26405 3 April 2019 4:42 pm Proof 22ANNUAL REPORT & ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2018Sound Energy plc Annual Report & Accounts for the year ended 31 December 2018Hunting for gas under Moroccan SkiesSound Energy Annual Report 2018.indd 303/04/2019 16:46:34 26405 3 April 2019 4:42 pm Proof 22Sound Energy is a well-funded exploration focused onshore gas company, listed on AIM (LSE:SOU), with a low cost 0.65 Tcf discovery (TE-5 Horst), a second TAGI discovery (TE-10), and a strategic partnership with Schlumberger. Our strategy is focused on the further exploration and development of our Moroccan portfolio.Annual Report 2018 Regional gas strategy underpinned by:– Strong gas demand and local pricing– Moroccan Cornerstone Investor (OGIF)– Multiple strategic partners Low cost 0.65 TcF development in Eastern Morocco Recent second TAGI discovery (at TE-10) awaiting test Significant exploration potential– Eastern Morocco up to 34 Tcf* – Southern Morocco up to 11 Tcf**Gross 100% unriskedReasons to invest Read about our Business Model on page 06 REPEAT ACQUIRE DISCOVERMONETISESound Energy Annual Report 2018.indd 403/04/2019 16:46:34 26405 3 April 2019 4:42 pm Proof 22www.soundenergyplc.comHeadingHeadingHeadingTable plain textDefaultDefaultDefaultBackground123Border123Border123Delivering on our promises2018 was a very active year for Sound Energy delivering on our priorities to de-risk and advance our existing discovery and unlock our significant exploration potential. Read more in the Financial Review on page 24Strategic ReportHighlights02Chairman’s Statement04Business Model06Strategy and KPIs08Future Focus09Market Review10Key Partners12Reserves and Resources14Operational Review16Financial Review24Corporate Social Responsibility26HSE during 201827Managing our Risks and Opportunities30GovernanceChairman’s Corporate Governance Statement35QCA Code 2018 Principles36Leadership– Overview37– The Team38Effectiveness– Board Activities40– Shareholder Relations42Accountability– Health and Safety Committee43– Audit Committee44– Nomination Committee45– Remuneration Committee46Directors’ Remuneration Report 47Directors’ Report52Statement of Directors’ Responsibilities54Independent Auditor’s Report55Financial StatementsConsolidated Statement of Comprehensive Income59Consolidated Balance Sheet60Company Balance Sheet61Group and Company Statements of Changes in Equity62Consolidated Cash Flow Statement64Company Cash Flow Statement65Notes to the Financial Statement66List of Licences and Interests 93Shareholder Information94 Read more inside this report Read more online www.soundenergyplc.comCorporate websiteVisit www.soundenergyplc.com for the latest news, reports, presentations and videosNavigating this ReportStrategic Report01Sound Energy Annual Report 2018.indd 103/04/2019 16:46:37 26405 3 April 2019 4:42 pm Proof 22HighlightsMoroccoCorporate −Completion of 2,850 line kilometres fully carried seismic programme −Recent second TAGI discovery at TE-10 at Tendrara with testing underway −De-risking of existing TE-5 discovery; including production concession awarded and GSA approaching −Heads signed for Infrastructure BOOT with Enagas, Elecnor and Fomento2nd TAGI discovery at TE-10 Read more in the Operational Review on page 16 −Cash balance as at 31 December 2018 of £20.5 million −Completion of disposal of Italian interests to centre strategic focus on high impact Moroccan assets£20.5 millioncash balance as at 31 December 2018 Read more in the Financial Review on page 24Strategic Report02Sound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 203/04/2019 16:46:38 26405 3 April 2019 4:42 pm Proof 22Strategic Report03www.soundenergyplc.comSound Energy Annual Report 2018.indd 303/04/2019 16:46:39 26405 3 April 2019 4:42 pm Proof 22Chairman’s StatementDuring the year, Sound Energy focused on safely delivering its Moroccan growth strategy which culminated in the recommencement of exploration drilling operations on the Tendrara licences in Eastern Morocco. During the year, in addition to the exploration drilling programme, the Company was awarded a 25-year exploitation (production) concession for the TE-5 discovery at Tendrara (less than two years from discovery), entered into a Heads of Terms with a Spanish consortium embracing the development infrastructure, completed its fully Schlumberger-carried Eastern Morocco 2D seismic programme, commenced the process to introduce Schlumberger directly onto the Eastern Morocco licences and was awarded new eight-year Petroleum Agreements for Sidi Mokhtar, Tendrara and Anoual. The Company is now well advanced in the execution of its Moroccan strategy which includes early options for monetisation.Strengthening the Moroccan Portfolio The Company continues to believe that the TAGI and Palaeozoic plays across Tendrara and Anoual have the potential to become a material hydrocarbon province, transforming both the Company and the Moroccan gas industry. In 2018, the Company strengthened its licence position by securing a new eight-year licence combining Tendrara and Matarka. In addition, the Company’s Moroccan strategic partner, Schlumberger, underlined its commitment to its partnership with Sound Energy and to the Tendrara licences by issuing notice to convert its synthetic commercial interest in the licences to a full participating licence interest.Sound Energy continued to deepen its knowledge of the Eastern Morocco basin through, in part, the completion in August 2018 of the US$27.2 million seismic programme which was fully funded by Schlumberger. This work has supported our new Eastern Morocco basin model and was critical to minimising the risk of the 2018/19 exploration drill programme.Exploration Drilling ProgrammeIn October, following an extensive pre-drill exploration work programme and detailed well planning, the Company embarked upon drilling the first well in a three-well exploration campaign in Eastern Morocco. The first well, TE-9, targeting the A1 structure at Tendrara, was safely drilled ahead of schedule and under budget. The well encountered approximately 60m gross section in the primary TAGI objective, consisting of dolomitized silty sandstones. In the secondary Palaeozoic objective, consisted of an approximately 630m of a Westphalian aged succession of fine sandstones siltstones and mudstones. The wireline logs did not indicate the presence of producible gas in either the primary or secondary objectives. Subsequent petrophysical analysis indicated that the intervals are of low porosity and therefore poor reservoir quality. Despite the poor reservoir quality, subsequent laboratory analysis of the drill gas samples from the well confirmed the presence of thermogenic hydrocarbons supporting the Company’s basin model and the significant remaining exploration potential in the area.A busy year2018 was a very active year for Sound Energy delivering on our priorities to de-risk and advance our existing discovery and unlock our significant exploration potential.What we promised −Developing existing gas discovery −Unlocking upside through seismic acquisition and bold exploration programmesWhat we delivered −Submission and award of the production concession. FEED and BOOT in advanced stages −Second TAGI discovery with stratigraphic upside identified −Italian exit −Completed seismic programmeDelivering on promises we’ve madeRichard Liddell Non-executive ChairmanStrategic ReportSound Energy plc Annual Report for the year ended 31 December 201804Sound Energy Annual Report 2018.indd 403/04/2019 16:46:40 26405 3 April 2019 4:42 pm Proof 22In December, the Company commenced the second well (TE-10) in the exploration programme, targeting a TAGI structural-stratigraphic play. TE-10 was also safely drilled ahead of schedule and under budget, underlining the Company’s operational capabilities. The well logs indicated a potential gross reservoir interval between a measured depth (‘‘MD’’) of 1,899 metres and 2,009 metres MD. The gas shows encountered during drilling and the petrophysical analysis both indicate that net pay extends below the seismically mapped structural closure. These observations suggest that the gas accumulation most likely extends up-dip into the larger North East Lakbir structural-stratigraphic trap. The well also encountered additional thin-bedded net pay and following the first successful modular formation dynamic testing (“MDT”) in the TAGI sands at Tendrara, the Company successfully recovered a gas sample to surface.Following completion of TE-10 drilling, the Company commenced the planning process for an unstimulated and stimulated well test over the reservoir interval in early 2019.Tendrara TE-5 DevelopmentThe Company made considerable progress in advancing the development of the Tendrara TE-5 discovery. An independent Competent Person’s Report (“CPR”) in relation to the discovery was completed in January 2018 – the report certified mid-case resources of 651 Bcf unrisked gas originally in place (GOIP) with an upside case of 873 Bcf and a downside case of 349 Bcf. In June, following a competitive market enquiry process, a Heads of Terms for front end engineering design (“FEED”) for a 20-inch (240mmsc/d capacity) gas export pipeline and central processing facilities (“CPF”) was signed with a consortium of Enagas, Elecnor and Fomento who bring strong industry expertise and capabilities. An innovative ‘build-own-operate-transfer’ (“BOOT”) structure was agreed with the consortium which further underpins the financial attractiveness of the development by leveraging vendor financing. FEED for the pipeline was completed in November, with FEED for the CPF scheduled to be completed in early 2019. Since June, and in parallel with the technical work, the Company has made progress to further develop the structuring and commercial framework relating to the proposed BOOT transaction.Positive discussions have continued to progress the gas sales agreement (“GSA”) for offtake which forms a key building block to support project sanction. The Company expects to sign binding GSA terms shortly.The Company continues to maintain a strong focus on health, safety, environment and the community, with the Company working in partnership with a local charity on the renovation of the Matarka healthcare centre. Sidi Mokhtar The Company views its Sidi Mokhtar licences as an exciting opportunity to explore for high-impact prospectivity within the pre-salt Triassic and Palaeozoic plays in the underexplored Essaouira Basin in Southern Morocco. In June, the Company was delighted to receive Ministerial approval of a new eight-year Sidi Mokhtar Onshore Petroleum Agreement. An Environmental Impact Assessment for the proposed seismic programme is underway and the Company continues to assess a potential farm down of the asset, while retaining operatorship of the permits, ahead of potential exploration operations in 2019. Italy DisposalFollowing the agreement entered into in 2017 with Saffron Energy PLC (now Coro Energy plc) to divest the Company’s Italian portfolio, the sale was successfully completed in April 2018. This divestment allowed the Company to centre its strategic focus and investments on its high-impact Moroccan portfolio whilst providing Sound Energy shareholders with direct shareholdings in Coro Energy plc. Work continues with Coro Energy plc on the restoration of the Badile land, to which the Company retains its economic rights to receive the proceeds of a future sale.Corporate The Company remains in a strong financial position for 2019 with cash balances remaining at 31 December 2018 of US$26 million. In June, the Company successfully completed an equity placing of US$15 million before expenses. The Company has significantly strengthened the Board during 2018 with Richard Liddell being appointed as Non-executive Chairman, David Clarkson joining as a Non-executive Director and JJ Traynor, the Company’s Chief Financial Officer, joining the Board.Richard Liddell | Chairman (Non-executive)Strategic Report05www.soundenergyplc.comSound Energy Annual Report 2018.indd 503/04/2019 16:46:40 26405 3 April 2019 4:42 pm Proof 22Business ModelCreating shareholder value through high-risk, high-reward frontier exploration.Cornerstone InvestorsOur 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. They contribute to 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 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. Our cornerstone investors give Sound Energy a strong financial foundation, bringing to the table both asset opportunities and the funds to deliver 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.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.Strategic Industry PartnersThe Building Blocks of Our BusinessKey PartnersRead about our Partners on page 12Strategic ReportSound Energy plc Annual Report for the year ended 31 December 201806Sound Energy Annual Report 2018.indd 603/04/2019 16:46:40 26405 3 April 2019 4:42 pm Proof 22Sound Energy 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. Sound Energy recognises that a fundamental element of value creation is swift, innovative and focused commercialisation of our opportunities. We continue to develop and move forward our portfolio through the gas industry life cycle at pace - leveraging the skills of our team, working with trusted external advisers and collaborating closely with our key industrial partners and the Moroccan state to develop industry-leading commercial outcomes. The Building Blocks of Our BusinessOur business, like the oil industry, is cyclical. We acquire, we discover, we deliver to our shareholders – and then we repeat. We have shown we can grow counter- cyclically and we can capitalise on the re-bound and boom of the industry. We are passionate about our business and enjoy what we do. We carefully manage our financial resources and exposures, use innovative methods to deliver acquisitions and fund discoveries, and then we do it all over again. Our energy is endless. Our primary goal is to deliver returns to shareholders. 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 a low-cost of finding reserves. We have demonstrated our capability to discover major fields and deliver wells, and carefully manage our technical and financial risk. REPEAT ACQUIRE DISCOVERMONETISEStrategic Report07www.soundenergyplc.comSound Energy Annual Report 2018.indd 703/04/2019 16:46:42 Strategy and KPIs
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Our overall aim.
The strategic focus for the Company is the further exploration and
development of our Moroccan portfolio. Key steps we plan to take
to deliver increased shareholder value.
Grow the value of our assets and de-risk
upside volumes
Commercialisation
of existing gas
discovery
− De-risk 34 Tcf exploration potential in Eastern
Morocco and up to 11 Tcf in Sidi Mokhtar through
shooting new seismic and aerial gradiometry
− Prove further volumes with bold exploration
programme in Eastern Morocco, each with multi
Tcf potential
− Develop existing 0.65 Tcf throughout gas
discovery, with first gas targeted for 2020
Highlights
Highlights
− Submission and award of the production
concession application for the existing discovery
at Tendrara
− Award of FEED and signing of a Heads of Terms
covering the infrastructure, including a 20-inch
pipeline, with a consortium including Enagas
− Completion of seismic programme in
Eastern Morocco
− Finalisation of the TE-10 well location
− Securing a new eight-year licence combining
Tendrara and Matarka into the Greater
Tendrara licence
− Award of a new Petroleum Agreement for
Sidi Mokhtar
Read about our Board of Directors on page 38
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26405 3 April 2019 4:42 pm Proof 22Future FocusCurrent exploration campaign2019 March April May June JulyOngoing: GSA heads for existing discoveryTE-11Exploration wellTE-10Flow testTE-11Flow testwww.soundenergyplc.comStrategic Report09Sound Energy Annual Report 2018.indd 903/04/2019 16:46:44 Market Review
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Energy Sector
2018 has been a clearly improving year for international
E&Ps, as companies have strengthened their balance sheets,
numerous projects have been brought into production and
agendas have refocused on growth; however recent weakness
in oil price will test the robustness of measures undertaken
over the last few years to strengthen balance sheets.
Oil companies set 2018 budgets on a $50-55/bbl basis and
hence overall capex levels have remained modest by historical
standards.
The surge in the Brent price to +$80/bbl catalysed interest
in the sector but a recent sharp correction has dissipated
a degree of enthusiasm. The final quarter in 2018 has been
problematic for global markets and stocks in the Oil and Gas
sector. On average, IOC stocks went down nearly 12% in the
quarter while E&Ps c.25% vs 13% for the S&P 500 and 33% for
Brent. Concerns of renewed oil price weakness prevail once US
infrastructure bottlenecks are resolved.
However, during the meetings on 6-7 December 2018, OPEC
decided to adjust OPEC overall production by 0.8mb/d
(additional 0.4mb/d cuts from non-OPEC countries). We see
OPEC+ continuing to remain focused on securing balance
(not targeting a specific price) - cuts will also create an
exacerbation of light heavy differentials. Therefore, short-term
oil prices are likely to remain volatile.
Key Themes for 2019:
− Continuing OPEC+ cuts:
a more urgent imperative to get prices back on a
firmer footing
− Doing more with less:
investors will pay attention to the type of spending – look
for an increase in capital to be committed to short cycle,
infrastructure-led opportunities
− Rationalisation of the portfolio:
the Majors continue to rationalise their portfolios while
the E&P companies look to benefit from tax synergies via
diversification into a larger number of jurisdictions to help
mitigate political, geographical and geological risk
− Returning money to shareholders:
a growing number of International E&P companies are
paying a dividend – dominated by stocks with major
shareholders
− IPO market:
relatively full pipeline of private equity and other E&Ps
targeting IPO in 2019-20
Brent Price
(US$/bbl)
NBP
(pence/therm)
Source: Bloomberg as at 12 February 2019
Source: Bloomberg as at 12 February 2019
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26405 3 April 2019 4:42 pm Proof 22 −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. Regional InfrastructureWhat this means to Sound Energy −Favourable fiscal terms (ten year tax holiday and 36% net government take including 5% royalty – one of the lowest globally) −Good economics and able 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 production3SlideInvestor PresentationQ4 2018Gas Maghreb-Europe PipelineProposed routing of pipeline to GMEOuedEl Makhazine2 x 400 MWAl Wahda4 x 400 MWDhar Doum4 x 400 MWOujdaCasablancaMarrakechMOROCCOMEDITERRANEANALGERIAATLANTICRabatTahaddart Power2 x 400 MW 120kmSidi Moktar OnshoreGreater TendraraExploration PermitTendrara Production ConcessionAnoual ExplorationPermitRetail InstitutionsDirectorsMoroccan CornerstoneInvestor (OGIF)2.1%8.7%63.3%25.9%Growing gas penetration• Low risk emerging market • Gas increasingly replacing other fuels• Circa 90% hydrocarbons imported from Algeria • GME pipeline ownership transitions to Morocco in 2021• New Gas Agency and law under discussion• 10 year tax holiday• Thereafter 36% net government take (31% Corporation tax and 5% royalty after 10.6 Bcf) Disadvantaged supply positionTop quartile fiscal termsMoroccoCOMPELLING MOROCCAN CASE FOR GASKEY SHAREHOLDERSMoroccowww.soundenergyplc.comStrategic Report11Sound Energy Annual Report 2018.indd 1103/04/2019 16:46:44 26405 3 April 2019 4:42 pm Proof 22Key PartnersSchlumberger 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 Energy 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.In October 2015, Sound Energy announced that it had signed a Memorandum of Understanding (“MOU”) with Schlumberger Oilfield Holdings Limited (“Schlumberger”) defining a strategic relationship between Sound Energy and Schlumberger across Europe and Africa. Associated with this, a Term Sheet was signed with Schlumberger Production Management (“SPM”), the production management arm of Schlumberger, regarding the Tendrara licence, onshore Morocco. The Company subsequently entered into a Field Management Agreement (“FMA”) with SPM in December 2015 where, under the FMA, Schlumberger provides integrated technical services, equipment and personnel to Sound Energy, Operator of the Tendrara Licence; −Schlumberger have funded a significant proportion of the capital expenditure on the first three Tendrara appraisal wells (80-75%), and of the development of the licence area thereafter (27.5%); and −Schlumberger were 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).Schlumberger Oilfield Holdings Limited (Schlumberger)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. Strategic Report12Sound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 1203/04/2019 16:46:45 26405 3 April 2019 4:42 pm Proof 22The Spanish BOOT Consortium of Enagas, Elecnor and Fomento is a key strategic partnering group of Sound Energy, following the signing (June) of a binding Heads of Terms for FEED in respect of the proposed TE-5 field processing facilities and gas export pipeline. The consortium is funding FEED and is currently in discussions with Sound Energy to deploy vendor-sourced financing to build, own and operate these facilities. The consortium’s strong midstream industry experience and project financing capabilities, combined with the upstream expertise and capability of Sound Energy is being blended to develop a strong partnership to further the development of the Moroccan oil and gas industry.Enagas led consortiumIn 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 31 December 2018, OGIF had an interest in 25.59% of Sound Energy’s current issued share capital. Oil and Gas Investment Fund (OGIF)The National Office of Hydrocarbons and Mines (“ONHYM”) is another key partner for Sound Energy. The department was established in August 2005 by the merger of the Bureau of Research and Mining Participations (“BRPM”) and the National Office for Research and Petroleum Explorations (“ONAREP”). ONHYM is a public institution with legal personality and financial autonomy under State supervision and is responsible for the awarding of licences for exploration and development in Morocco.Sound Energy has an excellent relationship with ONHYM and looks forward to future co-operation. Office of Hydrocarbons and Mines (ONHYM)Our ability to build and maintain relationships is a key part of our success, enabling us to identify accretive M&A opportunities, share the risks and rewards of oil and gas exploration and production with our partners and, in return, increase our knowledge and fund our work programmes. We have high quality relationships with our partners in our assets.Our Partners in Our VenturesThe 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.Our HostsStrategic Report13www.soundenergyplc.comSound Energy Annual Report 2018.indd 1303/04/2019 16:46:47 14
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Reserves and Resources
Sound Energy Resource
and Reserve Estimates.
The Company’s volumes and risk factors are presented in
accordance with the updated and revised June 2018 SPE/
WPC/AAPG/SPEE/SEG/SPWLA/EAGE Petroleum Resource
Management System (“PRMS”).
The Greater Tendrara and Anoual licences (“the licences”)
and Tendrara Production concession contain both discovered
and undiscovered hydrocarbons which fall within the PRMS
classifications of either Prospective or Contingent Resources.
Prospective Resources are, by definition, undiscovered and
are assigned a probability of success. This probability is
referred to by the Company as the geological Chance of
Success (“CoS”). Contingent Resources are, by definition,
discovered, and therefore do not have an associated
geological CoS but are subject to commercial contingencies
for development and production.
Contingent Resource Estimates for Eastern Morocco
(Tendrara Production concession)
Contingent Resources are those quantities of petroleum
estimated, at a given date, that are potentially recoverable
from known subsurface 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 Production concession contains Contingent
Resources (Development Unclarified or On Hold). At the
point of Final investment decision (“FID”), these resources
will move to Contingent Resources (Development Pending).
When developed, it is expected that the Contingent
Resources will be directly converted into Reserves.
In late 2017, Sound Energy undertook a resource evaluation
exercise for the Tendrara discovery. This exercise was
conducted by a leading independent technical consultancy
(RPS Energy). The results of the resource evaluation were
presented in a Competent Persons Report (“CPR”) and were
communicated by RNS on 23 January 2018. The key resource
estimates from the CPR are summarised in the table below.
Discovered Gas
Originally In-place
(Bcf)
Gross (100%) basis
Contingent
Resources
(Bcf)1
Gross (100%) basis
Low Mid
High
1C
2C
3C
349
651
873
197
377
533
Accumulation
Name
TE-5 Horst
(TAGI 1 and 2)
1. Contingent Resources are technical volumes i.e. no economic limit
test applied.
TABLE 1. Summary table showing the range of Discovered
Gas Originally In-place and Discovered Contingent Resources,
gross, for the TE-5 Horst accumulation, within the Tendrara
Production concession.
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Prospective Resource Estimates for Eastern Morocco
(Greater Tendrara and Anoual licences and the Tendrara
Production Concession)
Prospective Resources are those quantities of petroleum
estimated, as of a given date, to be potentially recoverable
from undiscovered accumulations assuming the application of
future development projects. Prospective Resources have an
associated geological CoS applied. 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 defined prospective
resources for a series of features internally classified as
either Prospects, Leads or Concepts based on their level of
technical maturity.
Sound Energy has internally estimated prospective resources
for the Greater Tendrara and Anoual licences and the Tendrara
Production Area concession, which are given in Fig. 1 on the
right. These estimates are presented as original gas in place
(OGIP), unrisked without an associated geological CoS and
on a gross basis. The total volume of Prospective Resource
is constrained by a basin modelling study undertaken by a
leading independent petroleum systems analysis consultancy
(IGI Ltd), as communicated by RNS on 29 June 2018.
The output of the basin modelling has allowed Sound Energy
to update the estimated exploration potential of the licences
and Production lease as 20 Tcf gas equivalent, mid case,
unrisked original gas in place. The Basin Model further defines
a possible range of estimated exploration potential across the
entire permit area, with a 7 Tcf low case of unrisked original
gas in place and, if all the key elements of the petroleum
system’s model are present, an upside case of 34 Tcf of
unrisked original gas in place.
The range of unrisked original gas in place volume estimates
from the Basin Model has been used to constrain and
consolidate the prospective resource inventory for the
licences and Production concession, as shown in the graph
below. The volumes are spread across a portfolio of prospects,
leads, and concepts with varying degrees of technical maturity.
The portfolio includes an estimate of volumes for features
identified from previous operators studies, plus new volumes
identified by Sound Energy from the recent geophysical data
acquisition, processing and interpretation exercise.
Sound Energy internal resource estimates are unrisked
original gas in place (gross)
Palaeozoic
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TAGI features
10.77 Tcf
Grand Tendrara
TAGI features
10.68 Tcf
Discovered
Resource
TE-5 Horst
881 bcf
Fig. 1. Summary chart showing the internally estimated, gross,
unrisked OGIP volumes for the Greater Tendrara and Anoual
licences and Tendrara Production concession. The Eastern
Morocco Development Volumes estimate is based on the
sum of the externally certified, gross, mid case discovered
and undiscovered OGIP estimates from the RPS resource
certification exercise. The Prospective Resource estimates are
Sound Energy internal estimates and have not been externally
verified or certified.
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Operational Review
Asset Overview
Eastern Morocco
Asset
Greater
Tendrara
Anoual
Tendrara
Production
Concession
Interest
Status
Area
47.5% interest
operated
Exploration
Permit
47.5%* interest
operated
47.5%* interest
operated
Exploration
Permit
Concession
14,599km2
acreage,
10 wells drilled
8,873km2
133.5km2
*upon Schlumberger converting their synthetic interest into an interest on the licence
Southern Morocco
Asset
Interest
Status
Area
Sidi Mokhtar
75% interest
operated
Exploration
Permit
4,711km2 acreage
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Operationally, 2018 was a busy year for Sound Energy in Morocco.
Development of Existing Discovery
Continued good progress has been made on the development
project, including the resource certification issued in
January 2018. Key forward steps including the contracting,
engineering and financing, are progressing well. Following a
competitive process and negotiation, a consortium comprising
Enagas, Elecnor and Fomento has been awarded the front-
end engineering and design (“FEED”) and exclusivity to
finalise the funding, construction and operation for both a
20-inch pipeline and the central processing facility under a
'build-own-operate-transfer' (“BOOT”) structure. Off-take and
other related commercial agreements under the Gas Sales
Agreement are in advanced negotiations.
In September, Sound Energy and its partners were awarded
the production concession. The production concession covers
an area of 133.5 square kilometres and follows the application
made in June 2018. The partnership expects to be in a
position to take a final investment decision on the Tendrara
development once key development milestones have been
secured, including a Gas Sales Agreement, development
capital funding and local regulatory administrative formalities.
Commercial Relationships
A new Greater Tendrara licence was awarded in August
2018, combining the previous Tendrara-Lakbir and Matarka
licences into a single licence with Schlumberger converting
through its affiliate Schlumberger Silk Route Services Limited
the previous 27.5% synthetic interests held by an affiliate of
Schlumberger Oilfield Holdings Limited in the Tendrara Lakbir
licences, into a participating interest. Schlumberger also
decided to convert their 27.5% synthetic interest into a 27.5%
participating interest in the Anoual licences and the Tendrara
Production Concession. Sound Energy retained operatorship
of this Eastern Morocco Portfolio.
Exploration Programme
Two challenging exploration wells were safely delivered in
the year, TE-9 and TE-10 both within the Greater Tendrara
permit in Morocco. TE-9 proved unsuccessful due to a lack of
effective reservoir in both the targeted TAGI and Westphalian
sequences. The second well TE-10 completed drilling in
December 2018 and established a new gas discovery within
the TAGI sequence with a potential gross reservoir interval
of 110m MD. A gas sample was successfully recovered, the
first successful MDT gas test from the TAGI sandstone in
the Tendrara licence. These two wells have fulfilled the work
programme commitment for the initial three-year phase of
the new Greater Tendrara licence awarded in August 2018,
combining the previous Tendrara Lakbir and Matarka licences
into a single licence.
Geophysical and Geological Programme
2018 saw Sound Energy complete its geophysical programme
in Eastern Morocco with an extensive programme of 2D
seismic acquisition and processing. This seismic programme
augmented the coverage of 22,800 square kilometres of
the licences with flown Gravity Gradiometry, Magnetics and
LiDAR data and detailed satellite imagery completed in 2017.
The seismic programme totalled approximately 2,850 line
kilometres commenced in October 2017 and all phases were
completed in August 2018. In total, approximately 2,252 line
kilometres were acquired in 2018. In addition to this operational
programme, the Company has completed reprocessing
approximately 2,431 line kilometres of historical 2D seismic
data across both the Greater Tendrara and Anoual licences,
including advanced quantitative interpretation techniques.
The Company further progressed an integrated programme of
geological studies including commissioning new petrographic,
surface geochemical, chemostratigraphic and biostratigraphic
analyses of the historical well data. Both geological and
geophysical programmes provided the datasets to build a
3D basin model in order to quantify hydrocarbon charge,
migration timing and migration pathways on a regional basis.
HSE
The Company’s HSE record met KPIs of zero LTIs
Company-wide for >1 million exposure hours and >2.5 million
kilometres driven on both Seismic and Drilling Operations.
More details on HSE are provided in the Health and Safety
Review on page 27.
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Operational Review
Eastern Morocco
2018
Highlights
− TE-10 vertical well drilled and
proved evidence of another
gas discovery in the TAGI play
on the Greater Tendrara licence
− Achievement of the Reserves
Certification on the first field
(TE-5 Horst structure)
− Completion of renegotiation
of the exploration licences
combining Tendrara Lakbir and
Matarka into a single licence,
Greater Tendrara with a new
8-year term
− Fulfilling the initial three-year
period work programme
commitment on Greater
Tendrara with the drilling of
TE-9 and TE-10
− Completion of the biggest
2D seismic acquisition and
processing ever done onshore
Morocco to provide a better
image of the drilled structures
and to support an improved
assessment of potential
prospects
− Award of a 25 year exploitation
(production) concession for the
TE-5 gas discovery at Tendrara
and entered into a Heads of
Terms with the Enagas-led
consortium embracing the
associated development
infrastructure
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Permit Area
− Figuig Province, North-East Morocco
− 120 kilometres from Gazoduc Maghreb Europe (“GME”)
pipeline (connecting Algeria and Morocco to the Spanish/
Portuguese gas grids)
− Greater Tendrara and Anoual licences are sub-divided into
thirteen blocks
Geology
Greater Tendrara is contiguous with the Algerian Triassic
Province and Saharan Hercynian platform. Comparable
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 and 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.
− In August 2018, the Tendrara-Lakbir and Matarka licences
are combined into a single licence, Greater Tendrara,
and Schlumberger convert their synthetic interests into
participating interests.
Historical Well Results
− First well (TE-6):
28m net pay, 17 mmscf/d achieved post-stimulation
− Second well (TE-7):
32 mmscf/d after clean up: Successful extended well test
Main Results in 2018
− TE-10 proved another gas accumulation, 19 kilometres to
the Northeast of the Tendrara production concession, in the
TAGI sequence, commencing at a measured depth of 1,899
metres. It penetrated a potential gross interval of 110 metres
with gas shows greater than background levels observed
from 1,908 metres to approximately 2,030 metres MD. The
TAGI encountered by TE-10 was also interpreted to be at a
different reservoir pressure to the previous wells on the TE-5
Horst (TE-5, TE-6, TE-7 and TE-8).
− Preliminary interpretation of the intermediate wireline
log data from TE-10 indicates thinly bedded gas bearing
intervals within the gross section, with initial estimates of net
pay of up to 10.5 metres and an average porosity of 8%. FMI
logs have potentially identified the presence of additional
thin bedded net pay within the gross reservoir interval. An
MDT gas sample (comprising C1 to C5 hydrocarbons) was
successfully recovered from one of these pay intervals at
approximately 1,937 metres MD.
− The gas shows observed extend below the currently
mapped structural closure suggesting the gas accumulation
may extend up dip into the larger stratigraphic trap.
The North East Lakbir stratigraphic trap, the most material
of TE-10’s two targets, had pre-drill mid case potential on a
gross (100%) basis of 2.7 Tcf gas originally in place (“GOIP”)
(4.5 Tcf GOIP upside case and a 1.5 Tcf GOIP low case).
− Sound Energy completed the 2D seismic and magneto-
telluric acquisition in Eastern Morocco, the largest onshore
survey ever in Morocco.
Future Focus
− Sound Energy will conduct a rigless stimulated well test
over the TE-10 reservoir interval. The testing programme will
conduct a series of flow tests on multiple intervals between
1,899 metres MD and 2,070 metres MD to establish the
presence of deepest moveable gas and then mechanically
stimulate the most prospective reservoir zones in a series of
production flow tests. This is expected to occur in early 2019.
− A third well, TE-11, targeting the Palaeozoic in the northern
area of the Greater Tendrara licence, is expected to be drilled
in 2019. Groundworks for TE-11 are expected to commence
after the TE-10 well test subject to partners’ approvals.
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26405 3 April 2019 4:42 pm Proof 22Eastern Morocco — CommercialisationSlide8Investor PresentationQ4 2018Gas Maghreb-Europe PipelineProposed routing of pipeline to GMEOuedEl Makhazine2 x 400 MWAl Wahda4 x 400 MWDhar Doum4 x 400 MWOujdaCasablancaMarrakechMOROCCOMEDITERRANEANATLANTICRabatTahaddart Power2 x 400 MW Greater TendraraExploration PermitTendrara Production ConcessionAnoual ExplorationPermitAnoual Exploration PermitGreater TendraraExploration PermitGAS VOLUME (TCF)21.2 TCFTE-5 HORST Development & Prospective Volumes 1.0Greater TendraraIdentified TAGI leads 14.7Anoual Identified TAGI leads5.5PaleozoicLOWMIDHIGH207034 25 year concession approved September 2018 Enagas led consortium providing FEED and potentially vendor financing through Build Operate Transfer (BOT) for both pipeline and CPF Production will connect to the GME pipeline near Ain Beni Mathar village, via a new 20 inch Pipeline GSA under discussion (Offtake expected to be either domestic power plants for gas-to-power generation (transit via GME line) or export to Southern Europe)PROSPECTS, LEADS AND RESOURCESAll volumetric estimates are Gross unrisked GOIPEASTERN MOROCCO: COMMERCIALISATION= Clusters (From 2 to 4 wellheads)Inlet point 110 barTie-in point80 barTENDRARAGAS EXPORTPIPELINEDiameter: 20 inchGME PIPELINE213..n4120 km= Compression Station60MMSCFDCentral ProcessingFacility(CPF)Gas Maghreb-Europe PipelineProposed routing of pipeline to GMEOuedEl Makhazine2 x 400 MWAl Wahda4 x 400 MWDhar Doum4 x 400 MWOujdaCasablancaMOROCCOMEDITERRANEANALGERIAATLANTICRabatTahaddart Power2 x 400 MW AnoualGas Maghreb-Europe PipelineProposed routing of pipeline to GMEOuedEl Makhazine2 x 400 MWAl Wahda4 x 400 MWDhar Doum4 x 400 MWOujdaCasablancaMarrakechMOROCCOMEDITERRANEANATLANTICRabatTahaddart Power2 x 400 MW Greater TendraraExploration PermitTendrara Production ConcessionAnoual ExplorationPermitAnoual Exploration PermitGreater TendraraExploration PermitBOOT and FEEDThe Company continued to make good progress commercialising its Eastern Morocco licence position. In June, the Company was pleased to enter into a binding Heads of Terms with a Spanish Consortium led by the Spanish midstream gas company, Enagas, for the provision of build own operate transfer (“BOOT”) services for the key infrastructure (processing and treatment facilities and gas export pipeline) associated with its proposed development of the TE-5 discovery.The agreement sets out the terms upon which the consortium will undertake and finance front end engineering design (“FEED”) and the conditional terms upon which the development and financing of the facilities will be undertaken by the consortium. FEED is now under way and is expected to complete in early 2019 prior to entering into a definitive BOOT Agreement ahead of the Company taking a Final Investment Decision (FID) on the project.Approval of Production ConcessionThe Company submitted its field development plan for the proposed TE-5 development to the Moroccan State in June and was pleased to have been awarded a 25-year exploitation (production) concession in September – a significant milestone in progressing Sound Energy’s Eastern Morocco commercialisation strategy. Award of the concession was followed by other pre-FID activities including progression of the environmental impact assessment, pipeline route survey and continuation of FEED activities.Gas Sales AgreementThe Company continues to make good progress in negotiating long-term gas offtake arrangements in support of the proposed development. This is a critical component in the proposed development and in the overall value creation in Eastern Morocco, and the Company anticipates signing binding gas sales terms in 2019.Operational ReviewStrategic Report20Sound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 2003/04/2019 16:46:48 26405 3 April 2019 4:42 pm Proof 22Southern MoroccoThe Sidi Mokhtar permit is located in the Essaouira Basin in central-southern Morocco and is sub-divided into three sub-blocks (North, South and West) with a combined area of 4,711 km2. Sound Energy originally farmed into the Sidi Mokhtar licences in 2015 and took over operatorship in 2016. Following the successful completion of the work programme on the old licences, the permit was re-awarded to Sound Energy in April 2018 with an extended footprint. Sound Energy holds a 75% interest in the licence, with ONHYM holding the remaining 25%. The licence has an overall eight year period (expiring in April 2026) divided into three phases: an initial period of two years and six months, followed by a first extension period of three years and second extension period of a further two years and six months. The Sidi Mokhtar permit area hosts some 40 vintage wells drilled between the 1950s and the present. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoir in the field are Triassic aged sands, directly analogous to the deeper exploration plays in the Sidi Mokhtar licences. The Meskala field andits associated gas processing facility is linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for the domestic and export markets. This pipeline passes across the Sidi Mokhtar licence. Two main play types are present in the Sidi Mokhtar licence. These are broadly divided into the Sidi Shallow and Sidi Deep play types. The main focus of activity in the basin and licence area historically has been the shallow plays. Indeed a number of discoveries were made from the 1950s to the present in Jurassic aged carbonates and clastics. With the discovery of the Meskala field in the 1980s, focus switched to the deeper play types. The discovery of the Meskala field proved the existence of a deep petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt super seal and provides evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within the deeper play fairways. Sidi Shallow (approx. 1,000 metres to 3,000 metres depth below surface) −Mainly Jurassic aged carbonate and clastic reservoirs. −Gas discovery (Kechoula) in Argovian and Lower Liassic aged reservoirs. The Argovian aged reservoir was successfully tested in the Kechoula discovery by Sound Energy, by re-enerting the Koba-1 well.Sidi Deep (approx. 3,000 metres to 4,500 metres depth below surface) −Mainly Triassic and older clastic and carbonate reservoirs, sealed by Triassic salt. −A potential of up to 9 Tcf mid case, gross, unrisked, gas initially in place.Future developmentThe forward plans for Sidi Mokhtar, following the initial tests of the remaining potential of the Kechoula discovery, are focused on exploring the deep potential of the Triassic TAGI and Palaeozoic plays. An exploration 2D seismic programme is planned to start in the second half of 2019. The 2D seismic programme will be focused on improving the imaging in the pre-salt section. www.soundenergyplc.comStrategic Report21Sound Energy Annual Report 2018.indd 2103/04/2019 16:46:49 26405 3 April 2019 4:42 pm Proof 22Operational ReviewItalyDisposal of Italian PortfolioOn 22 January 2018, the Company announced entry into a binding conditional sale and purchase agreement with Saffron Energy Plc under which Saffron acquired the Company’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. On completion Saffron was renamed Coro Energy plc. The divestment successfully completed on 9 April 2018.The consideration for the disposal was the issue of 183,907,500 new ordinary shares in Saffron directly to Sound Energy plc shareholders. The consideration value was approximately £8.0 million using the completion date share price of 4.3 pence per share.Strategic ReportSound Energy plc Annual Report for the year ended 31 December 201822Sound Energy Annual Report 2018.indd 2203/04/2019 16:46:51 26405 3 April 2019 4:42 pm Proof 22Strategic Report23www.soundenergyplc.comSound Energy Annual Report 2018.indd 2303/04/2019 16:46:52 Financial Review
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JJ Traynor
Chief Financial Officer
£8.9
million
spend on drilling and
exploration activities
in Morocco
£183.0
million
carrying value of development
and intangible assets at
31 December 2018
We invested £12.4 million during 2018, primarily
on the TE-9 and TE-10 wells. Approximately
£8.0 million worth of Coro Energy plc shares
were distributed to shareholders, as payment
for Sound’s exit from Italy. Sound’s cash position
at the end of the year was £20.5 million,
positioning us well for 2019.
Income Statement
The loss for the year before tax from
continuing operations was £11.7 million
(2017: £12.3 million). Exploration costs
of £4.1 million (2017: nil) related to the
impairment charge of TE-9 well costs as
the well didn’t encounter producible gas.
Administrative costs at £8.9 million were
slightly higher than 2017 administration
costs of £8.5 million.
£1.5 million cumulative translation gains
to the income statement on the Italy
divestment and recognition of interest
in Badile land and VAT refund receivable
in line with the divestment agreement.
The loss in 2017 was primarily due to
an impairment charge of approximately
£19.0 million attributable to the Badile
licence following sub-commercial
well results.
Foreign exchange gains and losses
primarily related to intra-Group loans
and Euro denominated borrowings.
As part of the acquisition of the Sidi
Mokhtar licences, onshore Morocco,
an agreement was entered into with
PetroMaroc and provided that, if the
shares of the Company which were
issued as part of the consideration for
the acquisition were sold, the realised
proceeds for any share price achieved
above 50 pence would be shared equally
between the Company and PetroMaroc.
The derivative financial instruments
arose from this agreement. During the
year, PetroMaroc sold all the outstanding
shares at prices below 50 pence.
The carrying value of the derivative,
£80 thousand, at the time of the sale
was expensed. In 2017, a £1.9 million loss
arose from the change in the share price
during the year.
The disposal of the Group’s operations in
Italy completed in April 2018. The profit
from discontinued operations increased
to £5.0 million (2017: £21.8 million
loss), primarily from the transfer of
Cash Flow/Financing
During 2018, an equity raise,
warrants and share option exercises
raised approximately £12.2 million
(2017: £11.6 million). Net proceeds
from the July 2018 equity raise was
£10.8 million.
The financing costs were £2.4 million
(2017: £1.1 million) primarily due
to amortised costs of the bonds,
net of interest capitalised to the
exploration licences of £0.6 million
(2017: £1.6 million). The capitalised
interest was lower in 2018 compared to
2017 due to a lower capital expenditure
on the licences during 2018.
The Group spent £12.4 million
(2017: £24.0 million) on investing
activities during 2018, which largely
consisted of spend on the greater
Tendrara licence TE-9 and TE-10
exploration wells in Morocco and
capitalised general and administrative
expenses. £2.7 million of cash disposed
with Italian operations is included in the
cash flow from investing activities.
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Balance Sheet
Following the award to the Group of a
production concession in September
2018, covering the Tendrara’s TE-5 Horst
area, approximately £146.2 million of
capital expenditure was transferred from
intangible assets to development and
production assets. As at 31 December
2018, the carrying amount of the
development and production assets
was £150.6 million after taking account
of additions and foreign exchange
movement.
Additions to the intangible assets
largely consisted of expenditure on
the Greater Tendrara licence TE-9 and
TE-10 exploration wells in Morocco and
capitalised general and administrative
expenses. During the year we completed
a $27.2 million (£21.4 million) carried
seismic programme and commenced
a three-well drilling programme. The
TE-9 and TE-10 exploration wells were
drilled ahead of schedule and under
budget with TE-10 well completing in
January 2019.
As part of the Italy divestment
agreement, the Company is entitled to
receive the proceeds, upon the sale, of
Badile land. The Company has therefore
recognised £1.6 million (2017: nil) being
the carrying value of Badile land at the
time of disposal.
Other receivables amounting to
£3.4 million (2017: £3.5 million) primarily
related to receivables from our partners
in Morocco licences and £0.8 million
VAT refund receivable as part of the Italy
divestment agreement.
2017 assets of the disposal group held
for sale related to the Italian operations
and primarily included intangible assets,
Badile land and VAT receivables.
Trade and other payables amounting to
£10.1 million (2017: £6.6 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. The Company
recognised £0.7 million as obligation for
the Badile land remediation in line with
the Italy divestment agreement.
Cash Flow Bridge Chart
(£’000)
22,011
12,218
50
20,536
(22)
(1,274)
(12,447)
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Net Assets
(£ million)
£179 million
2017: £172 million
Development and Intangible
Assets (£ million)
£183 million
2017: £164 million
172
179
183
164
58
19
16
28
9
10
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
2017 liabilities of the disposal group
held for sale related to the Italian
operations and primarily included trade
and other payables and provision for
decommissioning of licences.
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.
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
JJ Traynor | Chief Financial Officer
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Corporate Social Responsibility
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Our CSR Strategy
Environment
Suppliers
Employees
Communities
Aims:
Aims:
Aims:
.
Aims:
− We have the upmost
− We value the
− Diversity is key to
− As guests in Morocco
relationships we have
with our suppliers
and conduct our
business with them
with fairly and openly.
the growth of Sound
Energy; we employ a
range of nationalities
and rewards are
performance based.
respect for our
environment and
aim to operate with
minimal damage to it.
− We seek to do
any new business
with due care and
consideration on the
environment before
any operations begin.
we are extremely
conscious of our
relationships with the
local communities
and treat them with
the utmost respect.
− Our community
projects are a great
source of pride for
Sound Energy and
we always seek to do
more to improve their
daily lives.
Community at our heart
During 2018, Sound Energy has engaged
in various CSR-related projects, seeking
to enhance its involvement in local
community life and welfare. Some
highlights of these activities are:
Beni Guil Festival
in Maatarka
Local Employment
Opportunities
Revamp and extension
of Mataarka Dispensary
Sound Energy Morocco provided
the following goods and services for
the festival:
− Provision and delivery of three
water tanks
− Three-day ground levelling activities
using an industrial grader
− Provision and delivery of 500kg of
charcoal for the festival proceedings
Sound Energy has either directly
or indirectly been involved in the
employment of 870 members of
surrounding communities, who have
been instrumental in the safe and clean
operations of Sound over the years.
Sound Energy intends to continue this
good practice of engaging in Social
Corporate Responsibility projects during
2019, to give something back to the
communities with which our operations
are so inextricably intertwined.
Using the approved national charity
LNPE (Ligue National pour la Protection
des Enfants) as an intermediary,
Sound Energy Morocco sponsored the
redevelopment and extension of the
dispensary located in Mataarka. This
involved complete rebuild to allow for
a more hygienic level of medical care
to be provided to local communities. It
also provides more space for patients
and includes the addition of a local
pharmacy area.
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HSE during 2018
Promoting positive
behaviours
During this operationally busy
year HSE is at our core.
During 2018, Sound Energy Morocco has been actively
involved in Exploration activities, comprising of a 2D seismic
campaign and the drilling of two wells in Greater Tendrara as
well as the associated activities required for the successful
undertaking of these operations. The 2018 operations are
summarised as follows:
− Concluded 2,850 kilometres of 2D seismic lines recorded
− Surface sampling survey undertaken
− Civil works for construction of well pads for TE-9 and TE-10
− Rigmove from SMK Koba and TE-8-TE-6 camp to TE-9
− Drilling of TE-9
− Rigmove from TE-9 to TE-10
− Drilling of TE-10
− Man-hours: 828,589
− Kilometres driven: 1,765,755
− Introduction of industry standard Life-Saving Rules for our
major Hazard classes, part of a cultural change programme;
with major initiatives on Land Transportation and Lifting.
Also we undertook review of our contractor management
strategies and re-tendered contracts for Land Transportation
with an HSE qualification element to the award criteria.
The total man-hours worked in 2018 was 828,589 (110,638 Company, 717,951 Contractors) and the data recorded has been divided
into three main categories:
1. Lagging Indicators
2. Leading Indicators
3. Environmental Data
Fatality
LTI
RWC
MTC
FAC
Property Damage
Environmental Incident
RTA
NM
HiPO
Lost Workdays
0
0
0
3
7
8
4
7
2
5
0
HSE Inspections
HSE Audits
HSE Meetings
HSE induction hours
HSE training hours
Emergency Drills
Toolbox Talks
STOP Cards
Job Safety Analysis
Risk Assessments
Management Tours
9,814
24
403
1,100
4,921
38
3,135
7,036
1,076
376
24
Diesel consumed (m3)
Water Consumed (m3)
Mud Cuttings (m3)
Sewage Water (m3)
Waste Water (m3)
Non Hazardous Wastes
(ton)
Fuel Gas (m3)
Electrical Energy (kWh)
Km Driven
Total barrels spilled
2,299
19,833
676
13,599
5,560
86
0
93,323
1,765,755
3.06
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26405 3 April 2019 4:42 pm Proof 22HSE during 20182018 was a more active year for Sound Energy Morocco, with exploration activities ongoing for the whole 12 months. Consequently the exposure hours and driven kilometres were higher. We had set ourselves an ambitious target of no Lost-Time Injuries for the year and achieved this. However, our systems caught an increase in High-Potential Incidents and near-miss indicators during the drilling campaign. Sound Energy investigated and then took steps to manage these exposures through changes to organisational structure, engagements with our contractors and upgraded key procedures ahead of activities in 2019.In achieving a zero LTIF and a TRIR of 3.62, Sound Energy Morocco is aligned to similar operators in the IOGP database and in LTIF ahead of trend. But the instances of HiPo indicate the need to avoid complacency and those reactions have already been made. These build on the upgrading of driving and fleet management policies and the introduction of IOGP aligned Life-Saving Rules in 2018; our systems are fit for purpose and evolving.STOP CardsSound Energy has developed and implemented an HSE reporting system whereby all personnel, visitors and contractors, be they field-based or office based, are encouraged to report any unsafe conditions, unsafe acts and positive acts.This is an industry standard initiative which seeks to enhance behavioural safety and implicate everyone in the improvement of Company HSE culture.Sound Energy recorded 7,036 STOP cards during 2018.Putting Safety FirstPutting Safety First is an HSE cultural enhancement programme developed by Sound Energy that is based on four key principles: I will FOLLOW all the rules and procedures at my place of work. I will always ENCOURAGE those around me to act safely and praise those acting safely. I will STOP any activity that I think is unsafe and will not commence any job I consider unsafe. I will REPORT all unsafe acts and conditions, spills, incidents and accidents I see.This programme was devised to encourage and promote compliance with HSE procedures, increase HSE reporting and above all, empower everyone to stop any work that they consider to be unsafe without any consequences.Strategic Report28Sound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 2803/04/2019 16:46:54 26405 3 April 2019 4:42 pm Proof 22Life Saving RulesPersonal SafetyDriving SafetySite SafetyWork ControlsSound Energy has adopted the IOGP Life-Saving Rules, which are transposed throughout the DNA of Company activities and operations.These rules have been extracted from an extensive survey undertaken throughout the International Oil and Gas HSE world that identified the activities that have historically resulted in the most significant incidents. The Life-Saving Rules, focusing on Personal Safety, Driving Safety, Site Safety and Work Controls, clearly and concisely stipulate what is expected of each and every person working for Sound Energy and that a no-tolerance policy is in place with respect to their non-compliance.HSE Induction and Training SessionsDaily HSE meetings are held for all staff and contractors on site to convey the Sound Energy HSE messages to all persons working on site and as a periodic reminder of the importance that HSE holds within Sound Energy.Throughout 2018, Sound Energy organised a number of high-importance HSE training courses, such as Fire Fighting, First Aid and Defensive Drivers courses. Key people were selected for these courses, based on their roles and responsibilities and covered both Sound personnel and contractors.Other HSE Initiatives Taken During 2018Development and implementation of Land Transportation Safety Standards and Journey Management Procedures. Implementation of In-Vehicle Monitoring Systems in Field and Rabat vehicles allowing for daily monitoring of driver performance and GPS localisation. This action resulted in a noticeable improvement in driver performance. HSE Reward and Recognition ProgrammeSound Energy has developed an HSE Reward and Recognition programme for its drilling operations and sought to reward those demonstrating the best and safest HSE performance when working for Sound Energy.Strategic Report29www.soundenergyplc.comSound Energy Annual Report 2018.indd 2903/04/2019 16:46:56 Managing Ours Risk and Opportunities
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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.
Changes to Risks in the Year
Several factors have impacted the Company risk register
through 2018, including exit from Italy, focus on Morocco and
particularly the progress towards the TE-5 Horst development
project.
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’s operational and commercial
activities and support functions, or they can arise externally:
from third parties such as Joint Venture partners, suppliers,
regulators, competitors; from the economic environment or
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 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.
Removed or changed:
Development Risk
As the Company has progressed development planning,
development risk has been split into more specific risks
such as Facilities Funding and Construction Schedule Delays.
Insufficient Funds
Company has continued to progress its funding strategy
throughout year including entry into BOOT HoT (Heads of
Terms) and a mid year corporate fund raise.
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8
3
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1
2
6
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9
11
10
Unlikely
Possible
Probable Almost Certain
1 Limited diversification
6 Loss of Company data
2 Facilities funding
7 Drop in commodity
3 Absence of applying
standard operating
procedures creates
unnecessary errors
and costs
4 Reservoir uncertainty
prices
8 Major HSSE Event
9 Loss of key personnel
10 Fraud, anti-bribery
and corruption
5 Change in regulatory or
11 Currency Risk
fiscal regime
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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.
Risk
Impact
Control Measure
Owner
1 Limited
diversification
The Company operates
in a limited number
of jursidications
and thus operations
may be significantly
adversely impacted by
geographical issues
and/or regime changes.
2 Facilities funding
Inability/delay in
securing funding for
the TE-5 development
− Profitability and cash flow
− Build strong relationships with
CEO
− Increased risk profile
− Reduced appetite for investment
in the Company
partners, advisors, governments,
local authorities, local population
and other stakeholders
− Actively monitor potential
legislation changes
− Inability/delay to fund the
− Minimise up front funding
CFO
development project leads to
delay/halts on project progress
especially in the case of failure to
secure BOOT option
exposure via securing BOOT
contract with contractor
financing
− Seek post gas deferred payment
on development cost or enforce
association agreement penalty
− Identify alternative funding
structure options to BOOT e.g.
EPC deferred payment, post
first gas re-financing, no TGEP
transfer etc.
3 Absence of applying
standard operating
procedures creates
unnecessary errors
& costs
4 Reservoir
uncertainty
− Activities rushed without proper
planning and coherent approach
or methods
− 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 the hydrocarbon
potential of 7-20-34 Tcf
− H2S risk in respect of carbonate
reservoir in Sidi Mokhtar
− Changes being put in place to
CEO
improve forward planning
− Execute drilling operations
in accordance with industry
standard procedures and drilling
practices
− Comprehensive seismic and
data acquisition commitment to
improve reservoir understanding
Exploration
Director
− Independent resources
certification
5 Change in regulatory
or fiscal regime
− Regulatory and tax changes
− Regular engagement and
CFO
affect profitability and viability
of projects and operations (e.g.
Morocco 10 year tax holiday)
communication with government
and in-country stakeholders
− Monitor potential changes in
− Delay to projects and/or
legislation
regulatory approvals while
changes are agreed. May also
result in renegotation with
Partners
− Seek stabilisation provisions in
key agreements
www.soundenergyplc.com
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Managing Our Risks and Opportunities
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Risk
Impact
Control Measure
Owner
− Robust IT policy in place
− Anti-virus software up to date
and in place
VP
Commercial
& Finance
− Separate guest Wi-Fi to separate
access to corporate data
− Restricted admin access to
systems and IT infrastructure
− Robust connection with
negligible instances of drop-outs
6 Loss of
Company data
− Tools: Data integrity records and
their accuracy, completeness
in Sharefile system not fit for
purpose. High level of reliance
on spreadsheets, particularly for
financial planning and forecasting
− Structure: Records management
and electronic filing system not
structured adequately given
growth in business
− Security: Inadequate controls on
security with cyber risk of data
breach, data corruption, risk on
data protection obligations on
HR data
− Connectivity: Break in Internet
connection and thus access to
Company files given reliance
on cloud-based systems mean
reliance on effective Internet
connection
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Risk
Impact
Control Measure
7 Drop in
commodity prices
− Falls in commodity prices result
in loss in value, reduced cash
flows and/or impairments
− Gas price monitoring both in
country and on international
markets (inc. LNG, Brent)
− Reduced ability or appetite
− Secure long-term pricing under
to invest
key offtake agreements
Owner
CFO
8 Major HSE Event
− Loss of life or injury to personnel
− Highly skilled, competent
− Environmental impact
− Reputational damage
− Exposure to litigation
and qualified personnel and
subcontractors. Training provided
as required
− Management and Board
− Financial and operational losses
commitment
Exploration
Director
− Robust operational HSE
processes and procedures
− HSE Committee reviews and
regular HSE meetings and
engagements
− Insurance cover
9 Loss of key
personnel
− Loss of shareholder confidence
− Lack of direction and leadership
within the Company
− Loss of expertise and knowledge
− Competitive remuneration
package in place for key
executives, benchmarked
regularly relative to the market
− Succession planning
10 Fraud, anti-bribery
and corruption
− Prosecution of the Company and/
or individuals leading to unlimited
fines, jail sentences
− Anti-bribery and corruption
policy in place across the
Company. New starter training for
all contractor and staff to ensure
understanding of compliance
requirements
− Contract reviews to ensure policy
compliance
CEO
CFO
11 Currency risk
Currency fluctuations
impact on forecasting
and project
requirements, with
currency mix of USD,
GBP, EUR and MAD.
Additional complexity
to manage local MAD
currency due to in-
country FX restrictions.
− The Company may diminish cash
resources due to exchange rate
fluctuations
− MAD is a controlled currency,
limiting hedging opportunities
− Exchange rate fluctuations
may have an income statement
impact where the currency of
the transaction differs from the
functional currency of the entity
− Proactive FX management in
CFO
accordance with Group treasury
policy
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26405 3 April 2019 4:42 pm Proof 22Governance Chairman’s Corporate Governance Statement35QCA Code 2018 Principles36Leadership– Overview37– The Team38Effectiveness– Board Activities40– Shareholder Relations42Accountability– Health and Safety Committee43– Audit Committee44– Nomination Committee45– Remuneration Committee46Directors’ Remuneration Report 47Directors’ Report52Statement of Directors’ Responsibilities54Independent Auditor’s Report5534GovernanceSound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 3403/04/2019 16:46:57 26405 3 April 2019 4:42 pm Proof 22Chairman’s Corporate Governance StatementDear ShareholdersSince assuming the position of Chairman of the Company at the beginning of 2018, having been a non-executive director of the Company since September 2015 I have been particularly interested in ensuring that an effective and focused Board leads the Company and builds success. Strong corporate governance helps underpin the foundations of a solid and successful business. The Board is committed to strong corporate governance across the business, from executive level and throughout the operations of the business. Following the revisions to the AIM Rules for Companies in March 2018 pursuant to which all AIM companies are required to comply with a recognised corporate governance code, the decision has been made by the Company that it will adopt the Quoted Companies Alliance corporate governance code 2018. Historically the Company had aspired to comply with the 2013 Quoted Company Alliance corporate governance code and as such the adoption of the QCA Code remains the most appropriate recognised governance code for the Company.“ Strong corporate governance underpins the foundations of a solid and successful business”Richard Liddell ChairmanAs Chairman it is my duty to ensure that good standards of governance are delivered and cascaded down throughout the organisation. The Board as a whole looks to instil a culture across the Company, delivering strong values and behaviours. This is considered paramount at all levels and during 2017 the Board brought in an external consultant from the Institute of Directors to look at the functioning of the Board. This was a valuable exercise considering areas such as strategy, performance, corporate culture and risk oversight.The importance of engaging with our shareholders underpins the essence of the business, ensuring that there are numerous opportunities for investors to engage with both the Board and executive team. Richard Liddell | Chairmanwww.soundenergyplc.com35GovernanceSound Energy Annual Report 2018.indd 3503/04/2019 16:46:58 36
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QCA Code 2018 Principles
Introduction:
The Board of directors of the Company recognises the importance of sound corporate governance and applies the Quoted
Companies Alliance Corporate Governance Code (2018) (the ‘QCA Code’), which they believe is the most appropriate recognised
governance code for a company with shares admitted to trading on the AIM market of the London Stock Exchange. It is believed
that the QCA Code provides the Company with the framework to help ensure that a strong level of governance is maintained,
enabling the Company to embed the governance culture that exists within the organisation as part of building a successful and
sustainable business for all its stakeholders.
The QCA Code has ten principles of corporate governance that the Company has committed to apply within the foundations of
the business. These principles are:
QCA Code
Principle
Required disclosure
Reference
1
2
3
4
5
6
7
8
9
Establish a strategy and business model which promote long-term
value for shareholders.
See pages 6–8 of 2018 Annual Report.
Seek to understand and meet shareholder needs and expectations.
Explain the ways in which the Company seeks to engage with
shareholders.
See website disclosures: Principle Two
under AIM Rule 26.
Take into account wider stakeholder and social responsibilities and
their implications for long term success.
See website disclosures: Principle Three
under AIM Rule 26.
Explain how the business model identifies the key resources
and relationships on which the business relies. Explain how the
Company obtains feedback from stakeholders.
Embed effective risk management, considering both opportunities
and threats, throughout the organisation.
See page 30 of 2018 Annual Report.
Maintain the board as a well-functioning balanced team led by
the Chair.
See page 38 of 2018 Annual Report.
Ensure that between them the directors have the necessary up to
date experience, skills and capabilities.
Evaluate board performance based on clear and relevant
objectives, seeking continuous improvement.
A description of the Board performance evaluation process.
See page 38 of 2018 Annual Report.
See website disclosures: Principle Six
under AIM Rule 26.
See page 40 of 2018 Annual Report.
See website disclosures: Principle Seven
under AIM Rule 26.
Promote a corporate culture that is based on ethical values and
behaviours.
See website disclosures: Principle Eight
under AIM Rule 26.
Explain how the Board ensures that the Company has the means
to determine ethical values and behaviours.
Maintain governance structures and processes that are fit for
purpose and support good decision-making by the Board.
See website disclosures: Principle Nine
under AIM Rule 26.
Roles and responsibilities of the Chair, CEO and other directors
with commitments. Describe the roles of the Committees.
10
Communicate how the Company is governed and is performing
by maintaining a dialogue with shareholders and other relevant
stakeholders.
Outcomes of votes cast by shareholders to be disclosed in a clear
and transparent manner. If a significant number of votes were cast
against a resolution put to a general meeting (20%) explain the
reasons behind the votes cast.
See pages 43–46 of 2018 Annual
Report.
See website disclosures: Principle Ten
under AIM Rule 26.
Sound Energy plc Annual Report for the year ended 31 December 2018
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Overview
Leadership
37
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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. The Company applies
the Quoted Companies Alliance Corporate Governance Code
(2018) (the ‘QCA Code’) and is committed to adhering to the
ten principles of the QCA Code, and the requirements of the
AIM market of the London Stock Exchange.
The Directors are developing policies and procedures in line
with the QCA Code and these policies and procedures are
monitored on a regular basis.
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.
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.
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.
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.
Execution and Delivery
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26405 3 April 2019 4:42 pm Proof 22The TeamLeadershipDirectors and ExecutivesJames ParsonsChief Executive Officer (Executive Director)Richard Liddell Chairman (Non-Executive)ARHBrian Mitchener Exploration Director (Executive Director)HAppointed to Board28 September 2015BackgroundRichard 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 LtdAppointed to Board10 October 2012BackgroundJames Parsons has over 20 years’ experience in the fields of strategy, management, finance and corporate development in the energy industry. James Parsons 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, the Netherlands 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 Chief Financial Officer in 2011 from the European division of Inter Pipeline Fund, a Toronto-listed resources business, where he held the position of Finance and Corporate Development Director of Inter Pipeline Europe.James is a qualified accountant and has a BA Honours in Business Economics.Current external commitments• Non-Executive Chairman – Echo Energy plc• Non-Executive Chairman – Coro Energy plcAppointed to Board21 June 2017BackgroundBrian Mitchener has over 36 years’ experience in Oil & Gas exploration including as Regional General Manager of 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 JJ Traynor Chief Financial Officer (Executive Director)Appointed to Board11 July 2018BackgroundJJ Traynor joined Sound Energy in 2018 and has 30 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.Current external commitments• None Sound Energy plc Annual Report for the year ended 31 December 201838GovernanceSound Energy Annual Report 2018.indd 3803/04/2019 16:46:59 39
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Mohammed Seghiri
Managing Director,
Morocco
Marco Fumagalli
Marco Fumagalli
Director
Director
(Non-Executive)
(Non-Executive)
David Clarkson
Director
(Non-Executive)
A R
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Appointed to Board
Appointed to Board
17 July 2014
17 July 2014
Appointed to Board
14 May 2018
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.
Current external
commitments
• None
Background
Background
Marco Fumagalli joined
Marco Fumagalli joined
Sound Energy as a
Sound Energy as a
Non-executive Director in
Non-executive Director in
July 2014. Marco is Founding
July 2014. Marco is Founding
Partner at Continental
Partner at Continental
Investment Partners SA,
Investment Partners SA,
a Swiss based investment
a Swiss based investment
firm and cornerstone
firm and cornerstone
shareholder in Sound Energy.
shareholder in Sound Energy.
He is a well-known Italian
He is a well-known Italian
businessman who was
businessman who was
previously a Group Partner
previously a Group Partner
at 3i.
at 3i.
Marco is a qualified
Marco is a qualified
accountant and holds
accountant and holds
a degree in Business
a degree in Business
Administration.
Administration.
Current external
Current external
commitments
commitments
• Non-Executive Director –
• Non-Executive Director –
Echo Energy plc
Echo Energy plc
• Non-Executive Director –
• Non-Executive Director –
Coro Energy plc
Coro Energy plc
• Director – Continental
• Director – Continental
Group of Companies
Group of Companies
• Non-Executive Director –
• Non-Executive Director –
CIP Merchant Capital plc
CIP Merchant Capital plc
Background
David was formerly a member
of BP’s Group Leadership
Team and Senior Vice
President for Projects and
Engineering (Upstream) at BP.
In this role, he was functionally
accountable for embedding
rigour and discipline in BP’s
Upstream major project
investment decisions, and for
building engineering capability
to support the company’s
growth agenda.
He built his career delivering
safe, reliable industry-leading
projects in challenging
frontier locations. Throughout
a 34 year career with BP,
David held a variety of
senior management roles
in countries which include
Colombia, Indonesia, Iraq, the
USA and the UK.
David is a Chartered Engineer
and Fellow of the Institution of
Mechanical Engineers.
Current external
commitments
• Chief Operating Officer
and Member of the Board
of Directors –
Savannah Petroleum
Key:
A Audit
Committee
R Remuneration
Committee
H Health and Safety
Committee
www.soundenergyplc.com
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26405 3 April 2019 4:42 pm Proof 22Board ActivitiesEffectivenessThe Board retains full and effective control over the Company and holds regular meetings at which financial, operational and other reports are considered and where appropriate voted upon. The Board is responsible for the Group’s strategy and key financial and compliance issues. The key matters reserved for the Board: −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 of 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 −Reviewing the effectiveness of the Board and its CommitteesThe Board delegates matters not reserved for the Board concerning the management of the Group’s business to the Executive Team.Composition and Independence of the Board During the year ended 31 December 2018 the Board appointed David Clarkson as an Independent Non-Executive Director and JJ Traynor, Chief Financial Officer as an Executive Director of the Company. Mr. Clarkson was appointed as the Chairman of the Remuneration Committee and this change further strengthened the governance structure of the Company. The Board comprises the non-executive Chairman, two non-executive directors and three executive directors. The Board has significant industry, financial, public markets and governance experience, possessing the necessary mix of experience, skills, personal qualities and capabilities to deliver the strategy of the Company for the benefit of the shareholders over the medium to long-term. The role of the Chairman and Chief Executive Officer are split in accordance with best practice. The Chairman is responsible for leading the Board and ensuring that the Board discharges its responsibilities; the Chairman is also responsible for facilitating full and constructive contributions from each member of the Board in the determination of the Group’s strategy and overall commercial objectives. The Chief Executive Officer leads the business and the executive team, ensuring that strategic and commercial objectives set by the Board are met. He is accountable to the Board for the operational and financial performance of the business. Attendance at Meetings:A schedule of the Board and Board Committee meetings held during the year ended 31 December 2018 is noted below. Key Executives and advisors have attended these meetings where appropriate to present and provide feedback on actions throughout the year.Year ended 31.12.2018Board MeetingsName of the Director Scheduled (5)Ad Hoc* (8) Audit CommitteeRemuneration CommitteeHealth and Safety CommitteeTotal number of meetings held iv.13226Richard Liddell (Chairman)58126James Parsons (CEO)58NANANAMarco Fumagalli5322NABrian Mitchener52NANA5JJ Traynor i. (CFO)20NANANADavid Clarkson ii.31NA1NAStephen Whyte iii.101NANA Chairman 16.6% Executive Director 50% Non-Executive Director 33.4%33.4%16.6%50%Board Composition %* Ad hoc meetings: Additional meetings called for a specific matter generally of a more administration nature not requiring full Board attendance.i. JJ Traynor (CFO) was appointed to the Board on 11.07.2018ii. David Clarkson was appointed to the Board on 14.05.2018iii. Stephen Whyte resigned from the Board on 23.01.2018 iv. All directors attended the meeting they were expected to attendSound Energy plc Annual Report for the year ended 31 December 201840GovernanceSound Energy Annual Report 2018.indd 4003/04/2019 16:47:00 41
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What the Board did in 2018
Governance & Risk – 15%
15%
− Adoption of the Quoted Companies
− Adoption of Global Data Protection
Alliance Corporate Governance Code and
a review of the requirements of the Code
Regulations policy for roll out across the
Company
− AIM training carried out by the Company’s
− Review of insider dealing requirements
Nominated Advisor
− Manual of Authorities reviewed and
updated
− Risk Management Policy and Register
reviewed
and individuals persons closely associated
to PDMRs
− Updates from Board Committees
following every Committee meeting
− Updates from the Group Auditor via the
Audit Committee
Strategy – 45%
− Completion of the Divestment of Italian
− Business development opportunities
Portfolio
considered by the Board
45%
− Evaluated and appointed a Joint Broker to
− External strategy advisors retained to
the Company
present and advise to the Board
− Embark on a three well drilling exploration
− Funding review
programme in the Tendrara area
15%
10%
Investor Engagement – 15%
− Investor events held with opportunities
for shareholders to speak to executive
directors in both a formal environment
and also more informal one to one
− ‘CEO Fireside Chat’ periodic opportunities
for Q&A sessions with the CEO and
executive team
− Close liaising with the Company’s major
− Annual General Meeting with opportunity
shareholders
for shareholders to raise questions to
the Board
− AGM proxy figures reviewed and
considered
People, Visions, Values – 10%
− CEO scorecard presented and approved
− Establishing new Long Term Incentive
and fed down to the executive team
− Personal development of staff
− Executive team meetings
− Staff meetings in Country
Programme for Company’s management
and key personnel
− Consideration given to the organisation
structure and the needs of the business
Performance Monitoring – 15%
− Updates from the chairman of the Audit,
− Approval full and half year results
Remuneration and HSE Committees
− Annual Report and Accounts for 2017
15%
− Monthly reports on performance against
approved
targets received by the Board
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Shareholder Relations
Effectiveness
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 effectiveness of the Board is monitored on an on-going
basis. During 2017, the Directors undertook a Board evaluation
exercise with the Institute of Directors (IoD), which 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. During 2018 the Board addressed
one of the recommendations following the evaluation and
appointed David Clarkson as an independent non-executive
director of the Company. The directors continue to consider
the balance of executive and non-executive directors on the
Board to ensure that there is a good balance present to ensure
that it continues to function as effectively as possible.
The Board enters 2019 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.
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 the 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 the 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
the shareholders.
Communications with
Shareholders
2018 Review
− Regional roadshow with meetings in Bristol, Chester,
Durham, Edinburgh, London and Norwich close to
1,000 investors seen
− AGM held 24 May 2018
− Shareholder visit to Tendrara with over 50 investors
− Six on-line Q&A sessions held with 1,381 users from
40 countries and 1,213 questions answered
2019 Look forward
− London shareholder event planned for first half
of 2019
− Regular Q&A sessions throughout the year
Sound Energy plc Annual Report for the year ended 31 December 2018
Pictured:
Oil and Gas conference South Africa
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26405 3 April 2019 4:42 pm Proof 22Health and Safety CommitteeAccountabilityHealth and safety (HSE) Committee Activities The HSE Committee comprises of Richard Liddell and Brian Mitchener.During the year under review, the Committee met five times to discuss matters pertaining to Health Safety and Environmental issues. The Committee is primarily focused on ensuring that the HSE policies are adopted and applied across the Group. A full report of the activities of the HSE Committee can be found on pages 27 to 29. Richard Liddell Chairman of the Health and Safety Committee2018 Review −HSE Focus group continued to meet during the year to review the on-going HSE procedures and culture, with consideration given to the three well drilling programme. −The HSE Committee met at regular intervals during the year. −Crisis management. Stages drills carried out. −Site visit by Committee members.2019 Looking Forward −Ensure HSE policy and procedures remain effective given on-going drilling programme. −HSE management system and resources to be kept under review. −Carry out further staged drills. −Ensure ongoing transparent reporting to the HSE Committee.Pictured right: TE-9 investor site visitwww.soundenergyplc.com43GovernanceSound Energy Annual Report 2018.indd 4303/04/2019 16:47:01 44
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Audit Committee
Accountability
Audit Committee Activities
The Audit Committee comprises of
Marco Fumagalli (Chairman) and
Richard Liddell.
Responsibilities
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 Audit Committee reviews and
evaluates, based on the financial
statements, whether the Company is a
going concern and communicates to the
Board its findings and recommendations.
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 52.
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.
Marco Fumagalli
Chairman of the
Audit Committee
2018 Review
− Approved Audited and interim
financial statements; 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 U.K. LLP, including
fee structure.
− Comprehensive review of the
Company’s Risk Management
framework; extensive discussions
on controls and policies in place to
prevent Anti Bribery and corruption
and Insider dealing. Implemented
risk register matrix to measure risk
against individual goals and targets.
− Reviewed Company’s Contracting
and Procurement (C&P) process and
internal audit results on P&C controls.
− Discussed, reviewed and evaluated
training implementation on anti-
bribery and corruption, Insider
dealing and global data protection
regulations.
2019 Looking Forward
− Keep under review the Company’s
existing control framework
− In line with business priorities for the
year, complement existing internal
resources with fit for purpose internal
audit support through external
providers.
− Ensure continued risk management
procedures and controls are
appropriate to support the
Company’s exploration programme.
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26405 3 April 2019 4:42 pm Proof 22Nominations CommitteeAccountabilityNominations Committee ActivitiesThe Nominations Committee comprises of Richard Liddell (Chairman) and Marco Fumagalli. The Committee meets as and when required to consider matters related to succession planning and new nominations to the Board to ensure that the right skill sets are present in the Boardroom at each stage of the Company’s evolution.Richard Liddell Chairman of the Nominations Committee2018 Review −Selection and appointment of a new Independent Non-Executive Director, David Clarkson in May 2018. −Review of the composition of the Board. −Consideration of the requirements of the QCA Code to which the Company adheres with regards to the balance of the Board.2019 Looking Forward −On-going review of the composition of the Board. −Consider the longer term succession planning for the executive team.www.soundenergyplc.com45GovernanceSound Energy Annual Report 2018.indd 4503/04/2019 16:47:01 46
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Remuneration Committee
Accountability
David Clarkson
Chairman of the
Remuneration Committee
2018 Review
− Assessment of performance targets
and outcome against annual bonus
targets for CEO and other Executive
Directors.
− On-going review of pay and benefits
for CEO and Executive Directors’
ensuring packages are competitive
and fairly and responsibly rewarded.
− Determine awards made under the
Restricted Stock Option (RSU).
− Evaluated Scorecard analysis of 2018
(both mid and full year).
2019 Looking Forward
− Continued monitoring of pay and
benefits of the CEO and Executive
Directors.
− Agree categories and approve the
2019 performance targets for the
CEO and Company.
− Approval of the RSU’s performance
criteria and awards to be made.
Remuneration Committee Activities
The Remuneration Committee comprises
of David Clarkson (Chairman), Richard
Liddell and Marco Fumagalli. Richard
Liddell was the Chairman of both
Nominations and Remuneration
Committees until May 2018. Upon his
appointment to the Board of Directors
of the Company in May 2018, David
Clarkson was appointed Chairman of
Remuneration Committee.
The Committee meets to consider all
material elements of the Company’s
remuneration policy, including
assessing the directors’ remuneration
and performance. During 2018 the
Committee met twice.
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Directors’ Remuneration Report
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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
− 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
− Support both near-term and long-term success and
practice guidelines
sustainable shareholder value
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.
Provide the basis for a competitive
remuneration package.
Determined by reference to
market data.
Reflects individual
experience, skills and role.
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.
Benefits
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.
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.
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Directors’ Remuneration Report
Operation
Maximum Opportunity
Performance Measures
Individual Executive bonus
is based on performance
measured against Group
and personal objectives.
The value of any bonus
is at the discretion
of the Remuneration
Committee.
Performance is
assessed using
specific metrics set
by the Remuneration
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.
Awarded annually.
Awards vest based
on share price
performance or
in terms set by
the Remuneration
Committee.
Alternative or additional
criteria may be used
to determine future
rewards.
Purpose
Bonus Awards
The payment of bonus awards in the
form of cash has been largely replaced
by the restricted stock unit plan which
was introduced in 2018. Any future cash
payments made by the Company will
be made at the sole discretion of the
Remuneration Committee.
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 occurred with vesting criteria
in 2018 and first vesting to occur in
January 2021.
RSU awards recognise and rewards
outstanding performance and individual
contributions and give participants in
the plan an interest in the Company
parallel to that of the shareholders, thus
enhancing the proprietary and personal
interest in the Company’s continued
success and long-term progress.
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 or shares.
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 any set 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.
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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.
External Appointments
It has been expressly agreed that the CEO can take positions
of Non-executive Director or Non-executive Chairman in other
listed companies 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.
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.
Remuneration Policy for the Chairman
and Non-executive Directors
The Chairman and other Non-executive Directors are
appointed under Service Contracts with a notice period for
termination of three months. The Service Contracts 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,
CFO and Exploration Director have the option to give notice
and receive a lump sum equivalent to 18 months’ salary for the
CEO, 12 months’ salary for the CFO and 8 months’ salary for
the Exploration Director.
Executive Director Employment Contracts
and Termination Payments
The CEO, CFO and the Exploration Director have employment
contracts which entitle 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 for the CEO
and Exploration Director, and three months’ written notice
for the CFO.
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.
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26405 3 April 2019 4:42 pm Proof 22Directors’ Remuneration ReportSummary Of Actual Remuneration Of DirectorsSalary £’000s2018 Performance Award £’000sAdditional Award£’000sSeverance£’000sBenefits in kind£’000sTotal 2018 £’000sTotal 2017 £’000sExecutive DirectorsJames Parsons(i)499192300– 4 995549 Brian Mitchener(i) 322––– 1323195JJ Traynor(i)(ii)164––– 4168–Non-executive Directors and ChairmanRichard Liddell116––– –11655Marco Fumagalli 52––– –5250David Clarkson36––– –36–Stephen Whyte48––25–7394 Total for all Directors1,237192 30025 91,763 943 i. Includes pension contribution of 4%.ii. Appointed Director from 11 July 2018. Remuneration disclosed is from the date of the appointment. Share OptionsDate of GrantExercisable Date Acquisition Price per share (pence) Options held at 1 January 2018 Options held at 31 December 2018James Parsons25.09.1525.09.18 – 25.09.2014.251,250,000–23.03.1623.03.19 – 23.03.2116.003,000,0003,000,000Brian Mitchener07.10.1607.10.19 – 07.10.2184.00 1,500,000 1,500,00025.01.1725.01.20 – 25.01.2267.001,500,0001,500,000JJ Traynor14.09.1714.09.20 – 14.09.2248.004,000,0004,000,000Stephen Whyte08.08.1608.08.19 – 08.08.2160.001,000,000–Marco Fumagalli08.08.1608.08.19 – 08.08.2160.00250,000250,000Richard Liddell08.08.1608.08.19 – 08.08.2160.00250,000250,000During 2018, James Parsons exercised a total of 1.25 million options at an exercise price of 14.25 pence per option. The share price at the date of exercise was 38.12 pence and the calculated gain on the options at the date of exercise was £298,331. The options that had been granted to Stephen Whyte lapsed on resignation.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 occurred in 2018 and first vesting to occur in January 2021.RSU AwardsDate of GrantSettlement Date RSU Awards held at 1 January 2018 RSU Awards held at 31 December 2018Brian Mitchener26.04.1801.01.21–863,682JJ Traynor26.04.1801.01.21– 961,194Sound Energy plc Annual Report for the year ended 31 December 201850GovernanceSound Energy Annual Report 2018.indd 5003/04/2019 16:47:02 26405 3 April 2019 4:42 pm Proof 22Directors’ Shareholdings and Interests in SharesThe 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 personsNo. of SharesJames Parsons2,602,905Richard Liddell100,000Brian Mitchener–JJ Traynor–Marco Fumagalli (Continental Investment Partners)18,775,509David Clarkson–Movements in Share Price During the YearThe mid-market price of the Company’s shares at the end of the financial year was 22.5p and the range of mid-market prices during the year was between 11p and 57p.Advice Received by the CommitteeThe Committee has access to advice when it considers appropriate. In the year ended 31 December 2018, the Committee received advice relating to specific Executive compensation from Mercer who were paid £3,800 (excluding VAT).This Remuneration Report was approved by a duly authorised Committee of the Board of Directors on 20 March 2019 and signed on its behalf by:David Clarkson | Chairman of the Remuneration Committee 20 March 201951Governancewww.soundenergyplc.comSound Energy Annual Report 2018.indd 5103/04/2019 16:47:03 52
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Directors’ Report
Other Disclosures
Pages 38 to 53 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.
Political Donations
No political donations were made during the year (2017: £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 51.
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. Following
the sale of Italian assets in the first half of 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 2 to 33 and forms part of this report.
Results and Dividends
The loss for the year before tax was £6.8 million (2017:
£34.2million). 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 future. As at
31 December 2018, the Group had £20.5 million of total 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 U.K. LLP, has indicated its willingness to
continue in office and a resolution that they be reappointed
will be proposed at the Annual General Meeting.
Board of Directors
The names of the present Directors and their biographical
details are shown on pages 38 to 39.
The Directors who served during the year were
as follows:
− Richard Liddell
− James Parsons
− Stephen Whyte
− David Clarkson
− Marco Fumagalli
− Brian Mitchener
− JJ Traynor
Changes to the Board during the year:
Stephen Whyte resigned from the Board on 23.01.2018. David
Clarkson and JJ Traynor were appointed to the Board on
14.05.2018 and 11.07.2018, respectively.
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
2018, 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.
Sound Energy plc Annual Report for the year ended 31 December 2018
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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.
Substantial Shareholding
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 2018 and up to the date of
this report.
Share Capital
At 31 December 2018, the Company had 1,055,107,172 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.
Oil & Gas Investment Fund SAS 269,956,526 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 on page 92.
Richard Liddell | Chairman
20 March 2019
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Statement of Directors’ Responsibilities
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.
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.
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.
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
James Parsons | Chief Executive Officer
20 March 2019
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Independent Auditor’s Report
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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 2018, which comprise:
− the Consolidated statement of comprehensive income for
the year ended 31 December 2018;
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
in the preparation of the financial statements is not
appropriate; or
− the Group and Company balance sheet as at 31 December
− The Directors have not disclosed in the financial statements
2018;
− the Group 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 2018 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.
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
£2.0m, based on approximately 1% of total 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 £40,000. 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 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.
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Independent Auditor’s Report
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 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.
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 and evaluation assets
The Group’s primary focus is on exploration activities in
Eastern and Southern Morocco. Exploration expenditure
in the current year was significant and totaled £11.4m. The
carrying value of the exploration and evaluation assets was
£31.8m at 31 December 2018.
We consider the risk that exploration assets are impaired.
Transfer of assets to development and
production assets
During the year the Group transferred £146m of assets
from Exploration and Evaluation Assets to Development
and Production Assets. Under the accounting standards an
impairment test is required at this point.
We consider the risk that the assets were impaired at the
point of transfer.
Going concern
The risk that uncertainty on the timing of the receipt of cash
inflows and the potential overspend on outgoing costs gives
rise to going concern issues.
We reviewed management’s assessment which concluded
that there are no facts or circumstances that suggest the
carrying amount of the asset exceeds the recoverable
amount.
In considering this assessment we performed the following
working:
− Reviewed the board minutes, budgets and other
operational plans setting out the Group’s current plans for
the continued commercial appraisal of each exploration
asset;
− Reviewed current well and licence reserve appraisals; and
− Discussed plans and intentions with management.
We reviewed management’s assessment including their
internal model 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 performed the following
work:
− Verified the technical feasibility and commercial viability is
demonstrable as required by IFRS 6
− Obtained the impairment assessment carried out at the
transfer date and validated its mathematical accuracy.
− Challenged management’s inputs into the valuation model
to available market data and other sources of evidence.
This included the assessment of the discount rate, market
price and reserves.
We reviewed management’s assessment on going concern
and considered the following:
− The cash flow budgets and the key inputs on cash inflows
and outflows and their likely timing
− The appropriateness of the assumptions made on costs to
projects and the headroom available
− Review of the flexibility on the timing of cash flows
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
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.
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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 U.K. LLP
Statutory Auditor
London
20 March 2019
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 directors’ report and strategic 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 54, 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
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26405 3 April 2019 4:42 pm Proof 22Financial StatementsConsolidated Statement of Comprehensive Income59Consolidated Balance Sheet60Company Balance Sheet61Group and Company Statements of Changes in Equity 62Consolidated Cash Flow Statement64Company Cash Flow Statement65Notes to the Financial Statements6658Financial StatementsSound Energy plc Annual Report for the year ended 31 December 2018Sound Energy Annual Report 2018.indd 5803/04/2019 16:47:04 26405 3 April 2019 4:42 pm Proof 22Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2018 Notes2018 £’000s2017£’000sContinuing operationsRevenue––Exploration costs(4,058)–Gross loss(4,058)–Administrative expenses(8,857)(8,458)Group operating loss from continuing operations3(12,915)(8,458)Finance revenue623323Foreign exchange gain/(loss)3,387(914)Other gains and (losses)– derivative financial instruments21(80)(1,873)External interest costs24(2,374)(1,117)Loss for the year from continuing operations before taxation(11,749)(12,339)Tax credit/(expense)7––Loss for the year from continuing operations(11,749)(12,339)Discontinued operationsProfit/(loss) for the year from discontinued operations254,953(21,811)Total loss for the year(6,796)(34,150)Other comprehensive income/(loss)Items that may subsequently be reclassified to the profit and loss accountForeign currency translation gain/(loss)7,614(5,361)Total comprehensive profit/(loss) for the year818(39,511)Profit/(loss) for the year attributable to:Owners of the company818(39,511)Non-controlling interests–– Notes2018 Pence2017 PenceBasic and diluted loss per share for the year from continuing and discontinued operations8(0.66)(4.28)Attributable to the equity shareholders of the parent (pence)8(0.66)(4.28)Basic and diluted loss per share for the year from continuing operations8(1.14)(1.54)Attributable to the equity shareholders of the parent (pence)8(1.14)(1.54)www.soundenergyplc.com59Financial StatementsSound Energy Annual Report 2018.indd 5903/04/2019 16:47:05 60
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Balance Sheet
as at 31 December 2018
Non-current assets
Property, plant and equipment
Intangible assets
Interest in Badile land
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
Liabilities of disposal group held for sale
Non-current liabilities
Loans due in over one year
Total liabilities
Net assets
Capital and reserves
Share capital and share premium
Warrant reserve
Foreign currency reserve
Accumulated surplus/(deficit)
Total equity
Notes
9
10
25
12
21
13
25
14
25
24
2018
£’000s
151,005
32,008
1,618
184,631
929
3,365
–
178
20,536
25,008
–
209,639
10,068
10,068
–
20,476
20,476
30,544
179,095
22,600
4,090
2,163
150,242
179,095
2017
£’000s
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
The financial statements were approved by the Board and authorised for issue on 20 March 2019 and were signed on its
behalf by:
James Parsons | Director
Richard Liddell | Director
The accounting policies on pages 66 to 71 and notes on pages 66 to 92 form part of these financial statements.
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Company
Balance Sheet
as at 31 December 2018
Non-current assets
Property, plant and equipment
Fixtures and fittings
Software
Interest in Badile land
Investments in subsidiaries
Current assets
Other receivables
Prepayments
Derivative financial instruments
Cash and short term deposits
Total assets
Current liabilities
Trade and other payables
Non-current liabilities
Loans
Total liabilities
Net assets
Capital and reserves attributable to equity holders of the Company
Share capital and share premium
Warrant reserve
Accumulated surplus/(deficit)
Total equity
61
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2018
£’000s
2017
£’000s
25
11
12
21
13
14
24
34
79
24
1,618
171,708
173,463
834
169
–
11,160
12,163
185,626
1,901
1,901
20,476
22,377
163,249
22,600
4,090
136,559
163,249
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
The Company’s accumulated surplus/(deficit) includes loss for the year of £4.0 million (2017: £66.9 million). 2017 loss was
primarily due to an impairment charge of £47.0 million in respect of the divestment of the Italian operations.
The financial statements were approved by the Board and authorised for issue on 20 March 2019 and were signed on its
behalf by:
James Parsons | Director
Richard Liddell | Director
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Group and Company Statements
of Changes in Equity
for the year ended 31 December 2018
Group
At 1 January 2018
Total loss for the year
Other comprehensive income
Total comprehensive loss
Issue of share capital
Share issue costs
Reclassification to profit and loss
account on Italy divestment
Reclassification on share premium
account cancellation
Distribution to shareholders on
Italy divestment
Share based payments
At 31 December 2018
Company
Notes
Share
capital
£’000s
Share
premium
£’000s
Accumulated
surplus/
(deficit)
£’000s
Warrant
reserve
£’000s
Foreign
currency
reserves
£’000s
Total
equity
£’000s
10,159
277,670
(115,508)
4,090
(3,918)
172,493
–
–
–
392
–
–
–
–
–
–
–
–
12,687
(570)
–
(6,796)
–
(6,796)
–
–
–
(277,738)
277,738
–
–
(7,994)
2,802
17
25
17
22
–
–
–
–
–
–
–
–
–
–
7,614
7,614
–
–
(6,796)
7,614
818
13,079
(570)
(1,533)
(1,533)
–
–
–
–
(7,994)
2,802
10,551
12,049
150,242
4,090
2,163
179,095
Notes
At 1 January 2018 as previously reported
Adjustment on initial application of IFRS 9
Restated balance at 1 January 2018
Total loss for the year
Issue of share capital
Share issue costs
Reclassification on share premium account cancellation
Distribution to shareholders on Italy divestment
Share based payments
At 31 December 2018
11
17
17
17
22
Share
capital
£’000s
Share
premium
£’000s
10,159
277,670
–
–
Accumulated
surplus/
(deficit)
£’000s
(116,757)
(15,250)
Warrant
reserve
£’000s
4,090
–
10,159
277,670
(132,007)
4,090
–
392
–
–
–
–
–
(3,980)
12,687
(570)
–
–
(277,738)
277,738
–
–
(7,994)
2,802
–
–
–
–
–
–
Total
equity
£’000s
175,162
(15,250)
159,912
(3,980)
13,079
(570)
–
(7,994)
2,802
10,551
12,049
136,559
4,090
163,249
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Total
equity
£’000s
57,579
Group
Share
capital
£’000s
Share
premium
£’000s
Shares to
be issued
£’000s
Accumulated
deficit
£’000s
Warrant
reserve
£’000s
Notes
Foreign
currency
reserves
£’000s
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
Company
17
17
22
6,651
129,016
223
–
–
–
–
–
–
3,490
148,449
–
–
–
–
205
(223)
(84,213)
(34,150)
–
(34,150)
–
–
4,459
1,443
–
–
–
–
–
–
(34,150)
(5,361)
(5,361)
–
–
–
–
(5,361)
(39,511)
151,939
–
–
2,486
369
2,486
(369)
–
18
–
–
10,159
277,670
(115,508)
4,090
(3,918)
172,493
Share
capital
£’000s
Share
premium
£’000s
Shares to
be issued
£’000s
Accumulated
deficit
£’000s
Notes
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
17
17
22
6,651
129,016
–
–
3,490
148,449
223
–
–
205
(223)
(52,700)
(66,912)
–
–
369
2,486
–
–
–
10,159
277,670
(116,757)
4,090
Warrant
reserve
£’000s
4,459
–
–
–
(369)
–
Total
equity
£’000s
87,649
(66,912)
151,939
–
–
2,486
175,162
–
–
18
–
–
–
–
–
–
–
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Consolidated Cash Flow
Statement
for the year ended 31 December 2018
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 expenditure
Disposal of Italian operations
Net cash flow from investing activities
Proceeds from derivative financial instruments
Net proceeds from equity issue
Interest payments
Net cash flow from financing activities
Net decrease 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 Statement
for the year ended 31 December 2018
Cash flow from operations reconciliation
Loss before tax from continuing operations
Profit/(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
Increase/(decrease) in accruals and short term payables
Depreciation
Share based payments charge and bonuses paid in shares
Increase in drilling inventories
Loss on derivative financial instruments
Gain on disposal of Italy operations
Foreign currency translation gain reclassified from other comprehensive income
Finance costs and exchange adjustments
Decrease in receivables and prepayments
Cash flow from operations
Notes
2018
£’000s
2017
£’000s
(281)
259
(22)
(937)
(8,855)
(2,655)
(11,849)
102
(11,747)
(478)
(23,482)
–
(12,447)
(23,960)
–
12,218
(1,274)
10,944
(1,525)
50
22,011
20,536
592
11,550
(1,293)
10,849
(24,858)
60
46,809
22,011
25
24
13
Notes
2018
£’000s
2017
£’000s
(11,749)
4,953
(6,796)
(259)
–
4,058
1,078
164
3,094
(299)
80
(3,684)
(1,533)
(1,013)
4,829
(281)
(12,339)
(21,866)
(34,205)
(102)
55
19,833
(5,783)
406
2,486
(430)
1,873
–
–
2,158
1,860
(11,849)
25
25
Non-cash transactions during the year included the issue of 688,146 shares in lieu of cash bonuses at an issue price of
approximately 40.08 pence per share and issue of 88,740 shares at 17.80 pence per share to a third party in settlement of
services provided. In 2017, non-cash transactions included the issue of shares worth £138.8 million as the consideration for the
acquisition of OGIF’s interests in Morocco licences and issue of 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 $0.75 million (2017: $2.95 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 the funds to be released as soon as the commitment is fulfilled on this basis the amount remains included within
cash equivalent and cash equivalents. In 2017, a guarantee of €0.7 million was provided for expenditure relating to Badile licence
and was included in cash and cash equivalents as it was expected to be released as soon as the commitment was fulfilled.
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Company Cash Flow Statement
for the year ended 31 December 2018
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Notes
2018
£’000s
2017
£’000s
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
Proceeds from derivative financial instruments
Net proceeds from equity issue
Interest payments
Net cash flow from financing activities
Net decrease 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
13
Notes to Cash Flow Statement
for the year ended 31 December 2018
(5,261)
166
(5,095)
(14)
(11,608)
(11,622)
–
12,218
(1,274)
10,944
(5,773)
364
16,569
11,160
(7,465)
23
(7,442)
(47)
(28,772)
(28,819)
592
11,550
(1,293)
10,849
(25,412)
199
41,782
16,569
Cash flow from operations reconciliation
Loss before tax
Impairment of investments in subsidiaries
Intragroup recharges
Finance revenue
Decrease in receivables and prepayments
Decrease in accruals and short term payables
Depreciation
Share based payments charge and bonuses paid in shares
Expected credit loss allowance on intercompany loans
Loss on derivative financial instruments
Finance costs and exchange adjustments
Cash flow from operations
Notes
2018
£’000s
2017
£’000s
(3,980)
1,098
(1,202)
(166)
1,536
(456)
118
3,094
2,135
80
(7,518)
(5,261)
(66,912)
46,973
(918)
(23)
13
(576)
86
2,486
–
1,873
9,533
(7,465)
11
Non-cash transactions during the year included the issue of 688,146 shares in lieu of cash bonuses at an issue price of
approximately 40.08 pence per share and the issue of 88,740 shares at 17.85 pence per share to a third party in settlement
of services provided. In 2017, non-cash transactions included the issue of shares worth £138.8 million as the consideration for
the acquisition of OGIF’s interests in Morocco licences and the issue of 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.
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Notes to the Financial Statements
for the year ended 31 December 2018
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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 Company have been prepared in accordance with:
1. International Financial Reporting Standards (IFRS) 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 2018 were authorised for issue by the
Board of Directors on 20 March 2019.
As at 31 December 2018 the Group had £20.5 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
21 March 2020) 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 TE-9 well drilled at the Group’s Tendrara licence,
onshore Morocco was plugged and abandoned as no producible gas was encountered. An impairment charge of £4.1 million was
recognised.
Following the award of a production concession in Morocco, judgement was required in determining the date of and quantum of
the E&E expenditure transferred to development. In making assessment for impairment prior to transfer of the E&E expenditure
to development (see note 10), the inputs used in the valuation model included expected gas price, production volume, discount
rate and tax rate which are not considered likely to be subject to material change in the coming 12 months.
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).
Significant judgement and estimation is also required in the determination of the fair value of warrants and bonds. The proceeds
from the issue of the Company’s 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.
Other sources of estimate concern IFRS 9 on intercompany loans at parent Company level (note 11) and share based payments
(note 22) but are not considered likely subject to material change in the coming 12 months.
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(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.
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
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 Company applies IFRS9 in calculating expected credit losses on intercompany
loans and recognises a loss allowance based on lifetime expected credit loss at each reporting date.
Investments in subsidiaries, joint ventures and associates are recorded at cost, subject to impairment testing in the Group’s
financial statements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, until the date
that control ceases.
(c) Foreign currency translation
The functional currency of the Company is pound sterling. The Group also has subsidiaries whose functional currencies are US
dollar.
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.
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Notes to the Financial Statements
for the year ended 31 December 2018
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(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.
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(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 three to four years.
(g) Goodwill
Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the acquirer’s
interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is
measured at its original value, less any accumulated impairment losses subsequently incurred.
Goodwill is not amortised. Goodwill is reviewed for impairment annually, or more frequently if events or changes in
circumstances indicate the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of
the cash generating unit to which the goodwill relates. Where the recoverable amount of the cash generating unit or group of
cash generating units is less than the carrying amount, an impairment loss is recognised. 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.
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Notes to the Financial Statements
for the year ended 31 December 2018
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(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 or restricted stock
unit (RSU) 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 or RSU. The estimated fair value of the option or RSU
is recognised as an expense over the options’ or RSU’s 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 had derivative financial instruments arising from the shares issued on the acquisition of the Sidi Mokhtar 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) Inventories
Inventories represent drilling equipment and materials remaining after drilling operations are completed. Inventory is valued at
lower of cost and net realisable value. The value of inventory used during drilling operations is determined on a weighted average
basis.
(o) Standards, interpretations and amendments to published standards
New standard adopted
The Group applied IFRS 9 ‘Financial instruments’ for the first time. The Group applied IFRS 9 prospectively with the initial
application date of 1 January 2018.
The impact of the adoption was the recognition of expected credit loss on the Company’s intercompany loans to its subsidiaries.
The impact on the Company’s separate financial statements is as shown below.
Expected credit loss allowance (note 11)
Income
Statement
£’000s
Investments in
subsidiaries
£’000s
Accumulated
Surplus/(Deficit)
£’000s
2,135
(17,385)
15,250
The recognition of expected credit loss allowances as at 1 January 2018 led to an increased in the Company’s accumulated
deficit by £15.3 million. Due to further loans advanced to the subsidiaries during the year, an additional credit loss allowance of
£2.1 million was recognised in the income statement during the year.
IFRS 15, ‘Revenue from contracts with customers’ and several other amendments and interpretations apply for the first time in
2018, but do not have an impact on the Group’s financial statements.
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1 Accounting policies continued
Standards not yet effective
A number of new standards and amendments to standards and interpretations have been issued but not yet effective and in
some cases have not yet been adopted by the EU. The most significant new standard impacting the Group is IFRS 16, ‘Leases’.
IFRS 16 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.
On adoption of IFRS 16, the Group expects to recognise £0.6 million as right to use assets and a lease liability of the same amount.
The Group will opt to recognise an expense on a straight line basis for short-term leases (lease term of 12 months or less) and leases
of low-value assets.
(p) 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.
(q) 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.
(r) Revenue recognition
Revenue associated with production sales of natural gas is recorded when title passes to the customer on delivery to the
customer pipeline.
(s) 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.
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Notes to the Financial Statements
for the year ended 31 December 2018
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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 2018 the Group’s exploration and appraisal activities were primarily carried out in 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 2018:
Corporate
£’000s
Development
& Production
£’000s
Exploration
& Appraisal
£’000s
Exploration costs
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
The segments assets and liabilities at 31 December 2018 were as follows:
–
(8,857)
(8,857)
233
(80)
1,013
(7,691)
–
–
–
–
–
–
–
(4,058)
–
(4,058)
–
–
–
(4,058)
(11,749)
Non-current assets
Current assets
Liabilities attributable to continuing operations
The geographical split of non-current assets is as follows:
Development and production assets
Interest in Badile land
Fixtures, fittings and office equipment
Exploration and evaluation assets
Software
Total
Corporate
£’000s
Development
& Production
£’000s
Exploration
& Appraisal
£’000s
405
150,600
33,626
2,952
–
22,056
(22,377)
(320)
(7,847)
(30,544)
UK
£’000s
–
1,618
113
–
24
Morocco
£’000s
150,600
–
292
31,799
185
1,755
182,876
Total
£’000s
(4,058)
(8,857)
(12,915)
233
(80)
1,013
Total
£’000s
184,631
25,008
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2 Segment Information continued
Segment results for the year ended 31 December 2017 were as follows:
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
The segments assets and liabilities at 31 December 2017 are as follows:
Non-current assets
Current assets
Liabilities attributable to continuing operations
The geographical split of non-current assets is as follows:
Corporate
£’000s
Development
& Production
£’000s
Exploration
& Appraisal
£’000s
(8,458)
(8,458)
23
(1,873)
(2,031)
(12,339)
–
–
–
–
–
–
–
–
–
–
–
–
Corporate
£’000s
Development
& Production
£’000s
Exploration
& Appraisal
£’000s
372
21,701
(20,165)
–
–
–
163,939
3,848
(5,002)
Total
£’000s
(8,458)
(8,458)
23
(1,873)
(2,031)
(12,339)
Total
£’000s
164,311
25,549
(25,167)
Fixtures, fittings and office equipment
Exploration and evaluation assets
Software
Total
3 Operating Loss
Operating loss is stated after charging:
Depreciation
Employee costs
Impairment charges and exploration 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
UK
£’000s
Morocco
£’000s
177
–
66
243
195
163,737
136
164,068
2018
£’000s
2017
£’000s
164
5,728
4,058
222
5,173
–
2018
£’000s
2017
£’000s
50
5
–
6
61
53
7
9
8
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Notes to the Financial Statements
for the year ended 31 December 2018
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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
2018
£’000s
2017
£’000s
2,802
6,317
664
362
(4,417)
5,728
2,486
5,912
646
182
(4,053)
5,173
2018
Number
2017
Number
14
18
32
18
23
41
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 £4.4 million (2017: £4.1 million) of the employee costs
was capitalised.
6 Finance Revenue
Interest on cash at bank and short term deposits
7 Taxation
(a) Analysis of the tax charge for the year:
Current tax
UK corporation tax (charge)/credit
Adjustment to tax expense in respect of prior years
Overseas tax
Total current tax (charge)/credit
Deferred tax 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% (2017: 19.25%)
Tax effect of:
Expenses not deductible for tax purposes
Temporary differences not recognised
Differences in overseas tax rates
Total tax (charge)/credit
Sound Energy plc Annual Report for the year ended 31 December 2018
2018
£’000s
233
233
2017
£’000s
23
23
2018
£’000s
2017
£’000s
–
–
–
–
–
–
2018
£’000s
(11,749)
2,232
(564)
(1,645)
(23)
–
–
–
–
–
–
–
2017
£’000s
(12,339)
2,375
(521)
(1,651)
(203)
–
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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 year. The calculation of diluted profit/(loss) per share is based on profit/(loss) after
tax on the weighted average number of ordinary shares in issue plus weighted average number of shares that would be issued if
dilutive options and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated as follows:
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Loss after tax from continuing operations
Profit/(loss) after tax from discontinued operations
Total loss for the year
Weighted average shares in issue
Dilutive potential ordinary shares
Basic profit/(loss) per share
Basic loss per share from continuing operations
Basic profit/(loss) per share from discontinued operations
Basic loss per share from continuing and discontinued operations
Diluted profit/(loss) per share
Diluted loss per share from continuing operations
Diluted profit/(loss) per share from discontinued operations
Diluted loss per share from continuing and discontinued operations
2018
£’000s
(11,749)
4,953
(6,796)
2018
Million
1,035
18
1,053
2018
Pence
(1.14)
0.48
(0.66)
2018
Pence
(1.14)
0.47
(0.66)
2017
£’000s
(12,339)
(21,811)
(34,150)
2017
Million
799
–
799
2017
Pence
(1.54)
(2.74)
(4.28)
2017
Pence
(1.54)
(2.74)
(4.28)
The effect of the potential dilutive shares noted above on the earnings per share from continuing operations would be
anti-dilutive and therefore are not included in the above calculation of diluted earnings per share from continuing operations.
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Notes to the Financial Statements
for the year ended 31 December 2018
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9 Property, Plant and Equipment
Development and production assets
Cost
At start of the year
Transfer from intangible assets (note 10)
Additions
Exchange adjustments
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
Disposal
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
Disposal
Reclassified to assets of disposal group held for sale (note 25)
At end of the year
Net book amount
Total net book amount
2018
£’000s
2017
£’000s
–
15,968
146,245
755
3,600
–
150,600
–
–
–
–
–
–
150,600
646
25
127
(4)
–
794
274
21
96
(2)
–
389
405
151,005
–
–
51
(16,019)
–
14,752
–
27
97
(14,876)
–
–
815
7
386
–
(562)
646
302
5
309
–
(342)
274
372
372
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Cost
At 1 January 2018
Additions
Transfer to development and production assets (note 9)
Exchange adjustments
At 31 December 2018
Impairment
At start of the year
Charge for the year
Exchange adjustments
At end of the year
Net book amount at 31 December 2018
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Goodwill
£’000s
Software
£’000s
Exploration
& Evaluation
Assets
£’000s
2018
£’000s
–
–
–
–
–
–
–
–
–
–
281
55
–
24
360
79
68
4
151
209
Goodwill
£’000s
Software
£’000s
Exploration
& Evaluation
Assets
£’000s
163,737
11,392
164,018
11,447
(146,245)
(146,245)
7,168
36,052
–
4,058
195
4,253
31,799
39,902
165,670
(6,043)
(35,792)
163,737
12,515
19,018
(152)
(31,381)
–
7,192
36,412
79
4,126
199
4,404
32,008
2017
£’000s
42,386
165,762
(5,986)
(38,144)
164,018
14,326
19,190
(85)
(33,352)
79
163,737
163,939
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
2,202
–
64
(2,266)
–
1,769
55
64
(1,888)
–
–
282
92
(7)
(86)
281
42
117
3
(83)
79
202
Transfer to Development and production assets
In September 2018, the Group was granted a production concession award by the Moroccan Ministry of Energy, covering an area
of approximately 133.5 km2 in the Tendrara licence. The Group considers the discoveries included in the production concession
award area to be commercial and following the award of the concession, the exploration and evaluation expenditure of £146.2
million was transferred to development after an assessment for impairment which indicated that there was no impairment. The
key assumptions used in the impairment assessment valuation model included; Company’s share of the reserves estimated to be
169.5 bscf, a discount rate of 10% and an implicit oil price of 65 US$/bbl.
During the year, the Group had capitalised interest costs of approximately £0.6 million (2017: £1.6 million).
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Notes to the Financial Statements
for the year ended 31 December 2018
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10 Intangibles continued
Exploration and evaluation assets
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 2018 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.
11 Investment in Subsidiaries
At 1 January
Additions
Transfer of shares to fellow group company
Disposal
Impairment
Allowance for credit loss
At 31 December
2018
Cost of
shares in
subsidiaries
£’000
Intercompany
loans
£’000
Total
£’000
Intercompany
loans
£’000
2017
Cost of
shares in
subsidiaries
£’000
Total
£’000
165,936
23,162
71
(76)
–
(17,385)
171,708
12,313
178,249
–
(71)
23,162
–
(12,242)
(12,318)
57,628
153,934
4,828
62,456
8,832
162,766
–
–
–
–
–
–
–
–
–
–
(45,626)
(1,347)
(46,973)
(17,385)
171,708
–
–
–
165,936
12,313
178,249
As at the 31 December 2018 the cumulative impairment charge was £17.3 million (2017: 45.6 million) relating to the intercompany
loans. The 2017 impairment related to loans from Italian subsidiaries which were disposed in 2018 and hence the impairment not
carried forward. As at the 31 December 2018 the cumulative impairment charge was £nil (2017: £1.3 million) relating to the cost of
shares in the subsidiaries.
The subsidiary companies of the Company at 31 December 2018, 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
PO Box 173, Kingston, Chambers Road,
Tortola, VG 1110, British Virgin Islands
PO Box 173, Kingston,Chambers Road,
Tortola, VG 1110, British Virgin Islands
Mitra Energia Citarum Limited*
Mauritius
Exploration Company Fifth Floor, Ebene, Esplanade,
24 Cybercity, Ebene, Mauritius
Sound Energy Morocco SARL**
Morocco
Exploration Company Mahaj Ryad Center, Bd Al Arz.
Sound Energy Morocco East Limited
UK
Exploration Company 4 Pembroke Road, Sevenoaks, TN13 IXR, UK
Sound Energy Morocco South Limited UK
Exploration Company 4 Pembroke Road, Sevenoaks, TN13 IXR, UK
Sound Energy Meridja Limited
UK
Exploration Company 4 Pembroke Road, Sevenoaks, TN13 IXR, UK
Building 6, 3rd floor. Hay Ryad, Rabat 10100
* The investment in Mitra Energia Citarum Limited is held indirectly via Sound Oil International Limited.
**The investment in Sound Energy Morocco SARL is held indirectly via Sound Energy Morocco East Limited.
Impairment charge for the year is attributable to a write down of the carrying value of the investment in Sound Energy Holdings
Italy Limited upon disposal of the Italian operations. The Company applies IFRS9 in calculating expected credit losses on
intercompany loans and recognises a loss allowance based on lifetime expected credit loss at each reporting date.
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11 Investment in Subsidiaries continued
The Company considered available external data on oil and gas industry default rates and used a cumulative default rate of 9%
obtained from publicly available data published by a leading credit rating agency. £15.3 million expected credit loss allowance was
recognised in the accumulated deficit on adoption of IFRS 9 on 1 January 2018. £2.1 million was recognised in the income statement
during the year making the total outstanding expected credit loss allowance to be £17. 4 million as at 31 December 2018.
The Company has funded its subsidiaries through non-interest bearing loans payable on demand. Given that the Company has no
intention to call in the loans in the foreseeable future, the loans are classified as non-current investments.
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
2018
Number
2017
Number
Gas exploration and production
Italy
UK
UK
UK
Italy
Morocco
UK
UK
British Virgin Isles
British Virgin Isles
Mauritius
Morocco
Mauritius
Morocco
Gas exploration
Holding companies
Dormant
Holding companies
Holding companies
Gas exploration
12 Other Receivables
Group
UK VAT
Morocco VAT
Other receivables
Currency Analysis
US dollar
Euro
GBP sterling
Moroccan dirham
Company
UK VAT
Other receivables
Currency Analysis
GBP sterling
Euro
Total
–
3
1
–
2
1
1
2018
£’000s
30
710
2,625
3,365
2018
£’000s
1,313
790
44
1,218
3,365
1
3
2
1
2
1
1
2017
£’000s
83
665
2,778
3,526
2017
£’000s
2,555
–
100
871
3,526
2018
£’000s
2017
£’000s
30
804
834
83
17
100
2018
£’000s
2017
£’000s
44
790
834
100
–
100
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Notes to the Financial Statements
for the year ended 31 December 2018
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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
2018
£’000s
9,417
11,119
20,536
11,365
1,951
6,644
576
20,536
2017
£’000s
1,764
19,434
21,198
9,420
4,407
7,160
211
21,198
For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise the following as at 31 December 2018.
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
2018
£’000s
20,536
–
20,536
2018
£’000s
2,725
8,435
11,160
2,700
1,950
6,510
11,160
2018
£’000s
4,847
288
4,933
10,068
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
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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
Reclassified to liabilities of disposal group held for sale (note 25)
31 December
S
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s
2018
£’000s
6,719
988
1,551
810
10,068
2018
£’000s
582
158
1,161
1,901
2018
£’000s
673
1,228
1,901
2017
£’000s
4,049
553
1,287
712
6,601
2017
£’000s
741
126
732
1,599
2017
£’000s
1,085
514
1,599
2018
£’000s
2017
£’000s
–
–
–
–
433
(55)
(378)
–
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 2018 were estimated to be approximately £5.3 million (2017: £6.9 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
There are no provisions relating to the Moroccan licences.
2018
£’000s
–
–
–
–
–
–
–
2017
£’000s
2,049
131
749
(410)
(49)
(2,470)
–
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Notes to the Financial Statements
for the year ended 31 December 2018
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17 Capital and Reserves
Group and Company
Ordinary shares – 1p
At January
Issued during the year for cash
Non-cash share issue
At 31 December
2018
Number
of shares
1,055,107,172
£’000s
10,551
2017
Number
of shares
1,015,869,699
2018
Number
of shares
£’000s
10,159
2017
Number
of shares
1,015,869,699
665,069,037
38,460,587
66,550,042
776,886
284,250,620
1,055,107,172
1,015,869,699
Non-cash transactions during the year included the issue of 688,146 shares in lieu of cash bonuses at an issue price of
approximately 40.08 pence per share and the issue of 88,740 shares at 17.85 pence per share to a third party in settlement of
services provided.
As part of the Italy divestment process, the Company sought and was granted a court order on 13 March 2018 approving a capital
reduction following the cancellation of the share premium account. This resulted in the transfer of £277.7 million to distributable
reserves.
Share option schemes and RSU Awards
The Company’s share options scheme was replaced by an RSU Award scheme from 2018. The first RSU award was granted in
2018 and is expected to be settled in 2021.
Share issues
During the year ended 31 December 2018, the Company issued 2,681,279 shares following warrant exercises at exercise prices in
the range of 24p to 30p per share.
On 26 April 2018, the Company announced the issue of 688,146 shares in respect of performance bonuses for 2017 financial year.
The issue price was approximately 40.08p per share.
On 2 July 2018, the Company announced that it would issue 30,829,308 shares following a placing at 37p per share.
On 26 September 2018, the Company announced the issue of 1,250,000 shares following the exercise of share options by
a Director of the Company at a price of 14.25p per share. The gain on exercise is disclosed in the statement of Directors
remuneration.
On 23 November 2018, the Company announced that it would issue 88,740 shares at a price of 17.85p per share in settlement of
fees for services provided by a third party.
During the year ended 31 December 2018, the Company issued 3,700,000 shares as a result of share options exercised by non-
board members of the Company. The shares were issued at prices in the range of 14.25p to 17.13p per share.
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18 Related Party Disclosures
Key management
As at 31 December 2018, there were three key management personnel other than Directors of the Company (2017: seven). 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
2018
£’000s
2,616
1,944
4,560
2017
£’000s
3,043
1,914
4,957
Directors’ interest in employee share options
At 31 December 2018, the Chairman had 250,000 share options in the Company. Another non-executive Director held 250,000
options in the Company. Share options held by non-executive members of the Board of Directors at 31 December 2018 have the
following expiry dates and exercise prices:
2016
Expiry
Date
Exercise
price Pence
2018
Number
2017
Number
2021
60p
500,000
1,500,000
Share options held by the executive members of the Board of Directors at 31 December 2018 have the following expiry dates and
exercise prices:
2015
2016
2016
2017
2017
Expiry
Date
Exercise
price Pence
2018
Number
2017
Number
2020
2021
2021
2022
2022
14.25p
–
1,250,000
16p
84p
48p
67p
3,000,000
3,000,000
1,500,000
1,500,000
4,000,000
4,000,000
1,500,000
1,500,000
Key management’s (excluding Directors) interest in employee share options
2015
2015
2015
2016
2017
2017
2017
2017
2017
Expiry
Date
Exercise
price Pence
2018
Number
2017
Number
2020
2020
2020
2021
2022
2022
2022
2022
2022
14.25p
14.20p
14.07p
16p
67p
70p
65p
52.25p
48p
–
–
–
–
2,150,000
1,250,000
1,250,000
4,000,000
700,000
4,000,000
1,500,000
1,500,000
–
500,000
500,000
500,000
–
4,000,000
Key management (including executive Directors) interest in RSU Awards
2018
Settlement
date
2018
Number
2021
2,012,750
2017
Number
–
Other expenses
Two Directors of the Company are also non-executive Directors of Echo Energy plc (‘‘Echo’’), a Company listed on the London
stock exchange. The Company recharged and was paid by Echo £637 (2017: £24,381) in respect of travel expenses that had been
paid by the Company on behalf of Echo. Two Directors of the Company are also non-executive Directors of Coro Energy plc,
(‘‘Coro’’) a Company listed on the London stock exchange. The Company recharged and was paid by Coro £5,640 (2017: £21,398)
in respect of travel expenses paid by the Company on behalf of Coro.
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Notes to the Financial Statements
for the year ended 31 December 2018
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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,
interest in Badile land, 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 and interest in Badile land
Derivative financial instruments at fair value
Financial liabilities
Trade and other payables
Loans and borrowings held at amortised costs
2018
£’000s
2017
£’000s
20,536
4,983
–
21,198
3,526
80
25,519
24,804
10,068
20,476
30,544
6,601
18,566
25,167
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.
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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
2018
£’000s
(20,476)
20,536
60
10,551
12,049
179,095
2017
£’000s
(18,566)
21,198
2,632
10,159
277,670
172,493
20 Foreign Currency and Other Risks
As a result of the majority of the Group’s operations being denominated in US dollar (USD) , the Group’s balance sheet can be
impacted by movements in the USD exchange rate against sterling (GBP). Such movements will result in book gains or losses
which are unrealised and will be offset if the exchange rate moves in the opposite direction.
The GBP cost of the assets being acquired with the USD rises or falls pro rata to the currency movement, so the purchasing
power of the USD remains the same.
As the Group also holds some Moroccan dirham (MAD) and Euro (EUR) 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.
2018
2017
Increase/
(decrease) in
rate
Effect on
profit or loss
before tax
£’000s
Effect on
comprehensive
income
£’000s
Effect on
profit or loss
before tax
£’000s
Effect on
comprehensive
income
£’000s
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
5%
5%
5%
(5%)
(5%)
(5%)
(298)
(169)
(49)
298
169
49
(7,062)
–
–
7,062
–
–
(396)
(193)
(19)
396
193
19
(6,666)
–
–
6,666
–
–
The sensitivity table demonstrates the effect of a change in exchange rate assumptions while other assumptions remain
unchanged. In reality, such an occurrence is very unlikely due to correlation between the factors. Furthermore, these sensitivities
are non-linear, and larger or smaller impacts cannot easily be derived from the results. The sensitivity analysis does not take into
consideration that the Group’s assets and liabilities are actively managed and may vary at the time that any actual exchange rate
movement occurs.
Credit risk
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.
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.
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Notes to the Financial Statements
for the year ended 31 December 2018
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21 Financial Instruments
(i) Derivative financial instruments
Derivative on shares issued on acquisition of Sidi Mokhtar licence
2018
£’000s
–
2017
£’000s
80
In March 2016, the Company signed a binding agreement to acquire PetroMaroc’s 50% working interest in, and operatorship
of, the Sidi Mokhtar 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.
During 2018, Petro Maroc sold all the outstanding shares at prices below 50 pence and as a result, no proceeds were available to
be shared between the Company and PetroMaroc. The Company recognised a loss of £0.8 million (2017: £1.9 million, loss) in the
income statement on disposal of the shares.
(ii) Cash and short term deposits
2018
Sterling
Euro
US dollar
Moroccan dirham
2017
Sterling
Euro
US dollar
Moroccan dirham
Floating
rate
£’000s
Fixed
rate
£’000s
Interest-
free
£’000s
Total
£’000s
Weighted
average rate
%
4,619
–
2,095
–
6,714
4,135
888
–
–
5,023
2,000
899
–
–
25
1,052
9,270
576
6,644
1,951
11,365
576
2,899
10,923
20,536
3,000
–
4,447
211
7,658
25
3,519
4,973
–
8,517
7,160
4,407
9,420
211
21,198
0.14
1.89
–
–
0.26
0.60
0.57
3.75
Euro cash balances have been converted at the exchange rate of €1.1128: £1.00 (2017: €1.1263: £1.00). Moroccan dirham cash
balances have been converted at the exchange rate of MAD12.1940: £1.00 (2017: MAD12.6280: £1.00). US dollar cash balances
have been converted at the exchange rate of US$1.2736: £1.00 (2017: US$1.3493: £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.
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22 Share Based Payments
The Group has a Long Term Incentive Plan (LTIP) under which share options have been granted to the Directors and key staff.
The share options were awarded to employees on appointment and periodically thereafter. Options were 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.
In order to better meet the LTIP objectives, the Board determined in January 2018 that the existing Share Option Plan be
replaced with an 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. The RSU award are granted at nil cost to the Directors and key staff. First award
occurred in 2018 and first vesting is to occur in January 2021.
The expense recognised for employee services in the Consolidated Income Statement is as follows:
Group and Company
Expense arising from equity-settled share options and RSU awards
Share options
No share options were granted in 2018.
2018
£’000s
2,802
2017
£’000s
2,486
In 2017, the fair value of equity-settled share options granted was 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
Granted
8,800,000
1,500,000
800,000
500,000
4,000,000
15,600,000
Period
(years)
Price
(pence)
5
5
5
5
5
67
70
65
52.25
48
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: n/a (2017: 61.84 pence)
• Average risk free interest rate: n/a (2017: 0.39%)
• Expected volatility: n/a (2017: 60.69%)
• Assumed forfeitures: n/a (2017: 0%)
• Expected dividends: n/a (2017: 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 n/a (2017: 31.38p).
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Notes to the Financial Statements
for the year ended 31 December 2018
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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)
2017
£’000s
41.04 29,400,000
15,600,000
–
66.00
(3,750,000)
14.87
49.15
(7,850,000)
33,400,000
Weighted
average
exercise
price
(pence)
24.59
61.84
56.80
8.00
41.04
2018
£’000s
33,400,000
–
(3,500,000)
(4,950,000)
24,950,000
The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2018
was 37.54p (2017: 46.39p). The weighted average remaining contractual life of the options outstanding at 31 December 2018 was
3.1 years (2017: 3.5 years).
3.1 million share options were exercisable as at 31 December 2018 (2017: nil). If all equity share options were exercisable
immediately, new ordinary shares equal to approximately 2.4% (2017: 3.3%) of the shares currently in issue, would be created.
RSU Awards
2,809,956 RSU awards were granted in 2018 with a three year vesting period, and at vesting, the RSU awards will be satisfied by
issue of the Company’s shares to the plan participants. During the year 76,716 RSU awards expired and therefore 2,732,240 RSU
awards were outstanding as at 31 December 2018.
The fair value of the RSU awards granted is estimated at the date of grant using a Black–Scholes model, taking into account the
terms and conditions upon which the RSU awards were granted. The valuation used an expected life of three years and used the
following additional assumptions for the RSU awards granted during the year:
• Weighted average share price as of grant date: 41.84 pence (2017: n/a)
• Average risk free interest rate: 0.93% (2017: n/a)
• Expected volatility: 60.51% (2017: n/a)
• Assumed forfeitures: 0% (2017: n/a)
• Expected dividends: nil (2017: n/a)
No other features of RSU awards grant were incorporated into the measurement of fair value. The weighted average fair value of
the RSU awards granted was 41.83p (2017: n/a).
The weighted average remaining contractual life of the RSU awards outstanding as at 31 December 2018 was 2.01 years
(2017: n/a)
If all the RSU awards were exercisable immediately, new ordinary shares equal to 0.3% (2017:n/a) of the shares currently in issue,
would be created.
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22 Share Based Payments continued
Warrants
As at 31 December 2018, the Company had the following outstanding warrants to subscribe to the Company’s ordinary shares.
2018
2015 Warrants
2016 Warrants
2017
2014 Warrants
2015 Warrants
2016 Warrants
Exercise
price
(pence)
Expiry date
Number
At 1 January
Exercised
24.00 22 May 2020
19,675,152
(2,587,980)
30.00 21 June 2021
52,441,273
(30,000)
Number
At 31 December
2018
17,087,172
52,411,273
72,116,425
(2,617,980)
69,498,445
Exercise
price
(pence)
Expiry date
Number
At 1 January
Exercised
10.40 28 July 2017
34,048,080 (34,048,080)
24.00 22 May 2020
51,389,776
(31,714,624)
30.00 21 June 2021
55,057,294
(2,616,021)
140,495,150
(68,378,725)
Number
At 31 December
2017
–
19,675,152
52,441,273
72,116,425
23 Commitment and Guarantees
At 31 December 2018, the Group’s minimum capital expenditure on its licences was approximately £3.8 million primarily for the
exploration and appraisal activities in the Group’s licences in Morocco. The Group had $3.35 million as guarantee to the Moroccan
Oil Ministry for the minimum work commitments on its licences.
As at 31 December 2018, 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 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
Premises
£’000s
Vehicles
£’000s
Total
£’000s
313
197
43
–
553
79
–
–
–
79
392
197
43
–
632
Premises
£’000s
Vehicles
£’000s
Total
£’000s
382
386
307
–
1,075
99
–
–
–
99
481
386
307
–
1,174
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Notes to the Financial Statements
for the year ended 31 December 2018
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Group and Company
Non-current liabilities
5-year secured bonds
At 1 January/on recognition
Amortised finance charges
Interest payments
Exchange adjustments
2018
£’000s
2017
£’000s
18,566
2,927
(1,274)
257
20,476
16,455
2,706
(1,263)
668
18,566
The Company has a 5-year non-amortising secured bonds with an aggregate issue value of €28.8 million (the “bonds”). The
bonds are secured over the share capital of Sound Energy Morocco South Limited, have a 5% coupon and were issued at a 32%
discount to par value. 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.
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. The effective interest rate is approximately 16.3%. The 5-year secured bonds are due in
June 2021.
Reconciliation of liabilities arising from financing activities
2018
Long-term borrowings
Total liabilities from financing activities
2017
Long-term borrowings
Short-term borrowings
Total liabilities from financing activities
Reconciliation of external interest costs
Amortised finance charges – long-term borrowings
Amortised finance charges – short-term borrowings
Less capitalised interest
Exchange adjustments
Total external interest for the year
Non-cash changes
1 January
2018
£’000
18,566
18,566
Cash flows
£’000
(1,274)
(1,274)
Amortised
finance
charges
£’000
2,927
2,927
Exchange
adjustments
£’000
31 December
2018
£’000
257
257
20,476
20,476
1 January
2017
£’000
16,455
986
17,441
Cash flows
£’000
(1,263)
(30)
(1,293)
Non-cash changes
Loan
repayment
in shares
£’000
Amortised
finance
charges
£’000
–
(1,000)
(1,000)
2,706
44
2,750
Exchange
adjustments
£’000
31 December
2017
£’000
668
–
668
2018
£’000s
2,927
–
2,927
(561)
8
2,374
18,566
–
18,566
2017
£’000s
2,706
44
2,750
(1,618)
(15)
1,117
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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 was proposed that Company disposes of its portfolio of
Italian interests and permits through the sale of Sound Energy Holdings Italy and Apennine Energy SpA (the “disposal”) for
the consideration of 185,907,500 new ordinary shares in Saffron (subsequently renamed Coro Energy plc) issued directly to
the Company’s shareholders. On 23 January 2018, the Company announced that it had entered into a binding agreement with
Saffron for the disposal and the transaction completed on 9 April 2018. The value of the 185,907,500 Coro Energy plc shares
distributed to the Company’s shareholders was £8.0 million using the completion date share price of Coro Energy plc of
4.3 pence per share. The Company was also entitled to receive proceeds of VAT refund due from the Badile well operations and
retained economic interest in Badile land. The Company was also obligated to fund the Badile land restoration for a fixed amount.
The results of the Italian operations for the year are presented below:
Revenue
Operating costs
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
Foreign currency translation gain reclassified from other comprehensive income
Gain on disposal of Italian operations
Profit/(loss) for the year before taxation from discontinued operations
Deferred tax credit
Profit/(loss) for the year after taxation from discontinued operations
* Represent the results for the period to divestment on 9 April 2018.
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
The calculation of gain on disposal of Italian operation is shown below:
Consideration
Fair value of shares distributed to shareholders
Total disposal consideration
Carrying amount of net assets sold
Assets less liabilities payable by the Company
Impairments and other expenses on disposal
Gain on disposal of Italian operations
2018*
£’000s
140
(170)
–
–
(25)
(55)
(235)
(290)
26
–
–
1,533
3,684
4,953
–
4,953
2018
£’000s
1,897
(2,655)
–
(758)
2017
£’000s
708
(697)
(55)
(19,018)
(761)
(19,823)
(1,995)
(21,818)
79
4
(131)
–
–
(21,866)
55
(21,811)
2017
£’000s
(2,513)
(13,962)
–
(16,475)
2018
£’000s
2017
£’000s
7,994
7,994
(7,415)
3,969
(864)
3,684
–
–
–
–
–
–
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Notes to the Financial Statements
for the year ended 31 December 2018
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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 were 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
2017
£’000s
1,363
4,792
1,598
133
3,527
66
813
12,292
1,644
378
2,470
4,492
7,800
26 Post Balance Sheet Events
On 7 January 2019, the Company provided further update on the Company’s TE-10 exploration well, confirmed the achievement
of total depth, the potential identification of additional thin bedded net pay and the successful recovering of a gas sample to
surface.
On 28 January 2019, the Company provided further update on the operations in Eastern Morocco and confirmed that the
rig at TE-10 had been demobilised and that design, planning and procurement for the TE-10 testing programme was nearing
completion.
On 18 February 2019, the Company announced an increase in net pay estimate on TE-10 well from up to 10.5m to up to 15.3m.
The well testing and stimulation equipment has been mobilised from Libya and Tunisia and extra equipment mobilised from
the USA. The Company is expecting the equipment to arrive on location, and be rigged up and be ready to commence the test
programme within four weeks.
On 7 March 2019, the Company confirmed that it was in continued positive discussions with Morocco’s Office National de
l’Electricité et de l’Eau Potable (“ONEE”) and the Moroccan Minister of Energy in relation to a gas sales agreement (“GSA”),
pursuant to which the Minister of Energy had confirmed his intention that the GSA covers all of the gas to be produced from
the recently awarded Tendrara Production Concession, onshore Morocco.
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List of Licences and Interests
93
Key Project or Prospect
Licence
Greater Tendrara
Tendrara1
Anoual2
Sidi Mokhtar
Status
Name
Permit Greater Tendrara
Permit
Permit
Permit
Tendrara
Anoual
Sidi Mokhtar
Type
Exploration
Exploitation
Exploration
Exploration
WI
(%)
47.5
47.5
47.5
75
Area
(km2)
14,500
Operator
Sound Energy Morocco East
133.5
Sound Energy Morocco East
8,853.33
Sound Energy Morocco East
4,711.7
Sound Energy Morocco South
Notes:
1. 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%.
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%.
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94
Shareholder Information
Dealing Information
Stock code – SOU.LN
Financial Calendar
Meetings
Annual General Meeting – May 2019
Announcements
2019 Interim – September 2019
2019 Preliminary – March 2020
Addresses
Registered Office
Sound Energy plc
1st Floor
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
Auditor
Crowe U.K. 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
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
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