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
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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
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www.soundoil.co.uk
Sound Oil plc
Annual Report 2013