Sound Energy Plc Annual Report 2015

Plain-text annual report

S o u n d E n e r g y p l c A n n u a l R e p o r t & A c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5 s t o c k c o d e : S O U Annual Report & Accounts for the year ended 31 December 2015 stock code: SOU BUilDing A RegiOnAl Oil AnD gAS BUSineSS in the eye Of the StORm 24754.02 25 May 2016 7:43 PM Proof 4 About us Sound Energy plc is a well-funded Mediterranean upstream company, listed on AIM (LSE:SOU), with production, a cornerstone investor and a strategic partnership with Schlumberger, one of the largest companies in the sector. 2016 promises to be a potentially transformational year for the Company, with three strategic plays spanning onshore appraisal and exploration drilling in both Morocco and Italy. Welcome to our 2015 Annual Report: The story so far and the journey ahead Our Investment Proposition A bold growth agenda with strong thematic positioning Outstanding people and partnerships ´ Strong European and North African gas price fundamentals ´ A team with skills on board to originate and execute underpinning our business transformational transactions ´ Producing and exploring for clean gas in an increasingly ´ Supportive cornerstone investor carbon conscious world ´ An ambitious and talented team driving Sound’s growth agenda Read the Sector Overview on page 09 for more detail Creating value through the drill bit ´ Multiple near-term strategic plays with the potential to transform the resource base of the Company: Tendrara, Sidi Moktar and Badile Read 2015/16 at a Glance on pages 02 to 05 for more detail A balanced and evolving portfolio ´ Assets across the life cycle ´ Pursuing selective, accretive M&A opportunities to complement our portfolio and diversify our risk ´ Focused on world class assets Read about our Strategy on pages 10 to 11 for more detail ´ Strategic partnership with one of the largest companies in our sector to technically de-risk and fund our drilling Read more about our Key Partners on pages 12 and 13 See details on The Team on pages 24 and 25 Strong funding position ´ Maintaining a strong balance sheet in a turbulent sector environment ´ Able to leverage off partner’s balance sheets ´ A low cost and high quality operator See the Operational and Financial Review on page 14 to 19 Change of Name Corporate Website On 1 October 2015, Sound Oil plc became Sound Energy plc, thereby aligning the Company’s branding with its strategy and portfolio. Visit: www.soundenergyplc.com for the latest news, reports, presentations and video. Navigation key Read more content within the report View more content online @soundenergyplc #deliveringdreamsinthedesert Sound Energy plc 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Stock Code: SOU www.soundenergyplc.com Positioned for success with . . . the right portfolio Badile Zibido Nervesa Rapagnano SMG Dora / Dalla I T A L Y Laura Meridja Tendrara I Tendrara II Tendrara O C C O Sidi Moktar Exploration R O M Read 2015/16 at a Glance on pages 02 to 05 and our Operational and Financial Review on pages 14 to 19 the right partners Read about our Key Partners on pages 12 and 13 the right people Contents Strategic Report 2015/16 at a Glance Statement from the Chairman and Chief Executive Officer The Journey Sector Overview Strategy Key Partners Operational and Financial Review Corporate Social Responsibility Managing Risk Our Governance The Team Corporate Governance Report Remuneration Report Directors’ Report Statement of Directors’ Responsibilities Independent Auditor’s Report Financial Statements Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements List of Licences and Interests Shareholder Information See details on The Team on pages 24 and 25 24754.02 25 May 2016 7:43 PM Proof 4 02 06 08 09 10 12 14 20 21 24 26 28 30 32 33 34 35 36 37 38 39 40 61 62 01 2015/16 at a Glance We operate a well balanced portfolio of 22 onshore gas licences and permits across both italy and morocco. the portfolio contains a healthy blend of exploration and production potential. morocco italy ´ Currently drilling the first well at Tendrara, following the acquisition of the interest in the Tendrara licence (as our first asset in our Moroccan portfolio) ´ Entry into the Tendrara Field Management Agreement with Schlumberger – our first project in this strategic partnership ´ Broadening of the Moroccan portfolio with the acquisition of Sidi Moktar bringing scale and diversification to our Moroccan portfolio ´ Option to acquire Meridja Area, neighbouring Tendrara ´ Receipt of the final Badile drilling permission from the Italian Ministry of Economic Development (UNMIG) ´ Continued production from our onshore gas fields, partially covering our cost base ´ Memorandum of Understanding (“MOU”) signed for the rig for the forthcoming Badile exploration well the introduction of a cornerstone investor (Continental investment Partners S.A.) and a strategic partner (Schlumberger, a multibillion company specialist in oil and gas) now positions us with a funded 2016 drill programme and an accelerated journey to a mid cap status without material equity dilution. Assets Production Low risk discoveries High upside exploration Badile Zibido Nervesa Rapagnano SMG Dora / Dalla I T A L Y Laura Meridja Tendrara I Tendrara II Tendrara O C C O Sidi Moktar Exploration R O M 02 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Assets Cost covering production Low risk discoveries Focus on . . . Morocco: Strategic Plays High upside exploration Permit Power station project Online power station Gas Maghreb– Europe Pipeline Gas pipeline project Meridja Strategic Play See our Strategy on page 10 and 11 for more detail Tendrara Area: Status: 14,500 km2 Permit Tahaddart Power 2 x 400 MW Dhar Doum 4 x 400 MW C I T N A L T A Rabat Casablanca M E D I T E R R A N E A N Oued El Makhazine 2 x 400 MW Al Wahda 4 x 400 MW Meridja Oujda Tendrara Sidi Moktar Marrakech O C C O R O M Sidi Moktar Area: Status: A I R E G L A 4,500 km2 Permit Effective date: 23 April 2013 Effective date: 1 July 2009 Term: 8 years Term: 8 years Resource potential: Interest: Prospective resource with multiple Tcf potential (gross) Sound Energy Phase I 37.5%, increasing to 55% Phase II Net effective interest of 27.5% following Field Management Agreement with Schlumberger Read more about Tendrara on page 14 Resource potential: Prospective resource Interest: 25% Read more about Sidi Moktar on page 16 Meridja Area: Status: 9,000 km2 Reconnaissance area with prospective resource analogous to Tendrara Read more about Meridja on page 15 24754.02 25 May 2016 7:43 PM Proof 4 03 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial Statements2015/16 at a Glance Focus on . . . Italy: Strategic Plays Assets Production Low risk discoveries High upside exploration Strategic Play See our Strategy on page 10 and 11 for more detail A full list of the Group’s Licences and Interests can be found on page 61 Badile Zibido Nervesa Rapagnano SMG Dora / Dalla I T A L Y Laura Badile Area: Status: 154.5 km2 Exploration asset Laura Area: Status: Effective date: 23 March 2010 Resource potential: 63.1 km2 Appraisal of existing discoveries Up to 25.6 Bscf (Best estimate 17.1 Bscf) Term: 6 years* Resource potential: 178 Bscf Interest: 100% * Extended to the end of 2016; expected to be extended further. See more about Badile on page 17 Interest: 100% Pictured: Rapagnano field 04 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Pictured: Sound Energy’s first well site in Morocco 24754.02 25 May 2016 7:43 PM Proof 4 05 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsStatement from the Chairman and Chief Executive Officer Simon Davies Chairman James Parsons CEO Sound energy is a european/mediterranean focused upstream gas company, listed on Aim, with a strategic partnership with Schlumberger (one of the largest companies in our sector), a cornerstone investor and an active and potentially transformational drill programme. Sound Energy’s portfolio includes a blend of high upside exploration assets, low risk appraisal/development assets and production, which is diversified across Italy and Morocco. 2015 was a turbulent year for the energy sector, with continued low oil prices and increasing global carbon consciousness. In response to the challenging environment faced by the industry at large, Sound Energy has been steadfastly pursuing an onshore regional gas strategy, underpinned by solid European gas fundamentals and a trend of global transition to gas, as a cleaner alternative to coal and oil. Whilst acknowledging the recent disappointments of the Nervesa discovery, the Company with its high quality partnerships, strong cash position and strong management team is positioned well for continued counter-cyclical growth whilst sector valuations are low and competition is limited. The key highlights of 2015 include: • The acquisition of an operated 55% position in the Tendrara licence, onshore Morocco. Morocco is a stable, growing, gas-hungry country with strong gas prices and competitive fiscal terms. Tendrara benefits from a compelling risk/ reward balance with both a large scale gas discovery and multiple Tcf exploration potential. • Introduction of Schlumberger as a strategic partner for existing and new assets across Europe and Africa. • Entry of a Field Management Agreement with Schlumberger in respect of the Tendrara licence with a view to de-risking the asset technically and funding the majority of the first three wells. • Securing of the approval of the Environmental Impact Assessment for the significant Badile prospect, onshore Italy, which enabled the Company to secure the final permission to drill in May 2016. “ Sound Energy’s high quality partnerships, strong cash position and strong management team position the Company well for continued counter- cyclical growth.” 06 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Following the period end, Sound Energy entered into binding agreements to acquire a 75% operated position in the Sidi Moktar licences, onshore Morocco, where the Kechoula discovery represents an opportunity for material near term production. The wider Sidi Moktar licence area also provides significant exploration potential. As announced by the Company on 10 March 2016, the Company has entered into heads of terms in respect of a farmout of the Sidi Moktar licences which, if completed, would provide a carry on all future capital whilst only reducing the Company’s position to a 25% operated interest. As a result of this progress, Sound Energy’s current immediate focus is now on three strategic plays across Morocco and Italy: • Tendrara, onshore Morocco • Sidi Moktar, onshore Morocco • Badile, onshore Italy The outcome of the first well on the Company’s strategic Tendrara play, which is currently drilling, is expected to be known shortly. The Company is in a strong financial position as it enters 2016 and a period of high activity, with a cash balance of £15.2 million at 31 December 2015. We continue to operate with a low cost but high quality philosophy, keeping costs under control and leveraging partners’ balance sheets. The significant progress achieved by Sound Energy during 2015 would not have been possible without the efforts of Sound Energy’s executive team and supportive shareholders. We would like to take this opportunity to thank all of them as we continue to develop into a large-scale regional upstream company. “Despite the challenging sector backdrop, Sound Energy is positioned in a sweetspot – analogous to being in the peaceful eye of a violent storm – with an opportunity to grow boldly whilst valuations are low and competition is limited.” Pictured: CEO visit to TE-6 24754.02 25 May 2016 7:43 PM Proof 4 07 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsThe Journey 2016 January – further Sidi Moktar acquisition February – first gas from Nervesa February – secured option to acquire Meridja reconnaissance area March – introduction of partner to Sidi Moktar April – receipt of $1 million of Indonesian Contingent Consideration April – spudding of TE-6, the first well at Tendrara and in Morocco 2015 April – secured further funding from the institutional cornerstone investor May – Morocco country entry through the onshore gas licences at Tendrara June – Memorandum of Understanding (“MOU”) with strategic partner October – acquisition of Sidi Moktar licences consolidating our position in Morocco December – introduction of Schlumberger to Tendrara 2014 April – introduction of a new Institutional Investor, Continental July – first gas on the Casa Tiberi field, located in the Marche Region of Italy September – purchase of the land required for the world-class Badile exploration prospect 2013 Achieved first gas from the onshore Rapagnano field in central Italy, delivering free cash flow of c.€900,000 per annum Drilled and tested the Nervesa gas discovery in the Po Valley (Northern Italy) 2012 Strategic decision to focus on Mediterranean gas, leveraging off a strong onshore portfolio in Italy Disposal of participating interest in Indonesian assets s e u n i t n o c n o i t a m r o f s n a r T e h T s r a e y e v i t a m r o F e h T 08 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Sector Overview The Energy Sector in Transition Italy In 2015, the energy sector underwent a structural transition. With falling oil prices and general uncertainty surrounding the supply and demand balance, many upstream companies, including household names, have been brought to their knees on the back of an unsustainable debt burden and the inability to fund capital commitments. The market is littered with strategic reviews, forced asset sales, debt re-determinations, requisitions from activist shareholders and companies defaulting on licence commitments. The AIM oil and gas index has dropped dramatically over the last year and the general consensus is that the inevitable recovery is still some time away. In this new order, Sound Energy believes the market rewards companies with quality assets, cash in the bank, sustainable debt, and strong, growth-focused management. 2015 was transformational for Sound Energy, with key achievements in the Italian and Moroccan portfolios including: – entry into Morocco on the Tendrara licence – partnership with Schlumberger – the acquisition of the Sidi Moktar licence. Sound Energy has made great strides securing quality assets from distressed players. Sound Energy continues to grow counter-cyclically, in the peaceful eye of an industry-wide storm. The Company’s portfolio remains focused onshore in the Mediterranean region with acreage across Italy and Morocco, sheltered from low oil prices and underpinned by strong gas fundamentals. Morocco Over 90% of Morocco’s energy supply is imported. Demand grows at a steady rate to meet the needs of economic development, industrialisation, and the growing power grid. Gas is an important commodity in the country: the government encourages production from domestic resources, with gas- fired plants playing an important role in power supply and the phosphate industry. Morocco holds more than two-thirds of the world’s phosphate reserves and needs natural gas in the in the extraction and fertilizer production processes. In the medium to long term, Morocco expects to increase the share of natural gas in the energy mix. Morocco is also pushing for an increase in the utilisation of renewable sources for electricity generation which calls for gas-generated electricity to meet intermittent supply from solar and wind power. The decision in favour of the large-scale use of natural gas in the energy mix, and particularly in electricity generation, is essentially based on the need to introduce independence in the energy supply and additional flexibility into the Moroccan power system. Morocco provides one of the most attractive fiscal regimes, blend of hydrocarbon potential (both low-risk and rank exploration) and strong gas-market fundamentals. The stable economic and political environment makes it an ideal country in which Sound Energy can operate and unlock value organically. Italy’s production of both oil and natural gas has been progressively declining over the last decade. In 2015, domestic gas production met only 10% of its domestic demand, whilst Italy sits amongst Europe’s largest energy consumers and importers. The fuel supply mix remains dominated by hydrocarbons, with demand for natural gas growing rapidly over the last decades, notably as part of a national programme to mitigate the country’s dependence on oil imports. Gas demand is concentrated in three main sectors: residential, power generation and industrial, experiencing a steady growth at a rate of 9% approximately each year. This growth is almost entirely attributable to the increase in demand for power generation, which accounts for almost a third of the total gas demand in Italy. On the supply side, Italy is highly dependent on natural gas imports, standing at c.90% in 2015 with no decrease expected. With a developed network of infrastructure and pipelines across the country, Italy therefore offers strong gas-market fundamentals which make it a continuous area of interest for Sound Energy with a diverse range of asset classes including production, appraisal and high-impact exploration. Pictured: Sound Energy drills for gas “ Morocco provides one of the most attractive fiscal regimes for oil and gas companies worldwide.” 24754.02 25 May 2016 7:43 PM Proof 4 09 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsStrategy We are pursuing an onshore gas strategy, within the mediterranean area, which is proving very robust to the current oil price environment, security situation and to an increasingly carbon conscious world. the markets are rewarding companies with sustainable debt levels, strong management, cash on the balance sheet and a bias for gas. Sidi Moktar Exploration Tendrara Exploration K S I R Nervesa Rapagnano Tendrara Appraisal Zibido SMG Sidi Moktar Appraisal Badile Laura Dora/Dalla Strategic Play REWARD Cost Covering Production low Risk existing Discoveries high Upside exploration Sound Energy maintains a low cost base with revenues from the Italian asset production contributing to costs. We are working to build a balanced portfolio with assets across the life cycle, generating free cash flow. By focusing on previously drilled discoveries in areas where hydrocarbons have been identified, Sound Energy is able to minimise risk. We are leveraging the technical knowledge of our partners to increase our chances of success. Three upcoming strategic plays spanning onshore appraisal and exploration drilling in Morocco and Italy will potentially transform the reserve base of the Company: Tendrara, Sidi Moktar and Badile. Sound Energy is focused on world class assets and opportunities. Sound Energy’s strategy strikes a balance betweeen risk and reward, and between high upside exploration, low risk appraisal/ development assets and production with the target of covering our cost base, while pursuing transformational opportunities and generating significant returns for the Company and its shareholders. During 2015, the addition of the Moroccan portfolio (Tendrara and Sidi Moktar) has increased Sound’s exposure to high upside exploration potential and increased the level of potential reward within the portfolio. The exisiting discoveries of hydrocarbons in the licence area we have acquired, together with a strong technical partner, reduce risk, helping us maintain the balance within our portfolio. 10 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Overview Despite the challenging sector backdrop, Sound Energy is positioned in a sweetspot – analogous to being in the peaceful eye of a violent storm – with an opportunity to grow boldly and counter-cyclically whilst valuations are low and competition is limited. Our current portfolio includes a well balanced portfolio of onshore gas licences across both Italy and Morocco. This portfolio is a healthy blend of high upside exploration, low risk appraisal/development assets and some solid, cost covering, production. The Journey To Date Our journey began back in 2011/12 with the acquisition of our onshore Italian gas portfolio. Since then we have drilled the Nervesa gas discovery and secured first gas at both Nervesa and the onshore Rapagnano gas field. These two assets provided a solid base of cost covering production for the period under review. During 2015/16 we broadened the portfolio with the acquisition of an onshore gas portfolio in Morocco, including the Tendrara and Sidi Moktar licences. These licences bring scale and diversification with Tendrara forming the backbone of our 2016 drill programme. The introduction of a cornerstone investor (Continental Investment Partners) and a strategic partner (Schlumberger, a multibillion company specialist in oil and gas) now positions us with a funded 2016 drill programme and an accelerated journey to a mid cap status without material equity dilution. Our Future Focus In 2016 we expect results from three strategic plays, each one of which could be transformational to the Company: Tendrara, Sidi Moktar and Badile. We are focusing both our financial and human resources on our game-changing assets, including Tendrara where two wells are planned for 2016 and our largest gas prospect, Badile with a gross best estimate NPV10 of €486 million. It is our intention to farm out and then drill Badile in 2016 with a view to capturing the upside NPV, which exceeds US$2 billion. Sidi Moktar offers the possibility of near term cash flows from the production of two existing wells on the Kechoula structure. Kechoula is close to existing infrastructure and has been estimated to have an unrisked mid case GOIP of 293 Bscf on a 100% working interest basis. The final step in the journey involves continued expansion into the greater Mediterranean area, likely to be onshore or in shallow water and probably achieved through acquisition. This will be combined with consolidation within Italy and Morocco where possible. We have the skills onboard to originate and execute transformational transactions. In summary Sound Energy is a focused team dedicated to delivering “shaping moves” and working to build a mid cap regional oil and gas company. How We Measure Progress The Company’s strategy to date has been to develop low risk, previously drilled assets in order to minimise risk whilst accelerating revenue generation in order to cover its cost base. 2016 represents a step out from our comfort zone as we move towards realising the potential of our game-changing assets, with the first adventure being the drilling of TE-6 on the Tendrara structure. This well was spudded on 20 April 2016 and drill bit success will be mirrored in the increase to the net asset value of the Company. We will see our progress by our discoveries, alongside our ability to identify and exploit accretive M&A opportunities. Like our investors, we will measure our success in stewarding the business by its share price. Key Performance Indicators Management is held accountable to a variety of KPIs through the development of an individualised scorecard, comprising both company-wide and personal objectives. Remuneration is directly linked to meeting these targets and, as recently announced, share price growth is a key performance criterion of the Company’s long term incentive plan. The health and safety of our employees and contractors is our primary concern. We are, again, proud to confirm that, in 2015, we had no lost time incidents. Pictured: Casing cleaning and TE-6 rig site 11 24754.02 25 May 2016 7:43 PM Proof 4 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsKey Partners “ Our partners and our people play a vital role in creating value for our shareholders.” 12 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Schlumberger is the world’s leading provider of technology for reservoir characterisation, drilling, production, and processing to the oil and gas industry. It supplies the industry’s most comprehensive range of products and services, from exploration through production and integrated pore-to- pipeline solutions for hydrocarbon recovery that optimise reservoir performance, working in more than 85 countries and employing approximately 113,000 people who represent over 140 nationalities. The strategic partnership between Sound and Schlumberger allows the Company to benefit from Sclumberger’s wealth of experience and vast resource within the sector, in addition to sharing of the risks of the Tendrara project, with Schlumberger earning its net profit interest through funding a significant portion of the initial capital expenditure. Other Joint Venture Partners Our ability to build and maintain relationships is a key part of our success, enabling us to identify accretive M&A opportunities, share the risks and rewards of oil and gas exploration and production with our partners and, in return, increase our knowledge and fund our work programmes. We have high quality relationships with our partners in our assets. Our hosts The way in which we conduct ourselves with our host communities and governments, and our record on health, safety and the environment, is the bedrock for all our operations and is crucial to our success as a business. In close partnership with our host government we work to grow and strengthen our social and economic relationship within the countries and regions we operate in, through the community support we provide, employment opportunities we offer and the willingness of our local communities to work with us to create wealth. Our partners and our people play a vital role in creating value for our shareholders. Continental Investment Partners Continental Investment Partners S.A. (“Continental”) were introduced to Sound Energy in 2014 when they invested £14 million in the Company through a mixture of debt (£7 million) and equity (£7 million). They have continued to support Sound Energy throughout 2015 and, during April 2015, brought a further £12 million investment into the Company, when they subscribed for a total of 63 million shares, through an affiliate, Metano Capital S.A. These shares were subsequently placed with various pre- identified institutional investors. Continental have played a key role in enabling the Company’s drill programme and expansion and are a critical cornerstone of the Company. As at 9 May 2016, Continental had an interest in 12.98% of Sound Energy’s share capital. Schlumberger In October 2015, Sound Energy announced that it had signed a Memorandum of Understanding (“MOU”) with Schlumberger Oilfield Holdings Limited (“Schlumberger”) defining a strategic relationship between Sound Energy and Schlumberger across Europe and Africa. Associated with this, a Term Sheet was signed with Schlumberger Production Management (“SPM”), the production management arm of Schlumberger, regarding the Tendrara licence, onshore Morocco. The Company subsequently entered into a Field Management Agreement (“FMA”) with SPM in December 2015 where, under the FMA: • Schlumberger provide integrated technical services, equipment and personnel to Sound Energy, Operator of the Tendrara Licence; • Schlumberger will fund a significant proportion of the capital expenditure on the first three Tendrara appraisal wells (80-75%), and of the development of the licence area thereafter (27.5%); and • Schlumberger have been granted a synthetic net profit interest of half of the Company’s interest (which equates to 18.75% initially increasing to 27.5% after the first well). See the Sector Overview on page 9 Read about our Strategy on page 10 and 11 Pictured: TE-6 24754.02 25 May 2016 7:43 PM Proof 4 13 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsOperational and Financial Review Strategic Play - Tendrara M O R O C C O M E R I D J A R E C O N N A I S S A N C E Z O N E Tendrara I Tendrara II A L G E R I A Licence Details Area: Status: 14,500 km2 Permit Effective date: 23 April 2013 Term: 8 years Resource potential: Interest: Prospective resource with multiple Tcf potential (gross) Sound Energy Phase I 37.5%, increasing to 55% Phase II Net effective interest of 27.5% following Field Management Agreement with Schlumberger Permit Area The Tendrara permit is located in the Figuig Province, North- East Morocco, 120 km from the GME pipeline, connecting Algeria and Morocco to the Spanish/Portuguese gas grids. The permit area, which is sub-divided into eight blocks, covers a combined area of 14,500 km2. Geology The Tendrara structure represents a continuity of the Algerian Triassic Province and Saharan Hercynian platform with the same basin shows as the tectono-sedimentary evolution in the Algeria Basins. Activity History AGIP first explored the Tendrara structure in 1966/67 drilling two wells, both proved gas bearing but were not fully tested. In 1983 the Moroccan National Oil Company (NOC), ONHYM (Office National de HydroCarbures et des Mines) further appraised the structure drilling a third gas bearing well. In 2000, MPE drilled SBK-1 in the adjacent Sidi Belkacem structure to further assess the Trias Argilo-Gréseux Inférieur (“TAGI”) reservoir, which proved to be gas bearing and tested successfully. In total seven wells have been drilled in the permit, five have been gas bearing and two have tested successfully. Of the two successful test wells SBK-1 had a peak rate of 5.5 MMscf/d and TE-5 had flow rates of 1.5 MMscf/d. Sound Energy farmed in to the Tendrara licence in June 2015, taking a 55% working interest in the licence, partnering ONHYM (25% interest) and Oil & Gas Investment Fund (“OGIF”) (20% interest) and assuming the Operatorship. Sound’s 55% working interest will be secured in two tranches, with tranche one (37.5%) awarded on completion of the transaction and the second tranche (17.5%) secured once Sound Energy commits to the second exploration phase (which would include a second well). Under the terms of the farm-in to the licence Sound will pay 100% of the cost of three wells, of which only the first well would be a firm commitment. In December 2015, Sound entered into a Field Management Agreement (FMA) with Schlumberger. Under the terms of the FMA Schlumberger agreed to fund a significant portion of the capital expenditure on the first three Tendrara wells and provide technical services, equipment and personnel to Sound as Operator in exchange for an upside linked to production performance. The first well is to appraise the larger of two existing discoveries in the Tendrara licence with a view to addressing the residual reservoir uncertainties (well deliverability and areal continuity) and proving up sufficient reserves to properly size the design of the infrastructure required to commercialise the gas. The licence already has 4,400 km of 2D seismic and 500 km2 of 3D seismic. Preliminary internal estimates of existing discovery volumes suggest significant volumes in place with potential recoverable resources of multiple Tcf across multiple prospects/leads. 14 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Meridja Tahaddart Power 2 x 400 MW Dhar Doum 4 x 400 MW C I T N A L T A Rabat Casablanca Sidi Moktar Marrakech O C C O R O M M E D I T E R R A N E A N Oujda Oued El Makhazine 2 x 400 MW Al Wahda 4 x 400 MW Meridja Licence Details Area: Status: 9,000 km2 Reconnaissance Effective date: TBC Tendrara Term: Resource potential: A I R E G L A Interest: Reconnaissance permit expires 1 Aug 2016 Prospective resource analogous and adjacent to Tendrara Option to acquire a 55% interest in the exploration permit Permit Area Sound has secured an option to acquire a 55% interest in the Meridja permit, located next to its Tendrara licence. The Meridja reconnaissance permit is currently held 75% by OGIF and 25% by ONHYM. Both Meridja and Tendrara have a pericratonic position and are located between three geologic domains: the inverted High Atlas, the Folded Hercynian Basement and the Non Deformed Saraha Platform. In Meridja, two main targets have been identified: the Paleozoic formations, which belong to the Hercynian Saharan Platform, and the Triassic Sandstones (TAGI) which belong to the Triassic province. Currently, 15 leads have been identified with reserves potentially similar in scale to those in Tendrara. Pictured: Drilling TE-6 24754.02 25 May 2016 7:43 PM Proof 4 15 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsOperational and Financial Review Strategic Play - Sidi Moktar Jorf Lasfar Power Plant Safi Chemicals Plant State owned Phosphate Plant (OCP) Licence Details Area: Status: 4,500 km2 Permit Effective date: 1 July 2009 Term: 8 years Sidi Moktar II Chichaoua Resource potential: CPR to be commissioned Meskala Plant Planned New Phosphate Plant Sidi Moktar I Interest: 25% The development of the Meskala Field gave rise to the discovery of gas-condensate in Triassic clastics at 3,500m and a DST yielded a flow rate of 12 MMscf/d. Between 1980 and 1987 a further 28 wells were drilled including nine development wells at Meskala, two of which were the deepest stratigraphic tests in the basin (4.3km), proving the possibility of Ordovician sands as a second potential Palaeozoic target. Additionally, 7,000 km of seismic have been acquired since the late 1950s. In 2009, Magreb Petroleum Exploration (MPE) signed a Petroleum Agreement with ONHYM to secure a 75% interest in the Sidi Moktar North, South and West licences, the remaining 25% being held by ONHYM. MPE subsequently farmed out a 50% working interest operated position to Petromaroc (formerly Longreach) in exchange for a full carry to first commercial gas. During the course of 2013 and 2014, Petromaroc drilled two wells which both had gas shows but which were never completed and tested. In January 2016, Sound secured a 75% interest in the licences through two transactions. The Company is now working on finalising a farmout of the asset. Permit Area The Sidi Moktar permit is located in the Essaouira Basin in central Morocco (Western sea border) and is sub-divided into three blocks (North, South and West) with a combined area of 4,500 km2. Adjacent to and surrounding the permit is the Meskala Field, a gas/condensate discovery, which has been producing since the late 1980s and represents one of the most significant discoveries in Morocco to date. The Sidi Moktar permit itself hosts some 40 wells, a pipeline and production facilities for gas and condensate. The Geology There are four petroleum systems (PS) within the Sidi Moktar permit: • PS1 Argovian (sandy dolomite) which has given rise to five discoveries (Jeer, Kechoula, Sidi Rhalem, Toukimt and N’Dark); • PS2 Low Liasssic (sandstone) which has given rise to two discoveries (Zelten and Kechoula); • PS3 Triassic (TAGI equivalent) which has given rise to one discovery (Meskala); and • PS4 Paleozoic Devonian carbonates which remains frontier exploration. Activity History Historically, 84 wells have been drilled in the Essaouira basin with PS2 and PS3 having the highest discovery ratio. Exploration in the basin began in the 1950s resulting in the discovery of two small gas fields (Kechoula in 1957 and Jeer in 1958) and one oil field (Sidi Rhalem in 1961). By 1970, 35 onshore wells and one offshore well had been drilled, of which 12 were classed as appraisal/development. From 1974 to 1980, a further 13 wells were drilled with the aid of multi-fold 2D seismic resulting in three further discoveries at Toukimt (1976), at N’Dark (1976) and at Meskala (1977). 16 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Area: Status: 154.5 km2 Exploration asset Effective date: 23 March 2010 Term: 6 years* Resource potential: 178 Bscf Interest: 100% * Extended to the end of 2016; expected to be extended further. In October 2014, Sound Energy purchased a 59,140 m2 plot of industrial land in the Lombardy region of Italy, which will host the drill site for the initial Badile exploration well and for all other production wells required to exploit the discovery. The approval of the Environment Impact Assessment (“EIA”) for the Badile exploration well was received from the Lombardy regional government in March 2015. Since then, the Company has been advised by UNMIG (the Italian Ministry of Economic Development) that the Badile permit will be extended until the earlier of 31 December 2016 or 12 months from the date of the award of the final authorisation to drill the forthcoming well. This marks an important step in the local permitting process and enables Sound to continue preparations for the forthcoming exploration well. Final authorisation was achieved in May 2016. In January 2016 Sound Energy, with independent external support, completed the acquisition of additional well stratigraphic information from the area. As a result of the work, Sound updated its assessment of the prospect resulting in an increase in the estimated chance of success to 34%. Strategic Play - Badile 3D Seismic Coverage Milano Licence Details SNAM Gas Pipeline Lacchiarella Badile Zibido Pavia Badile Permit Permit Area The Badile Permit is situated in the Piedmont Lombard Basin in northern Italy where the principal play is oil, gas and condensate in deep Triassic dolomites and limestones. The permit is adjacent to ENI’s Gaggiano oil field and a short distance from the giant Villafortuna-Trecate and Malossa oil fields with total proven recoverable reserves of over 400 MMboe. The permit area was initially held by ENI in the exclusive zone until 2004. A total of 460-line km 2D and 238 km2 3D seismic was acquired between 1974 and 1990. Two dry wells were drilled within the permit area between 1978 and 1982. Activity History Sound Energy filed an application in January 2006 and the permit was awarded in March 2010. To date G&G data studies, drilling application (Moirago-1 dir. well) and Environmental Impact Assessment have been completed on this permit. ERC Equipoise Limited completed a full independent Competent Person’s Report of this prospect in 2013, confirming a Best Case estimate of 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 46 Bscfe (28 Bscf of gas plus 3 MMbbl of condensate). The study confirmed a 22% geological chance of success for the prospect. 24754.02 25 May 2016 7:43 PM Proof 4 17 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsOperational and Financial Review Producing Assets Rapagnano Gas Field Licence Details Area: Status: 8.49 km2 Concession Effective date: 28 November 2012 Term: Reserves: Interest: 10 years 1.3 Bscf 100% Nervesa Gas Discovery Licence Details Area: Status: 529.75 km2 Concession Effective date: 14 November 2015 Term: Reserves: Interest: 20 years TBD 100% Casa Tiberi Gas Discovery Licence Details Area: Status: 49.4 km2 Concession Effective date: 24 February 2012 Term: Interest: 20 years 100% The concession is located in Fermo Province, Marche Region. Geologically the area is within the Ancona-Pescara Basin associated with the Central Apennine foredeep. First gas was delivered from the onshore Rapagnano field to the local gas distributor on 15 May 2013. The asset successfully produced 125.6 MMscf in 2015 at a rate of 0.34 MMscf/d. During the period, Sound also entered into a 12-month gas sales agreement with Steca Energia Srl, until September 2016 based on a variable market price. The permit is located in northeast Italy, within the Alpine foredeep province. The Nervesa structure was first 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. Sound drilled its first well in July 2013 encountering 46 metres of net pay across 13 zones. A second well, Cascina Daga-1 was drilled on the southern structure during 2015, which did not encounter commercial hydrocarbons. Sound received a Production Concession for the first well (the concession is named Casa Tonetto), in late 2015, achieved first gas in February 2016 and has a GSA with Royal Dutch Shell. The permit is located in Ancona, Marche in central Italy, within the foredeep trough of the Central Apennines. First gas was delivered from the onshore Casa Tiberi field, to the local gas distributor on 28 July 2014, with initial production from the Lower Pliocene Cellino formation. Sound Energy signed a gas sales agreement with Prometeo Spa in summer 2014. Selected Exploration and Appraisal Prospects Zibido Prospect (Sound Oil 100%) – Exploration The Zibido prospect is adjacent to the Badile prospect in the Po Valley. It is a downthrown fault terrace play in the Mesozoic with a total depth of 5,600 metres. Laura Discovery (Sound Oil 100%) – Appraisal Laura (DR74-AP) is located in the Ionian Sea Zone D within the Sibari Basin, Gulf of Taranto, 4 km offshore, where the average water is 200 m deep. In 1980, commercial gas was discovered in two sand intervals in Laura-1. The Company was awarded the permit in June 2014 and intends to drill the discovery from an onshore location with a long reach deviated well. Dora/Dalla (Sound Oil 100%) – Appraisal The Dora gas discovery, which lies 21 km offshore in the Adriatic Sea, was previously drilled in 1972 and achieved flow rates of 200 MMScf/d. The play is a faulted anticline, gas-condensate in the Scaglia Formation (1,400 m depth). The Dalla project, held within the Dora permit, provides additional exploration potential. A full list of the Group’s Licences and Interests can be found on page 61. 18 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Income Statement In 2015, production continued from the Rapagnano and Casa Tiberi fields, generating revenues of £0.9 million consistent with 2014, which was the first full year of Rapagnano production. The loss before finance costs and tax from continuing operations increased in 2015 to £18.3 million from £4.9 million, due to a write-off of exploration costs associated with the Cascina Daga-1 well of £5.6 million, impairment of Casa Tonetto £6.3 million and an increase in foreign exchange losses primarily related to intra-group loans denominated in euros. Administrative costs increased by £0.4 million to £3.2 million (2014: £2.8 million) reflecting the increased corporate activity and expansion into a second country. Cash Flow/Financing During 2015, £13.9 million of net cash proceeds were raised from financing activities (2014: £19.1 million), primarily from a private placement arranged by Continental Investment Partners in April 2015, and a subsequent Open Offer in June 2015. These placements demonstrate Continental’s continued confidence, and the wider shareholder base’s confidence, in the Company’s strategy against a difficult market backdrop. In 2014, financing activities were split between the issue of debt (£11.4 million gross) and the issue of equity (£8.2 million gross). The Group spent £7.7 million on investing activities during 2015, which largely consisted of the Cascina Daga exploration well as well as the facilities additions to the Casa Tonetto site in preparation for commercial production. Balance Sheet In the year, non-current assets decreased by £7.0 million due to exchange adjustments and impairments offset by capital additions. The functional currency of the Group’s Italian subsidiary, which holds most of the Group’s assets as at 31 December 2015, is the euro, which weakened significantly against sterling during the year to 31 December 2015 causing the exchange adjustments. The Group’s closing cash balance remained strong at £15.2 million as at 31 December 2015 (2014: £12.6 million). The net proceeds of the successful equity raising more than offsetting the capital expenditure incurred on the work programme for the year. Debt marginally reduced to £12.9 million (2014: £13.4 million). Pictured: View looking up the rig mast Statement of Proved and Probable Reserves The Group’s proved and probable hydrocarbon reserves as at 31 December 2015 were: Proved reserves at 31 December 2014 Reclassifications* Production Proved reserves at 31 December 2015 Probable reserves at 31 December 2014 Reclassifications* Probable reserves at 31 December 2015 Total Proved and Probable Reserves at 31 December 2015 Gas (Bscf) 0.86 0.75 (0.13) 1.48 0.23 2.21 2.44 MMboe 0.14 0.13 (0.02) 0.25 0.04 0.37 0.41 3.92 0.66 Accounting Standards * Reported 1P/2P/3P reserves are based on a reservoir study completed in Jan 2015; following the commencement of production in 2016, revisions are anticipated. The Group has reported its 2015 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union. Abbreviations: Going Concern 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). The Directors have reviewed the forward cash flow projections for the Group for the foreseeable future, being at least the next 12 months from the date of this report, which show that the Group has sufficient financial resources to undertake its committed work programme, and thus the Directors have concluded that the Group is a going concern. 24754.02 25 May 2016 7:43 PM Proof 4 19 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial Statements Corporate Social Responsibility Our business relies heavily on successful partnerships with all stakeholders. We target building deep and constructive relationships with our stakeholders, be they government, local communities, employees, suppliers or investors, by being a responsible operator and partner. We conduct our business safely and in a socially responsible and ethical manner. We respect the law and endeavour to protect the environment and communities in which we work. We are focused on minimising the environmental impact of our operations and are committed to a healthy and safe workplace, whether it be on a drill site or in an office. Alongside our employees, we ensure our contractors share our values to produce a safe working environment for all. Transparency and Ethical Conduct The Group continues to run its business in an ethical and transparent manner and is aware of its legal obligations with regards to the UK Bribery Act of 2010. These risks are monitored continuously and the Company actively encourages whistleblowing should any inappropriate behaviours be suspected. Employees are supported in identifying and managing these risks. Alongside this, we set minimum standards for contractor selection to ensure our partners are aligned with us in their conduct. We are committed to building long term relationships with our key suppliers and treat them with respect, aiming for prompt payment. People and Skills We strive to align our values in the interests of the people who continue to contribute towards Sound Energy’s success. This includes all employees and contractors, as we ensure their safety and wellbeing while supporting individual educational and training needs. We have a first class team on the ground and throughout the organisation. The Company is focused on controlling cost, which is reflected in the size of our workforce; Sound Energy had an average of 22 employees during 2015. Our business is growing at a rapid pace with the acquisition of licences in Morocco and the 2016 planned drilling programme, making the recruitment, training, development and retention of our staff critical to the success of our business. Health and Safety Policy Sound Energy is committed to conducting its business and operations in all areas of the world in a manner which achieves the following objectives: • Safeguard the HEALTH of its employees, contractors and the public. • Conduct its operations without accident, maintaining SAFETY as its goal. • Minimise the impact of its operations on, and maintain respect for, the ENVIRONMENT. The Directors and Senior Officers of the Company ensure that these objectives are achieved through: 1. Ensuring that the standards and procedures adopted for its operations will meet the requirements of both the laws of local jurisdictions and international standards of best oilfield practice. 2. Managing our activities to prevent pollution and to minimise adverse effects on the world around us. 3. Ensuring that in designing our operations, health and safety hazards and environmental impacts have been fully assessed and appropriately mitigated. 4. Ensuring that all personnel, including contractors employed by us, are fully aware of their HSE responsibilities and have been properly trained. The commitment to, and ability to adhere to, the above objectives will be a key factor in selecting and awarding contracts to third parties. 5. Undertaking regular monitoring, audit and reporting of its operational activity to identify the necessary compliance with its HSE policy and objectives and adopting targets to achieve continuous improvement in HSE performances. 6. HSE performance will be regularly reported to the Board of Directors who will ensure that appropriate resources are provided to achieve the objectives of this policy in full. Where the Company participates in, but does not operate, joint ventures it will seek to ensure that similar standards are adopted by its Operators. Considerations of health, safety and environment are the concern of all employees of the Company and its contractors. We will ensure that competent people, the correct equipment and appropriate standards and procedures are available to meet these considerations. Where necessary the appropriate training will be provided. We will always act responsibly and safely in our business to bring energy resources to market for the benefit of the community at large. In 2015, we are again delighted to report that we recorded no lost time incidents. 20 Pictured: One team 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Managing Risks Risk management is central to achieving the Group’s strategy and delivering long term value to shareholders. The Board, its Committees and the executive team are actively engaged in setting the risk appetite as well as monitoring and limiting (where possible) the risks to which the Group is exposed. Our governance structure and processes ensure that the Group is able to establish, monitor and review appropriate risk management and internal control systems to identify and mitigate the risks the Group faces. The risk management framework: • Defines the Company’s risk appetite, with reference to the Company’s strategy • Identifies the principal risks and their likelihood and impact • Enables the Company to manage the risks through an effective internal control system • Regularly monitors and reviews the risk framework The framework is regularly reviewed and assessed for completeness and relevance and the Company’s business profile monitored throughout the year. Prior to the approval of any new project or transaction, risks are assessed and incorporated into the risk register as appropriate. Responsibility for the risk is allocated to an individual. Principal risks The table below indicates the principal risks the Group faces and has been produced following a robust assessment of risk, including consideration of those that would threaten its business model, future performance, solvency or liquidity. The list is not exhaustive or in priority order, and may change over time. Risk and definition Impact Mitigation Limited diversification • May adversely impact ability to operate (e.g. • Diversify portfolio to multiple Company and its operations may be significantly adversely impacted by regulatory, fiscal, political and/or any other regime changes change to on/offshore regulatory regime in Italy) countries (e.g. Morocco entry in 2015) • Adversely impact profitability & cash flow • Build strong relationships with • Reduce appetite for investment in the Company governments, local authorities, local population and other stakeholders • Lobby where appropriate • Monitor potential legislation changes Licence to operate • Environmental, ethical, and above ground incidents • Build strong relationships with may result in loss of reputation and licence to operate governments, local authorities, local population and other stakeholders • Key local stakeholders do not want the Company as a partner adversely impacting the ability to operate Project execution • Projects are unprofitable and do not generate Major capital projects realised late and/or over budget or do not achieve expected results shareholder value • Loss of company and management credibility • Additional cost impacts the ability of Company to finance itself • Project reserve potential and economics regularly reviewed • High quality operational and financial management processes in place, incl. processes relating to well design, AFE and budgeting • Project progress & cost monitoring controls in place Loss of key personnel • Loss of confidence of shareholder base • Competitive remuneration for key • Lack of direction and leadership within the Company • Loss of expertise and knowledge executives bench-marked regularly relative to the market • Long term incentive plan in place • Succession planning considered 24754.02 25 May 2016 7:43 PM Proof 4 21 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial Statements Managing Risks Risk and definition Impact Mitigation Exploration & Reservoir Risk The Company fails to locate, explore, appraise and develop oil reserves that deliver commercially e.g. key wells are dry or less successful than anticipated. Operational Incident Including blowouts, safety and environmental incidents and accidents, terrorism • The Company does not manage to recover its investment and suffers financial loss. • The Company loses credibility and suffers reputational damage • Analysis of available technical information (e.g. seismic, drill results) to determine drilling programme • Risk sharing arrangements entered into to reduce downside risk • Technical, financial and Board approvals required for all projects • Loss of life or injury to personnel (staff, • Highly skilled, qualified and contractors, third parties) • Reputational damage • Loss of “licence to operate” • Exposure to litigation • Damage to equipment and disruption of operations • Consequential financial loss (litigation, equipment competent staff. Training provided as required. • Strong HSE ethic & risk assessment • High quality operational management processes including well design, emergency response plan and change of control process replacement, cost to redrill) • TAC & HSE Committee reviews • Insurance • Security measures in place Insufficient funds • Company can no longer finance current operations • Finances are controlled through To deliver the Company’s work programme and meet ongoing operating requirements or future investment • Company cannot meet the capital commitments required to maintain licence interests and explore and develop assets Exchange rate risk Business transactions are carried out in a variety of currencies including GBP, EUR, USD and MAD. The exchange rates for these key currencies in which the Company transacts may vary significantly. • The Company may lose out in cash terms, due to exchange rate fluctuations relative to when funds were raised • Exchange rate movements may have an income statement impact where the currency of a transaction differs from the functional currency of the entity 22 24754.02 25 May 2016 7:43 PM Proof 4 an annual budgeting process and periodic forecast updates, including sensitivity reviews. Budgets are monitored against prior period actuals • The projected cash balance is reviewed on an ongoing basis • There are mitigating actions available to management, including the delay of capex and discretionary spending • Risk is transferred through mechanisms such farm-in and joint venture agreements, which has significantly mitigated the risk during 2016 • Match transactional currency to currency of liabilities • Consider use of forwards and/ or other derivative instruments to hedge currency risk • Ensure significant contracts are denominated in currencies where the Company can mitigate exchange rate risk Sound Energy plc Annual Report for the year ended 31 December 2015Risk and definition Impact Mitigation Commodity price • Reduction in gas price reduces revenues and asset valuations • Reduction in commodity prices reduces appetite of investors for the business risks and availability of funding • A number of different pricing scenarios are used when determining asset values • Price flexes are undertaken for budgeting and cash flow purposes • Enter into long term price contracts • Ensure the business is well funded • Consider strategic purchases and hedging Breach of Bribery Act • Prosecution of the Company and/or individuals • Anti-bribery policy in place The Company, or parties acting on its behalf, breach the rules of the UK Bribery Act 2010 or equivalent legislation. under the UK Bribery Act 2010 (or foreign equivalents) leading to unlimited fines, jail sentences and prohibition from operating • Reputational damage • Uneconomic contracts • Training of staff • Vendors and partners made aware of the Company’s anti-bribery policy • Strong financial authority controls 24754.02 25 May 2016 7:43 PM Proof 4 23 www.soundenergyplc.comStock Code: SOU Strategic ReportOur GovernanceFinancial StatementsThe Team 01 04 07 02 05 08 03 06 09 24 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 201501 Simon Davies Chairman (Non-Executive) Simon was appointed as a Non-executive Director of Sound Energy in February 2014, and has over 30 years’ experience of investment management. He is also currently a Non-Executive Director of LCH Clearnet, and a Director of Old Mutual Wealth Management Limited. He began his investment career in 1981 with Rothschild Asset Management, and has held various positions in the City of London, including Chairman and Chief Executive of Threadneedle Asset Management Limited, and Chairman of Thames Water Pension Trustees. Simon holds various professional and academic qualifications, including a degree in Engineering and Economics. 02 James Parsons Chief Executive Officer James Parsons has over 20 years’ experience in the fields of strategy, management, finance and corporate development in the energy industry. James was appointed Chief Executive Officer in October 2012 having previously held the office of Chief Financial Officer for a period of a year. James started his career with the Royal Dutch Shell group in 1994 and spent 12 years with Shell working in Brazil, the Dominican Republic, Scandinavia, Holland and London. Leading up to 2006 (when he joined Inter Pipeline Fund), James held various positions in Shell’s exploration and production business, latterly as Vice President, Finance, of New Business. Prior to joining Sound Energy, James was Finance and Corporate Development Director of Inter Pipeline Europe, a division of Inter Pipeline Fund, a Toronto-listed resources business. 03 Luca Madeddu Managing Director, Morocco Luca has over 25 years of experience in the upstream oil and gas industry with the Company and ENI, a major integrated energy company. Luca is a reservoir geologist by background and has extensive experience in hydrocarbon production, field development, petroleum engineering, supply chain management and reservoir engineering. He has managed operations across Italy, Venezuela, Nigeria, Indonesia, UK, Congo. 05 Leonardo Salvadori Business Development Director and Deputy MD, Italy Leonardo Salvadori has over 30 years of international upstream experience with ENI (North Sea, North Africa, Middle and Far East) and Dana Gas (Egypt) leading multinational teams in exploration, business development and general management, both onshore and offshore. 06 Mary Hood Chief Financial Officer Mary joined Sound Energy in January 2016. Mary has more than 10 years upstream experience with Gulf Keystone and Deloitte. Mary is a Qualified Chartered Accountant and Chartered Company Secretary. 07 Marco Fumagalli Director (Non-Executive) Marco Fumagalli joined Sound Energy as a Non-executive Director in July 2014. Marco is Managing Partner at Continental Investment Partners SA, a Swiss based investment firm and cornerstone shareholder in Sound Energy. Marco is a well-known Italian businessman who was previously a Group Partner at 3i. Marco is a qualified accountant and holds a degree in Business Administration. 08 Richard Liddell Director (Non-Executive) Richard Liddell has over 35 years’ experience in the oil and gas industry. He served on the board of Falkland Oil and Gas from 2005 to 2015 initially as a non-executive director and for the nine years from 2006, as Chairman. Richard is also Chairman and Managing Director of Clara Petroleum, an exploration and production company which he founded in 2008. He served on the board of Premier Oil as Operations Director from 2000 until 2003 and prior to that spent three years as Director of Development on the board of BG Exploration and Production. Richard previously held a number of senior UK and international positions during an 18-year career at Philips Petroleum Company. Luca holds a degree in Geology and has been a Member of the Society of Petroleum Engineers (SPE) since 1995. 09 Stephen Whyte Director (Non-Executive) 04 Leonardo Spicci Managing Director, Italy Leonardo has over 25 years’ upstream experience with ENI, Petrobel, KPO and GSA, with extensive experience of working in Italy, Northern Africa, Middle East and Central Asia. Prior to joining Sound Energy in 2013 he was the District Manager for all Northern Italian Assets at ENI, managing a portfolio of onshore fields, offshore platforms and gas and oil treatment plants. Leonardo has a BSc in Geological Science and is a Member of the Society of Petroleum Engineers. Stephen Whyte has over 25 years’ experience in the oil and gas industry. He was Chief Operating Officer and Executive Director for Exploration and Production at Galp Energia for three years until 2014 and prior to that spent three years as Senior Vice President Commercial at BG Group. He previously spent a total of 14 years with Shell and six years with Clyde Petroleum. 24754.02 25 May 2016 7:43 PM Proof 4 25 www.soundenergyplc.comStock Code: SOU Financial StatementsStrategic ReportOur GovernanceCorporate Governance Report 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 fluctuations, government and fiscal 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 financial year and up to the date that the financial statements were signed. The Company has less than thirty permanent employees and the Directors do not believe the Company is sufficiently complex to warrant the establishment of an internal audit function. The Directors will review this policy as and when the Company’s circumstances warrant. The Board has a health and safety committee, audit committee, remuneration and nominations committee and a technical assurance committee. Audit Committee The Audit Committee comprises two of the Non-executive Directors, Marco Fumagalli and Stephen Whyte. Mr Fumagalli chairs the Committee. Its role is to monitor: • the integrity of the Company’s financial statements and other formal announcements relating to the Company’s financial 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 findings; • the appropriateness of the Company’s relationship with the external Auditor 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 and anti-bribery and corruption policy. The Audit Committee may if it wishes hold private sessions with management and the external Auditor. The Audit Committee met twice during 2015 and proposes to meet at least twice during the next financial year. 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. However, the Company is committed to high standards of good governance and has regards to the principles of the Code as far as is practicable and appropriate having regard to the current size and structure of the Company. The Board and its Committees As at 31 December 2015 the Board consisted of the Chief Executive Officer, Non-executive Chairman and three Non- executive Directors. All the Non-executive Directors and the Chairman are independent in character and judgement and have the range of experience and calibre to bring independent judgement on issues of strategy, performance, resources and standards of conduct which is vital to the success of the Group. Two of the Non-executive Directors meet the requirements of independence prescribed in the UK Code. In accordance with the Code no Director has an employment contract with more than one year’s notice. The Board is responsible for overall strategy, acquisition policy, major capital expenditure projects, corporate overhead costs, significant financing matters and maintaining sound internal control procedures. The matters reserved for the Board include approval of the Group’s long term objectives, policies, budgets, changes to the management structure, ensuring systems of internal control and approval of the annual report and financial statements. The Company holds regular Board meetings, with six scheduled meetings throughout the year and ad hoc meetings held as and when required. During the year 13 Board meetings were held. There is a clearly defined organisational structure with lines of responsibility and delegation of authority to executive management. The Board is responsible for monitoring the activities of the executive management. The Chairman has the responsibility of ensuring that the Board discharges its responsibilities. In the event of an equality of votes at a meeting of the Board, the Chairman has a second or casting vote. No one individual has unfettered powers of decision. The roles of Chairman and Chief Executive Officer are split in accordance with best practice. There is no formal Board performance appraisal system in place but the Remuneration and Nomination Committee considers this part of its remit. The Board has established levels of authorisation of financial 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 financial position. On the wider aspects of internal control, relating to operational and compliance controls and risk management as included in provision C.2.1 of the Code, the Board, in setting the control environment, identifies and reviews the key areas of business risk facing the Group. 26 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Remuneration and Nominations Committee The Board has a Remuneration and Nominations Committee as described in the Report on Directors’ Remuneration. The Committee consists of three Non-executive Directors, Simon Davies, Marco Fumagalli and Richard Liddell. Mr Davies chairs the Committee. The Committee meets to consider all material elements of remuneration policy, including Directors’ remuneration, assessing Directors’ performance, planning succession for the Chairman and Chief Executive and for new nominees to the Board. The Committee met twice during 2015 and proposes to meet at least twice during the next financial year. Technical Assurance Committee The Committee consists of two Non-executive Directors, Richard Liddell and Stephen Whyte, with Richard Liddell in the Chair. The Committee meets on an ad hoc basis to discuss technical matters as required. In 2015 the Committee held 7 meetings. Health and Safety (HSE) Committee The Committee consists of Richard Liddell and two of the executive management, Luca Madeddu and Leonardo Spicci. Mr Liddell chairs the committee, which is primarily focused on ensuring that the HSE policies are are adopted and applied across the Group. In 2015 the Committee held 10 meetings. 24754.02 25 May 2016 7:43 PM Proof 4 27 www.soundenergyplc.comStock Code: SOU Financial StatementsStrategic ReportOur GovernanceRemuneration Report Compliance Base salary The remuneration of the Executive Director is determined by the Remuneration and Nominations Committee (the ‘Committee’) and ratified by the Board. The Committee is composed entirely of Non-executive Directors, and currently comprises Simon Davies, who chairs the Committee, Marco Fumagalli and Richard Liddell. The Executive Director of the Company is not involved in determining his own remuneration. The Committee’s role includes: • determining and agreeing the remuneration policy for Directors and executive management; • ensuring that executive remuneration packages are competitive and fairly and responsibly reward contributions; • determining the award of annual bonus payments and recommending the levels for executives; • determining the award of share options under the incentive schemes; • considering any new long term incentive schemes and any performance criteria attached; and • agreeing Directors’ service contracts. The Committee has the authority to seek independent advice as required. The Committee consults with the Executive Team as required during the year. 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 2016 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 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 six months. • Non-executive Directors have letters of appointment with a notice period for termination of three 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. 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. • In the event of a change of control of the Company, James Parsons has the option to give notice and receive a lump sum equivalent to 18 months’ salary. The Non-Executive Directors have the option to give notice and receive a lump sumequivlent to 12 months’ salary. 28 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Summary of actual remuneration of Directors Executive Directors James Parsons Luca Madeddu(i) (iii) Non-executive Directors and Chairman Simon Davies Marco Fumagalli Richard Liddell(iv) Stephen Whyte(iv) Andrew Hockey(ii) (iii) Gerry Orbell(iii) Total for all Directors 2015 Performance Award £’000s Salary £’000s Total 2015 £’000s Total 2014 £’000s 287 150 60 40 10 10 56 40 653 205 N/A – – – – – – 205 492 150 60 40 10 10 56 40 858 420 104 40 15 – – 62 30 671 Includes prorated salary as Group Chairman until 25 June 2014. (i) Luca Madeddu’s reported remuneration commences from the date of his appointment to the Sound Energy Board in September 2014 until his resignation. (ii) (iii) Resigned from the Board on 28 September 2015. (iv) Appointed 28 September 2015. Share Options J Parsons Date of Grant 5.09.2011 5.09.2011 5.09.2011 1.03.2012 1.03.2012 1.03.2012 26.10.2012 26.10.2012 26.10.2012 19.06.2014 25.09.2015 Exercisable Date 5.09.2012–4.09.2016 5.09.2013–4.09.2016 5.09.2014–4.09.2016 1.03.2013–28.02.2018 1.03.2014–28.02.2018 1.03.2015–28.02.2018 26.10.2012–25.10.2016 26.10.2013–25.10.2016 26.10.2014–25.10.2016 29.07.2017–29.07.2019 25.09.2018–25.09.2020 Acquisition Price per share (pence) 21.75 21.75 21.75 25.00 25.00 25.00 16.50 16.50 16.50 8.00 14.25 Options held at 1 January 2015 110,000 110,000 110,000 150,000 150,000 150,000 333,333 333,333 333,334 3,350,000 – Options held at 31 December 2015 110,000 110,000 110,000 150,000 150,000 150,000 333,333 333,333 333,334 3,350,000 1,250,000 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 2015 option coverage to Directors and Key Personnel is is 4.0% of issued share capital. Over the long term the Board wish to move towards the 10% approved cap. During 2015, James Parsons exercised 1,333,333 options at an acquisition price of 6.50 pence per share. 24754.02 25 May 2016 7:43 PM Proof 4 29 www.soundenergyplc.comStock Code: SOU Financial StatementsStrategic ReportOur GovernanceDirectors’ Report The Directors present their report and the Group financial statements for the year ended 31 December 2015. Principal Activities The principal activity of the Company and its subsidiaries (the Group) is the exploration, appraisal and development to first production as an active operator in the oil and gas industry. Its current principal activity is in Italy and Morocco. Directors and their interests Directors of Sound Energy plc holding office during the year were: Simon Davies James Parsons Marco Fumagalli Richard Liddell (appointed 28 September 2015) Stephen Whyte (appointed 28 September 2015) Luca Madeddu (appointed 8 September 2014, resigned 28 September 2015) Andrew Hockey (resigned 28 September 2015) Gerry Orbell (appointed 5 February 2014, resigned 28 September 2015 ) The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company: Simon Davies 10,000,000 shares James Parsons 957,354 shares Richard Liddell 75,000 shares Stephen Whyte 68,646 shares Going concern Details of going concern considerations are shown in the Operating and Financial Review on page 19. Results and Dividends The loss for the year was £18.5 million (2014: £4.8 million) The Directors do not recommend the payment of a dividend. Political contributions During the period the Group made no political contributions. Auditor Crowe Clark Whitehill LLP continue as the Company’s Auditor until the next Annual General Meeting. A resolution to reappoint them as Auditor will be put to shareholders at the forthcoming Annual General Meeting. Technical Assurance Committee (TAC) The TAC exists to provide subsurface, technical, and operational oversight of and support to the Company’s executive. The TAC is also routinely involved in the technical, geological and operational screening of growth opportunities. The CEO attends all TAC meetings along with other Executive Team members who are invited from time to time depending on the requirement for specialist input. The TAC has formal meetings which are minuted and has access to an annual budget for use in securing relevant professional assistance. Provision of information to Auditor Each of the persons who is a Director at the date of approval of this Annual Report and Financial Statements confirms that: • so far as the Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; • 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 is aware of that information; and • this confirmation 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. Health and Safety The Board of Sound Energy 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 Energy convened a Board Committee dedicated to ensuring the application of our HSE policies across the Company. This Committee has continued to work through 2014. The table below sets out our operational HSE performance for 2014 and 2015, 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 2016. 30 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Operations Type Drilling Well Testing Facilities Construction Production Operations Totals Operations (Hours) 4,128 – 470 444 5,042 2015 Lost time Incidents* (Numbers) – – – – – (Hours) – – – – – Operations (Hours) – – 552 608 1,160 2014 Lost time Incidents* (Numbers) – – – – – (Hours) – – – – – * Lost Time Incident: any work related injury or illness which prevents that person from doing any work the day after the accident (as defined by the International Association of Oil and Gas Producers Glossary of HSE Terms,1999). Substantial shareholdings At 9 May 2016, Continental Investment Partners (Metano Capital S.A. & Greenberry S.A.) was directly and indirectly interested in 12.98% of Sound Energy’s share capital. By order of the Board Amanda Bateman Company Secretary 23 May 2016 24754.02 25 May 2016 7:43 PM Proof 4 31 www.soundenergyplc.comStock Code: SOU Financial StatementsStrategic ReportOur GovernanceStatement of Directors’ Responsibilities The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and to disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial 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 financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial 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 financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements 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 financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. 32 24754.02 25 May 2016 7:43 PM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Independent Auditor’s Report t r o p e R c i g e t a r t S e c n a n r e v o G r u O s t n e m e t a t S l a i c n a n F i We have audited the consolidated financial statements of Sound Energy plc for the year ended 31 December 2015 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 financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and the Auditor As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Strategic Report, Directors’ Report, the Chairman and Chief Executive Officer’s Statement, the financial and technical reviews, the statement of proved and probable reserves, the report on Directors’ Remuneration and the Corporate Governance Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 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 financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Matthew Stallabrass (Senior Statutory Auditor) For and on behalf of Crowe Clark Whitehill LLP Statutory Auditor St. Bride’s House 10 Salisbury Square London EC4Y 8EH 23 May 2016 Note: The maintenance and integrity of Sound Energy plc website is the responsibility of the Directors. The work carried out by the auditor does not involve consideration of these matters and accordingly the auditor accept no responsibility for any changes that may have occurred to the financial statements since they were originally presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 24754.02 27 May 2016 8:27 AM Proof 4 33 www.soundenergyplc.comStock Code: SOU Consolidated Statement of Comprehensive Income for the year ended 31 December 2015 Revenue Operating costs Impairment of producing assets Exploration costs Gross profit Administrative expenses Group operating loss from continuing operations Finance revenue Foreign exchange loss External interest costs Loss for the year before taxation Tax expense Loss for the year after taxation Foreign currency translation Total comprehensive loss for the year Loss for the year attributable to: Owners of the company Non-controlling interests Loss per share and diluted for the year Attributable to the equity shareholders of the parent (pence) Notes 9 11 3 6 7 Notes 8 8 2015 £’000s 859 (538) (6,347) (5,838) (11,864) (3,181) (15,045) 52 (1,389) (1,905) (18,287) – (18,287) (320) (18,607) (18,607) – 2015 £’000s (3.90) (3.90) 2014 £’000s 983 (658) (723) (74) (472) (2,773) (3,245) 7 (661) (1,022) (4,921) – (4,921) 127 (4,794) (4,794) – 2014 £’000s (1.40) (1.40) 34 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Consolidated Balance Sheet as at 31 December 2015 Non-current assets Property, plant and equipment Intangible assets Land and buildings Current assets Other receivables 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 Loans due in over one year Provisions Total liabilities Net assets Capital and reserves Equity share capital Warrant reserve Foreign currency reserve Accumulated deficit Total equity Notes 9 11 10 13 14 15 15 16 15 17 t r o p e R c i g e t a r t S e c n a n r e v o G r u O s t n e m e t a t S l a i c n a n F i 2015 £’000s 5,558 9,564 1,327 16,449 2,506 99 15,240 17,845 34,294 2,097 5,751 7,848 1,992 7,157 1,138 10,287 18,135 16,159 2014 £’000s 13,200 8,888 1,433 23,521 2,173 157 12,608 14,938 38,459 2,194 131 2,325 2,099 13,437 1,164 16,700 19,025 19,434 86,315 369 1,068 (71,593) 16,159 71,298 369 1,388 (53,621) 19,434 The financial statements were approved by the Board and authorised for issue on 23 May 2016 and were signed on its behalf by: J Parsons Director S Davies Director The accounting policies on pages 40 to 44 and notes on pages 40 to 60 form part of these financial statements. 24754.02 27 May 2016 8:27 AM Proof 4 35 www.soundenergyplc.comStock Code: SOU Company Balance Sheet as at 31 December 2015 Company Number 05344804 Non-current assets Property, plant and equipment Fixtures and fittings Software Investments in subsidiaries Current assets Other receivables Prepayments Cash and short term deposits Total assets Current liabilities Trade and other payables Non-current liabilities Loans Net assets Capital and reserves attributable to equity holders of the Company Issued share capital and share premium Warrant reserve Accumulated deficit Total equity Notes 12 13 14 15 15 2015 £’000s 7 30 100 35,450 35,587 171 25 12,288 12,484 48,071 2014 £’000s 7 35 – 25,735 25,777 44 32 11,914 11,990 37,767 1,213 1,448 7,157 39,701 86,315 369 (46,983) 39,701 6,627 29,692 71,298 369 (41,975) 29,692 The financial statements were approved by the Board and authorised for issue on 23 May 2016 and were signed on its behalf by: J Parsons Director S Davies Director 36 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Consolidated Statement of Changes in Equity for the year ended 31 December 2015 Group Notes 23 At 1 January 2015 Total loss for the year Other comprehensive income Total comprehensive loss Issue of share capital Transaction costs Share based payments At 31 December 2015 Company At 1 January 2015 Total loss for the year Issue of share capital Transaction costs Share based payments At 31 December 2015 Group Notes At 1 January 2014 Total loss for the period Other comprehensive income Total comprehensive income/(loss) Issue of share capital Transaction costs Fair value of warrants Share based payments At 31 December 2014 Company 23 At 1 January 2014 Total Loss for the period issue of share capital Transaction costs Fair value of warrants Share based payments At 31 December 2014 Share capital £’000s 4,153 – – – 886 – – 5,039 Share premium £’000s 67,145 – – – 15,342 (1,211) – 81,276 Accumulated deficit £’000s (53,621) (18,287) – (18,287) – – 315 (71,593) Warrant reserve £’000s 369 – – – – – – 369 Notes 23 Share capital £’000s 2,876 – – – 1,277 – – – 4,153 Notes 23 Share capital £’000s 4,153 – 886 – – 5,039 Share premium £’000s 67,145 – 15,342 (1,211) – 81,276 Accumulated deficit £’000s (41,975) (5,323) – – 315 (46,983) Share premium £’000s 60,209 – – – 7,442 (506) – – 67,145 Accumulated deficit £’000s (49,029) (4,921) – (4,921) – – – 329 (53,621) Warrant reserve £’000s – – – – – – 369 – 369 Share capital £’000s 2,876 – 1,277 – – – 4,153 Share premium £’000s 60,209 – 7,442 (506) – – 67,145 Accumulated deficit £’000s (38,653) (3,651) – – – 329 (41,975) Foreign currency reserves £’000s 1,388 – (320) (320) – – – 1,068 Warrant reserve £’000s 369 – – – – 369 Foreign currency reserves £’000s 1,261 – 127 127 – – – – 1,388 Warrant reserve £’000s – – – – 369 – 369 24754.02 27 May 2016 8:27 AM Proof 4 t r o p e R c i g e t a r t S Total equity £’000s 19,434 (18,287) (320) (18,607) 16,228 (1,211) 315 16,159 Total equity £’000s 29,692 (5,323) 16,228 (1,211) 315 39,701 Total equity £’000s 15,317 (4,921) 127 (4,794) 8,719 (506) 369 329 19,434 Total equity £’000s 24,432 (3,651) 8,719 (506) 369 329 29,692 37 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Consolidated Cash Flow Statement for the year ended 31 December 2015 Cash flow from operating activities Cash flow from operations Interest received Net cash flow from operating activities Cash flow from investing activities Capital expenditure and disposals Exploration and development expenditure Net cash flow from investing activities CSTI funding contract Net proceeds from debt Net proceeds from equity issue Interest payments Net cash flow from financing activities Net increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes to Cash Flow for the year ended 31 December 2015 Cash flow from operations reconciliation Loss before tax Finance revenue Payroll bonuses paid in shares Exploration expenditure written off and impairment of producing assets Decrease in accruals and short term payables Depreciation Share based payments charge Increase in long term provisions Finance costs and exchange loss on intercompany loans Increase in receivables Cash flow from operations Notes 14 Notes 6 9 23 2015 £’000s (3,487) 52 (3,435) (1,156) (6,545) (7,701) (117) – 15,017 (1,051) 13,849 2,713 (81) 12,608 15,240 2015 £’000s (18,287) (52) – 12,185 (97) 136 315 – 2,588 (275) (3,487) 2014 £’000s (3,327) 7 (3,320) (2,258) (1,089) (3,347) (242) 11,398 8,213 (280) 19,089 12,420 (355) 543 12,608 2014 £’000s (4,921) (7) 60 797 (603) 225 329 (62) 1,022 (167) (3,327) In the year the Company provided a bank guarantee of $2.75 million to the Moroccan Ministry of Petroleum in order to guarantee the Company’s minimum work programme obligations. As the Company expects to satisfy these commitments within 2016, this amount remains included as a liquid cash equivalent. 38 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 Company Cash Flow Statement for the year ended 31 December 2015 Cash flow from operating activities Cash flow from operations Interest received Net cash flow from operating activities Cash flow from investing activities Capital expenditure and disposals Cash advances to subsidiaries Net cash flow from investing activities Net proceeds from debt Net proceeds from equity issue Interest payments Net cash flow from financing activities Net increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes to Cash Flow for the year ended 31 December 2015 Cash flow from operations reconciliation Loss before tax Intragroup recharges Finance revenue Finance charges to be paid in shares Payroll bonuses paid in shares (Increase)/decrease in receivables (Decrease)/increase in accruals and short term payables Depreciation Share based payments charge Finance costs and exchange losses on intercompany loans Cash flow from operations Notes 14 2015 £’000s (2,937) 29 (2,908) (55) (10,669) (10,724) – 15,017 (662) 14,355 723 (349) 11,914 12,288 2014 £’000s (2,034) 5 (2,029) (36) (1,263) (1,299) 6,430 8,213 (185) 14,458 11,130 366 418 11,914 Notes 2015 £’000s 2014 £’000s (5,323) (143) (29) – – (120) (235) 22 315 2,576 (2,937) (4,921) (408) (5) 625 30 155 1,449 5 329 707 (2,034) 23 24754.02 27 May 2016 8:27 AM Proof 4 39 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements 1 Accounting policies Sound Energy plc is a public limited company registered and domiciled in England and Wales under the Companies Act 2006. (a) Basis of preparation The financial statements of the Group and its parent have been prepared in accordance with: 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 financial 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 financial 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 financial reporting periods presented in these consolidated financial statements and by all Group entities, unless otherwise stated. All amounts classified as current are expected to be settled/recovered in less than 12 months unless otherwise stated in the notes to these financial statements. The Group and its parent company’s financial statements for the year ended 31 December 2015 were authorised for issue by the Board of Directors on 23 May 2016. As at 31 December 2015 the Group had £15.2 million of available cash. Based on the current management plan, management believes that the Group will remain a going concern for the next 12 months from the date of the authorisation of the financial statements on the basis that the Group has sufficient funding options for the forecast expenditure (12 months through 23 May 2017) using both the available cash resources and funding from partners in the main strategic licences. Use of estimates and key sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the impairment of intangible exploration and evaluation (E&E), investments and goodwill and the estimation of share based payment costs. The Group determines whether E&E assets are impaired in cost pools when facts and circumstances suggest that the carrying amount of a cost pool may exceed its recoverable amount. As recoverable amounts are determined based upon risked potential, or where relevant, discovered oil and gas reserves, this involves estimations and the selection of a suitable discount rate. The capitalisation and any write-off of E&E assets necessarily involve certain judgements with regard to whether the asset will ultimately prove to be recoverable. In determining the treatment of E&E assets and investments the Directors are required to make estimates and assumptions as to future events and circumstances. There are uncertainties inherent in making such assumptions, especially with regard to oil and gas reserves and the life of, and title to, an asset; recovery rates; production costs; commodity prices; and exchange rates. Assumptions that are valid at the time of estimation may change significantly 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 finance being available to fund the development of the E&E assets. Goodwill is tested annually and at other times when impairment indications exist. When value in use calculations are undertaken, management estimates the expected future cash flows from the asset and chooses a suitable discount rate in order to calculate the present value of those cash flows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in 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). 40 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 20151 Accounting policies continued The Group considers the latest available information on the performance of producing licences compared to expected targets and where there are indications that the production is below expectations, the Group’s reservoir engineers conduct an evaluation to identify the technical reasons and where necessary seek opinion from external engineers. The Group has reviewed the carrying value of the Casa Tonetto licence in view of the reservoir performance being below expectations upon commencement of production at the beginning of 2016 and recognised that an impairment charge of £6.3 million (note 9) was required. The carrying value of Casa Tonetto after impairment was £4.8 million and for every 5% adjustment in the reservoir size the impairment charge would vary by approximately £0.3 million. (b) Basis of consolidation The Group financial statements consolidate the Income Statements and Balance Sheets of the Company and its subsidiary undertakings. Joint venture undertakings are accounted for using the proportionate consolidation method from the date that significant influence or joint control (respectively) commences until the date this ceases. Associates are accounted for using the equity method. Investments in subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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. Separate financial statements Investments in subsidiaries, joint ventures and associates are recorded at cost, subject to impairment testing in the Group’s financial 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 specific requirements of the standard. The Group will continue to monitor the application of these policies in the light of expected future guidance on accounting for oil and gas activities. The Group applies the successful efforts method of accounting for E&E costs. Exploration and evaluation assets Under the successful efforts method of accounting, all licence acquisition, exploration and appraisal costs are initially capitalised in well, field or specific exploration cost centres as appropriate, pending determination. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial reserves have been established or the determination process has not been completed. The useful lives of the assets are considered to be finite. Exploration and evaluation costs Costs are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as exploration and evaluation assets. 41 24754.02 27 May 2016 8:27 AM Proof 4 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial StatementsNotes to the Financial Statements continued 1 Accounting policies continued 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 however, 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 reclassified as development and production assets. If, however, commercial reserves have not been found, the capitalised costs are charged to expense after conclusion of appraisal activities. Development and production assets Development and production assets are accumulated generally on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined in the accounting policy above. The cost of development and production assets also includes the cost of acquisitions and purchases of such assets, directly attributable overheads, finance costs capitalised, and the cost of recognising provisions for 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 flows expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single income generating unit where the cash flows of each field are interdependent. Acquisitions, asset purchases and disposals Acquisitions of oil and gas properties are accounted for under the purchase method where the transaction meets the definition of a business combination or joint venture. Transactions involving the purchase of an individual field interest, or a group of field interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specific transactions involve the transfer of the field interests directly, or the transfer of an incorporated entity. Accordingly, no goodwill arises, and the consideration is allocated to the assets and liabilities purchased on an appropriate basis. (e) Expenses recognition Expenses are recognised on the accruals basis unless otherwise stated. (f) Property, plant and equipment Fixtures, fittings and equipment are recorded at cost as tangible assets. The straight-line method of depreciation is used to depreciate the cost of these assets over their estimated useful lives, which is estimated to be four years. (g) Goodwill Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at its original value, less any accumulated impairment losses subsequently incurred. Goodwill is not amortised. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit or group of cash generating units is less than the carrying amount, an impairment loss is recognised. (h) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 42 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 20151 Accounting policies continued (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 financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable results will be available against which the temporary differences can be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. Temporary differences arising from investments in subsidiaries give rise to deferred tax in the Company Balance Sheet only to the extent that it is probable that the temporary difference will reverse in the foreseeable future or the Company does not control the timing of the reversal of that difference. Deferred tax is provided on unremitted 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 financial liabilities are recognised on the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Trade and other receivables are initially measured at fair value and are subsequently reassessed at the end of each accounting period. Cash and cash equivalents comprise cash on hand and demand deposits, and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below. Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Shares issued are held at their fair value. (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 satisfied, provided that all other performance and/or service conditions are satisfied. 24754.02 27 May 2016 8:27 AM Proof 4 43 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial StatementsNotes to the Financial Statements continued 1 Accounting policies continued (m) Standards, interpretations and amendments to published standards that are not yet effective and have not been early adopted by the Group A number of new standards and amendments to standards and interpretations have been issued but are not yet effective and in some cases have not yet been adopted by the EU. The Directors do not expect that the adoption of these standards will have a material impact on the financial statements of the Company in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments, IFRS 15 may have an impact on revenue recognition and related disclosures and IFRS 16 will have an impact on the recognition of operating leases. At this point it is not practicable for the Directors to provide a reasonable estimate of the effect of these standards as their detailed review of these standards is still ongoing. (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 outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. (p) Revenue Recognition Revenue associated with production sales of natural gas is recorded when title passes to the customer. 2 Segment information The Group categorises its operations into three business segments based on corporate, exploration and appraisal and development and production. In the year ended 31 December 2015 the Group’s exploration and appraisal activities were carried out in Italy. A Moroccan office was opened in 2015 with the objective of drilling at the recently acquired Tendrara appraisal opportunity. 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. Details regarding each of the operations of each reportable segment is included in the following tables. 44 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 20152 Segment information continued Segment results for the period ended 31 December 2015 Sales and other operating revenues Operating costs Exploration costs Impairment of producing assets Administration expenses Operating loss segment result Interest receivable Finance costs Loss for the period before taxation Corporate £’000s – – – – (3,181) (3,181) 52 (3,294) (6,423) Development & Production £’000s 859 (538) – (6,347) – (6,026) – – (6,026) Exploration & Appraisal £’000s – – (5,838) – – (5,838) – – (5,838) Total £’000s 859 (538) (5,838) (6,347) (3,181) (15,045) 52 (3,294) (18,287) Segment revenue reported above represents revenue generated from external customers. All the revenue arose from operations in Italy. The segments assets and liabilities at 31 December 2015 were as follows: Non-current assets Current assets Total liabilities The geographical split of non-current assets is as follows: Development and production assets Land and buildings Fixtures, fittings and office equipment Goodwill Exploration and evaluation assets Software Total Corporate £’000s 137 17,845 (7,743) Development & Production £’000s 5,391 – (1,498) Exploration & Appraisal £’000s 10,921 – (8,894) UK £’000s – – 37 – – 100 137 Italy £’000s 5,391 1,327 101 1,992 6,960 – 15,771 Total £’000s 16,449 17,845 (18,135) Morocco £’000s – – 29 – 512 – 541 Segment revenue reported above represents revenue generated from external customers. All the revenue arose from operations in Italy. Segment results for the year ended 31 December 2014 were as follows: Sales and other operating revenues Operating costs Exploration costs Impairment of producing assets Administration expenses Operating loss segment result Interest receivable Finance costs Loss for the period before taxation Corporate £’000s – – – – (2,773) (2,773) 7 (1,552) (4,318) Development & Production £’000s 983 (658) – (723) – (398) – (131) (529) Exploration & Appraisal £’000s – – (74) – – (74) – – (74) Total £’000s 983 (658) (74) (723) (2,773) (3,245) 7 (1,683) (4,921) 45 24754.02 27 May 2016 8:27 AM Proof 4 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 2 Segment information continued The segments assets and liabilities at 31 December 2014 are as follows: Non-current assets Current assets Total liabilities The geographical split of non-current assets is as follows: Corporate £’000s – 14,938 (2,099) Development & Production £’000s 13,112 – (1,557) Exploration & Appraisal £’000s 10,409 – (15,369) UK £’000s – – 42 – – 42 2015 £’000s 76 136 2,557 12,185 2015 £’000s 65 7 4 76 2015 £’000s 315 1,885 308 49 2,557 Development and production assets Land and buildings Fixtures, fittings and office equipment Goodwill Exploration and evaluation assets Total 3 Operating Loss Operating loss is stated after charging: Auditor’s remuneration Depreciation Employee costs Impairment charges and exploration costs 4 Auditor’s Remuneration Fees payable to Company’s Auditor for the audit of 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 benefits Total 46 24754.02 27 May 2016 8:27 AM Proof 4 Total £’000s 23,521 14,938 (19,025) Italy £’000s 13,112 1,433 46 2,099 6,789 23,479 2014 £’000s 75 225 2,192 723 2014 £’000s 65 6 4 75 2014 £’000s 329 1,507 347 9 2,192 Sound Energy plc Annual Report for the year ended 31 December 2015 5 Employee Costs continued Number of employees (including Executive Directors) at the end of the year Technical and operations Management and administration Total 6 Finance Revenue Interest on cash at bank and short term deposits 7 Taxation (a) Analysis of the tax charge for the year: Current tax UK Corporation tax (charge)/credit Adjustment to tax expense in respect of prior years Overseas tax Total current tax (charge)/credit Deferred tax income arising in the current year Total tax (charge)/credit (b) Reconciliation of tax charge Loss before tax Tax (charge)/credit charged at UK corporation tax rate of 20% (2014: 21%) Temporary differences not recognised Differences in overseas tax rates Total tax (charge)/credit 8 Profit/(loss) per share 2015 Number 2014 Number 8 14 22 2015 £’000s 52 2015 £’000s Group – – – – – – 2015 £’000s Group (18,287) 3,657 (1,065) (2,592) – 5 11 16 2014 £’000s 7 2014 £’000s Group – – – – – – 2014 £’000s Group (4,921) 1,033 (625) (408) – The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic profit/(loss) per share is calculated as follows: Loss after tax from continuing operations Weighted average shares in issue Loss per share (basic) from continuing operations 24754.02 27 May 2016 8:27 AM Proof 4 2015 £’000s (18,287) 2015 million 467 2015 pence (3.90) 2014 £’000s (4,921) 2014 million 360 2014 pence (1.40) 47 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 9 Property, plant and equipment Development and production assets Cost At start of the year Exchange adjustments Additions Reversal of capitalised interest Transfers At end of the year Depreciation At start of the year Impairment of assets Charge for the year At end of the year Net book amount Fixtures, fittings and office equipment Cost At start of the year Exchange adjustments Additions Disposal At end of the year Depreciation At start of the year Exchange adjustments Charge for the year Disposals At end of the year Net book amount Total net book amount 2015 £’000s 2014 £’000s 15,566 (957) 234 (546) – 14,297 2,454 6,347 105 8,906 5,391 273 (10) 120 (6) 377 185 (4) 31 (2) 210 167 5,558 2,947 (548) 1,612 – 11,555 15,566 1,559 712 183 2,454 13,112 231 (4) 46 – 273 143 – 42 – 185 88 13,200 In 2015, the impairment costs related to Casa Tonetto due to latest revisions on the remaining life of production from the field. The Group has reviewed the carrying value of the Casa Tonetto licence in view of the reservoir performance being below expectations upon commencement of production at the beginning of 2016 and recognised an impairment charge of £6.3 million as at 31 December 2015. In 2014, San Lorenzo was impaired due to revisions on the remaining life of production from the field (see note 1 for further details). 2015 £’000s 6,347 6,347 2014 £’000s 712 712 Italy Total 48 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 10 Land and Buildings Cost At start of year Additions Exchange adjustments At end of year Depreciation At start of year Additions At end of year Net book amount 11 Intangibles Cost At 1 January 2015 Additions Transfers Exchange adjustments At 31 December 2015 Impairment At start of the year Charge for the year At end of the year Net book amount at 31 December 2015 Cost At 1 January 2014 Additions Transfers Exchange adjustments At 31 December 2014 Impairment At start of period Exchange adjustments Charge for period At end of period Net book amount at 31 December 2014 Group 2015 £’000s 2014 £’000s 1,433 – (106) 1,327 – – – 1,327 Goodwill £’000s Software £’000s Exploration & Evaluation Assets £’000s 2,099 – – (107) 1,992 – – – 1,992 91 15 – – 106 – 6 6 100 11,758 6,545 – (203) 18,100 5,060 5,568 10,628 7,472 Goodwill £’000s Software £’000s Exploration & Evaluation Assets £’000s 2,167 – – (68) 2,099 – – – – 2,099 – 91 – – 91 – – – – 91 22,393 998 (11,555) (78) 11,758 5,060 – – 5,060 6,698 – 1,433 – 1,433 – – – 1,433 2015 £’000s 13,948 6,560 – (310) 20,198 5,060 5,574 10,634 9,564 2014 £’000s 24,560 1,089 (11,555) (146) 13,948 5,060 – – 5,060 8,888 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. In accordance with IFRS, goodwill is assessed annually for impairment. The carrying value of the goodwill is linked to the exploration and evaluation assets, on the basis that there is significant headroom (see below) no impairment is considered necessary. The impairment charge is included within exploration costs in the consolidated statement of comprehensive income. The Company has no goodwill. 49 24754.02 27 May 2016 8:27 AM Proof 4 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 11 Intangibles continued Exploration and Evaluation Assets Intangible assets are allocated to the cash generating unit (“CGU”) identified according to business segment. In assessing whether impairment indications exist in relation to intangible assets, the Directors have regard to the results of the Group’s exploration and evaluation programme and to the most recent review and valuation of the Group’s assets prepared independently by its geoscience advisers in competent persons’ reports (“CPRs”). A CPR for covering most of Group’s assets was released in April 2015. A CPR for Santa Maria Goretti was performed in July 2014. A Badile CPR was executed in October 2013 which gave a Best estimate NPV10 of €486 million, an increase of 60% on the previous CPR. During the year the Group wrote off £5.8 million as exploration costs primarily relating to the Carita licence as commercial quantities of hydrocarbons were not discovered at the conclusion of drilling. After taking account of the CPR and current work programme the Directors do not therefore consider that any impairment indications exist in relation to the remaining Italian CGU. The valuation calculations included in the CPRs are entirely dependent on the availability of finance to fund capital expenditure on the development of exploration and evaluation assets. Should finance not be available the carrying amounts of the Group’s exploration and evaluation assets are likely to be impaired to their market value in a distressed sale. The methodology to arrive at the values attributed to the Group’s assets in the CPRs was as follows: • 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 profile and duration of sales contracts. The principal assumptions on which the NPV calculations are based are as follows: • The 2015 Italian CPR was produced with five different pricing scenarios with base gas prices of between 23 euro cents and 31 euro cents for 2015. Gas prices, in all cases, were then escalated at 2% per annum from 2016. The oil price scenarios were priced from 38.64 euros per barrel to 57.96 euros per barrel with future years being escalated according to a Brent futures curve until 2022 and from then on at 2% per annum. • A discount rate of 10% was used which the Directors believe to be standard industry practice and approximate to the Group’s weighted average cost of capital. • The NPV calculations are most sensitive to the assumptions for production and operating expenditure. During the year, the Group had capitalised interest costs of approximately £525,000 (2014: £799,000); primarily to Carita licence but these were subsequently written off on impairment of the Carita licence. 12 Investment in subsidiaries At 1 January Net advances to Group companies At 31 December 2015 £’000s Company 25,735 9,715 35,450 2014 £’000s Company 24,252 1,483 25,735 The subsidiary companies of the Company at 31 December 2015, which are all 100% owned by the Company are: Name Sound Oil International Limited Sound Oil Asia Limited Mitra Energia Citarum Limited* Sound Energy Holdings Italy Limited Apennine Energy SpA Sound Energy Morocco SARL Incorporated British Virgin Isles British Virgin Isles Mauritius UK Italy Morocco Principal Activity Holding Company Holding Company Exploration Company Holding Company Exploration, Development and Production Company Exploration Company * The investment in Mitra Energia Citarum Limited is held indirectly via Sound Oil International Limited. 50 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 12 Investment in subsidiaries continued The investment in Apennine Energy SpA is held indirectly through Sound Energy Holdings Italy Limited. Apennine Oil and Gas SPA was merged with Apennine Energy SPA during 2015. Sound Energy Holdings Italy Limited (formerly Consul Oil and Gas Limited) is directly funded through non-current, non-interest bearing loans from Sound Energy plc. Given that Sound Energy has no intention to call the loans in the foreseeable future, the loans are treated as “permanent as equity”. As a result, Sound Energy has classified these loans as investments which represent the carrying value of the investment in Sound Energy International and the Italian company. Composition of the Group Information about the composition of the Group at the end of the reporting period is as follows: Principal activity Gas exploration and production Holding companies Holding companies Holding companies Gas exploration 13 Other Receivables Group Place of incorporation and operation Italy UK British Virgin Isles Mauritius Morocco Italian VAT UK VAT Other receivables Currency Analysis Euro GBP sterling Moroccan dirham Company UK VAT Other receivables Currency Analysis GBP sterling Total 24754.02 27 May 2016 8:27 AM Proof 4 Number of wholly owned subsidiaries 2015 1 2 2 1 1 2015 £’000s 2,124 140 242 2,506 2015 £’000s 2,262 192 52 2,506 2015 £’000s 140 31 171 2015 £’000s 171 171 2014 2 2 2 1 – 2014 £’000s 1,975 24 174 2,173 2014 £’000s 2,117 56 – 2,173 2014 £’000s 24 20 44 2014 £’000s 44 44 51 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 2015 £’000s 3,157 12,263 15,240 1 7,406 5,957 1,876 15,240 2015 £’000s 25 12,263 12,288 1 6,330 5,957 12,288 2015 £’000s 1,257 160 680 2,097 2015 £’000s 786 1,302 9 2,097 2014 £’000s 719 11,889 12,608 1 11,205 1,402 – 12,608 2014 £’000s 25 11,889 11,914 1 10,511 1,402 11,914 2014 £’000s 1,016 88 1,090 2,194 2014 £’000s 747 1,447 – 2,194 14 Cash and Cash Equivalents Group Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount 31 December Being: In US dollar In euros In sterling In Moroccan dirham Company Cash at bank and in hand Cash equivalents: Short term deposits Carrying amount 31 December Being In US dollar In euros In sterling Total 15 Trade & Other Payables Group Trade payable Payroll taxes and social security Accruals Currency Analysis Euro Sterling Moroccan dirham Total 52 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 15 Trade & Other Payables continued Company Trade payable Payroll taxes and social security Accruals Total Currency Analysis Sterling Total Loans and Borrowings Group Current liabilities Other loans Non-current liabilities Other loans Loans and Borrowings Company Current liabilities Other loans Non-current liabilities Other loans The non-current loans are repayable in July 2017. 16 Deferred tax liabilities 1 January Unreleased foreign exchange (decrease)/increase 31 December 2015 £’000s 683 29 501 1,213 2015 £’000s 1,213 1,213 2014 £’000s 502 34 912 1,448 2014 £’000s 1,448 1,448 2015 £’000s 2014 £’000s 5,751 131 7,157 13,437 2015 £’000s 2014 £’000s – – 7,157 6,627 2015 £’000s 2,099 (107) 1,992 2014 £’000s 2,165 (66) 2,099 Deferred tax assets have not been recognised in respect of tax losses available due to the uncertainty of utilisation of those assets. 24754.02 27 May 2016 8:27 AM Proof 4 53 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 17 Provisions At 1 January 2015 Discount unwind Additions in 2015 Released due to change in estimates Unrealised forex decrease At 31 December 2015 The provision of £1,138,000 relates to the following licenses: Rapagnano Montemarciano Marciano Carita Abandonment £’000s 1,164 32 151 (124) (85) 1,138 Total £’000s 1,164 32 151 (124) (85) 1,138 £’000s 115 214 262 547 Decommissioning is likely to occur within one year for Marciano and between 2017 and 2025 for the other licences. Expected abandonment costs are capitalised and depreciated on a unit of production basis once gas sales commence. There are no provisions in the parent company. 18 Capital and Reserves Group Ordinary shares – 1p Company Ordinary shares – 1p 2015 Number of shares 503,898,868 2015 Number of shares 503,898,868 2014 Number of shares 415,300,815 2014 Number of shares 415,300,815 £’000s 5,039 £’000s 5,039 £’000s 4,153 £’000s 4,153 Share option schemes Options to subscribe for the Company’s shares were granted to certain executives in 2014 and 2015 (note 19). 54 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 18 Capital and Reserves continued Share Issues On 22 January 2015, Sound Energy announced the issue of 3,906,250 shares in relation to payment of introductory fees relating to the reserve based lending facility provided by Greenbury SA in 2014. On 28 April 2015, Sound Energy announced an equity raise arranged by Continental Investment Partners for the issue of 63,157,895 ordinary shares and 63,157,895 warrants. The issue of these shares and warrants was completed in two tranches and was completed by July 2015. On 24 June 2015, Sound Energy was pleased to announce the results of its Open Offer which resulted in 15,599,752 new ordinary shares being issued along with 15,599,752 warrants. On 17 July 2015, the Group announced that 1,499,999 new ordinary shares had been issued following the exercise of share options available to senior management. On 21 July 2015, Sound Energy announced the issue of 2,196,153 new ordinary shares following the exercise of 2014 warrants at 10.4p per share. On 29 July 2015, Sound Energy announced the issue of 2,015,807 new ordinary shares following the exercise of 2014 warrants at 10.4p per share. On 13 August 2015, Sound Energy announced the issue of 10,600 new ordinary shares following the exercise of warrants issued in July 2015 at 24p per share. On 17 August 2015, Sound Energy announced a block admission covering up to 100,737,454 warrants. At the end of December 2015, the Company had 503,898,868 ordinary shares in issue. 19 Related Party Disclosures The financial statements include the financial statements of Sound Energy plc (the parent) and the subsidiaries listed in the following table: Name Sound Oil International Limited Sound Oil Asia Limited Sound Energy Holdings Italy Limited (formerly Consul Oil and Gas Limited) Apennine Energy SPA Apennine Oil and Gas SPA Mitra Energia Citarum Limited Sound Oil Morocco Sarl Country of Incorporation British Virgin Isles British Virgin Isles UK Italy Italy Mauritius Morocco 2015 100% 100% 100% 100% N/A 100% 100% 2014 100% 100% 100% 100% 100% 100% – Apennine Oil and Gas SPA was merged with Apennine Energy SPA in 2015 in order to streamline the business and reduce overhead costs. Terms and conditions of transactions with related parties There were no sales or purchases to or from related parties (2014: none). There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2015, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2014: none) and is not owed or owes amounts to/from any related parties. 24754.02 27 May 2016 8:27 AM Proof 4 55 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial StatementsNotes to the Financial Statements continued 19 Related Party Disclosures continued Key Management As at 31 December 2015, there were three key management personnel other than Directors of the Company (2014: one). Details of the Directors’ remuneration are set out in the Report of Directors’ Remuneration. Salaries and employee benefits Share based payments Directors’ Interest in employee share options 2015 £’000s 1,317 315 2014 £’000s 1,219 329 At 31 December 2015, the Chairman had no interest in share options in the Group. No other Non-executive Directors held any options. Andrew Hockey, whose appointment was terminated on 28 September 2015, continued to hold 400,000 options. 2011 2012 Expiry Date 2016 2016 2015 Exercise price Number Pence 49.5p 100,000 300,000 16.5p 2014 Number 100,000 300,000 Share options held by the executive members of the Board of Directors at 31 December 2015 have the following expiry dates and exercise prices: 2011 2012 2012 2012 2013 2014 2014 2015 Key management’s interest in employee share options 2012 2012 2013 2014 2014 2015 2015 2015 Expiry Date 2016 2018 2016 2017 2018 2017 2019 2020 Exercise price Pence 21.75p 25.0p 16.5p 16.5p 12.15p 6.50p 8.0p 14.25p Expiry Date 2018 2017 2018 2017 2019 2020 2020 2020 Exercise price Pence 25.0p 16.5p 12.15p 6.50p 8.0p 14.25p 14.20p 14.07p 2015 Number 330,000 450,000 1,000,000 – – – 3,350,000 1,250,000 2015 Number 450,000 330,000 2,622,221 166,666 4,500,000 1,250,000 1,250,000 1,250,000 2014 Number 330,000 900,000 1,000,000 330,000 1,333,333 1,499,999 5,800,000 – 2014 Number – – 1,288,888 166,666 2,050,000 – – – 20 Financial Instruments risk management objectives and policies A financial instrument is defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The Group’s financial instruments comprise trade payables, receivables, cash and short term deposits. The Group has no long term borrowings. The main purpose of the financial instruments is to finance the Group’s operations. The fair value of the financial instruments is their carrying value, with the carrying value amounts included in the Group Balance Sheet with further analysis in note 13 (other debtors), note 14 (cash and cash equivalents) and note 15 (trade and other payables). 56 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 20 Financial Instruments risk management objectives and policies continued The main risks arising from the Group’s financial instruments are interest rate risk and foreign currency risk. The Board of Directors reviews and agrees policies for managing each of these risks which are summarised below: Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s deposit accounts and short term debt instruments. The Group’s policy is to manage this exposure by investing in short term, low risk bank deposits. Interest rate risk table 2015 Sterling US dollar Euro Sterling US dollar Euro 2014 Sterling US dollar Euro Sterling US dollar Euro Increase/ (decrease) % Effect on profit before tax £’000s 10 10 10 (10) (10) (10) 10 10 10 (10) (10) (10) 5 – – (5) – – 1 – – (1) – – Capital Management The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern in order to provide return for shareholders, benefit for other stakeholders and to maintain optimal capital structure and to reduce the cost of capital. Management considers as part of its capital, the financial sources of funding from shareholders and third parties. In order to ensure an appropriate return for shareholder capital invested in the Group, management thoroughly evaluates all material projects and potential acquisitions and has them approved by the Board of Directors where applicable. The Group monitors capital on a short and medium term view. During 2015 the Group’s strategy was to fund capital expenditure through equity. The table below illustrates the Group’s capital structure. Borrowings Cash and cash equivalents Net (debt)/cash Total capital excluding reserves: Equity share capital Equity share premium Shareholders’ equity 2015 £’000s (12,908) 15,240 2,332 5,039 81,276 16,159 2014 £’000s (13,568) 12,608 (960) 4,153 67,145 19,434 57 24754.02 27 May 2016 8:27 AM Proof 4 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements 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 Moroccan deposits rises or falls pro rata to the currency movements, so the purchasing power of the respective currency remains the same. As the Group also holds some Moroccan dirham (MAD) denominated assets at the end of the year, the following table demonstrates the sensitivity to a reasonably possible change in the MAD or euro exchange rates, with all other variables held constant, of the Group’s profit or loss before tax. Wherever possible the company holds the same currency as our liabilities, thereby providing a natural hedge. The Group no longer holds significant US dollar assets. 2015 2014 Credit risk Increase/ (decrease) in euro rate % 5 (5) Effect on profit or loss before tax £’000s (535) 563 Increase/ (decrease) in MAD rate % 5 (5) Effect on profit or loss before tax £’000s (10) 11 5 (5) (708) 745 – – – – The Group currently has sales to one customer. The maximum credit exposure at the reporting date of each category of financial assets above is the carrying value as detailed in the relevant notes. The Group’s management considers that the financial assets that are not impaired for each of the reporting dates are of good credit quality. Payment terms are limited to one month’s gas sales at any one time and therefore the credit risk is considered negligible. Liquidity Risk The Group and Company have significant liquid assets and are not materially exposed to liquidity risk. For further details on the maturity of financial liabilities see note 15. 22 Financial Instruments 2015 Cash and short term deposits Sterling Euro US dollar Moroccan dirham 2014 Cash and short term deposits Sterling Euro US dollar Floating Rate £’000s Fixed rate £’000s Interest- free £’000s 5,932 7,406 1 – 13,339 39 696 1 736 – – – 1,876 1,876 25 – – – 25 1,363 10,511 – 11,874 Total £’000s 5,957 7,406 1 1,876 15,240 1,402 11,205 1 12,608 Weighted average rate % 0.57 0.06 0.00 3.75 0.00 0.00 0.25 – Euro cash balances have been converted at the exchange rate of €1.3572:£1.00 (2014: €1.2565:£1.00). Moroccan dirham cash balances have been converted at the exchange rate of MAD14.6608:£1.00 (2014: Not applicable). US dollar cash balances have been converted at the exchange rate of US$1.4803:£1.00 (2014: USD$1.5649:£1.00). The floating rate cash and short term deposits comprise cash held in interest bearing deposit accounts. The Group carrying value of the financial instruments approximates the fair values. 58 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015 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 in the Consolidated Income Statement is as follows: Group Expense arising from equity-settled share options Company Expense arising from equity-settled share options 2015 £’000s 315 2015 £’000s 315 2014 £’000s 329 2014 £’000s 329 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. 2015 Total 2014 total Granted 4,000,000 1,250,000 1,250,000 6,500,000 Period (years) 5 5 5 Price (pence) 14.25 14.20 14.07 15,350,000 3–5 6.06–6.50 The expected life of the options is based on the maximum option period and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. No other features of options grant were incorporated into the measurement of fair value. Share options outstanding at the start of the year Share options granted Share options expired Share options exercised Share options outstanding at the end of the year 2015 £’000s 15,698,885 6,500,000 (350,000) (1,499,999) 20,348,886 2014 £’000s 6,182,220 15,350,000 (5,833,335) – 15,698,885 If all equity share options were exercisable immediately, new ordinary shares equal to approximately 4.0% would be created. 24 Commitment and guarantees At 31 December 2015, the Group had the following commitments other than for decommissioning (note 17) and a capital commitment to drill at least one appraisal well on the Tendrara licence in Morocco. Sound Energy has provided a $2.75 million bond to the Moroccan Oil Ministry in order to guarantee this commitment will be met. We expect the well to drill in Q2 2016 thereby satisfying this requirement. 24754.02 27 May 2016 8:27 AM Proof 4 59 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial Statements Notes to the Financial Statements continued 25 Debt and Warrant Instruments On 28 July 2014, the Company issued £8 million of debt to Continental Investment Partners (£7 million) and Simon Davis (£1 million) combined with equity and warrants with a three year term with an annual coupons of 8% and 10% respectively. Each warrant is convertible into equity at a price of 10.4p for that three year term. The loan notes therefore contain two components: liability and equity elements. The equity is presented in equity under the heading ‘‘warrant reserve’’. Proceeds of issue Liability at date of issue Equity component Liability component at 1 January 2015/date of issue Interest charge calculated at effective interest rate Interest paid Liability component at 31 December 26 Post Balance Sheet Events 2015 £’000s – – – 6,588 1,190 (660) 7,118 2014 £’000s 6,605 (6,236) 369 6,236 491 (139) 6,588 On 14 January 2016, the Company entered into an agreement with Maghreb Petroleum Exploration S.A (‘‘MPE’’) for the purchase of three onshore gas permits located in Morocco (together the ‘‘Sidi Moktar Licences’’). In consideration for the acquisition, the Company issued MPE 21,764,706 ordinary shares and granted MPE a 1.6% net profit interest in any future cash flows from the Kechoula discovery. On 8 February 2016, the Company announced that it had signed a binding agreement with Oil & Gas Investment Fund S.A.S (‘‘OGIF’’) whereby OGIF granted the Company an option to acquire a 55% interest in the Meridja permit, onshore Morocco. As consideration for the option, the Company was required to pay OGIF US$100,000 as well as funding commitment of up to US$200,000 and on exercise of option pay a further US$150,000 to OGIF and a carry of costs up to the end of a first Meridja exploration well. On 10 March 2016, the Company announced a further 50% acquisition of an operated interest in three onshore gas licences in Morocco (together the ‘‘Sidi Moktar Licences’’) from PetroMaroc Corporation Plc (‘‘PetroMaroc’’). The Company also entered into a transaction with Culebra Petroleum Limited for Culebra to acquire a 50% interest in Sidi Moktar. The effect of the transaction was that the Company has an effective 25% working interest in Sidi Moktar with a carry to US$18 million and an additional US$6 million receivable by the Company. On 21 April 2016 the Company announced the commencement of drilling of the first well at Tendrara, onshore Morocco. On 10 May 2016, the Company announced the signing of heads of terms with Greenberry plc for Greenberry and other investors to subscribe for bonds to be issued by the Company to provide additional funding for the Company’s growth strategy and simplify the Company’s corporate debt. The bonds are expected to be five year non-amortising bonds with aggregate par value of up to €28.8 million and a 5% coupon. The bonds will be issued at a 32% discount to par and will attract a total cash fee of €1.1 million. The Company also intends to issue Greenberry 70,312,500 warrants to subscribe for new shares in the Company at an exercise price of 30p per share and with an exercise period of five years from the date of issue. On 11 May 2016, the Company announced the receipt of the final Badile Drilling Approval. On 16 May 2016, the Company provided an update on Nervesa and noted that there had been reduction in the resevoir pressure and that it was planning for a remedial re-perforation and evaluating the possibility of a sidetrack well. 60 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015List of Licences and Interests Licence Rapagnano San Lorenzo Fonte San Damiano Status1 Concession Concession Concession Key Project or Prospect Name Marciano Type Rapagnano Gas Production Casa Tiberi Gas Production Awaiting Abandonment Gas Discovery Oil Discovery Appraisal Prospect Appraisal Oil Discovery – – Gas Discovery Gas Discovery – – – Oil Discovery – – Prospect Prospect Prospect App Conc. Casa Tonetto Strombone Nervesa Badile T.Tesino Musone – – Laura Dora/Dalla – – – Manfria – – Tendrara Meridja Sidi Moktar Permit Permit Permit Permit Permit Permit Permit Permit Application Application Application Application Application Application Application Permit Reconnaissance Permit WI (%) 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 27.5 55 25 Area (km2) 8.5 4.9 23.7 Operator Apennine Energy Apennine Energy Apennine Energy Apennine Energy 4.2 Apennine Energy 84.3 Apennine Energy 529.8 Apennine Energy 154.5 Apennine Energy 101.3 Apennine Energy 100.9 Apennine Energy 287.7 Apennine Energy 49.4 Apennine Energy 65.2 Apennine Energy 138.1 Apennine Energy 113.6 Apennine Energy 337 Apennine Energy 162.3 Apennine Energy 41.5 Apennine Energy 212.4 Apennine Energy 118.0 Sound Energy Morocco 14,500 9,000 Sound Energy Morocco 4,500 Sound Energy Morocco South Carità2 Torrente Alvo2 Carità2 Badile S.Maria Goretti Villa Gigli3 Monte Negro2 Montemarciano D-R74-AP D503 BR-CS Posta Del Giudice3 Solfara Mare D148 DR-CS Costa Del Sole Tardiano Torre del Ferro Tendrara Meridja4 Sidi Moktar Notes: 1. A Concession allows hydrocarbon production and is valid for 20 years. An Application for a Concession can be made following a declaration of commercial discovery ratified by the Ministry of Economic Development. The Concession requires the approval of an Environmental Impact Assessment and becomes exclusive after publication in the Official Journal of the EU. A Permit is valid for six years and allows seismic and drilling operations. An Application for a permit can be made at any time it becomes exclusive to the applying company three months after publication in the Official 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. 2. Carità, Monte Negro and Torrente Alvo Permit: 100% . SOU (50% Apennine Energy – 50% Apennine Oil and Gas; Apennine Oil and Gas merged with Apennine Energy during 2015). 3. Prior to the asset swap transaction announced by the Company on 28 February 2013, Compagnia Generale Idrocarburi SpA and Sound Energy each held a 50% equity position in four assets: two awarded licences (Villa Gigli and Colle Ginestre) and two outstanding applications (Posta del Guidice and Il Convento). Sound Energy increased its equity position to 100% in Villa Gigli and Posta Del Giudice in exchange for eliminating any equity interest in Il Convento and Colle Ginestre. 4. The Group has an option to acquire a 55% interest in the exploration permit. 24754.02 27 May 2016 8:27 AM Proof 4 61 www.soundenergyplc.comStock Code: SOU Our GovernanceStrategic ReportFinancial StatementsShareholder Information Dealing Information FT Share Price Index – Telephone 0906 8433711 SEAQ short code – SOU Financial Calendar Meetings Annual General Meeting – 29 June 2016 Announcements 2016 Interim – 15 September 2016 2016 Preliminary – May 2017 Addresses Registered Office Sound Energy plc 4A Brewery Lane Sevenoaks, Kent TN13 1DF Business Address Sound Energy plc 4A Brewery Lane Sevenoaks Kent TN13 1DF Company Secretary A Bateman Amba Co Sec Ltd 12 Clifton Park Caversham Reading Berkshire RG4 7PD Website www.soundenergyplc.com Auditor Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Stockbrokers Cantor Fitzgerald One Churchill Place London E14 5RB Nominated Advisers Smith & Williamson Corporate Finance Limited 25 Moorgate London EC2R 6AY Registrars Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 62 24754.02 27 May 2016 8:27 AM Proof 4 Sound Energy plc Annual Report for the year ended 31 December 2015Sound Energy plc 4a Brewery Lane Bligh’s Meadow Sevenoaks TN13 1DF United Kingdom Tel: +44 (0)1732 606030 #deliveringdreamsinthedesert 24754.02 25 May 2016 7:43 PM Proof 4 S o u n d E n e r g y p l c A n n u a l R e p o r t & A c c o u n t s f o r t h e y e a r e n d e d 3 1 D e c e m b e r 2 0 1 5 s t o c k c o d e : S O U

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