% 0.10% 0.00% 0.00% 0.53% 0.89% 0.15% US$ cash balances have been converted at the exchange rate of US$1.5825/£1.00 (2011: US$1.5456/£1.00). Euro cash balances have been converted at the exchange rate of €1.2347/£1.00 (2011: €1.1936/£1.00). The ﬂ oating rate cash and short-term deposits comprise cash held in interest bearing deposit accounts. Cash on which no interest is received is and relates to balances available to meet immediate operating payments and was therefore only held for short periods interest free. The value of US $ accounts which paid no interest was impacted by the receipt of $4.1m from Salamander Energy on 31st December following completion of the sale of the Group’s interests in Mitra Energia Bangkanai Limited. 58 Annual Report 2012 2 3 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 2012 £’000s 71 2012 £’000s 71 2011 £’000s 260 2011 £’000s 260 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. Granted Period (years) Price (pence) 2012 Total 2011 Total 1,3 0 0,000 3 30,0 00 1 00 ,000 1,3 50 ,000 3 ,08 0,000 9 5 0,000 1 00 ,000 1,326,000 1 00,000 3 3 0,000 2,8 06, 000 4 5 5 6 5 5 5 5 5 1 6.5 1 6.5 2 5.0 2 5.0 5 6.0 4 9.5 2 7.5 2 2.0 2 1.75 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 reﬂ ects 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 expired Share options exercised Share options outstanding at the end of the year 2012 3,7 64 ,000 3,0 80, 000 (6 74,6 66 ) – 6,1 69 ,33 4 2011 1,4 07 ,000 2,8 06 ,000 (2 10 ,000) (2 39 ,000) 3,7 64 ,000 If all equity share options were exercisable immediately, new ordinary shares equal to approximately 1.7% of the Group’s existing ordinary share capital base would be created. 59 Sound Oil plc Notes to the Financial Statements (continued) 2 4 Commitment and guarantees At 31 December 2012, the Group had no commitments other than for decommissioning (note 17) and no capital commitments (2011: £1,889,000). In December 2012, the Italian Ministry for Economic Develop ment requested that the Group supply it with a € 500,000 bank guarantee to cover any potential decommissioning liabilities relating to the Rapagnano licence. The guarantee was requested pending approval of a share capitalisation increase in Apennine Energy SpA ( €6m) from the Group. The re-capitalisation was approved and completed. A request was made to the Italian Ministry for Economic Development to return the bank guarantee in May 2013. Sound Oil expects the bank guarantee to be returned shortly. 2 5 Post balance sheet events Share consolidation On 12 December 2012, the Group announced its intention to execute a ten for one share consolidation subject to shareholder approval with the main aim being the reduction of share volatility inherent in penny stocks. Shareholder approval was obtained at a General Meeting on 4 January 2013. Consequently, 287,012,882 new consolidated ordinary shares were admitted to trading on the AIM market. Open Offer The redemption of the private placement was completed in February 2013 at which time the Group announced an Open Offer to existing shareholders. Up to 12,386,968 new ordinary shares were offered at a price of 8.073p per share. The offer was not underwritten. A company Circular was issued on 6 March 2013 deﬁ ning the terms of the announcement. The Company announced the results on 22 March 2013 which conﬁ rmed 605,662 Open Offer Share acceptances had been received. Following the issue of the these shares, the Company has 287,618,544 Ordinary Shares in issue. Subsidiary Sale On 16 February 2013, the Group executed the sale of its 100% subsidiary, Mitra Energia Ltd, to Ilham Habibie, a former non-Executive Director of the Group, for $1. Mitra Energia Limited is the holding company of Mitra Energia Bangkanai Ltd which was sold to Salamander Energy in 2012. Mitra Energia Limited had no assets on disposal. 60 Annual Report 2012 Sound Oil plc Perivan Financial Print 228511 Annual Report 2012 Dealing Information FT Share Price Index – Telephone 0906 8433711 SEAQ short code – SOU Financial Calendar Announcements Interim – September 201 3 Preliminary – May 201 4 Addresses Registered Ofﬁ ce 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 Peel Hunt, Moor House, 120 London Wall, London, EC2Y 5ET 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 www.soundoil.co.uk Sound Oil plc Riverbridge House, Guildford Road, Leatherhead, Surrey KT22 9AD

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