30394 21 May 2021 1:38 pm V15Sound Energy plc Annual Report & Accounts for the year ended 31 December 2020Sound Energy plc Annual Report & Accounts for the year ended 31 December 2020Resetting our strategic directionAnnual Report & Accounts for the year ended 31 December 202030394-Sound-energy-AR2020 Strategic and Governance.indd 330394-Sound-energy-AR2020 Strategic and Governance.indd 321-May-21 1:39:12 PM21-May-21 1:39:12 PM 30394 21 May 2021 1:38 pm V15CRefreshed strategic focusesRead more in Our Strategy on pages 12 to 13Advancing our Micro LNG production planRead more in Portfolio Review on pages 16 to 19Structural cost reductionsRead more in Financial Review on pages 20 to 21Change in leadershipRead more about The Team on pages 36 to 37HighlightsSound Energy is a Moroccan-focused upstream oil and gas company.This year, we reset our strategy to transition towards becoming a cash-generating company with significant exploration potential. Refocusing our growth ambitionsCorporate websiteGet the latest reports and presentations at www.soundenergyplc.comCSTRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 330394-Sound-energy-AR2020 Strategic and Governance.indd 321-May-21 1:39:13 PM21-May-21 1:39:13 PM 30394 21 May 2021 1:38 pm V15Strategic ReportStatement from the Executive Chairman 02Our Focus on LNG06Attractiveness of Morocco07Business Model08Business Partnerships10Our Strategy 12Reserves and Resources14Portfolio Review16Financial Review20HSE22ESG – Societal25Directors’ Statement under Section 172 (1) of the Companies Act 200626Principal Risks and Uncertainties28ContentsGovernance ReportChairman’s Corporate Governance Statement33QCA Code Principles34Leadership– Overview35– The Team36Effectiveness– Board Activities38– Shareholder Relations40Accountability– Health and Safety Committee41– Audit Committee42– Nominations and Remuneration Committee44Directors’ Remuneration Report 46Directors’ Report51Statement of Directors’ Responsibilities53Independent Auditor’s Report54Financial StatementsConsolidated Statement of Comprehensive Income59Consolidated Balance Sheet61Company Balance Sheet63Group and Company Statements of Changes in Equity62Group Statement of Cash Flows64Company Statement of Cash Flows65Notes to the Financial Statements66Other InformationList of Licences and Interests93Shareholder Information94Read more in our Business Model on pages 08 to 09Sound Energy plc Annual Report for the year ended 31 December 2020112Sound Energy’s current focusSectors that use LNG41Rail6Agriculture5Industry7Trucking8MiningProducing wells2Gas processing3Small-scale LNG Production4867The LNG value chain35www.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 202001STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 130394-Sound-energy-AR2020 Strategic and Governance.indd 121-May-21 1:39:14 PM21-May-21 1:39:14 PM 30394 21 May 2021 1:38 pm V15Statement from the Executive Chairman“ 2020 was a pivotal year for Sound Energy, as it transitioned its leadership team and reset its strategy to move towards becoming a cash-generating development and production company with significant exploration upside potential from its legacy portfolio position.”Graham LyonExecutive Chairman2020 was a pivotal year for Sound Energy, as it transitioned its leadership team and reset its strategy in moving towards becoming a cash-generating development and production company with significant exploration upside potential from its legacy portfolio position. This work has positioned the Company well for some important potential milestones in the coming period. The leadership team with the support of the board has a clear focus as we move forward on creating material value for shareholders as we progress all phases of the Tendrara project.The Company took swift and purposeful action to materially reduce corporate overheads and to reduce costs, as it navigated its way through the significant headwinds brought on by the Covid-19 global pandemic, which challenged the global business environment and was exacerbated in the oil and gas sector by a significant drop in commodities prices, which have since recovered. The Company announced in July that it had concluded discussions with the previously proposed purchaser relating to a potential partial disposal of its Eastern Morocco portfolio. In furtherance of the refocused strategy, the Company announced in June that it had entered into a Heads of Terms in order to sell the Liquified Natural Gas (“LNG”) associated with its Phase 1 development project to the main gas distributor in Morocco, Afriquia Gaz, and get access to partial financing. Post period, the Company successfully restructured its €28.8 million 5% senior secured loan notes to stabilise the platform upon which it can move forward to deliver its strategy. In December, the Company announced another significant step forward towards readiness for a final investment decision (“FID”) on the Phase 1 development, when it announced the entry into a period of exclusivity with Italfluid Geoenergy S.r.l. (“Italfluid”) for the provision of gas processing and liquefaction equipment through an innovative leasing structure. In addition, during the period, the Company also received the Environmental Impact Assessment (‘‘EIA’’) approval for the Tendrara Gas Export Pipeline and Central Processing Facility (‘‘CPF’’), whilst continuing to progress the finalisation of binding terms for the proposed Gas Sales Agreement (‘‘GSA’’) with Office National de l’Electricité et de l’Eau Potable (‘‘ONEE’’) for the second phase of development of the TE-5 Horst.Eastern Morocco Partial DisposalThe Company announced in July 2020 that it was no longer in discussions with the previously proposed purchaser in relation to the potential partial disposal of the Eastern Morocco portfolio. However, having announced its phased development strategy for the Tendrara Production Concession, the Company continues to engage with other parties who have expressed interest in participating in the Company’s strategy by way of a potential farm-in. Whilst a partial disposal of its Eastern Morocco portfolio is not STRATEGIC REPORT0230394-Sound-energy-AR2020 Strategic and Governance.indd 230394-Sound-energy-AR2020 Strategic and Governance.indd 221-May-21 1:39:18 PM21-May-21 1:39:18 PM STRATEGIC REPORT
a strategic priority for the Company, normal business
development discussions are ongoing in this regard. There
is no certainty that any of these discussions will progress
and the Company’s current key priority is to deliver a final
investment decision on its proposed Phase 1 development of
the Tendrara Production Concession during 2021.
Phase 1 Micro LNG Development
In June, the Company was pleased to announce that
Heads of Terms had been entered into to permit exclusive
discussions to negotiate definitive agreements for both the
purchase of LNG to be produced from the TE-5 Horst to
the main gas distributor in Morocco, Afriquia Gaz, as well
as partial financing for the Phase 1 development by the
Moroccan conglomerate. An LNG Gas Sales Agreement
is currently being negotiated pursuant to which the joint
venture will commit over a 10-year period to supply an annual
contractual quantity of 100 million standard cubic metres of
(liquefied) gas from the Phase 1 development, based upon
the key commercial terms set out in the Heads of Terms. In
December, the Company entered into a letter of exclusivity
with Italfluid, an Italian integrated services provider, pursuant
to which the parties have agreed to use their reasonable
endeavours to negotiate and enter into a binding project
contract which will on entry commit Italfluid to design,
construct, commission, operate, maintain and let to the
Company a micro liquefied natural gas plant (‘’mLNG Plant’’)
that can process raw gas and produce LNG.
Phase 2 Tendrara TE-5 Development
The Company continued to make progress in advancing the
development of the Tendrara TE-5 discovery including the
approval of the EIA mentioned above, along with progression
of discussions to obtain pipeline corridor rights. Despite
the difficulties imposed by the Covid-19 pandemic, positive
discussions with ONEE have continued in order to finalise the
fully termed GSA for gas offtake. This will form a key building
block to support project sanction of the proposed TE-5
Phase 2 development.
EIA of the Tendrara Gas Export Pipeline and CPF
In January 2020, the Company announced receipt of the
EIA approval from the Moroccan Ministry of Energy, Mines
and Environment to build and operate a 120km 20-inch
gas pipeline connecting the CPF to the Gazoduc Maghreb
Europe pipeline (‘‘GME’’). This was followed by the ministerial
approval of the EIA for the CPF in March. Approval of the
respective EIAs are important steps in the development
process of the TE-5 Horst. The EIA incorporates the Micro
LNG project activity.
Structural Cost Reductions
The Company continues to manage its cash resources
prudently and, accordingly, having paused its operational
programme in 2019, the Company continued a structural
cost reduction programme aimed at materially reducing
the Company’s ongoing operating expenditure, including
reductions in staff numbers, executive remuneration and
other business costs. By the end of the reporting period,
the cost reduction initiatives that have been implemented
delivered a reduction in general and administrative expenses
by 52% compared with the year ended 31 December 2019.
Licensing
The Company announced in July that it had successfully
concluded a renegotiation of the terms of its Anoual
Exploration Permit in order to realign the Company’s
committed exploration work programme in Eastern Morocco,
so that it dovetails more efficiently with the proposed
phasing of our Phase 1 development plan at the Tendrara
Production Concession, in a manner that underscores both
our confidence in the potential of the basin as a future
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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Statement from the
Executive Chairman
continued
In August, the Company placed 163,529,411 new ordinary
shares at a price of 2.125 pence per share to raise £3.2 million
after costs. Later in the month, the Company also announced
that its former subsidiary, Apennine Energy SPA, had entered
into a binding Pre-Sale Agreement with a buyer in respect of
the proposed sale of the Badile Land pursuant to which the
buyer has agreed, in addition to purchasing the Badile Land in
two tranches, to take responsibility for meeting the remaining
costs of the restoration of the Badile Land associated with
the historical drilling activity on the site. Pursuant to the sale
of the land, the net proceeds of the sale (after costs) are to
be remitted to Sound Energy under the terms of the disposal
of the Company’s former subsidiary, Sound Energy Holdings
Italy Limited, in 2018. The first of two payments arising from
the sale was received, post period, in March 2021.
In August, the Company received a notification from
the Moroccan tax authority that, pursuant to an audit of
its subsidiary Sound Energy Morocco East Limited, the
Moroccan tax administration had reassessed taxes for the
period of 2016–2018 and had assessed additional withholding
taxes and value-added tax liabilities totalling approximately
US$14 million were due pursuant to historical licensing
changes, with the tax administration suggesting that this
assessment might also result in a revision of the tax bases for
previously submitted corporate tax returns, which could lead
to additional corporate taxes being assessed. The Company
believes that the assessment arises from a misunderstanding
of the historical licensing changes and has appealed the
assessment.
As at 31 December 2020, the Group had total cash balances
of £4.5 million (including approximately £1.3 million held as
collateral for a bank guarantee against licence commitments).
As at 30 April 2021, the Group’s unaudited cash balance was
£3.2 million (including approximately £1.3 million held as
collateral for a bank guarantee against licence commitments).
Graham Lyon
Executive Chairman
significant gas-producing province and our ability to deploy
capital judiciously across the portfolio. As such, the Initial
Period on the licence was extended from August 2020 to
December 2021 with the agreement to drill one Triassic
exploration well within this period.
At Sidi Moktar, due to further disruption caused by the
impact of the Covid-19 pandemic, during which the Company
has continually engaged with the regulatory authorities,
ONHYM has approved a two-year extension to the initial
period of Petroleum Agreement in order for the Company to
complete the committed work programme. The length of the
initial period will now be four years and six months, ending
6 October 2022. The work programme commitments for the
initial period remain unchanged. The lengths of the first and
second complimentary periods remain unchanged at three
years, and two years and six months respectively.
Corporate
In February, the Company announced the appointment of
myself, Graham Lyon, as Executive Chairman. The Company
was pleased to subsequently appoint Mohammed Seghiri
as Chief Operating Officer in April. Mohammed brings
extensive technical and commercial experience, as well
as Moroccan knowledge and relationships, which will be
utilised in particular to drive forward the Company’s phased
development strategy in Eastern Morocco. In July, the
Company announced further Board strengthening with the
appointment of David Blewden as an Independent Non-
Executive Director. David brings a wealth of oil and gas
specific financial experience, including in relation to debt
restructuring, which was a key priority for the Company in
2020 and remained so moving into 2021.
The Company began discussions relating to the restructuring
of its €28.8 million 5% senior secured bond and announced
in December that, whilst it had received the support of a
majority of noteholders for its restructuring proposal issued
in October, it had fallen short of the 75% majority required to
approve the proposal. Post-period, the Company continued
constructive dialogue with noteholders and was pleased
to announce in April 2021 that noteholders had approved
a revised restructuring proposal which inter alia moved the
maturity of the loan notes to 31 December 2027, converted
EUR 3,479,999 of the notes to 141,176,448 new ordinary
shares in the Company and amended the coupon structure
(applicable from June 2021) from a 5% cash coupon per
annum to a 2% cash coupon per annum together with a
deferred 3% per annum coupon payable at maturity. The
restructuring of the notes has resulted in the delivery of a
stabilised capital structure from which the Company can
focus on pursuing its growth aspirations in the near term.
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Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15While the LNG industry has traditionally focused primarily on development of ever increasing plant capacities, the maturity of the technology has allowed development of technologies applicable for small volumes to be competitive and potentially economically attractive. The main challenge for small scale LNG applications is therefore not technical but economic. Mini/Micro LNG facilities currently mainly consist of LNG liquefaction plants supplying LNG satellite stations with annual LNG volumes up to 0.2 mtpa. As an indication, these LNG quantities correspond to the yearly LNG demand for a power plant up to approximately 100MW. The mini-LNG chain is virtually identical to the conventional LNG chain, differing only in scale. One difference is that for small gas volumes: LNG transport is feasible using trucks (onshore) or barges (offshore), rather than large marine carriers.What this means for Sound Energy• Remote location but with good road infrastructure means that trucks are a feasible mode of transport • Good in-country gas prices means that the economics make sense • Relatively short time to market – infrastructure fairly quick to install• Supports the transition to lower carbon intensive economies and the Moroccan state planRead more in our Business Model on pages 8 to 9Micro LNGAs the transition to cleaner energy sources continues to evolve, Sound Energy’s Micro LNG and Phase 2 development project enables Morocco to participate in this global trend.Environmental and Consumer Benefits of LNGCleaner – LNG is better than any other fossil fuel for the environmentVersatile – Easy to transport and store, and is used in a wide range of industriesSectors that use LNGRailAgriculture and IndustryTruckingMaritime fuelPower generation What this means for Sound EnergyWe are invested in a sector that fits in with the global ambitions for combating climate change and transition from heavier fuels to LNG and renewables:• Potentially easier to attract investment into greener fuels • Current requirement in Morocco for natural gas is 0.44Bcf – we can supply 0.4Bcf annually • Ability to deliver to a market sector in remote locations • Likely to gain further traction as market and regulatory pressures to transition to lower carbon energy intensify Our Focus on LNG06STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 630394-Sound-energy-AR2020 Strategic and Governance.indd 621-May-21 1:39:30 PM21-May-21 1:39:30 PM Attractiveness
of Morocco
STRATEGIC REPORT
• 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.
• Ease of doing business – ranks high in the World Bank’s
2019 report Ease of Doing business report.
The properties of natural gas (low environmental impact
of its combustion), its energy performance and its
abundant reserves distributed around the globe make it
an energy of the future: natural gas use is expected to
account for 25% of the world energy portfolio by 2035,
compared to 21% today, i.e. a demand of 5,1000 billion
m3 (Gm3).
Source: https://www.elengy.com/en/lng/lng-an-energy-of-the-
future.html#:~:text=The%20properties%20of%20natural%20
gas,a%20demand%20of%205%2C1000
What this means for Sound Energy
• Favourable fiscal terms (10-year tax holiday and 36% net
government take including 5% royalty – one of the lowest
globally).
• Good economics and able to get gas to market with ease.
• Attractive pricing – benefits from high European and
Moroccan gas pricing.
• Supportive and stable government with a desire to
promote gas demand in-country.
• Low-cost production.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V1508Enabling the Energy Transition to Deliver Shareholder ValueA business model centred around value delivery at the heart of the energy transition. The world is changing. Society demands an irreversible transition towards a decarbonised and sustainable energy future. Sound Energy is committed to this aspiration and has a strategy focused on developing a portfolio of opportunities to deliver business growth whilst serving society’s aspirations.Environmental, social and governance (“ESG”) factors are core to Sound Energy’s strategy as we look to develop and build our portfolio. We will grow our business responsibly, safely and sustainably, and work with society, governments, stakeholders and local communities to create a legacy from which shareholders and communities can benefit alike.EvaluateEvaluate our existing portfolio, focusing on value extraction via a variety of energy transition strategies including partnerships, farm-outs and revenue-producing opportunities.Recycle and GrowRecycle cash and leverage portfolio to fuel growth. Leverage technical, financial and commercial skillsets to build the portfolio.Sound Energy’s Current FocusPhase 1 of TE-5 development (Micro LNG plant)DevelopAdvance development strategies while preserving financial resources. Seek opportunities for revenue generation. Move discoveries through the development phase at pace. Innovative co-operation with strategic partners who can deploy capital.ProduceNatural gas production via Micro LNG or larger projects at advantaged pricing to generate cash and value for shareholders.Upstream Gas Value ChainBusinessModelRelationships and PartneringStrategic RelationshipsSound Energy recognises that it can achieve more than we can alone by developing high impact and sustainable strategic industry relationships. These relationships allow us to leverage technical, financial and commercial expertise to enhance our business, and deliver on our objectives, whilst derisking our opportunities and accessing capital to fund our operations. We believe the creation of mutually beneficial partnerships allows us and our partners to enhance and deliver our business strategies. Governmental RelationshipsHaving strong and well developed relationships with host governmental bodies is key to delivering Sound Energy’s aspirations. The Company invests time, expertise and resources to engage with governmental agencies to build trust and understanding around its strategy and operations. We believe we have a responsibility for operating safely, efficiently and reliably in the countries in which we operate, and that through our investments and expertise, we can add value to communities and create a positive legacy for society and key stakeholders. InvestorsThe support of Sound Energy’s investors and shareholders provides us with a firm financial foundation to deliver our strategy. We regularly engage with our shareholders and we collaborate with our cornerstone investors who bring insight, knowledge and business skills, which offers an additional layer of value to help us achieve success within the business. STRATEGIC REPORT0830394-Sound-energy-AR2020 Strategic and Governance.indd 830394-Sound-energy-AR2020 Strategic and Governance.indd 821-May-21 1:39:32 PM21-May-21 1:39:32 PM 30394 21 May 2021 1:38 pm V15Delivering Sustainable Shareholder Value Through the Energy TransitionThis year, we reset our near-term strategic direction to pivot towards becoming a revenue-generating development Company whilst retaining the significant exploration potential opportunity inherent within our existing portfolio. The Company recognises that it is uniquely positioned through its people, portfolio, expertise and innovative approach to attracting investment to be at the vanguard of transitioning Morocco towards a lower carbon future, whilst creating access to reliable sources of energy. As the Company delivers upon its objectives, it will look to grow its portfolio by leveraging these strengths and focusing its investments on opportunities with strong ESG attributes that can also generate cash and sustainable long-term value for shareholders.The immediate focus is on development of the discovered TE-5 Horst divided into two phases. Phase 1 is focused on a Micro LNG (liquefied natural gas) development to sell liquefied gas into the Moroccan industrial market through a fuel distributor, whilst Phase 2 centres around the development of a pipeline and central processing facility to sell gas to the electrical power sector. Both developments look to displace liquefied petroleum gas and coal from the Moroccan energy mix to enable Morocco to bridge towards a lower carbon future.During 2020, the Company made significant progress in advancing Phase 1 including:• Signing of a Heads of Terms with Afriquia Gaz for both the purchase of LNG and the partial financing of the Phase 1 development. This included: −A 10-year take or pay commitment from first gas to purchase an annual contractual quantity of 100 million standard cubic metres per annum at a price between $7–9 per mmBTU −Approval of LNG CPF EIA permit −Letter of exclusivity signed with EPC contractor Italfluid for provision and operation of Micro LNG facilitiesDuring the coming period, the next steps are:1. Finalise funding with gas offtaker2. Complete definitive LNG gas sales agreement3. Entry into service agreement with LNG equipment supplier and operator4. Final investment decisionAs we transition towards becoming a near-term revenue generating business via our Micro LNG and Phase 2 full field development plan, the focus on delivery of exploration has been deprioritised within our overall strategy. The significant exploration potential in our Moroccan portfolio remains, so as we deliver the revenue-generating opportunities, our strategy will include selective investments to further unlock the exploration and appraisal potential, particularly where this can underpin further cash-generative developments in and around key infrastructure. www.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 202009STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 930394-Sound-energy-AR2020 Strategic and Governance.indd 921-May-21 1:39:32 PM21-May-21 1:39:32 PM 30394 21 May 2021 1:38 pm V15Business PartnershipsOur 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. Afriquia GazSound Energy is pleased to be partnering with Afriquia Gaz as the LNG offtaker for its phase 1 development plan for the TE-5 Horst development. As the largest LPG distributor in Morocco with a 44% Market share they have significant liquified petroleum gas, butane and propane distribution and marketing operations. They are listed on the Casablanca Stock exchange (Market cap: approx. £1.1 billion). The partnership commits SEMEL for 10 years from first gas and subject to the conclusion of a gas sales agreement to produce, process, liquify and sell to Afriquia Gaz an annual contractual quantity of 100 million standard cubic metres of gas from the Phase 1 development with Afriquia Gaz committing to an annual minimum “take or pay” quantity of 90 million standard cubic meters of gas, priced within a range. Afriquia Gaz has also committed to use reasonable endeavours to conclude definitive agreements in respect of a proposed partial financing for the development via a subscription of Sound Energy Shares and a secured commercial loan. Post completion of the subscription Afriquia Gaz will become a shareholder in Sound Energy with an approximate 10% stake. Afriquia Gaz will also be providing development funding to Sound Energy thereby cementing alignment between all companies.10STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 1030394-Sound-energy-AR2020 Strategic and Governance.indd 1021-May-21 1:39:34 PM21-May-21 1:39:34 PM STRATEGIC REPORT
Italfluid Geoenergy S.r.l
In December 2020 Sound Energy Morocco East entered
into a letter of exclusivity with Italfluid to negotiate and
enter into a binding project contract to commit to design,
construct, commission, operate, maintain and to let to
SEMEL a mLNG plant. This exclusivity period ended in
March 2021 but negotiations continue positively between
the two parties.
Italfluid is a global integrated service company which
provides certain upstream petroleum services, including
the design, construction, commissioning and maintenance
of process plants and hydrocarbon processing, including
gas liquefaction to produce liquified natural gas. It has been
operating in the oil and gas industry for over 30 years.
Their clients include Total, Edison, British Gas and Eni.
Italfluid through a vendor financing and lease to own
financial structure with Sound Energy are aligned with
delivering plant and operation and maintenance services
to the Phase 1 mLNG Project such that LNG deliveries are
guaranteed to market as required under take or pay and
send or pay contractual obligations.
Schlumberger Silk Route
Services Limited (“SSRL”)
Schlumberger Silk Route Services Limited is a subsidiary
of Schlumberger group (“Schlumberger”) which is the
world’s leading provider of technology for reservoir
characterisation, drilling, production, and processing to the
oil and gas industry. Schlumberger supplies the industry’s
most comprehensive range of products and services, from
exploration through production and integrated pore-to-
pipeline solutions for hydrocarbon recovery working in
more than 85 countries.
Schlumberger
In October 2015, Sound Energy announced that it had
signed a Memorandum of Understanding (“MOU”)
with Schlumberger Oilfield Holdings Limited (“SOHL”)
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 and later has renewed it with
SSRL where, under the FMA as amended from time to
time, Schlumberger provides via SSRL integrated technical
services, equipment and personnel to Sound Energy,
operator of the Tendrara Exploitation Concession in which
Schlumberger has a 27.5% synthetic interest.
Oil and Gas Investment Fund
In January 2017, Sound Energy announced the acquisition
of the Eastern Morocco portfolio of Oil and Gas Investment
Fund (“OGIF”), 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 2020, OGIF had an interest in approx.
20% of Sound Energy’s current issued share capital.
Office of Hydrocarbons and Mines
• 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 monitoring of licences for exploration
and for funding the development jointly with the private
partners in Morocco.
• Sound Energy has a good relationship with ONHYM and
looks forward to future co-operation.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Our StrategyThis year, we reset our strategy to transition towards becoming a cash-generating Company with significant exploration potential.The focus is on development of the TE-5 Horst divided into two phases. Phase 1 involves on the Micro LNG development plan, and Phase 2 involves a full field development plan, centred around the development of a pipeline and central processing facility.Phase 1 – Micro liquefied natural gas (“mLNG”) development plan for the TE-5 Horst developmentObjectivesWith the global energy transition to more climate-friendly sources – such as natural gas – well underway, the key objective of the mLNG project is to provide alternative energy to Moroccan industry where there is a clear demand and willingness to replace coal with fuels such as natural gas. Additionally, Sound Energy:• is transitioning to a revenue-generating Company and the mLNG project is key in this transition; and• will use this revenue on meeting our exploration commitments and other value creating opportunities.Phase 2 – Full field development plan centred around the development of a 120km pipeline and central processing facilityObjectivesThe larger full field development plan has the primary objective of increasing the amount of natural gas available within Morocco and aiding the transition from coal fired power generation. Furthermore, development of Moroccan domestic gas can reduce Morocco’s reliance on current Algerian sourced gas.• Connection into the GME pipeline – offering multiple prospective commercialisation routes• Increase in the available quantum of gas to our purchaser ONEESTRATEGIC REPORT1230394-Sound-energy-AR2020 Strategic and Governance.indd 1230394-Sound-energy-AR2020 Strategic and Governance.indd 1221-May-21 1:39:35 PM21-May-21 1:39:35 PM 30394 21 May 2021 1:38 pm V15HighwayNational RoadMain Industrial CentresRailway InfrastructureOROCCOMEDITERRANEANATLANTICCasablancaBerrechidTendraraMarrakechSafiJorf LasfarOujdaRabatTangierNadorKenitraMGas Maghreb-Europe PipelineProposed rMarrakechMOROCCOMEDITERRANEANATLANTIC (cid:31)(cid:31)(cid:31)(cid:31)(cid:31)(cid:31)(cid:31)= Clusters (From 2 to 4 wellheads)Inlet point 110 barTie-in point80 barTENDRARAGAS SALESPIPELINEGME PIPELINE213..n4= Compression StationGas 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 GME(OuedEl Makhazine2 x 400 MW)(Al Wahda4 x 400 MW)(Dhar Doum4 x 400 MW)CasablancaMarrakechMOROCCOMEDITERRANEANATLANTICRabatTahaddart Power400 MW Ain Beni MatharOujdaGreater TendraraExploration PermitTendrara Production ConcessionAnoual ExplorationPermitGreater TendraraExploration PermitTendaraProduction ConcessionAnoual ExplorationPermitTahaddart Power400 MW(Dhar Doum4 x 400MW)CasablancaCompression stationClusters (from 2 to 4 wellheads)Rabat4 x 400MW)(Al Wahda OujdaAin Beni MatharCentral ProcessingFacility(CPF)120kmPhase 2 – full field development plan centred around the development of a 120km pipeline and central processing facilityPhase 1 – Micro liquefied natural gas (“mLNG”) development plan for the TE-5 Horst development Progress• HoT with Afriquia Gaz• Exclusivity for both the purchase of LNG (TE-5 Horst development) and partial financing of Phase 1 development• 10-year commitment from first gas to sell annual contractual quantity of 100 million standard cubic metres per annum with take or pay agreement priced at $7–9 per mmBTU• LNG CPF EIA permit approvedNext steps• Conclude agreements with Italfluid• Finalise funding • Complete definitive LNG GSA• Final investment decision Progress• 25-year concession awarded September 2018• GSA MoU signed October 2019 based on M4 connection to GME pipeline• Definitive 10-year take or pay GSA with ONEE (the state power company of Morocco) for minimum annual volume of 0.3 bcm currently being negotiated• 20-inch, 120km Tendrara Gas Export Pipeline (TGEP) FEED complete• CPF FEED completed• Interconnection to existing GME pipeline tie-in FEED completed by Metragaz• Pipeline EIA permit and land access approvedNext steps• Enter into definitive gas sales agreement with ONEE• Mature project towards FIDwww.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 202013STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 1330394-Sound-energy-AR2020 Strategic and Governance.indd 1321-May-21 1:39:39 PM21-May-21 1:39:39 PM 30394 21 May 2021 1:38 pm V15Reserves and ResourcesContingent Resource Estimates for Eastern Morocco (Tendrara Production Concession) 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 Tendrara Production concession contains both discovered and undiscovered petroleum, 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 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 Consultants Ltd). 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)Contingent Resources (Bcf)1Accumulation NameGross (100%) basisGross (100%) basisLowMidHigh1C2C3CTE-5 Horst(TAGI 1 and 2)3496518731973775331 Contingent Resources are technical volumes i.e., no economic limit test applied.Summary table showing the range of Discovered Gas Originally In place and Contingent Resources, gross, for the TE-5 Horst accumulation (TAGI Reservoir), within the Tendrara Production concession.STRATEGIC REPORT1430394-Sound-energy-AR2020 Strategic and Governance.indd 1430394-Sound-energy-AR2020 Strategic and Governance.indd 1421-May-21 1:39:39 PM21-May-21 1:39:39 PM STRATEGIC REPORT
Sound Energy internal exploration potential
estimates are unrisked original gas in place
(gross)
Palaeozoic
34
h
g
H
i
20.33TcF
20
)
f
c
T
(
e
m
u
o
v
l
s
a
G
i
d
M
w
o
L
7
0
Anoual
TAGI features
11.48 Tcf
Grand Tendrara
TAGI features
7.97 Tcf
Concession
Discovered
Resource
881 bcf
Summary chart showing the internally estimated, gross,
unrisked OGIP exploration potential for the Greater Tendrara
and Anoual licences and the resources of the Tendrara
Production concession. The Concession Discovered Resource
estimate is based on the sum of the externally certified,
gross, mid case discovered OGIP estimates from the RPS
resource certification exercise from several features, of
which the TE-5 Horst is included, within the concession. The
exploration potential estimates are Sound Energy internal
estimates and have not been externally verified or certified.
Resource Estimates for Eastern Morocco
(Greater Tendrara and Anoual licences)
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. The term “exploration
potential” as used herein is intended to encompass all
quantities of undiscovered petroleum recoverable and
unrecoverable and presented as original gas in place
(“OGIP”).
Sound Energy has internally estimated exploration potential
for the Greater Tendrara and Anoual licences and the
Tendrara Production Area concession, which are given in the
graph on the right. These estimates are presented as original
gas in place, unrisked without an associated geological
CoS and on a gross basis. The total volume of exploration
potential 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 concession 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 exploration inventory of features across
the licences in addition to the resources of the Tendrara
Production concession, as shown in the graph. 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 plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Our PortfolioSound Energy’s basin model for the Eastern Morocco portfolio predicts the presence of sufficient gas charge available to fill the high graded Trias Argilo-Gréseux Inférieur (“TAGI”) prospects, generated from source rocks, attributed to the regionally significant Palaeozoic succession. The model gives the Company its internal view of the estimated volumes for the exploration potential, expressed as unrisked gross gas originally in place, of a low case of 7 Tcf, a mid case of 20 Tcf, and if all the key elements of the petroleum, system’s model are present an upside case of 34 Tcf. Gas Maghreb-Europe PipelineProposed routing of pipeline to GMEOROCCOMEDITERRANEANATLANTICCasablancaTendraraProductionConcessionMarrakechAl Wahda4 x 400 MWTahaddart Power2 x 400 MWAnoual ExplorationPermitSidi Moktar Onshore120kmGreater TendraraExploration PermitOuedEl Makhazine2 x 400 MWDhar Doum4 x 400 MWOujdaRabatMALGERIAPortfolio ReviewGreater TendraraAnoualSidi Mokhtar onshoreProduction Concession16STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 1630394-Sound-energy-AR2020 Strategic and Governance.indd 1621-May-21 1:39:40 PM21-May-21 1:39:40 PM STRATEGIC REPORT
The Company continued to progress Phase 2, the full field
development of the Concession and following discussions
with representatives of Morocco’s Ministry of Interior and of
the Forestry Department obtained rights through a long-term
lease agreement for a 50m wide corridor along the entire
120km length of the Tendrara Gas Export Pipeline (“TGEP”),
with formal land access approvals received from the Ministry
of Interior and the Forestry Department. Approvals relate to
land covering 99.9% of the entire length of the 50m-wide
TGEP corridor and the remaining land approvals required,
covering land required for the three principal blacktop roads
and five river crossings along the TGEP route, are to be sought
at a later date, after the Final Investment Decision is taken.
In June, the Company announced Heads of Terms were
entered into with a Moroccan conglomerate, that controls the
main gas distributor in Morocco, Afriquia Gaz, with significant
liquified petroleum gas, butane and propane distribution
and marketing operations in Morocco, pursuant to which
the Company entered into exclusive discussions in order to
enter into agreements for both the purchase of LNG to be
produced from the TE-5 Horst development, as well as the
partial financing of the Phase 1 development.
Under the Heads of Terms, the parties have agreed to use
their reasonable endeavours to negotiate and enter into a gas
sales agreement pursuant to which the Company, on behalf
of the Concession joint venture partners, will commit, over
a period of ten years from first gas from the Concession, to
produce, process, liquefy and sell to Afriquia Gaz an annual
contractual quantity of 100 million standard cubic metres
of gas (approximately 4 billion standard cubic feet of gas
per year) from the Phase 1 development, and Afriquia Gaz
will commit to an annual minimum “take or pay” quantity
of 90 million standard cubic meters of gas, priced within a
range of US$7–9 per mmBTU with an indexed formula using
a combination of the European Title Transfer Facility and
United States Henry Hub benchmark indexes.
Eastern Morocco Development and Exploration
Our Eastern Morocco Licences comprising the Tendrara
Production Concession, Anoual and Greater Tendrara
are positioned in a region containing a continuity of the
established petroleum plays of Algerian Triassic Province
and Saharan Hercynian Platform. The presence of the key
geological elements of the Algerian TAGI gas play are
already proven within the licence areas with the underlying
Palaeozoic, representing a significant upside opportunity
to be explored. These licences cover a surface area of over
23,000 square kilometres, but so far only thirteen wells have
been drilled, of which six are either located within or local
to the Tendrara Production Concession. Exploration drilling
beyond the region of the Production Concession has been
limited and the Company maintains a portfolio of features
identified from previous operators’ studies, plus new targets
identified by Sound Energy from the recent geophysical data
acquisition, processing and ongoing interpretation studies.
These features are internally classified as either prospects,
leads or concepts based on their level of technical maturity
and represent potential future exploration drilling targets.
In February 2020, the Company announced an innovative
concept to advance development of the discovered TE-5
Horst gas field within the Production Concession through
a fast-track, cost-efficient, mLNG production scheme. This
proposal divided the gas development project into two
phases. The proposed mLNG production plan, Phase 1, would
be advanced alongside workstreams related to the full field
development plan, Phase 2. The mLNG scheme includes
the processing and liquification of the gas produced at the
field with the resulting LNG being transported to industrial
customer sites in Morocco. This mLNG production plan for
the TE-5 Horst is viewed by the Company as an attractive
route to generating early cash flows from the Production
Concession.
In March, the Company confirmed further progress with
the development of the Production Concession with the
receipt of an approved Environmental Impact Assessment
(“EIA”) from the Moroccan Ministry of Energy, Mines and
Environment related to the building of the proposed gas
treatment plant and compression station (“CPF”) at the
Concession, including the option for gas liquefaction.
Inclusion of gas liquefaction within the CPF EIA approval
enables the LNG development planned as Phase 1 of the
Concession field development plan, with the full field
development of the Concession following as Phase 2.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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STRATEGIC REPORT
Portfolio
Review
continued
In July 2020, the Company successfully concluded a
renegotiating of the terms of its Anoual licence with ONHYM
to align the work programme commitments with the
expected phasing of the Company’s Tendrara Production
Concession LNG development plan. The amended work
programme commitments under the Permit included:
• Initial period of four years and four months from 31 August
2017 (the “Initial Period”): FTG-aerogradiometry and
600km of 2D seismic and one exploration well with Triassic
objective.
• Optional first complimentary period of a further two years
and six months (from 31 December 2021): if the results of
the drilling of the exploration well drilled in the Initial Period
are likely to constitute a commercially exploitable discovery,
the Company will acquire 150 square kilometres of 3D
seismic or its equivalent in 2D seismic data. If the results of
the exploration well drilled in the Initial Period are not likely
to constitute a commercially exploitable discovery, the
Company will undertake further geological and geophysical
studies but will not be required to acquire this additional
seismic.
• Optional second complimentary period of a final two
years and six months: a further single exploration well with
Triassic objective.
The effective date of the Permit remains the same
at 31 August 2017. The commitment to acquire
FTG-aerogradiometry and 600km of 2D seismic has already
been fulfilled and approved by ONHYM.
In December 2020, the Company announced entry into a
letter of exclusivity (the “LoE”) with Italfluid, agreeing to
use reasonable endeavours to negotiate and enter into a
binding project contract with Italfluid to design, construct,
commission, operate, maintain and let to the Company a
mLNG Plant. Italfluid is an integrated service company that
provides certain upstream petroleum services, including the
design, construction, commissioning and maintenance of
process plants and hydrocarbon processing, including gas
liquefaction, to produce liquified natural gas. The mLNG Plant,
which will also treat and process raw gas from the Phase 1
development prior to liquefaction, is a substantial part of the
surface facilities required to be built and operated as part of
the Phase 1 development. The mLNG Plant shall be designed,
constructed, commissioned, operated and maintained by
Italfluid for the Company in consideration for the Initial
Payments and the Daily Rental Payments.
Southern Morocco Exploration
The Sidi Moktar licence is located in the Essaouira Basin, in
Southern Morocco. The licence covers a combined area of
4,712km2.
The Company views the Sidi Moktar licences as an exciting
opportunity to explore high impact prospectivity within the
pre-salt Triassic and Palaeozoic plays in the underexplored
Essaouira Basin in the West of Morocco. In June 2018,
Ministerial approval was received for a new eight–year Sidi
Moktar Onshore Petroleum Agreement, consisting of a two
years and six months initial period, a first extension period of
three years, and a second extension period of two years and
six months. Due to disruption caused by the impact of the
Covid-19 pandemic, during which the Company undertook
regular dialogue with the regulatory authorities, ONHYM
approved a 24-month extension to the initial period of the
Sidi Moktar Petroleum Agreement in order for the Company
to complete the committed work programme. Subject to
the issuance of the Joint Arreté signed by the Minister in
charge of Energy and Minister in charge of Finance, the
length of the initial period will now be four years and six
months. The work programme commitments for the initial
period remain unchanged. The lengths of the first and second
complimentary periods, which would commence upon the
successful completion of the recently extended initial period,
also remain unchanged.
The Sidi Moktar permit hosts a variety of proven plays.
The licences host 44 vintage wells drilled between the
1950s and the present. Previous exploration has been
predominantly focused on the shallower post-salt plays. The
licence is adjacent to the ONHYM operated Meskala gas and
condensate field. The main reservoirs in the field are Triassic-
aged sands, directly analogous to the deeper exploration
plays in the Sidi Moktar licences. The Meskala field and its
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 Moktar licence.
The discovery of the Meskala field proved the existence of a
deeper petroleum system in the basin. Specifically, Meskala
provides evidence that Triassic clastic reservoirs are effective,
proves the existence of the overlying salt seal and provides
support for 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 this deeper play fairway. We believe that the
deeper, pre-salt Triassic and Palaeozoic plays may contain
significant prospective resources, in excess of any discovered
volumes in the shallower stratigraphy.
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STRATEGIC REPORT
Our evaluation of the exploration potential of Sidi Moktar,
following an independent technical review, includes a
mapped portfolio of 27 Jurassic, Triassic and Palaeozoic leads
in a variety of hydrocarbon trap types. In addition, the Sidi
Moktar licence also contains discovered resource in Jurassic
reservoirs in the Kechoula gas field, which is located close to
existing infrastructure and gas demand, including the large-
scale Moroccan state-owned OCP phosphate plant.
Sound Energy is developing a work programme to mature
the licence with specific focus on the deeper, pre-salt plays.
Subject to financing, we aim to acquire the committed, high-
quality 2D seismic data in 2021, focused on improving trap
imaging. Preparations for this seismic acquisition campaign
have commenced with the completion and approval of an
EIA in late 2019. This approval, which concerns 25 territorial
communes of the province of Essaouira and 11 territorial
communes of the province of Chichaoua, is an important step
in the local permitting process and enables the Company
to continue its preparations for the seismic acquisition
campaign. The Company has also undertaken an invitation
to tender for acquisition and processing of the 2D seismic
survey and received responses from multiple seismic service
providers.
This work is planned to culminate in an exploration well,
targeting a deep prospect in 2023. The Company continues
to seek to progress a farm out process for this permit,
offering an opportunity to a technically competent partner to
acquire a material position in this large tract of prospective
acreage.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Financial ReviewWe prioritised the restructuring of our €28.8 million corporate loan notes, which was successfully completed following the year end, and on structural cost reduction, which led to a decrease by 52% in administrative expenses to £2.9 million (2019: £6.1 million) during 2020.Income StatementThe loss for the year before tax from continuing operations was £18.8 million (2019: £16.4 million). Impairment of development assets and exploration costs of £9.8 million (2019: £6.6 million) related to the impairment loss on TE-5 Horst production concession following revision to forecast assumptions, primarily forward Brent price assumption in line with long-term Brent price forecast as at 31 December 2020. In 2019, the impairment loss of £6.6 million related to TE-10 drilling and well test costs as the well did not achieve a commercial gas flow rate. Administrative costs at £2.9 million were 52% lower than 2019 administration costs of £6.1 million due to a focus on cost reduction.Foreign exchange losses primarily related to intra-Group loans and euro denominated borrowings. Foreign exchange gains and losses arising from intercompany loans that originated on acquisition of Moroccan licences are recognised in the other comprehensive income section of the statement of comprehensive income.Cash Flow/FinancingDuring 2020, equity issuances and warrants exercises raised approximately £4.6 million (2019: £2.2 million) net of issue costs.Financing costs were £3.3 million (2019: £2.8 million), primarily due to amortised costs of the notes, net of interest capitalised to the development and exploration licences of £0.1 million (2019: £0.5 million). The Company’s €28.8 million bond due in June 2021 was successfully restructured subsequent to the year end such that inter alia extended the maturity of the loan notes to 31 December 2027, converted EUR 3,479,999 of the notes to 141,176,448 new ordinary shares in the Company and amended the coupon structure (applicable from June 2021) from a 5% cash coupon per annum to a 2% cash coupon per annum together with a deferred 3% per annum coupon, payable at maturity. Further details on the restructuring are provided in the subsequent events note 25.The Group spent £1.3 million (2019: £5.7 million) on investing activities during 2020, which consisted of spend on the Group’s Morocco licences and capitalised general and administrative expenses. Balance SheetAs at 31 December 2020, the carrying amount of property, plant and equipment was £133.4 million (2019: £147.3 million), primarily related to the development and production assets in Morocco with a carried value of £133.2 million (2019: £146.9 million) after taking account of impairment loss, additions and foreign exchange movement. Additions of £0.9 million intangible assets largely consisted of capitalised general and administrative expenses. As part of the 2018 Italy divestment agreement, the Company is entitled to receive the proceeds, upon the sale, of land associated with the former Badile onshore exploration permit (‘‘Badile land’’). The Company therefore has a carrying amount of approximately £1.0 million (2019: £0.9 million) as interest in Badile land. Subsequent to year end, the Company received approximately £0.2 million following the sale of Badile Area 1 and expects the sale of Badile Area 2 to be completed before the end of 2021.Other receivables amounting to £1.4 million (2019: £1.5 million), primarily related to receivables from our partners in Morocco licences and recoverable VAT in Morocco.Trade and other payables amounting to £2.2 million (2019: £2.4 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 has a carrying amount of £0.5 million (2019: £0.6 million) relating to the obligation for the Badile land remediation in line with the 2018 Italy divestment agreement.Going ConcernAs detailed in note 1 on page 66 the Company’s cash flow forecasts for the next twelve-month period to May 2022, indicated that additional funding will be required to enable the Company meet its obligations. These conditions, along with other matters described in Note 1 indicates existence of a material uncertainty on the Company’s ability to continue as going concern.STRATEGIC REPORT2030394-Sound-energy-AR2020 Strategic and Governance.indd 2030394-Sound-energy-AR2020 Strategic and Governance.indd 2021-May-21 1:39:49 PM21-May-21 1:39:49 PM STRATEGIC REPORT
Cash Flow Bridge Chart (£m)
179
172
162
145
£4.5m
2019: £4.6m
4.6
4.5
4.6
(1.4)
(0.2)
(1.8)
(1.3)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0
Net Assets (£m)
£145m
2019: £162m
200
180
160
140
120
100
80
60
40
20
0
58
2016
2017 2018 2019 2020
Development and Intangible Assets (£m)
At 31
December
2019
Spend on
operating
activities
Spend on
investing
activities
Proceeds
from
equity
issue
Interest
and
lease
payments
Foreign
exchange
difference
At 31
December
2020
£164m
2019: £178m
183
178
164
164
200
180
160
140
120
100
80
60
40
20
0
28
2016
2017 2018 2019 2020
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15HSEPromoting Positive BehaviourDuring this unprecedented year, Health and Safety (HSE) remains at our core.During the first half of 2020, Sound Energy Morocco has actively been dealing with the effects of the Covid-19 global pandemic on our activities to maintain an operational presence and progress our plans to develop (starting with the mLNG project) the TE-5 Horst gas discovery in a phased manner. In May 2019, the Company announced that it would pause further operations and 2020 did not seeing any further geophysical surveying or drilling activities. However, Sound Energy Morocco undertook a series of activities to promote safe working practices for our personnel and contractors. The 2020 activities are summarised as follows:• Relocation of the Rabat office • Aligned to UK and Moroccan law, regulations and guidelines the Company carried out a Covid-19 risk assessment, adopted a policy of measures to actively mitigate the spread of coronavirus in the office environment, including increased hygiene management, social distancing, and working from home where possible • Continued enhancement and implementation of security to the Company’s information technology infrastructure • Emptying of the TE-10 stimulation liquid storage facility, cleaning and removal of the liner • Audit and restocking of the field inventory at the TE-5 site, TE-10 site, and the Tendrara WarehouseThe total labour hours worked in 2020 was 80,755 and the data recorded has been divided into three main categories:1. Lagging IndicatorsFatality – LTI – RWC – MTC – FAC – Property damage 1 Environmental incident – RTA – NM – HiPO – Lost workdays –2. Leading IndicatorsHSE inspections 32 HSE audits – HSE meetings 22 HSE induction hours – HSE training hours 59 Emergency drills – Toolbox talks – STOP cards – Job safety analysis – Risk assessments 2 Management tours –3. Environmental DataDiesel consumed (m3) 19.21 Water consumed (m3) 58 Mud cuttings (m3) n/a Sewage water (m3) n/a Waste water (m3) 278 Non-hazardous wastes (tonne) n/a Fuel gas (m3) n/a Electrical energy (kWh) n/a Km driven 193,339 Total barrels spilled n/a22STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 2230394-Sound-energy-AR2020 Strategic and Governance.indd 2221-May-21 1:39:56 PM21-May-21 1:39:56 PM STRATEGIC REPORT
STOP Cards
Putting Safety First
Sound Energy has developed and implemented an
HSE reporting system whereby all personnel, visitors
and contractors are encouraged to report any unsafe
conditions, unsafe acts and positive acts.
This is an industry standard initiative that seeks to
enhance behavioural safety and implicate everyone in
the improvement of Company HSE culture.
Sound Energy cards during 2020.
Safety Hazard Observation Card
Observation Name
Location
Date
Time
n Drilling
n Construction
n Seismic n Other
n Rigless
n Production
n Office
Personal Protective Equipment
Hard hat, eye and face protection, foot wear
Hearing protection
Respiratory protection/Air quality
Protective clothing/gloves
Fall protection
Appropriate working attire
Body Position/Body Mechanics
Clear of “line of fire”
Clear of pinch points, sharp edges and hot surfaces
Eyes on path or work
Ascending/descending/stairs, steps or fixed ladders
Body mechanics when lifting, reaching, pulling, pushing
Appropriate pace
Adequate personnel for job
Tools & equipment
Safe
n
n
n
n
n
n
Safe
n
n
n
n
n
n
n
Concerns
n
n
n
n
n
n
Concerns
n
n
n
n
n
n
n
Safe
Concerns
Putting Safety First is a 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.
From the outbreak of Covid-19 in Europe and North Africa
at the end of Q1 2020, Sound Energy Morocco had to
curtail a number of envisaged operationally activities until
the situation improved. As a direct consequence, coupled
with a reduction of the operational resources, the exposure
hours and driven kilometres were significantly lower than the
previous year. Again, we had set ourselves a target of no lost
time injuries for the year, which we achieved accepting this
context of lower operational exposure.
Sound Energy Morocco is aligned to similar operators in
the International Association of Oil and Gas Producers
(“IOGP”) database. During 2020, we recognised the need to
avoid complacency particularly during the relatively minor
operations we undertook at the well sites and warehouse.
We continue to follow the introduction of IOGP aligned
Life-Saving Rules in 2018; our systems are fit for purpose
and evolving.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15HSE continuedLife-Saving RulesSound 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.Personal safetyDriving safetySite safetyWork controlsHSE Induction and Training SessionsOperational daily 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.HSE Reward and Recognition ProgrammeSound Energy has developed a 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.24STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 2430394-Sound-energy-AR2020 Strategic and Governance.indd 2421-May-21 1:39:59 PM21-May-21 1:39:59 PM ESG – Societal
STRATEGIC REPORT
Water Storage Tanks: In order to help the local community
better utilise the water pumped from the well, Sound
Energy provided three 6,000 litre PVC water tanks.
Training Programme: In line with the Company’s
commitment to the various contributions to develop
local competencies in the oil and gas industry, Sound
Energy Morocco established an academic collaboration
agreement with the Mohammed 1st University in Oujda
in 2019. Under the agreement, Sound Energy Morocco
received two doctoral students in Geology/Geoscience in
the Company’s offices to work on their doctoral theses.
The candidates chosen not only have access to data in real
time, but also receive academic supervision throughout
the period of their research as PhD candidates, as well as
technical training provided in house and externally. The
programme of this training is focused on bibliography,
geological field missions, structural studies (geochemistry,
petrophysics, gravity), and the integrated structural and
sedimentological interpretation of the Tendrara Basin.
Training and Employment Opportunities: In 2020, at the
Tendrara well sites and warehouse, Sound Energy provided
training and employment opportunities for members of
neighbouring communities. The total number of persons
from the local community who were employed, directly or
indirectly, by Sound Energy Morocco from 2016 to early
2019 is 870 individuals. Sound Energy continues to employ
eight individuals at our operational locations in Morocco.
Telecom Tower: Sound Energy Morocco commissioned
and fully paid for the construction of a Maroc Telecom
telecommunications tower in the Tendrara area, which
was required for operational purposes. Its presence has
significantly enhanced mobile phone coverage in the area,
and local communities have benefitted greatly.
Telecom Tower: Sound Energy Morocco commissioned
and fully paid for the construction of a Maroc Telecom
telecommunications tower in the Tendrara area, required
for operational purposes. Its presence has significantly
enhanced mobile phone coverage in the area, which local
communities benefitted from, since its deployment in 2018.
Water Well: Sound Energy Morocco drilled the Hassi
Lahcen water well and installed the required pump for
operational purposes. In 2020, as per previous years,
we continued to provide a 24/7 guard from the local
community to ensure safe access for all. We also provided
an electrical generator at the well.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Directors’ Statement under Section 172 (1) of the Companies Act 2006The Section 172 (1) of the Companies Act 2006 obliges the Directors to promote the success of the Company for the benefit of the Company’s members as a whole.The section specifies that the Directors must act in good faith when promoting the success of the Company and in doing so have regard (amongst other things) to: a. the likely consequences of any decision in the long term; b. the interests of the Company’s employees;c. the need to foster the Company’s business relationship with suppliers, customers and others;d. the impact of the Company’s operations on the community and environment;e. the desirability of the Company maintaining a reputation for high standards of business conduct; andf. the need to act fairly as between members of the Company.The Board of Directors is collectively responsible for the decisions made towards the long-term success of the Company and how the strategic, operational and risk management decisions have been implemented throughout the business is detailed in the Strategic Report on pages 2 to 30EmployeesOur employees are one of the primary assets of our business, and the Board recognises that our employees are the key resource that enables delivering Company’s vision and goals. Annual pay and benefit reviews are carried out to determine whether all levels of employees are benefitted equally and to retain and encourage skills vital for the business. The Remuneration Committee oversees and makes recommendations of executive remuneration and long-term share awards. The Board encourages management to improve employee engagement and to provide necessary training in order to use their skills in the relevant areas in the business. The Board periodically reviews the health and safety measures implemented in the business premises and improvements are recommended for better practices. Engagement during 2020 has been paramount due to the Covid-19 pandemic. The Company has worked to ensure that employees are safe and well, both physically and mentally. The majority of staff have worked remotely during the year. The employees are informed of the results and important business decisions, and are encouraged to feel engaged and to improve their potential.Suppliers, Customers and Regulatory AuthoritiesThe Board acknowledges that a strong business relationship with suppliers and customers is a vital part of the growth. Whilst day-to-day business operations considering suppliers and customers are delegated to the executive management, the Board sets directions and evaluates policies with regard to new business ventures and investing in research and development. The Board upholds ethical business behaviour and encourages management to seek comparable business practices from all suppliers and customers doing business with the Company. During 2020 there was regular engagement with key suppliers to ensure ongoing safety within the business. The HSE Committee was kept up to date with the safety measures in place and they were fed back to the Board as appropriate. We value the feedback we receive from our stakeholders and we take every opportunity to ensure that, where possible, their wishes are duly considered. The Board is aware of its regulatory requirements and receives training and advice when required. In early 2021 the directors received a refresher update on the requirements under the UK Market Abuse regulations and disclosure of information to the Market.26STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 2630394-Sound-energy-AR2020 Strategic and Governance.indd 2621-May-21 1:40:04 PM21-May-21 1:40:04 PM Directors’ Statement under Section
172 (1) of the Companies Act 2006
STRATEGIC REPORT
Community and Environment
Shareholders
The Board upholds high standards of care towards the
community and environment, and is conscious of the fact
that the nature of the Company’s business requires strong
measures to protect the environment. At its meetings, the
Board receives HSE updates from the HSE Committee and
considers the impact of the Company’s operations on the
environment and the neighbouring community.
The Company provides training and employment
opportunities to members of the communities in the areas
it operates. As detailed in the CSR section of the Strategic
Report, the Company fully paid for the construction of a
telecommunication tower in the Tendrara area, drilled a
water well, supplied water storage tanks, and continues
to provide round the clock security to enable safe access
to the water by the local community. The Company is
supporting two PhD students in Geology/Geoscience in
the Company’s offices to enable them to complete their
doctoral thesis.
Maintaining High Standards of
Business Conduct
The Company is incorporated in the UK and governed
by the Companies Act 2006. The Company has adopted
the Quoted Companies Alliance Corporate Governance
Code 2018 (the “QCA Code”) and the Board recognises
the importance of maintaining a good level of corporate
governance, which, together with the requirements to
comply with the AIM Rules, ensures that the interests
of the Company’s stakeholders are safeguarded. The
Board has prompted that ethical behaviour and business
practices should be implemented across the business. Anti-
corruption and anti-bribery training are compulsory for all
staff and contractors, and the anti-bribery statement and
policy is contained in the Company’s Employee Manual.
The Company’s expectation of honest, fair and professional
behaviour is reflected by this and there is zero tolerance
for bribery and unethical behaviour by anyone relating to
the Company.
The importance of making all staff feel safe in their
environment is maintained and a whistleblowing policy is
in place to enable staff to confidentially raise any concerns
freely and to discuss any issues that arise. Strong financial
controls are in place and are well documented. The risk
framework and key business risks reviewed by the Audit
Committee who in turn reports to the Board.
The Board places equal importance on all shareholders
and recognises the significance of transparent and
effective communications with its investors. As an
AIM listed company, there is a need to provide fair and
balanced information in a way that is understandable to
all stakeholders and particularly our shareholders.
The primary communication tool with our shareholders
is through the Regulatory News Service (“RNS”), on
regulatory matters and matters of material substance.
The Company’s website provides details of the business,
investor presentations and details of the Board and
Committees, changes to major shareholder information,
QCA Code disclosure and updates under AIM Rule 26.
Changes are promptly published on the website to enable
the shareholders to be kept abreast of Company’s affairs.
The Company’s Annual Report and Notice of Annual
General Meetings (AGM) are available to all shareholders.
The Interim Report and other investor presentations
are also available for the last six years and can be
downloaded from our website. Typically the chair of the
Audit Committee and the chair of the Remuneration and
Nominations Committee would attend the AGM and be
available to shareholders to answer any questions.
There are opportunities throughout the year for shareholders
to meet with the Board and members of the Executive Team,
through general meetings, investor events and the Company’s
‘fireside chat’, Q&A sessions. The Board is mindful that with
the global Covid-19 pandemic, face-to-face meetings with
shareholders have not been possible during 2020. The
Company has endeavoured to maintain communication with
investors remotely and believes that engagement has been
carried out efficiently during these challenging times. The
Board considers stakeholder engagement and discussed the
safest way to keep the lines of communication open with
shareholders during the pandemic.
The Board acknowledges that encouraging effective
two-way communication with shareholders encourages
mutual understanding and better connection with them.
The benefits include improved transparency of information
on the business and its performance, appropriate
consideration of all shareholders’ views, as well as instilling
trust and confidence to allow informed investment
decisions to be made by the Board.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Principal Risks and UncertaintiesRisk management is central to achieving the Group’s strategy and delivering long-term value to shareholders. The Board, its Committees and the Executive Team are actively engaged in setting the risk appetite as well as managing both risks and opportunities to the Group.Definition of RiskRisk 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 ManagementThe 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; and• Ensure compliance with legal, regulatory, and ethical requirements.Identifying Risk and OwnershipRisk management is actively promoted from both a top-down and bottom-up approach where all individuals in the organisation are empowered to highlight risks and opportunities to the business. All agreed risks are allocated to an individual risk owner with mitigations and actions followed up through quarterly reporting to the Executive Team and biannual reporting to the Audit Committee. Our principal risks have been categorised as strategic, operational and financial, although many risks impact more than one aspect of the business.Changes to Risks in the YearSeveral factors have impacted the Company risk register through 2020, including marketing the Company’s interests in the Tendrara Production Concession, the Greater Tendrara and the Anoual Permits, the cost reduction programme and particularly the progress towards the TE-5 Horst development project. Removed or Changed:Absence of applying standard operating procedures creates unnecessary errors and costs riskCompany executes operations in accordance with industry standard procedures and practices aligned with products and services provided with our joint venture partner Schlumberger under the Field Management Agreement.Loss of Company dataCompany has a robust IT policy in place and business continuity plan. Fraud, bribery and corruptionCompany has a robust anti-bribery and corruption policy in place.Currency RiskCompany undertakes proactive FX management in accordance with the Group treasury policy.28STRATEGIC REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 2830394-Sound-energy-AR2020 Strategic and Governance.indd 2821-May-21 1:40:05 PM21-May-21 1:40:05 PM STRATEGIC REPORT
Risk
Impact
Control measure
1 – Limited diversification
• Profitability and cash flow
• Build strong relationships with
Owner
Chairman
The Company operates in a
single country and thus the
business may be significantly
adversely impacted by political,
fiscal and regime changes.
The Company portfolio is not
currently balanced across the
oil and gas lifecycle
2 – Facilities funding
Inability/delay in securing
funding for Phase 1 and Phase
2 development of the TE-5
Horst results in delays or
inability to take FID
• 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
• Activate new business development
programme
• Company investment profile
and ability to generate cash is
impaired as a consequence
• Minimise up-front funding exposure via
securing agreements with contractor
financing
Chairman
• Ensure adequate resourcing of
negotiation team
3 – Reservoir uncertainty
• Exploration 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
exploration potential across our
exploration permits
• Reservoir distribution and
effectiveness, hydrocarbon
saturation and H2S risk in
respect of Jurassic carbonate
reservoirs in Sidi Moktar
Chairman
• Comprehensive geophysical surveying,
data analysis, and modelling integrated
with geological and reservoir
engineering studies to improve
reservoir understanding throughout
the basin
• Independent resources certification
4 – Change in regulatory or
fiscal regime
5 – Drop in commodity prices
• Regulatory and tax changes
• Regular engagement and COO
COO
affect profitability and viability
of projects and operations (e.g.
Morocco ten-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 renegotiation with
partners
• Seek stabilisation provisions in key
agreements
• Falls in commodity prices result
in loss in value, reduced cash
flows and/or impairments
• Gas price monitoring both in
COO
country and on international markets
(including LNG, Brent)
• Reduced ability or appetite to
• Secure long-term pricing under key
invest
offtake agreements
6 – Major HSE event
• Loss of life or injury to personnel
• Environmental impact
• Reputational damage
• Exposure to litigation
• Financial and operational losses
Chairman
• Highly skilled, competent and qualified
personnel and subcontractors. Training
provided as required
• Management and Board commitment
• Robust operational HSE processes and
procedures
• HSE Committee reviews and regular
HSE meetings and engagements
• Insurance cover
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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STRATEGIC REPORT
Principal Risks
and Uncertainties
continued
Risk
Impact
Control measure
Owner
7 – Loss of or inability to
secure key personnel
• Loss of shareholder confidence
• Competitive remuneration package in
Chairman
• Lack of direction and leadership
within the Company
• Loss of expertise and knowledge
• Unable to secure required
expertise to deliver the work
programme
place for key executives, benchmarked
regularly relative to the market
• Succession planning
• Programme to identify and source
additional expertise as and when
required
8 – Insufficient funds to
operate and sustain the
business
• Capital constraints due to
insufficient funding of work
programme, potential impact to
long-term viability of business
• Insufficient working capital to
sustain the business as a going
concern
Chairman
• Active engagement with capital
markets and financing streams
• Long-term cashflow management
• Finances are controlled through
annual planning process with regular
forecast updates. Monthly MI measures
performance against plan
• Risk transfer through farm-ins, joint
venture and funding arrangements
• Active commitment management and
tracking for main contracts
9 – Business disruption due to
Covid-19 virus outbreak
• Delay in implementation of
mLNG strategy
• Follow government guidelines and
enable personnel to work remotely
Chairman
• Key staff absence due to illness
• Explore liquidity continuity measures
• Capital markets disruption
• Implement business continuity plan
• Consequential impact of
disruption to key counterparties
e.g. government, suppliers
• Reduction of working capital and
• Manage Moroccan tax assessment
COO
cash flow
• Reduced appetite for investment
in the Company
process taking appropriate technical
and legal advice to resolve,
as the Company believes, this
misunderstanding
On behalf of Board
Graham Lyon
Executive Chairman
19 May 2021
10 – Requirement to pay
substantial Moroccan tax
demand
The Company was issued
notification by the Moroccan
tax administration of
interpreted taxable liabilities
in respect of historic transfer
of licence interests between
wholly owned subsidiaries of
Sound Energy plc
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STRATEGIC REPORT
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Governance ReportChairman’s Corporate Governance Statement33QCA Code Principles34Leadership– Overview35– The Team36Effectiveness– Board Activities38– Shareholder Relations40Accountability– Health and Safety Committee41– Audit Committee42– Nomination Committee44Directors’ Remuneration Report 46Directors’ Report51Statement of Directors’ Responsibilities53Independent Auditor’s Report5432GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 3230394-Sound-energy-AR2020 Strategic and Governance.indd 3221-May-21 1:40:11 PM21-May-21 1:40:11 PM Chairman’s Corporate
Governance Statement
GOVERNANCE REPORT
Dear Shareholders
My first year as Executive Chairman of the Company has
certainly seen a challenging business environment with
the global pandemic and the downturn in the oil and gas
sector. However, the Company has continued to work hard
to drive forward its strategy to transition the business to a
cash-generative Company with exploration opportunities.
Underpinning the foundations of the business is a developed
and strong corporate governance structure. The Board is
committed to fit-for-purpose corporate governance across
the business, from executive level and throughout the
business. The Company made the decision to adopt the
Quoted Companies Alliance Corporate Governance Code
2018 (“QCA Code”). I firmly believe in the importance of solid
governance from the top of an organisation. The QCA Code
and the principles contained within this are valued by the
Company and seen as fundamental building blocks for the
underlying development of the business.
As Chairman, it is my duty to ensure that good standards of
governance are maintained and cascaded down throughout
the organisation. The Board, as a whole, look to instil a culture
across the Company and throughout the business, delivering
strong values and behaviours.
Graham Lyon
Executive Chairman
Purposeful corporate
governance underpins
the foundations of a solid
and successful business
Graham Lyon
Executive Chairman
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
QCA Code
Principles
Introduction
The Board of Directors of the Company recognises the
importance of good 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 sound
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
Required disclosure
Reference
1
2
3
4
5
6
7
8
9
Establish a strategy and business model that promote long-term value
for shareholders.
See pages 8 to 9 of 2020
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 pages 28 to 30 of 2020
Annual Report.
Maintain the Board as a well-functioning balanced team led by the Chair.
Ensure that, between them, the Directors have the necessary up-to-date
experience, skills and capabilities.
See pages 36 to 37 of 2020
Annual Report.
See pages 36 to 37 of 2020
Annual Report. See website
disclosures: Principle Six under
AIM Rule 26.
Evaluate Board performance based on clear and relevant objectives,
seeking continuous improvement.
A description of the Board performance evaluation process.
See pages 38 to 39 of 2020 Annual
Report. See website disclosures:
Principle Seven under AIM Rule 26.
Promote a corporate culture that is based on ethical values and behaviours.
Explain how the Board ensures that the Company has the means to
determine ethical values and behaviours.
See website disclosures: Principle
Eight under AIM Rule 26.
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.
See pages 40 to 54 of 2020
Annual Report.
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 website disclosures: Principle
Ten under AIM Rule 26.
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Overview
GOVERNANCE REPORT
Leadership
The Company remains committed to achieving high
standards in all we do. Our business and processes are
aligned around a robust governance framework. The
Company applies and seeks to adhere 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 solid 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.
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.
That incidents that occur are
dealt with correctly and lessons
learnt and exercises carried out to
prevent repeats.
Audit
Committee
The main responsibilities of the
Audit Committee is 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. The Committee is
mindful of the guidance from the
QCA with respect to the function
and duties of the Audit Committee
within the business.
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. The Committee
will consider recruitment of
Board members and members
of the Executive Team together
with consideration of succession
planning.
The Committee assesses Executive
Directors’ performance based on
an annually approved scorecard.
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
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
The Team
Directors and Executives
Graham Lyon
Executive Chairman
Appointed to Board
25 February 2020
Background
Graham Lyon was appointed
Executive Chairman on 25 February
2020. Graham is an experienced
oil and gas executive with 40
years’ experience across technical,
operational and commercial
leadership roles.
Current external commitments
• Non-Executive Chair at Clarion
Petroleum (private co.)
• Founder and Director of
Soncer Limited
Key:
A Audit Committee
R Remuneration and Nominations
Committee
H Health and Safety Committee
36
Mohammed Seghiri
Chief Operating Officer
H
Appointed to Board
23 January 2020
Background
Mohammed Seghiri has over
18 years’ experience leading
complex European and African
projects across different sectors,
including gas storage, oil and 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
Richard Liddell
Director (Non-Executive) –
Senior Independent Director
A R H
Appointed to Board
28 September 2015
Background
Richard Liddell joined the Board
as a Non-Executive Director in
September 2015, holding the
role of Non-Executive Chairman
from January 2018 to May 2019.
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 that he
founded in 2008.
He served on the board of Premier
Oil as Operations Director from
2000 until 2003, and prior to that,
spent three years as Director of
Development on the board of BG
Exploration and Production. Richard
previously held a number of senior
UK and international positions
during an 18-year career at Philips
Petroleum Company.
Richard has a BSc in Electrical
Engineering.
Current external commitments
• Founder and Executive Chairman –
Clara Petroleum Ltd
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30394 21 May 2021 1:38 pm V15David BlewdenDirector (Non-Executive)A R Appointed to Board1 July 2020BackgroundDavid Blewden joined the Board as a Non-Executive Director in July 2020. David is currently CFO of Sunny Hill Energy Ltd, a UK private E&P company, he is also a non-executive director of Gulf Marine Services plc and a director of Philipshill Consulting Limited. From 2015 to January 2020 he was a non-executive director of new Age (African Global Energy) Limited, a private E&P company. From 2010 to 2016 he was CFO of Sterling Resources Ltd, a TSX-V listed Canadian E&P company.Current external commitments• Chief Financial Officer of Sunny Hill Energy Ltd (formerly Petroceltic International)• Non-Executive Director of Gulf Marine Services plc (LSE:GMS)• Director of Philipshill Consulting LimitedMarco FumagalliDirector (Non-Executive)A R Appointed to Board17 July 2014, appointed as Acting Chairman on 12 November 2019 to 25 February 2020.BackgroundMarco Fumagalli joined Sound Energy as a Non-Executive Director in July 2014. Marco is Founding Partner at Continental Investment Partners SA, a Swiss-based investment firm and cornerstone shareholder in Sound Energy. He is a well-known Italian businessman who was previously a Group Partner at 3i. Marco is a qualified accountant and holds a degree in Business Administration.Current external commitments• Non-Executive Director – Echo Energy plc• Non-Executive Director – Coro Energy plc• Director – Continental Group of Companies• Non-Executive Director – CIP Merchant Capital plcFormer Directors who served during the yearBrian MitchenerFormer Exploration Director (Executive Director)Appointed to Board21 June 2017; resigned from the Board on 31 March 2020James ParsonsFormer Chief Executive Officer (Executive Director)Appointed to Board10 October 2012; resigned from the Board 23 January 2020JJ TraynorFormer Chief Financial Officer (Executive Director)Appointed to Board11 July 2018; resigned from the Board on 6 February 2020The information provided sets out the current Board of Sound Energy, as at the time of signing these accounts together with the names and dates of tenure of those that resigned during 2020.www.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 202037GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 3730394-Sound-energy-AR2020 Strategic and Governance.indd 3721-May-21 1:40:18 PM21-May-21 1:40:18 PM GOVERNANCE REPORT
Board
Activities
Effectiveness
The 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 Committees
The 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
As at 31 December 2020, the Board comprised of the
Executive Chairman, three Non-Executive Directors and one
Executive Director.
Name of the Director
Total number of meetings heldiv
Graham Lyon (Chairman)
Mohammed Seghiri (COO)
David Blewdenii
Marco Fumagalli
Richard Liddell
Brian Mitcheneriii
James Parsonsiv
JJ Traynorv
Scheduled
4
3
3
2
4
4
1
1
–
There were a number of changes within the Board during
the first quarter of 2020 as the Company entered a new
stage of development. The current Board has a good level of
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
term. The Company has an Executive Chairman who provides
a bridge of the Chairman and Chief Executive Officer role.
David Blewden joined the Board during 2020 as a further
independent Non-Executive Director. The Company now has a
good balance of Executive and Non-Executive Directors, with
a strong level of independence within the Board.
The Executive Chairman is responsible for leading the Board
and Executive Team, 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. Without a Chief Executive Officer, the
Executive Chairman, with the support of the Chief Operating
Officer and other members of the Executive Team, leads the
business, 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.
The Board continues to believe, given the current stage of the
business, that an Executive Chairman is right for the Company.
At present, there is no Chief Executive Officer; however, with
three Non-Executive Directors, of which two are independent,
it is believed there is a strong voice of independence.
Board Composition %
Attendance at Meetings:
A schedule of the Board and Board Committee meetings
held during the year ended 31 December 2020 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 December 2020
Board meetings
Ad hoc* Audit Committee
3
n/a
n/a
1
3
3
n/a
n/a
14
13
14
8
12
12
–
–
Remuneration
and Nominations
Committee
3
n/a
n/a
1
3
3
n/a
n/a
Health and Safety
Committee
2
n/a
2
n/a
n/a
2
n/a
n/a
–
n/a
n/a
n/a
*Ad hoc meetings: Additional meetings called for a specific matter generally of a more administration nature not requiring full Board attendance.
i Graham Lyon missed one scheduled Board meeting as he was only appointed in February 2020.
ii David Blewden was appointed to the Board as independent Non-Executive Director on 1 July 2020.
iii Brian Mitchener resigned from the Board on 31 March 2020.
iv James Parsons resigned from the Board on 23 January 2020.
v JJ Traynor resigned from the Board on 6 February 2020.
All Directors attended all the meetings they were required to attend.
3838
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GOVERNANCE REPORT
What the Board did in 2020
15%
45%
15%
Governance and Risk – 15%
Strategy – 45%
Investor Engagement – 15%
• Ongoing consideration of the Quoted
• Business development opportunities
• Investor events held with
Companies Alliance Corporate
Governance Code and a review of
the requirements of the Code.
• AIM training carried out by the
Company’s nominated advisor for
individual Directors to ensure that
the Board is up to date with their
regulatory requirements.
• Manual of Authorities reviewed and
updated.
• Risk Management Policy and
Register reviewed.
• Review of insider dealing
requirements and individual persons
closely associated to PDMRs.
• Updates from Board Committees
following every Committee meeting.
• Updates from the Group auditor via
the Audit Committee.
− Review of Committee structures
and composition.
considered by the Board.
• mLNG production plan, Heads of
Terms executed for the gas sales
agreement.
• Successful fundraise and
implementation of a cost reduction
programme.
− Pre-sales agreement for the
disposal of Badile land.
− Sidi Moktar permit, extension to
work programme.
− Financing strategy, including bond
restructuring and capital raises.
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 shareholders.
• AGM proxy figures reviewed and
considered.
10%
15%
People, Visions, Values – 10%
Performance Monitoring – 15%
• Company scorecard presented and
approved, and fed down to the
Executive Team.
• Personal development of staff.
• Executive Team meetings.
• Consideration given to the
organisation structure and the
needs of the business.
• Updates from the Chairman
of the Audit, Nominations
and Remuneration, and HSE
Committees.
• Monthly reports on performance
against targets received by the
Board.
• Approval full and half-year results.
• Annual Report and Accounts for
2019 approved.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15Shareholder RelationsThe Board meets regularly throughout the year, with a combination of scheduled meetings and ad hoc ones held 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 Executive Chairman liaises with board and other exec directors, with an enhanced role for the Senior Independent Director (Richard Liddell). The Chairman ensures that there is open communication with the Non-Executive Directors.The effectiveness of the Board is monitored on an ongoing basis. The Board has undertaken a formal evaluation exercise in the last few years 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 Board may consider a similar exercise, either internally or externally run, during 2020 once the new Directors and the Board as a whole has had time to settle in. 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 2021 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 meet 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 2020 Review• AGM held 8 June 2020 (closed event in line with Covid-19 restrictions) • Four online Q&A sessions held throughout the year with accompanying videos Look Forward • AGM in the first half of 2021 • Q&A sessions planned throughout the year• Face-to-face meetings when government guidelines allow 40GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 4030394-Sound-energy-AR2020 Strategic and Governance.indd 4021-May-21 1:40:18 PM21-May-21 1:40:18 PM 30394 21 May 2021 1:38 pm V15HSE Committee ActivitiesThe HSE Committee comprises of Richard Liddell (Chairman) and Mohammed Seghiri. Other members of the Executive Team and those within the business responsible for matters pertaining to HSE are invited to join and present to the Committee.Health and Safety (HSE) Committee Activities During the year under review, the Committee met twice 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. During operational times and in the lead up to activities within the business, the Committee will meet more regularly to ensure monitoring of the safety of the business.A full report of the activities of the HSE Committee can be found on pages 22 to 24.2020 Activities• HSE focus group continued to meet during the year to review the ongoing HSE procedures and culture.• The HSE Committee met twice during the year. • Review of HSE procedures carried out.• Ensuring safe working measures implemented both within the UK and Morocco with regards to the Covid-19 pandemic.2021 Looking Forward• Ensure HSE policy and procedures remain effective and purposeful for the activities of the business.• HSE management system and resources to be kept under review. • Ensure ongoing transparent reporting to the HSE Committee with Committee updates provided to the Board.Health and Safety CommitteeRichard LiddellChairman of the Health and Safety Committeewww.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 202041GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 4130394-Sound-energy-AR2020 Strategic and Governance.indd 4121-May-21 1:40:18 PM21-May-21 1:40:18 PM 30394 21 May 2021 1:38 pm V15Audit CommitteeDavid BlewdenChairman of the Audit CommitteeAudit Committee ActivitiesThe Audit Committee comprises of David Blewden (Chairman), Marco Fumagalli and Richard Liddell.ResponsibilitiesThe 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 are 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. 2020 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.• Appointment of David Blewden as Chairman of the Audit Committee.• Review of the Company’s key strategic risks and mitigations.• Extensive discussions on controls and policies in place and related training to prevent bribery, corruption and insider dealing. Consideration given to the additional pressures within the business and the economy as a whole due to the Covid-19 global pandemic. • Ongoing monitoring of the going concern status of the business.• Reviewed and approved the update to the manual of authorities taking into account new members of the Executive Team.42GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 4230394-Sound-energy-AR2020 Strategic and Governance.indd 4221-May-21 1:40:21 PM21-May-21 1:40:21 PM GOVERNANCE REPORT
2021 Looking Forward
Risk and Controls
• 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
business growth.
• Ongoing monitoring of the Company’s going concern
status.
• Supporting the Executive Team with regards to the tax
assessment of the Company’s Moroccan subsidiary, Sound
Energy Morocco East Limited.
• Continue to consider the recommendations of the Quoted
Companies Alliance Corporate Governance Code, Audit
Guide.
• Work with the auditor in respect of a new audit partner for
the business.
• Approval of the interim and annual reports and financial
statements.
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
note 1 to the financial statements on page 66.
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 28.
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.
External audit – audit partner
Considering the significant changes that occurred to the
Company following the completion of the 2018 audit, at
the Audit Committee’s request, the audit partner remained
in place for a further two years (the maximum extension
allowed by the Financial Reporting Council). This extension
includes the 2019 and 2020 audits; a new audit partner will
be appointed for the 2021 audit.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
Nominations and
Remuneration Committee
Richard Liddell
Chairman of the Nominations and Remuneration Committee
Nominations and Remuneration
Committee Activities
The Nominations and Remuneration Committee comprises
of Richard Liddell (Chairman), Marco Fumagalli and
David Blewden.
The Committee meets as and when required to consider
matters related to succession planning, new nominations to
the Board to ensure that the right skill sets are present in the
Board room at each stage of the Company’s evolution, to
consider all material elements of the Company’s remuneration
policy, including assessing the Directors’ remuneration and
performance. During 2020 the Committee met three times.
2020 Review
• Review of the composition of the Board.
• Ongoing consideration of the requirements of the QCA
Code to which the Company adheres with regards to the
balance of the Board.
• Appointment of a further independent Non-Executive
Director.
• Consideration of the remuneration packages for the
Executives, including the newly appointed Executive
Chairman and Chief Operating Officer during Q1 of 2020.
• Agreed exit arrangement and payments to Executive
Directors during Q1 of 2020.
• Determined awards made under the Restricted Stock
option (“RSU”).
• Evaluated 2020 scorecard (mid-year review).
2021 Looking Forward
• Ongoing review of the composition of the Board.
• Consider the longer-term succession planning for the
Executive Team.
• Carry out a review of the remuneration package offered
to the Executive Directors and Executive Team, to ensure
that the Company offers a fit-for-purpose package, which
incentivises senior members within the business and is
aligned with the future growth of the business and is
commensurate with the Company’s peer group.
• Implement the agreed outcome of the remuneration review.
• Continue monitoring of pay and benefits of the CEO and
Executive Directors.
• Agree the 2020 performance awards for the CEO and
Company based on delivery of the 2020 scorecard.
• Agree the 2021 scorecard for the CEO and Company.
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Directors’
Remuneration
Report
GOVERNANCE REPORT
The Committee and the wider Board recognise the
importance of attracting, retaining and motivating talent
within the Board and wider Executive Team to promote
the successful growth of the Group. As Sound Energy
continues to develop, 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 of our shareholders. The
Committee also wants to ensure that the policy provides
simplicity and transparency.
Principles For Executive Remuneration
The main principles of the Senior Executive remuneration
policy are set out below:
• Attract and retain high-calibre Executives in a competitive
international market, and remunerate Executives fairly and
responsibly
• Motivate delivery of our key business strategies and
encourage a strong performance-oriented culture
• Reward achievement over the short and long term
• Support both near-term and long-term success and
sustainable shareholder value
• Align the business strategy and achievement of planned
business objectives
• Be compatible with the Company’s risk policies and systems
• Ensure that a proportion of remuneration is performance-
related
• Take into consideration the views of shareholders and best
practice guidelines
2020 was a transitional period for the Company, with new
executive directors and a re-focus on the strategy of the
business. The Company has worked hard to establish a path
forward despite the challenges of the Covid-19 pandemic,
compounded with the significant drop in commodity prices
during the first half of 2020.
The Remuneration Committee has spent considerable time
assessing the current remuneration policy and have sought
to devise a policy that aligns executives’ rewards for delivery
of the success of the business with shareholders. The
fundamental principles of the Senior Executive remuneration
remains the same, as set out in this report. However, the
Committee has taken those principles and is seeking to
develop a policy, which it believes will not only incentivise
and drive the Executive team to strive for success but will
also align them clearly with the aspirations of shareholders
for capital growth and ultimately long term value to the
business for all stakeholders.
Fixed remuneration comprises salary, pension and benefits.
Variable pay includes the potential for an annual bonus and
longer term incentives is currently awarded by the use of
restricted stock unit (RSU) awards. However, the Committee
is currently assessing the on-going use of the RSU scheme
and whether a different style of LTIP (Long Term Incentive
Plan) scheme would be more appropriate. 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.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
Directors’
Remuneration
Report continued
2020 Remuneration Policy
Purpose
Salary
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.
Operation
Maximum opportunity Performance measures
Determined by reference to
market data.
Reflects individual
experience, skills and role.
Increases will be made at the
discretion of the Committee,
or for Non-Executive
Directors, the Executive
Directors, considering:
None, although overall
performance of the individual
is considered when setting
and reviewing salaries
annually.
Paid monthly.
Reviewed annually.
• increase in responsibility,
particularly as the
Company grows and
expands
• development and
performance in the role
• alignment to market level.
4.5% of base salary.
No element other than salary
is pensionable.
None. Pension contribution is
set at commencement of an
individual’s contract.
Set at a level which provides
a sufficient level of benefit.
None.
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.
Pension
Provide a level of pension
provision which is compliant
with regulation and allows
staff to build long-term
retirement savings.
Defined contribution based
on a percentage of salary.
Executives may elect to
take part of their pension
contribution as salary.
Benefits
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.
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.
Individual Executive bonus
is based on performance
measured against Group and
personal objectives.
Performance measures
are both quantitative and
qualitative, and both financial
and non-financial.
Bonus awards are made by
the Committee and awards
are paid in shares. Any
cash payments are made
at the sole discretion of the
Remuneration Committee.
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GOVERNANCE REPORT
Purpose
Operation
Maximum opportunity Performance measures
Long-Term Incentive Plan (LTIP)
Share options awards
vest based on share price
performance or in terms
set by the Remuneration
Committee. RSU awards
vest after three years or on
attainment of performance
criteria associated with the
awards.
Alternative or additional
criteria may be used to
determine future rewards
LTIP awards are made by
the Committee for the CEO
and for Executives by the
Committee based on CEO
recommendations.
Awards are made at market
price at the date of grant and
are discretionary.
Awarded annually.
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.
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. RSU
awards recognise and reward
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.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
47
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Directors’
Remuneration
Report continued
Purpose
Operation
Maximum opportunity Performance measures
Chairman and Non-Executive Director Fees
Benchmarked externally from
time to time as appropriate.
Provide an appropriate
reward to attract and retain
high calibre individuals.
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.
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.
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GOVERNANCE REPORT
Remuneration Policy for the Chairman and
Non-Executive Directors
The Executive Chairman and other Non-Executive Directors
are appointed under employment 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 occurring
during their employment. Mohammed Seghiri, COO, has the
option to give notice and receive a lump sum equivalent to
three months salary. The former CEO, James Parsons and the
Exploration Director, Brian Mitchener no longer have a right
to receive a change of control payment from the Company.
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
Director Shareholding Guidelines
From 2017 and applicable to future LTIP awards, the
Committee has introduced new guidelines regarding Director
and Senior Executive shareholder requirements. All Executive
Directors and Senior Executives are expected to build-up
over a reasonable period from appointment, and hold, a
minimum level of shareholding in the Company equal to one
year’s salary, with the CEO expected to build up a holding
of 200% of base salary. Transitional provisions have been
introduced with each Executive having three years to build
up the requisite holding. The minimum level of shareholding
is intended to be a pre-requisite for further LTIP awards. This
is considered an effective way to align the interests of the
Executive Management and shareholders over the long term.
Executive Director Employment Contracts and
Termination Payments
The Executive Chairman has an employment contract and the
COO an employment contract 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 three months’ written notice.
External Appointments
It has been expressly agreed that the Executive Chairman
must obtain agreement from the Board before accepting
additional commitments that might affect the time he is able
to devote as chair of the company.
Summary of Actual Remuneration of Directors
Executive Directors
James Parsons(i)
Brian Mitchener(i)
JJ Traynor(i)(ii)
M Seghiri(ii)
Executive Chairman and
Non-Executive Directors
Graham Lyon(iii)
Richard Liddell
Marco Fumagalli
David Blewden(iv)
David Clarkson
Simon Davies
Total for all Directors
Salary
£’000s
Remuneration
in shares
£’000s
Additional
award
£’000s
Benefits in
kind
£’000s
Total
2020
£’000s
183
13
20
195
199
73
52
26
–
–
761
–
108
–
–
–
–
–
–
–
–
108
–
–
–
–
3
–
–
–
–
–
3
1
2
2
14
–
–
–
–
–
–
19
184
123
22
209
202
73
52
26
–
–
891
Total
2019
£’000s
475
300
238
–
–
150
82
–
36
57
1,338
Includes pension contribution of 4.5%.
(i)
(ii) Benefits in kind includes travel/relocation cost benefit.
(iii) Additional award represents a bonus for services provided.
(iv) Remuneration from the date of appointment.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 1:38 pm V15The Executive Directors elected to take a salary reduction during the year, which is reflected in the table above. Date of grantExercisable dateAcquisition price per share (pence)Options held at 1 January 2020 Options held at 31 December 2020James Parsons23.03.1623.03.19 – 23.03.2116.003,000,000–Brian Mitchener07.10.1607.10.19 – 07.10.2184.00 1,500,000 –25.01.1725.01.20 – 25.01.2267.001,500,000–JJ Traynor14.09.1714.09.20 – 14.09.2248.004,000,000–Marco Fumagalli08.08.1608.08.19 – 08.08.2160.00250,000250,000Richard Liddell08.08.1608.08.19 – 08.08.2160.00250,000250,000There were no options exercised by the Directors during the year. For the directors who resigned during the year, their outstanding options expired.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 are made on an annual basis, with a three-year vesting period, and at vesting the awards will be satisfied in Sound Energy shares. RSU Awards Date of grantSettlement dateRSU Awards held at 1 January 2020 RSU Awards held at 31 December 2020Brian Mitchener26.04.1801.01.21863,682–JJ Traynor26.04.1801.01.21961,194 –M Seghiri26.04.1801.01.21126,501 126,50121.06.1901.01.22195,591 195,591During the year 863,682 RSU awards were exercised while 961,194 RSU awards expired.Directors’ 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 as at 31 December 2020:Directors and connected persons No. of sharesGraham Lyon1,066,962Richard Liddell1,141,176David Blewden1,176,471Mohammed Seghiri–Marco Fumagalli (Continental Investment Partners)(i)18,775,509(i) In May 2021 Continental Investment Partners shareholding of 18,775,509 was distributed and Marco Fumagalli became a direct holder of 4,693,877 ordinary shares in Sound Energy plc.Movements in Share Price During the YearThe mid-market price of the Company’s shares at the end of the financial year was 1.4 pence and the range of mid-market prices during the year was between 0.9 pence and 4.2 pence.Advice Received by the CommitteeThe Committee has access to advice when it considers appropriate. The Committee engaged a consultant to review the existing Company’s LTIP. The amount payable to the consultant for services provided to 31 December 2020, was £3,250.This Remuneration Report was approved by a duly authorised Committee of the Board of Directors on 19 May 2021 and signed on its behalf by:Richard LiddellChairman of the Remuneration Committee 19 May 2021Directors’ Remuneration Report continued50GOVERNANCE REPORT30394-Sound-energy-AR2020 Strategic and Governance.indd 5030394-Sound-energy-AR2020 Strategic and Governance.indd 5021-May-21 1:40:27 PM21-May-21 1:40:27 PM 30394 21 May 2021 1:38 pm V15Directors’ Report Executive ChairmanGraham LyonExecutive ChairmanOther DisclosuresPages 36 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 UK company law and the liabilities of the Directors in connection with that Report are subject to the limitations and restrictions provided by that law.Principal Activities and Business ReviewSound 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 31 and forms part of this Report.Results and DividendsThe loss for the year before tax was £18.8 million (2019: £16.4 million). The Directors do not recommend the payment of a dividend.Going ConcernDisclosure on going concern is included on note 1 to the financial statements. See page 66.AuditorSo 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 their willingness to continue in office and a resolution that they be reappointed will be proposed at the Annual General Meeting.Political DonationsNo political donations were made during the year (2019: £nil).Takeover DirectiveThe 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 50.Board of DirectorsThe names of the present Directors and their biographical details are shown on pages 36 to 37.The Directors who served during the year were as follows:• Graham Lyon • David Blewden• Marco Fumagalliwww.soundenergyplc.com51GOVERNANCE REPORTGOVERNANCE REPORTSound Energy plc Annual Report for the year ended 31 December 202030394-Sound-energy-AR2020 Strategic and Governance.indd 5130394-Sound-energy-AR2020 Strategic and Governance.indd 5121-May-21 1:40:27 PM21-May-21 1:40:27 PM GOVERNANCE REPORT
• Richard Liddell
• Brian Mitchener
• James Parsons
• Mohammed Seghiri
• JJ Traynor
Changes to the Board during the year:
• James Parsons, CEO, resigned from the Board on
23 January 2020.
• JJ Traynor, CFO, resigned from the Board on 6 February
2020.
• Brian Mitchener, Exploration Director, resigned from the
Board on 31 March 2020.
• Mohammed Seghiri, COO, was appointed to the Board on
23 January 2020.
Indemnities
Insurance cover also remains in place to protect all Directors
and senior management in the event of a claim being
brought against them in their capacity as Directors or officers
of the Company and its subsidiaries.
Share Capital
At 31 December 2020, the Company had 1,326,244,389 ordinary
shares in issue as shown in note 16 to the consolidated financial
statements. There are no restrictions on the transfer of the
Company’s ordinary shares other than certain restrictions that
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.
• Graham Lyon, Executive Chairman, was appointed to the
Substantial Shareholding
Board on 25 February 2020.
• David Blewden, independent Non-Executive Director, was
appointed to the Board on 1 July 2020.
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
2020 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 the 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.
52
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 2020 and up to the date of
this report.
Oil & Gas Investment Fund SAS hold 265,605,201 shares,
representing a 20.03% interest.
Financial Instruments
The information relating to the Group’s financial assets and
its financial risk management can be found in note 18 to the
consolidated financial statements.
Subsequent Events
See note on page 92.
Graham Lyon
Executive Chairman
19 May 2021
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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; and
• prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
Company will continue in business.
GOVERNANCE REPORT
The Directors are responsible for keeping adequate
accounting records that are sufficient to show and
explain the Company’s transactions and to disclose
with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They are
also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
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 are
prepared in accordance with applicable law in the United
Kingdom.
The maintenance and integrity of Sound Energy plc’s
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.
Graham Lyon
Executive Chairman
19 May 2021
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
Independent Auditor’s
Report to the members
of Sound Energy PLC
Opinion
We have audited the financial statements of Sound Energy
plc (the “Company”) and its subsidiaries (the “Group”) for the
year ended 31 December 2020, which comprise:
• the Group statement of comprehensive income for the year
ended 31 December 2020;
• the Group and Company balance sheets as at
31 December 2020;
• the Group and Company statements of changes in equity
for the year then ended;
• the Group and Company statements of cash flows 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 and as regards the parent
company, as applied in accordance with the provisions of the
Companies Act 2006.
In our opinion:
Material uncertainty in relation to going concern
We draw attention to Note 1 in the financial statements. The
Company’s cash flow for the next twelve-month period to
May 2022, indicate that additional funding will be required to
enable the Company to meet its obligations.
These conditions, along with other matters set forth in Note
1, indicate that a material uncertainty exists that may cast
significant doubt on the Group’s ability to continue as going
concern. Our conclusion is not modified in respect of this
matter.
In auditing the financial statements, we have concluded that
the directors use of the going concern basis of accounting
in the preparation of the financial statements is appropriate.
Our evaluation of the director’s assessment of the group and
company’s ability to continue to adopt the going concern
basis of accounting included:
− Assessing the cash flow requirements of the Group and
Company over the duration of the assessment period
based on budgets and forecasts.
− Understanding what forecast expenditure is committed
and what could be considered discretionary.
− Considering potential downside scenarios and the resultant
• the financial statements give a true and fair view of the
impact on available funds.
state of the Group’s and of the Company’s affairs as at 31
December 2020 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 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.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Overview of our audit approach
Materiality
In planning and performing our audit we applied the concept
of materiality. An item is considered material if it could
reasonably be expected to change the economic decisions
of a user of the financial statements. We used the concept
of materiality to both focus our testing and to evaluate the
impact of misstatements identified.
Based on our professional judgement, we determined overall
materiality for the Group financial statements as a whole
to be £1.7m (2019: £1.9m) and the overall materiality for the
parent company is £1.6m, based on 1% of 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.
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GOVERNANCE REPORT
We agreed with the Audit Committee to report to it all identified errors in excess of £34,000. 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.
The Group also has operations in Morocco which has a separate accounting function. We have performed a remote audit of
the accounting systems operating locally in Morocco in order to perform the required audit work.
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.
In addition to going concern which is described in the Material uncertainty in relation to going concern section, we have
determined the matters described below to be the key audit matters to be communicated in our report. 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 totalled £1.0m. The carrying value of
the exploration and evaluation assets was
£30.5m at 31 December 2020.
We consider the risk that exploration
assets are impaired.
Impairment of development and
production assets
We reviewed management’s assessment which concluded that there are no
facts or circumstances that indicate the carrying amount of the assets exceeds
the recoverable amount.
In considering this assessment we performed the following:
• 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
• Obtaining evidence of continued legal title
• Reviewed current well and licence reserve appraisals
• Discussed and critically analysed plans and intentions with management
The Group has a significant amount of
development and production assets which
totalled £133.2m at 31 December 2020.
We reviewed management’s assessment which included their internal model
which concluded that there are no facts or circumstances that indicate the
carrying amount of the assets exceeds the recoverable amount.
We consider the risk that development and
production assets are impaired.
In considering this assessment we performed the following:
• Obtained management’s impairment assessment carried out during
the year
• 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
• Reviewed the board minutes, budgets and other operational plans setting
out the Group’s plans in regard to the exclusivity award
• Discussed and critically analysed plans and intentions with management
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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GOVERNANCE REPORT
Independent Auditor’s
Report to the members
of Sound Energy PLC continued
Key audit matter
How the scope of our audit addressed the key audit matter
Taxation
The Group received a claim from the
Moroccan tax authority for approximately
$14m.
We considered whether it was probable
that settlement would be required and if
so, the amount should be recognised as a
liability.
We reviewed management’s assessment which concluded the liability is
contingent.
In considering this assessment we performed the following:
• Reviewed the initial claim from the Moroccan tax authority and the
independent professional advice received by management
• Obtained an independent view from our local tax experts
• Agreed the disclosure for consistency with the facts as presented and
understood by us.
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.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in
the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material misstatement in the financial statements or a
material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinion on other matter prescribed by the Companies Act 2006
In our opinion based on the work undertaken in the course of our audit
• the information given in the strategic report and the directors’ report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Group and the 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.
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GOVERNANCE REPORT
Responsibilities of the directors for the financial
statements
As explained more fully in the directors’ responsibilities
statement 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 Company’s ability
to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
concern basis of accounting unless the directors either
intend to liquidate the Group or the 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.
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design procedures
in line with our responsibilities, outlined above, to detect
material misstatements in respect of irregularities, including
fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below
however the primary responsibility for the prevention and
detection of fraud lies with management and those charged
with governance of the company.
• We obtained an understanding of the legal and regulatory
frameworks that are applicable to the Group and the
procedures in place for ensuring compliance. The most
significant identified were the Companies Act 2006 and
UK and Moroccan taxation legislation. Our work included,
reviewing board and relevant committee minutes and
inspection of correspondence and HSE reports.
• As part of our audit planning process we assessed the
different areas of the financial statements, including
disclosures, for the risk of material misstatement. This
included considering the risk of fraud where direct
enquiries were made of management and those
charged with governance concerning both whether
they had any knowledge of actual or suspected fraud
and their assessment of the susceptibility of fraud. We
considered the risk was greater in areas involve significant
management estimate or judgement. Based on this
assessment we designed audit procedures to focus on the
key areas of estimate or judgement, including impairment,
this included specific testing of journal transactions, both
at the year end and throughout the year.
• We used analytics to identify any unusual transactions or
unexpected relationships, including considering the risk of
undisclosed related party transactions.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some
material misstatements in the financial statements, even
though we have properly planned and performed our audit in
accordance with auditing standards. We are not responsible
for preventing non-compliance and cannot be expected to
detect non-compliance with all laws and regulations.
These inherent limitations are particularly significant in the
case of misstatement resulting from fraud as this may involve
sophisticated schemes designed to avoid detection, including
deliberate failure to record transactions, collusion or the
provision of intentional misrepresentations.
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
19 May 2021
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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30394 21 May 2021 11:57 am V15FINANCIAL STATEMENTSFinancial StatementsConsolidated Statement of Comprehensive Income59Consolidated Balance Sheet60Company Balance Sheet61Group and Company Statements of Changes in Equity62Group Statement of Cash Flows64Company Statement of Cash Flows65Notes to the Financial Statements665830394-Sound-energy-AR2020 Financials.indd 5830394-Sound-energy-AR2020 Financials.indd 5821-May-21 1:42:35 PM21-May-21 1:42:35 PM FINANCIAL STATEMENTSConsolidated Statement of Comprehensive Incomefor the year ended 31 December 2020 Notes2020 £’000s2019£’000sContinuing operationsRevenue––Impairment of development assets and exploration costs(9,777)(6,570)Gross loss(9,777)(6,570)Administrative expenses(2,904)(6,064)Group operating loss from continuing operations3(12,681)(12,634)Finance revenue646102Foreign exchange loss(2,877)(1,101)Finance expense23(3,304)(2,787)Loss for the year before taxation(18,816)(16,420)Tax credit/(expense)7––Loss for the year after taxation(18,816)(16,420)Other comprehensive (loss)/incomeItems that may subsequently be reclassified to the profit and loss accountForeign currency translation loss(4,010)(4,256)Total comprehensive loss for the year(22,826)(20,676)(Loss)/profit for the year attributable to:Owners of the Company(22,826)(20,676) Notes2020 Pence2019 PenceBasic and diluted loss per share for the year attributable to the equity shareholders of the parent (pence)8(1.54)(1.54)www.soundenergyplc.comSound Energy plc Annual Report for the year ended 31 December 20205930394-Sound-energy-AR2020 Financials.indd 5930394-Sound-energy-AR2020 Financials.indd 5921-May-21 1:42:35 PM21-May-21 1:42:35 PM FINANCIAL STATEMENTS
Consolidated
Balance Sheet
as at 31 December 2020
Non-current assets
Property, plant and equipment
Intangible assets
Interest in Badile land
Current assets
Inventories
Other receivables
Prepayments
Cash and short-term deposits
Total assets
Current liabilities
Trade and other payables
Lease liabilities
Loans and borrowings
Non-current liabilities
Lease liabilities
Loans and borrowings
Total liabilities
Net assets
Capital and reserves
Share capital and share premium
Accumulated surplus
Warrant reserve
Foreign currency reserve
Total equity
Notes
2020
£’000s
2019
£’000s
9
10
24
12
13
14
15
23
15
23
133,387
30,657
988
165,032
912
1,371
23
4,468
6,774
171,806
2,206
30
24,709
26,945
–
–
–
26,945
144,861
29,540
117,334
4,090
(6,103)
144,861
147,342
30,784
936
179,062
1,014
1,492
41
4,608
7,155
186,217
2,444
183
–
2,627
42
21,235
21,277
23,904
162,313
24,835
135,481
4,090
(2,093)
162,313
The financial statements were approved by the Board and authorised for issue on 19 May 2021 and were signed on its
behalf by:
Mohammed Seghiri Director
Graham Lyon 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 2020
Non-current assets
Property, plant and equipment
Fixtures and fittings
Software
Interest in Badile land
Investments in subsidiaries
Current assets
Other receivables
Prepayments
Cash and short-term deposits
Total assets
Current liabilities
Trade and other payables
Leases liabilities
Loans and borrowings
Non-current liabilities
Leases liabilities
Loans and borrowings
Total liabilities
Net assets
Capital and reserves
Share capital and share premium
Accumulated surplus
Warrant reserve
Total equity
FINANCIAL STATEMENTS
Notes
2020
£’000s
2019
£’000s
24
11
12
13
14
23
23
36
–
–
988
157,851
158,875
–
9
2,248
2,257
161,132
1,139
30
24,709
25,878
–
–
–
25,878
135,254
29,540
101,624
4,090
135,254
105
31
2
936
172,127
173,201
10
34
1,802
1,846
175,047
1,091
55
–
1,146
30
21,235
21,265
22,411
152,636
24,835
123,711
4,090
152,636
The Company’s accumulated surplus includes loss for the year of £22.8 million (2019: loss of £14.5 million).
The financial statements were approved by the Board and authorised for issue on 19 May 2021 and were signed on its
behalf by:
Mohammed Seghiri Director
Graham Lyon Director
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Group and Company Statements
of Changes in Equity
for the year ended 31 December 2020
Group
At 1 January 2020
Total loss for the year
Other comprehensive income
Total comprehensive loss
Issue of share capital
Share issue costs
Share-based payments
At 31 December 2020
Company
At 1 January 2020
Total loss for the year
Issue of share capital
Share issue costs
Share-based payments
At 31 December 2020
Notes
Share
capital
£’000s
10,796
Share
premium
£’000s
14,039
–
–
–
2,466
–
–
–
–
–
2,656
(417)
–
16
21
Accumulated
surplus
£’000s
Warrant
reserve
£’000s
Foreign
currency
reserves
£’000s
Total
equity
£’000s
135,481
(18,816)
–
(18,816)
–
–
669
4,090
(2,093)
162,313
–
–
–
–
–
–
–
(4,010)
(4,010)
(18,816)
(4,010)
(22,826)
–
–
–
5,122
(417)
669
13,262
16,278
117,334
4,090
(6,103)
144,861
Notes
21
Share
capital
£’000s
10,796
–
2,466
–
–
Share
premium
£’000s
14,039
Accumulated
surplus
£’000s
Warrant
reserve
£’000s
Total
equity
£’000s
123,711
4,090
152,636
–
(22,756)
2,656
(417)
–
–
–
669
–
–
–
–
(22,756)
5,122
(417)
669
13,262
16,278
101,624
4,090
135,254
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FINANCIAL STATEMENTS
Group
At 1 January 2019
Total loss for the year
Other comprehensive income
Total comprehensive loss
Issue of share capital
Share issue costs
Share-based payments
At 31 December 2019
Company
At 1 January 2019
Total loss for the year
Issue of share capital
Share issue costs
Share-based payments
At 31 December 2019
Notes
Share
capital
£’000s
10,551
Share
premium
£’000s
12,049
–
–
–
245
–
–
–
–
–
2,228
(238)
–
10,796
14,039
21
Accumulated
surplus/
(deficit)
£’000s
150,242
(16,420)
–
(16,420)
–
–
1,659
135,481
Warrant
reserve
£’000s
4,090
–
–
–
–
–
–
Foreign
currency
reserves
£’000s
Total
equity
£’000s
2,163
179,095
–
(16,420)
(4,256)
(4,256)
(4,256)
(20,676)
–
–
–
2,473
(238)
1,659
4,090
(2,093)
162,313
Share
capital
£’000s
10,551
Share
premium
£’000s
12,049
–
245
–
–
–
2,228
(238)
–
10,796
14,039
Accumulated
surplus/
(deficit)
£’000s
136,559
(14,507)
–
–
1,659
123,711
Warrant
reserve
£’000s
Total
equity
£’000s
4,090
163,249
–
–
–
–
(14,507)
2,473
(238)
1,659
4,090
152,636
Notes
21
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Group Statement of Cash Flows
for the year ended 31 December 2020
Cash flow from operating activities
Cash flow from operations
Interest received
Net cash flow from operating activities
Cash flow from investing activities
Capital expenditure
Exploration expenditure
Disposal of Italian operations
Net cash flow from investing activities
Cash flow from financing activities
Net proceeds from equity issue
Interest payments
Lease payments
Net cash flow from financing activities
Net increase/(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
2020
£’000s
2019
£’000s
(1,873)
46
(1,827)
(461)
(821)
–
(1,282)
4,589
(1,269)
(128)
3,192
83
(223)
4,608
4,468
(10,909)
102
(10,807)
(1,011)
(5,401)
761
(5,651)
2,235
(1,266)
(195)
774
(15,684)
(244)
20,536
4,608
23
13
Note to Statement of Cash Flows
for the year ended 31 December 2020
Cash flow from operations reconciliation
Loss for the year before tax
Finance revenue
Decrease/(increase) in drilling inventories
Decrease in receivables and prepayments
Decrease in accruals and short-term payables
Impairment of development assets and exploration costs
Impairment of interest in Badile land
Depreciation
Share-based payments charge and remuneration paid in shares
Finance costs and exchange adjustments
Cash flow from operations
Notes
2020
£’000s
(18,816)
(46)
102
139
(315)
9,777
–
328
777
6,181
(1,873)
2019
£’000s
(16,420)
(102)
(85)
313
(7,773)
6,570
616
425
1,659
3,888
(10,909)
Non-cash transactions during the year included the issue of 5,805,555 ordinary shares at a price of 1.86 pence per share to an
employee of the Company in connection with the termination of an employment contract, and the issue of 863,682 ordinary
shares to a former employee under the Company’s RSU plan. 1,425,000 ordinary shares were issued at a price of 2 pence
per share to a third party in lieu of fees incurred in connection with a placing announced in December 2019. In 2019, 40,915
ordinary shares were issued to a former employee under the Company’s RSU plan.
The Group has provided collateral of $1.75 million (2019: $3.35 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 and cash equivalents. During the year $1.6 million of the $3.35 million collateral outstanding at the end of 2019 was
released and became unrestricted.
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Company Statement
of Cash Flows
for the year ended 31 December 2020
Cash flow from operating activities
Cash flow from operations
Interest received
Net cash flow from operating activities
Cash flow from investing activities
Badile VAT refund received
Cash advances to subsidiaries
Net cash flow from investing activities
Cash flow from financing activities
Net proceeds from equity issue
Interest payments
Lease payments
Net cash flow from financing activities
Net increase/(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
FINANCIAL STATEMENTS
Notes
2020
£’000s
2019
£’000s
(2,179)
3
(2,176)
–
(604)
(604)
4,589
(1,269)
(59)
3,261
481
(35)
1,802
2,248
(4,586)
46
(4,540)
761
(6,406)
(5,645)
2,235
(1,266)
(59)
910
(9,275)
(83)
11,160
1,802
13
Note to Statement of Cash Flows
for the year ended 31 December 2020
Cash flow from operations reconciliation
Loss before tax
Impairment of interest in Badile land
Intragroup recharges
Finance revenue
Decrease in receivables and prepayments
Increase/(decrease) in accruals and short-term payables
Depreciation
Share-based payments charge and remuneration paid in shares
Increase/(decrease) in impairment and expected credit loss allowance on
intercompany loans
Finance costs and exchange adjustments
Cash flow from operations
Notes
2020
£’000s
2019
£’000s
(22,756)
–
(479)
(3)
35
48
102
777
8,843
11,254
(2,179)
(14,507)
616
(475)
(46)
198
(810)
149
1,659
(260)
8,890
(4,586)
11
Non-cash transactions during the year included the issue of 5,805,555 ordinary shares at a price of 1.86 pence per share to an
employee of the Company in connection with the termination of an employment contract, and the issue of 863,682 ordinary
shares to a former employee under the Company’s RSU plan. 1,425,000 ordinary shares were issued at a price of 2 pence
per share to a third party in lieu of fees incurred in connection with a placing announced in December 2019. In 2019, 40,915
ordinary shares were issued to a former employee under the Company’s RSU plan.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
for the year ended 31 December 2020
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 2020 were authorised for issue by
the Board of Directors on 19 May 2021.
Going concern
As at 30 April 2021, the Group’s cash balance was £3.2 million (including approximately £1.3 million held as collateral for a
bank guarantee against licence commitments). The Company’s €28.8 million bond was due for settlement on 21 June 2021
but subsequent to the year-end, the terms and maturity date of the bond were restructured such that (inter alia) the maturity
date was extended to 21 December 2027 and the coupon rate amended such that 2% coupon interest is payable in cash and
3% coupon interest deferred to the maturity date. Further details on the restructuring are provided in the subsequent events
note 25. The Directors have reviewed the Company’s cash flow forecasts for a range of micro-LNG FID timing scenarios and
reflecting expected costs. While the micro-LNG project itself is expected to be fully financed through associated commercial
arrangements, the Company will require additional funding later this year to cover its obligations.
The COVID-19 pandemic has not had a material impact on the Company’s operations but could impact market conditions for
longer than the Directors currently expect and therefore delay the Company’s ability to raise additional funding.
These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company’s ability
to continue as a going concern. These financial statements do not include adjustments that would be required if the Company
was unable to continue as a going concern. The Company continues to exercise cost control to conserve cash resources and
the Directors believe that additional funding will be available in good time from the capital markets when required. Based
on the Company’s proven success in raising capital and based on feedback from advisors, the Directors have a reasonable
expectation that the Company and the Group will be able to secure the funding required to continue in operational existence
for the foreseeable future and have made a judgement that the Group will continue to realise its assets and discharge its
liabilities in the normal course of business. Accordingly, the Directors have adopted the going concern basis in preparing the
consolidated financial statements.
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. The Group based its assumptions
and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances
and assumptions about future developments, however, may change due to market changes or circumstances arising that are
beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
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”) assets,
impairment of development and production assets, investments and the estimation of share-based payment costs.
E&E assets
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. In considering whether development and production assets are impaired the Group considers significant declines
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FINANCIAL STATEMENTS
1 Accounting Policies continued
in the market capitalisation of the Company and whether this indicates existence of an impairment. If those indicators are met
a full impairment test is performed.
lmpairment test
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.
At 31 December 2020, the Company’s market capitalisation was £19.0 million, which is below the Group and Company’s
net asset value of £144.9 million and £135.3 million respectively. Management considers this to be a possible indication of
impairment of the Group and Company’s assets. A significant portion of the Group’s net assets is the carrying value of the
development and producing assets and disclosures relating to management’s assessment of impairment are included in note 9,
on the basis that the recoverability of the investment in subsidiaries in the Company balance sheet is linked to the value of the
development and producing assets as ultimately the cash flows these generate will determine the subsidiaries’ ability to pay
returns to the Company.
Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the
higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on
available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices
less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow model
(‘‘DCF model’’). The cash flows are derived from latest budgets, expenditure and price data in agreed heads of terms and
latest management plans on project phasing. The recoverable amount is sensitive to the discount rate as well as the Brent
price assumption that forms part of the indexation for the gas price used in the DCF model. The carrying amount of the
development and production assets and parent Company investment in subsidiaries was reduced by a £9.2 million impairment
loss during the year. The key assumptions used to determine the recoverable amount of the development and production
assets are disclosed in note 9.
Share-based payment
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 (note 17).
Fair value of warrants and bonds and allocation of issue costs
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.
Taxation
The Group seeks professional tax and legal advice to make a judgement on application of tax rules on underlying transactions
within the Group or with third parties. Tax treatment adopted by the Group may be challenged by tax authorities. During the
year, Morocco tax authority informed the Group that it intended to claim taxes on historical acquisition of licences in Eastern
Morocco by the Group. The Group believes that the Morocco tax authority has misunderstood or misinterpreted the underlying
transactions and has appealed the assessment. Accordingly, no liability has been recognised in the financial statements but the
assessment is considered to be a contingent liability. A disclosure has been made in note 7.
Intercompany loans
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. Other source
of estimate concern IFRS 9 on intercompany loans at parent Company level (note 11) but is not considered likely subject to
material change in the coming 12 months.
(b) Basis of consolidation
The Group financial statements consolidate the income statements, balance sheets, statements of cash flows 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
Sound Energy plc Annual Report for the year ended 31 December 2020
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
1 Accounting Policies continued
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. On adoption of IFRS 9, the Company calculated the expected credit losses
on intercompany loans based on lifetime expected credit loss. The expected credit loss is re-evaluated when credit risk
significantly changes.
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 GBP 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.
On consolidation, 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.
(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.
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
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FINANCIAL STATEMENTS
1 Accounting Policies continued
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
cash-generating unit where the cash flows of each field are interdependent.
Acquisitions, asset purchases and disposals
Acquisitions of oil and gas properties are accounted for under the purchase method where the transaction meets the definition
of a business combination or joint venture. Transactions involving the purchase of an individual field interest, or a group of field
interests, that do not qualify as a business combination are treated as asset purchases, irrespective of whether the specific
transactions involve the transfer of the field interests directly, or the transfer of an incorporated entity. Accordingly, no goodwill
arises, and the consideration is allocated to the assets and liabilities purchased on an appropriate basis.
(e) Expenses recognition
Expenses are recognised on the accruals basis unless otherwise stated.
(f) Property, plant and equipment
Fixtures, fittings and equipment are recorded at cost as tangible assets.
The straight-line method of depreciation is used to depreciate the cost of these assets over their estimated useful lives, which
is estimated to be three to five years.
(g) 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.
(h) 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.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
1 Accounting Policies continued
(i) Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at call with banks. Cash and cash equivalents also include
restricted cash that has been placed as guarantee for commitments on the licences.
(j) 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.
(k) 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 vested irrespective of whether or not the market condition is satisfied, provided that all other
performance and/or service conditions are satisfied.
(l) 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.
(m) Leases
The Group assesses at contract inception whether a contract is, or contains, a lease, if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for a consideration. The Group applies a single recognition and
measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease
liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
I. Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is
available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and
adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities
recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease
incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease
term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and
the lease term. Right-of-use assets are subject to impairment.
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FINANCIAL STATEMENTS
1 Accounting Policies continued
II. Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease
payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable,
variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees.
The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group
and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The
variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event
or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement
date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease
liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying
amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change in the assessment to
purchase the underlying asset.
III. Short-term leases and leases of low value assets
The Group applies the short-term lease recognition exemption to its short-term leases of offices, vehicles and rented staff
housing (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain
a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that
are considered of low value (i.e., below $5,000). Lease payments on short-term leases and leases of low-value assets are
recognised as expense on a straight-line basis over the lease term.
(n) Standards, interpretations and amendments to published standards
Amendments to published standards
A number of amendments to standards and interpretations have been issued but had no material impact on the Group.
(o) Earnings per share
Earnings per share are calculated using the weighted average number of ordinary shares outstanding during the period per
IAS 33. Diluted earnings per share are calculated based on the weighted average number of ordinary shares outstanding
during the period plus the weighted average number of shares that would be issued on the conversion of all potentially dilutive
shares to ordinary shares. It is assumed that any proceeds obtained on the exercise of any options and warrants would be
used to purchase ordinary shares at the average price during the period. Where the impact of converted shares would be anti-
dilutive, these are excluded from the calculation of diluted earnings.
(p) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable
estimate of the amount of the obligation can be made.
(q) Revenue recognition
Revenue associated with production sales of natural gas is recorded when title passes to the customer on delivery to the
customer pipeline.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
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 2020, 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 segments are included in the following tables.
Segment results for the year ended 31 December 2020:
Corporate
£’000s
Development
and production
£’000s
Exploration
and appraisal
£’000s
Impairment of development assets and exploration costs
–
(9,787)
Administration expenses
Operating loss segment result
Interest receivable
Finance costs and exchange adjustments
Loss for the period before taxation from continuing operations
The segments assets and liabilities at 31 December 2020 were as follows:
(2,904)
(2,904)
46
(6,181)
(9,039)
–
(9,787)
–
–
(9,787)
10
–
10
–
–
10
Development
and production
£’000s
Exploration
and appraisal
£’000s
133,243
800
(58)
30,597
1,376
Non-current assets
Current assets
Liabilities attributable to continuing operations
The geographical split of non-current assets is as follows:
Corporate
£’000s
1,192
4,598
(25,878)
Development and production assets
Interest in Badile land
Fixtures, fittings and office equipment
Right-of-use assets
Exploration and evaluation assets
Software
Total
Total
£’000s
(9,777)
(2,904)
(12,681)
46
(6,181)
(18,816)
Total
£’000s
165,032
6,774
(1,009)
(26,945)
Europe
£’000s
–
988
5
31
–
–
Morocco
£’000s
133,243
–
108
–
30,597
60
1,024
164,008
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FINANCIAL STATEMENTS
2 Segment Information continued
Segment results for the year ended 31 December 2019 were as follows:
Exploration costs
Administration expenses
Operating loss segment result
Interest receivable
Finance costs and exchange adjustments
Loss for the period before taxation from continuing operations
The segments assets and liabilities at 31 December 2019 are as follows:
Non-current assets
Current assets
Liabilities attributable to continuing operations
The geographical split of non-current assets is as follows:
Development and production assets
Interest in Badile land
Fixtures, fittings and office equipment
Right-of-use assets
Exploration and evaluation assets
Software
Total
3 Operating Loss
Operating loss is stated after charging:
Depreciation
Employee costs
Impairment of development assets and exploration costs
Corporate
£’000s
Development
and production
£’000s
Exploration
and appraisal
£’000s
–
(6,064)
(6,064)
102
(3,888)
(9,850)
–
–
–
–
–
–
(6,570)
–
(6,570)
–
–
(6,570)
Corporate
£’000s
1,530
4,795
(22,636)
Development
and production
£’000s
Exploration
and appraisal
£’000s
146,876
30,656
–
(9)
2,360
(1,259)
Europe
£’000s
–
936
46
90
–
2
Total
£’000s
(6,570)
(6,064)
(12,634)
102
(3,888)
(16,420)
Total
£’000s
179,062
7,155
(23,904)
Morocco
£’000s
146,876
–
195
135
30,656
126
1,074
177,988
2020
£’000s
2019
£’000s
328
1,893
9,777
425
3,798
6,570
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
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
Tax services
5 Employee Costs
Staff costs, including Executive Directors
Share-based payments
Wages and salaries
Social security costs
Employee benefits
Employee costs capitalised to development and intangible assets
Total
The average monthly number of employees (including Executive Directors) was:
Technical and operations
Management and administration
Total
2020
£’000s
2019
£’000s
54
5
6
65
52
5
6
63
2020
£’000s
2019
£’000s
669
1,388
166
129
(459)
1,893
1,659
2,967
321
132
(1,281)
3,798
2020
Number
2019
Number
3
11
14
8
17
25
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 £0.5 million (2019: £1.3 million) of the employee
costs was capitalised.
6 Finance Revenue
Interest on cash at bank and short-term deposits
2020
£’000s
46
46
2019
£’000s
102
102
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FINANCIAL STATEMENTS
2020
£’000s
2019
£’000s
–
–
–
–
–
2020
£’000s
(18,816)
3,575
(189)
(3,409)
23
–
–
–
–
–
–
2019
£’000s
(16,420)
3,120
(396)
(2,883)
159
–
7 Taxation
(a) Analysis of the tax charge for the year:
Current tax
UK corporation tax
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% (2019: 19%)
Tax effect of:
Expenses not deductible for tax purposes
Temporary differences not recognised
Differences in overseas tax rates
Total tax (charge)/credit
Deferred tax assets have not been recognised in respect of tax losses available due to uncertainty of utilisation of those assets.
Unrecognised tax losses as at 31 December 2020 were estimated to be approximately £8.2 million (2019: £8.9 million).
In August 2020, the Group received a notification from the tax authority in Morocco of its intention to assess Sound Energy
Morocco East Limited for additional withholding taxes and VAT liabilities totalling approximately $14 million, and intention to
consider a revision of the tax bases for previously submitted corporation tax returns, which could lead to additional corporate
taxes being assessed. The Group believes that the assessment arises from a misunderstanding of the underlying transactions
and has appealed the assessment. Accordingly, no liability has been recognised in the financial statements but the assessment
is considered to be a contingent liability.
Following the Group’s appeal, the tax authority has referred the matter to a local tax committee. The local tax committee can
take up to 12 months to make a decision.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
8 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, RSUs and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated
as follows:
Loss for the year after taxation
Weighted average shares in issue
Basic and diluted loss per share
2020
£’000s
(18,816)
2020
Million
1,225
2020
Pence
(1.54)
2019
£’000s
(16,420)
2019
Million
1,068
2019
Pence
(1.54)
The effect of the potential dilutive shares on the earnings per share would have been anti-dilutive and therefore were not
included in the calculation of diluted earnings per share.
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FINANCIAL STATEMENTS
9 Property, Plant and Equipment
Cost
At 1 January 2020
Additions
Derecognition on termination of lease
Exchange adjustments
At 31 December 2020
Impairment and depreciation
At 1 January 2020
Charge for period
Derecognition on termination of lease
Exchange adjustments
At 31 December 2020
Net book amount
Cost
At 1 January 2019
Additions
Disposal
Exchange adjustments
At 31 December 2019
Impairment and depreciation
At 1 January 2019
Charge for period
Disposal
Exchange adjustments
At 31 December 2019
Net book amount
Development and
production assets
£’000s
Fixtures, fittings
and office
equipment
£’000s
Right-of-use
assets
£’000s
146,876
494
–
(4,923)
142,447
–
9,787
–
(583)
9,204
133,243
785
–
–
(7)
778
544
128
–
(7)
665
113
410
–
(262)
2
150
185
133
(193)
(6)
119
31
Development and
production assets
£’000s
Fixtures, fittings
and office
equipment
£’000s
Right-of-use
assets
£’000s
150,600
1,079
(4,803)
146,876
–
–
–
–
–
146,876
794
–
(2)
(7)
785
389
155
(1)
1
544
241
–
414
–
(4)
410
–
185
–
–
185
225
2020
£’000s
148,071
494
(262)
(4,928)
143,375
729
10,048
(193)
(596)
9,988
133,387
2019
£’000s
151,394
1,493
(2)
(4,814)
148,071
389
340
(1)
1
729
147,342
During the year, the Group’s office lease in Morocco was terminated and a new short-term lease entered into at new office
premises. Accordingly, the right-of-use assets with carrying amount of £0.3 million and the related accumulated depreciation
of £0.2 million was derecognised.
The Company’s market capitalisation was £19.0 million as at 31 December 2020, which is below the Group’s net assets of
£144.9 million and the Company’s net assets of £135.3 million. An impairment indicator therefore exists. The Company is
pursuing a micro-LNG development (phase 1) followed by full field development (phase 2) of its TE-5 Horst concession at the
Group’s Tendrara licence and an impairment test was undertaken on the carrying amount of the TE-5 Horst concession. The
Company used a DCF model (‘‘Model’’) to calculate the value in use for the Company’s share of the TE-5 Horst concession.
The Model has an NPV of $181.9 million (£133.2 million), which when compared to the carrying amount of the development and
production assets of £142.4 million (before impairment) led to recognition of an impairment loss of £9.2 million (£9.8 million
less translation exchange adjustment of £0.6 million).
The Model covers the period 2021 to 2045. The input to the Model included a discount rate of 10% and a gas price of
$8.25/mmbtu for the first 0.3 bcm gas produced per annum and the price for additional volumes range between $7 to $9 per
Sound Energy plc Annual Report for the year ended 31 December 2020
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
9 Property, Plant and Equipment continued
mmbtu with an indexed formula using a combination of the European Title Transfer Facility and United States Henry Hub
benchmark indexes and Brent price range of $50/bbl in 2021 to $67/bbl in 2030, increasing at 2% per annum thereafter
consistent with published sources. The base gas prices used are consistent with Head of Terms for the phase 1 development
and memorandum of understanding on the gas sales agreement in negotiation with ONEE. The production volumes and
production profile was based on the 2018 CPR for TE-5 Horst.
Well costs assumptions used were based on management’s past experience, mLNG plant leasing costs were based on agreed
Head of Terms with the potential contractor and pipeline related costs were based on Head of Terms entered into with a
consortium of partners that had offered to provide a build, own, operate and transfer (‘‘BOOT’’) solution for the phase 2 of the
development. The Company’s latest budgets covered the period to 2023 but the model extends to 2045, as that is the period
required to produce the gas resources at TE-5 Horst concession and economic cut-off.
A change in the discount rate by 1% has a $21 million (£15.4 million) impact on the NPV and change in the Brent price by $1/bbl
has a $0.5 million (£0.4 million) impact on the NPV.
10 Intangibles
Cost
At 1 January 2020
Additions
Exchange adjustments
At 31 December 2020
Impairment and depreciation
At start of the year
Charge/(release) for the year
Exchange adjustments
At end of the year
Net book amount at 31 December 2020
Cost
At 1 January 2019
Additions
Exchange adjustments
At 31 December 2019
Impairment and depreciation
At start of the year
Charge for the year
Exchange adjustments
At end of the year
Net book amount at 31 December 2019
10,616
10,847
Exploration
& Evaluation
Assets
£’000s
Software
£’000s
359
–
(10)
349
231
67
(9)
289
60
41,272
939
(1,008)
41,203
(10)
–
10,606
30,597
Exploration
& Evaluation
Assets
£’000s
Software
£’000s
360
9
(10)
359
151
85
(5)
231
128
36,052
5,965
(745)
41,272
4,253
6,570
(207)
10,616
30,656
2020
£’000s
41,631
939
(1,018)
41,552
57
(9)
10,895
30,657
2019
£’000s
36,412
5,974
(755)
41,631
4,404
6,655
(212)
10,847
30,784
Exploration and evaluation assets
Details regarding the geography of the Group’s 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 2020 the Directors have:
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FINANCIAL STATEMENTS
10 Intangibles continued
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. During the year, the Group had capitalised interest costs
of approximately £0.1 million (2019: £0.5 million).
11 Investment in Subsidiaries
Cost
At 1 January
Additions
Exchange adjustment
At 31 December
Credit loss allowance and impairment
At 1 January
Decrease in credit loss during the year
Impairment loss
At 31 December
Net book amount at 31 December
2020
Cost of
shares in
subsidiaries
£’000s
Intercompany
loans
£’000s
Total
£’000s
Intercompany
loans
£’000s
2019
Cost of
shares in
subsidiaries
£’000s
189,252
1,083
(6,516)
183,819
17,125
(361)
9,204
25,968
157,851
–
–
–
–
–
–
–
–
–
189,252
1,083
(6,516)
183,819
17,125
(361)
9,204
25,968
157,851
189,093
6,881
(6,722)
189,252
17,385
(260)
–
17,125
172,127
–
–
–
–
–
–
–
–
–
Total
£’000s
189,093
6,881
(6,722)
189,252
17,385
(260)
–
17,125
172,127
The subsidiary companies of the Company at 31 December 2019, 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 SARLAU**
Morocco
Exploration Company Mahaj Ryad Center, Bd Al Arz.
Sound Energy New Co Limited
Sound Energy Morocco East Limited
UK
UK
Dormant
4 Pembroke Road, Sevenoaks, TN13 IXR, 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 SARLAU is held indirectly via Sound Energy Morocco East Limited.
On the basis that the recoverability of the investment in subsidiaries in the Company balance sheet is linked to the value of the
development and production assets, as ultimately the cash flows these generate will determine the subsidiaries ability to pay
returns to the Company, an impairment loss of £9.2 million has been recognised for the investment in subsidiaries following the
Sound Energy plc Annual Report for the year ended 31 December 2020
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
11 Investment in Subsidiaries continued
recognition of an impairment in the development and production assets (note 9).
On adoption of IFRS 9, the Company calculated the expected credit losses on intercompany loans based on lifetime expected credit
loss. The expected credit loss is re-evaluated when credit risk significantly changes.
The Company uses available external data on oil and gas industry default rates, where available, or speculative bond default rates.
During the year, the Company used a cumulative default rate of 9% (2019: 9%) obtained from publicly available data published by
leading credit rating agencies. £0.3 million (2019: £0.3 million) release was recognised in the income statement.
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:
Place of incorporation
Place of operation
2020
Number
2019
Number
UK
UK
UK
Morocco
UK
UK
British Virgin Isles
British Virgin Isles
Mauritius
Morocco
Mauritius
Morocco
3
1
1
2
1
1
2020
£’000s
–
464
907
1,371
2020
£’000s
800
–
571
1,371
2020
£’000s
–
–
2020
£’000s
–
–
3
1
1
2
1
1
2019
£’000s
10
654
828
1,492
2019
£’000s
692
10
790
1,492
2019
£’000s
10
10
2019
£’000s
10
10
Principal activity
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
GBP sterling
Moroccan dirham
Company
UK VAT
Currency Analysis
GBP sterling
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FINANCIAL STATEMENTS
2020
£’000s
1,229
3,239
4,468
2,350
61
1,978
79
4,468
2020
£’000s
311
1,937
2,248
225
61
1,962
2,248
2019
£’000s
1,754
2,854
4,608
3,636
564
376
32
4,608
2019
£’000s
1,494
308
1,802
905
564
333
1,802
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
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
The Group has provided collateral of $1.75 million (£1.3 million) (2019: $3.35 million (£2.54 million)) to the Morocco 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 and cash equivalents. In August 2020, $1.6 million of the collateral that was
outstanding at the end of 2019 was released and became unrestricted.
14 Trade and Other Payables
Group
Trade payable
Payroll taxes and social security
Accruals
2020
£’000s
1,268
112
826
2,206
2019
£’000s
1,312
81
1,051
2,444
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
14 Trade and Other Payables continued
Currency Analysis
US dollar
Euro
Sterling
Moroccan dirham
Company
Trade payable
Payroll taxes and social security
Accruals
Currency Analysis
Sterling
Euro
15 Lease Liabilities
Amounts due within one year
Amounts due after more than one year
The movement during the year is as below
As at 1 January
Interest accretion
Payments
Office lease termination
Exchange adjustments
As at 31 December
2020
£’000s
902
794
313
197
2019
£’000s
1,192
810
270
172
2,206
2,444
2020
£’000s
351
105
683
1,139
2020
£’000s
345
794
1,139
2020
£’000s
30
–
30
225
10
(128)
(79)
2
30
2019
£’000s
325
82
684
1,091
2019
£’000s
281
810
1,091
2019
£’000s
183
42
225
400
25
(195)
–
(5)
225
The Group’s leases are in respect of the office premises. During the year, the Group’s office lease in Morocco was terminated
and a new short-term lease entered into at new office premises.
The right-of-use assets are reported within property, plant and equipment (note 9). During the year ended 31 December 2020,
the amount recognised as short-term lease expenses was not material.
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FINANCIAL STATEMENTS
16 Capital and Reserves
Group and Company
Ordinary shares – 1p
At 1 January
Issued during the year for cash
Non-cash share issue
At 31 December
2020
Number
of shares
1,326,244,389
£’000s
13,262
2019
Number
of shares
1,079,612,264
2020
Number
of shares
£’000s
10,796
2019
Number
of shares
1,079,612,264
1,055,107,172
238,537,888
8,094,237
24,464,177
40,915
1,326,244,389
1,079,612,264
Non-cash transactions during the year included the issue of 5,805,555 ordinary shares at a price of 1.86 pence per share to an
employee of the Company in connection with the termination of an employment contract and the issue of 863,682 ordinary
shares to a former employee under the Company’s RSU plan. 1,425,000 ordinary shares were issued at a price of 2 pence per
share to a third party in lieu of fees incurred in connection with a placing announced in December 2019.
Share issues
During the year ended 31 December 2020, the Company issued 8,477 shares following warrant exercises at an exercise price of
24 pence per share.
In January 2020, the Company issued 76,425,000 shares following a placing announced in December 2019 at 2 pence per
share.
In January 2020, the Company issued 5,805,555 shares at 1.86 pence per share to an employee of the Company in connection
with the termination of an employment contract.
In July 2020, the Company issued 863,682 shares following vesting of RSU previously awarded to a former employee of the
Company.
In August 2020, the Company issued 163,529,411 shares at a price of 2.125 pence per share following a placing.
Reserves
In 2018, the Company sought and was granted a court order approving a capital reduction following the cancellation of the
share premium account. This resulted in the transfer of £277.7 million to distributable reserves.
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
17 Related Party Disclosures
Key management
As at 31 December 2020, there were two key management personnel other than Directors of the Company (2019: three).
Details of the Directors’ remuneration are set out in the Report of Directors’ Remuneration. The table below shows the total
remuneration of key management personnel, including the Executive Directors.
Salaries and employee benefits
Share-based payments
2020
£’000s
1,136
604
1,740
2019
£’000s
1,492
1,283
2,775
Directors’ interest in employee share options
Share options held by non-executive members of the Board of Directors at 31 December 2020 have the following expiry dates
and exercise prices:
2016
Expiry
date
2021
Exercise
price
Pence
2020
Number
2019
Number
60p
500,000
500,000
Share options held by the executive members of the Board of Directors at 31 December 2020 have the following expiry dates
and exercise prices:
2016
2016
2017
2017
Expiry
date
2021
2021
2022
2022
Key management’s (excluding Directors) interest in employee share options
2017
2017
2017
Expiry
date
2022
2022
2022
Key management’s (including Executive Directors) interest in RSU awards
2018
2019
Exercise
price
Pence
16p
84p
48p
67p
Exercise
price
Pence
67p
70p
2020
Number
2019
Number
–
–
–
3,000,000
1,500,000
4,000,000
1,500,000
1,500,000
2020
Number
2019
Number
300,000
700,000
–
1,500,000
52.25p
500,000
500,000
Settlement
date
2021
2022
2020
Number
310,548
520,992
2019
Number
2,096,554
462,475
Other expenses
Two Directors of the Company were 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 £nil (2019: £9,018) in respect of travel expenses that
had been paid by the Company on behalf of Echo. Two Directors of the Company were 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 £nil
(2019: £3,847) in respect of travel expenses paid by the Company on behalf of Coro.
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FINANCIAL STATEMENTS
18 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 23 (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
Financial liabilities
Trade and other payables
Loans and borrowings held at amortised costs
2020
£’000s
4,468
2,359
6,827
2,206
24,709
26,915
2019
£’000s
4,608
2,428
7,036
2,444
21,235
23,679
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.
The main risks arising from the Group’s financial instruments are interest rate risk and foreign currency risk (note 19). The
Board of Directors reviews and agrees policies for managing each of these risks which are summarised below:
Market risk
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.
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
18 Financial Instruments Risk Management continued
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 have them approved by the Board of Directors where applicable.
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
Total capital excluding reserves:
Equity share capital
Equity share premium
Shareholders’ equity
2020
£’000s
(24,709)
4,468
(20,241)
13,262
16,278
144,861
2019
£’000s
(21,235)
4,608
(16,627)
10,796
14,039
162,313
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FINANCIAL STATEMENTS
19 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.
2020
2019
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%)
(112)
(13)
(23)
112
13
23
(6,589)
–
–
6,589
–
–
(157)
(35)
(33)
157
35
33
(6,821)
–
–
6,821
–
–
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 manage cash resources to ensure that sufficient funding is in place to settle obligations as they fall
due. Disclosure on going concern consideration is provided in note 1. For further details on the maturity of financial liabilities
see note 23.
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
20 Financial Instruments
Cash and short-term deposits
2020
Sterling
Euro
US dollar
Moroccan dirham
2019
Sterling
Euro
US dollar
Moroccan dirham
Floating
rate
£’000s
452
–
1,302
–
1,754
351
–
1,973
–
2,324
Fixed
rate
£’000s
1,501
–
–
–
1,501
–
–
–
–
–
Interest-
free
£’000s
Total
£’000s
Weighted
average rate
%
25
61
1,048
79
1,213
25
564
1,663
32
2,284
1,978
61
2,350
79
4,468
376
564
3,636
32
4,608
0.33
–
1.44
–
0.09
–
1.41
–
Euro cash balances have been converted at the exchange rate of €1.1129: £1.00 (2019: €1.1757: £1.00). Moroccan dirham cash
balances have been converted at the exchange rate of MAD12.159: £1.00 (2019: MAD12.646: £1.00). US dollar cash balances
have been converted at the exchange rate of US$1.3650: £1.00 (2019: US$1.3189: £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.
21 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 2018 that the Share Option Plan be replaced with an RSU
Plan. The RSU awards are made on an annual basis, with a three-year vesting period and may contain performance conditions,
and at vesting the awards will be satisfied in Sound Energy shares. The RSU awards are granted at nil cost to the Directors and
key staff.
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 2020 and 2019.
2020
£’000s
669
2019
£’000s
1,659
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FINANCIAL STATEMENTS
21 Share-Based Payments continued
Weighted
average
exercise price
Pence
2020
Number
2019
Number
Share options outstanding at the start of the year
23,225,000
44.93
24,950,000
Share options granted
Share options expired
Share options exercised
–
–
–
(14,275,000)
41.47
(1,100,000)
–
–
(625,000)
Share options outstanding at the end of the year
8,950,000
49.19
23,225,000
Weighted
average
exercise
price
Pence
49.15
–
58.00
14.07
44.93
The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2020
was n/a (2019: 23 pence). The weighted average remaining contractual life of the options outstanding at 31 December 2020
was 0.8 years (2019: 1.9 years).
9.0 million share options were exercisable as at 31 December 2020 (2019: 11.4 million). If all equity share options were
exercisable immediately, new ordinary shares equal to approximately 0.7% (2019: 2.2%) of the shares currently in issue, would
be created. The exercise prices for the share options exercisable as at 31 December 2020 range from 16 pence to 70 pence.
RSU awards
During the year, nil (2019: 828,978) RSU awards were granted 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.
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: n/a (2019: 8.72 pence)
• Average risk free interest rate: n/a (2019: 0.57%)
• Expected volatility: n/a (2019: 75.42%)
• Assumed forfeitures: n/a (2019: 0%)
• Expected dividends: n/a (2019: nil)
No other features of RSU awards grant are incorporated into the measurement of fair value. The weighted average fair value of
the RSU awards granted was n/a (2019: 8.71p).
The weighted average remaining contractual life of the RSU awards outstanding as at 31 December 2020 was one year
(2019: 1.25 years)
If all the RSU awards were exercisable immediately, new ordinary shares equal to 0.1% (2019: 0.3%) of the shares currently in
issue, would be created.
RSU awards outstanding at the start of the year
Granted during the year
Expired during the year
Exercised during the year
RSU awards outstanding at the end of the year
2020
Number
2019
Number
3,380,019
2,733,240
–
(1,028,572)
(863,682)
828,978
(141,284)
(40,915)
1,487,765
3,380,019
The weighted average share price at the date of exercise of the RSU during the year was 2.38 pence (2019: 8.6 pence).
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
21 Share-Based Payments continued
Warrants
As at 31 December 2020, the Company had the following outstanding warrants to subscribe to the Company’s ordinary shares.
2020
2015 Warrants
2016 Warrants
2019
2015 Warrants
2016 Warrants
Exercise price
Pence
Expiry date
Number
at 1 January
Exercised
Expired
24.00 22 May 2020
17,078,323
(8,477)
(17,069,846)
30.00 21 June 2021
52,411,273
–
–
69,489,596
(8,477)
(17,069,846)
Exercise price
Pence
Expiry date
Number
at 1 January
Exercised
24.00 22 May 2020
17,087,172
(8,849)
30.00 21 June 2021
52,411,273
–
Number
at 31 December
–
52,411,273
52,411,273
Number
at 31 December
17,078,323
52,411,273
69,498,445
(8,849)
69,489,596
22 Commitment and Guarantees
At 31 December 2020, the Group’s minimum capital expenditure on its licences was approximately £4.2 million, primarily for
the exploration and appraisal activities in the Group’s licences in Morocco. The Group had placed $1.75 million collateral to
guarantee to the Moroccan Oil Ministry for the minimum work commitments on its licences.
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FINANCIAL STATEMENTS
2020
£’000s
2019
£’000s
–
23,845
1,731
(647)
(220)
24,709
–
–
–
–
–
–
21,235
20,476
1,637
(622)
1,595
(23,845)
–
3,249
(1,266)
(1,224)
–
21,235
23 Loans and Borrowings
Group and Company
Current liabilities
At 1 January
Reclassification from non-current liabilities
Amortised finance charges
Interest payments
Exchange adjustments
At 31 December
Non-current liabilities
Five year secured bonds
At 1 January
Amortised finance charges
Interest payments
Exchange adjustments
Reclassification to current liabilities
At 31 December
The Company had a five year non-amortising secured bonds with an aggregate issue value of €28.8 million (the “bonds”)
issued in 2016. The bonds are secured over the share capital of Sound Energy Morocco South Limited, had a 5% coupon
and were issued at a 32% discount to par value. Alongside the bonds, the Company in 2016 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 from 2016, 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 five year secured bonds had been
due in June 2021. Subsequent to year-end the terms and maturity date of the bonds were restructured as detailed in Note 25.
Reconciliation of liabilities arising from financing activities
2020
Long-term borrowings
Leases
Total liabilities from financing activities
2019
Long-term borrowings
Leases
Total liabilities from financing activities
Non-cash changes
1 January
2020
£’000s
21,235
225
21,460
Cash flows
£’000s
(1,269)
(128)
(1,397)
Amortised
finance
charges
£’000s
3,368
10
3,378
Exchange
adjustments
£’000s
Termination of
lease
31 December
2020
£’000s
1,375
2
1,377
–
(79)
(79)
24,709
30
24,739
Non-cash changes
1 January
2019
£’000s
20,476
400
20,876
Cash flows
£’000s
(1,266)
(195)
(1,461)
Amortised
finance
charges
£’000s
3,249
25
3,274
Exchange
adjustments
£’000s
31 December
2019
£’000s
(1,224)
(5)
(1,229)
21,235
225
21,460
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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FINANCIAL STATEMENTS
Notes to the Financial Statements
continued
for the year ended 31 December 2020
23 Loans and Borrowings continued
Reconciliation of finance expense
Amortised finance charges
Less capitalised interest
Exchange adjustments
Total external interest for the year
2020
£’000s
3,378
(74)
–
3,304
2019
£’000s
3,274
(492)
5
2,787
24 Interest in Badile land
In 2018, the Company completed the sale of its Italian operations. As part of the divestment agreement, the Company retained
economic interest in Badile land. The Company was also obligated to fund the Badile land restoration for a fixed amount.
A potential buyer for the land has been identified and discussions are continuing and expected to lead to the sale of land.
The proposed sale contemplates that the buyer takes over the obligation relating to the land restoration. Based on the terms
offered by the buyer, the Company would make a profit of approximately £0.1 million and has therefore concluded that no
impairment charge is required.
In 2019, the Company received approximately £0.8 million VAT refund from the Badile well operations and recognised
£0.6 million impairment charge in respect of the interest in Badile land due to decline in expected sale price.
25 Post Balance Sheet Events
In March 2021, the Company announced that the sale of Badile land area where no restoration works were required (‘‘Area 1’’)
had been completed and the Company had received €182,535 net of administrative, agency and the legal fees. The sale of
Badile land area where restoration work is required (‘‘Area 2’’) is expected to be completed later in the year.
In April 2021, the Company announced that the holders of the Company’s €28.8 million secured notes (‘‘the Notes’’) had
approved the Company’s proposal for restructuring of the Notes. The revised terms of the Notes are as below:
1) The Maturity date of the Notes was extended by six years from 21 June 2021 to 21 December 2027;
2) The outstanding principal amount of the Notes will be partially amortised, at a rate of 5% every six months,
commencing on 21 December 2023;
3) Approximately €3.5 million of the Notes were converted to a total of 141,176,448 new ordinary shares in the
Company at a conversion price of 2.125 pence per share;
4) The Notes shall bear until maturity 2% cash interest paid per annum and 3% deferred interest per annum to be
paid at redemption for the period commencing on 21 June 2021;
5) The Company issued to the Noteholders 99,999,936 warrants to subscribe for new ordinary shares in the
Company at an exercise price of 2.75 pence per share; and
6) The Company will have the right, at any time until 21 December 2024, to redeem the Notes in full for 70% of the
principal value then outstanding together with any unpaid interest at the date of redemption.
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List of Licences and Interests
Licence
Greater Tendrara
Tendrara1
Anoual
Sidi Moktar
Status
Name
Permit Greater Tendrara
Permit
Permit
Permit
Tendrara
Anoual
Sidi Moktar
Type
Exploration
Exploitation
Exploration
Exploration
Key Project or Prospect
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%.
Sound Energy plc Annual Report for the year ended 31 December 2020
www.soundenergyplc.com
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Shareholder Information
Dealing Information
Stock code: SOU.LN
Financial Calendar
Meetings
Annual General Meeting – June 2021 (Subject to Government guidelines)
Announcements
2021 Interim – September 2021
2021 Preliminary – March 2022
Stockbrocker
SP Angel Corporate Finance LLP
35 Maddox St
Mayfair
London
WIS 2PP
Nominated Advisers
Cenkos Securities plc
6, 7, 8 Tokenhouse Yard
London
EC2R 7AS
Registrars
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
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
AMBA Secretaries Limited
400 Thames Valley Park Road
Reading
RG6 1PT
Website
www.soundenergyplc.com
Auditor
Crowe U.K. LLP
55 Ludgate Hill
London
EC4M 7JW
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30394 21 May 2021 1:38 pm V15Sound Energy plc Annual Report & Accounts for the year ended 31 December 2020Sound Energy plc1st Floor 4 Pembroke Road Sevenoaks Kent TN13 1XR United KingdomSound Energy plc Annual Report & Accounts for the year ended 31 December 202030394-Sound-energy-AR2020 Strategic and Governance.indd 330394-Sound-energy-AR2020 Strategic and Governance.indd 321-May-21 1:39:12 PM21-May-21 1:39:12 PM