Sound Energy Plc Annual Report 2013

Plain-text annual report

www.soundoil.co.uk Sound Oil plc Annual Report 2013 Sound Oil plc is a European and Mediterranean independent oil and gas exploration and development company Sound Oil plc’s strategy is to achieve substantial and sustainable growth in value through an active drill programme Contents Highlights Chairman’s Statement Financial Review Technical Review Statement of Proved and Probable Reserves The Team Strategic Report Report of the Directors Report on Directors’ Remuneration Corporate Governance Report Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Statement of Comprehensive Income 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 List of Licences and Interests Dealing Information, Financial Calendar and Addresses 1 5 7 8 10 11 13 14 15 17 18 19 20 21 22 23 24 25 26 27 51 52 Designed and printed by Perivan 231838 Highlights Assets • High upside Italian portfolio (18 licen ces) • 18MM boe (P50) discoveries with NPV 10 of €227M • 96MM boe (P50) exploration portfolio • Successful Nervesa discovery, tested at 2.7 MM scf/day • One producing gas ﬁ eld with more to follow • Sound Oil retains operatorship and 100% interest in all licen ces Figure 1 • Blend of production and exploration End game • European/Mediterranean focused oil and gas company of some scale Team • Balance of technical, operational, ﬁ nancial/M&A • High energy; Action orientated Short term priorities and news ﬂ ow • Producing Casa Tiberi ( Summer 2014) • Secure farm in on Badile • Second Nervesa well ( Q3 2014) Medium term • Badile exploration well – NPV €486MM • Producing the Laura ﬁ eld – NPV €66MM • Santa Maria Goretti appraisal well – NPV €39M M • Zibido (Badile Licen ce) exploration well – NPV €225MM Sound Oil plc Annual Report 2013 1 Drilling Existing Discoveries 2015 Laura Discovery (100%) Location: Play Type: Gulf of Taranto (4km offshore) Inverted fault block Gas in Pleistocene NPV: €66MM P50 Resource potential: 30 BSCF P50 Cost: €17.5MM (dry hole case) 2015 Santa Maria Goretti Discovery (100%) Location: Play Type: NPV: Marche Region (Central Italy) Inverted fault block Gas in Pliocene €39MM P50 Resource potential: 18 BSCF P50 Cost: €9MM (dry hole case) Abbreviations: Bopd: Barrels of oil per day. Bscf: Billion standard cubic feet of gas. BScfe: Billion standard cubic feet of gas equivalent. MMbo: Million barrels of oil. MMboe: 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. Mscf: Thousand standard cubic feet of gas. NPV10 Net present value at a discount rate of 10%. Scfd: Standard cubic feet of gas per day. Scmd: Standard cubic meters of gas per day. 2 Sound Oil plc Annual Report 2013 Signiﬁ cant Exploration Potential 2014/15 Badile Prospect (100%) Location: Play Type: Po Valley (Northern Italy) Inverted fault block Gas-condensate in Mesozoic NPV: €486MM mid case | €1,745MM high case Resource potential: 178 BSCFE mid case (106 BSCF gas plus 12mmbo of condensate) 673 BSCFE high case Cost: €2 3MM (dry hole case) 2015 Zibido Prospect (100%) Location: Play Type: NPV: Po Valley (Northern Italy) Downthrown fault terrace Gas/oil in Mesozoic €225MM P50 Resource potential: 130 BSCF P50 (Gas) Cost: €18.9MM (dry hole case) Sound Oil plc Annual Report 2013 3 Producing and Development Assets: “building material cash ﬂ ows” Nervesa Gas Discovery (100%) Status: NPV: Cash Flow: Location: Resource Potential: First well 2013; Drilling 2014; Production 2015 €51MM €18MM pa (3 wells) Po Valley (Northern Italy) 24 BSCF • 1st well drilled July 2013; 46 metres of net pay across 13 zones; ﬂ owed 2.7 MM scf/day on test 3 well development plan with second well Q3 2014 Potential exploration prospect • • Rapagnano Gas Field (100%) Status: NPV: Cash Flow: Location: Resource Potential: Producing €3MM €500K pa Marche Region (Central Italy) 1.2 BSCF • First gas achieved 15 May 2013 from the Sabbie reservoir 2013 production of 79MM scf 12 years production remaining • • Casa Tiberi Gas Discovery (100%) Status: Operations start end H1 2014 NPV + Cash Flow: TBD Location: Marche Region (Central Italy) • • • Successful 2011 exploration well; 4 metres net pay; ﬂ owed 1.3m scf/day on ﬁ rst test First gas 2014 Shared production skid signﬁ cantly improves economics 4 Sound Oil plc Annual Report 2013 Chairman’s Statement 2013 was a year in which Sound Oil made strong progress and built upon the foundations laid by the signiﬁ cant re-structuring carried out in 2012. I am delighted to report that the Company announced its maiden revenues in 2013 with the Rapagnano gas ﬁ eld supplying its ﬁ rst volumes on 15 May 2013. Total Rapagnano production from this date to 31 December 2013 was 79.45 MMscf, yielding revenue of approximately £0.5 million. Although Rapagnano is one of the Company’s smaller assets, delivering ﬁ rst gas was a vital milestone for Sound Oil as it demonstrated the Company’s ability to take projects through development and on to production and revenue generation. Our production capacity will be further enhanced with the development of the Casa Tiberi discovery. First gas production is expected in the summer of 2014. Combined with revenues from Rapagnano, the cash ﬂ ows generated from our producing assets are expected to more than cover the running costs of our highly experienced Milan-based Italian technical team. I am satisﬁ ed to note that all operational activity during the period 20 May 2014 has been executed without a single Lost Time Incident. Another highlight of 2013 was the successful drilling of the ﬁ rst well on the northern limb of the Nervesa discovery on the Carita permit. The well was spudded on 7 June 2013 and reached total depth on 15 July 2013. On test, the well achieved a stabilised total gas ﬂ ow rate of 2.7 MMscfd using a dual string completion. Based on test and other data, the Company announced that our internal P50 estimate of recoverable resources for the Nervesa discovery had increased to 24 Bscf from the previously announced 21 Bscf. The Company now plans to develop the ﬁ eld and we have applied for a production concession with a view to achieving ﬁ rst gas in mid-2015. As recently announced, we intend to drill a second well to address the southern part of the Nervesa structure. We expect that this second well will be fully funded by a farm-in partner, with whom Heads of Terms were signed, and announced, on 28 April 2014. The Company also made tangible progress in developing its other core assets, most particularly the Badile exploration prospect. We are currently marketing Badile to potential farm-in partners, having already received, but not accepted, an earlier offer from a large Italian oil company. In October 2013, the Company announced that a new Competent Person’s Report (“CPR”) had conﬁ rmed a new best estimate NPV10 of €486 million for the Badile licence, which represented a 60% increase on the previous CPR. We expect to receive the Environmental Impact Assessment approval in respect of Badile in the second half of 2014 and drilling is scheduled to commence late 2014/early 2015. On 14 January 2014, Sound Oil announced a new discounted underwritten open offer to eligible shareholders to raise approximately £1.6 million before expenses. The open offer was made of 38,349,139 shares at 4.2 pence per share. We were pleased to announce on 3 February 2014 that the open offer was signiﬁ cantly over-subscribed. The Company also announced on 14 January 2014 that it had secured an asset-backed eighteen month loan facility of up to £1.5 million. In February 2014 I was delighted to welcome both Simon Davies and Gerry Orbell to the Board following the retirement of two long serving Non-Executive Directors, Michael Nobbs, who stepped down from the Board last December and Tony Heath, who has signiﬁ ed his intention to retire after the forthcoming AGM. Michael and Tony joined the Board at the inception of the Company nine years ago and we wish them both well after their long and distinguished service. Sound Oil plc Annual Report 2013 5 Chairman’s Statement continued Simon Davies and Gerry Orbell bring extensive experience and knowledge, which will strengthen Sound Oil as we progress towards commercialising the Nervesa discovery and as we prepare to drill the ﬁ rst-class exploration opportunity at Badile. In the summer of 2013 we were pleased to announce the recruitment of Leonardo Spicci, formerly ENI’s District Manager for Northern Italy to lead a speciﬁ c Badile project team and the appointment of Stuart Joyner as our Chief Financial Ofﬁ cer. Stuart was formerly Head of Oil and Gas at Investec Bank plc and brings twenty years’ experience in fundraising and mergers and acquisitions to the Executive Team. In April 2014, we were also pleased to announce a proposed £14 million funding injection via a combination of debt and equity from Swiss institutional investor Continental Investment Partners SA. As referred to above, we have also agreed Heads of Terms for a 3.6 to 1 farm out on Sound Oil’s ﬂ agship asset, Nervesa. This farm-in will fully fund the next well addressing the southern part of the structure and enables Sound Oil to achieve ﬁ rst gas on Nervesa without signiﬁ cant further capital and whilst maintaining control of the asset. 2014 and Beyond Looking to the future, the Company’s focus is to monetise the value of our signiﬁ cant licence position in Italy. Our strategy remains consistent with the focus remaining on the Nervesa and Laura discoveries and Badile and Zibido exploration prospects. To this exciting portfolio, we have now added the Santa Maria Goretti discovery following the completion of further technical studies. This low risk opportunity has a preliminary internal best estimate NPV10 of €39 million with estimated P50 resources of 18 Bscf and we are looking to accelerate potential cash ﬂ ows from this asset. Our immediate operational priority is to drill the second well at Nervesa to address the southern part of the structure. We have already signed a letter of intent for the rig and expect to complete the drilling in Q3 2014. In parallel we will proceed to develop the ﬁ eld and we expect ﬁ rst gas production in mid-2015. This will represent a step change in the revenue generation of the Group and will provide crucial cash ﬂ ow to develop further projects. Following success at Nervesa we will then proceed with our planned drilling programme, including Badile and Laura. In summary, 2014 and 2015 should be the busiest and most exciting time in the history of Sound Oil to date. We can expect to be well under way with development work on both the Nervesa wells with ﬁ rst revenues following shortly after. This will be a landmark in the Company’s history as for the ﬁ rst time we will be able to use free cash ﬂ ow to grow the business. Success at the Laura discovery and at the game-changing Badile exploration well should also propel Sound Oil, under the leadership of our Chief Executive Ofﬁ cer James Parsons, towards our continued aim of becoming a fully funded mid-cap company. I am enthused by the variety and quality of prospects in our portfolio and look forward to unlocking their value with the highly skilled and professional team we have built. I would like to take this opportunity to thank our shareholders for their support over the past year and to wish you well. Andrew Hockey Chairman 20 May 2014 6 Sound Oil plc Annual Report 2013 Financial Review Accounting Standards The Group has prepared its 2013 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union. Income Statement In 2013, the Group recorded its ﬁ rst revenues from the Rapagnano ﬁ eld following ﬁ rst production on 15 May. The loss before ﬁ nance costs and tax from continuing operations in 2013 was £6,437,000 an increase from £4,631,000 in 2012. This was as a result of increased impairments. As the Group has shifted its focus toward large gas plays, such as Badile, Laura and Zibido, the Group decided to de-prioritise developments such as Strombone. We also further reviewed the inherent risk of Strombone, and consequently we have lowered its carrying value and the quantity of estimated hydrocarbons. Administrative expenses fell signiﬁ cantly in 2013 to £2,616,000 (2012: £3,176,000). This reduction is the result of efforts to pro-actively minimi se administrative costs in addition to the one-off costs incurred in 2012 as a result of the Group re-structuring. Cash Flow/Financing During 2013, £3,240,000 net cash proceeds from ﬁ nancing were raised. Of this £1,664,000 was provided by our Italian partner CSTI to develop the Rapagnano ﬁ eld and drill the ﬁ rst appraisal well at Nervesa . A further £1,576,000 was raised on completion of a placement entered into in 2012. The open offer of March 2013 also provided funding. The funding arrangements with CSTI for both Rapagnano and Nervesa have been accounted for as loans with repayments made as a ﬁ xed proportion of net revenue until the arrangements are repaid. As the amounts due will not be repaid in their entirety in 201 4, the Group’s balance sheet now shows long term borrowings of £1,947,000 (2012: £Nil). In January 2014, the Group raised a further £1.6m (before expenses) as part of a new Open Offer and also agreed a £1.5m asset-backed loan arrangement with Simon Davies, a non-Executive Director. 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 reali se its assets and discharge its liabilities in the normal course of business. The Group is obtaining strong revenues from the Rapagnano gas ﬁ eld and shortly hopes to commence commercial production from the Casa Tiberi ﬁ eld. It is expected that net revenues from these ﬁ elds will more than cover the cost of the Italian ofﬁ ce. The directors have considered the Group’s cash ﬂ ow forecasts for the period to end of June 2015. Forward cash ﬂ ow projections show that funds available to the Group will exceed forecast commitments. As a result the Group has sufﬁ cient cash resources to undertake its work programme over the next twelve months. Balance Sheet In the year, exploration and evaluation increased by £8,719,000 which was related primarily to the drilling of the Nervesa appraisal well including its subsequent decommissioning provision and to expenditure incurred in beginning work on the Badile project. In the year impairments relating to exploration and evaluation totalled £3, 984,000. The costs related primarily to the Strombone development and Monteluro, a permit that the Group has decided to relinquish. £706,000 was incurred on development and production assets primarily being necessary work to put Rapagnano into production. Non-current provisions increased to £1,226,000 (2012: £680,000) due to the recognition of decommissioning provisions following the drilling of the Nervesa appraisal well. Sound Oil plc Annual Report 2013 7 Technical Review Sound Oil currently has interests in 18 licences in Italy: 3 production concessions, 7 permits and 8 exclusive permit applications. The Company’s interests are held through its wholly- owned Italian subsidiary companies Apennine Energy SpA and Apennine Oil & Gas SpA (Fig. 1). Production Rapagnano Concession ( Sound Oil 100%) The concession is located in Fermo Province, Marche Region, central Italy (Fig. 2). Geologically the area is within the Ancona-Pescara Basin associated with the Central Apennine foredeep. First gas was delivered from the onshore Rapagnano ﬁ eld to the local gas distributor on 15 May 2013. The initial production rate was 10,000 Scmd (0.4 MMscfd). Under the gas sales agreement with Steca Energia Srl, gas was priced initially at €0.316 per Scm (US$11.2/Mscf), varying quarterly based on a basket of commodity prices (diesel, Brent and fuel oil as published in Platts) with an average 2013 price of €0.320 per Scm. On 30 September 2013, this GSA expired and Sound Oil now receives a monthly ﬁ xed price of €0.29 per Scm from Steca. Total 2013 production for the period May to December was 2.25 MMscm (79.45 MMscf) with an average production rate of 9,770 Scmd (0.34 MMscfd). This yielded revenue of €567,000 for 2013 gas deliveries. On an annuali sed basis, the Company expects the ﬁ eld to yield circa €480,000 of cash ﬂ ow after operating costs per annum. The Company plans to produce a further 1.2 Bscf over a twelve year period. San Lorenzo Concession (Montemarciano Permit, Sound Oil 100%) The permit is located in Ancona, Marche in central Italy (Fig. 3), within the foredeep trough of the Central Apennines. The principal hydrocarbon plays are for biogenic gas in sand bodies in the shallow Pleistocene-Pliocene section and thermogenic gas in the deeper Miocene and older carbonates. Following Board approval to develop the Casa Tiberi gas ﬁ eld, an Engineering, Procurement, Construction and Lease contract has been awarded to TESI Srl, a local company with proven experience in onshore processing plants in Italy. The contract is for a total of €300,000 and involves the three month construction and subsequent lease of a production skid in anticipation of ﬁ rst gas from the ﬁ eld at the end of H1 2014. The plant will be based on modular skids with nitrogen used for both gas dehydration and as “service gas” providing an effective and extremely environmental friendly solution to deliver the gas to the local low pressure network. Appraisal and Development Nervesa Field, Carita Permit ( Sound Oil 100%) The permit is located in northeast Italy, within the Alpine foredeep province (Fig. 4). The Nervesa structure was drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa-1dir A) and proved gas-bearing in at least 13 sand intervals within the Tortonian (5, 6a-d, 7a-e, 8, 9a-b). Of these intervals only one (9a) was completed in Nervesa-1 and put in production between 1989 and 1991. The permit was acquired by Celtique Energie in 2010 and subsequently operated by Sound Oil. Sound Oil acquired Celtique’s 50% interest in November 2011. The Nervesa ﬁ eld has the potential of ﬁ ve further completions on the remaining 12 sand intervals at 1,829m to 1,964m depth. Gross P50 contingent resources have been independently estimated to be 20.7 Bscf. The ﬁ rst well was drilled in July 2013 with 46 metres of net pay across 13 zones. The well test achieved a stabilised total gas ﬂ ow rate of 2.7 MMscfd from multiple sandstone intervals in the Upper Miocene San Dona Formation using a dual string completion. Following these successful results, Sound Oil has applied for a Production Concession with a view to achieving ﬁ rst gas sales at Nervesa in 2015. This is the ﬁ rst well in a 2 or 3 well development plan with the second well, in the Southern part of the structure, planned for Q2-Q3 2014. There are preliminary signs of potential for an additional exploration prospect on the same licence. Figure 2 Figure 3 Figure 4 8 Sound Oil plc Annual Report 2013 Figure 5 Figure 6 Technical Review continued Laura Discovery (Sound Oil 100%) D150 DR-CS is located in the Ionian Sea Zone D within the Sibari Basin in offshore (ENI) Calabria (Fig. 5). Average water depth is 200m. The permit area was formerly held by Agip as permit D.R50.AG between 1976 and 1984. In 1980 commercial gas was discovered in two sand intervals in Laura-1 . Gross P50 contingent resources for the Laura discovery have been independently estimated to be 30 Bscf. The permit is expected to be awarded shortly and the strategy is to drill an appraisal well on the discovery. In order to reduce potential drilling and development 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 project and intends to submit a drilling application on award of the permit to enable drilling in 2015. Santa Maria Goretti Permit (Sound Oil 100%) In December 2013, Sound was pleased to announce the award of the Santa Maria Goretti Permit (“SMG Permit”) from the Italian Ministry of Economic Development. The onshore SMG Permit sits in the Marche Region in Italy, covers an area of 101km2 and is owned 100% by Sound Oil. The SMG Permit area contains the southern extension of two signiﬁ cant producing gas ﬁ elds, which are operated by ENI in the adjacent permit. Sound Oil’s internal seismic evaluation and reservoir studies are very encouraging and the Company plans to submit a drilling application to appraise the reservoir. Exploration Assets Badile Prospect (Sound Oil 100%) The permit containing the Badile Prospect was awarded in March 2010. An independent Competent Person’s Report (CPR) has conﬁ rmed a Best estimate NPV10 of €486m, an increase of 60% on the previous CPR (which was €302m). The CPR has also estimated a High Case NPV10 of €1.7bn and a Low Case NPV10 of €101m. Underpinning these estimates are gross prospective resources of 178Bscf equivalent (106 Bscf of gas plus 12 MMbbl of condensate) with a High Case estimate of 673Bscfe (397 Bscf of gas plus 46 MMbbl of condensate) and a Low Case estimate of 46Bscfe (28 Bscf of gas plus 3 MMbbl of condensate). The study has also conﬁ rmed a 22% geological chance of success for the prospect. In December 2013 Sound Oil applied to drill the exploratory well Moirago-1 submitting both the well plan and the relevant EIA documentation. Sound Oil plc Annual Report 2013 9 Statement of Proved and Probable Reserves The Group’s prove d and probable hydrocarbon reserves as at 31 December 2013 were: Proved reserves at 31 December 2012 Additions Production Proved reserves at 31 December 2013 Probable reserves at 31 December 2012 Additions Revisions Probable reserves at 31 December 2013 Total Proved and Probable Reserves at 31 December 2013 Abbreviations: Bscf: Billion standard cubic feet of gas. MMbo: Million barrels of oil. MMboe: Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil). Gas (Bscf) MMboe 0.81 0.09 (0.08) 0.82 0.49 0.13 (0.02) 0.60 1.42 0.14 0.02 (0.01) 0.14 0.08 0.02 (0.00) 0.10 0.24 10 Sound Oil plc Annual Report 2013 The Team Andrew Hockey, Chairman (Non-Executi ve) • Chairman of Exploration and Production Technical Committee • 30 years technical and managerial experience in the upstream oil and gas industry in the UK and overseas • MSc in Petroleum Geology (Imperial College), BA in Geology (Oxford) James Parsons, Chief Executive Ofﬁ cer and Director • 21 years in Oil/Gas across Europe, South America and Central America • 12 years with Royal Dutch Shell • Strong background in upstream strategy, M&A and ﬁ nance Stuart Joyner, Chief Financial Ofﬁ cer • 20 years in oil and gas investment banking • Previously Head of Oil and Gas at Investec, Credit Suisse and Morgan Stanley • Relationships with key institutions and debt funding experience Luca Madeddu, Italy Managing Director • 22 years as reservoir geologist with ENI in Europe, Asia and South America • Extensive experience in hydrocarbon production, ﬁ eld development, petroleum engineering, supply chain management and reservoir engineering • Able to navigate the Italian regulatory process Leonardo Spicci, Italy Deputy Managing Director • 20 years reservoir geologist with ENI, Petrobel, KPO and GSA • Previously ENI District Manager for all Northern Italian Assets • Worked across Italy, Northern Africa, Middle East and Central Asia Sound Oil plc Annual Report 2013 11 The Team continued Simon Davies, Non-Executive Director • • 30 years of investment management experience. Retired as Executive Chairman of Threadneedle Asset Management in 2012 having joined Threadneedle as Chief Investment Ofﬁ cer in 1995; over this period Threadneedle’s assets under management increased from £22 billion to approximately £70 billion. Currently Chairman of JP Morgan Overseas Investment Trust, a Non Executive Director of Grainger Plc and Director of a number of subsidiaries of Old Mutual Wealth Management. Gerry Orbell, Non-Executive Director • • • A petroleum geologist with over 40 years of international experience including Board positions at Premier Oil and Fina Currently Chairman of AIM quoted Antrim Energy Inc. and serves as a director on a number of private company boards Retired as Chairman and CEO of Sound Oil in 2012 after founding the company in 2005 and running it for seven years Tony Heath, Non-Executive Director (Retiring end of June 2014) • • • 30 years of ﬁ nancial, exploration and general management experience in the oil and gas industry Was responsible for all ﬁ nancial information and control for Burmah Oil covering operations in 35 countries Is a chartered accountant and was Group Finance Director of Sound Oil from 2005 to August 2010 12 Sound Oil plc Annual Report 2013 The Team continued Simon Davies, Non-Executive Director • • 30 years of investment management experience. Retired as Executive Chairman of Threadneedle Asset Management in 2012 having joined Threadneedle as Chief Investment Ofﬁ cer in 1995; over this period Threadneedle’s assets under management increased from £22 billion to approximately £70 billion. Currently Chairman of JP Morgan Overseas Investment Trust, a Non Executive Director of Grainger Plc and Director of a number of subsidiaries of Old Mutual Wealth Management. Gerry Orbell, Non-Executive Director • • • A petroleum geologist with over 40 years of international experience including Board positions at Premier Oil and Fina Currently Chairman of AIM quoted Antrim Energy Inc. and serves as a director on a number of private company boards Retired as Chairman and CEO of Sound Oil in 2012 after founding the company in 2005 and running it for seven years Tony Heath, Non-Executive Director (Retiring end of June 2014) • • • 30 years of ﬁ nancial, exploration and general management experience in the oil and gas industry Was responsible for all ﬁ nancial information and control for Burmah Oil covering operations in 35 countries Is a chartered accountant and was Group Finance Director of Sound Oil from 2005 to August 2010 12 Sound Oil plc Annual Report 2013 Strategic Report The Directors present their strategic report for Sound Oil plc (the Company) and its subsidiaries (the Group) for the year ended 31 December 2013. Business Review The Group’s loss after the tax for the year amounted to £6,864,000 (2012 loss: £13,738,000). Future Developments The Group continues to focus on its core strategy of commercialising the Carita licence (Nervesa) with the aim of ﬁ rst revenues from this licence in 2015, drilling the potentially game-changing Badile prospect at the end of 2014 and then proceeding to develop the Laura discovery. First production from the Casa Tiberi well is expected mid-2014 and, combined with the strong Rapagnano revenues now being received, this will more than cover the majority of on-going running costs. 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 its development. This report was approved by the board on 1 9 May 2014 and signed on its behalf 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. 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 the Technical Review. Environment The Group places high priority on minimising the environmental impact of our operations. No group company has been notiﬁ ed of any instance of non-compliance with environmental legislation in the country in which they work. Andrew Hockey Chairman 20 May 2014 Sound Oil plc Annual Report 2013 13 Report of the Directors The Directors submit their report and the audited accounts for the year ended 31 December 2013. Directors Directors of Sound Oil plc holding ofﬁ ce during the year were: Andrew Hockey James Parsons Tony Heath (retiring end June 2014) Michael Nobbs (retired 18 December 2013) Going concern Details of going concern considerations are shown in the Financial Review on page 7. Dividends The Directors do not recommend the payment of a dividend. 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. Exploration and Production Technical Committee The Exploration and Production Technical Committee (“EPTC”) exists 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 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 technical 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. 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: • • 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. Disclosure in the Strategic Report As permitted by Paragraph 1A of Schedule 7 to the Large and Medium-sized companies and groups (Accounts and Reports) Regulations 2008, certain matters which are required to be disclosed in the directors’ report have been omitted as they are included in the strategic report on page 14. These matters relate to the principal activities, review of the business, future developments, ﬁ nancial risk management objectives and policies, key performance indicators and business risk and uncertainties. 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 2012 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 2013. The table below sets out our operational HSE performance for 2012 and 2013, 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 2014. Operations Type Drilling Well Testing Facilities Construction Production Operations Totals Operations (Hours) 32,865 2,888 960 360 37,073 2013 Lost time Incidents* (Number) – – – – – (Hours) – – – – – Operations (Hours) – 133 24 – 157 2012 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) By order of the Board Step hen Ronaldson Company Secretary 20 May 2014 14 Sound Oil plc Annual Report 2013 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 currently comprises Simon Davies, who chairs the Committee, and Tony Heath. None of the Executive Directors of the Company is involved in determining his own remuneration. 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 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 2014 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 may be 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 and gas sector and general market data on the basis of companies in similar industries and those of a similar size. The objective is to ensure that the base salary provides a competitive remuneration package. The base salaries of the Executive Team are currently positioned in the median . 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 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’s contract of employment and non-executive directors’ letters of appointment are set out below: • • • • 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 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. Sound Oil plc Annual Report 2013 15 Report on Directors Remuneration continued Summary of actual remuneration of directors Executive Directors James Parsons (i) Gerry Orbell Non-executive Directors and Chairman Andrew Hockey Michael Nobbs (ii) Tony Heath Ilham Habibie Total for all Directors 2013 Performance Award 2012 Performance Award 2013 Extraordinary Compensation Salary 234 – 70 35 31 – 370 60 – – – – – 60 – – – – – – – – – – 30 30 – 60 Total 2013 294 – 70 65 61 – 490 Total 2012 52 496 40 31 31 29 679 Includes pension contribution of 4%. Salary revised to £250,000 plus 4% pension contribution from 1 January 2014. (i) (ii) Left the Company on 18 December 2013 Share Options J Parsons J A Heath A Hockey Date of Grant Exercisable Date Acquisition Price per share (pence) Options held at 1 January 2013 Options held at 31 December 2013 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 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 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 18.04.2011 01.03.2011-29.02.2016 29.09.2011 29.09.2011-28.09.2016 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 21.75 21.75 21.75 25.00 25.00 25.00 16.50 16.50 16.50 43.75 43.75 43.75 27.50 22.00 49.50 16.50 16.50 16.50 110,000 110,000 110,000 150,000 150,000 150,000 333,333 333,333 333,334 33,333 33,333 33,334 200,000 100,000 100,000 100,000 100,000 100,000 110,000 110,000 110,000 150,000 150,000 150,000 333,333 333,333 333,334 33,333 33,333 33,334 200,000 100,000 100,000 100,000 100,000 100,000 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 end of 2013 option coverage is relatively limited (some 2.3% of issued share capital). Over the long term the Board wish to move towards the 10% approved cap. 16 Sound Oil plc Annual Report 2013 Corporate Governance Report The Board recognises the importance of sound corporate governance and notes 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 has established levels of authorisation of ﬁ nancial commitments and payment approval procedures appropriate to the size of the business. The Board receives 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, identiﬁ es and reviews the key areas of business risk facing the Group. 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 are split in accordance with best practice. 20 board meetings were held during the year. 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. 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. The Committee met twice during 2013. 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 is 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 permanent 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. Sound Oil plc Annual Report 2013 17 Statement of Directors’ Responsibilities The Directors are responsible for keeping adequate accounting records that are sufﬁ cient to show and explain the company’s transactions and to 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. The Directors 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. 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: • • • • select suitable accounting policies and then apply them consistently; make judgments and accounting estimates that are reasonable and prudent; 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. 18 Sound Oil plc Annual Report 2013 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 2013 which comprise Consolidated Statement of Comprehensive Income, 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 Strategic Report, 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent, with the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on ﬁ nancial statements In our opinion: • • • 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 2013 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. 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: • • • • 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. 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 20 May 2014 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. Sound Oil plc Annual Report 2013 19 Consolidated Statement of Comprehensive Income for the year ended 31 December 2013 Revenue Operating costs Exploration and development costs Gross loss Administrative expenses Group trading loss from continuing operations Finance revenue Foreign exchange (loss)/gain 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: Equity holders of the parent Loss per share (basic) from continuing operations Loss per share (basic) from discontinued operations Notes 3 6 7 8 Notes 9 9 2013 £’000s 482 (265) (4,038) (3,821) (2,616) (6,437) 9 (304) (132) (6,864) – (6,864) – (6,864) 557 (6,307) 2012 £’000s – – (1,455) (1,455) (3,176) (4,631) 11 (174) (10) (4,804) – (4,804) ( 8,934) (13,738) 427 ( 13,311) (6,307) ( 13,311) 2013 Pence (2.40) – 2012 Pence (2.00) (3.70) 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 £2,183,000 (2012: £28,647,000). 20 Sound Oil plc Annual Report 2013 Consolidated Balance Sheet as at 31 December 2013 Group Non-current assets Property, plant and equipment Intangible assets 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 Loans due in over one year Total liabilities Net assets Capital and reserves attributable to equity holders of the company Issued equity share capital and share premium Accumulated deﬁ cit Foreign currency reserve Total equity Notes 2013 £’000s 10 11 13 14 15 15 16 17 15 1 8 1,476 19,500 20,976 1,978 184 543 2,705 23,681 2,797 229 3,026 2,165 1,226 1,947 5,338 8,364 15,317 63,085 (49,029) 1,261 15,317 2012 £’000s 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 ﬁ nancial statements were approved by the Board and authorised for issue on 20 May 2014 and were signed on its behalf by: J Parsons Director A Hockey Director The accounting policies on pages 27 to 31 and notes on pages 32 to 50 form part of these ﬁ nancial statements . Sound Oil plc Annual Report 2013 21 Company Balance Sheet as at 31 December 2013. Company number: 05344804 Company Non-current assets Property, plant and equipment Investments in subsidiaries 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 Notes 10 12 13 14 15 2013 £’000s 6 24,252 24,258 12 143 418 573 24,831 399 24,432 63,085 (38,653) 2012 £’000s 7 22,880 22,887 1,698 38 2,141 3,877 26,764 259 26,505 63, 083 (36,578 ) Total equity 18 24,432 26,505 The ﬁ nancial statements were approved by the Board and authorised for issue on 20 May 2014 and were signed on its behalf by: J Parsons Director A Hockey Director The accounting policies on pages 27 to 31 and notes on pages 32 to 50 form part of these ﬁ nancial statements . 22 Sound Oil plc Annual Report 2013 Consolidated Statement of Changes in Equity for the year ended 31 December 2013 Group At 1 January 2013 Total loss for the period Other comprehensive gain/(loss) Total comprehensive income/(loss) Issue of share capital Transaction costs Share based payments At 31 December 2013 Notes 23 Notes At 1 January 2012 Total loss for the year 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 23 Share capital £’000s 2,870 – – – 6 – – Share premium £’000s 60,213 – – – 43 (47) – Accumulated deﬁ cit £’000s (42,273) (6,864) – (6,864) – – 108 Foreign currency reserves £’000s 704 – 557 557 – – – Total equity £’000s 21,514 (6,864) 557 (6,307) 49 (47) 108 2,876 60,209 (49,029) 1,261 15,317 Share capital £’000s 1,833 – – – – 1,037 – – 2,870 Share premium £’000s 52,871 – – – – 8,589 (1,247) – 60,213 Accumulated deﬁ cit £’000s (28,606) (17,229) 3,491 – (13,738) – – 71 (42,273) Foreign currency reserves £’000s 3,768 – (3,491) 427 (3,064) – – – 704 Total equity £’000s 29,866 (17,229) – 427 (16,802) 9,626 (1,247) 71 21,514 Sound Oil plc Annual Report 2013 23 Company Statement of Changes in Equity for the year ended 31 December 2013 Company At 1 January 2013 (Loss) for the year Issue of share capital Transaction costs Share based payments At 31 December 2013 At 1 January 2012 (Loss) for the year Issue of share capital Transaction costs Share based payments At 31 December 2012 Notes 23 Notes 23 Share capital £’000s 2,870 – 6 – – 2,876 Share capital £’000s 1,833 – 1,037 – – 2,870 Share premium £’000s 60,213 – 43 (47) – Accumulated deﬁ cit £’000s (36,578) (2,183) – – 108 60,209 (38,653) Share premium £’000s 52,871 – 8,589 (1,247) – 60,213 Accumulated deﬁ cit £’000s (8,002) (28,647) – – 71 (36,578) Total equity £’000s 26,505 (2,183) 49 (47) 108 24,432 Total equity £’000s 46,702 (28,647) 9,626 (1,247) 71 26,505 24 Sound Oil plc Annual Report 2013 Consolidated Cash Flow Statement for the year ended 31 December 2013 Cashﬂ ow from operating activities Cashﬂ 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 Net cash inﬂ ow on disposal of subsidiary Net cash ﬂ ow used in investing activities Proceeds from CSTI funding contract Net proceeds from equity issues Net cash ﬂ ow from ﬁ nancing activities Net increase/(decrease) in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Notes to cash ﬂ ow Cash ﬂ ow from operations reconciliation Proﬁ t/(loss) after tax Finance revenue Payroll bonuses paid in shares Exploration expenditure written off Increase/(decrease) in accruals and short term creditors Depreciation, Depletion and Amortisation Share based payments charge Increase in short term debtors Accrued interest 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 14 Notes 6 3 23 2013 £’000s (2,645) 9 (2,636) (706) (6,482) – (7,188) 1,664 1,576 3,240 (6,584) 218 6,909 543 2013 £’000s (6,864) (9) 60 4,038 318 146 108 (623) 132 – – 49 – (2,645) 2013 £’000s – – – 2012 £’000s (4,327) 11 ( 4,316) (80) (3,913) 2,515 (1,478) – 6,804 6,804 1,010 (387) 6,286 6,909 2012 £’000s (13, 738) (11) – 13,538 – 24 71 393 – 668 (1,432) (20) (3,820) (4,327) 2012 £’000s (2,184) (805) (2,989) Sound Oil plc Annual Report 2013 25 Company Cash Flow Statement for the year ended 31 December 2013 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 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 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 Notes to cash ﬂ ow Cash ﬂ ow from operations reconciliation Proﬁ t/(loss) after tax Finance revenue 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 Movement in debtors (Increase) in other non-current assets Depreciation, Depletion and Amortisation Cash ﬂ ow from operations Notes 14 Notes 23 2013 £’000s (1,8 20) 9 (1,8 11 ) (6) (1,626) (1,632) 1,576 1,576 (1,86 7) 2,141 14 4 418 2013 £’000s (2,183) (9) 108 18 139 (3) 103 – 7 (1,8 20) 2012 £’000s (2,453) 11 (2,442) (2) (7,317) (7,319) 6,804 6,804 (2,95 7) 5,092 6 2,141 2012 £’000s (28, 646) (11) 71 26,156 (26) – (3) 6 (2,453) 26 Sound Oil plc Annual Report 2013 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 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 2013 the Group had £0.6m 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 2015) will be less than the funds available as at 31 December 2013. 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 have 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) assets, provisions made for decommissioning, 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. The recognition and measurement of decommissioning provisions involves the use of estimates and assumptions. These include the existence of a legal or constructive obligation to decommission, based on current legislation, contractual or regulatory requirements or best practice; the risk-free discount rate used to determine the net present value of the liability; the estimated cost of decommissioning based on internal and external engineering estimates and reports; and the payment dates of expected decommissioning costs which are uncertain and are based on economic assumptions surrounding the useful economic lives of the ﬁ elds concerned. Actual costs could differ from estimated costs due to changes in legislation, regulations, technology, price levels and the expected date of decommissioning Goodwill is tested annually and at other times when impairment indications exist. When value in use calculations are undertaken, management estimates the expected future cash-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 11. 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 19). Sound Oil plc Annual Report 2013 27 Notes to the Financial Statements continued 1 Accounting policies (continued) 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. 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. 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. 28 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 1 Accounting policies (continued) 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 expenses 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) Revenue recognition Revenue associated with production sales of natural gas is recorded when title passes to the customer. (f) Expenses recognition Expenses are recognised on the accruals basis unless otherwise stated. (g) Property, plant and equipment Fixtures, ﬁ ttings and equipment are recorded at cost as tangible assets. The straight-line method of depreciation is used to depreciate the cost of these assets over their estimated useful lives, which is estimated to be four years. Producing oil and gas assets are depreciated on the unit of production basis. (h) 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. Sound Oil plc Annual Report 2013 29 Notes to the Financial Statements continued 1 Accounting policies (continued) 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. (i) Income tax 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. 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. (j) Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at call with banks. (k) 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. (l) 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. (m) 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. 30 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 1 Accounting policies (continued) IFRS Standards and Interpretation issues (and EU adopted) but not yet effective – – Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS30); issued June 2013 and effective for accounting periods beginning on or after 1st January 2014 Investment Entities (Amendments to IFRS10, IFRS 12 and IAS27); issued October 2012 and effective for accounting periods beginning on or after 1 January 2014 – and effective for accounting periods beginning on or after 1 January 2014 IFRS Standards and Interpretation issues issued by IASB but not yet EU approved – IFRS 9 Financial Instruments; issued November 2009 – IFRIC 21 Levies; issued May 2013 – IFRS14 Regulatory Deferral Accounts; issued January 2014 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. (n) 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. (o) 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. Sound Oil plc Annual Report 2013 31 Notes to the Financial Statements continued 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 2013 the Group’s exploration and appraisal activities were carried out in Italy only under a licensing and permit scheme. 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. The Group reported its ﬁ rst production in 2013 and reports this accordingly under the Development and Production segment. Details regarding each of the operations of each reportable segment is included in the following tables. The segment results for the year ended 31 December 2013 are as follows: Development and Production 2013 £’000s Exploration and Appraisal 2013 £’000s Sales and other operating revenue from external customers Operating costs Impairment of exploration and evaluation assets Administration expenses Operating loss segment result Interest receivable Interest payable Loss for the year before taxation Corporate 2013 £’000s – – – (2,616) (2,616) 9 (436) (3,043) During the period, revenues amounting to £482,000 arose from a single customer. 482 (265) – – 217 – – 217 Corporate 2013 £’000s 8 8 2,705 ( 2,165) Development and Production 2013 £’000s 1,388 – (578) Capital expenditure Other assets Total liabilities The geographical split of non-current assets is as follows: Sales and other operating revenue Development and production assets Fixtures, ﬁ ttings and ofﬁ ce equipment Goodwill Exploration and evaluation assets Total Assets The segment results for the year ended 31 December 2012 were as follows: 32 Sound Oil plc Annual Report 2013 – – (4,038) – (4,038) – – (4,038) Exploration and Appraisal 2013 £’000s 19,50 0 (5,621) UK £’000s – – 6 – – 6 Total 2013 £’000s 482 (265) (4,038) (2,616) (6,437) 9 (436) (6,864) Total 2013 £’000s 20,976 2,705 (8,364) Italy £’000s 482 1,388 82 2,167 17,333 20,970 Notes to the Financial Statements continued 2 Segment information (continued) 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 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 were as follows: Corporate 2012 £’000s – – – – (3,176) (3,176) 11 (10) (174) (3,349) Corporate 2012 £’000s 88 9,721 (3,606) Development and Production 2012 £’000s Exploration and Appraisal 2012 – – – (1,455) – (1,455) – – – (1,455) – – – – – – – – – Development and Production 2012 £’000s 76 5 – – Exploration and Appraisal 2012 £’000s 14,546 – – Development and production assets Fixtures, ﬁ ttings and ofﬁ ce equipment Goodwill Exploration and evaluation assets Total Assets 3 Operating loss Operating loss is stated after charging: Auditors’ remuneration Depreciation and amortisation Employee costs Impairment charge UK £’000s – 7 – – 7 2013 £’000s 82 146 2,045 3,984 Notes 4 10 5 11 Total £’000s – – – (1,455) (3,176) (4,631) 11 (10) (174) (4,804) Total 2012 £’000s 15,39 9 9,721 (3,606) Italy £’000s 765 81 2,126 12,420 15,392 2012 £’000s 98 24 2,357 1,455 Sound Oil plc Annual Report 2013 33 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 2013 £’000s 67 7 8 82 2013 £’000s 108 1,616 311 10 2,045 2012 £’000s 73 6 19 98 2012 £’000s 71 2,015 265 6 2,357 Notes 23 3 Total directors’ remuneration in the year was £490,000 (2012: £ 679,000). The highest paid director received remuneration of £294,000 (2012: £ 496,000) Number of employees (including executive directors) at the end of the year Technical and operations Management and administration Total 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 2013 2012 5 11 16 2013 £’000s 9 9 4 12 16 2012 £’000s 11 11 34 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 7 Taxation (a) Analysis of the tax charge for the year: Current tax United Kingdom corporation tax (charge)/credit Adjustment to tax expense in respect of prior years Overseas tax Total current tax (charge)/credit Deferred tax Deferred tax income arising in the current year Total deferred tax Total tax (charge)/credit (b) Reconciliation of tax charge: (Loss)/proﬁ t before tax Tax (charge)/credit at UK corporation tax of 23% (2012: 24.5%) 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 2013 £’000s Group 2012 £’000s Group – – – – – – – 2013 £’000s Group (6,864) 1,579 (474) (1,105) – 2013 £’000s Group – – – – – – – – – 2012 £’000s Group (13, 738) 3, 366 (7,019) 3,65 3 – 2012 £’000s Group – – In 2012 the Company announced the sale of its 20% working interest in the Citarum PSC to Pan Orient Energy (Citarum) PTE . On 12 December 2012 the Company sold its subsidiary, Mitra Energia Bangkanai Ltd (‘MEB’) to Salamander Energy Plc. Both of the above transactions were classiﬁ ed and accounted for as disposals in 2012 and presented as discontinued activities in the ﬁ nancial statements. 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 2013 £’000s – – – – – 2012 £’000s 671 (329) 12,083 (3,491) 8,934 In arriving at the net loss on disposal of the Citarum and Bangkanai assets in 2012 no value was attributed to contingent cash consideration of up to £12.2m ($18.6m) 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. Despite positive newsﬂ ow from the Bangkanai PSC, the Board feels the likelihood of realisation of economic beneﬁ t from the contingent consideration is not sufﬁ ciently proximate to recognise the amounts as assets in the ﬁ nancial statements. Sound Oil plc Annual Report 2013 35 Notes to the Financial Statements continued 9 Earnings per share 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 Diluted loss per share has not been disclosed as inclusion of unexercised options (see note 23) would be anti-dilutive. 2013 £’000s (6,864) 2013 million 288 2013 Pence (2.40) 2013 £’000s – 2013 Pence – 2012 £’000s (4, 804) 2012 million 242 2012 Pence (2.00) 2012 £’000s (8,934) 2012 Pence (3.70) 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. Development and production assets £’000s Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s Note 2,218 21 706 2 2,947 1,453 106 1,559 1,388 191 3 37 – 231 103 40 143 88 3 Total £’000s 2,409 24 743 2 3,178 1,556 146 1,702 1,476 10 Property, Plant and Equipment Group Cost At 1 January 2013 Exchange adjustments Additions Decommissioning provisions As at 31 December 2013 Depreciation At 1 January 2013 Charge for the year As at 31 December 2013 Net book amount at 31 December 2013 36 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 10 Property, Plant and Equipment (continued) Group Cost At 1 January 2012 Exchange adjustments Acquisitions Additions Transfers (1) Disposals At 31 December 2012 Depreciation At 1 January 2012 Exchange adjustments Transfers Charge for the year Disposals At 31 December 2012 Net book amount at 31 December 2012 (1) Transfers represent the reclassiﬁ cation of assets from intangible assets (note 11) Company Cost At 1 January 2013 Additions Disposals As at 31 December 2013 Depreciation At 1 January 2013 Charge for the year Disposals As at 31 December 2013 Net book amount at 31 December 2013 Company At 1 January 2012 Additions At 31 December 2012 Depreciation At 1 January 2012 Charge for the year At 31 December 2012 Net book amount at 31 December 2012 Development and production assets £’000s Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s Note 1,246 – – 341 1,877 (1,246) 2,218 – – 1,453 – – 1,453 765 3 204 (5) 80 – – (88) 191 172 (5) – 24 (88) 103 88 Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s 22 6 (10) 18 15 7 (10) 12 6 Fixtures, ﬁ ttings and ofﬁ ce equipment £’000s 20 2 22 9 6 15 7 Total £’000s 1,450 (5) 80 341 1,877 (1,334) 2,409 172 (5) 1,453 24 (88) 1,556 853 Total £’000s 22 6 (10) 18 15 7 (10) 12 6 Total £’000s 20 2 22 9 6 15 7 Sound Oil plc Annual Report 2013 37 Notes to the Financial Statements continued 11 Intangible Assets Cost At 1 January 2013 Exchange adjustments Additions At 31 December 2013 Impairment At 1 January 2013 Additions At 31 December 2013 Net book amount at 31 December 2013 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 Goodwill £’000s Exploration and evaluation assets £’000s 2,126 41 2,167 – – – 2,167 Goodwill £’000s 3,577 74 – – (1,525) 2,126 – – – – – 13.494 180 8,719 22,393 1,076 3,984 5,060 17,333 Exploration and evaluation assets £’000s 26,856 240 4,247 (1,879) (15,970) 13,494 (4,131) (1,455) 1,455 3,055 (1,076) Total £’000s 15,620 221 8,719 24,560 1,076 3,984 5,060 19,500 Total £’000s 30 ,433 314 4,247 (1,879) (17,495) 15,620 (4,131) (1,455) 1,455 3,055 (1,076) Net book amount at 31 December 2012 2,126 12,420 14,546 (1) Transfers represent the reclassiﬁ cation of assets to PP&E (note 10) 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”). A CPR for Badile was performed in October 2013 which gave a Best estimate NPV10 of €486m, an increase of 60% on the previous CPR. CPRs for the other Italian assets were last prepared 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. 38 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 11 Intangible Assets (continued) 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% (2012: 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. In 2013, the impairment costs related primarily to the decision to relinquish the Sambucheto and Monteluro licen ces whilst reducing the carrying value of the Strombone license. Italy Total 12 Investment in Subsidiaries Company At 1 January Net advances to group companies Write-off on disposals (net of foreign exchange gains on disposal) At 31 December 2013 £’000s 4,038 4,038 2013 £’000s 22,880 1,372 – 24,252 2012 £’000s 1,453 1,453 2012 £’000s 41,719 7,317 (26,156) 22,880 The subsidiary companies of the Company at 31 December 2013 which are all 100% owned by the Company are: Name Sound Oil International Limited Sound Oil Asia Limited* Mitra Energia Citarum Limited* Consul Oil and Gas Limited Apennine Energy SpA Apennine Oil and Gas SpA Incorporated British Virgin Islands British Virgin Islands Mauritius UK Italy Italy Principal Activity Holding Company Holding Company Dormant Company Holding Company Exploration company Exploration company * The investment in Mitra Energia Citarum Limited is 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 Sound Oil International and Consul group of companies. Sound Oil plc Annual Report 2013 39 Notes to the Financial Statements continued 13 Other Debtors Group Group Italian VAT UK VAT Other receivables 2013 2012 Non Current £’000s – – – – Current £’000s 963 19 1,792 2,774 Non Current £’000s – – – – Current £’000s 1,923 10 45 1,978 None of the amounts included in other debtors are past due or impaired. The maximum exposure to credit risk is represented by their carrying amount. The Group and Company do not hold any collateral as security. Currency analysis US Dollar Euro GBP Sterling Company UK VAT recoverable Other receivables Currency analysis GBP Sterling 2013 2012 Non Current £’000s – – – – Current £’000s 21 1,054 1,699 2,774 2013 2012 Non Current £’000s – – – Non Current £’000s – – 2013 Current £’000s 18 1,680 1,698 Current £’000s 1,698 1,698 2012 Current £’000s 11 1,955 12 1,978 Current £’000s 10 2 12 Current £’000s 12 12 Non Current £’000s – – – – Non Current £’000s – – Non Current £’000s – – 40 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 14 Cash and cash equivalents Group Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount at 31 December being in US Dollars in Euros in Sterling in Indonesian Rupiah Total Company Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount at 31 December being in US Dollars in Euros in Sterling Total 2013 £’000s 211 332 543 23 187 333 – 543 2013 £’000s 104 314 418 23 62 333 418 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 Sound Oil plc Annual Report 2013 41 Notes to the Financial Statements continued 15 Trade and other payables Group Trade payable Payroll taxes and social security Accruals Total Currency Analysis US Dollar Euro Sterling Total Company Trade payables Payroll taxes and social security Accruals Total Currency Analysis US Dollar Sterling Total All payables are due for within one year. Loans and Borrowings Current liabilities Other loans Non-current liabilities Other loans There were no default or breaches of loans payable in the year. 42 Sound Oil plc Annual Report 2013 2013 Current £’000s 2,317 79 401 2,797 2013 Current £’000s – 2,397 400 2,797 2013 Current £’000s 64 38 297 399 2013 Current £’000s – 399 399 2013 Current £’000s 229 229 1,947 1,947 2012 Current £’000s 461 121 137 719 2012 Current £’000s 101 393 225 719 2012 Current £’000s 120 – 111 259 2012 Current £’000s 34 225 259 2012 Current £’000s – – – – Notes to the Financial Statements Notes to the Financial Statements continued 16 Deferred tax assets and liabilities 1 January Released on disposal Unrealised foreign exchange (decrease)/increase 31 December Deferred tax assets have not been recognised in respect of losses due to the uncertainty of utilisation of these losses. 2013 £’000s 2,125 – 40 2,165 17 Provisions At 1 January 2013 Additions in 2013 Released during the year Discount unwind Unrealised foreign exchange increase As at 31 December 2013 Current Non-current Total Abandonment The provision of £1,164,0 00 relates to the following licences: Rapagnano Montemarciano Marciano Carita Abandonment £’000s Other provisions £’000s 559 587 – 3 15 1,164 451 713 1,164 121 – (63) – 4 62 62 – 62 2012 £’000s 3,576 (1,525) 7 4 2,125 Total £’000s 680 587 (63) 3 19 1,226 513 713 1,226 £’000s 12 7 201 250 586 Abandonments costs relating to Marciano and Montemarciano are likely to be incurred during 2015 and have been classiﬁ ed as current. There are no provisions in the parent Company. Sound Oil plc Annual Report 2013 43 Notes to the Financial Statements continued 18 Capital and Reserves Company Ordinary shares - 0.1p Share option schemes Number of shares £’000s Number of shares 2013 2012 287,618,544 2,876 2,870,012,882 £’000s 2,870 Options to subscribe for the Company’s shares were granted to certain executives in 2012 and 2013 (note 19). Group At 1 January 2013 Total loss for the period Other comprehensive income Issue of share capital Transaction costs Share based payments At 31 December 2013 Group At 1 January 2012 Total loss for the period excluding foreign exchange recycled to the income statement Foreign exchange recycled from foreign currency reserve on disposal Other comprehensive income Issue of share capital Share based payments Transaction costs Share based payments At 31 December 2012 Share capital £’000s 2,870 – – 6 – – Share premium £’000s 60,213 – – 43 (47) – Accumulated deﬁ cit £’000s (42,273) (6,864) – – – 108 Foreign currency reserve £’000s 704 – 557 – – – Total equity £’000s 21,514 (6,864) 557 49 (47) 108 2,876 60,209 (49,029) 1,261 15,317 Share capital £’000s 1,833 – – – 1,037 – – – 2,870 Share premium £’000s 52,871 Accumulated deﬁ cit £’000s (28,606) – (17,229) – – 8,589 – (1,247) – 3,491 – – – – 71 60,213 (42,273) Foreign currency reserve £’000s 3,768 – (3,491) 427 – – – – 704 Total equity £’000s 29,866 (17,229) – 427 9,626 – (1,247) 71 21,514 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. 44 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 18 Capital and Reserves Company At 1 January 2013 (Loss) for the year Shares issued Share based payments Transaction costs At 31 December 2013 Share Issues Share capital £’000s 2,870 – 6 – – Share premium £’000s 60,213 – 43 – (47) Accumulated deﬁ cit £’000s (36,578) (2,183) – 108 – 2,876 60,209 (38,653) Total equity £’000s 26,505 (2,183) 49 108 (47) 24,432 On 4 January 2013, the Company held a general meeting to approve the previously announced 1 for every 10 share consolidation. The consolidation was approved and consequently Sound Oil shares were re-admitted to the AIM market with 287,012,882 shares in circulation. On the 22 March 2013, the Company announced the results of its Open Offer which had been announced on 24 January 2013 with an offer price of 8.073 pence per New Ordinary Share. The Offer was not underwritten. The Company received valid acceptances in respect of 605,662 Open Offer Shares from eligible shareholders. Consequently, the Company now has 287,618,544 Ordinary Shares in issue. 19 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 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 Country of Incorporation British Virgin Islands British Virgin Islands UK Italy Italy Mauritius Mauritius % equity interest 2013 100 100 100 100 100 – 100 2012 100 100 100 100 100 100 100 In 2013 the Group disposed of its investment in Mitra Energia Limited which had nil net assets at the end of 2012. Terms and conditions of transactions with related parties There were no sales or purchases to or from related parties (2012: none). There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2013, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2012: 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 three key management personnel other than directors of the Company (2012: two). 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 2013 £’000s 871 108 979 2012 £’000s 1,373 71 1,444 Sound Oil plc Annual Report 2013 45 Notes to the Financial Statements continued 19 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 2011 2012 Expiry Date 2016 2016 Exercise price Pence 49.5 16.5 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 Key management’s interest in employee share options Issue Date 2012 2012 2013 Expiry Date 2016 2018 2016 Expiry Date 2017 2018 2018 Exercise price Pence 21.75 25.0 16.5 Exercise price Pence 1 6.5 2 5.0 12.15 Number 2013 100,000 300,000 Number 2013 330,000 450,000 1,000,000 Number 2013 330,000 450,000 2,622,219 Number 2012 100,000 300,000 Number 2012 330,000 450,000 1,000,000 Number 2012 3 30, 000 450,000 – 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 entity 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 13 (other debtors), note 14 (cash and cash equivalents) and note 15 (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. 46 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 20 Financial Instruments risk management objectives and policies (continued) Interest rate risk table 2013 Sterling US Dollar Euro Sterling US Dollar Euro 2012 Sterling US Dollar Euro Sterling US Dollar Euro Capital Management Increase/ (decrease) % Effect on proﬁ t before tax £’000s 10 10 10 (10) (10) (10) 10 10 10 (10) (10) (10) 1 – – (1) – – 1 – – (1) – – 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 2013 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. Borrowings Cash and cash equivalents Net (debt)/cash Total capital excluding reserves: Equity share capital Equity share premium Shareholders equity 2013 £’000s (2,176) 5 43 (1,6 33) 2,876 60,209 1 5,317 2012 £’000s ( 82) 6,909 6,827 2,870 60,213 21,514 Sound Oil plc Annual Report 2013 47 Notes to the Financial Statements continued 21 Foreign Currency Risk As a result of the majority 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 hold some 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. 2013 2012 Credit risk 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) ( 283) 298 (456) 480 5 (5) 5 (5) (2) 1 (136) 143 The Group currently has one external customer from whom it earns revenue. 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 counterpar ty has a strong credit rating . Liquidity Risk The Group and Company have signiﬁ cant liquid assets and are not materially exposed to liquidity risk. For further details on the maturity of ﬁ nancial liabilities see note 15. 22 Financial Instruments 2013 Cash and short term deposits GBP Sterling Euro US$ Indonesian Rupiah Total 2012 Cash and short term deposits GBP Sterling Euro US$ Indonesian Rupiah Total Floating Rate £’000s Interest- free £’000s Total interest rate £’000s Weighted average % 315 126 17 – 458 1,451 2,762 42 3 4,258 18 61 6 – 85 29 – 2,622 – 2,651 333 187 23 – 543 1,48 0 2,76 2 2,66 4 3 6,90 9 0.45% 1.27% 0.25% – – 0.45% 0.10% 0.00% 0.00% – US$ cash balances have been converted at the exchange rate of US$1.6349/£1.00 (2012: US$1.5825/£1.00). Euro cash balances have been converted at the exchange rate of €1.2015/£1.00 (2012: €1.2347/£1.00). The ﬂ oating rate cash and short-term deposits comprise cash held in interest bearing deposit accounts. 48 Sound Oil plc Annual Report 2013 Notes to the Financial Statements continued 23 Share Based Payments The Group has a Long Term Incentive Plan under which share options have been granted to the executive team. The expense recognised for employee services received in the Consolidated Income Statement is as follows: Group and Company Expense arising from equity settled share options 2013 £’000s 108 2012 £’000s 71 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. 2013 Total 2012 Total Granted 2,622,219 2,622,219 1,300,000 330,000 100,000 1,350,000 3 ,08 0,000 Period (years) 5 5 4 5 5 6 Price (pence) 12.15 12.15 16.5 16.5 2 5.0 2 5.0 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 outstanding at the end of the year 2013 6,169,334 2,622,219 (2,609,333) 6,182,220 2012 3,7 64 ,000 3,0 80, 000 (6 74,6 66 ) 6,1 69 ,33 4 If all equity share options were exercisable immediately, new ordinary shares equal to approximately 2.3% of the Group’s existing ordinary share capital base would be created. Sound Oil plc Annual Report 2013 49 Notes to the Financial Statements continued 24 Commitment and guarantees At 31 December 2013, the Group had no commitments other than for decommissioning (note 17) and no capital commitments (2012: none). 25 Post balance sheet events On 14 January 2014, the Company announced that both Simon Davies and Gerry Orbell would be appointed to the Board as non-executive directors following completion of the Open Offer announced on the same day. Consequently, they were both formally appointed on 3 February 2014. On the 14 January 2014, the Company announced a new Open Offer to eligible shareholders in order to raise approximately £1.6m (before expenses). The Offer was made for 38,349,139 new shares at 4.2p per share and represented a 32.8% discount to the closing market price of the Company’s shares on 13 January 2014. The Open Offer was fully underwritten by Peel Hunt and Simon Davies. The Company was pleased announced on 3 February that it had received applications for shares signiﬁ cantly in excess of shares available as part of the issue. Consequently, 38,349,139 were admitted for trading on the AIM market on 4 February 2014. On 14 January 2014, the Company also conﬁ rmed placement of a new asset backed loan of £1m provided by Simon Davies, which may be increased at the Company’s discretion to £1.5m. The loan carries a 10% coupon and 17.5% fee. On 25 April 2014, the Company announced that it had signed Heads of Terms with a new Institutional Investor, Continental Investment Partners SA (“Continental”). Continental agreed, subject to due diligence and contract, to inject a total of £14 million into the Company at an average price, post warrant exercise, of approximately 9 pence per share (a 69% premium to the closing share price on 24 April 2014). Continental has agre ed to subscribe for 100,000,000 new ordinary shares at a price of 8 pence per share to raise £8,000,000 before expenses. On Completion, the Investor will therefore own 23.41% of the Company’s issued ordinary share capital. The Investor has agreed to an 18 month lock-in period for half of the shares to be subscribed for and a 12 months lock-in period for the other half. As a sign of its commitment to the transaction, Continental immediately subscribed for a £1.5 million 3 year loan at a 10% coupon and was, on issue of this initial loan, granted 14,423,076 warrants to subscribe for new ordinary shares in the Company exercisable at a price of 10.4 pence per share. The exercise price of 10.4 pence per share represented a 98% premium to the closing share price on 24 April 2014 and a 79% premium to the three month VWAP. Coupon payments are made quarterly in arrears in cash. Following approval by the Company’s shareholders of the ordinary share issue at the Annual General Meeting, the Investor will provide Sound Oil with an additional £4.5 million by way of a further loan on the same terms as the initial £1.5 million loan described above (10% coupon and the issue of 43,269,230 warrants, exercisable at 10.4 pence per share). Coupon payments will also be made quarterly in arrears in cash. A fee of 5% of the total proceeds of the £14 million fundraising will be payable to the Investor by the Company. The warrants are be both detachable and transferable and can be exercised at any point during the term of the loan. Should any of the warrants be exercised, the Company is entitled, but not obliged, to apply the proceeds received to the repayment of the loan at the time of exercise. The Investor will only be able to exercise the warrants up to the point where its ownership does not exceed 29.9% of the issued share capital of the Company. Any balance of the loan not repaid after three years will be repayable at that point in cash by the Company. It is intended that on the issue of the second tranche of the loan note, the existing £1 million loan from Simon Davies, a director of the Company, will convert into a new loan on identical terms to the Investor loan (including the issue of warrants) but without fees. Upon successful completion of the ordinary share issue and issue of the loan notes and warrants, it is intended that the Investor will have the right to nominate two Non-Executive Directors for appointment to the Board of the Company. On 28 April 2014, the Company announced it had signed non-binding heads of terms with Niche Group plc (“Niche”) for a farm down of the Company’s onshore Carita licence in the Po Valley, Northern Italy (the “Heads of Terms”). The Carita licence area includes the Nervesa discovery. Under the Heads of Terms, Niche will acquire, subject to completion of due diligence, a 27.5% interest in the Carita licence in exchange for paying 100% of the costs of a second well to address the southern part of the structure, planned for Q2/Q3 2014. Following the farm out, the Company will continue to hold a 72.5% interest in the Carita licence. The second well, to be funded by Niche, is estimated to cost Euro 6 million, including testing, completion and applicable taxes. The Heads of Terms include a binding and mutual break fee and a binding agreement is expected to be entered into during Q2 2014. 50 Sound Oil plc Annual Report 2013 Notes to the Financial Statements List of Licences and Interests continued Licence Status Name Type Key Project or Prospect Rapagnano1 Fonte San Damiano Torrente Alvo2 Villa Gigli3 Badile Santa Maria Goretti Carità 4 Monte Negro2 Montemarciano D150 DR-CS D503 BR-CS Posta Del Giudice3 Solfara Mare D148 DR-CS Costa Del Sole Tardiano Torre del Ferro San Lorenzo Concession Concession Permit Permit Permit Permit Permit Permit Permit Application Application Application Application Application Application Application Application Concession Rapagnano Marciano Strombone Musone Badile Tesino Nervesa – – Laura Dora – – – Manfria – – Casa Tiberi Gas Production Gas Production (suspended ) Oil Discovery Oil Discovery Prospect Appraisal Gas Discovery – – Gas Discovery Gas Discovery – – – Oil Discovery – – Gas Discovery WI (%) 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 Area (km2) 8.5 23.7 84.3 100.9 154.5 101.3 529.8 287.7 49.4 65.2 138.1 113.6 337 63.1 41.5 212.4 118. 4.9 Operator Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Sound Oil Notes: 1. 2. 3. 4. A concession allows hydrocarbon production and is valid for twenty years. A permit is valid for six years and allows seismic and drilling operations. An application for a permit can be made at anytime, it becomes exclusive to the applying company three months after publication in the Ofﬁ cial Journal of the EU. All the applications listed here are exclusive to Apennine Energy. The conversion of an application to a full permit requires the approval of an Environmental Impact Assessment. Monte Negro and Torrente Alvo Permit: 100 per cent. SOU (50 per cent. Apennine Energy -50 per cent. Apennine Oil and Gas). Prior to the asset swap transaction announced by the Company on 28 February 2013, Compagnia Generale Idrocarburi SpA and Sound Oil each held a 50 per cent. equity position in four assets: two awarded licences (Villa Gigli and Colle Ginestre) and two outstanding applications (Posta del Guidice and Il Convento). Sound Oil increased its equity position to 100 per cent. in Villa Gigli and Posta Del Giudice in exchange for eliminating any equity interest in Il Convento and Colle Ginestre. Final regulatory approved is awaited. On 28 April 2014, the Company announced it had signed non-binding heads of terms with Niche Group plc (“Niche”) for a farm down of the Company’s onshore Carita licence in the Po Valley, Northern Italy (the “Heads of Terms”). The Carita licence area includes the Nervesa discovery. Under the Heads of Terms, Niche will acquire, subject to completion of due diligence, a 27.5 per cent. interest in the Carita licence in exchange for paying 100 per cent. of the costs of a second well to address the southern part of the structure, planned for Q2/Q3 2014. Following the farm out, the Company will continue to hold a 72.5 per cent. interest in the Carita licence. The second well, to be funded by Niche, is estimated to cost Euro 6 million, including testing, completion and applicable taxes. The Heads of Terms include a binding and mutual break fee and a binding agreement is expected to be entered into during Q2 2014. Sound Oil plc Annual Report 2013 51 Dealing Information FT Share Price Index – Telephone 0906 8433711 SEAQ short code – SOU Financial Calendar Meetings Annual General Meeting – 25 June 2014 Announcements 2014 Interim – 19 September 2014 2014 Preliminary – April 2015 Addresses Registered Ofﬁ ce Sound Oil plc 55 Gower Street London WC1E 6HQ Business Address Sound Oil plc Riverbridge House Guildford Road Leatherhead Surrey KT22 9AD Company Secretary S Ronaldson 55 Gower Street London WC1E 6HQ Tel: +44 (0) 20 7580 6075 Fax: +44 (0) 20 7580 7429 Website www.soundoil.co.uk Auditors Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Stockbrokers Peel Hunt Moor House, 120 London Wall, London EC2R 6AY Nominated Advisers 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 52 Sound Oil plc Annual Report 2013 Sound Oil plc is a European and Mediterranean independent oil and gas exploration and development company Sound Oil plc’s strategy is to achieve substantial and sustainable growth in value through an active drill programme Contents Highlights Chairman’s Statement Financial Review Technical Review Statement of Proved and Probable Reserves The Team Strategic Report Report of the Directors Report on Directors’ Remuneration Corporate Governance Report Statement of Directors’ Responsibilities Independent Auditor’s Report Consolidated Statement of Comprehensive Income 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 List of Licences and Interests Dealing Information, Financial Calendar and Addresses 1 5 7 8 10 11 13 14 15 17 18 19 20 21 22 23 24 25 26 27 51 52 Designed and printed by Perivan 231838 www.soundoil.co.uk Sound Oil plc Annual Report 2013

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