Sound Energy Plc
Annual Report 2017

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 7 ANNUAL REPORT & ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2017 DELIVERING THE MOROCCAN GAS PROMISE 25655.04 4 April 2018 1:15 PM Proof 26 2017 ANNUAL REPORT Sound Energy is a well-funded exploration-focused onshore gas company, listed on AIM (LSE: SOU), with a low cost 0.65 Tcf gas discovery, a supportive investor base, a strategic partnership with Schlumberger and a potentially transformational drill programme. Our strategy is focused on the further exploration and development of our Moroccan portfolio. Read more in our Strategy and KPIs on page 08 A MID-CAP MOROCCAN GAS COMPANY REGIONAL GAS STRATEGY UNDERPINNED BY • Strong European gas demand and local pricing • Supportive Cornerstone Investors • Private Investor Centricity STRONG THEMATIC POSITIONING LOW COST 0.65 TCF DEVELOPMENT IN EASTERN MOROCCO WITH RECENT RESERVES CERTIFICATION SIGNIFICANT EXPLORATION POTENTIAL • Carbon consciousness and global warming driving • Eastern Morocco up to 31 Tcf transition to gas • Southern Morocco up to 11.2 Tcf FURTHER CONSOLIDATION OPPORTUNITIES IN MOROCCO Getting around the Report Read more content within this Report View more content Online “ Our focus during 2017 has been building on our success in Morocco, both in terms of exploration and the development of our existing discovery.” James Parsons Chief Executive Officer Corporate website Visit www.soundenergyplc.com for the latest news, reports, presentations and videos 01 Strategic Report Our Asset Portfolio Highlights Statement from the Chairman and Chief Executive Officer Business Model Strategy and KPIs – The Journey So Far Strategy and KPIs – Future Focus and Plans Market Review Key Partners Reserves and Resources Operational Review Financial Review Corporate Responsibility Health and Safety Review Managing Our Risk and Opportunities 02 Governance Leadership – Overview – The Team Effectiveness – Board activities – Shareholder relations Accountability – Health and Safety Committee – Audit Committee – Remuneration and Nominations Committee Directors’ Remuneration Report Directors’ Report Statement of Directors’ Responsibilities Independent Auditor’s Report 03 Financial Statements Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Group and Company Statements of Changes in Equity Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements List of Licences and Interests Shareholder Information 02 03 04 06 08 10 12 14 16 18 24 26 28 30 36 37 39 41 42 43 44 45 50 52 53 58 59 60 61 62 63 64 90 91 01 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01 Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU OUR ASSET PORTFOLIO Eastern Morocco Asset Interest Status Area Tendrara Anoual Matarka 47.5% interest operated 47.5% interest operated 47.5% interest operated 8 year exploration permit Exploration permit 9,336km2 acreage, 7 wells drilled 8,873km2 Reconnaissance permit 5,223km2 Read more about Eastern Morocco in the Operational Review on pages 18 to 23 Southern Morocco Asset Interest Status Area Sidi Moktar 75% interest Exploration permit 4,499 km2* * Subject to final approvals. Read more about Southern Morocco in the Operational Review on pages 18 to 23 02 25655.04 4 April 2018 1:15 PM Proof 26 HIGHLIGHTS Morocco • Successful TE-7 extended well test • Acquisition of interests in OGIF (Oil & Gas Investment Fund) in Eastern Morocco • US$27.2 million Schlumberger carried seismic programme • Continued preparation for next exploration drilling, including ongoing 2D seismic acquisition and aerial gradiometry US$27.2 million carried seismic programme Read more in our Operational Review on pages 18 and 23 Corporate • Cash balance at 31 December 2017 of £21.2 million • Strong safety record • Disposal of Italian interests • Appointment of new Chief Financial Officer £21.2 million cash balance at 31 December 2017 Read more in our Financial Review on pages 24 and 25 03 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01STATEMENT FROM THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER Richard Liddell Non-executive Chairman James Parsons Chief Executive Officer “ 2017 has been a busy year for the Sound Energy business, consolidating and expanding our operations in Eastern Morocco, particularly through a significant seismic programme and bringing on board our cornerstone partner, OGIF.” 2017 was a busy year for Sound Energy with a successful extended well test on TE-7, the acquisition of Oil & Gas Investment Fund’s (“OGIF”) interests in Morocco, two material exploration wells drilled safely, a further Schlumberger investment in Eastern Morocco and significant progress on a fully carried seismic programme. Morocco Portfolio and Schlumberger Field Management Agreement (“FMA”) During 2017, the Company built on its early success in Tendrara with the acquisition from OGIF of a further 27.5% interest in Tendrara and a 75% interest in both the Anoual exploration permit and the Matarka reconnaissance licence. The Company granted a 27.5% working interest in the Anoual permit and the Matarka reconnaissance (subject to definitive agreements) to Schlumberger. This has enabled a fully funded material seismic programme which we believe will prove to be critical in de-risking the forthcoming exploration drill programme. Tendrara During the period, the Company completed a successful extended well test on TE-7 and drilled a third well, TE-8, which was largely funded by Schlumberger under its carried arrangement. Drilling was completed in May 2017 and despite tighter TAGI sands than in TE-6 and TE-7, this well established the westward extension of the primary hydrocarbon system proven in Algeria into Morocco. Building on the outstanding TE-6 and TE-7 well results in 2016 and 2017, the Company is progressing with the development of its existing discovery. As outlined in our recent resource certification, the discovery has a gross (100%) mid-case unrisked gas originally in place (“GOIP”) of 651 Bcf with an 873 Bcf upside case and a 349 Bcf downside case. The Company intends to sign a Gas Sales Agreement, secure development funding and apply for a concession, all during 2018. Seismic Programme The Company continues to progress its 2,900 km 2D seismic programme which is now already more than 47% complete. The objective of the seismic is to de-risk the forthcoming three well exploration programme and provide line of sight on the potential of the province. The US$ 27.2 million cost of the programme is fully funded by Schlumberger. Sidi Moktar During 2017, the Company completed its licence obligations with a positive re-entry and work over of the Koba-1 well. Sound has recently received, subject to Ministerial approval, a new eight year exploration permit and is looking forward to further drilling in 2019 once a seismic programme is complete. 04 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUItaly Following the safe but unsuccessful drilling of the Badile well in Italy, an agreement was signed with Saffron Energy PLC to divest of the Company’s Italian portfolio. It is anticipated that this transaction will complete in early April 2018. The consideration shares in Saffron Energy PLC are to be distributed directly to Sound shareholders on the register on 3 April 2018. Corporate The Company remains in a solid financial position as it enters 2018. Funding through the Schlumberger seismic carry, and cash balance of £21.2 million as at 31 December 2017 will support the forthcoming exploration well programme. We continue to work with strategic partners to technically and financially de-risk our portfolio. During 2017, we also continued to broaden and deepen the team and we were delighted to welcome JJ Traynor to the Company (and soon to the Board) as Chief Financial Officer. Summary The Company continues to believe that the TAGI and Paleozoic plays across Tendrara, Anoual and Matarka have the potential to become a material hydrocarbon province on a regional scale and therefore transform both Sound Energy and the Moroccan gas industry. Unlocking such a province requires time and technical skill and none of this would be possible without the efforts of our people, our shareholders and other stakeholders. We remain hugely excited about our future and look forward to success together. Richard Liddell Chairman James Parsons Chief Executive Officer Pictured below: Part of the exploration team in the South Sevenoaks office. 05 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01BUSINESS MODEL Key Partners 1 Strategic Industry 2 Partnerships Cornerstone Investors Operational Model A C QUIRE R E P E A T R E V O D I S C The building blocks of the business Our business model is underpinned by a series of fundamental building blocks that we must have in place to manage our risks and provide us with our licence to operate. These include: An engaged, industry experienced and entrepreneurial team with a balance of technical, commercial and financial skills. Strong governance coupled with effective risk management. A culture of safe and sustainable operations, enabling us to achieve high standards of health and safety and minimise our environmental and social impact. 06 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU Key Partners Key Partners 1 Strategic Industry 2 Partnerships Cornerstone Investors 1 Strategic Industry Partnerships 2 Cornerstone Investors Our strategic industry partnerships allow Sound Energy to achieve more than we could alone. Our partners enable scale, help to technically de-risk assets and provide funding for our activities. We contribute our ability to move quickly and take advantage of opportunities, as well as our own creative technical, commercial and financial expertise. The partnerships we create are mutually beneficial, enhancing both our, and our partners’, businesses. We play to our strengths and are stronger together. Our cornerstone investors give Sound Energy a strong financial foundation, bringing to the table both asset opportunities and the funds to develop discoveries. Having our cornerstone investors represented on the Board helps align management and shareholders, ensuring that our strategy plays to our strengths and delivers value. Our cornerstone investors bring more than just funds to the business – their skills, knowledge and relationships help us deliver successful outcomes. Operational Model Operational Model A C QUIRE R E P E A T R E V O D I S C The building blocks of the business Our business model is underpinned by a series of fundamental building blocks that we must have in place to manage our risks and provide us with our licence to operate. These include: ACQUIRE DISCOVER REPEAT Sound is continually looking for new opportunities to diversify our portfolio. We screen for corporate and asset acquisitions which fit with our high impact exploration strategy, onshore or shallow water, in countries with attractive fiscal terms. We have demonstrated our deal-making capability to enter assets pre-discovery and can apply the same skills to gas commercialisation and asset or corporate exit as required. We can move quickly to take advantage of the attractive opportunities identified by our team under current market conditions. We are well-positioned in this environment to take advantage of our exciting exploration acreage and the significantly reduced cost of drilling to deliver material gains to shareholders. We are permanently placing emphasis on efficient exploration and low-cost reserves. We have demonstrated our capability to discover major fields and deliver wells, and carefully manage our technical and financial risk. Our business model, like the oil and gas industry, is cyclical. We acquire, discover and deliver value to our shareholders. Building on our strong technical experience, we are agile and innovative. Through these attributes we are able to look for and quickly create new opportunities for the Company. Our primary goal is to deliver returns to shareholders. Read more on our Portfolio on pages 18 to 23 Read more on our Risks on pages 30 to 34 Read more on our Strategy on pages 2 to 34 07 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01 Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU STRATEGY AND KPIs The Journey So Far . . . Introduction of Cornerstone Investors • Continental Investment Partners • Oil and Gas Investment Fund (OGIF) Acquisition of Moroccan onshore gas portfolio • Eastern Morocco (Tendrara, Anoual, Matarka) • Southern Morocco (Sidi Moktar) Introduction of Strategic Partner • Schlumberger Successful drilling and appraisal in Eastern Morocco • TE-6 – 28m net pay, 17mmscf/d achieved post stimulation • TE-7 – 32 mmscf/d after clean up, successful extended well test • TE-8 – Paleozoic Play Opener and extension of TAGI reservoir • Start of Tendrara aerial gradiometry and seismic programme Sidi Moktar Work Programme • Workover and test of Koba-1 1 2 3 4 5 08 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com 01 Strategic Report We measure our performance based on the achievement of desired outcomes. At the beginning of each year, we create a vision of what strategic success looks like and capture this in a corporate scorecard. Sound’s scorecard is made up of a collection of key performance indicators (KPIs) across a range of operational and financial metrics. Each objective measured has a percentage weighting and a desired outcome. Progress is tracked throughout the year and the Board’s and Executives’ performance is judged on the delivery of desired outcomes. We disclosed the summary of our targets in our 2016 Annual Report. They are listed below, along with associated KPIs, and our performance against these targets. 2017 KPI Measurement 2017 Performance Continued diversification and further build out of Sound’s Eastern Morocco position. • New acreage in Morocco. • Additional acreage in Eastern Morocco. Exploration, appraisal and development of the Tendrara Licence. • Deliver exploration and appraisal program. Detailed work on new play opportunities in Morocco has been completed. Completion of the OGIF deal delivered the Anoual exploration permit and Matarka reconnaissance area. Material seismic programme across Tendrara and Eastern licences initiated in 2017 with Schlumberger funding. • Progress TE-5 development to FID. Independent CPR complete for TE-5 to prepare project for FEED. Successful delivery of the Badile well and operations on Sidi Moktar. • Delivery of Moirago-1 well at Badile. Moirago-1 well drilled safely, however discovery uneconomic. • Sidi Moktar licence obligations. Koba-1 successful re-entry confirming producible gas accumulation. Exploring early opportunities to monetise assets. • Monitor potential farm out and other monetisation options. Ensure continued high-quality partner relationships. • Strategic investor engagement. Work continues to develop monetisation options. With the unsuccessful Morago-1 well at Badile, exit from Italy to focus portfolio and deliver value to shareholders. Completion of the OGIF deal in Q3 enabled full alignment with largest shareholder with additional Eastern Morocco acreage. • Leverage industry partnership with Schlumberger. Schlumberger partnership delivered fully funded material seismic programme for Eastern Morocco acreage. 09 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU STRATEGY AND KPIs Future Focus . . . Our Overall Aim The strategic focus for the Company is the further exploration and development of our Moroccan portfolio. Below are the key steps we plan to take to deliver increased shareholder value. Disposal of Italian Portfolio • By exiting Italy, we can focus our capital allocation and management time on Morocco Grow the Value of our Assets and De-risk Upside Volumes • De-risk 31 Tcf exploration potential in Eastern Morocco and up to 11 Tcf in Sidi Moktar through shooting new seismic and aerial gradiometry • Prove further volumes with three bold exploration wells in Eastern Morocco, each with multi Tcf potential Development of Existing Gas Discovery • Develop existing 0.6 Tcf gas discovery, with first gas targeted for 2020 Broaden our Portfolio in Morocco • Consolidate onshore gas position in Morocco 1 2 3 4 10 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com 01 Strategic Report Future Plans . . . Sound’s 2018 scorecard comprises a mix of stretching financial, operational and corporate targets incentivising sustainable growth and safe operations. A summary of the targets is listed below and the KPIs will be disclosed in the 2018 Annual Report: 2018 Scorecard 1 2 3 4 5 6 7 8 Upcoming Newsflow Ongoing (to August 2018) Tendrara – New 2D seismic (2,900 live km) Ongoing Morocco consolidation April 2018 Tendrara – 1st CPR released Q2 2018 Tendrara – 2nd CPR released Q3 2018 Tendrara – 3rd CPR released H1 2018 Tendrara – GSA secured Eastern Morocco – Pipeline BOT secured July 2018 onwards Eastern Morocco – Three well exploration programme 2018 Tendrara – Final investment decision on discovery 11 25655.04 4 April 2018 1:15 PM Proof 26 Brent Price (US$/bbl) Source: Bloomberg as at 8 February 2018 75 65 55 45 35 25 6 1 n a J 6 1 r p A 6 1 l u J 6 1 t c O 7 1 n a J 7 1 r p A 7 1 l u J 7 1 t c O 8 1 n a J NBP (GBP/therm) Source: Bloomberg as at 8 February 2018 70 60 50 40 30 20 6 1 n a J 6 1 r p A 6 1 l u J 6 1 t c O 7 1 n a J 7 1 r p A 7 1 l u J 7 1 t c O 8 1 n a J MARKET REVIEW Energy Sector The oil market has been volatile over the last few years, with the energy sector as a whole affected by the decline in the oil price from its highs. Although there has been some recovery in oil prices in 2017, the uncertainty in the sector led to a drop in the AIM Oil and Gas Index (around 9% for 2017) with many of our peers experiencing financial difficulties. For well-funded companies such as Sound Energy, the broader sector malaise has resulted in a number of high-quality assets coming onto the market which we have been able to and continue to look to add to our portfolio at attractive prices. Despite a recovery in the oil price (Brent was up 17% during 2017) the AIM O&G index still struggled, closing the year down by around 9% although the FTSE 350 O&G fared slightly better, up 6.2%. As we enter 2018 (despite a recent weakening in global equity markets), there is a sense that there has been a shift in sentiment with many investors becoming increasingly optimistic about the oil and gas sector and its future performance. The recovering oil price and sustained cost-cutting efforts over the last few years will result in a supply deficit in the coming years. Oil and gas companies have materially cut operating costs, both internally and as a result of the c.50% decline in oil service company rates. Consequently, companies possessing strong balance sheets, near-term exploration/appraisal upside and low/manageable debt are increasingly the ‘top picks’ for fund managers. Increased carbon consciousness and concerns around climate change are becoming increasingly prevalent globally. Gas has around half the emissions of coal and is recognised for the role it can play as the ideal bridging fuel during the transition to carbon neutral solutions. As a result, demand for gas has increased and will continue to do so for the foreseeable future – currently, the consumption of natural gas worldwide is projected to increase to 177 Tcf in 2040, with demand in countries outside the Organisation for Economic Co-operation and Development (OECD) increasing more than those 35 member countries across the globe. Key Themes for 2018: • Improvement in global growth which should evoke gains in global equities • Monetary policy shift, with divergence between US and the EU, and although the ECB will slow its asset purchase programme it is not expected for them to raise rates any time soon • Geopolitical risks – Brexit negotiations likely to cause some instability • Further support for O&G equities on any commodity price rallies 12 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU 01 Strategic Report European Oil Demand Source: RBC Capital Markets, Petro-Logistics SA, IEA, EIA, JODI, company and government sources; IEA disclosure MOROCCO 15,000 14,500 14,000 13,500 13,000 • Around 90% of Morocco’s hydrocarbons are imported from Algeria • In the medium to long term, Morocco expects to increase the share of natural gas in the energy mix • Morocco provides one of the most attractive fiscal regimes for oil and gas companies worldwide • GME pipeline ownership transitions to Morocco in 2021 • New Gas Agency is under discussion A 6 1 ’ 1 Q A 6 1 ’ 2 Q A 6 1 ’ 3 Q A 6 1 ’ 4 Q A 7 1 ’ 1 Q A 7 1 ’ 2 Q A 7 1 ’ 3 Q A 7 1 ’ 4 Q E 8 1 ’ 1 Q E 8 1 ’ 2 Q E 8 1 ’ 3 Q E 8 1 ’ 4 Q Regional Infrastructure European Gas Consumption Source: RBC Capital Markets, Petro-Logistics SA, IEA, EIA, JODI, company and government sources; IEA disclosure 15,000 14,500 14,000 13,500 13,000 A 6 1 ’ 1 Q A 6 1 ’ 2 Q A 6 1 ’ 3 Q A 6 1 ’ 4 Q A 7 1 ’ 1 Q A 7 1 ’ 2 Q A 7 1 ’ 3 Q A 7 1 ’ 4 Q E 8 1 ’ 1 Q E 8 1 ’ 2 Q E 8 1 ’ 3 Q E 8 1 ’ 4 Q What this means to Sound Energy • Favourable fiscal terms (10 year tax holiday and 36% net Government take including 5% royalty – one of the lowest globally) • Good economics and ability to get gas to market with ease • Attractive pricing – benefits from high European gas pricing • Supportive government with a desire to keep gas in- country • Low cost production 13 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGas Maghreb-Europe PipelineTriassic (TAGI) leadsGas Pipeline ProjectOuedEl Makhazine2 x 400 MWAl Wahda4 x 400 MWDhar Doum4 x 400 MWCasablancaMarrakechMOROCCORabatTahaddart Power2 x 400 MW Jorf LasfarPower PlantSafi Chemicals PlantChichaouaState owned Phosphate Plant (OCP)Planned New PhosphatePlantMeskalaGas Field KEY PARTNERS Our key partners allow Sound Energy to achieve more than we could do alone. Our partners support us from investment and funding to project execution and delivery. 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 2016. During April 2015, they 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 28 February 2018, Continental had an interest in 6.63% of Sound Energy’s current issued share capital. Oil and Gas Investment Fund (OGIF) In January 2017, Sound Energy announced the acquisition of OGIF’s Eastern Morocco portfolio and introduced OGIF as a second cornerstone investor: • Consolidates interest in Eastern Morocco’s prospective acreage • Strengthens Sound Energy’s position in Morocco; OGIF is a Moroccan fund, owned by the seven largest Moroccan financial institutions As at 28 February 2018, OGIF had an interest in 26.77% of Sound Energy’s current issued share capital. 14 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUSchlumberger Schlumberger 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 Schlumberger’s wealth of experience and vast resource within the sector. In addition, Schlumberger shares the risks of the Tendrara project, earning its net profit interest through funding a significant portion of the initial capital expenditure. Schlumberger provides integrated technical services, equipment and personnel to Sound Energy, operator of the Tendrara licence: • Schlumberger has funded a significant proportion of the capital expenditure on the first three Tendrara appraisal wells (75-80%), and of the development of the licence area thereafter (27.5%); and fully funded the $27.2 million seismic acquisition in Eastern Morocco; and • Schlumberger has 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). Our Partners in Our Ventures 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. 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. 15 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01RESERVES AND RESOURCES Sound Energy Resource and Reserve Estimates The Company volumes and risk factors are presented in accordance with the 2007 SPE/WPC/AAPG/SPEE Petroleum Resource Management System (“PRMS”). The Tendrara licences contain both discovered hydrocarbons and undiscovered prospects which fall within the PRMS classifications of either Contingent or Prospective Resources. Given the current phase of a field life cycle, these contain no proven reserves at this point. Both the Contingent Resources and Prospective Resources in Tendrara are subject to risk. Prospective Resources are, by definition, undiscovered and the probability of success is referred by the Company in PRMS as the Chance of Success (CoS). Contingent Resources are, by definition, discovered, and therefore do not have an associated Chance of Success (CoS). Using the PRMS methodology, Contingent Resources may be subject to a Chance of Development (CoD). Contingent Resource Estimates for Eastern Morocco (Tendrara, Matarka and Anoual) Contingent Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent Resources are further categorised in accordance with the level of certainty associated with the estimates and may be subclassified based on project maturity and/or characterised by their economic status as follows: • Contingent Resources (Development Pending); • Contingent Resources (Development Unclarified or On Hold); • Contingent Resources (Development Not Viable). The Tendrara development contains Contingent Resources (Development Unclarified or On Hold). At the point of FID, the resources will move to Contingent Resources (Development Pending). When developed, the Contingent Resources will be converted into Reserves. In late 2017, Sound Energy undertook a resource certification exercise for the core Tendrara licence area, the key results of which are outlined below. Discovered In-place Volumes and Contingent Resources Segment nameet`` Discovered Gas Originally In-place (Bcf) Contingent Resources (Bcf)1 Gross (100%) basis Gross (100%) basis Low Mid High 1C 2C 3C 349 651 873 197 377 533 TE-5 Horst (TAGI 1 and 2) 1 Contingent Resources are technical volumes i.e. no economic limit test applied. 16 Prospective Resource Estimates for Eastern Morocco (Tendrara, Matarka and Anoual) Prospective Resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective Resources have both an associated chance of success and a chance of development. Prospective Resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be subclassified based on project maturity. Sound Energy has internally estimated prospective resources for the Tendrara, Matarka and Anoual licences, which are given in Fig. 1 below. These estimates are based on work previously communicated by RNS on 1 February 2017. The Prospective Resource estimates were based on a preliminary basin modelling study undertaken by a leading independent consultancy. The output of the basin modelling allowed Sound Energy to estimate that the exploration potential of the entire Tendrara, Matarka and Anoual permit areas is 17 Tcf mid case unrisked original gas in place (gross). The Basin Model highlights the possibility for a range of estimated volumes across the entire permit areas, with a 9 Tcf low case for unrisked original gas in place (gross) and, if all the key elements of the petroleum system’s model are present, an upside case of 31 Tcf of unrisked original gas in place (gross). These resource estimates are all Sound Energy 100% gross, in place, unrisked estimates. 31 Paleozoic Anoual Identified TAGI leads 5.5 ) F C T ( E M U L O V S A G H G H I I D M W O L 21.2 TCF 17 Tendrara and Matarka Identified TAGI leads 14.7 9 0 Eastern Morocco Development Volumes 1.0 Fig. 1 Summary chart showing the internally estimated, gross, unrisked GIIP volumes for the Tendrara, Matarka and Anoual licences. The Eastern Morocco Development Volumes estimate (1.0 Tcf) is based on the sum of the externally certified, gross, mid case discovered and undiscovered GIIP estimates from the RPS resource certification exercise. The Prospective Resource estimates are Sound Energy internal estimates and have not been externally verified or certified. 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU Prospective Resource Estimates for Southern Morocco (Sidi Moktar Onshore) The Sidi Moktar Onshore permit area was awarded to Sound Energy on 12 February 2018. In late 2017, Sound Energy commissioned Echo Geoscience Management Ltd (“EG”) (a UK-based consultancy providing geological and geophysical interpretation services to the upstream oil and gas industry) to undertake an independent preliminary technical evaluation* of the available historical exploration well and 2D seismic data across the Sidi Moktar permit area with a focus on the under-explored pre-salt plays. EG have defined and mapped a portfolio of 28 Liassic, Triassic and Paleozoic leads in a variety of hydrocarbon trap types across the Sidi Moktar licences. Much of the potential lies within 11 of the pre-salt Triassic and Paleozoic leads ranging in size individually from 200 Bcf to 2.5 Tcf. The EG Study highlights an exploration potential best case of 8.9 Tcf with a high of 11.2 Tcf and a low case of 6.7 Tcf, unrisked gas originally in place (gross), shown in Fig 2 below. Prospects, Leads and Resources Paleozoic 7.6 Best Case 8.9 11.2 8.9 6.7 H G H I I D M W O L ) F C T ( E M U L O V S A G Triassic 0.6 Liassic 0.6 0 Fig 2 Summary chart showing the internally estimated, gross, unrisked GIIP volumes for the Sidi Moktar onshore licences. These estimates were produced as part of the Echo Geoscience evaluation of the permit area and have not been externally verified or certified. * The evaluation was prepared by Echo Geoscience Management Ltd, (“EG”) for the sole use of Sound Energy plc. The Study is not a Competent Person’s Report (CPR), a Qualified Person’s Report (QPR) or a Technical Expert’s Report (TER) and should not be relied upon as such. Pictured: Rig at TE-7 17 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01 OPERATIONAL REVIEW Overview of the Operational Performance for the Year 2017 was a busy year for Sound Energy in Morocco. Wells Programme Two challenging wells were safely delivered in the year, Moirago-1 at Badile in Italy and the TE-8 step out well for Tendrara in Morocco. The Italian well was ultimately unsuccessful with insufficient hydrocarbon shows. The TE-8 step out well completed drilling in May 2017 and despite lower quality TAGI sands than in the previous wells, is the first well to establish significant gas shows with a Westphalian aged sequence. Sidi Moktar During 2017, the Company completed the licence obligations with a positive re-entry and work over of the Koba-1 well. Sound Energy has, subject to final approvals, recently received the exploration permit for the next phase on the licence and is looking forward to progressing the work programme in this area in late 2018 onwards. Seismic 2017 saw Sound Energy commence its geophysical programme in Eastern Morocco. The coverage of all the 22,800km2 of the licences with flown Gravity Gradiometry, Magnetics and LiDAR data was completed during Q4 and augmented with detailed satellite imagery. The proposed 2,900km of 2D seismic was commenced in October and the phase 1 lines completed in early December. In total, 598km were acquired in 2017. In addition to this operational programme, the Company has completed reprocessing of the existing 522km2 of 3D seismic data across the TE-5 Horst discovery and an integrated programme of geological studies including commissioning new petrographic, geochemical, chemostratigraphic and biostratigraphic analyses of the historical well data. Development of existing discovery Good progress has been made on the development project, including the resource certification issued in January 2018. Key forward steps include the contracting, engineering and financing which are progressing as well as off take and other related commercial agreements. The Company intends to apply for the concession in 2018 with final sanction estimated for later in the year. The Company’s HSE record has been strong with only one LTI (Lost Time Incident) during the year. More details on HSE are provided in the Health and Safety Review on page 28. Pictured: TE-7 storage tank and generator 18 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUwww.soundenergyplc.com EASTERN MOROCCO Permit Area • Figuig Province, North-East Morocco Overview Eastern Morocco, representing a total superfice of 23,432 km2 is composed of three areas: Asset Area Status Terms Interest 9,336 km2 8,873 km2 Tendara- Lakbir Effective Date 16 April 2013 Anoual Effective Date 31 August 2017 Matarka Effective Date 27 July 2017 Permits 8 years Net effective interest of 47.5% Permits 8 years Net effective 5,223 km2 Reconnaissance Licence 1 year interest of 47.5% Net effective interest of 47.5% Tahaddart Power 2 x 400 MW Dhar Doum 4 x 400 MW M E D I T E R R A N E N A Oued El Makhazine 2 x 400 MW Oujda I C T N A L T A Rabat Al Wahda 4 x 400 MW 120km Anoual Casablanca Sidi Moktar Marrakech Tendrara Matarka A A L G E R I Gas Maghreb-Europe Pipeline Gas Pipeline Project Highlights • TE-8 vertical well drilled and proved evidence of the presence of a potential second play in Paleozoic • Achievement of the Reserves Certification on the first unlocked field, TE-5 Horst structure • Completion of OGIF transaction • Completion of the Field Development Plan of TE-5 Horst structure • Acquisition of an airborne gradiometry survey / delineation of the Basin geometry and understanding of the Paleozoic potential underway • Completion of the existing 2D and 3D seismic reprocessing / better assessment of potential prospects • Launch of the biggest 2D seismic campaign ever done in onshore Morocco, to better image the next structures to be drilled • 120km from Gazoduc Maghreb Europe (GME) pipeline (connecting Algeria and Morocco to the Spanish/Portuguese gas grids) • Sub-divided into eight blocks Geology Represents a continuity of the Algerian Triassic Province and Saharan Hercynian platform. Same tectono-sedimentary as the evolution in the Algeria Basins. Partnerships • Sound Energy farmed in to the Tendrara licence in June 2015, taking a 55% working interest in the licence, partnering L’office National des Hydrocarbures et des Mines (ONHYM) (25% interest) and OGIF - (20% interest) and assuming Operatorship • In December 2015, Sound Energy entered into a Field Management Agreement (FMA) with Schlumberger. Schlumberger agreed to fund a significant portion of the capital expenditure on the first three Tendrara wells and provide technical services, equipment, personnel to Sound Energy as Operator in exchange for an upside linked to production performance • In February 2017, Sound Energy entered into binding agreements with OGIF for the conditional acquisition by the Company of a further 20% interest in the Company’s Tendrara-Lakbir permits and a 75% position in Matarka (relinquished area of the Tendrara exploration area) and in Anoual permits (ex Meridja reconnaissance licence converted in permits). These agreements were approved by Sound Energy shareholders at a general meeting in March 2017 • In June 2017, Sound Energy and Schlumberger expanded their partnership to Matarka reconnaissance licence and Anoual permits • In September 2017, after the completion of all the conditions precedent-related to February 2017’s binding agreements, OGIF became a substantial shareholder of the company. Pictured: Map of Tendrara 19 25655.04 4 April 2018 1:15 PM Proof 26 MOROCCOStrategic Report 01OPERATIONAL REVIEW CONTINUED Existing Wells TE-6 28m net pay, 17 mmscf/d achieved post-stimulation TE-7 32m mmscf/d after clean up: Successful Extended Well Test TE-8 paleozoic play opener and extension of TAGI reservoir Forthcoming Exploration Wells Main Results • TE-8 proved, 12km to the Northeast of TE-7, the presence of a TAGI sand sequence, commencing at a measured depth of 2,643 metres. It penetrated 114 metres of TAGI I (approximately twice the thickness of the TAGI I reservoir encountered in wells on the TE-5 Horst) with gas shows. The TAGI sands encountered by TE-8 are also interpreted to be at the same reservoir pressure as the previous wells on the TE-5 Horst (TE-5, TE-6 and TE-7) • TE-8 was drilled some 359 metres into the Paleozoic and identified the full series of Westphalian stratigraphy including sandstones (between 2,762 metres through to 3,120 metres), which are one of the producing horizons in neighbouring Algeria. The sandstones are interpreted to lie in a separate pressure regime to the overlying TAGI play beneath the TE-5 Horst and the Lakbir High. Gas shows were encountered over this interval and subsequent petrophysical analysis suggests that these sandstones may be permeable and likely to be producible with mechanical stimulation • Sound Energy completed the first phase of the 2D seismic and magneto-telluric acquisition in Eastern Morocco Future Focus • The second phase of the 2D seismic acquisition campaign is underway and should be completed during summer 2018 • Further wells targeting the Paleozoic on the Tendrara permit are being planned in 2018. The ‘A’ Structure is expected to be the first target at TAGI level s i c T v o s 2 A e r y a G I n 1 . 2 T d c f T ri a d i s l e s c a p d o t e 5 2 n ti a l 3 - 0 5 0 0 0 m M D JK-1 North East Lakbir N TE-2 TE-8 TE-3 A Structure RR-1 TE-6 TE-7 TE-5 Paleozoic Test SBK-1 TE-1 TE-4 ‘A’ Structure (up to 1.2 Tcf) North East Lakbir (up to 5 Tcf) P a l e o c a o z c n d 1 o i c p t s n c f p - 0 e d iti o 0 T 0 3 0 a l c a . o t e 0 0 n ti a l M 0 m 4 D 5 0 K M 20 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUANOUALTENDRARA& MATARKAwww.soundenergyplc.com SOUTHERN MOROCCO Sidi Moktar Overview Western Morocco is composed of a unique area, Sidi Moktar. Terms Interest 8 years Net Asset Sidi Moktar Area Status Effective Date 4,499 km2* Exploration Permits February 2018 * Subject to final approvals. Jorf Lasfar Power Plant Safi Chemicals Plant State owned Phosphate Plant (OCP) Tahaddart Power 2 x 400 MW Dhar Doum 4 x 400 MW Oued El Makhazine 2 x 400 MW Meskala Gas Field Planned New Phosphate Plant Chichaoua Rabat Al Wahda 4 x 400 MW Casablanca Marrakech Highlights • Play type: gas discovery (Kechoula) in the Lower Liassic Gas Maghreb-Europe Pipeline Triassic (TAGI) leads sequence, (73 Bscf net to Sound Energy, initial estimate, single accumulation most likely), deeper upside potential in Triassic (TAGI) and Paleozoic Gas Pipeline Project • Two wells drilled with positive gas indications from log and gas shows in the Liassic; extended well test planned in 2017 • Unrisked up to 11.2 Tcf exploration potential (Net to Sound Energy) following interpretation of the existing 2D seismic • Risked up to 3 Tcf exploration potential targeting the Triassic (TAGI) objective; net to Sound Energy • Asset is located 10km from the Meskala gas processing plant 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 4,500km2 • 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 and Activity History There are four Exploration plays 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 Liassic (sandstone) which has given rise to two discoveries (Zelten and Kechoula); • PS3 Triassic (TAGI equivalent) which has given rise to one discovery (Meskala); and effective interest of 75% • PS4 Paleozoic Devonian carbonates which remain frontier exploration, gas shows present in penetrations beneath the Meskala field with one well testing gas. Essaouira Basin history • Historically, 84 wells have been drilled in the Essaouira Basin with discoveries in the lower Liassic and Triassic having the highest discovery ratio. Additionally, 7,000 km of seismic have been acquired since the late 1950s. 1950s and 1960s • 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 oilfield (Sidi Rhalem in 1961). 1970s • 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), N’Dark (1976) and Meskala (1977). 1980s • 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 Paleozoic target. Most recent history • 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 (the Moroccan NOC). 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 not completed and tested. In January 2016, Sound Energy secured and retained MPE’s 25% carried interest in the licence and in March 2016 secured Petromaroc’s 50%. 21 25655.04 4 April 2018 1:15 PM Proof 26 MOROCCOStrategic Report 01Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU 22 25655.04 4 April 2018 1:15 PM Proof 26 ITALY Badile Moirago-1 The exploration well Moirago-1 was located 20 km south of Milan and was spudded on the 7th March 2017, by the drilling contractor Pergemine S.p.A. The project was successfully executed with no Lost Time Incidents (LTIs) and no recordable injuries. The objective of the well was to target the Badile prospect. The prognosed reservoir in Badile was the Lower Jurassic aged Conchodon Dolomite formation. The Conchodon dolomite reservoir was successfully reached, was proven to be permeable and displayed significant gas shows during drilling. Subsequent data, however, proved that any potential gas accumulation was sub-commercial, and as such the well was plugged and abandoned on the 26th July 2017. The well reached a final TD of 4473m MD (4406m TVD). Saffron Deal Sound Energy plc entered on 5 October into non-binding conditional heads of terms with Saffron Energy PLC, based on which Sound Energy plc proposes to dispose its portfolio of Italian interests and permits through the sale of Apennine Energy SpA (“APN”) and its Holding Company, Sound Energy Holding Italy Limited to Saffron Energy PLC. The SPA was signed on 22 January 2018 and the deal is expected to complete in April 2018. Pictured: Badile rig and shakers at Moirago 1 well 23 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01FINANCIAL REVIEW “ Our commitment to unlocking Moroccan gas was demonstrated by the issue of 272 million shares valued at £138.8 million for the acquisition of OGIF’s interests in Tendrara, Anoual and Matarka licences, increasing our investment in Morocco.” JJ Traynor Chief Financial Officer £24.0 million spend on drilling and exploration activities in Morocco and Italy £164.0 million carrying value of intangible assets at 31 December 2017 Income Statement The Group’s operations in Italy were classified as discontinued operations following the entering of an agreement between the Company and Saffron Energy Plc for the divestment of the Company’s Italian licences. The loss from discontinued operations increased to £21.8 million (2016: £8.7 million) primarily due to an impairment charge of approximately £19.0 million attributable to the Badile licence following sub- commercial well results. The loss for the year before tax from continuing operations was £12.3 million (2016: £4.7 million). Administrative costs increased by £4.3 million to £8.5 million (2016: £4.2 million) reflecting the growth of the business with increased activities in Morocco. Foreign exchange gains and losses primarily related to intra- Group loans and Euro denominated borrowings. As part of the acquisition of the Sidi Moktar licences, onshore Morocco, an agreement was entered with PetroMaroc and provides that, if the shares of the Company which were issued as part of the consideration for the acquisition, are sold, the realised proceeds for any share price achieved above 50 pence to be shared equally between the Company and PetroMaroc. The loss on the derivative financial instruments of £1.9 million (2016: £0.6 million gain) arose from this arrangement and reflects the change in the share price during the year. Cash Flow/Financing During 2017, warrants and share options exercises raised approximately £11.6 million (2016: £15.9 million). Net proceeds from equity issued in 2016 also included £24.3 million that had been raised through an underwritten offer. The financing costs were £1.1 million (2016: £3.7 million) primarily due to amortised costs of the bonds, net of interest capitalised to the exploration licences of £1.6 million (2016: £1.5 million). Financing costs in 2016 included accelerated amortisation of issue costs on refinancing of the debt. 24 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUCash Flow Bridge Chart (£’000) 46,809 (11,747) (23,960) 592 60 11,550 (1,293) 22,011 r e b m e c e D 1 3 t A 6 1 0 2 n o d n e p S g n i t a r e p o s e i t i v i t c a e r u t i d n e p x e l a t i p a C y t i u q e m o r f s d e e c o r P e u s s i s d e e c o r P e v i t a v i r e d m o r f s t n e m y a p t s e r e t n I e g n a h c x e e c n e r e f f i d i n g e r o F r e b m e c e D 1 3 t A 7 1 0 2 Net Assets (£ million) Intangible Assets (£ million) 172 164 58 19 4 1 0 2 16 5 1 0 2 6 1 0 2 7 1 0 2 9 4 1 0 2 10 5 1 0 2 28 6 1 0 2 7 1 0 2 Original image of this map needed The Group spent £24.0 million (2016: £11.8 million) on investing activities during 2017, which largely consisted of the Badile licence’s Moirago-1 well, Tendrara TE-8 exploration well and re-entry of Koba-1 well at the Sidi Moktar licence in Morocco. 2016 capital expenditure was primarily for TE-6 and TE-7 wells in the Tendrara licence. Balance Sheet Additions to the intangible assets included consideration paid for the acquisition of OGIF’s interests in Tendrara, Anoual and Matarka licences in Morocco. The consideration included the issue of 272.0 million shares valued at £138.8 million at the time of the acquisition. Additions also included expenditure on drilling Moirago-1 well at Badile, TE-8 well at Tendrara licence and re-entry of Koba-1 well at Sidi Moktar licence. Other receivables amounting to £3.5 million (2015: £8.8 million) primarily related to receivables from our partners in the Tendrara licence. Assets of the Disposal Group held for sale related to the Italian operations and primarily included intangible assets, Badile land and VAT receivable. Trade and other payables amounting to £6.6 million (2016: £12.6 million) primarily related to payables and accruals for the operations in the Group’s licences in Morocco, where the Group, as operator, recognises 100% of the liability and receives funds from partners to pay the partners’ share. Liabilities of Disposal Group held for sale related to the Italian operations and primarily included trade and other payables and provision for decommissioning of licences. Accounting Standards The Group has reported its 2017 and 2016 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union. Going Concern 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. Pictured: Seismic work, Morocco 25 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01 Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU CORPORATE RESPONSIBILITY Our CSR Strategy 1 Environment 2 Suppliers Aims: • All operations shall be completed with minimal disruption to the environment • All flora and fauna in our operating area should be treated with respect Aims: • We aim to treat and deal with our suppliers fairly and with respect • Where possible we look to use in-country suppliers to benefit the local economic environment 3 Employees 4 Communities Aims: • We will provide a rewarding, safe and hospitable working environment with high levels of employee engagement and participation • We actively engage, nurture and develop local labour in all countries of operation • We value and support diversity in the workplace Aims: • We aim to conduct our activities with minimal disruption to local hosts • We aim to play an active part in the community hiring local employees, assisting with infrastructure and supporting the improvement of local facilities such as mobile phone towers and hospitals 26 25655.04 4 April 2018 1:15 PM Proof 26 We are committed to operating our business in a way that delivers lasting benefit to the communities and environments where we work, as well as to our shareholders and employees. • We are also in the process of building an office with accommodation that will vastly improve the conditions of the employees that live and work on-site in the sometimes unforgiving desert heat and freezing cold conditions that occur in the region. Further details and photos of this project are below The office building is a two-storey building with offices, meeting room/kitchen on the main floor and accommodation reception room on the top floor, as well as a 12m x 12m warehouse, and will be the main focal point for drilling support. The building is right next door to the current Saipem Rig camp, however the Saipem camp will move with the equipment as it goes out into the field and then the space will be used as a pipe and storage yard. “ Creating lasting legacies for local communities is core to our CSR strategy.” Mohammed Seghiri Managing Director, Morocco Sound Energy’s strategic positioning continues to focus on gas – a bridge fuel with significantly lower CO2 emissions than coal (around half as much). At Sound Energy, we understand that being involved in the exploration and production of energy brings with it enormous environmental, social and cultural responsibilities. Core to our CSR strategy is conducting operations that comply to the highest international social, environmental and safety standards. Sound Energy places great importance on engaging with the community near our operations and ensuring that they benefit from our presence in the area. This approach is shown through the numerous ways that we have supported the local community near the Tendrara site in Morocco. They are as follows: • In addition to the many locals we employ across a range of jobs on and near our site. In 2017 with the start of the seismic programme our subcontractor hired and trained more than 70 local people • We have built a new mobile phone tower, improving the local community’s ability to communicate • We are also in the process of improving the health centre in the local area which requires extensive work and supplies to be able to serve the local community adequately Pictured: Logistics manager Kelly Sheets with his dog 27 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01HEALTH AND SAFETY REVIEW Morocco • Civil works for construction of well pads for TE-8 in Tendrara field • Drilling and completion of TE-8 in Tendrara field • Drilling and completion of Koba-1 well in Sidi Moktar field • Completion of airborne survey on Tendrara-Lakbir Concession by ABI • Beginning of seismic Tendrara-Lakbir project by WesternGeco Italy • Completion and P&A of Badile well in Basilicata • Site restoration of Cascina Daga 1 dir well in Veneto • Ongoing production sites support The worked man hours have been 624.849 (121.351 Company, 503.498 Contractors) and the data recorded have been divided into the three main following families: 1 Lagging Indicators 2 Leading Indicators 3 Environmental Data Environmental Data Diesel Consumed (m3) Water Consumed (m3) Mud Cuttings (m3) Sewage Water (m3) Waste Water Non-Hazardous Wastes (ton) Fuel Gas (m3) Electrical Energy (kWh) Km Driven 1.085,35 14.272,2 6.627,0 8.549,8 2.342,9 4.066,0 5.612 8.888.332 1.494.324 There has been an increase of working manhours compared to 2016, and the recordable injuries have followed the same trend. However, comparing the data recorded against the market reference standards, the values of the HSE indexes are broadly in line with industry data. Lagging Indicators Fatality LTI (Lost Time Injury) RWC (Restricted Work Case) MTC (Medical Treatment Case) FAC (First Aid Case) Property Damage Environmental Incident RTA (Road Traffic Accident) NM (Near Miss) HiPO (High Potential Event) Lost Workdays Leading Indicators HSE Inspections HSE Audits HSE Meetings HSE Inductions Emergency Drills Toolbox Talks Training Hours SHOC Cards (Safety Hazard Observation Card) Job Safety Analysis Management Tours 0 1 1 3 1 1 4 1 6 4 15 1.588 8 711 2.121 54 1.343 7.986 5.007 872 29 28 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUHSE Initiatives Many initiatives were carried out in 2017 in order to strengthen the Company’s, HSE culture and to promote positive HSE behaviours: Despite the reference to industry benchmarks, it is positive to see that the Severity Index has been low, which means the LTI occurred had a minor severity. Celebration of the World Day for Health & Safety at Work promoted by the ILO Organisation. Company employees and subcontractors’ personnel were involved in different events: for example, a Mannequin HSE Challenge was launched in all sites and at the Moirago-1 Dir site in Italy and HSE campaign relevant to Hand Safety (Hands Up Before Hands On) was carried out in collaboration with Schlumberger. In 2016 the Company introduced the use of HSE Observation Cards. In 2017 this use has been consolidated and positive behaviour has been highlighted. An implementation of awareness programme was held at each site through the regular execution of daily Toolbox Talks, during which workers’ attention is focused on the main risks potentially encounterable during the day. Dedicated HSE Workshops were carried out, both by Italy and Morocco teams, in order to make everybody familiar with the HSE architecture of the Group HSE Management System and in order to stimulate the active participation, involvement and commitment of all staff and contractors. 29 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01MANAGING OUR RISK AND OPPORTUNITIES 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 managing both risks and opportunities to the Group. Definition of Risk Risk is defined as a potential future event that may influence the achievement of business objectives. This includes both “upside” (opportunity) and “downside” (threat) risks. Risks and opportunities can come from a variety of sources and can be directly related to the Company operational and commercial activities and support functions, or they can arise externally: from third parties such as Joint Venture partners, suppliers, regulators and competitors; from the economic environment; or from the political climate. Risk Management The Group operates to ensure that risks are identified, understood, agreed, communicated and acted upon in a timely and consistent manner. It enables informed resource allocation and the delivery of expected results by providing a structured way to foresee the unexpected and be prepared for it. The main objectives for the Group risk management system are: • Support the achievement of business objectives and safeguard Company assets • Integrate consistent risk management methodology into key business processes • Create a risk-aware culture where staff actively identify and respond to risks and opportunities • Ensure compliance with legal, regulatory, and ethical requirements Identifying Risk and Ownership Risk management is actively promoted from both a top- down and bottom-up approach where all individuals in the organisation are empowered to highlight risks and opportunities to the business. All agreed risks are allocated to an individual risk owner with mitigations and actions followed up through quarterly reporting to the Executive team and biannual reporting to the Audit Committee. Our principal risks have been categorised as strategic, operational and financial, although many risks impact more than one aspect of the business. Principal Risks at a Glance Main Risk Movements Our principal risks 1 Limited diversification 2 Reservoir uncertainty Commodity price 3 Insufficient funds Inadequate resourcing to handle workload and complexity Changes in regulatory or fiscal regime t c a p m I Major HSE incident Development risk Fraud, bribery and corruption Currency risk Loss of key personnel 4 5 6 7 8 9 10 11 30 7 8 3 4 9 6 2 1 5 11 10 s u o i r e S t n a c i f i n g S i e t a r e d o M r o n M i Unlikely Possible Probable Almost Certain Likelihood Risks that are highly likely to occur and could materially impact our ability to reach our business objectives Risks that remain at tolerable levels but could impact the business unless monitored and managed Risks that are unlikely to materialise and are unlikely to materially impact our business Current risks 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUChanges to Risks in the Year: Several factors have impacted the Company risk register through 2017, including exit from Italy, focus on Morocco and particularly the progress towards the Horst TE-5 Development project. Removed or Changed: Loss of Key Partners OGIF transaction and seismic funding with Schlumberger demonstrate strong relationships with our key partners. Environmental lobbying prevents successful development of discovered resources With the focus on Eastern Morocco and engagement with local organisations. Exploration risk As the fundamental focus of the Company this risk has been distilled into the areas ‘reservoir’ and ‘development’, to key stages in the exploration for new resources. Our 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. Current ranking Strategic 1 2 Risk Impact Mitigation Owner • Ability to operate • Build strong relationships with CEO • Profitability and cash flow • Reduce appetite for investment in the Company governments, local authorities, local population and other stakeholders • Actively monitor potential legislation changes • Unable to recover investment and financial loss • Exploration team bench strength and experience Expl Dir • Delivery of Eastern Morocco seismic • Loss of credibility and programme with Schlumberger reputation Limited Diversification Company operates in limited jurisdictions may be significantly adversely impacted by geopolitical issues and/or any regime changes. Reservoir Uncertainty Play risk in relation to basin understanding, reservoir distribution and effectiveness. Hydrocarbon volume available to charge the structures in the basin, in order to deliver 9-17-31 Tcf potential. 31 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01MANAGING OUR RISK AND OPPORTUNITIES CONTINUED Current ranking Strategic 8 11 Risk Impact Mitigation Owner Development Risk The Company fails to locate and explore hydrocarbons that have the potential to deliver commercially. Loss of Key Personnel • Ability to operate • Gate approach to development with CFO • Profitability and cash management oversight flow • Use of key contractors to support project • Loss of credibility and team reputation • Loss of confidence of retail shareholder base • Lack of direction and leadership within the Company • Competitive remuneration for key CEO Executives benchmarked regularly, relative to the market • Depth across the organisation in all key activities • Loss of expertise and • Stock incentives in place knowledge • Succession planning Operational 5 7 Inadequate Resourcing to Handle Workload and Complexity Major HSE Incident • Errors could lead to • Active personnel selection and Head of HR management to meet business needs • Develop robust processes and procedures and embed throughout organisation operational incident or financial loss • Inability to delivery business objectives in timely manner • Loss of life or injury to personnel (staff, contractors, third parties) • Reputational damage • Ability to operate • Exposure to litigation • Financial and operational losses • Highly skilled, qualified and competent staff. Training provided as required Mor MD • Strong HSE ethic and risk management system • High-quality operational management processes including well design, security, emergency response plan and change of control process • HSE Committee reviews and regular HSE meetings with Executive leaders and HSE manager • Insurance cover 32 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUCurrent ranking Financial 3 4 6 Risk Impact Mitigation Owner Commodity Price Gas prices have a material impact on the return of the Company, particularly for Development economics. Insufficient Funds Inability to deliver the Company’s exploration and development work programme. • Reduction in gas • Utilise a number of different pricing CFO prices reduces asset valuations scenarios when determining asset values and planning • Reduction in • Enter into long term price contracts, commodity prices reduces appetite of investors for the business risks and availability of funding • Company cannot meet the capital commitments required to explore and develop assets • Company cannot service and/or repay its debt • Business is insolvent considering oil indexation • Ensure the business is well-funded with appropriate mix of debt and equity • Annual planning process and periodic forecast updates and sensitivities. Performance reporting to ensure delivery CFO • The projected cash balance is reviewed on an ongoing basis • Mitigating actions available to management, including the delay of capex and discretionary spending • Risk is transferred through mechanisms such farm-in and JV agreements, such as funding for 2017/18 Schlumberger seismic programme • Tailored funding solution to support development project Change in Regulatory or Fiscal Regime Fiscal pressures on governments may lead to unfavourable changes in regime, particularly in emerging oil and gas producing countries. • Regulatory and • Build strong relationships with CFO tax changes affect profitability and operational viability • Delayed projects and/ or regulatory approvals whilst changes are being proposed and agreed • Renegotiation with government and partners governments, local authorities, local population and other stakeholders • Ensure appropriate local content and that all stakeholders benefit from operations • Actively monitor potential legislation changes • Work with governments to share good governance and best practices 33 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comStrategic Report 01MANAGING OUR RISK AND OPPORTUNITIES CONTINUED Current ranking Financial 9 10 Risk Impact Mitigation Owner Fraud, Bribery, Corruption The Company, or parties acting on its behalf, breach the rules of the UK Bribery Act 2010 or equivalent legislation. Currency 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. • Prosecution of the Company and/or individuals leading to unlimited fines, jail sentences • Ability to operate • Reputational damage • Uneconomic contracts • Anti-bribery policy and training in place CFO • Staff required to sign an agreement to comply with anti-bribery policies • Ensuring staff are aware of where the policy can be found • Vendors and partners made aware of the Company’s anti-bribery policy • Strong financial authority controls • The Company may • Match transactional currency to currency CFO of liabilities • Actively manage cash balances by currency with view to forward requirements • Ensure significant contracts are denominated in currencies where the Company can mitigate exchange rate risk • Monitor exchange rate movements and take advantage of events and political news to obtain favourable rates 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 • MAD is a controlled currency limiting hedging opportunities 34 Pictured: Seismic planning and analysis 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUwww.soundenergyplc.com 02 Governance GOVERNANCE Leadership – Overview – The Team Effectiveness – Board activities – Shareholder relations Accountability – Health and Safety Committee – Audit Committee – Remuneration and Nominations Committee Directors’ Remuneration Report Directors’ Report Statement of Directors’ Responsibilities Independent Auditor’s Report 36 37 39 41 42 43 44 45 50 52 53 35 25655.04 4 April 2018 1:15 PM Proof 26 OVERVIEW Leadership Sound Energy’s success is fundamentally linked to good governance and we remain committed to achieving high standards in all we do. Our business and processes are aligned around a robust governance framework. We support the principles and recommendations of the Corporate Governance Code for Small and Mid-Size Quoted Companies published by the Quoted Company Alliance (“QCA Guidelines”) and are committed to applying these principles as far as practicable, having regard to the current size and structure of the Company, and the requirements of the AIM market of the London Stock Exchange. As the Company grows, the Directors are developing policies and procedures in line with the QCA Guidelines where appropriate and these policies and procedures are monitored on a regular basis. The Directors will continue to comply with the relevant requirements of the QCA Guidelines to the extent that they consider it appropriate for the current business. While building a strong governance framework we also try to ensure that we take a proportionate approach and that our processes remain fit for purpose as well as embedded within the culture of our organisation. We continue to evolve our approach and make ongoing improvements as part of building a successful and sustainable company. Good governance provides a framework that allows the right decisions to be taken by the right people at the right time. Shareholders and other stakeholders Board Set strategy and deliver value to shareholders Review performance against plan Board reserved matters: policy risk Health and Safety Committee The Health and Safety Committee is primarily focused on ensuring that the HSE policies are adopted and applied across the Group. Remuneration and Nominations Committee The Remuneration and Nominations Committee is responsible for all material elements of remuneration policy, including Directors’ remuneration and assessing Directors’ performance. It is also responsible for Board recruitment and succession planning, ensuring that the right skill sets are present in the Boardroom. Audit Committee The main responsibilities of the Audit Committee are to monitor the integrity of the Company’s financial statements and other formal announcements relating to the Company’s financial performance. The Committee ensures that the Company has effective risk management and appropriate internal controls in place. The responsibility for the enforcement of the Company’s code of conduct, and the adequacy and security of the anti-bribery and corruption policy also rests with the Audit Committee. Executive Committee The Executive Team supports CEO and Board decision-making, particularly around assurance at project decision gates and new business opportunities. The Executive Team is accountable for implementation of the strategy, the performance of the business, and designing and implementing the culture and tone of the organisation. 36 Execution and Delivery 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUTHE TEAM THE TEAM Leadership Leadership Governance Leadership Directors and Executives James Parsons Chief Executive Officer (Executive Director) Appointed to Board October 2012 Background 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. James started his career with the Royal Dutch Shell group in 1994 and spent 12 years with Shell working in Brazil, the Dominican Republic, Scandinavia, Holland and London. Leading up to 2006 (when he left Shell to join Inter Pipeline Fund), James held various positions in Shell’s exploration and production business, latterly as Vice President, Finance, of New Business. James joined Sound Energy as CFO in 2011 from the European division of Inter Pipeline Fund, where he held the position of Finance and Corporate Development Director of Inter Pipeline Europe. James is a qualified accountant and has a BA Hons in Business Administration. Current external commitments Chairman (Non-executive) Echo Energy PLC, Chairman (Non- executive) Coro Energy PLC. Richard Liddell Chairman (Non-executive) Marco Fumagalli Director (Non-executive) Brian Mitchener Exploration Director (Executive Director) A R H A R H Appointed to Board September 2015 Appointed Chairman January 2018 Background Richard Liddell joined the Board as a Non-executive Director in September 2015, taking on the role of Non-executive Chairman in January 2018. 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. Richard has a BSc in Electrical Engineering. Current external commitments Founder and Executive Chairman Clara Petroleum Ltd Executive Director – Spinnaker Opportunities plc. Appointed to Board July 2014 Appointed to Board June 2017 Background Brian Mitchener has over 36 years’ experience in Oil & Gas exploration including as Regional General Manager Exploration at BG, Vice President International Exploration for Africa at Statoil and 22 years with BP Exploration. Brian is a Chartered Geologist, and a past President of the Petroleum Group of the Geological Society. Current external commitments None Background Marco Fumagalli joined Sound Energy as a Non-executive Director in July 2014. Marco is Founding Partner at Continental Investment Partners SA, a Swiss based investment firm and cornerstone shareholder in Sound Energy. He 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. Current external commitments Director (Non-executive) Echo Energy PLC, Director (Non- executive) Coro Energy PLC Director of Continental Groups of companies. Key: A Audit Committee R Remuneration Committee H Health and Safety Committee 37 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com02THE TEAM Leadership JJ Traynor Chief Financial Officer Mohammed Seghiri Managing Director, Morocco Background JJ Traynor joined Sound Energy in September 2018 has over 28 years’ experience in the Oil & Gas and financial markets, including as Executive Vice President of Investor Relations at Shell, Managing Director of the number one ranked Oil & Gas research team at Deutsche Bank and as an Exploration Geologist at BP. JJ has a First Class honours degree in Geology and a PhD in Geology from Cambridge University. To be appointed to the Board. Background Mohammed Seghiri has over 18 years’ experience leading complex European and African projects across different sectors, including Gas Storage, Oil & Gas Exploration, Telecom, Real Estate and Power Production. He was Managing Director at Advisory & Finance Group, a Morocco-based investment bank where he led, amongst other projects, the financing and construction of the first coal to power plant in Senegal. Mohammed joined Sound Energy from OGIF where he was a Managing Partner. Mohammed is a graduate from the School of Mines in Nancy, France (one of the top ten engineering schools in France). 38 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUBOARD ACTIVITIES Effectiveness The Board The Board is responsible for the long-term success of the Group and retains ultimate accountability for strategy, risk management, performance and governance. It is responsible for ensuring that its obligations to its shareholders and other stakeholders, including employees, host governments, suppliers, customers and the community, are understood and met as well as being responsible for the Group’s values and standards. The roles of Chairman and Chief Executive Officer are split in accordance with best practice. The Non-executive Chairman, Richard Liddell, has the responsibility of ensuring that the Board discharges its responsibilities as per key matters below. He is responsible for facilitating full and constructive contributions from each member of the Board in determination of the Group’s strategy and overall commercial objectives. The Chief Executive, James Parsons, leads the business and the Executive Team, ensuring that strategic and commercial objectives are met. He is accountable to the Board for the operational and financial performance of the business. Board Composition % 25% 50% 25% Chairman Executive Director Non-Executive Director The key matters reserved for the Board’s decision are: • Reviewing the effectiveness of the Board and its Committees • Approval of the Group’s strategic aims and objectives • Approval of the Group’s annual operating and capital expenditure budgets and any material changes to them • Review of Group performance and ensuring that any necessary corrective action is taken • Extension on the Group’s activities into new business or geographical areas • Any decision to cease to operate all or any material part of the Group’s business • Major changes to the Group’s corporate structure and management and control structure • Any changes to the Company’s listing • Changes to governance and key business policies • Ensuring maintenance of a sound system of internal control and risk management • Approval of half yearly and annual report and accounts and preliminary announcements of final year results • Reviewing material contracts and contracts not in the ordinary course of business The Board delegates matters not reserved for the Board concerning the management of the Group’s business to the Executive Team. Composition and Independence The skills and experience of the Non-executive Directors are wide and varied and they provide constructive challenge in the Boardroom. The composition and mix of the Board change during 2017 was reflective of the business need and growth of the Company: Role Non-exec Chairman Non-exec Directors Executive Directors Q1 Q2 Q3 Q4 1 3 1 1 3 2 1 3 2 1 2 2 Addition of Brian Mitchener as Executive Director It is anticipated that JJ Traynor, CFO, will join the Board as an Executive Director at a future date. The Company is currently recruiting two new Non-executive Directors. Attendance at Meetings The following meetings where held during 2017. Key Executives and staff have attended these meetings to present and provide feedback on actions throughout the year. Number of meetings Stephen Whyte (Chairman)* James Parsons (CFO) Richard Liddell (Senior Independent Director) Marco Fumagalli Brian Mitchener (appointed June 2017) *Resigned on 23 January 2018 Board (6 scheduled; 5 ad hoc) 11 11 11 11 10 6 Audit 2 N/A N/A N/A 2 N/A Remuneration and Nominations Health and Safety Committee 2 N/A N/A 2 2 N/A 6 N/A N/A 6 N/A 39 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02BOARD ACTIVITIES CONTINUED Effectiveness What the Board did in 2017 15% 45% 15% Governance & Risk – 15% Strategy – 45% Investor Engagement – 15% • Board effectiveness workshop • Completion of OGIF transaction • Investor events held with • Manual of authorities reviewed and • Divestment of Italian assets updated • Business development opportunities • Matters reserved for the Board considered by the Board reviewed and updated • External strategy advisers retained to • Risk Management Policy and present and advise to the Board Register reviewed • Receive updates from Board Committees • Updated from the Group Auditor via the Audit Committee • Funding review undertaken opportunities for shareholders to speak to Executive Directors in a formal environment and a more informal one-to-one • AGM and General Meeting – Directors present to answer shareholders questions • Q&A sessions with the CEO and Executive Team • Considered the AGM proxy figures • Liaised closely with the Company’s major shareholders 10% 15% People, Visions, Values – 10% Performance Monitoring – 15% • CEO Scorecard presented and approved • Personal development of staff • Executive Team meetings • Meetings with staff both in Rabat and Italy • Reviewed structure of the organisation, giving consideration to the development needs of the business • Monthly reports on performance against targets received by the Board • Treasury management updated • Updates from the Chairman of the Audit Committee, Remuneration Committee and HSE Committee • Approval of full and half year results • 2016 Annual Report & Accounts approved 40 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUSHAREHOLDER RELATIONS Effectiveness Governance Effectiveness In 2017, the Directors undertook a Board evaluation exercise with the Institute of Directors (IoD), to consider the effectiveness of the Board. The evaluation was based on the IoD board evaluation methodology and covered key areas such as strategy, performance, corporate culture and risk oversight. Consideration was given to Board composition, processes and behaviours. It enabled the Directors to consider the functioning of the Board, both within the Boardroom and in the relationships of the Non-executive and Executive Directors. The findings of the exercise were positive and whilst there is always room for improvement, the overall indication was that the Board has performed well during a period of rapid growth for the Company. In particular, the Board needs to look to build its representation of Non-executive Directors. This is an area that the Directors are currently addressing in early 2018. The Board will look to carry out a similar exercise every few years to ensure that it continues to function as effectively as possible. The Board meets every other month, with ad hoc meetings as and when business demands require. The Agenda is set with the consultation of both the CEO and Chairman, with consideration being given to both standing Agenda items and the strategic and operational needs of the business. Papers are circulated well in advance of the meetings, giving Directors ample time to review the documentation and enabling an effective meeting. Resulting actions are tracked for appropriate delivery and follow-up. The CEO and Chairman meet and speak regularly to ensure alignment between the day-to-day running of the business and the Board. The Chairman ensures that there is open communication with the other Non-executive Directors. The Board enters 2018 looking forward to building further on the governance structure already in place. Ongoing review of the functioning of the Board and ensuring that the highest level of governance is maintained whilst being mindful of the size and stage of development of the Company. Communications with Shareholders 2017 Review • Shareholder visits to Badile (Italy), Tendrara and Sidi Moktar (Morocco) locations by over 200 investors • Annual AGM held 23 May 2017 • Annual investor engagement meeting on 5 October 2017 in London, attended by over 400 shareholders • Implementation of online Q&A sessions with CEO and Executive Team in Q4 2017, with over 450 questions answered over the sessions to date 2018 Look Forward • Regional meetings initiated with first meeting planned for Chester in March 2018 • Further site visit in the second half of the year • Regular Q&A sessions throughout the year The Company has a strong reputation of active and transparent communication with its shareholders. It regularly offers opportunities for the private investor to attend events and meet Executive Management, as well as offering opportunities for all interested shareholders to see its operations at work. It uses its website and social media as key communication tools to reach its wide private investor audience. In addition, cornerstone investors have Board representation, further helping to align Executive Management and shareholder interests. The Executive Team regularly meets with present and prospective institutional investors. At the Company’s Annual General Meetings, all Directors are available to respond to questions from shareholders present. The Annual General Meeting provides a forum for constructive communication between the Board and shareholders. Pictured: Investor engagement session in Morocco 41 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com02HEALTH AND SAFETY COMMITTEE Accountability Health and Safety (HSE) Committee Activities The Committee consists of Richard Liddell, Brian Mitchener and three of the Executive Management: Luca Madeddu, Leonardo Salvadori and Leonardo Spicci. Mr Liddell chairs the Committee, which is primarily focused on ensuring that the HSE policies are adopted and applied across the Group. In 2017, the Committee held six meetings and a full report on its activities, the Health and Safety Review, can be found on pages 28 to 29. Richard Liddell Chairman of the Health and Safety Committee 2017 Review • HSE Focus Group established which reports back to the HSE Committee • Completion of HSE management system • Crisis management, a number of staged drills carried out 2018 Look Forward • Ensure HSE policy and procedures remain effective given the exit from Italy and focus on Morocco exploration activities • Ensure HSE management system and resources are in place for Tendrara Development project post sanction • Carry out an audit of the HSE management system to ensure it conforms with the requirements of management • Carry out further staged drills 42 Pictured: Earthworks, Morocco 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUAUDIT COMMITTEE Accountability Audit Committee Activities Marco Fumagalli Chairman of the Audit Committee 2017 Review • Approved full year and interim accounts; including key judgements and policies to ensure they are fair, balanced and understandable for our shareholders • Reviewed and recommended the reappointment of our external Auditor Crowe Clark Whitehill LLP, including fee structure • Update to our risk framework from policy to implementation (see pages 30 to 34) • Tender and selection of new insurance broker, Alesco, owned by Arthur J Gallagher • Comprehensive review of the existing Group Manual of Authorities 2018 Look Forward • Review and update existing Company control framework in light of exit from Italy and increased exploration activity levels in Morocco • In line with business priorities for the year, complement existing internal resources with fit for purpose internal audit support through external providers • Ensure that risk management processes and appropriate controls required to support Tendrara development project post sanction are in place and operational Governance Accountability The Audit Committee is comprised of Marco Fumagalli (Chairman), and Stephen Whyte (subsequently replaced by Richard Liddell). Audit Committee The main responsibilities of the Audit Committee are to monitor the integrity of the Company’s financial statements and other formal announcements relating to the Company’s financial performance. The Committee approves the risk management policy, strategic risks and mitigation actions allocated to the Executive Team. Follow-up and review is undertaken throughout the year to ensure effective risk management and appropriate internal controls are in place. The responsibility for the enforcement of the Company’s code of conduct, and the adequacy and security of the anti-bribery and corruption policy also rests with the Audit Committee. Financial and Business Reporting The Board is responsible for presenting a fair, balanced and understandable assessment of the Group’s position and prospects. The statement setting out the reasons why the Board continues to adopt the going concern basis for preparing the financial statements is included in the Directors’ Report on page 50. Risk and Controls The Board, through the Audit Committee, is responsible for determining the nature and extent of the significant risks that the Group is willing to take in achieving its strategic objectives and for maintaining sound risk management and internal control procedures. The Group’s internal control system is designed to manage the risk of failure to achieve business objectives, rather than to eliminate that risk. Such systems can only provide reasonable, and not absolute, assurance against material misstatement or loss. A summary of our approach and strategic risks is covered in detail on page 30. Conflicts of Interest Under the Companies Act 2006, a Director must avoid a situation where a direct or an indirect conflict of interest may occur. The Company has in place procedures to deal with any situation where a conflict may be perceived. 43 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com02REMUNERATION AND NOMINATIONS COMMITTEE Accountability Remuneration and Nominations Committee Activities The Remuneration and Nominations Committee is comprised of Richard Liddell (Chairman), and Marco Fumagalli. Remuneration and Nominations Committee The Remuneration and Nominations Committee is responsible for all material elements of remuneration policy, including Directors’ remuneration and assessing Directors’ performance. It is also responsible for Board recruitment and succession planning, ensuring that the right skill sets are present in the Boardroom at each stage of the Company’s evolution. Pictured: Saipem operative, Morocco Richard Liddell Chairman of the Remuneration and Nominations Committee 2017 Review • Review of the Directors’ remuneration policy, including any shareholding requirements • Review of pay and benefits for CEO and Executive Directors’ ensuring packages are competitive and fairly and responsibly reward contributions • Assessment of performance targets and outcome against annual bonus targets for CEO and other Executive Directors • Determining the award of share options under the incentive schemes • Selection and appointment of new CFO, JJ Traynor, who commenced in September 2017 2018 Look Forward • Ensure Board and organisation remains fit for purpose for business activities including exploration and development activities for Tendrara development • Consideration of the composition of the Board • Ongoing monitoring of pay and benefits of CEO and Executive Directors • Approval of performance targets for CEO • Approval of Restricted Stock Units (RSU) and performance criteria 44 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUDIRECTORS’ REMUNERATION REPORT The Committee and the wider Board recognise the importance of attracting, retaining and motivating talent within the Board and wider Executive Team to continue the successful growth of the Group as Sound Energy pursues its strategy to deliver high-impact exploration and development opportunities, to leverage strategic partnerships and to add further opportunities through acquisition. As Sound Energy continues to grow, the Company’s remuneration policy and framework is evolving to ensure that Directors and Executives are rewarded for achieving strategic targets and creating value for shareholders. We are creating a remuneration framework that is appropriately aligned, both to our business and to the interests and current expectations of our shareholders. The Committee also wanted to ensure that the policy was capable of satisfying investor preferences for simplicity and transparency. Principles For Executive Remuneration The main principles of the senior Executive remuneration policy are set out below: • Attract and retain high-calibre Executives in a competitive international market, and remunerate Executives fairly and responsibly • Motivate delivery of our key business strategies and encourage a strong performance-oriented culture • Reward achievement over the short and long term • Support both near-term and long-term success and sustainable shareholder value • Align the business strategy and achievement of planned business objectives • Be compatible with the Company’s risk policies and systems • Ensure that a significant proportion of remuneration is performance-related • Take into consideration the views of shareholders and best practice guidelines Fixed remuneration comprises salary, pension and benefits. Variable pay includes annual bonus and LTIP awards. Together, fixed and variable remuneration comprise total remuneration for Senior Executives. The Committee recognises that it may be necessary on occasion to use its discretion to make remuneration decisions outside the standard remuneration policy, such as agreeing a sign-on payment, to attract and retain talent. Purpose Salary Operation Maximum Opportunity Performance Measures Attract and retain the right calibre of staff required to support the long-term success of the business. Determined by reference to market data. Reflects individual experience, skills and role. Provide the basis for a competitive remuneration package. Paid monthly. Reviewed annually. None, although overall performance of the individual is considered when setting and reviewing salaries annually. Increases will be made at the discretion of the Committee, or for Non- executive Directors, the CEO, considering: • increase in responsibility, particularly as the Company grows and expands • development and performance in the role • alignment to market level Pension Provide a level of pension provision which is compliant with regulation and allows staff to build long-term retirement savings. Defined contribution based on a percentage of salary. Executives may elect to take part of their pension contribution as salary. 4% of base salary. No element other than salary is pensionable. None. Pension contribution is set at commencement of an individual’s contract. 45 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02DIRECTORS’ REMUNERATION REPORT CONTINUED Purpose Benefits Operation Maximum Opportunity Performance Measures Protect against risks and provide other benefits reflecting the international aspects of roles. Private medical and dental insurance in the UK, permanent health insurance and life assurance cover. Set at a level which provides a sufficient level of benefit. None The value of any annual bonus is limited to a percentage of salary. Performance is assessed using specific metrics set by the Remuneration and Nominations Committee, including the delivery of the Company Scorecard and the share price performance. Awards are made at market price at the date of grant and are discretionary. Awards vest based on share price performance. Awarded annually. Alternative or additional criteria may be used to determine future rewards. Individual Executive bonus is based on performance measured against Group and personal objectives. Performance measures are both quantitative and qualitative, and both financial and non-financial. Bonus awards are made by the Committee and awards are paid in cash. LTIP awards are made by the Committee for the CEO and for Executives by the Committee based on CEO recommendations. Awards vest three years after the date of the award, subject to achievement of performance criteria. At vesting, the LTIP awards are satisfied in Sound Energy shares. Awards will typically lapse on termination of employment, although the Committee may determine that awards may vest after termination of employment, in accordance with the plan rules and taking into account performance during the date of grant and date of termination of employment. In the event of a change of control of the Company, awards shall vest and be exercisable. Annual Bonus Provide a direct link between measurable individual performance and rewards. Encourage the achievement of outstanding results aligned to Group strategy and achievement of business objectives. Long-Term Incentive Plan (LTIP) Reward execution of Group strategy and growth in shareholder value over a multiple- year period. Long-term performance measurement discourages excessive risk-taking and inappropriate short-term behaviours, and also aligns Executive interests with those of shareholders. The LTIP is designed to retain Senior Executives over the performance period of the awards. In order to better meet the LTIP objectives, the Board determined in January 2018 that the existing Share Option Plan be replaced with a Restricted Stock Unit (RSU) Plan. The RSU awards will be made on an annual basis, with a three-year vesting period, and at vesting the awards will be satisfied in Sound Energy shares. First award to occur in 2018 and first vesting to occur in January 2021. 46 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUPurpose Operation Maximum Opportunity Performance Measures Chairman and Non-executive Director Fees Provide an appropriate reward to attract and retain high calibre individuals. Neither the Chairman nor any of the Non-executive Directors are entitled to a bonus or benefits and their fees are not performance-related. The fee for the Chairman and Non-executive Directors reflects the level of commitment and responsibility of the role. The fee is paid monthly in cash and is inclusive of all Committee roles. There is a fee for the role of Senior Independent Director. Benchmarked externally from time to time as appropriate. Set at a level which reflects the commitment and contribution expected from the Chairman and Non- executive Directors, and is appropriately positioned against comparable roles in companies of a similar size and complexity. Actual fee levels are disclosed in the Directors’ Annual Remuneration Report for the relevant financial year. Recruitment Remuneration Arrangements When recruiting a new Executive Director, whether from within the organisation or externally, the Committee will take into consideration all relevant factors to ensure that remuneration arrangements are in the best interests of the Company and its shareholders without paying more than is necessary to recruit an Executive of the required calibre. The Committee will seek to align the remuneration package offered with the remuneration policy outlined above, but retains discretion to make proposals on hiring which are outside the standard policy. Director Shareholding Guidelines From 2017 and applicable to future LTIP awards, the Committee has introduced new guidelines regarding Director and Senior Executive shareholdering requirements. All Executive Directors and Senior Executives are expected to build up over a reasonable period from appointment, and hold, a minimum level of shareholding in the Company equal to one year’s salary, with the CEO expected to build up a holding of 200% of base salary. Transitional provisions have been introduced with each Executive having three years to build up the requisite holding. The minimum level of shareholding is intended to be a pre- requisite for further LTIP awards. This is considered an effective way to align the interests of the Executive Management and shareholders over the long term. Executive Director Service Contracts and Termination Payments The CEO and the Exploration Director have service contracts which entitles them to the fixed elements of remuneration and to consideration for variable remuneration each year. Their contracts are terminable by the Company on not more than six months’ written notice. External Appointments It has been expressly agreed, which is reflected in his contract of employment, that the CEO can take the position of Non- executive Director or Non-executive Chairman in another listed company provided that (i) the company is not in direct or indirect competition with the business of Sound Energy plc and/or any Group company and that (ii) the position and corresponding duties and obligations do not reduce in any manner his ability to fulfil his duties and obligations under his employment contract with Sound Energy. It is the Company’s policy that remuneration earned from any such appointment may be retained by the individual. Remuneration Policy for the Chairman and Non-executive Directors The Chairman and other Non-executive Directors are appointed under a letter of appointment with a notice period for termination of three months. The letters of appointment cover such matters as duties, time commitment and other business interests. Loss of Office and Change of Control Provisions In the event of a change of control of the Company, the CEO 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 sum equivalent to 12 months’ salary. All of the Company’s current share plans contain provisions relating to a change of control. On a change of control, outstanding awards would normally vest and become exercisable, subject to the satisfaction of any performance conditions at that time. 47 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02DIRECTORS’ REMUNERATION REPORT CONTINUED Summary Of Actual Remuneration Of Directors Executive Directors James Parsons(i) Brian Mitchener(i) (ii) Non-executive Directors and Chairman Stephen Whyte Marco Fumagalli Richard Liddell Simon Davies Total for all Directors (i) Includes pension contribution of 4%. 2017 Performance Award £’000s Salary £’000s Medical Insurance £’000s Total 2017 £’000s 394 148 94 50 55 – 741 152 46 – – – – 198 3 1 – – – – 4 549 195 94 50 55 – 943 Total 2016 £’000s 1,092 – 60 45 45 30 1,272 (ii) Appointed Director from 21 June 2017. Remuneration disclosed is from the date of the appointment. Share Options James Parsons Brian Mitchener Stephen Whyte Marco Fumagalli Richard Liddell Date of Grant 19.06.14 25.09.15 23.03.16 07.10.16 25.01.17 08.08.16 08.08.16 08.08.16 Exercisable Date 29.07.17 – 29.07.19 25.09.18 – 25.09.20 23.03.19 – 23.03.21 07.10.19 – 07.10.21 25.01.20 – 25.01.22 08.08.19 – 08.08.21 08.08.19 – 08.08.21 08.08.19 – 08.08.21 Acquisition Price per share (pence) 8.00 14.25 16.00 84.00 67.00 60.00 60.00 60.00 Options held at 1 January 2017 3,350,000 1,250,000 3,000,000 1,500,000 – 1,000,000 250,000 250,000 Options held at 31 December 2017 – 1,250,000 3,000,000 1,500,000 1,500,000 1,000,000 250,000 250,000 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 2017 option coverage is approximately 3.3% of issued share capital. Over the long term, the Board wishes to move towards the 10% approved cap. During 2017, James Parsons exercised a total of 3.35 million options at an exercise price of 8.0 pence per option. The share price at the date of exercise was 48.15 pence and the calculated gain on the options at the date of exercise was £1,345,025. In order to better meet the LTIP objectives, the Board determined in January 2018 that the existing Share Option Plan be replaced with a RSU Plan. The RSU awards will be made on an annual basis, with a three-year vesting period, and at vesting the awards will be satisfied in Sound Energy shares. First award to occur in 2018 and first vesting to occur in January 2021. 48 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUDirectors’ Shareholdings and Interests in Shares The Directors who held office at the end of the financial year had the following interests in the ordinary shares of the Company: Directors and connected persons James Parsons Richard Liddell Brian Mitchener Marco Fumagalli (Continental Investment Partners) Steve Whyte Nicola Whyte No. of Shares 3,192,283 100,000 – 66,417,162 141,786 24,171 Movements in Share Price During the Year The mid-market price of the Company’s shares at the end of the financial year was 51p and the range of mid-market prices during the year was between 40p and 94p. Advice Received by the Committee The Committee has access to advice when it considers appropriate. In the year ended 31 December 2017, the Committee received advice relating to specific Executive compensation from Mercer who were paid £6,500 (excluding VAT). This Remuneration Report was approved by a duly authorised Committee of the Board of Directors on 21 March 2018 and signed on its behalf by: Richard Liddell Chairman 21 March 2018 49 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02Political Donations No political donations were made during the year (2016: £Nil). Takeover Directive The Company has only one class of ordinary share and these shares have equal voting rights. The nature of individual Directors’ holdings is disclosed on page 49. Board of Directors The names of the present Directors and their biographical details are shown on page 37. The Directors who served during the year were as follows: Stephen Whyte James Parsons Richard Liddell Marco Fumagalli Brian Mitchener None of the Directors had any interest during or at the end of the year in any contract of significance in relation to the business of the Company or its subsidiary undertakings. Full details of the interests in the ordinary share capital of the Company of those Directors holding office on 31 December 2017, are set out in the Directors’ Remuneration Report. Powers Given to Directors The powers given to the Directors are contained in the Articles of Association (the Articles) and are subject to relevant legislation and, in certain circumstances (including in relation to the issuing or buying back by the Company of its ordinary shares), subject to authority being given to the Directors by shareholders in general meeting. The Articles also govern the appointment and replacement of Directors. The Articles, which may only be amended with shareholders’ approval in accordance with relevant legislation, can be found on our website. DIRECTORS’ REPORT Other Disclosures Pages 37 to 51 inclusive (together with sections of the Annual Report incorporated by reference) constitute a Directors’ Report that has been drawn up and presented in accordance with applicable English company law and the liabilities of the Directors in connection with that report are subject to the limitations and restrictions provided by that law. Principal Activities and Business Review Sound Energy plc is the holding company for a group of companies whose principal activities are the exploration, appraisal and development of oil and gas assets to first production and the operation of producing assets. With the sale of Italian assets, anticipated to complete in 2018, the Group’s current principal area of activity is Morocco. A review of the performance and future development of the Group’s business is contained on pages 3 to 34 and forms part of this report. Results and Dividends The loss for the year before tax was £34.2 million (2016: £15.2 million). The Directors do not recommend the payment of a dividend. Going Concern In presenting the annual and interim financial statements, the Directors aim to present a balanced and understandable assessment of the Group’s position and prospects. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable. As at 31 December 2017, the Group had £21.2 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 using both the available cash resources and funding from partners in the main strategic licences, and therefore, the Group continues to adopt the going concern basis in preparing the financial statements. Auditor So far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware. Each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. The Auditor, Crowe Clark Whitehill LLP, has indicated its willingness to continue in office and a resolution that they be reappointed will be proposed at the Annual General Meeting. 50 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUIndemnities Insurance cover also remains in place to protect all Directors and senior management in the event of a claim being brought against them in their capacity as Directors or officers of the Company and its subsidiaries. Share Capital At 31 December 2017, the Company had 1,015,869,699 ordinary shares in issue as shown in note 17 to the consolidated financial statements. There are no restrictions on the transfer of the Company’s ordinary shares other than certain restrictions which may be imposed by law, for example, insider trading law and the Company’s share dealing code. Each ordinary share carries the right to one vote at General Meetings of the Company. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Substantial Shareholdings The Company was advised of the following significant direct and indirect interests in the issued ordinary share capital of the Company as at 31 December 2017 and up to the date of this report. Continental Investment Partners (Metano Capital S.A. & Greenberry S.A.) Oil & Gas Investment Partners (OGIF) 66,417,162 share interest 272,000,000 share interest Financial Instruments The information relating to the Group’s financial assets and its financial risk management can be found in note 19 to the consolidated financial statements. Subsequent Events See note 26 on page 89. By order of the Board Richard Liddell Chairman 21 March 2018 51 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02STATEMENT OF DIRECTORS’ RESPONSIBILITIES They are further responsible for ensuring that the Strategic Report and the Directors’ Report and other information included in the Annual Report and financial statements is prepared in accordance with applicable law in the United Kingdom. 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 the consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred in the accounts since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements and other information included in the Annual Report may differ from legislation in other jurisdictions. James Parsons Chief Executive Officer 21 March 2018 The Directors are responsible for preparing the Strategic Report, 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. 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. 52 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUINDEPENDENT AUDITOR’S REPORT Opinion We have audited the financial statements of Sound Energy plc (the “Parent Company”) and its subsidiaries (the “Group”) for the year ended 31 December 2017, which comprise: Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • the Directors’ use of the going concern basis of accounting • the Consolidated statement of comprehensive income for the year ended 31 December 2017; in the preparation of the financial statements is not appropriate; or • the Consolidated balance sheet and Company balance sheet as at 31 December 2017; • the Consolidated cash flow statement and Company cash flow statement for the year then ended; • the Group and Company statements of changes in equity for the year then ended; and • the notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2017 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 IFRSs 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. • the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent Company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Overview of our audit approach Materiality In planning and performing our audit we applied the concept of materiality. An item is considered material if it could reasonably be expected to change the economic decisions of a user of the financial statements. We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified. Based on our professional judgement, we determined overall materiality for the Group financial statements as a whole to be £1.4m, based approximately 0.8% of net assets. We use a different level of materiality (‘performance materiality’) to determine the extent of our testing for the audit of the financial statements. Performance materiality is set based on the audit materiality as adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit area having regard to the internal control environment. Where considered appropriate performance materiality may be reduced to a lower level, such as, for related party transactions and Directors’ remuneration. We agreed with the Audit Committee to report to it all identified errors in excess of £50,000. Errors below that threshold would also be reported to it if, in our opinion as Auditor, disclosure was required on qualitative grounds. Overview of the scope of our audit The head office of the Group is located in the UK which has an accounting function for group reporting as well as the head office costs and certain exploration activities. Our audit was conducted from this location. The Group also has a significant component, which was included as a disposal group at 31 December 2017 based in Italy. A member firm of the Crowe Horwath International network undertook the audit in Italy under our instruction. Key audit risks were communicated to them at the planning stage and audit findings and underlying audit working papers were reviewed as part of our work. 53 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02INDEPENDENT AUDITOR’S REPORT CONTINUED The Group also has operations in Morocco which has a separate accounting function. A senior member of the audit team visited Morocco in order to assess the accounting systems operating locally and to perform the required audit work. the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing This is not a complete list of all risks identified by our audit. Key audit matter How the scope of our audit addressed the key audit matter Impairment of exploration assets The group’s primary focus is on exploration activities in Eastern and Southern Morocco. Exploration expenditure in the current year totalled £150.5m which includes the £138.8m transaction relating to the acquisition of OGIF’s interests in the Tendrara, Anoual and Martaka licences We considered the risk that exploration assets are impaired. Classification and valuation of the disposal group. On 5 October the Company announced that it had entered into a non-binding conditional heads of terms with Saffron Energy plc to dispose of its Italian interests through the disposal of 100% of the share capital of Sound Energy Holdings Italy Limited, who in turn hold 100% of the issued share capital of Apennine Energy Spa. The classification of this as a disposal group has a material impact on the presentation of these financial statements. We reviewed management’s assessment which concluded that there are no facts or circumstances that suggest the recoverable amount of the asset exceeds the carrying amount. In considering this assessment we reviewed the following sources of evidence: • Board minutes, budgets and other operational plans setting out the Group’s current plans for the continued commercial appraisal of each exploration asset; • Reviewing current well and licence reserves appraisals; and • Discussing plans and intentions with management The Italian interests can only be accounted for as a disposal group in the event that, at the year end, management is committed to a plan to sell, the assets were available for sale and a sale is highly probable. We evidenced this by examining board minutes, market news announcements and agreements with the potential acquirer. In addition we carried out tests to compare the carrying value of the disposal group to the fair value less costs to sell to establish whether any impairment charge was required. Management override of controls Our work focused on the following areas: The Group operates out of a number of different geographical locations. We considered the risk that material weaknesses exist in relation to controls over financial controls and processes. • Considering the appropriateness of estimates and judgements to external evidence • Reviewing journal transactions • Assessing the control environment in Morocco given its recent establishment and geographical distance from central management Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole. They were not designed to enable us to express an opinion on these matters individually and we express no such opinion. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our Auditor’s report thereon. Our opinion on the financial statements does not 54 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUcover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinion on other matter prescribed by the Companies Act 2006 In our opinion based on the work undertaken in the course of our audit: • 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; and • the strategic report and directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In light of the knowledge and understanding of the group and the parent Company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. 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. Responsibilities of the Directors for the financial statements As explained more fully in the Directors’ responsibilities statement set out on page 52, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s report. Use of our report 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. Matthew Stallabrass (Senior Statutory Auditor) for and on behalf of Crowe Clark Whitehill LLP Statutory Auditor London 21 March 2018 55 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comGovernance 02Sound Energy plc Annual Report for the year ended 31 December 2017 Stock code: SOU 56 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.com 03 Financial Statements FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Group and Company Statements of Changes in Equity Consolidated Cash Flow Statement Company Cash Flow Statement Notes to the Financial Statements 58 59 60 61 62 63 64 – 89 57 25655.04 4 April 2018 1:15 PM Proof 26 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2017 Continuing operations Revenue Other income Gross loss Administrative expenses Group operating loss from continuing operations Finance revenue Foreign exchange (loss)/gain Other gains and (losses) – derivative financial instruments External interest costs Loss for the year from continuing operations before taxation Tax credit/(expense) Loss for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Total loss for the year Other comprehensive (loss)/income Items that may subsequently be reclassified to the profit and loss account Foreign currency translation (loss)/gain Total comprehensive loss for the year Loss for the year attributable to: Owners of the company Non-controlling interests Basic and diluted loss per share for the year from continuing and discontinued operations Attributable to the equity shareholders of the parent (pence) Basic and diluted loss per share for the year from continuing operations Attributable to the equity shareholders of the parent (pence) Notes 2017 £’000s 2016 £’000s – – – (8,458) (8,458) 23 (914) (1,873) (1,117) (12,339) – (12,339) – 715 715 (4,246) (3,531) 96 1,844 583 (3,697) (4,705) – (4,705) (21,811) (34,150) (8,734) (13,439) (5,361) (39,511) (39,511) – 2017 Pence (4.28) (4.28) (1.54) (1.54) 375 (13,064) (13,064) – 2016 Pence (2.52) (2.52) (0.88) (0.88) 3 6 21 24 7 25 Notes 8 8 8 8 58 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU    CONSOLIDATED BALANCE SHEET as at 31 December 2017 Non-current assets Property, plant and equipment Intangible assets Land and buildings Current assets Inventories Other receivables Derivative financial instruments Prepayments Cash and short term deposits Assets of disposal group held for sale Total assets Current liabilities Trade and other payables Loans repayable in under one year Liabilities of disposal group held for sale Non-current liabilities Deferred tax liabilities Loans due in over one year Provisions Total liabilities Net assets Capital and reserves Share capital and share premium Shares to be issued Warrant reserve Foreign currency reserve Accumulated deficit Total equity Notes 2017 £’000s 2016 £’000s 9 10 12 21 13 25 14 24 25 15 24 16 17 372 163,939 – 164,311 628 3,526 80 117 21,198 25,549 12,292 202,152 6,601 – 6,601 4,492 – 18,566 – 18,566 29,659 172,493 287,829 – 4,090 (3,918) (115,508) 172,493 1,729 28,060 1,535 31,324 331 8,777 2,545 320 46,809 58,782 – 90,106 12,604 986 13,590 – 433 16,455 2,049 18,937 32,527 57,579 135,667 223 4,459 1,443 (84,213) 57,579 The financial statements were approved by the Board and authorised for issue on 21 March 2018 and were signed on its behalf by: James Parsons Director Richard Liddell Director The accounting policies on pages 64 to 69 and notes on pages 64 to 89 form part of these financial statements. 59 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03  COMPANY BALANCE SHEET for the year ended 31 December 2017 Company Number 05344804 Non-current assets Property, plant and equipment Fixtures and fittings Software Investments in subsidiaries Current assets Other receivables Prepayments Derivative financial instruments Cash and short term deposits Total assets Current liabilities Trade and other payables Loans due in under one year Non-current liabilities Loans Total liabilities Net assets Capital and reserves attributable to equity holders of the Company Share capital and share premium Shares to be issued Warrant reserve Accumulated deficit Total equity Notes 2017 £’000s 2016 £’000s 11 12 21 13 14 24 24 17 46 131 66 178,249 178,492 100 86 80 16,569 16,835 195,327 1,599 – 1,599 18,566 20,165 175,162 287,829 – 4,090 (116,757) 175,162 37 157 89 62,456 62,739 129 70 2,545 41,782 44,526 107,265 2,175 986 3,161 16,455 19,616 87,649 135,667 223 4,459 (52,700) 87,649 The Company’s accumulated deficit includes loss for the year of £66.9 million (2016: £6.5 million) primarily due to an impairment charge of £47.0 million in respect of the divestment of the Italian operations and £5.5 million exchange loss on intercompany balances following the acquisition of OGIF’s licences by a subsidiary whose functional currency is US dollars. The financial statements were approved by the Board and authorised for issue on 21 March 2018 and were signed on its behalf by: James Parsons Director Richard Liddell Director 60 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU  GROUP AND COMPANY STATEMENTS OF CHANGES IN EQUITY for the year ended 31 December 2017 Group   Notes At 1 January 2017 Total loss for the year Other comprehensive loss Total comprehensive loss Issue of share capital Reclassification on share issue Reclassification on debt settlement Share based payments At 31 December 2017 17 17 22 Share capital £’000s 6,651 – – – 3,490 18 – – 10,159 Share premium £’000s 129,016 – – – 148,449 205 – – 277,670 Shares to be issued £’000s 223 – – – – (223) – – – Accumulated deficit £’000s (84,213) (34,150) – (34,150) – – 369 2,486 (115,508) Warrant reserve £’000s 4,459 – – – – – (369) – 4,090 Foreign currency reserves £’000s 1,443 – (5,361) (5,361) – – – – (3,918) Foreign currency reserve attributable to the Italian operations amounted to £1,658,000 (gain) as at 31 December 2017. Company At 1 January 2017 Total loss for the year Issue of share capital Reclassification on share issue Reclassification on debt settlement Share based payments At 31 December 2017 Group   Notes 17 17 22 Share capital £’000s 6,651 – 3,490 18 – – 10,159 Share premium £’000s 129,016 – 148,449 205 – – 277,670 Shares to be issued £’000s 223 – – (223) – – – Accumulated deficit £’000s (52,700) (66,912) – – 369 2,486 (116,757) Warrant reserve £’000s 4,459 – – – (369) – 4,090   Notes At 1 January 2016 Total loss for the year Other comprehensive income Total comprehensive loss Issue of share capital Share issue costs Shares to be issued Fair value of warrants issued with bonds Share based payments At 31 December 2016 17 17 22 Company Share capital £’000s 5,039 – – – 1,612 – – – – Share premium £’000s 81,276 – – – 50,425 (2,685) – – – 6,651 129,016 Shares to be issued £’000s – – – – – – 223 – – 223 Accumulated deficit £’000s (71,593) (13,439) – (13,439) – – – – 819 (84,213) Warrant reserve £’000s 369 – – – – – – 4,090 – 4,459 At 1 January 2016 Total loss for the year Issue of share capital Share issue costs Shares to be issued Fair value of warrants issued with bonds Share based payments At 31 December 2016   Notes 17 22 Share capital £’000s 5,039 – 1,612 – – – – 6,651 Share premium £’000s 81,276 – 50,425 (2,685) – – – 129,016 Shares to be issued £’000s – – – – 223 – – 223 Accumulated deficit £’000s (46,983) (6,536) – – – – 819 (52,700) 25655.04 4 April 2018 1:15 PM Proof 26 Foreign currency reserves £’000s 1,068 – 375 375 – – – – – 1,443 Warrant reserve £’000s 369 – – – – 4,090 – 4,459 Total equity £’000s 57,579 (34,150) (5,361) (39,511) 151,939 – – 2,486 172,493 Total equity £’000s 87,649 (66,912) 151,939 – – 2,486 175,162 Total equity £’000s 16,159 (13,439) 375 (13,064) 52,037 (2,685) 223 4,090 819 57,579 Total equity £’000s 39,701 (6,536) 52,037 (2,685) 223 4,090 819 87,649 61 www.soundenergyplc.comFinancial Statements03CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2017 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 Proceeds from derivative financial instruments Net proceeds from debt Net proceeds from equity issue Repayment of debt Interest payments Net cash flow from financing activities Net (decrease)/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 2017 Cash flow from operations reconciliation Loss before tax from continuing operations Loss before tax from discontinued operations Total loss for the year before tax Finance revenue Impairment of goodwill Exploration expenditure written off and impairment of producing assets (Decrease)/increase in accruals and short term payables Depreciation Share based payments charge Increase in drilling inventories Loss/(gain) on derivative financial instruments Finance costs and exchange adjustments Decrease/(increase) in receivables and prepayments Cash flow from operations Notes 2017 £’000s 2016 £’000s (11,849) 102 (11,747) (478) (23,482) (23,960) – 592 – 11,550 – (1,293) 10,849 (24,858) 60 46,809 22,011 (2,826) 96 (2,730) (945) (10,882) (11,827) (14) – 10,248 40,247 (5,435) (1,108) 43,938 29,381 2,188 15,240 46,809 24 13 Notes 2017 £’000s 2016 £’000s (12,339) (21,866) (34,205) (102) 55 19,833 (5,783) 406 2,486 (430) 1,873 2,158 1,860 (11,849) (4,705) (10,478) (15,183) (1,364) 1,704 7,789 9,035 272 819 (331) (583) 1,508 (6,492) (2,826) 9 22 Non-cash transactions during the year included the issue of shares worth £138.8 million as the consideration for the acquisition of OGIF’s interests in Morocco licences. The Company also issued shares worth £0.7 million as part settlement of the drilling services at the Badile licence, onshore Italy. 9.6 million warrants of 10.4p per warrant were exercised in settlement of £1.0 million debt. During the year, the Group provided a bank guarantee of $2.95 million (2016: $2.5 million) to the Moroccan Ministry of Petroleum to guarantee the Group’s minimum work programme obligations. The cash is held in a bank account under the control of the Company and as the Group expects to satisfy these commitments within 2018, on this basis the amount remains included as a liquid cash equivalent. A guarantee of €0.7 million was provided for expenditure relating to Badile licence and is included in cash and cash equivalents as it is expected to be released as soon as the commitment is fulfilled. 62 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU    COMPANY CASH FLOW STATEMENT for the year ended 31 December 2017 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 Proceeds from derivative financial instruments Net proceeds from equity issue Repayment of debt Interest payments Net cash flow from financing activities Net (decrease)/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 2017 Cash flow from operations reconciliation Loss before tax Impairment of investments in subsidiaries Intragroup recharges Finance revenue Decrease/(Increase) in receivables and prepayments (Decrease)/increase in accruals and short term payables Depreciation Share based payments charge Loss/(gain) on derivative financial instruments Finance costs and exchange adjustments Cash flow from operations Notes 2017 £’000s 2016 £’000s (7,465) 23 (7,442) (47) (28,772) (28,819) – 592 11,550 – (1,293) 10,849 (25,412) 199 41,782 16,569 (3,209) 35 (3,174) (178) (14,758) (14,936) 10,248 – 40,247 (2,710) (953) 46,832 28,722 772 12,288 41,782 13 Notes 2017 £’000s 2016 £’000s 11 22 (66,912) 46,973 (918) (23) 13 (576) 86 2,486 1,873 9,533 (7,465) (6,536) – (884) (35) (3) 962 54 819 (583) 2,997 (3,209) Non-cash transactions during the year included the issue of shares worth £138.8 million as the consideration for the acquisition of OGIF’s interests in Morocco licences. The Company also issued shares worth £0.7 million as part settlement of the drilling services at the Badile licence, onshore Italy. 9.6 million warrants of 10.4p per warrant were exercised in settlement of £1.0 million debt. 63 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03    NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2017 1 Accounting policies Sound Energy plc is a public limited Company registered and domiciled in England and Wales under the Companies Act 2006. The Company’s registered office is 1st Floor, 4 Pembroke Road, Sevenoaks, Kent, TN13 1XR. (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 2017 were authorised for issue by the Board of Directors on 21 March 2018. As at 31 December 2017 the Group had £21.2 million of available cash. Based on the current management plan, management believes that the Group will remain a going concern for at least 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 22 March 2019) 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. When considering whether E&E assets are impaired the Group first considers the IFRS 6 indicators set out in note 10. The making of this assessment involves judgement concerning the Group’s future plans and current technical and legal assessments. If those indicators are met a full impairment test is performed. During the year, and following unsuccessful exploration results, this was performed for the Badile block as disclosed further in note 10. In combination with the write down of the intangible asset the associated surface installations, recognised as property, plant and equipment, were also tested for impairment. Due to the impairment of the Badile licence these assets no longer have a value in use to the Group and hence were written down to their fair value. Consequently a provision of £0.2 million was made to write them down to £0.1 million, the best estimate of their fair value. This estimate was based on an offer obtained from a third party. 64 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU1 Accounting policies continued 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 10. The estimation of share based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the continuing participation of key employees (see note 18). 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. Significant judgement and estimation is also required in the determination of the fair value of warrants and bonds. In 2016, the proceeds from the issue of the bonds were used to settle existing liabilities and therefore an element of judgement was required in determining the portion of issues costs to be allocated to the old and new debt. (b) Basis of consolidation The Group financial statements consolidate the Income statements, Balance sheets, Cash flow statements and statements of changes in equity and related notes of the Company and its subsidiary undertakings. 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. Costs of acquisition are expensed during the period they are incurred. 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 Group also has subsidiaries whose functional currencies are euro and US dollar. During 2017, a subsidiary of the Company changed its functional currency from Moroccan Dirham to US dollar as significant amount of expenditure is incurred in US dollar. The effect of the change in functional currency has been applied prospectively. 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, unless this is not a reasonable approximation of the rates on the transaction dates. The resulting exchange differences are recognised in other comprehensive income and held in a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that foreign operation is recognised in the income statement. 65 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 1 Accounting policies continued (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. 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 E&E assets. Treatment of exploration and evaluation expenditure at the end of appraisal activities Intangible E&E assets relating to each exploration licence/prospect are carried forward, until the existence (or otherwise) of commercial reserves has been determined subject to certain limitations including review for indications of impairment. If, 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. 66 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU1 Accounting policies continued (e) Expenses recognition Expenses are recognised on the accruals basis unless otherwise stated. (f) Property, plant and equipment and land and buildings 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. Land and buildings relate to land which is not depreciated. (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. The Directors consider that the cash generating units to which the goodwill relates are each applicable licence held in the Group’s portfolio. (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. (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. Cash and cash equivalents also includes restricted cash that has been placed as guarantee for commitments on the licences. 67 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 1 Accounting policies continued (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 receivables and other receivables are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Cash and cash equivalents comprise cash on hand and demand deposits, restricted cash 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. Derivative financial instruments are measured at fair 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. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest rate method. Warrants issued are measured at their fair value on the date of issuance. 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 on issue and are not subsequently remeasured. (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 exercise price, the share price at the date of issue, volatility and the life of the option. The estimated fair value of the option is recognised as an 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. (m) Derivative financial instruments The Company has derivative financial instruments arising from the shares issued on the acquisition of the Sidi Moktar licence, onshore Morocco. Derivative financial instruments are stated at their fair value. Gains and losses on the derivatives that do not qualify for hedge accounting are taken directly to the income statement in the period. (n) 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 most significant new standards are as follows: IFRS 9 ‘Financial Instruments’ covers classification and measurements of financial assets and financial liabilities, impairment methodology and hedge accounting and is effective for accounting periods beginning on or after 1 January 2018; IFRS 15 ‘Revenue from Contracts with Customers’ provides a single model for accounting for revenue arising from contracts with customers and is effective for accounting periods beginning on or after 1 January 2018. Natural gas revenue is currently recognised on delivery to the customer pipeline and as Sound consider this to be the point at which the customer obtains control of the gas this remains the appropriate revenue recognition point under IFRS 15; IFRS 16 ‘Leases’ provides a new model for lease accounting in which all leases, other than short-term, will be accounted for by recognition in the balance sheet of a right-to-use asset and a lease liability. The right-to use asset is initially measured at cost and subsequently at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments as well as the impact of lease modifications, amongst others. IFRS 16 is effective for accounting periods beginning on or after 1 January 2019. 68 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU1 Accounting policies continued The Company has no intention to recall the intercompany loans in the foreseeable future and therefore classifies them as investments in the Company balance sheet. The adoption of IFRS 9 may have a material impact on the financial statements in future periods as the Directors will need to assess whether these balances are impaired in accordance with IFRS 9. The Directors will further assess and review the impact of IFRS 9 during 2018. IFRS 16 will require that the operating leases disclosed in note 23 be recognised in the balance sheet. The Directors’ assessment and review of the impact of IFRS 16 will be undertaken during 2018. (o) 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. (p) 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. (q) Revenue recognition Revenue associated with production sales of natural gas is recorded when title passes to the customer on delivery to the customer pipeline. (r) Discontinued operations The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately in the balance sheet. A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and: • Represents a separate major line of business or geographical area of operations • Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of comprehensive income. All other notes to the financial statements include amounts for continuing operations, unless otherwise mentioned. The Board considered the disposal of Italy operations met the criteria to be classified as held for sale as at 31 December 2017 for the following reasons: i. On 5 October 2017, the Company announced that it had entered into non-binding conditional heads of terms with Saffron Energy plc (“Saffron”) and Po Valley Energy Limited under which the Company was to dispose of its portfolio of Italian interests and permits through the sale of its subsidiaries, Sound Energy Holdings Italy and Apennine Energy SpA. ii. Subsequent to the year end, the Company announced that it had entered into a binding agreement with Saffron and expected to complete the disposal by April 2018. 69 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 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 2017 the Group’s exploration and appraisal activities were carried out in Italy and Morocco. 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. Segment results for the year ended 31 December 2017: Corporate £’000s Development & Production £’000s Exploration & Appraisal £’000s Administration expenses Operating loss segment result Interest receivable Loss on derivative financial instruments Finance costs and exchange adjustments Loss for the period before taxation from continuing operations (8,458) (8,458) 23 (1,873) (2,031) (12,339) – – – – – – – – – – – – The segments assets and liabilities at 31 December 2017 were as follows: Non-current assets Current assets Liabilities attributable to continuing operations The geographical split of non-current assets is as follows: Fixtures, fittings and office equipment Exploration and evaluation assets Software Total Corporate £’000s 372 21,701 (20,165) Development & Production £’000s Exploration & Appraisal £’000s – – – 163,939 3,848 (5,002) UK £’000s 177 – 66 243 Total £’000s (8,458) (8,458) 23 (1,873) (2,031) (12,339) Total £’000s 164,311 25,549 (25,167) Morocco £’000s 195 163,737 136 164,068 70 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU      2 Segment Information continued Segment results for the year ended 31 December 2016 were as follows: Corporate £’000s Development & Production £’000s Exploration & Appraisal £’000s Other income Administration expenses Operating loss segment result Interest receivable Gain on derivative financial instruments Finance costs and exchange adjustments Loss for the period before taxation from continuing operations – (4,246) (4,246) 96 583 (1,853) (5,420) 715 – 715 – – – 715 – – – – – – – Total £’000s 715 (4,246) (3,531) 96 583 (1,853) (4,705) Other income represents receipt during 2016 of $1.1 million Indonesian contingent consideration, triggered by the achievement of various operational targets of the Bangkanai licence which was previously owned by the Group. A contingent asset was not recognised when the licence was disposed of due to the uncertainty around the achievement of the conditions leading to the payment. The segments assets and liabilities at 31 December 2016 are as follows: Non-current assets Current assets Liabilities attributable to continuing operations 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 342 48,730 (3,161) Development & Production £’000s Exploration & Appraisal £’000s – – – 19,110 6,234 (25,374) Total £’000s 19,452 54,964 (28,535) UK £’000s Morocco £’000s – – 194 – – 89 283 – – 148 – 18,876 145 19,169 The segments assets and liabilities at 31 December 2016 excludes the assets and liabilities of the disposal group held for sale (note 25). 71 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03      NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 3 Operating Loss Operating loss is stated after charging: Auditor’s remuneration Depreciation Employee costs 4 Auditor’s Remuneration Fees payable to the 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 Other assurance services Tax services 5 Employee Costs Staff costs, including Executive Directors Share based payments Wages and salaries Social security costs Employee benefits Employee costs capitalised to intangible assets Total Number of employees (including Executive Directors) at the end of the year Technical and operations Management and administration Total 2017 £’000s 2016 £’000s 77 222 5,173 58 71 2,028 2017 £’000s 2016 £’000s 53 7 9 8 77 47 7 – 4 58 2017 £’000s 2016 £’000s 2,486 5,912 646 182 (4,053) 5,173 819 2,701 273 17 (1,782) 2,028 2017 Number 2016 Number 18 23 41 11 18 29 A proportion of the Group’s employee costs is capitalised to the cost of development, exploration and appraisal under the Group’s accounting policy for these assets. During the year, approximately £4.1 million (2016: £1.8 million) of the employee costs was capitalised. 6 Finance Revenue Interest on cash at bank and short term deposits 2017 £’000s 2016 £’000s 23 23 96 96 72 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU          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 credit 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 19.25% (2016: 20%) Tax effect of: Expenses not deductible for tax purposes Temporary differences not recognised Differences in overseas tax rates Total tax (charge)/credit 2017 £’000s 2016 £’000s – – – – – – 2017 £’000s (12,339) 2,375 (521) (1,651) (203) – – – – – – – 2016 £’000s (4,705) 941 (192) (729) (20) – 8 Profit/(Loss) per Share The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic profit/(loss) per share is calculated as follows: Loss after tax from continuing operations Loss after tax from discontinued operations Total loss for the year Weighted average shares in issue Basic and diluted loss per share from continuing operations Basic and diluted loss per share from discontinued operations 25655.04 4 April 2018 1:15 PM Proof 26 2017 £’000s (12,339) (21,811) (34,150) 2017 million 799 2017 pence (1.54) (2.74) (4.28) 2016 £’000s (4,705) (8,734) (13,439) 2016 million 534 2016 pence (0.88) (1.64) (2.52) 73 www.soundenergyplc.comFinancial Statements03          NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 9 Property, Plant and Equipment Development and production assets Cost At start of the year Exchange adjustments Additions Reclassification to assets of disposal group held for sale (note 25) At end of the year Depreciation At start of the year Exchange adjustments Impairment of assets Charge for the year Reclassified to assets of disposal group held for sale (note 25) At end of the year Net book amount Fixtures, fittings and office equipment Cost At start of the year Exchange adjustments Additions Reclassified to assets of disposal group held for sale (note 25) At end of the year Depreciation At start of the year Exchange adjustments Charge for the year Reclassified to assets of disposal group held for sale (note 25) At end of the year Net book amount Total net book amount 2017 £’000s 2016 £’000s 15,968 51 – (16,019) – 14,752 – 27 97 (14,876) – – 815 7 386 (562) 646 302 5 309 (342) 274 372 372 14,297 785 886 – 15,968 8,906 187 5,455 204 – 14,752 1,216 377 33 405 – 815 210 24 68 – 302 513 1,729 During 2016, the Group 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 £5.5 million to write-off the carrying value to the recoverable amount of £0.5 million, being the fair value less costs to sell of the plant and equipment. The valuation was considered a Level 3 valuation (see note 19). 2017 £’000s – – 2016 £’000s 5,455 5,455 Italy- impairment Total 74 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU    10 Intangibles Cost At 1 January 2017 Additions Exchange adjustments Reclassified to assets of disposal group held for sale (note 25) At 31 December 2017 Impairment At start of the year Charge for the year Exchange adjustments Reclassified to assets of disposal group held for sale (note 25) At end of the year Net book amount at 31 December 2017 Cost At 1 January 2016 Additions Exchange adjustments At 31 December 2016 Impairment At start of the year Charge for the year Exchange adjustments At end of the year Net book amount at 31 December 2016 Goodwill £’000s Software £’000s Exploration & Evaluation Assets £’000s 2,202 – 64 (2,266) – 1,769 55 64 (1,888) – – 282 92 (7) (86) 281 42 117 3 (83) 79 202 39,902 165,670 (6,043) (35,792) 163,737 12,515 19,018 (152) (31,381) – 163,737 Goodwill £’000s Software £’000s Exploration & Evaluation Assets £’000s 1,992 – 210 2,202 – 1,704 65 1,769 433 106 176 – 282 6 36 – 42 240 18,100 21,176 626 39,902 10,628 1,819 68 12,515 27,387 2017 £’000s 42,386 165,762 (5,986) (38,144) 164,018 14,326 19,190 (85) (33,352) 79 163,939 2016 £’000s 20,198 21,352 836 42,386 10,634 3,559 133 14,326 28,060 Goodwill 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 development and exploration and evaluation assets. During 2016, impairment charges were recognised for the Casa Tonetto and Strombone licences, which led to £1.7 million that was linked to these licences being impaired. Exploration and evaluation assets Additions during the year primarily related to acquisition of OGIF’s interests in Tendrara, Anoual and Martaka licences, onshore Morocco, for £138.8 million and expenditure on drilling of wells in Italy and Morocco. During the year, the Group had capitalised interest costs of approximately £1.6 million (2016: £1.5 million). 75 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03    NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 10 Intangibles continued Details regarding the geography of the Groups E&E assets is contained in note 2. The Directors assess for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. In making this assessment the Directors have regard to the facts and circumstances noted in IFRS 6 paragraph 20. In performing their assessment of each of these factors at 31 December 2017 the Directors have: a. reviewed the time period that the Group has the right to explore the area and noted no instances of expiration, or licences that are expected to expire in the near future; b. determined that further E&E expenditure is either budgeted or planned for all licences; c. not decided to discontinue exploration activity due to there being a lack of quantifiable mineral resource; and d. not identified any instances where sufficient data exists to indicate that there are licences where the E&E spend is unlikely to be recovered from successful development or sale. On the basis of the above assessment, the Directors are not aware of any facts or circumstances that would suggest the carrying amount of the E&E asset may exceed its recoverable amount, with exception of Badile. See below and note 1a. During 2017, following sub-commercial well results, the E&E asset related to the Badile licence, Italy, was fully impaired; resulting in charge of £19.0 million. During 2016, the impairment charge of £1.8 million related to the Strombone licence, Italy, as the current and forecast operational spend had significantly decreased due to an application for a time extension on the licence being rejected. 11 Investment in Subsidiaries At 1 January Advances to Group companies Impairment charge for the year At 31 December 2017 £’000s 62,456 162,766 (46,973) 178,249 2016 £’000s 35,450 27,006 – 62,456 The subsidiary companies of the Company at 31 December 2017, which are all 100% owned by the Company, are: Name Incorporated Principal Activity Registered Addresses Sound Oil International Limited British Virgin Isles Holding Company Sound Oil Asia Limited British Virgin Isles Holding Company Mitra Energia Citarum Limited* Mauritius Exploration Company Sound Energy Holdings Italy Limited UK Italy Apennine Energy SpA Sound Energy Morocco SARL Morocco Sound Energy Morocco East Limited UK Sound Energy Morocco South Limited UK UK Sound Energy Meridja Limited UK Sound Oil Limited Holding Company Exploration, Development and Production Company Exploration Company Exploration Company Exploration Company Exploration Company Dormant * The investment in Mitra Energia Citarum Limited is held indirectly via Sound Oil International Limited. PO Box 173, Kingston,Chambers Road,Tortola,VG 1110, British Virgin Islands PO Box 173, Kingston,Chambers Road,Tortola,VG 1110, British Virgin Islands Fifth Floor,Ebene, Esplanade, 24 Cybercity,Ebene, Mauritius 4 Pembroke Road, Sevenoaks,TN13 IXR, UK Via,XXV, Aprile 5, SAN DONATO MILANESE (MI) 20097 Angle Av. Mehdi, Benbarka et Rue Euginia, 2éme étage Hay Riad Rabat 4 Pembroke Road, Sevenoaks,TN13 IXR, UK 4 Pembroke Road, Sevenoaks,TN13 IXR, UK 4 Pembroke Road, Sevenoaks,TN13 IXR, UK 4 Pembroke Road, Sevenoaks,TN13 IXR, UK Increase in advances to Group companies was primarily related to acquisition of OGIF’s interests in Tendrara, Anoual and Martaka licences, onshore Morocco, for £138.7 million. Impairment charge for the year is attributable to a write down of the carrying value of the investment in Sound Energy Holdings Italy Limited to the expected recoverable value upon disposal of the Italian operations. 76 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU  11 Investment in Subsidiaries continued The investment in Apennine Energy SpA is held indirectly through Sound Energy Holdings Italy Limited. Sound Energy Holdings Italy Limited is directly funded through non-current, non-interest bearing loans from Sound Energy plc. Given that Sound Energy plc has no intention to call in the loans in the foreseeable future, the loans are treated as “permanent as equity”. As a result, Sound Energy plc has classified these loans as investments which represent the carrying value of the investment in Sound Energy International, Morocco subsidiaries 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  Place of incorporation Place of operation 2017 2016 Gas exploration and production Italy UK Gas exploration UK Holding companies UK Dormant British Virgin Isles Holding companies Mauritius Holding companies Morocco Gas exploration 12 Other Receivables Group Italy Morocco UK UK British Virgin Isles Mauritius Morocco Italian VAT (note 25) UK VAT Morocco VAT Other receivables Currency Analysis US dollar Euro GBP sterling Moroccan dirham Company UK VAT Other receivables Currency Analysis GBP sterling Total 25655.04 4 April 2018 1:15 PM Proof 26 1 3 2 1 2 1 1 2017 £’000s – 83 665 2,778 3,526 2017 £’000s 2,555 – 100 871 3,526 1 3 2 1 2 1 1 2016 £’000s 2,445 110 296 5,926 8,777 2016 £’000s 5,607 2,603 129 438 8,777 2017 £’000s 2016 £’000s 83 17 100 2017 £’000s 100 100 110 19 129 2016 £’000s 129 129 77 www.soundenergyplc.comFinancial Statements03        NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 13 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 Total 2017 £’000s 1,764 19,434 21,198 9,420 4,407 7,160 211 21,198 2016 £’000s 1,056 45,753 46,809 7,845 11,865 25,089 2,010 46,809 For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following as at 31 December 2017. 2017 £’000s 21,198 813 22,011 2017 £’000s 25 16,544 16,569 4,983 4,395 7,191 16,569 2017 £’000s 3,910 157 2,534 6,601 2016 £’000s 46,809 – 46,809 2016 £’000s 25 41,757 41,782 5,819 10,874 25,089 41,782 2016 £’000s 3,514 231 8,859 12,604 Cash and short term deposits Cash and short term deposits attributable to discontinued operations Total 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 14 Trade and Other Payables Group Trade payable Payroll taxes and social security Accruals 78 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU        14 Trade and Other Payables continued Currency Analysis US dollar Euro Sterling Moroccan dirham Total Company Trade payable Payroll taxes and social security Accruals Total Currency Analysis Sterling Euro Total 15 Deferred Tax Liabilities 1 January Derecognised on impairment of licences Exchange adjustments Reclassified to liabilities of disposal group held for sale (note 25) 31 December 2017 £’000s 4,049 553 1,287 712 6,601 2017 £’000s 741 126 732 1,599 2017 £’000s 1,085 514 1,599 2017 £’000s 433 (55) – (378) – 2016 £’000s 7,216 1,510 1,681 2,197 12,604 2016 £’000s 998 83 1,094 2,175 2016 £’000s 1,681 494 2,175 2016 £’000s 1,992 (1,744) 185 – 433 Deferred tax assets have not been recognised in respect of tax losses available due to the uncertainty of utilisation of those assets. Unrecognised tax losses as at 31 December 2017 were estimated to be approximately £6.9 million (2016: £4.7 million). 16 Provisions for Abandonment At 1 January Discount unwind Additions during the year Released during the year Exchange adjustments Reclassified to liabilities of disposal group held for sale (note 25) At 31 December 25655.04 4 April 2018 1:15 PM Proof 26 2017 £’000s 2,049 131 749 (410) (49) (2,470) – 2016 £’000s 1,138 133 786 (188) 180 – 2,049 79 www.soundenergyplc.comFinancial Statements03          NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 17 Capital and Reserves Group and Company Ordinary shares – 1p At 1 January Issued during the year for cash Non-cash share issue At 31 December 2017 Number of shares 1,015,869,699 £’000s 10,159 2016 Number of shares 665,069,037 2017 Number of shares £’000s 6,651 2016 Number of shares 665,069,037 66,550,042 284,250,620 1,015,869,699 503,898,868 118,147,455 43,022,714 665,069,037 Non-cash transactions during the year included the issue of 272.0 million shares worth £138.8 million as the consideration for the acquisition of OGIF’s interests in Morocco licences. The Company also issued 0.8 million shares worth £0.7 million as part settlement of the drilling services at the Badile licence, onshore Italy, and 9.6 million warrants of 10.4p per warrant were exercised in settlement of £1.0 million debt. 1.8 million shares were issued for which cash had been received in the prior year as a result of share options exercise. Share option schemes Options to subscribe to the Company’s shares were granted to executives and certain employees in 2017 and 2016. Share issues During the year ended 31 December 2017, the Company issued 58,700,042 shares following warrant exercises at exercise prices in the range of 10.4p to 30p per share. On 7 February 2017, the Company announced the issue of 830,565 shares at a price of 82p per share in respect of drilling services at the Badile licence in Italy. On 13 February 2017, the Company announced that it would issue 9,615,384 shares as a result of warrants exercise. The exercise price of the warrants totalling £1.0 million (10p per warrants) was satisfied by settlement of a £1.0 million loan to the warrant holder (see note 24). On 1 August 2017, the Company announced the issue of 2,050,00 shares following the exercise of share options by a non-board member of the Company at a price of 8p per share. On 12 September 2017, the Company announced that it would issue 272,000,000 shares as consideration for the acquisition of OGIF’s interests in Tendrara, Anoual and Martaka licences, onshore Morocco. On 21 September 2017, the Company announced the issue of 3,350,000 shares following the exercise of share options by a Director of the Company at a price of 8p per share. The gain on exercise is disclosed in the statement of Directors remuneration. During 2017, the Company issued 4,254,671 shares as a result of share options exercises by non-board members of the Company. 1,804,660 of the shares were issued to satify option excercises that occured in December 2016 and as result, the shares to be issued reserve was fully utilised. The shares were issued at prices in the range of 8p to 25p per share. 18 Related Party Disclosures The financial statements include the financial statements of Sound Energy plc (the parent) and the subsidiaries (note 11). Terms and conditions of transactions with related parties There were no sales or purchases to or from related parties (2016: none). Advances to subsidiaries are disclosed in note 11. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 31 December 2017, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2016: none) and is not owed or owes amounts to/from any related parties. Impairment on investment in subsidiaries is disclosed in note 11. 80 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU    18 Related Party Disclosures continued Key management As at 31 December 2017, there were seven key management personnel other than Directors of the Company (2016: six). Details of the Directors’ remuneration are set out in the Report of Directors’ Remuneration. The table below show the total remuneration of key management personnel, including the executive Directors. Salaries and employee benefits Share based payments 2017 £’000s 3,043 1,914 4,957 2016 £’000s 2,922 748 3,670 Directors’ interest in employee share options At 31 December 2017, the Chairman had 1,000,000 share options in the Company. The other non-executive Directors held a total of 500,000 options in the Company. Share options held by non-executive members of the Board of Directors at 31 December 2017 have the following expiry dates and exercise prices: 2016 Expiry Date Exercise price Pence 2017 Number 2016 Number 2021 60p 1,500,000 1,500,000 Share options held by the executive members of the Board of Directors at 31 December 2017 have the following expiry dates and exercise prices: 2014 2015 2016 2016 2017 Expiry Date Exercise price Pence 2017 Number 2016 Number 2019 2020 2021 2021 2022 8.0p 14.25p 16p 84p 67p – 1,250,000 3,000,000 1,500,000 1,500,000 3,350,000 1,250,000 3,000,000 1,500,000 1,500,000 Key management’s (excluding Directors) interest in employee share options 2014 2015 2015 2015 2016 2016 2017 2017 2017 2017 2017 Expiry Date Exercise price Pence 2017 Number 2016 Number 2019 2020 2020 2020 2021 2021 2022 2022 2022 2022 2022 8.0p 14.25p 14.20p 14.07p 16p 84p 67p 70p 65p 52.25p 48p – 2,150,000 1,250,000 1,250,000 4,000,000 – 4,000,000 1,500,000 500,000 500,000 4,000,000 4,500,000 2,150,000 1,250,000 1,250,000 5,250,000 3,000,000 – – – – – Other expenses During 2017 three Directors of the Company were also Directors of Echo Energy plc (‘‘Echo’’), a company listed on the London stock exchange. The Company recharged and was paid by Echo £24,381 in respect of travel expenses that had been paid by the Company on behalf of Echo. As disclosed in note 25, the Company has entered into an agreement with Saffron Energy plc (‘‘Saffron’’), a company listed on the London stock exchange in respect of divestment of its Italian operations. Two Directors of the Company were appointed as non-executive Directors of Saffron in December 2017. The Company has recharged Saffron £21,398 in respect of travel expenses paid by the Company on behalf of Saffron. 81 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03        NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 19 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, loans and borrowings, receivables, cash and short term deposits. 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 12 (Other Receivables), note 13 (Cash and Cash Equivalents), note 14 (Trade and Other payables) and note 24 (Loans and Borrowings). The table below sets out the Group’s accounting classification of its financial assets and liabilities. Financial assets Cash and short term deposits Other receivables Derivative financial instruments at fair value Financial liabilities Trade and other payables Loans and borrowings held at amortised costs 2017 £’000s 2016 £’000s 21,198 3,526 80 24,804 6,601 18,566 25,167 46,809 8,777 2,545 58,131 12,604 17,441 30,045 The Company classifies the fair value of the financial instruments according to the following hierarchy, based on the amount of observable inputs used to value the instrument. The three levels of the fair value hierarchy are as follows: • Level 1 – inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. • Level 2 – inputs to the valuation methodology are derived from quoted prices for identical assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. • Level 3 – inputs to the valuation methodology are not based on observable market data. Derivative financial instruments are classified as Level 2. 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. Market risk As the derivative financial instruments are linked to the share price, the movement in the Company’s share price has an impact on the value of the derivative financial instruments. The Group continues its exploration and production activities and selective acquisitions to increase shareholder value through capital growth. 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. 82 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU  19 Financial Instruments Risk Management continued The Group monitors capital on a short and medium term view. 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 2017 £’000s (18,566) 21,198 2,632 10,159 277,670 172,493 2016 £’000s (17,441) 46,809 29,368 6,651 129,016 57,579 20 Foreign Currency and Other Risks As a result of the majority of the Group’s operations being denominated in US dollar (USD) and Euros (EUR) , the Group’s balance sheet can be impacted by movements in these exchange rates against sterling (GBP). Such movements will result in book gains or losses which are unrealised and will be offset if the currencies involved move in the opposite direction. The GBP cost of the assets being acquired with the USD or EUR 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 USD, EUR or MAD 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. Increase in USD/GBP exchange rate Increase in EUR/GBP exchange rate Increase in MAD/GBP exchange rate Decrease in USD/GBP exchange rate Decrease in EUR/GBP exchange rate Decrease in MAD/GBP exchange rate Increase/ (decrease) in exchange rate % 2017 Effect on profit or loss before tax £’000s 2016 Effect on profit or loss before tax £’000s 5% 5% 5% (5%) (5%) (5%) (396) (193) (19) 396 193 19 (312) (62) (13) 312 62 13 Share price risk The derivative financial instruments are linked to the Company’s share price. The effect on the Group’s loss for the year of a 10% movement in the share price is shown below. Increase in share price Decrease in share price 2017 Effect on loss before tax/(decrease)/ Increase £’000s 2016 Effect on loss before tax/(decrease)/ Increase £’000s (80) 80 (784) 784 Increase/ (decrease) in share price % 10% (10%) 83 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03      NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 20 Foreign Currency and Other Risks continued Credit risk The Group currently has sales to one customer. The maximum credit exposure at the reporting date of each category of financial assets 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 cash calls to partners are paid within one month 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 24. 21 Financial Instruments (i) Derivative financial instruments Derivative on shares issued on acquisition of Sidi Moktar licence 2017 £’000s 80 2016 £’000s 2,545 In March 2016, the Company signed a binding agreement to acquire PetroMaroc’s 50% working interest in, and operatorship of, the Sidi Moktar Licences. The terms of the acquisition included the issue by the Company of 21,258,008 ordinary shares to PetroMaroc as consideration. In September 2016, the agreement with PetroMaroc was amended such that should PetroMaroc dispose of the shares issued, the proceeds of the share price above 50 pence would be shared equally between the Company and PetroMaroc. The value of this derivative as at 31 December 2017 was £80,000 (2016: £2.5 million) using the Company’s closing share price of 51p (2016: 74p). During 2017, the Company recognised a loss of £1.9 million (2016: £0.6 million, gain) in the income statement as a result of movement in the share price during the year. PetroMaroc sold 5,314,502 shares during the year and the Company received £592,000, being its share of the proceeds in line with the agreement. Subsequent to the end of the year, PetroMaroc notified the Company, and the Company acknowledged, that PetroMaroc had transferred 11,608,411 shares at a deemed price of 48.38p per share to Debentureholders and as a result, there were no proceeds to be shared in respect of the said shares. (ii) Cash and short term deposits 2017 Sterling Euro US dollar Moroccan dirham 2016 Sterling Euro US dollar Moroccan dirham Floating rate £’000s Fixed rate £’000s Interest- free £’000s 4,135 888 – – 5,023 25,064 992 – – 26,056 3,000 – 4,447 211 7,658 – – – 2,010 2,010 25 3,519 4,973 – 8,517 25 10,873 7,845 – 18,743 Weighted average rate % 0.26 0.60 0.57 3.75 0.01 0.05 0.00 3.75 Total £’000s 7,160 4,407 9,420 211 21,198 25,089 11,865 7,845 2,010 46,809 Euro cash balances have been converted at the exchange rate of €1.12631: £1.00 (2016: €1.17288: £1.00). Moroccan dirham cash balances have been converted at the exchange rate of MAD12.6280: £1.00 (2016: MAD12.4979: £1.00). US dollar cash balances have been converted at the exchange rate of US$1.3493: £1.00 (2016: US$1.23412: £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. 84 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU    22 Share Based Payments The Group has a Long Term Incentive Plan under which share options have been granted to the Directors and key staff. The Group’s policy is to award options to employees on appointment and periodically thereafter. Options are issued at market price on the grant date and have vesting periods of up to three years. The options expire after five years if they remain unexercised and are forfeited if the employee leaves the Group before the options vest except at the discretion of the Board. The expense recognised for employee services in the Consolidated Income Statement is as follows: Group and Company Expense arising from equity-settled share options 2017 £’000s 2,486 2016 £’000s 819 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. 2017 Total 2016 Total Granted 8,800,000 1,500,000 800,000 500,000 4,000,000 15,600,000 9,050,000 600,000 1,500,000 3,300,000 300,000 300,000 15,050,000 Period (years) Price (pence) 5 5 5 5 5 5 5 5 5 5 5 67 70 65 52.25 48 16.00 17.13 60.00 84.00 75.00 76.50 The expected life of the options is based on the maximum option period and is not necessarily indicative of exercise patterns that may occur. Expected volatility is determined by reference to the historical volatility of the Company’s share price over a three year period. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. The valuations assumed an expected life of five years and used the following additional assumptions for options granted during the year: • Weighted average share price as of grant date: 61.84 pence (2016: 37.72 pence) • Average risk free interest rate: 0.39% (2016: 0.52%) • Expected volatility: 60.69% (2016: 60.35%) • Assumed forfeitures: 0% (2016: 0%) • Expected dividends: nil (2016: nil) No other features of options grant were incorporated into the measurement of fair value. The weighted average fair value of the options granted was 31.38p (2016: 19.17p). 85 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03    NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 22 Share Based Payments continued 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 Weighted average exercise price (pence) 24.59 61.84 56.80 8.00 41.04 2016 £’000s 20,348,886 15,050,000 (350,000) (5,648,886) 29,400,000 Weighted average exercise price (pence) 11.19 37.72 10.27 15.85 24.59 2017 £’000s 29,400,000 15,600,000 (3,750,000) (7,850,000) 33,400,000 The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2017 was 46.39p (2016: 69.37p). The weighted average remaining contractual life of the options outstanding at 31 December 2016 was 3.5 years (2016: 3.8 years). There were no exercisable options at the end of the year. If all equity share options were exercisable immediately, new ordinary shares equal to approximately 3.3% (2016: 4.4%) of the shares currently in issue, would be created. 23 Commitment and Guarantees At 31 December 2017, the Group’s minimum capital expenditure on its licences was approximately £2.1 million primarily for the exploration and appraisal activities in the Group’s licences in Morocco. The Group provided $2.95 million as guarantee to the Moroccan Oil Ministry for the minimum work commitments on its licences. As at 31 December 2017, the Group had the following operating leases: Due within one year After one year but within two years After two years but within five years After five years As at 31 December 2016, the Group had the following operating leases: Due within one year After one year but within two years After two years but within five years After five years Premises £’000s Vehicles £’000s Total £’000s 382 386 307 – 1,075 99 – – – 99 Premises £’000s 483 341 344 – 1,168 Vehicles £’000s 179 100 – – 279 481 386 307 – 1,174 Total £’000s 662 441 344 – 1,447 86 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU      24 Loans and Borrowings Group and Company Current liabilities Other loans Non-current liabilities 5 year secured bonds At 1 January/on recognition Amortised finance charges Interest payments Exchange adjustments 2017 £’000s 2016 £’000s – 986 16,455 2,706 (1,263) 668 18,566 14,777 1,367 (592) 903 16,455 On 21 June 2016 the Company announced that Greenberry S.A (‘‘Greenberry’’) had subscribed for 5-year non-amortising secured bonds with an aggregate issue value of €28.8 million (the “Bonds”). Alongside the Bonds, the Company issued 70,312,500 warrants to subscribe for new ordinary shares in the Company at an exercise price of 30 pence per ordinary share and an exercise period of approximately five years, concurrent with the term of the Bonds, to Greenberry (the “Warrants”). The Bonds were secured over the share capital of Sound Energy Holdings Italy Limited (‘‘SEHIL’’) but subsequent to year-end, the security on the share capital of SEHIL was released and replaced by security on the share capital of Sound Energy Morocco South Limited. The Bonds have a 5% coupon and were issued at a 32% discount to par value. A total cash fee of €1.1 million was paid by the Company. The Warrants were recorded within equity at fair value on the date of issuance and the proceeds of the notes net of issue costs were recorded as non-current liability. Part of the Bonds’ proceeds were used to settle an existing Reserve Based Lending facility with Greenberry of €7.0 million at a discount of 50%. The Company also settled £7.0 million debt that had been issued to Continental Investment Partners in 2014 as part of the re-financing. The coupon rate of 5% for the Bonds ensures that the Company’s ongoing cash out-flow on interest payments remains low, conserving the Company’s cash resources. The effective interest rate is approximately 16.3%. The 5-year secured Bonds are due in June 2021. The £7.0 million settled was the debt issued to Continental Investment Partners with an annual coupon of 8% on 28 July 2014, which was issued alongside £1.0 million of debt to Simon Davies, with an annual coupon of 10%. The total issue of £8.0 million, with a three year term, was combined with equity and warrants which also had a three year term. Each warrant was convertible into equity at a price of 10.4p per share during that three-year term. The fair value of the warrants at issue is included within warrant reserve. During 2017, the Company settled £1.0 million debt due to Simon Davies through the exercise of 9.6 million warrants at 10.4p per share. Liability component at 1 January Interest and amortised issue costs Interest paid Debt paid Reconciliation of liabilities arising from financing activities Non-cash changes Loan repayment in shares £’000 Cash flows £’000 (1,263) (30) (1,293) – (1,000) (1,000) Amortised finance charges £’000 2,706 44 2,750 1 January 2017 £’000 16,455 986 17,441 Long-term borrowings Short-term borrowings Total liabilities from financing activities 2017 £’000s 986 44 (30) (1,000) – 2016 £’000s 7,118 1,413 (545) (7,000) 986 Exchange adjustments £’000 31 December 2017 £’000 668 – 668 18,566 – 18,566 87 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03    NOTES TO THE FINANCIAL STATEMENTS CONTINUED for the year ended 31 December 2017 24 Loans and Borrowings continued Reconciliation of external interest costs Amortised finance charges- long-term borrowings Amortised finance charges- short-term borrowings Accelerated bond costs amortisation on debt settlement Less capitalised interest Exchange adjustments Total external interest for the year 2017 £’000 2,706 44 – 2,750 (1,618) (15) 1,117 2016 £’000 1,367 1,413 2,353 5,133 (1,455) 19 3,697 25 Discontinued Operations On 5 October 2017, the Company announced that it had entered into non-binding conditional heads of terms with Saffron Energy plc (“Saffron”) and Po Valley Energy Limited under which it is proposed that Company disposes of its portfolio of Italian interests and permits through the sale of Sound Energy Holdings Italy (‘‘SEHIL’’) and Apennine Energy SpA (‘‘APN’’) (the “disposal”). The consideration for the disposal would be fully satisfied through the issue of 185,907,500 new ordinary shares in Saffron which would be distributed directly to SOU shareholders valued at approximately £8.1 million using the share price of Saffron of 4.38 pence per share being the closing mid-market price per Saffron ordinary share before the announcement was made. Subsequent to the year end, the Company announced that it had entered into a binding agreement with Saffron for the disposal and is expected to complete the disposal by April 2018. At 31 December 2017, the Italian operations were classified as a disposal group held for sale and as discontinued operations. With the classification as discontinued operations, the Italian operations have been excluded from the segment note (note 2). The results of the Italian operations for the year are presented below: Revenue Operating costs Impairment of producing assets Impairment of goodwill Impairment of intangible assets Exploration costs Gross loss Administrative expenses Operating loss from discontinued operations Finance revenue Foreign exchange gain Finance costs Loss for the year before taxation from discontinued operations Deferred tax credit Loss for the year after taxation from discontinued operations 2017 £’000s 708 (697) – (55) (19,018) (761) (19,823) (1,995) (21,818) 79 4 (131) (21,866) 55 (21,811) 2016 £’000s 833 (1,110) (5,455) (1,704) (1,819) (515) (9,770) (1,995) (11,765) 2,054 94 (861) (10,478) 1,744 (8,734) 88 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOU  25 Discontinued Operations continued The major classes of assets and liabilities of the Italian operations classified as held for sale as at 31 December 2017 are as follows: Assets Property, plant and equipment Intangible assets Land and buildings Inventories Other receivables Prepayments Cash and short term deposits Assets of disposal group held for sale Liabilities Trade and other payables Deferred tax liabilities Provisions Liabilities of disposal group held for sale Net assets The net cash flows of the Italian operations were as follows: Net cash flow from operating activities Net cash flow from investing activities Net cash flow from financing activities Net cash outflow 2017 £’000s (2,513) (13,962) – (16,475) 2017 £’000s 1,363 4,792 1,598 133 3,527 66 813 12,292 1,644 378 2,470 4,492 7,800 2016 £’000s (1,810) (2,468) (2,894) (7,172) 26 Post Balance Sheet Events On 22 January 2018, the Company announced that it had entered into a binding conditional sale and purchase agreement (the “Binding Agreement”) with Saffron Energy Plc (“Saffron”) under which it is proposed that Saffron acquires Sound Energy’s portfolio of Italian interests and permits through the acquisition by Saffron of the entire issued share capital of the Company’s wholly owned subsidiary, Sound Energy Holdings Italy Limited (“SEHIL”). SEHIL holds all of Sound Energy’s Italian oil and gas interests through its own wholly owned subsidiary, Apennine Energy SpA (“APN”). It is proposed that Saffron will be renamed Coro Energy plc. The consideration for the disposal of SEHIL will be fully satisfied through the issue of 185,907,500 new ordinary shares of £0.001 each in the capital of Saffron (the “Consideration Shares”), subject to any rounding of fractional entitlements. The Consideration Shares would be paid directly to the Company’s shareholders on completion which is expected to be in April 2018. The Company was granted a court order on 13 March 2018 approving a capital reduction following cancellation of the share premium account and transferring £277.7 million to distributable reserves. On 23 January 2018, the Company announced that it had received the final results of the resources certification in relation to the TE-5 horst core volumes at the Company’s Tendrara asset, onshore Morocco (the “Final Certification”). The Final Certification, was entirely consistent with and confirmed the preliminary results of the certification announced by the Company on 20 December 2017. The Company also announced that Stephen Whyte, the Company’s Non-Executive Chairman, had stepped down from the Board and his position would be assumed by Richard Riddell, a Non-Executive Director of the Company. On 31 January 2018, the Company announced the appointment of Macquarie Capital (Europe) Limited as joint broker to the Company. Macquarie Capital (Europe) Limited will act alongside RBC Capital Markets, joint broker, and Smith & Williamson Corporate Finance Limited, continue as the Company’s nominated adviser. On 12 February 2018, the Company announced it had been granted, subject to Moroccan Energy and Finance Ministry approval, a petroleum agreement covering Sidi Moktar (the “Petroleum Agreement”). The Petroleum Agreement, has been granted to the Company by L’Office National des Hydrocarbures et des Mines (“ONHYM”), the Moroccan state regulator for petroleum operations, and will come into force on approval of the Moroccan Energy and Finance Ministries. The petroleum agreement is for an 8 year period. On 7 March 2018, the Company provided an update on the Italy divestment and noted that the divestment was expected to complete on or around 9 April 2018. 89 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comFinancial Statements03  LIST OF LICENCES AND INTERESTS Licence Rapagnano San Lorenzo Fonte San Damiano Carità Torrente Alvo Carità Badile S.Maria Goretti Villa Gigli Monte Negro D-R74-AP D503 BR-CS Posta Del Giudice Solfara Mare Costa Del Sole Torre del Ferro Tendrara2 Anoual3 Matarka4 Sidi Moktar5 Key Project or Prospect Status1 Name Type Concession Casa Tonetto Concession Concession Concession Permit Permit Permit Permit Permit Permit Permit Application Application Application Application Application Permit Permit Permit Permit Rapagnano Casa Tiberi Marciano Gas production Gas production Abandonment in process Awaiting abandonment Oil discovery Appraisal Prospect Appraisal Oil discovery – Gas discovery Gas discovery – – Oil discovery – Prospect Prospect Matarka Reconnaissance Prospect Strombone Nervesa Badile T.Tesino Musone – Laura Dora/Dalla – – Manfria – Tendrara Anoual Sidi Moktar WI (%) 100 75 100 100 100 100 100 100 100 100 100 100 100 100 100 100 47.5 47.5 47.5 75 Area (km2) 8.5 4.9 23.7 4.2 Operator Apennine Energy Apennine Energy Apennine Energy Apennine Energy 84.3 529.8 154.5 101.3 100.9 287.7 65.2 82.6 113.6 337 41.5 118.0 9,335.6 8,873.3 5,223.3 Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Apennine Energy Sound Energy Morocco East Sound Energy Meridja Sound Energy Morocco East 4,499 Sound Energy Morocco South Notes: 1. Italy A Concession in Italy (licences operated by Apennine Energy) 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. The conversion of an application to a full permit requires the approval of an Environmental Impact Assessment. Morocco An Exploration Permit in Morocco (licences operated by Sound Energy Morocco and Sound Energy Morocco South) allows hydrocarbon exploration and is valid for up to 8 years. Exploration Permits are granted by the Energy Ministry and published in the Bulletin. The initial term is not dictated by law and is defined in the Petroleum Agreement. The Petroleum Agreement is to be entered into between ONHYM and the permit holder, which must be approved by a joint decree of the Energy Ministry and the Finance Ministry. 2. The Company’s interest in the permit is 75%, of which 27.5% is shared with Schlumberger resulting in the Company’s net effective interest of 47.5%. 3. The Company’s interest in the permit is 75%, of which 27.5% is shared with Schlumberger resulting in the Company’s net effective interest of 47.5%. The Reconnaissance covering previously relinquished Tendrara acreage. 4. The Company’s interest in the permit is 75%, of which 27.5% is shared with Schlumberger resulting in the Company’s net effective intere to final approvalst of 47.5%. 5. Subject to final approval. 90 25655.04 4 April 2018 1:15 PM Proof 26 Sound Energy plc Annual Report for the year ended 31 December 2017Stock code: SOUSHAREHOLDER INFORMATION Dealing Information Stock code – SOU.LN Financial Calendar Meetings Annual General Meeting – May 2018 Announcements 2018 Interim – September 2018 2018 Preliminary – March 2019 Addresses Registered Office Sound Energy plc 4 Pembroke Road Sevenoaks Kent TN13 1XR Business Address Sound Energy plc 4 Pembroke Road Sevenoaks Kent TN13 1XR Company Secretary A Bateman Amba Co Sec Ltd 12 Clifton Park Caversham Reading Berkshire RG4 7PD Website www.soundenergyplc.com Registrars Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Auditor Crowe Clark Whitehill LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Stockbrokers RBC Capital Markets Riverbank House 2 Swan Lane London EC4R 3BF Macquarie Capital (Europe) Ltd Ropemaker Place 28 Ropemaker Street London EC2Y 9HD Nominated Advisers Smith & Williamson Corporate Finance Limited 25 Moorgate London EC2R 6AY 25655.04 4 April 2018 1:15 PM Proof 26 www.soundenergyplc.comSound Energy plc 1st Floor 4 Pembroke Road Sevenoaks Kent TN13 1XR United Kingdom 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 7 

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