Sterling Energy plc
Annual Report 2014

Plain-text annual report

Report and Financial Statements 2014 Sterling Energy plc Report and Financial Statements Year ended 31 December 2014 CONTENTS Chairman’s Statement STRATEGIC REPORT Operations Review Schedule of Interests Reserves Summary Financial Review Business Risk CORPORATE GOVERNANCE Board of Directors Audit Committee Report Nominations Committee Remuneration Committee Report Communications with Shareholders Internal Controls Conflicts of Interest Extractive Industries Transparency Initiative (‘EITI’) Directors’ Report Statement of Directors’ Responsibilities GROUP ACCOUNTS Independent Auditors’ Report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes In Equity Consolidated Statement of Cash Flows Company Statement of Financial Position Company Statement of Changes In Equity Company Statement of Cash Flows Notes to the Financial Statements Definitions and Glossary of Terms Professional Advisers 4 10 14 20 21 25 32 35 37 38 49 50 50 51 52 55 58 59 60 61 62 63 64 65 66 98 101 3 Sterling Energy plc (the ‘Company’), together with its subsidiary undertakings (the ‘Group’), is an upstream oil and gas company listed on the AIM market of the London Stock Exchange. The Company is an experienced operator of international licences with a focus on projects in Africa. The Group has high potential exploration projects in Cameroon, Somaliland, Madagascar and Mauritania together with a production interest in Mauritania. 2 Cover image courtesy of CGG Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014OVERVIEW Chairman’s Statement $108.1 million CASH RESOURCES During 2014 we focused on the exploration of our existing assets and building our portfolio with the addition of new and diverse opportunities... During 2014 we focused on the exploration of our existing In May 2014 we completed the acquisition of 40% of the in these disputed waters is too great and in May 2014 Sterling Energy (UK) Limited, as operator, expects to assets and building our portfolio with the addition of new Odewayne PSC onshore Somaliland. Genel, the operator, force majeure was declared again. Société Nationale complete in Q2 2015 the acquisition of 1,250km² of 3D and diverse opportunities, spreading our resources, carries us for our share of costs to acquire a 1,500km 2D des Hydrocarbures (‘SNH’), the national oil company seismic data over the Ambilobe block in Madagascar, both human and financial, across varying technical, seismic programme and to drill one exploration well; by of Cameroon, has advised Sterling Cameroon Limited the cost of which is being paid by Pura Vida who farmed commercial and geopolitical ventures. acquiring an uncapped carried interest we can forecast that “Cameroon does not recognise that any situation into 50% of the Ambilobe PSC in December 2013. We We have made progress in our quest for new ventures in work programme. discussions with SNH to agree the best way to progress identify possible prospects ahead of the ‘drill or drop’ a rapidly changing oil and gas industry landscape. At the the exploration activity in the Ntem block. decision in July 2016. with certainty our exploration costs for a pre-defined of force majeure exists in the Ntem Permit”. We are in look forward to acquiring and interpreting this data to beginning of 2014, the Company and many of our peers all In February 2015 we signed an agreement with Tullow Oil actively sought new portfolio opportunities. As the global to acquire a 40.5% interest in PSC C-3 offshore, shallow In February 2015 Murphy advised Sterling Cameroon FINANCIAL oil price started to decline the competitive market for new water Mauritania. As operator, Tullow had just finished Limited and SNH that Murphy proposes to transfer its The Group had cash resources of $108.1 million at the ventures started to ease in parallel with some additional the acquisition of a 1,600km 2D seismic programme. 50% interest and operatorship to Sterling Cameroon end of 2014, including $1.1 million of partner funds, and opportunities being offered by companies with exploration During the next few months we shall work with Tullow Limited subject to receipt of Cameroon government we remain free of debt. Our work programme for 2015 commitments but whose budgets were under pressure in to integrate the new seismic data with the existing sub- approvals. We would like to thank Murphy for their is fully funded and we have funds available to progress response to the falling oil price. We have also seen the surface data-set to mature leads to drill-ready prospects diligent work as operator of the Ntem concession and both our existing portfolio and new venture activity. traditional business model of the smaller E&P companies ahead of the decision to enter the next exploration period their financial contribution that covered the Group’s share securing acreage, and then undertaking leveraged with a commitment to drill one exploration well. of all exploration costs since November 2011. BOARD AND MANAGEMENT CHANGES farm-outs to reduce their exposure to the high costs of On 23 March 2015 the Company announced the exploration, coming under commercial and financial strain In January 2014, the Company’s wholly owned subsidiary, In Madagascar we received Presidential consent to appointment of Eskil Jersing as Chief Executive Officer as the medium and larger independent oil companies Sterling Cameroon Limited, and our joint venture partner, extend Phase 2 and 3 of the Ambilobe and Ampasindava (CEO) and a director of the Company. Eskil’s career to are no longer willing to fund 100% of the exploration risk. lifted force majeure in the Ntem block, in Cameroon, PSCs, respectively, to July 2016. We had adapted our Group strategy accordingly and in to allow exploration activities to resume. The Ocean date spans almost 30 years working exploration, new ventures, strategy, planning and business development particular are more cautious about our ability to farm-out Confidence rig commenced the drilling of Bamboo-1 The Company’s wholly owned subsidiary, Sterling roles of increasing responsibility in the world’s key what are sometimes, very large financial commitments. exploration well in February 2014. The well encountered Energy (UK) Limited, and ExxonMobil, our joint venture petroleum basins (Africa, Brazil, SE Asia, Australasia, the reservoirs that had been identified from the extensive partner in the Ampasindava PSC, have completed a North Sea, and Deep Water Gulf of Mexico). I am very We believe the key to long term exploration success is 3D seismic dataset but no commercial hydrocarbons review of the Sifaka prospect and concluded that the pleased to welcome Eskil to the Company and I look to be diligent during the appraisal of new ventures and were encountered; the well was plugged and abandoned technical and commercial risks are too great to justify forward to the addition of his specialist oil and gas highly selective in the final choice, securing fewer high in April 2014. A review of the remaining prospectivity has an exploration well; furthermore no other drill ready experience, excellent business skills, and clear focused quality opportunities rather than over-stretching the highlighted a drill-ready prospect located in Cameroon prospects have been identified. The joint venture leadership that will strengthen our ability to manage our Company’s resources with smaller equity spread across maritime waters which are also claimed by Equatorial partners are in discussions with OMNIS, the Malagasy existing exploration portfolio and identify new venture more higher risk ventures. Guinea. We believe the geopolitical risk involved in drilling petroleum agency on the future work programme. opportunities. 4 5 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 OVERVIEW Chairman’s Statement (cont.) I will relinquish the role of Interim CEO and continue as The Group has, via a combination of our own funds the Company’s executive Chairman. and carried interests, the resources to see our existing projects advance during 2015. We hold sufficient funds In December 2014 the Company announced that to acquire additional growth options to add to our Dr. Philip Frank, the Company’s Exploration Director, portfolio; we shall continue to seek new opportunities intended to step down from the Board and leave the within and beyond our existing areas of interest and shall Company. As part of the Company’s succession plan, only pursue those ventures that we believe will ultimately we appointed Matthew Bowyer as Exploration Manager deliver value for our shareholders. and following a period of transition Dr. Frank stood down from the Board on 13 March 2013. I would like to I would like to thank our shareholders for their continuing thank Phil for the contribution he made to the Group’s support for our strategy and all of our management and exploration activity during his three year tenure and wish staff for their diligent efforts during 2014. him all the very best for his future challenges. OUTLOOK FOR 2015 AND BEYOND During 2015 we expect to receive 3D seismic data covering the high-graded area of the Ambilobe block Alastair Beardsall Chairman and 2D data on the C-3 block which will be interpreted 25 March 2015 to identify potential drill-ready prospects, in addition we expect the planning for 2D seismic acquisition in the Odewayne block to be well advanced. We have a material drill-ready prospect in the Ntem block and will work with SNH, the Cameroon state oil company, to agree a forward plan that does not put at risk any drilling investment in an area of disputed territorial waters. The high technical and commercial risks associated with drilling the Sifaka prospect on the Ampasindava block means there is no expectation of drilling during 2015 or 2016; in the year ahead we shall endeavour to agree a forward plan with ExxonMobil and OMNIS, the Malagasy petroleum agency. 2014 SUMMARY In Cameroon, the Bamboo-1 exploration well was drilled on the Ntem block; no commercial hydrocarbons were encountered and the well was subsequently plugged and abandoned in April 2014. The Group’s share of the drilling cost was funded by Murphy under the 2011 farm-out agreement. 3D Seismic Programme on the Ambilobe block, offshore Madagascar, is expected to be completed in Q2 2015. Acquisition of a 40% carried interest in the Odewayne block, Somaliland, was completed in Q2 2014. Signature of an agreement with Tullow Oil to acquire a 40.5% interest in PSC C-3, offshore Mauritania. The Group received $6.9 million of net cash flow from Chinguetti field operations, offshore Mauritania in 2014 (2013: $11.2 million). Cash resources at 31 December 2014 of $108.1 million (2013: $120.8 million). The Group remains debt free. 6 Sterling Energy plc Report and Financial Statements 2014 Sterling Energy plc Report and Financial Statements 2014 7 Sterling Energy plc Strategic Report Year ended 31 December 2014 STRATEGIC REPORT Operations Review The Group’s current portfolio provides exposure to exploration opportunities within a number of under-explored African basins that have the potential to deliver material hydrocarbon reserves. These frontier and emerging basins have historically seen little activity but offer significant encouragement for the presence of working hydrocarbon systems and commercial discoveries. CAMEROON Despite a recent dry exploration well, Ntem remains highly prospective deep water acreage in the southern Douala Basin. The Douala Basin of Cameroon is a proven oil and gas producing province with multiple discoveries made within the shallower water shelf area to the east of the Ntem concession and with multiple deeper water discoveries to the north. Ntem (WI 100% & Operator)1 Overview The Ntem concession lies adjacent to the southern maritime border of the Douala Basin province of Cameroon. Water depths range from 400m to 2,000m across this 2,319km² block. This large block is well placed with respect to both Tertiary and Upper Cretaceous play potential, both of which have proven successful nearby in Cameroon and in Equatorial Guinea. Operations within the Ntem concession area were suspended in 2005 under the force majeure provisions of the concession owing to an overlapping maritime border claim between Cameroon and Equatorial Guinea (referred to as the “Affected Area”). In November 2011, Sterling Cameroon Limited completed a farm-out agreement with Murphy Cameroon Ntem Oil Co. Ltd (‘Murphy’), under which Murphy was assigned a 50% working interest in, and operatorship of, the Ntem concession. Sterling Cameroon Limited retained a 50% non-operated working interest. As consideration, Murphy agreed to pay all costs associated with the current exploration phase of the concession (First Renewal Period). 1 In February 2015, Sterling Cameroon Limited signed an agreement with Murphy whereby Murphy will transfer its 50% interest in, and operatorship of, the Ntem concession to Sterling Cameroon Limited. Completion of the transaction remains subject to Cameroon Ministerial approval. 2014 Activity The border dispute between Cameroon and Equatorial Guinea remains unresolved but Murphy and Sterling Cameroon Limited agreed, together with Société Nationale des Hydrocarbures (‘SNH’), the national oil company of Cameroon, to formally lift force majeure on 22 January 2014 in order to allow exploration activity to proceed. The current exploration period re-commenced on that date with the minimum work obligation of one exploration well required to be drilled before April 2015. Murphy drilled the Bamboo-1 exploration well using the Ocean Confidence semi-submersible rig as soon as force majeure was lifted. Bamboo-1 was located in 1,600m of water and was the first well drilled in the Ntem concession area. It commenced drilling operations on 9 February 2014 and reached a total depth of 4,747m after penetrating a series of good quality, Cretaceous aged basin floor submarine fans. The well encountered all pre-drill targets, but analysis of the well data indicated that no commercial hydrocarbons were found and the well was plugged and abandoned on 16 April 2014. Bamboo-1 satisfied the minimum work obligation for the First Renewal Period. An important consideration in the joint venture’s decision to lift force majeure was that the prospect targeted by the Bamboo-1 well lay outside of the Affected Area. Following the drilling of Bamboo-1 an exhaustive reassessment of the prospectivity led the joint venture to the conclusion that the area of greatest potential in the Ntem Concession lay in the Affected Area, to the south. As a result, on 6 May 2014 Murphy (as operator and on behalf of the Ntem joint venture partners) notified SNH of the joint venture’s re-declaration of force majeure pending formal resolution of the conflicting maritime border claims. SNH has advised that “Cameroon does not recognise that any situation of force majeure exists in the Ntem Permit”. Sterling Cameroon Limited is Mauritania Cameroon Somaliland Madagascar working with SNH to determine the forward plan for the Ntem Concession. A summary of the Ntem asset details is provided on page 15 of the Strategic Report. SOMALILAND The onshore basins of Somaliland offer one of the last opportunities to target undrilled Mesozoic basins in Africa. The Odewayne block is ideally located to explore this play covering a large area of a completely unexplored onshore rift basin. Geophysical data and geological field studies indicate that the basin underlying the block has analogous characteristics to producing basins in Yemen. Odewayne (WI 40%) Overview This very large unexplored acreage position comprises an area of 22,840km2. Exploration to date has been limited to the acquisition of airborne gravity and magnetic data, with no seismic coverage and no wells drilled on block. The field data provides strong support for the presence of a deep sedimentary basin and geological fieldwork has highlighted the presence of numerous oil seeps at the surface giving encouragement that a working hydrocarbon system is present. The Odewayne Production Sharing Agreement (‘PSA’) was awarded in 2005, and is in the Third Period with an outstanding minimum work obligation of 500km of 2D seismic. The Third Period was recently extended by two years (to 2 November 2016) in order to allow time for an Oil Field Protection Unit to be established (see below). The minimum work obligation during the Fourth Period of the PSA (also extended by 2 years to May 2018) is for 1,000km of 2D seismic and one exploration well. The Company’s wholly owned subsidiary, Sterling Energy (East Africa) Limited, currently holds a 40% working interest in the PSA. Sterling Energy (East Africa) Limited from Petrosoma Limited acquired an original 10% (‘Petrosoma’) in November 2013 and an additional 30% from Jacka Resources Somaliland Limited (‘Jacka’) in two transactions during 2014. In aggregate, as consideration, Sterling Energy (East Africa) Limited has paid $17.0 million to date and a further $8.0 million is to be paid to Petrosoma when certain operational milestones are reached. The joint venture participants in the PSA are: • Genel Energy Somaliland Limited (Operator) • Sterling Energy (East Africa) Limited • Petrosoma Limited 50% 40% 10% Sterling Energy (East Africa) Limited is fully carried by Genel Energy Somaliland Limited (‘Genel Energy’) for its share of the costs of all exploration activities during the Third Period and the Fourth Period of the PSA. Future Activity Operations in Somaliland have been delayed while the Government of the Republic of Somaliland establishes a trained and equipped Oilfield Protection Unit that can provide the level of security required by the in-country operators to ensure that future seismic and drilling operations can be conducted safely and effectively. In the meantime, results from extensive fieldwork will continue to be analysed to enable a greater understanding of the exploration play elements. A summary of the Odewayne asset details is provided on page 16 of the Strategic Report. 10 11 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 STRATEGIC REPORT Operations Review (cont.) MADAGASCAR The Group’s Ambilobe and Ampasindava blocks are located in the Ambilobe and Majunga deep water basins, respectively, offshore north-west Madagascar. the new president of Madagascar Following the inauguration of Hery Rajaonarimampianina as in January 2014, exploration activities on the Group’s assets in Madagascar resumed. At that time agreement had been reached with OMNIS, the state regulator, to prolong the current exploration periods of both the Ambilobe and Ampasindava PSCs to September 2015, but more recently further extensions of both licences to July 2016 have been approved and formally gazetted. Ampasindava (WI 30%) Overview The Ampasindava block covers some 7,379km² and is located in the Majunga basin, offshore Madagascar. Water depths across the block range from 20m to 2,500m. (‘ExxonMobil’) The Ampasindava PSC is currently in the third phase of the exploration period with a remaining minimum work commitment of one exploration well. In late 2013 (Northern ExxonMobil Exploration and Production Madagascar) Limited (WI 70% and Operator) and Sterling Energy (UK) Limited resumed exploration activities including acquisition of a 1,314km 2D seismic programme. The new seismic data provided improved sub-surface imaging over the Sifaka prospect but failed to mature additional leads and prospects within the Ampasindava block to drill-ready status. In addition, a detailed subsurface re-assessment of the Sifaka prospect has led to a view that the technical and commercial risk remains too high; specifically the high chance of reservoir quality being poor (production concerns) and an increased phase risk for gas over oil. Following the farm-in by ExxonMobil in 2005, Sterling Energy (UK) Limited’s costs have been carried up to a fixed amount. The Group estimates that ExxonMobil’s remaining carry at the beginning of 2015 is $28.3 million; however we expect the Group’s 30% share of the cost of potentially drilling an exploration well would exceed this amount. Future Activity Following the review of the remaining on block prospectivity, and the Sifaka prospect specifically, ExxonMobil and Sterling Energy (UK) Limited have not planned to drill an exploration well in 2015 or 2016 and have engaged with OMNIS to discuss the work programme. A summary of the Ampasindava asset details is provided on page 17 of the Strategic Report. Ambilobe (WI 50% & Operator) Overview The Ambilobe block covers some 17,650km² and is located in the Ambilobe basin, offshore Madagascar. Water depths across the block range from shoreline to 3,000m. The Ambilobe PSC is in the second phase of the exploration period and all work commitments have been fulfilled. The Ambilobe block is covered by an extensive database of vintage 2D data that has led to the identification of a number of Cretaceous and Tertiary aged leads, located in both shallow and deep waters, all of which require additional seismic data to develop into possible drillable prospects. Sterling Energy (UK) Limited completed a farm-out agreement in December 2013 with Pura Vida Mauritius (‘Pura Vida’) under which Pura Vida assumed a 50% interest in the Ambilobe PSC and will pay all costs associated with a planned 1,250km² 3D seismic survey up to a maximum of $15.0 million. Following the farm-out, Sterling Energy (UK) Limited retains a 50% interest in the PSC and remains as operator. Future Activity The Ambilobe joint venture will acquire 1,250km² of new 3D seismic data, expected to be completed in Q2 2015. This data will be focused over an area of high-graded prospectivity following prior interpretation of vintage 2D seismic data. The required permits have been secured to allow the seismic acquisition. The survey will be undertaken by CGG and it is anticipated that processed time migrated data will be available for interpretation at the end of 2015. Depth migrated data will follow in Q1 2016 and will be an important factor in the “drill or drop” decision required by July 2016. A summary of the Ambilobe asset details is provided on page 18 of the Strategic Report. C-3 (WI 40.5%)2 Overview Block C-3 is located in shallow water within the Nouakchott sub-basin, offshore Mauritania and covers 9,800km². The production sharing contract (‘PSC’) for block C-3 is held by the Company’s wholly owned subsidiary Sterling Energy Mauritania Limited (40.5% working interest)2, Tullow (49.5% working interest and operator) and SMHPM (10% working interest). SMHPM is carried by Sterling Energy Mauritania Limited and Tullow, pro-rata to their working interest, during the exploration phases. The PSC is in the first phase of the exploration period, which runs to June 2016, with a minimum work commitment of acquiring 1,600km of 2D seismic data. In late 2014, the operator acquired 1,600km of new 2D seismic data over block C-3 and processing of the new seismic data will satisfy the minimum work obligations for the current phase of the exploration period. Future Activity Reinterpretation of exploration efforts in light of the Cairn SNE-1 discovery in Senegal has highlighted the possible extension of an Albian clastic play into PSC C-3. Following the acquisition of the new 2D data, the joint venture will focus on the interpretation and integration of regional data in 2015, to inform the decision on entry into Phase 2 and the commitment to acquire 700km² of 3D seismic and drill one exploration well. A summary of the C-3 asset details is provided on page 19 of the Strategic Report. MAURITANIA Chinguetti (Economic Interest via Funding and Royalty Agreements). interests in the The Company has economic Chinguetti field through a funding agreement with Société Mauritanienne Des Hydrocarbures et du Patrimoine Minier (‘SMHPM’), Mauritania’s national oil company, and a royalty agreement with Premier Oil through its wholly owned subsidiary Sterling North West Africa Holdings Limited. Overview Gross production during 2014 averaged 5,512 bopd (2013: 6,156 bopd) and the average production net to the Group, from the Group’s economic interests during 2014, was 432 bopd (2013: 527 bopd). Production in the first half of the year was reduced by a planned sub-sea intervention campaign in January to consolidate maintenance and intervention programmes and minimise production down- time. This was completed, as planned, within 10 days. The Company estimates that at the end of 2014, the net entitlement to 2P reserves is 292k barrels (2013: 559k barrels). No infill drilling or workover activity took place on the Chinguetti field during 2014. In early 2015, the Company was notified by Premier Oil (‘Premier’) that Premier’s interest in PSC-A (including the Banda gas field), PSC-B (other than the Chinguetti field) and PSC C-10 had expired. Premier’s exit from each of these PSC’s does not affect the royalty currently received by the Group from Premier over Premier’s interest in production from the Chinguetti field. Future Activity The Chinguetti joint venture is investigating how best to manage the Chinguetti field in the current low oil price environment. Discussions are being held with the Government of Mauritania and contractors to best manage the situation. A summary of Chinguetti interests and a resource summary are provided on pages 14 and 20 of the Strategic Report. 2 In February 2015, Sterling Energy Mauritania Limited signed an agreement with Tullow Oil for the acquisition of a 40.5% working interest in PSC C-3. The transaction is subject to Mauritanian Governmental approval and completion with Tullow. 12 13 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 STRATEGIC REPORT Cameroon Licence Name Sterling Working Interest % Sterling Net Revenue Interest % Operated/ Non-operated STRATEGIC REPORT Schedule of Interests Year ended 31 December 2014 Location Mauritania: Offshore Mauritania: Offshore Mauritania: Offshore Cameroon: Offshore Madagascar: Offshore Size (km²) 29 29 9,800 2,319 17,650 PSC B - Chinguetti Field PSC B - Chinguetti Field n/a n/a PSC C-3 3 40.5% Ntem 4 Ambilobe 5 100% 50% 30% 6 40% Sliding scale royalty from 6% WI 1 Non-operated Economic interest for approximately 8% of Chinguetti project 2 Non-operated Non-operated Operated Operated Non-operated Non-operated Madagascar: Offshore 7,379 Ampasindava 5 Somaliland: Onshore 22,840 Odewayne Block 7 1 The Company’s royalty interests derive from Premier Oil’s working interests of 6% in PSC B. The Company’s royalty is up to 6% of Premier Oil’s working interest. 2 The Company’s interest derives from the Funding Agreement with SMHPM. 3 Acquisition of PSC C-3 remains subject to Mauritanian Government approval and completion of the transaction with Tullow Oil. 4 Force majeure was lifted on 22 January 2014 in order to drill the Bamboo-1 well, as a result the current phase was extended to 22 April 2015. On 6 May 2014 force majeure was re-declared; SNH, however, has not accepted this as valid. Transer of Murphy’s 50% working interest and operatorship remains subject to Cameroon Ministerial approval. 5 The licences were taken out of suspension and new exploration periods were agreed with OMNIS; extensions to July 2016 have been approved and gazetted. 6 Carried for defined gross cost $ amount. 7 Carried for the minimum work obligation of current phase and next phase of PSA. Ntem (WI 100%) OVERVIEW During the first term of the concession over 2,100km of 2D and 1,500km2 of 3D seismic data were acquired. Additional seismic and gravity data were also purchased. In November 2011, Murphy Cameroon Ntem Oil Co. Ltd (‘Murphy’) farmed into the block becoming a 50% working interest partner in, and operator of the Ntem Concession. Sterling Cameroon Limited retained a 50% non-operated working interest. The Ntem Concession entered force majeure from June 2005 to January 2014 as a result of overlapping maritime border claims by the Republic of Cameroon and the Republic of Equatorial Guinea affecting the licence area. Whilst the border claims have not been resolved by the Cameroon and Equatorial Guinea Governments, in January 2014 the joint venture partners agreed, with Société Nationale des Hydrocarbures (‘SNH’), the national oil company of Cameroon, to formally lift the declaration of force majeure in order to allow drilling of the Bamboo-1 exploration well. Following the lifting of force majeure, the current exploration period (the ‘First Renewal Period’) of the Ntem Concession re-commenced on 22 January 2014. Upon lifting of force majeure the remaining term of the First Renewal Period was approximately 15 months (expiring April 2015). The minimum work obligation in the First Renewal Period to drill one exploration well was satisfied by the Bamboo-1 well. The Bamboo-1 well failed to find hydrocarbons and was plugged and abandoned on 16 April 2014. (cid:11)(cid:10)(cid:30)(cid:22)(cid:9)(cid:10)(cid:22) (cid:10)(cid:24)(cid:25)(cid:12)(cid:17) (cid:20)(cid:19)(cid:18)(cid:30)(cid:17)(cid:29)(cid:16)(cid:15)(cid:14)(cid:10)(cid:18)(cid:17)(cid:9)(cid:14)(cid:8)(cid:17)(cid:7)(cid:11)(cid:6)(cid:5) (cid:22)(cid:19)(cid:4)(cid:18)(cid:30)(cid:14)(cid:10)(cid:18)(cid:17)(cid:9)(cid:14)(cid:8)(cid:17)(cid:7)(cid:11)(cid:6)(cid:5) (cid:23)(cid:22)(cid:21)(cid:22)(cid:20)(cid:22)(cid:19)(cid:23)(cid:18)(cid:17) (cid:18)(cid:17)(cid:16)(cid:17)(cid:23)(cid:15)(cid:24) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:29) (cid:18)(cid:17)(cid:16)(cid:17)(cid:23)(cid:15)(cid:24) (cid:31)(cid:30)(cid:29)(cid:28)(cid:29) (cid:26)(cid:25)(cid:24) (cid:18)(cid:17)(cid:16)(cid:17)(cid:23)(cid:15)(cid:24) (cid:21)(cid:20)(cid:19)(cid:25)(cid:24)(cid:24)(cid:29)(cid:28) (cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:29)(cid:28) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27) (cid:31)(cid:8)(cid:7)(cid:6)(cid:5) (cid:18)(cid:20)(cid:23)(cid:27)(cid:13)(cid:12)(cid:20)(cid:23)(cid:13)(cid:22)(cid:15) (cid:31)(cid:30)(cid:29)(cid:28) (cid:20)(cid:19)(cid:18)(cid:30)(cid:17)(cid:29)(cid:16)(cid:15)(cid:14)(cid:24)(cid:16)(cid:18)(cid:30)(cid:15)(cid:13) (cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:22)(cid:21) (cid:26)(cid:19)(cid:17)(cid:12)(cid:16)(cid:19)(cid:29)(cid:11) (cid:22)(cid:11)(cid:18)(cid:12)(cid:16) (cid:31)(cid:8)(cid:7)(cid:6)(cid:4) (cid:14)(cid:12)(cid:17)(cid:23)(cid:15)(cid:24)(cid:16)(cid:17) (cid:16)(cid:30)(cid:29)(cid:15)(cid:14)(cid:19)(cid:12) (cid:27)(cid:13)(cid:12)(cid:20)(cid:11) (cid:16)(cid:30)(cid:29)(cid:15)(cid:14)(cid:19)(cid:13) (cid:14)(cid:26)(cid:18)(cid:17)(cid:13)(cid:16)(cid:24)(cid:12) (cid:3)(cid:2)(cid:14)(cid:31)(cid:1) CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area Concession 14 March 2001 3 September 2002 2,319km2 Participants Sterling Cameroon Limited (Operator) 100%* *Pending approval by the Government of Cameroon Exploration term Current First Renewal Period: On 6 May 2014 the joint venture declared force majeure pending formal resolution of the conflicting maritime border claims Minimum work commitment: Drill one exploration well (completed by drilling Bamboo-1) Second Renewal Period (optional): Two years duration Second Renewal Period work commitment: Drill two exploration wells Production term Twenty five years, renewable for ten years State Participation State may back in for a 10% participating interest in any development and production area has advised that “Cameroon does not recognise that any situation of force majeure exists in the Ntem Permit”. In February 2015, Sterling Cameroon Limited signed an agreement with Murphy whereby Murphy will transfer its 50% interest in, and operatorship of, the Ntem Concession to Sterling Cameroon Limited. Completion of the transaction remains subject to Cameroon Ministerial approval. 14 15 On 6 May 2014, Murphy (as operator and on behalf of the Ntem joint venture partners) notified SNH of the joint venture’s re-declaration of force majeure pending formal resolution of the conflicting maritime border claims. SNH Sterling Cameroon Limited is working with SNH to determine the forward plan for the Ntem Concession given the declaration of force majeure. Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 STRATEGIC REPORT Somaliland Odewayne (WI 40%) OVERVIEW The Odewayne block is located onshore Somaliland. The block is at a frontier stage of exploration with no seismic coverage and no wells drilled, but with field data indicating the presence of a sedimentary basin and oil seeps at surface indicating the presence of a working hydrocarbon system. Sterling Energy (East Africa) Limited acquired its 40% interest through separate farm-in agreements with Petrosoma and Jacka Resources, under which all Sterling Energy (East Africa) Limited’s share of costs associated with the Phases 3 and 4 work programmes are carried by Genel Energy. In May 2014, the Government granted the joint venture a 2 year extension to the current phase of the PSA (to 2 November 2016), and the dates of each subsequent phase were also adjusted accordingly. (cid:1)(cid:26)(cid:12)(cid:26)(cid:9) (cid:15)(cid:14)(cid:30)(cid:29) (cid:31)(cid:18)(cid:28)(cid:17)(cid:27)(cid:16)(cid:17)(cid:27)(cid:15)(cid:14)(cid:30)(cid:29) (cid:8)(cid:4)(cid:10)(cid:3)(cid:13)(cid:2)(cid:7)(cid:10) (cid:8)‚(cid:19)ƒ(cid:16)(cid:18)(cid:20)(cid:19) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:29) (cid:31)(cid:30)(cid:29)(cid:30)(cid:28)(cid:27)(cid:26)(cid:29)(cid:30)(cid:25)(cid:24)(cid:23)(cid:27)(cid:22) (cid:21)(cid:20)(cid:30)(cid:25)(cid:28)(cid:19)(cid:29)(cid:24)(cid:27)(cid:26)(cid:29)(cid:30)(cid:25)(cid:24)(cid:23) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:31)(cid:30)(cid:26)(cid:25) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25) (cid:31)(cid:30)(cid:26)(cid:24)(cid:23)(cid:28)(cid:27)(cid:31)(cid:30)(cid:26)(cid:22) (cid:27)(cid:24)(cid:23)(cid:24)(cid:22)(cid:28)(cid:21)(cid:23)(cid:24)(cid:20)(cid:19)(cid:18) (cid:31)(cid:30)(cid:26)(cid:21) (cid:17)(cid:16)(cid:15) (cid:21)(cid:13)(cid:12)(cid:15)(cid:11)(cid:10)(cid:11)(cid:15)(cid:9)(cid:8) (cid:157) (cid:27) € (cid:21)(cid:20)(cid:30)(cid:25)(cid:28)(cid:19)(cid:29)(cid:24)(cid:27)(cid:6)(cid:30)(cid:28)(cid:14)(cid:27)(cid:3)(cid:28)(cid:16)(cid:129)(cid:141)(cid:143) (cid:13)(cid:20)(cid:144)(cid:30)(cid:25)(cid:27)(cid:6)(cid:30)(cid:28)(cid:14)(cid:27)(cid:3)(cid:28)(cid:16)(cid:129)(cid:141)(cid:143) (cid:26)(cid:7)(cid:6)(cid:10)(cid:13)(cid:5)(cid:10)(cid:15) (cid:21)(cid:13)(cid:12)(cid:15)(cid:11)(cid:10)(cid:15) (cid:10)(cid:29)(cid:14)(cid:19)(cid:127)(cid:29)(cid:27)(cid:13)(cid:129)(cid:30)(cid:127)(cid:29) CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area PSA 6 October 2005 6 October 2005 22,840km2 Participants Genel Energy Somaliland Limited (Operator) Sterling Energy (East Africa) Limited Petrosoma Limited Exploration term Phase 3: To 2 November 2016 Phase 3 work commitment: 500km 2D seismic acquisition Phase 4 (optional): To 2 May 2018 Phase 4 work commitment: 50% 40% 10% 1,000km 2D seismic acquisition and one exploration well Phase 5 (optional): To 2 May 2019 Phase 5 work commitment: 500km 2D seismic acquisition and one exploration well Phase 6 (optional): To 2 May 2020 Phase 6 work commitment: 500km 2D seismic acquisition and one exploration well Production term Twenty five years, renewable for ten years State Participation State may back in for up to a 20% participating interest in any development and production area STRATEGIC REPORT Madagascar Ampasindava (WI 30%) OVERVIEW The Ampasindava block is located in the Majunga basin, offshore Madagascar. Water depths across the block range from 20m to 2,500m. Sterling Energy (UK) Limited, as operator, fulfilled the Phase 1 and Phase 2 work programme commitments for the block by completing G&G studies and acquiring more than 3,000km of 2D seismic. In July 2005, Sterling Energy (UK) Limited, farmed out the block to ExxonMobil Exploration and Production (Northern Madagascar) Limited (‘ExxonMobil’). Following acquisition, processing and interpretation of the new 2D seismic, Sterling Energy (UK) Limited transferred operatorship to ExxonMobil at the end of 2006. In November 2008 the joint venture partners elected to enter Phase 3 of the exploration period which has a one well commitment. The Sifaka Prospect has been previously identified as the most likely prospect for drilling and is located in water depths of 500m to 1,800m. ExxonMobil and Sterling Energy (UK) Limited completed the acquisition of a discretionary 1,314km 2D seismic programme in December 2013 to provide additional control over the Sifaka prospect and to delineate previously identified leads within the Sifaka trend. However a thorough analysis by the joint venture has highlighted the high technical and commercial risks associated with the Sifaka prospect. In addition the new seismic data indicated that no additional leads can be matured to drill-ready status. (cid:12)(cid:19)(cid:10)(cid:19)(cid:28)(cid:19)(cid:6) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:29)(cid:25)(cid:24)(cid:23)(cid:22)(cid:21) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:25)(cid:29)(cid:28)(cid:24)(cid:21) (cid:12)(cid:127)(cid:27)(cid:19)(cid:29)(cid:28)(cid:27)(cid:30)(cid:24)(cid:22) (cid:5)(cid:25)(cid:4)(cid:26)(cid:8)(cid:25) (cid:3)(cid:2)(cid:29)(cid:8)(cid:25) (cid:23)(cid:25)(cid:24)(cid:15)(cid:26)(cid:21)(cid:30)(cid:25)(cid:30)(cid:25)(cid:30) (cid:144)(cid:12)‚(cid:24)(cid:17) (cid:143)(cid:144)(cid:144)(cid:23)(cid:157)(cid:10) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:1)(cid:29)(cid:27)(cid:4)(cid:23)(cid:127)(cid:27)(cid:19)(cid:2)(cid:129)(cid:6) (cid:3)(cid:30)(cid:141)(cid:29)(cid:28)(cid:23)(cid:1)(cid:29)(cid:27)(cid:4)(cid:23)(cid:127)(cid:27)(cid:19)(cid:2)(cid:129)(cid:6) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:30)(cid:26)(cid:25)(cid:24)(cid:28)(cid:23)(cid:25)(cid:22)(cid:21)(cid:20)(cid:28)(cid:19)(cid:27)(cid:31) (cid:144)(cid:157)(cid:157)(cid:28)(cid:11)(cid:17)(cid:28)(cid:27)(cid:19)(cid:29) (cid:1)(cid:19)(cid:29)(cid:26)(cid:127)(cid:26)(cid:6)(cid:129)(cid:26)(cid:24)(cid:22) (cid:7)(cid:26)(cid:8)(cid:24)(cid:14)(cid:26)(cid:19)(cid:11)(cid:6) (cid:12)(cid:11)(cid:5)(cid:18)(cid:30) (cid:3) (cid:4) (cid:22) (cid:2) (cid:18)(cid:20)(cid:17)(cid:16)(cid:22)(cid:16)(cid:17)(cid:30) (cid:17) (cid:10)(cid:143) (cid:31)(cid:30)(cid:20)(cid:19)(cid:18)(cid:28)(cid:17)(cid:16)(cid:19)(cid:15)(cid:19)(cid:24)(cid:23)(cid:22)(cid:21) (cid:22)(cid:20)(cid:20)(cid:19)(cid:25)(cid:18)(cid:19)(cid:17)(cid:26)(cid:27)(cid:23)(cid:16) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:25)(cid:29)(cid:28)(cid:24)(cid:21) (cid:12)(cid:30)(cid:11)(cid:10)(cid:25)(cid:9)(cid:30)(cid:28)(cid:19)(cid:27)(cid:31) (cid:144)(cid:157)(cid:157)(cid:28)(cid:11)(cid:17)(cid:28)(cid:27)(cid:19)(cid:29) (cid:17)(cid:26)(cid:9)(cid:26)(cid:141)(cid:26)(cid:127)(cid:27)(cid:26)(cid:24)(cid:22) (cid:17)(cid:26)(cid:18)(cid:19)(cid:26)(cid:18)(cid:26)(cid:11)(cid:28)(cid:24)(cid:22) (cid:23)(cid:25)(cid:24)(cid:15)(cid:16)(cid:14)(cid:26)(cid:14)(cid:13) (cid:17) (cid:24)€(cid:28)(cid:18)(cid:6)(cid:9) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:26)(cid:24)(cid:23)(cid:22) (cid:14)(cid:28)(cid:13)(cid:19)(cid:26)(cid:24)(cid:22) (cid:21)(cid:20)(cid:19)(cid:29)(cid:30)(cid:18)(cid:19)(cid:30)(cid:24)(cid:22) (cid:17)(cid:26)(cid:18)(cid:26)(cid:16)(cid:26)(cid:15)(cid:24)(cid:22) (cid:10)(cid:9)(cid:28)(cid:8)(cid:15)(cid:24)(cid:22) (cid:12)(cid:11)(cid:25)(cid:26)(cid:18)(cid:26)(cid:24)(cid:22) (cid:18) (cid:15) (cid:14) (cid:15) (cid:13) (cid:15) (cid:31) (cid:12) (cid:15) (cid:11) (cid:15)(cid:10)(cid:9)(cid:8)(cid:25)(cid:8)(cid:7)(cid:19)(cid:8)(cid:25)(cid:8) (cid:143)(cid:29)(cid:30)(cid:24)(cid:14)(cid:6)(cid:30)(cid:24)(cid:17)(cid:26)(cid:18)(cid:19)(cid:30)(cid:24)(cid:22) CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area PSC 15 July 2004 28 November 2004 7,379km2 Participants ExxonMobil (Operator) Sterling Energy (UK) Limited 70% 30% Exploration term Originally an eight year period (in four phases) with possible two year extension, but suspended between February 2009 and November 2012 Current Phase 3: To July 2016 Phase 3 work commitment: Drill one exploration well Production term Twenty five year period with possible extensions Phase 3 of the Exploration Period was previously extended to September 2015, and a further extension to July 2016 has now been approved and gazetted. Sterling Energy (UK) Limited estimates that ExxonMobil’s remaining carry at the beginning of 2015 is $28.3 million. 16 17 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 STRATEGIC REPORT Madagascar Ambilobe (WI 50%) OVERVIEW The Ambilobe block is located in the Ambilobe basin, offshore Madagascar. Water depths across the block range from shoreline to 3,000m. The Phase 1 and Phase 2 work programme commitments were fulfilled by conducting G&G studies, acquiring approximately 1,000km of new 2D seismic and processing more than 5,000km of new and vintage 2D seismic data. Sterling Energy (UK) Limited signed a farm-out agreement in November 2013 with Pura Vida Mauritius (‘Pura Vida’) under which Pura Vida has assumed a 50% interest in the PSC. Pura Vida has paid Sterling Energy (UK) Limited $1.25 million towards Sterling Energy (UK) Limited’s past costs, and will pay all costs associated with the 3D seismic survey (expected to be completed in Q2 2015) up to a maximum cost of $15.0 million. Following the farm-out, Sterling Energy (UK) Limited retains a 50% interest in the PSC and remains as operator. Sterling Energy (UK) Limited and Pura Vida continue with preparations for the 3D seismic programme which is expected to be completed in Q2 2015. Phase 2 was previously extended to September 2015, and a further extension to July 2016 has now been approved and gazetted. There are no outstanding work commitments under the current phase of the PSC. (cid:12)(cid:19)(cid:10)(cid:19)(cid:28)(cid:19)(cid:6) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:29)(cid:25)(cid:24)(cid:23)(cid:22)(cid:21) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:25)(cid:29)(cid:28)(cid:24)(cid:21) (cid:12)(cid:127)(cid:27)(cid:19)(cid:29)(cid:28)(cid:27)(cid:30)(cid:24)(cid:22) (cid:5)(cid:25)(cid:4)(cid:26)(cid:8)(cid:25) (cid:3)(cid:2)(cid:29)(cid:8)(cid:25) (cid:23)(cid:25)(cid:24)(cid:15)(cid:26)(cid:21)(cid:30)(cid:25)(cid:30)(cid:25)(cid:30) (cid:144)(cid:12)‚(cid:24)(cid:17) (cid:143)(cid:144)(cid:144)(cid:23)(cid:157)(cid:10) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:1)(cid:29)(cid:27)(cid:4)(cid:23)(cid:127)(cid:27)(cid:19)(cid:2)(cid:129)(cid:6) (cid:3)(cid:30)(cid:141)(cid:29)(cid:28)(cid:23)(cid:1)(cid:29)(cid:27)(cid:4)(cid:23)(cid:127)(cid:27)(cid:19)(cid:2)(cid:129)(cid:6) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:30)(cid:26)(cid:25)(cid:24)(cid:28)(cid:23)(cid:25)(cid:22)(cid:21)(cid:20)(cid:28)(cid:19)(cid:27)(cid:31) (cid:144)(cid:157)(cid:157)(cid:28)(cid:11)(cid:17)(cid:28)(cid:27)(cid:19)(cid:29) (cid:1)(cid:19)(cid:29)(cid:26)(cid:127)(cid:26)(cid:6)(cid:129)(cid:26)(cid:24)(cid:22) (cid:7)(cid:26)(cid:8)(cid:24)(cid:14)(cid:26)(cid:19)(cid:11)(cid:6) (cid:12)(cid:11)(cid:5)(cid:18)(cid:30) (cid:3) (cid:4) (cid:22) (cid:2) (cid:18)(cid:20)(cid:17)(cid:16)(cid:22)(cid:16)(cid:17)(cid:30) (cid:17) (cid:10)(cid:143) (cid:31)(cid:30)(cid:20)(cid:19)(cid:18)(cid:28)(cid:17)(cid:16)(cid:19)(cid:15)(cid:19)(cid:24)(cid:23)(cid:22)(cid:21) (cid:22)(cid:20)(cid:20)(cid:19)(cid:25)(cid:18)(cid:19)(cid:17)(cid:26)(cid:27)(cid:23)(cid:16) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:24)(cid:23)(cid:22)(cid:25)(cid:29)(cid:28)(cid:24)(cid:21) (cid:12)(cid:30)(cid:11)(cid:10)(cid:25)(cid:9)(cid:30)(cid:28)(cid:19)(cid:27)(cid:31) (cid:144)(cid:157)(cid:157)(cid:28)(cid:11)(cid:17)(cid:28)(cid:27)(cid:19)(cid:29) (cid:17)(cid:26)(cid:9)(cid:26)(cid:141)(cid:26)(cid:127)(cid:27)(cid:26)(cid:24)(cid:22) (cid:17)(cid:26)(cid:18)(cid:19)(cid:26)(cid:18)(cid:26)(cid:11)(cid:28)(cid:24)(cid:22) (cid:23)(cid:25)(cid:24)(cid:15)(cid:16)(cid:14)(cid:26)(cid:14)(cid:13) (cid:17) (cid:24)€(cid:28)(cid:18)(cid:6)(cid:9) (cid:31)(cid:30)(cid:29)(cid:28)(cid:27)(cid:26)(cid:25)(cid:26)(cid:24)(cid:23)(cid:22) (cid:14)(cid:28)(cid:13)(cid:19)(cid:26)(cid:24)(cid:22) (cid:21)(cid:20)(cid:19)(cid:29)(cid:30)(cid:18)(cid:19)(cid:30)(cid:24)(cid:22) (cid:17)(cid:26)(cid:18)(cid:26)(cid:16)(cid:26)(cid:15)(cid:24)(cid:22) (cid:10)(cid:9)(cid:28)(cid:8)(cid:15)(cid:24)(cid:22) (cid:12)(cid:11)(cid:25)(cid:26)(cid:18)(cid:26)(cid:24)(cid:22) (cid:18) (cid:15) (cid:14) (cid:15) (cid:13) (cid:15) (cid:31) (cid:12) (cid:15) (cid:11) (cid:15)(cid:10)(cid:9)(cid:8)(cid:25)(cid:8)(cid:7)(cid:19)(cid:8)(cid:25)(cid:8) (cid:143)(cid:29)(cid:30)(cid:24)(cid:14)(cid:6)(cid:30)(cid:24)(cid:17)(cid:26)(cid:18)(cid:19)(cid:30)(cid:24)(cid:22) CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area PSC 15 July 2004 28 November 2004 17,650km2 Participants Sterling Energy (UK) Limited (Operator) 50% Pura Vida Mauritius 50% Exploration term Originally an eight year period (in four phases) with possible two year extension, but suspended between February 2009 and November 2012 Current Phase 2: To July 2016 Phase 2 work commitment: Completed Phase 3 (optional): One year duration Phase 3 work commitment: Drill one exploration well Production term Twenty five year period with possible extensions STRATEGIC REPORT Mauritania (cid:31)(cid:30)(cid:23) (cid:23)(cid:22)(cid:21)(cid:22) (cid:31)(cid:30)(cid:24) (cid:27)(cid:26)(cid:25)(cid:25)(cid:30)(cid:24) (cid:31)(cid:30)(cid:29) (cid:26)(cid:24)(cid:23)(cid:23)(cid:22)(cid:21)(cid:20)(cid:19) (cid:18)(cid:17)(cid:16)(cid:15)(cid:23)(cid:14)(cid:13)(cid:12) (cid:11)(cid:13)(cid:16)(cid:15)(cid:12)(cid:10) (cid:31)(cid:30)(cid:29)(cid:27) (cid:27)(cid:26)(cid:25)(cid:25)(cid:30)(cid:24) (cid:30)(cid:17)(cid:23)(cid:7)(cid:13)(cid:17)(cid:14)(cid:6) (cid:5)(cid:6)(cid:16)(cid:7)(cid:13) (cid:31)(cid:30)(cid:22) (cid:27)(cid:30)(cid:20)(cid:22)(cid:25) (cid:31) (cid:30) (cid:29) (cid:28) (cid:27) (cid:26) (cid:30) (cid:25) (cid:27) (cid:30) (cid:25)(cid:22)(cid:24)(cid:7)(cid:1)(cid:6)(cid:129)(cid:22)(cid:17)(cid:17) (cid:31)(cid:30)(cid:29)(cid:25) (cid:31)(cid:30)(cid:29)(cid:28)(cid:30)(cid:29) (cid:28)(cid:27)(cid:31)(cid:26)(cid:25) (cid:21)(cid:31)(cid:20)(cid:19)(cid:18)(cid:17)(cid:16)(cid:15)(cid:14)(cid:14)(cid:19)(cid:13) (cid:31)(cid:30)(cid:29)(cid:29) (cid:19)(cid:21)(cid:20)(cid:18)(cid:17)(cid:21)(cid:22)(cid:20)(cid:16)(cid:30)(cid:21)(cid:22)(cid:25)(cid:15)(cid:14)(cid:18)(cid:20)(cid:17)(cid:30)(cid:25)(cid:18)(cid:26)(cid:28)(cid:15)(cid:13)(cid:17)(cid:30)(cid:26)(cid:12) (cid:31)(cid:30)(cid:29)(cid:26) (cid:27)(cid:26)(cid:25)(cid:25)(cid:30)(cid:24) (cid:141)(cid:143)(cid:20)(cid:144)(cid:157) (cid:18)(cid:17)(cid:16)(cid:15)(cid:23)(cid:14)(cid:13)(cid:12)(cid:20)(cid:4)(cid:16)(cid:23)(cid:3)(cid:20)(cid:2)(cid:23)(cid:22)(cid:6)(cid:1)(cid:127) (cid:18)(cid:17)(cid:16)(cid:15)(cid:23)(cid:14)(cid:13)(cid:12)(cid:20)(cid:27)(cid:13)(cid:17)(cid:16)(cid:15)(cid:16)(cid:127)(cid:17) (cid:5)(cid:17)(cid:129)(cid:16)(cid:15)(cid:20)(cid:4)(cid:16)(cid:23)(cid:3)(cid:20)(cid:2)(cid:23)(cid:22)(cid:6)(cid:1)(cid:127) (cid:31)(cid:30)(cid:29)(cid:28) (cid:31)(cid:30)(cid:29)(cid:28)(cid:30)(cid:29) (cid:31)(cid:30)(cid:27) (cid:31)(cid:30)(cid:29)(cid:28)(cid:30)(cid:29) (cid:18)(cid:11)(cid:25)(cid:11)(cid:9)(cid:30)(cid:8) Block C-3 (WI 40.5%) OVERVIEW The block is in the initial phase of exploration with the work commitment of acquiring 1,600km of 2D data completed. CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area PSC 17 April 2013 30 June 2013 9,781km2 In February 2015, Sterling Energy Mauritania Limited signed an agreement with Tullow Oil for the acquisition by Sterling Energy Mauritania Limited of a 40.5% working interest in PSC C-3 in return for a consideration of approximately $2.5 million to compensate for past costs. The transaction is subject to Mauritanian Governmental approval. Participants Tullow Mauritania Limited (Operator) Sterling Energy Mauritania Limited 49.5% 40.5%* Société Mauritanienne Des Hydrocarbures Et Du Patrimoine Minier (‘SMHPM’) 10%** * Subject to approval by the Mauritanian Government ** Carried through exploration Exploration term Phase 1: To 30 June 2016 Phase 1 work commitment: 1,600km 2D seismic acquisition (completed) Phase 2 (optional): To 30 June 2019 Phase 2 work commitment: One well and 700km2 of 3D seismic Phase 3 (optional): To 30 June 2022 Phase 3 work commitment: One well Production term Twenty five years State Participation The State may back in for up to a maximum of 18% participating interest (to include their 10% carried interest in the exploration phase) in any development and production area 18 19 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 STRATEGIC REPORT Reserves Summary Year ended 31 December 2014 2014 Oil (000 boe) 2014 Gas (mcf) 2014 Reserves (000 boe) 2013 Oil (000 boe) 2013 Gas (mcf) 2013 Reserves (000 boe) Volumes of Proven plus Probable Reserves At 1 January Revision – Chinguetti (1-3) Production At 31 December 559 (109) (158) 292 - - - - 559 (109) (158) 292 475 276 (192) 559 - - - - 475 276 (192) 559 1 The reserves stated are for the Company’s net interests in the Chinguetti field only and are based on the Company’s own assessment of reserves, as at 31 December 2014. The Group’s interest in the Chinguetti field is through its Funding Agreement and Royalty Agreement; The Company does not have a direct equity participation in the Chinguetti field. The assessment was made in accordance with the definitions as set out on pages 98 - 100. 2 The Group has not booked reserves relating to other Mauritanian discoveries, on the basis that there are no approved development plans for these discoveries. 3 In accordance with the guidelines of the AIM Market of the London Stock Exchange, Mr Matthew Bowyer, Exploration Manager of Sterling Energy plc, who has been involved in the oil industry for over 18 years, is the qualified person that has reviewed the technical information set out above. Matthew Bowyer Exploration Manager 25 March 2015 STRATEGIC REPORT Financial Review Year ended 31 December 2014 Selected Financial Data Chinguetti production 1 Year end 2P reserves 1 Revenue Adjusted EBITDA 1 (Loss)/profit after tax Net cash investment in oil & gas assets Year end cash (including partner funds) Average realised oil price Total cash operating costs (produced) Year end share price Share price change 1 1 Key performance indicators bopd 000 boe $million $million $million $million $million $/bbl $/bbl Pence % 2014 432 292 16.0 5.1 (12.3) 14.1 108.1 94.2 57.4 20 (55) 2013 527 559 18.4 9.1 8.3 5.9 120.8 101.1 36.9 43 12 Highlights • Group net loss of $12.3 million in 2014 (2013: profit $8.3 million). • Full impairment of both Chinguetti Funding Agreement and Royalty Agreement totalling $6.0 million resulting from lower oil forecast price base and increased production decline rate. • Cash balance at end of year $108.1 million (2013: $120.8 million). • Average 2014 Chinguetti production, net to the Company, of 432 bopd (2013: 527 bopd). • Debt free throughout 2014. 20 21 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014STRATEGIC REPORT Financial Review (cont.) Year ended 31 December 2014 Revenue and Cost of Sales 2014 production, net to the Company, averaged 432 bopd, including royalty barrels, a decrease of 18% from the 527 bopd averaged in 2013; the reduced volumes reflect the 10 day planned production shutdown in January 2014. Gross volumes lifted and sold during the year from the Chinguetti field were down by 6% to 2.1 million barrels (2013: 2.2 million barrels). The lifting cost per barrel has increased in 2014 by $16.2 to $70.0 (2013: $53.8). This was principally due to an increase in direct operating costs during the year, most of which are fixed and not variable, apportioned to a low level of production. The Group has made a provision in recognition of expected future net onerous commitments for 2015 under the Chinguetti Funding Agreement of $3.4 million (2013: $nil). Group administrative overhead decreased during the year to $2.1 million (2013: $3.2 million). Included within this charge is $659k (2013: $1.2 million) with respect to share-based payment charges. In 2014 a portion of the Group’s staff costs and associated overheads are recharged to joint venture partners ($576k), expensed as pre-licence expenditure ($2.0 million), or capitalised ($1.5 million) where they are directly attributable to capital projects. This totals $4.1 million in the year (2013: $4.2 million). Currently, all of the Group’s production is from the Chinguetti field and the Group’s production was 388 bopd for the month of December 2014 (December 2013: 476 bopd). During 2014, the Group fully impaired the Chinguetti Funding Agreement and Royalty Agreement totalling $6.0 million following the Group’s commercial analysis of lower current and forecast oil prices and increased production decline rates. A summary of revenue, cost of sales and lifting volumes are provided below. The operator on the Ampasindava block in Madagascar has identified there is no commercial drillable prospect. The Group has fully impaired the asset $1.9 million at 31 December 2014. Liftings (bbls) 1 Revenue ($million) Revenue/bbl ($) Lifting cost ($million) Lifting cost/bbl ($) 1 Net Sterling production during the year totalled 157,751 (2013: 192,370) Loss for Year The 2014 loss totalled $12.3 million (2013: profit $8.3 million). Profit for year 2013 Decrease in revenue Increase in operating costs Increase in other obligations Decrease in G&A Impairment reversal of Chinguetti (2013) Impairment of Chinguetti FA and RA (2014) Impairment of Ampasindava (2014) Increase in finance net expense Release of accrual on final dissolution of in-country branch (2013) Loss for year 2014 2014 2013 169,699 181,691 16.0 94.2 (11.9) (70.0) 18.4 101.1 (9.8) (53.8) $ (million) 8.3 (2.4) (2.1) (3.4) 1.1 (4.4) (6.0) (1.9) (0.6) (0.9) (12.3) A summary of these movements are provided below. Group administrative overhead (page 59) Costs capitalised Costs recharged to JV partners Pre-licence expenditure Share based payment expense Other non-cash expenditure Group cash G&A expense 2014 $ (million) 2013 $ (million) (2.1) (1.5) (0.6) (2.0) (4.1) 0.7 0.1 (5.4) (3.2) (2.0) (0.1) (2.1) (4.2) 1.2 0.1 (6.1) EBITDA and Net Loss Group Adjusted EBITDA (as defined within the Definitions and Glossary of Terms on pages 98-100) totalled $5.1 million (2013: $9.1 million). Net loss after tax totalled $12.3 million (2013: profit $8.3 million). The basic loss per share was $0.06 per share (2013: profit $0.04 per share). Interest received and finance expenses result in a net expense of $878k (2013: $251k) which includes exchange losses of $181k (2013: $66k) on GBP cash deposits held at 31 December 2014 reported in US Dollars, a non-cash finance expense of $1.1 million (2013: $434k) relating to the unwinding of the Chinguetti decommissioning provision (see Note 8 on page 79 and Note 20 on pages 87 - 88), interest received totalled $398k (2013: $268k) and other finance expenses totalling $16k (2013: $19k). No dividend is proposed to be paid for the year ended 31 December 2014 (2013: $nil). Cost of sales for the Group increased by $2.1 million mainly due to an increase on Chinguetti FPSO operating day rates. 22 23 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014STRATEGIC REPORT Financial Review (cont.) Year ended 31 December 2014 STRATEGIC REPORT Business Risk Cash Flow Net Group cash inflow generated from operating activities was $1.4 million (2013: $6.3 million); a full reconciliation of which is provided in the Consolidated Statement of Cash Flows. Net cash investments in oil and gas assets totalled $14.1 million (2013: $5.9 million) and are summarised below: Somaliland Madagascar Cameroon 2014 $ (million) 2013 $ (million) 12.4 1.0 0.7 14.1 5.1 0.1 0.7 5.9 Net cash investments in the year do not include the $3.0 million prepayment incurred in 2013 ($17.1 million E&E additions per Note 14). Statement of Financial Position At the year end, cash and cash equivalents totalled $108.1 million (2013: $120.8 million) of which $1.1 million (2013: $2.1 million) were held on behalf of partners, leaving a cash balance of $107.0 million (2013: $118.7 million). There are currently no restricted funds in the Group. At the end of 2014, net assets/total equity stood at $102.4 million (2013: $114.1 million), and non-current assets totalled $28.5 million (2013: $21.6 million). Net current assets reduced to $96.6 million (2013: $114.1 million). The Group’s Chinguetti decommissioning provision increased during the year by $1.1 million to $22.7 million (2013: $21.6 million). Cautionary Statement This financial report contains certain forward-looking statements that are subject to the usual risk factors and uncertainties associated with the oil and gas exploration and production business. Whilst the Directors believe the expectation reflected herein to be reasonable in light of the information available up to the time of their approval of this report, the actual outcome may be materially different owing to factors either beyond the Group’s control or otherwise within the Group’s control but, for example, owing to a change of plan or strategy. Accordingly, no reliance may be placed on the forward-looking statements. PRINCIPAL BUSINESS RISKS The long-term commercial success of the Group will depend on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Moreover, the Group may determine that current market conditions, terms of acquisition and participation, or pricing conditions make such acquisitions or participations uneconomic. The Directors have identified the following principal risks in relation to the Group’s future performance. The relative importance of risks faced by the Group can, and is likely to change with progress in the Group’s strategy and developments in the external business environment. STRATEGIC Strategy Risk The Group’s strategy may not deliver the results expected by shareholders. The Directors regularly monitor the appropriateness of the strategy, taking into account both internal and external factors, and the progress in implementing the strategy, and modify the strategy as may be required based on results. Key elements of this process are annual business plans which are reviewed every six months, in addition to ongoing strategy reviews, monthly reporting, and regular Board meetings. Concentration Risk The Group’s portfolio of assets remains relatively concentrated on early stage exploration within the African continent. The Board has considered broadening the exploration portfolio, using the existing financial resources of the Group, as an alternative element of the Group’s strategy. Competition Risk The petroleum industry is highly competitive across in all its lifecycle phases. The Group competes with numerous other participants in the search for acquisition and production of, oil and natural gas properties and in the marketing of oil and natural gas. The addition of exploration licences to the Group’s portfolio is subject to increasing competition even in the currently depressed market. Many of the Group’s larger competitors have significantly greater financial and technical resources and are able to devote more to the development of their business. The Group mitigates this risk by being highly selective in choosing where and when to deploy its business development resources. OPERATIONAL Exploration Risk Exploration activities within the Group’s licences may not result in a commercial discovery. Future oil and gas exploration may involve non-commercial efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Putting a well on production does not assure a profit on the investment or recovery of drilling, completion and operating costs. There is no certainty of success from the Group’s existing portfolio. The Group mitigates exploration risk through the experience and expertise of the Group’s specialists, the application of appropriate technology, and the selection of prospective exploration assets. The Group has an ongoing objective to acquire additional exploration assets to enable diversification and risk mitigation across the exploration portfolio. Operator Risk For some assets, the Group is dependent on other operators for the performance of E&P activities and will be largely unable to direct, control or influence the activities and costs of these operators. By farming out exploration assets prior to drilling activities, the Group has reduced its cost exposure and may transfer operatorship to other, normally larger and more experienced, operators for drilling, appraisal and development activities, with a consequent increase in the Group’s dependence on other operators for the performance of these activities. The Group carefully considers the technical, HSSE and financial capabilities of future potential operators during a farm- out process. ExxonMobil is the operator of the Ampasindava licence in Madagascar, Genel Energy is the operator of the Odewayne licence in Somaliland, and Tullow Oil is the operator of the C-3 licence in Mauritania. 24 25 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014STRATEGIC REPORT Business Risk (cont.) EXTERNAL Country Risk The Group’s assets are located in non-OECD countries. Governments, regulations, and the security environment may change with a consequential effect on the Group’s assets. The Group’s assets in Cameroon, Madagascar, Somaliland and Mauritania are affected by country-specific situations; the use by governments of tax claims, real or not, as a pressure point to coerce oil companies also appears to be increasing. In Cameroon, following the post balance sheet event (Note 26), Sterling Cameroon Limited will hold a 100% working interest in the Ntem block. The Governments of Cameroon and Equatorial Guinea continue to negotiate their joint maritime border, part of which runs concurrent with two of the Ntem block boundaries. The Group believes the final location of the maritime border will not impinge upon the Ntem area; however, there is no certainty that when agreement over the maritime border is reached the Ntem acreage will remain as it is defined under the current licence agreement with the Cameroon Government. In Madagascar, Sterling Energy (UK) Limited holds 50% and 30% in the Ambilobe and Ampasindava licences respectively. Further approval has been given by OMNIS, the state regulator, to prolong the current exploration period of both licences, with no changes to the work commitments. These agreements were signed by the Government of Madagascar in October 2014 and formal gazettal ratified in February 2015. Extensions are confirmed through to July 2016. In Madagascar; however, there remains uncertainty over government and fiscal policy with regards to international trade taxes, economic growth and in-country investment. In Somaliland, Sterling Energy (East Africa) Limited holds a 40% interest in the Odewayne licence. Somaliland is situated in the Horn of Africa and was, until 1960, a protectorate of the United Kingdom. The local government in Somaliland declared independence from the Republic of Somalia in May 1991 and has since developed the institutions and structures of democratic government. Although not officially recognised as an independent country, Somaliland maintains political contacts with its neighbours Ethiopia and Djibouti and a number of international countries, including the United Kingdom. The Government of Somaliland has conducted a tendering process for establishing an Oilfield Protection Unit (OPU); however, implementation has been delayed due to funding uncertainties and lack of clear UN support. The operator, Genel, is continuing to evaluate methods to initiate operations with sufficient levels of security in place. In Mauritania, Sterling Energy Mauritania Limited has signed an agreement to purchase a 40.5% working interest in the C-3 block, offshore Mauritania. Block C-3 has an active work program with Phase 1 of the PSC due to expire in June 2016. Prior to 1996 it was believed there were no hydrocarbon resources in Mauritania with the first PSC being signed in that year; however first oil from the Chinguetti field commenced in February 2006 and the Company participates via its Funding Agreement with Société Mauritanienne Des Hydrocarbures et du Patrimoine Minier. There remains considerable uncertainty over the future abandonment of the Chinguetti field, together with future government and fiscal policy in respect of investment from international organisations in the exploration, development and production of hydrocarbons. Country risk is mitigated by monitoring the political, regulatory and HSSE environment within the countries in which the Group holds its assets; engaging in constructive discussions where and when appropriate, and introducing third-party expertise if this may assist in resolution of issues affecting the Group’s assets. Financial The Group has an objective to acquire additional assets for the exploration portfolio, which may assist in diversifying country risk. OTHER BUSINESS RISKS In addition to the principal risks identified above and general business risks, the Group’s business is subject to risks inherent in oil and gas exploration, development and production activities. There are a number of potential risks and uncertainties which could have a material impact on the Group’s long-term performance and could cause actual results to differ materially from expected and historical results. The Group has identified certain risks pertinent to its business including: Category Risk Strategic and Economic Operational Commercial Human Resources and Management Processes • Inappropriate or poorly conceived strategy and plans • Failure to deliver on strategy and plans • Business environment changes • Competition and barriers to entry • Failure to access new opportunities • Operations in territories which are susceptible to political, fiscal and social instability • Limited portfolio diversification • Shareholder concentration • HSSE incident or non-compliance under local rules and/or laws • Failure to add value through exploration and appraisal • Poor field performance • Licences, permits and/or approvals may be difficult to sustain • Reliance on other operators • Delays in conducting work programmes • Failure to maximise value from existing interests • Business environment changes • Loss of control of key assets • Dissatisfied stakeholders • Failure to negotiate optimal contract terms • Reserve and production estimations are not exact determinations • Complex regulatory compliance • Failure to recruit and retain key personnel / human capital deficit • Human error or deliberate negative action • Bribery and corruption • Inadequate management processes • Insufficient timely information available to the management and the Board • Restrictions in capital markets impacting available financial resource • Oil or gas price volatility impacting both revenues and reserves • Counterparty default • Cost escalation and budget overruns • Fiscal stability • Operations under-insured • Foreign currency risk • Financial control of operated and non-operated assets • Fraud and corruption / increased third party exposure 26 27 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014HEALTH, SAFETY, SECURITY AND ENVIRONMENT (‘HSSE’) It is an objective of the Group that every individual is aware of his/her responsibility towards providing for a safe and secure working environment. HSSE and social responsibility leadership are core competencies throughout the Group’s line management organisation. The Group’s HSSE risks are managed in a systematic way by utilising procedures and appropriate training of staff, with the aim to reduce these risks to as low as is reasonably practical. The Group ensures that appropriate emergency response systems are in place to reduce and mitigate the impact and losses of any incident and any residual risks and that it is in compliance with all relevant laws, regulations and industry standards. The Group maximises its influence with joint venture partners to share its HSSE and social responsibility values. Contractors are required to demonstrate and deliver a credible HSSE and social responsibility programme. In order to achieve continual improvement, the Group is committed to reviewing its HSSE and social responsibility performance at least each quarter. The Group is committed to minimising its impact on the environment in both field operations and within its offices. All staff share responsibility for monitoring and improving the performance of its environmental policies with the objective of reducing our impact on the environment on a year-on-year basis. The Strategic Report was approved by the Board of Directors on 25 March 2015 and signed on its behalf by: Gavin Milne Company Secretary Alastair Beardsall Chairman STRATEGIC REPORT Business Risk (cont.) The Directors regularly monitor such risks using information obtained or developed from external and internal sources, and will take actions as appropriate to mitigate these. Effective and proactive risk mitigation is critical to the Group in achieving its strategic objectives and protecting its assets, personnel and reputation. The Group has developed a business management system, including a risk management process that identifies key business risks and measures to mitigate these risks and then implements such measures considered appropriate. Other significant elements of the business management system include regular Board review of the business, defined process for preparation and approval of the annual work programme and budget, monthly management reporting, financial operating procedures, and HSSE and anti-bribery management systems. The Group reviews its business risks and management systems on a regular basis and, through this process, the Directors continually identify the principal risks for mitigation. The Group manages some risks by ensuring the Group is in compliance with the terms of all its agreements, through the application of appropriate policies and procedures implemented in the business management system, and via the recruitment and retention of a team of skilled and experienced professionals. CORPORATE RESPONSIBILITY The Group is committed to conducting its business in a responsible and sustainable way. The Group recognises that it has corporate and social responsibilities to the indigenous communities in the areas in which it operates, to its partners, to its employees and to its shareholders. In pursuing its business objectives it undertakes not to compromise its corporate and social responsibilities with any of these stakeholders. BUSINESS INTEGRITY The highest ethical standards are the cornerstone of the Group’s business. The Group is committed to conducting its business with integrity, honesty and fairness. All business activities are reviewed to ensure they meet these standards. The Group also seeks to ensure that similar standards are applied by its business partners, contractors and suppliers. All members of staff are individually accountable for their actions to ensure they apply and maintain these standards. COMMUNITY RESPONSIBILITY The Company and its subsidiary undertakings are committed to being a good partner in the communities in which it operates. Engagement and dialogue with local communities is essential in ensuring, that where possible, projects benefit both the Group and the communities in which the project is located. EMPLOYEES The Group is committed to providing a workplace free of discrimination where all employees are afforded equal opportunities and are rewarded on merit and ability. In the implementation of this policy the Group is committed to ensuring that all employees are given contracts with clear and fair terms. Staff are offered access to relevant training and encouraged to join professional bodies to enhance their knowledge, competence and career development. The Group is committed to achieving the highest possible standards of conduct, accountability and propriety and to a culture of openness in which employees can report legitimate concerns without fear of penalty or punishment. The Group has a whistleblowing policy which empowers employees to be proactive, to report any failure to comply with legal obligations or the Group’s regulations, dangers to health and safety, financial malpractice, damage to the environment, criminal offences and actions which are likely to harm the reputation of the Group. The whistleblowing policy allows employees to make anonymous reports directly to a non-executive Director. 28 29 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 Sterling Energy plc Corporate Governance Year ended 31 December 2014 CORPORATE GOVERNANCE Board of Directors Alastair Beardsall, executive Chairman, aged 61 Alastair joined the Company in September 2009. He has been involved in the oil industry for over 35 years. For the first 12 years Alastair worked on international assignments with Schlumberger, the oil-field services company. From 1992 he began working for exploration and production operators, with increasing responsibility for exploration, development and production ventures. Between September 2003 and October 2009, Alastair was executive Chairman of Emerald Energy plc (Emerald). In October 2009 Emerald was acquired by Sinochem Resources UK Limited, for £7.50 per share in a transaction that valued Emerald at £532.0 million. Alastair is a non-executive Director of Jupiter Energy Limited and advises other private companies in the oil and gas industry. Eskil Jersing, Chief Executive Officer, aged 51 Eskil joined the Company on 23 March 2015. He holds a BSc in Geophysics from University College Cardiff and an MSc in Petroleum Geology from Imperial College London. He started his career in the oil and gas industry in 1985 as a Field Seismologist with SSL in Papua New Guinea. From 1993 to 2009 he worked for Enterprise Oil (London, Aberdeen, Houston, and Brazil), and following the takeover, Shell International (Houston); initially as a Senior Geophysicist, moving on to be the Gulf of Mexico Exploration Strategy and Planning Manager and finally as the Gulf of Mexico Paleogene Exploration Manager. In 2009 Eskil joined Marathon Oil (Houston) as their Exploration Manager (Conventional New Ventures) Worldwide and subsequently Apache Corporation (Perth) as Director Worldwide Exploration and New Ventures Asia Pacific. Most recently he was Head of New Ventures and Co-Head of Mergers & Acquisitions at Petrobras Oil & Gas BV (Rotterdam). Nicholas Clayton, non-executive Director, aged 51 Nicholas was appointed a non-executive Director of the Company in October 2009. Nicholas is chairman of the Audit Committee and a member of the Remuneration and Nomination Committees. Nicholas has provided strategic and corporate finance advice to a number of public and private oil and gas companies since January 2007. Between August 2005 and December 2006 he was Global Co-Head of Oil and Gas Corporate Finance for Canaccord Adams. For the previous 5 years he held the position of Global Head of Oil and Gas Corporate Finance for Dresdner Kleinwort Benson, the investment bank, having previously been Global Head of Oil and Gas Research between 1997 and 2000. Nicholas obtained a first class honours degree in Business Studies, from Portsmouth Polytechnic in 1985. Nicholas serves as a non-executive Director of Alpha Petroleum Resources Limited and Circle Oil plc, where he is chairman of the Audit Committee. Keith Henry, non-executive Director, aged 70 Keith was appointed a non-executive Director of the Company in September 2009. He chairs the Remuneration Committee and is a member of the Audit and Nominations Committees. He has over 35 years of international business experience in the development, ownership, design and construction of major facilities worldwide. He was with Brown & Root Limited for 23 years, the last five of which were as Chief Executive responsible for Europe, Africa and the FSU region. From 1995 to 1999 he was Chief Executive of National Power plc, and then Chief Executive of Kvaerner Engineering and Construction Ltd until June 2003. Keith serves as Chairman of Regal Petroleum plc as well as serving as a non-executive Director and advisor to a number of companies in the engineering, services and energy sectors. He is a Fellow of the Royal Academy of Engineering. Malcolm Pattinson, non-executive Director, aged 71 Malcolm was appointed a non-executive Director of the Company in November 2010. Malcolm is Chairman of the Nomination Committee and a member of the Audit and Remuneration Committees. Malcolm is a geoscientist with 40 years of experience and joined the Company in November 2010. Until 2001 he was the vice-president of exploration for Ranger Oil (subsequently CNR); and prior to this he was exploration vice-president for Hamilton Brothers Oil (subsequently BHP). From 2001 to 2006 Malcolm was a consultant for Tullow Oil. Malcolm is an honorary life member and former chairman of the Petroleum Exploration Society of Great Britain, and was awarded the medal for outstanding achievement in 1996 by the Petroleum Group of the Geological Society. He is the chairman of GTO Limited and was formerly a non- executive Director of Aurelian Oil and Gas plc. APPLICATION OF UK CORPORATE GOVERNANCE CODE PRINCIPLES Throughout the year ended 31 December 2014 the Board has sought to comply with a number of the provisions of the UK Corporate Governance Code (‘the Code’) in so far as it considers them to be appropriate to an entity of the size and nature of the Group. The Directors make no statement of compliance with the Code overall and do not explain in detail any aspect of the Code with which they do not comply. The Group continues to keep its overall system of internal control under review. THE BOARD OF DIRECTORS AND ITS COMMITTEES Board Composition, Operation and Independence The Board currently comprises the executive Chairman, one executive Director and three non-executive Directors. Each of the executive Directors has extensive knowledge of the oil and gas industry combined with general business and financial skills. All of the Directors bring independent judgement to bear on issues of strategy, performance, resources, key appointments and standards. The Board meets regularly throughout the year and all the necessary information is supplied to the Directors on a timely basis to enable them to discharge their duties effectively. The Board is responsible to the shareholders for the proper management of the Company. A Statement of Directors’ Responsibilities in respect of the financial statements is set out on page 55. The Board has a formal schedule of matters specifically reserved for its decision. These include strategic planning, business acquisitions or disposals, authorisation of major capital expenditure and material contractual arrangements, changes to the Group’s capital structure, setting policies for the conduct of business, approval of budgets, remuneration policy of Directors and senior management, and taking on debt and approval of financial statements. Other matters are delegated to the Committees of the Board and executive Directors, supported by policies for reporting to the Board. Keith Henry is the Senior Independent Director. The Senior Independent Director is available to shareholders if they have concerns which, through the normal channels of contact with the Chairman and CEO, have not been resolved or for which such contact is inappropriate. The Group maintains Directors’ and Officers’ liability insurance cover and provides the Directors with indemnity, the level of which is reviewed annually. Meetings and Attendance The following table summarises the number of Board and committee meetings held during the year and the attendance record of the individual Directors: Number of meetings in year Alastair Beardsall Philip Frank Keith Henry Nicholas Clayton Malcolm Pattinson Board Meetings Audit Committee1 Remuneration Committee Nominations Committee2 10 10 9 10 10 10 5 - - 5 5 5 3 - - 3 3 3 - - - - - - 1 In addition to the Audit Committee meeting to discuss the annual audit and full year results, the Committee also meets in advance of announcements of a financial disclosure, including the Interim Results at 30 June and Q1 and Q3 Interim Management Statements. 2 There were no separate Nominations Committee meetings held in the year as Nominations Committee matters were handled by either the Non- Executive Directors prior to, or by the Directors during, Board Meetings. 32 33 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Board of Directors (cont.) Audit Committee Report Induction and Training New Directors, on their appointment to the Board, are briefed by the Board and management on the activities of the Group and its key business and financial risks, the Terms of Reference of the Board and its Committees, the list of Board reserved matters, and the latest financial information about the Group. The Chairman ensures that Directors update their skills, knowledge and familiarity with the Group to fulfil their roles on the Board and on Board Committees. Ongoing training is available as necessary and includes updates from the Company Secretary on changes to the AIM rules, the Code, requirements under the Companies Act and other regulatory matters. Directors may consult with the Company Secretary at any time on matters related to their role on the Board. All Directors have access to independent professional advice at the Company’s expense. Evaluation of the Board’s Performance Performance evaluation takes place for individual Directors, the Board and its Committees and includes assessing the effectiveness of the Board as a whole. The evaluation of the performance of Directors is carried out using peer appraisal questionnaires which combine business and personal performance and includes discussions with the Senior Independent Director. Aspects of performance include attendance and participation at Board meetings, quality of involvement in Committees, commitment and effectiveness of their contribution to Board activities (including the AGM and shareholder communications), the adequacy of training and non-executive Directors’ independence. The process is conducted and reviewed by the Senior Independent Director, on behalf of the Nominations Committee; the Company Secretary is advised of its completion. The performance of the Chairman is reviewed annually in a meeting of the non-executive Directors, led by the Senior Independent Director. This review takes into account the views of executive Directors. Retirement and Re-election The Company’s Articles of Association require that any Director who has been a Director at the preceding two Annual General Meetings and who was not been appointed or re-appointed by the Company, retire and stand for re-election. All new Directors appointed since the previous Annual General Meeting need to stand for election at the following Annual General Meeting. An important part of the role of the Audit Committee is its responsibility for reviewing the effectiveness of the Group’s financial reporting, internal control policies, and procedures for the identification, assessment and reporting of risk. The latter two areas are integral to the Group’s core management processes and the Committee devotes significant time to their review. Further information on the risk management and internal control systems is provided within the Strategic Report on pages 25 - 29 and also on page 50. One of the key governance requirements of a group’s financial statements is for the report and accounts to be fair, balanced and understandable. The co-ordination and review of the Group-wide input into the Annual Report and Accounts is a sizeable exercise performed within an exacting time-frame which runs alongside the formal audit process undertaken by the external Auditors. Arriving at a position where initially the Audit Committee, and then the Board, is satisfied with the overall fairness, balance and clarity of the document, is underpinned by the following: • comprehensive guidance issued to contributors at operational levels; • a verification process dealing with the factual content of the reports; • comprehensive reviews undertaken at different levels that aim to ensure consistency and overall balance; and • comprehensive review by the senior management team. The Audit Committee has also championed efforts to remove unnecessary items from the Report and Financial Statements by stripping out duplication and sequencing information in a consistent and reasonable manner without compromising compliance with UK regulatory and accounting requirements. An essential part of the integrity of the financial statements is the key assumptions and estimates or judgments that have to be made. The Committee reviews key judgments prior to publication of the financial statements at both the end of the financial year and at the end of the six month interim period, as well as considering significant issues throughout the year. In particular, this includes reviewing any subjective material assumptions within the Group’s activities to enable an appropriate determination of asset valuation and provisioning and the accounting treatment thereof. The Committee reviewed and was satisfied that the judgments exercised by management on material items contained within the Report and Financial Statements are reasonable. Additionally, the Committee also considered management’s assessment of going concern with respect to the Group’s cash position and its commitments for the next 12 months and was satisfied that the Group continues to be able to fund its liabilities from existing cash reserves which totalled $108.1 million at 31 December 2014. The Audit Committee has considered the Group’s internal control and risk management policies and systems, their effectiveness and the requirements for an internal audit function in the context of the Group’s overall risk management system. The Committee is satisfied that the Group does not currently require an internal audit function; however, it will continue to periodically review the situation. The Committee also considered the Group’s whistleblowing procedures to ensure that its employees are able to raise concerns, in confidence, about possible wrongdoing in financial reporting and other matters. The Audit Committee met several times during the year to consider these matters. The external audit function plays an important part in assessing the effectiveness of financial reporting and internal controls and the effectiveness and quality of audit is of key importance. Our Auditors, BDO LLP have been in place since 2010 and, in line with the audit profession’s own ethical guidance, the current audit engagement partner is due to rotate off the Company’s account in the year ending 31 December 2015 having served for a period of five years. 34 35 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Audit Committee Report (cont.) Nominations Committee The Committee reviews the Auditors’ independence and monitors the nature and level of non-audit fees payable to them on an annual basis. The Committee believes that certain work of a non-audit nature is best undertaken by the external Auditors, and believes that it is not appropriate to limit the level of such work by reference to a set percentage of the audit fee, as this does not take into account important judgments that need to be made concerning the nature of work undertaken to help safeguard the Auditors’ independence. Details of fees payable to the Auditors are set out in Note 5 on page 78. The Committee has reviewed the recent changes to the UK Corporate Governance Code (September 2014) including the best practice for companies to put the external audit contract out to tender at least every ten years. Having considered the FRC’s guidance on aligning the timing of such re-tenders with the audit engagement partner rotation cycle, the Committee’s current intentions are that it will initiate a re-tendering process prior to 2020. This policy will be kept under review and the Committee will use its regular reviews of Auditor effectiveness to assess whether an earlier date for such a re-tender would be desirable. Such regular reviews are used to assess the effectiveness of the external audit process and the Auditors’ performance, with the Committee undertaking an internal assessment of the audit effectiveness and performance which is mapped against audit appointment criteria. The Committee has recommended to the Board that it recommend that shareholders support the re-appointment of BDO LLP at the 2015 AGM. There were no separate Nominations Committee meetings held in the year, as Nominations Committee matters were handled by either the Non-Executive Directors prior to, or by the Directors during, Board Meetings. The members of this Committee are currently Nicholas Clayton, Keith Henry and Malcolm Pattinson under the Chairmanship of Malcolm Pattinson. The Nominations Committee considers the composition of the Board and makes recommendations on the appointment of new Directors and those candidates presenting themselves for re-election at the AGM. The Senior Independent Director coordinates the annual performance evaluation of Directors. The Nominations Committee was central to the search process for a CEO which culminated in the appointment on 23 March 2015 of Eskil Jersing; the Committee was involved in preparation of the search brief, compilation of short-lists for interviews by the Board and the final selection of the appointed candidate. The Remuneration Committee was involved in the recommendation of the package offered to the CEO prior to appointment. Alastair Beardsall will retire by rotation and offer himself for re-election at the AGM. His biographical details, provided on page 32, demonstrate the range of experience and skill he brings to the Group. The Nominations Committee and the Board considers that his performance continues to be effective and that he has the necessary commitment to fulfil his respective role. Nicholas Clayton Chairman of the Audit Committee 25 March 2015 MEMBERS This Committee comprises: • Nicholas Clayton (Chairman) • Keith Henry • Malcolm Pattinson SUMMARY OF RESPONSIBILITIES • Reviewing the effectiveness of the Group’s financial reporting, internal control policies and procedures for the identification, assessment and reporting of risk; • monitoring the integrity of the Group’s financial statements, including a review of the management report issued by the executive management to the Board each month; • monitoring the effectiveness of the internal control environment; • making recommendations to the Board on the appointment of the Auditors; • making recommendation to the Board on Auditors’ fees; • agreeing the scope of the Auditors’ annual audit programme and reviewing the output; • ensuring the independence of the Auditors is maintained; • assessing the effectiveness of the audit process; and • developing and implementing policy on the engagement of the Auditors to supply non-audit services. The Auditors have unrestricted access to the Chairman of the Audit Committee. Audit Committee meetings are attended by the Auditor where and when appropriate and, by invitation, the executive Chairman, other Directors and senior management. 36 37 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014CORPORATE GOVERNANCE Remuneration Committee Report The Remuneration Committee convened several times during the year and has been actively engaged on all matters of corporate remuneration. Over the past year, the Committee has considered the following matters: • the terms of the 2009 All Staff LTIP, NED LTIP and HMRC Approved schemes and, if in the current economic conditions being experienced in the natural resources sector, whether or not they retain the ability to motivate, incentivise and retain the calibre of staff and management required to promote future success for the Group; • the 2014 awards under the 2009 All Staff LTIP rules to staff and executive management; • the 2014 review of achievement of certain corporate objectives (KPI); and subsequently • the setting of 2015 corporate objectives (KPI); and • the proposed basic salary uplift for 2015 to reflect general inflation and merit awards for staff and executive management. Director Alastair Beardsall Philip Frank 2014 bonus 2013 bonus % increase £0 £0 £31,500 £40,570 n/a n/a Annual bonuses are also granted to eligible UK staff under the same rules; the maximum percentage that can be awarded reflects the individual’s skills and experience. Bonuses are not awarded to non-executive Directors. The Committee awarded the following options under the All Staff LTIP schemes: The safe operation of our activities, the management and maturation of the Group’s assets, and the selective pursuit of new business opportunities, are three main criteria on which the performance of the Company’s executive team and employees are judged when considering remuneration. Director Alastair Beardsall Philip Frank 2013 LTIP Award 2012 LTIP Award % increase 727,100 936,100 1,657,500 627,000 <56% >49% In both Cameroon and Madagascar, projects that previously experienced very limited operational progress have seen significant activity in 2014 and 1H 2015 respectively. In Somaliland, the acquisition of a 40% in the Odewayne licence was completed in 1H 2014 and added to the Group’s portfolio of projects. Refer to the Operations Review for details on current assets. New venture identification, appraisal, and subsequent delivery, continues to be challenging in a competitive market where there are a limited number of attractive opportunities to selectively pursue. The Committee was satisfied with the number of opportunities reviewed by management who continue to work hard to short-list and appraise ventures with a view to only pursuing those where they see material upside for shareholders. The Committee, when reviewing base salaries for staff and executive Directors, consider matters of retention, motivation, the economic climate (CPI/RPI), the challenges facing the business and appropriate industry benchmarks of remuneration in peer companies. The annual base salary levels for executive Directors were as follows: Alastair Beardsall is considered by the Panel on Takeovers and Mergers (‘Panel’) to be a concert party with Waterford Finance and Investment Limited. Consequently, any LTIP award would require a Rule 9 Waiver granted by the Panel and approved by the shareholders at a general meeting and Alastair Beardsall has therefore declined to accept any LTIP awards since 2009 to avoid this necessity. However, in recognition of Alastair Beardsall’s significant executive role during the past five years, the Committee wished to better align his incentive package with the interests of shareholders and, accordingly, considered that the awards totalling 2,384,600 options for 2013 and 2014 was appropriate. The award represents the aggregate of the awards that would have been made to him for the period 2010-2014 had he accepted the awards offered previously for these years. These awards remain subject to the granting of a Rule 9 Waiver by the Panel being approved by the shareholders at a general meeting. Under the Remuneration Policy, the Committee recommended the grant to Philip Frank of 936,100 options under the All Staff LTIP which represents an amount capped at 100% of annual salary. Director Alastair Beardsall Philip Frank 2014 salary 2013 salary % increase £193,400 £249,000 £180,000 £231,800 7% 7% Under the vesting criteria of the All Staff LTIP, options granted will only vest if the Company Share Price meets the criteria set out in Note 24 on pages 92 - 96. Under these criteria, if the Company Share Price underperforms the FTSE 350 Index, by more than 10% then no options will vest. For 100% of the options to vest the Company Share Price must outperform the FTSE 350 Index by more than 50%. No LTIPs vested in the year. As the Company’s executive Chairman, Alastair Beardsall has executive responsibilities, but remains a part-time employee. The non-executive fees are determined by the Board with no Director voting on his own remuneration. For 2014 the fees for each non-executive individual were £35,000 (2013: £33,000). The Committee awarded no bonuses to the executive Directors during the year. The rules of the Company’s Staff Bonus Scheme permit the award of an annual bonus to executive Directors where: • The total annual bonus is capped at a maximum of 100% of the base salary; • up to 50% may be awarded for achieving certain corporate objectives, for 2014 these objectives included HSSE performance, new ventures and farming out certain assets; • up to 50% may be awarded for exceptional personal performance; exceptional is performance above and beyond that expected under the individual’s job description. The Company also utilises an HMRC approved Company Share Option Plan (‘CSOP’) that allows both the Company and the employee to benefit from some tax savings offered on the exercise of qualifying options. The specific details of the scheme can again be found in Note 24. Where appropriate, Directors, senior management and other employees have been issued options under the HMRC Sub-Plan in preference to the non-approved All Staff LTIP; the sum of the awards to all individuals under the HMRC Sub-Plan and All Staff LTIP is equal to the number that would have been issued under the All Staff LTIP if the HMRC Sub-Plan had not been approved and implemented. Given the current economic climate in the natural resources sector, the Committee is to consider whether or not the All Staff LTIP and HMRC approved CSOP schemes retain the ability to motivate, incentivise and retain the calibre of staff and management required to promote future success for the Group. On 18 December 2014 the Company announced Philip Frank’s intention to stand down from the Board. Philip joined the Company in 2011 and has guided the Group through its exploration activity including the drilling of the Bamboo-1 well in Cameroon. In addition he secured the Group’s entry into the Odewayne prospect in Somaliland. The Board wishes him well in his future endeavours. 38 39 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Remuneration Committee Report (cont.) The Company made considerable progress during 2014 which will hopefully act as the springboard for future success in 2015 and beyond. In recognition of this, the Committee believes that the recommendations it has made to the Board on executive and staff remuneration have been fair, balanced and reflective of the corporate objectives that were met during the year. Keith Henry Chairman, Remuneration Committee 25 March 2015 MEMBERS This Committee comprises: • Keith Henry (Chairman) • Nicholas Clayton • Malcolm Pattinson SUMMARY OF RESPONSIBILITIES • Agreeing a policy for the remuneration of the Chairman, executive Directors and other senior executives; • within the agreed policy, determining individual remuneration packages for the Chairman, executive Directors and senior employees; • agreeing the policy on terms and conditions to be included in service agreements for the Chairman, executive Directors, and other senior executives, including termination payments and compensation commitments, where applicable; and • the approval of any employee incentive schemes and the performance conditions to be used for such schemes including share performance targets. OPERATION OF THE COMMITTEE The Remuneration Committee makes recommendations to the Board, within its agreed terms of reference, on the structure and overall remuneration package for executive Directors and reviews the remuneration for other senior employees. The Committee consists entirely of non-executive Directors and, where appropriate, will invite executive Directors or senior managers to attend meetings to provide suitable context for its discussions. Only members of the Committee participate in discussions and reach conclusions on matters with which the Committee is responsible. No member or attendee is authorised to participate in matters relating to their own remuneration. Non-executive Directors’ fees are considered and agreed separately by the Board. The Committee has not engaged the services of any remuneration consultants during the year. REMUNERATION STRATEGY The Company remuneration strategy is to provide a remuneration package that: • helps to attract, retain and motivate; • is aligned to shareholders’ interests; • is competitive within the appropriate market; • encourages and supports a performance culture aligned to the achievement of the Company’s strategic objectives; and • is fair and transparent. REMUNERATION POLICY The Company’s policy on Directors’ remuneration is that the overall remuneration package should be sufficiently competitive to attract, retain and motivate high quality executives capable of achieving the Group’s objectives and thereby enhancing shareholder value. The package consists of salary, performance related bonus, pension provision, other benefits such as private medical cover, life assurance and share options awarded under the All Staff LTIP. The balance between these components is targeted at base salary levels around the middle of the range for peer companies with material additional remuneration linked to performance and results that add materially to shareholder value. The Company acknowledges the benefit of the executive Directors accepting appointments as non-executive Directors of other companies; however, if they accept more than two such appointments, they are required to deduct such fees for those appointments from their Company executive remuneration. Details of individual components of executive remuneration are: Elements of package Purpose and link to strategy How element is reviewed Base salary and fees To recognise market value of the role, reflecting the individual’s skills, experience, authorities and responsibilities, to ensure the business can attract and retain the appropriate Directors, both executive and non- executive. Reviewed annually. The Committee uses comparator data collected from published accounts and industry surveys of peer companies to determine the base salary for each of the executive Directors. No executive remuneration consultants were used during the year. The executive Directors use peer group data to determine the level of fees for the non- executive Directors. Performance related bonuses To incentivise and reward, on an annual basis, the performance of individuals, and the Group on both financial and non-financial metrics. All Staff LTIP, NED LTIP, HMRC Approved schemes To reward delivery of sustained long- term total shareholder returns (TSR) performance aligned to the interests of shareholders. Pension provision To provide competitive retirement benefits commensurate with schemes offered by peer companies. Other benefits To provide competitive cost-effective benefits through leveraging the Group’s size and scale. Objectives (KPIs) are set, prior to the year under review, to align near-term goals with the longer term sustainable future of the Group. At the end of each year the Committee considers if the KPIs have been achieved in addition to individual performance and contribution to the Group. The maximum level of performance related bonus for executive Directors is capped at 100% of annual salary; non-executive Directors do not participate in the bonus scheme. The All Staff and NED LTIP scheme options are equity settled and have a vesting period of three years. If options remain unexercised after a period of five years from the date of grant, the options expire. Options are forfeited if the employee or Director leaves the Group before the options vest or are exercised, however, the Committee may exercise discretionary powers in certain circumstances. All Staff LTIPs are subject to the performance conditions set out in Note 24. NED LTIPs have no performance conditions attached to them. The maximum value to which options may be granted in any one year is capped, the cap is based upon the individual’s role and responsibilities, for the executive Directors the cap is 100% of annual base salary. The Group operates a number of defined contribution pension schemes pursuant to which it contributes 10% of pensionable salary per eligible member. Scheme membership and contribution is linked to the member’s base salary (see above). The Group subscribes to a number of benefits for employees and Directors which include life assurance, income protection, subsidised fitness centre membership and private medical insurance, some of these benefits are linked to base salary. The Company operates no defined benefit schemes and no material changes to the benefits have been made during the year. 40 41 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014CORPORATE GOVERNANCE Remuneration Committee Report (cont.) The principles and criteria used in the remuneration of executive personnel do not differ materially from those listed above. The Committee may incentivise the engagement of new employees by way of uplift to the LTIPs awarded in the first year of employment. No upper limit to the size of the uplift to the LTIP award has been set as the Committee will consider sign-on awards on a case-by-case basis. No cash settled sign-on payments are made. Notice periods for Directors are in line with Code guidance, none are currently greater than six months with Code guidance being none greater than twelve months. Termination payments made to Directors on loss of office that are not provided for within their service contracts are only made if the Committee considers them appropriate, has recommended them to the Board and the Board has granted their approval. Following the remuneration policy set out above the Remuneration Committee has determined the following packages for 2015: • Alastair Beardsall, Executive Chairman, will receive a base salary, effective 1/1/2015, of £197,300, a 10% non- contributory pension contribution paid directly to Alastair Beardsall and other benefits as set out above. • Eskil Jersing, Chief Executive Officer, will receive a base salary, effective 23/3/2015, of £275,000, a 10% non-contributory pension contribution paid to Eskil Jersing’s personal pension scheme and other benefits as set out above. • For Alastair Beardsall and Eskil Jersing any award under the performance related bonus scheme will be determined at the end of 2015 and will be based on achievement of certain corporate KPIs and individual performance, the principles of the bonus scheme are set out on page 38. The Company considers the specifics of the KPIs to be commercially sensitive as they reflect the Company’s commercial strategy; in general the KPIs are focused on HSE, new ventures and managing the Companies financial exposure to its existing assets. • The award of options under the Companies All Staff LTIP plan to Alastair Beardsall and Eskil Jersing will be determined by the Remuneration Committee during the year in accordance with the principles as set out on page 39, and disclosed at the time of any award. Following the remuneration policy set out above the executive Directors have determined the fees for the non-executive Directors for 2015 be set at £35,700. All Staff and NED LTIPs Directors’ interests in LTIPs are accounted for under IFRS 2 - Share-Based Payments; accounting charges in the period are detailed in Note 24 on pages 92 - 96. The Directors’ interests in the All Staff LTIP scheme, which was approved by shareholders at the EGM held on 22 December 2009, are as follows (audited): 1 January 2014 Lapsed Granted Exercised 31 December 2014 Exercise price Earliest exercise date 1 Latest exercise date 1 Alastair Beardsall 1,657,500 - 727,100 Philip Frank Philip Frank 2,498,850 (1,097,600) 936,100 69,500 - - 4,225,850 (1,097,600) 1,663,200 - - - - 2,384,600 40p 01.11.16 30.09.19 2,337,350 40p 01.10.15 30.09.19 69,500 43p 10.12.16 09.12.18 4,791,450 1 If the Company is in a closed period, the earliest and latest date of exercise may vary. No gains were made on the exercise of options during the year (2013: nil). The non-executive Directors’ interests in the NED LTIP, which was approved by shareholders at the EGM held on 22 December 2009, are as follows (audited): 1 January 2014 2 Lapsed Granted Exercised 31 December 2014 Exercise price Earliest exercise date 1 Latest exercise date 1 Nicholas Clayton 228,150 (125,000) Keith Henry 228,150 (125,000) Malcolm Pattinson 186,483 - 642,783 (250,000) - - - - - - - - 103,150 103,150 186,483 392,783 1 If the Company is in a closed period, the earliest and latest date of exercise may vary. 2 Awards approved by shareholders on 22 December 2009, 28 April 2011 and 19 April 2013. No LTIPs vested in the year as the performance conditions were not met. 40p 01.10.15 30.09.17 40p 01.10.15 30.09.17 40p 01.10.13 30.09.17 The rules of the LTIP schemes and a full list of performance conditions and vesting criteria can are summarised in Note 24 on pages 92 - 96. Service contracts Directors’ service contracts are reviewed annually at the end of each calendar year with any changes taking effect from 1 January of the following year. The 2014 salary review was implemented on 1 January 2015 and is incorporated within the numbers below: Director Alastair Beardsall Philip Frank Commencement of appointment Date of current contract Base annual salary Notice period 8 September 2009 1 January 2011 £197,300 6 months 3 October 2011 3 October 2011 £254,000 6 months Non-executive Directors do not have service contracts, but instead each has a letter of appointment setting out the terms and conditions of their appointment, details of which are as follows: Director Nicholas Clayton Keith Henry Commencement of appointment Date of current contract Base fees per annum 1 October 2009 1 October 2009 8 September 2009 8 September 2009 £35,700 £35,700 £35,700 Malcolm Pattinson 15 November 2010 15 November 2010 Save for the fees outlined above and the share options awarded under the NED LTIP, the non- executive Directors are not entitled to any other benefits or arrangements. Except as disclosed above, there are no service contracts or letters of appointment in force between any Director with the Company or the Group as at the date of this document. 42 43 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Remuneration Committee Report (cont.) Directors and their interests (audited) The Directors, who served during the year and subsequently, together with their beneficial interests in the issued share capital of the Company, were as follows: 2013 Remuneration Fees and basic salary Bonus Defined contribution pension Benefits in kind Single figure remuneration Total 2013 Ordinary shares of 40p each Alastair Beardsall 1 Philip Frank 1 Keith Henry 2 Nicholas Clayton 2 Malcolm Pattinson 2 1 Executive Director. 23 March 2015 1,062,500 132,204 500,000 132,500 62,810 31 December 2014 31 December 2013 1,062,500 1,062,500 132,204 500,000 132,500 62,810 132,204 500,000 132,500 62,810 2 Non-executive Director, member of the Audit, Remuneration and Nominations Committees. Beneficial shareholdings include the shareholdings of a Director’s spouse and infant children. The Company has granted an indemnity to its Directors (including subsidiary undertakings) under which the Company will, to the maximum extent possible, indemnify them against all costs, charges, losses and liabilities incurred by them in the performance of their duties. The Company provides limited Directors’ and Officers’ liability insurance, at a cost of approximately $26k in 2014 (2013: $22k). Aggregate Remuneration The single figure of total remuneration paid to Directors in 2014 and 2013 is summarised below (audited): 2014 Remuneration Fees and basic salary Bonus Defined contribution pension Benefits in kind Single figure remuneration Total 2014 Executive Directors: Alastair Beardsall Philip Frank £ £ 198,000 1 231,800 31,500 40,570 Angus MacAskill (resigned 16 Aug 2013) 258,458 Non-executive Directors: Nicholas Clayton Keith Henry Malcolm Pattinson 33,000 33,000 33,000 - - - - £ - 23,180 17,109 - - - £ £ 4,398 8,683 3,647 - - - 233,898 304,233 279,214 33,000 33,000 33,000 Aggregate remuneration 2013 (£) 787,258 72,070 Aggregate remuneration 2013 (US$) 1,231,584 112,746 40,289 63,028 16,728 916,345 26,169 1,433,527 1 Includes pension contributions paid as cash. In addition to the remuneration paid to Directors as above, further payments for ‘loss of office’ were made to Angus MacAskill in the year of £74,745 (2013: £74,745). These payments were made under Angus MacAskill’s Settlement & Compromise Agreement. Fees and basic salary Base fees and salary remain the foundation stone of the Directors’ remuneration packages which determine the levels of other elements such as pension contributions and bonus payments. When setting base salaries for executive Directors, the Company Remuneration Committee will take into account: • the Director’s performance, individual responsibilities, authorities and experience; and • comparisons with salary levels in peer group companies gathered from disclosure in various public documents such as £ £ peer group annual reports and accounts. Executive Directors: Alastair Beardsall Philip Frank Non-executive Directors: Nicholas Clayton Keith Henry Malcolm Pattinson Aggregate remuneration 2014 (£) Aggregate remuneration 2014 (US$) 1 Includes pension contributions paid as cash. £ 212,740 1 249,000 35,000 35,000 35,000 566,740 933,728 £ - - - - - - - £ - 24,900 - - - 7,061 8,880 219,801 282,780 - - - 35,000 35,000 35,000 24,900 41,024 15,941 26,264 607,581 1,001,015 The basic salary is used to determine the level of pension contributions. The level of fees for the non-executive Directors is set by the executive Directors with reference to the fees paid to non-executive Directors in peer group companies. Bonus The Remuneration Committee administers the bonus scheme for the Company and considers whether executive Directors are eligible for an annual and/or interim bonus payment; the Committee also has an oversight for bonus awards to staff. The bonus scheme comprises of two parts, (i) corporate performance as measured against pre-determined objectives (KPI), and (ii) individual performance; refer to page 41 for further details. If so, performance conditions will be relevant to the award, stretched and designed to enhance shareholder value and to promote the long term success of the Company. Upper limits are set and disclosed by the Remuneration Committee. The Remuneration Committee reviewed the outcome of the Company’s performance with regard to its 2014 KPIs and noted that it had not met any of its key objectives and accordingly no executive bonuses were awarded to the executive Directors in 2014. As a comparison, in 2013 the Remuneration Committee agreed that a percentage proportion of the 2013 KPIs had been achieved and awarded such executive bonuses to the executive Directors accordingly. The Company considers the KPIs to be commercially sensitive as they reflect the Company’s commercial strategy; in general the KPIs are focused on HSE, new ventures and managing the Companies financial exposure to its existing assets. The KPIs for 2014 are similar to those adopted in 2013. Non-executive Directors are not eligible to receive bonus payments. 44 45 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Remuneration Committee Report (cont.) Defined Contribution Pension The defined contribution pension scheme is an employer contribution scheme calculated at 10% of base salary. Such payments are made into individual Director personal pension plans as chosen by each individual Director. On retirement, such contribution payments cease from the effective date of cessation of employment. Contributions to Phil Frank’s pension scheme ceased following his departure from the Company. Non-executive Directors are not eligible to receive pension contributions. Benefits in Kind Taxable benefits in kind for executive Directors include Company paid private medical health schemes and associated cash plans, the latter is subject to an annual limit. In addition the Company pays for life insurance, travel insurance, directors and officers insurance and disability cover; such benefits are not taxable benefits for individual Directors. The graphs below show the value of the executive Director packages for 2014 together with minimum and maximum remuneration attainable: Alastair Beardsall (executive Chairman and interim CEO) Maximum Actual Minimum £0 £100,000 £200,000 £300,000 £400,000 £500,000 Basic salary Bonus Pension provision Other benefits Basic salary Bonus Pension provision Other benefits The table below sets out the total remuneration for the Company’s CEO for the past six years: Philip Frank (Exploration Director) Year CEO % change CEO single figure of total remuneration (£) Annual bonus pay-out against maximum opportunity (%) Long-term incentive vesting rates against maximum opportunity (%) Maximum Actual Minimum £0 £100,000 £200,000 £300,000 £400,000 £500,000 2014 2013 2012 2011 2010 2009 Alastair Beardsall 1 219,801 (51.3%) Angus MacAskill 2/Alastair Beardsall 1 451,417 52.4% Angus MacAskill Angus MacAskill 296,169 (18.9%) 365,004 (0.4%) 23% Graeme Thomson/Angus MacAskill 366,377 (51.2%) Graeme Thomson 751,003 91.9% - - - - - - - - - - - 1 Part-time. 2 Includes £74,745 paid as compensation for loss of office. Since August 2013, Alastair Beardsall has acted as interim CEO in addition to being executive Chairman (his remuneration as relating to his appointment in 2013 has been prorated accordingly). The annual percentage change in CEO single figure remuneration for years 2009 to 2014 compares with that of all employees: (8.8%), 1.3%, (23.9%), (20.5%), 8.5% and (19.8%) respectively. Performance Graph The graph below shows a comparison between the TSR for the Company’s shares for the five-year period to 31 December 2014 and the TSR for the companies comprising the FTSE 350 Index over the same period. This index has been selected to provide a relevant comparator to the Company. The TSR measure is based on the weighted average share price for December. Total Shareholder Return Based on weighted average share price for December 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% SEY FTSE 350 January 09 December 09 December 10 December 11 December 12 December 13 December 14 46 47 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014CORPORATE GOVERNANCE Remuneration Committee Report (cont.) Communications with Shareholders • In August 2009 the Company announced the raising of £62.5 million by way of a share placing at the equivalent of 52p per share and the repayment of $35 million of historic debt. • In October 2009 the Company announced the sale of its US business for $90 million. • In December 2009 the Company completed on the sale of the US business and announced an Open Offer to its shareholders to subscribe for £20.4 million at 52p per share. • In February 2010 the Sangaw North-1 exploration well was spudded in Kurdistan. • In September 2010 the Company announced the initial drilling results from the Sangaw North-1 well which had not, at that time, encountered hydrocarbons at commercially recoverable flow rates. • In July 2011 the Company announced that it had plugged and abandoned the Sangaw North-1 well. • On 9 February 2014 the Ntem Bamboo-1 exploration well was spudded offshore Cameroon. • On 8 April 2014 the Company announced the drilling results from the Ntem Bamboo-1 well which had not encountered commercial hydrocarbons and the well was to be plugged and abandoned. The table below shows the total Group remuneration compared to the total distribution to shareholders: 2014 2013 Total Group remuneration (£) Total distribution to shareholders 1,810,941 2,256,832 0 0 The Board is accountable to the Company’s shareholders and as such it is important for the Board to appreciate the aspirations of the shareholders and equally that the shareholders understand how the actions of the Board and short- term financial performance relate to the achievement of the Group’s longer term goals. The Board reports to the shareholders on its stewardship of the Company through the publication of interim and final results each year. Press releases are issued throughout the year and the Company maintains a website (www.sterlingenergyplc. com) on which press releases, corporate presentations and the Report and Financial Statements are available to view. Additionally this Report and Financial Statement contains extensive information about the Group’s activities. Enquiries from individual shareholders on matters relating to the business of the Company are welcomed. Shareholders and other interested parties can subscribe to receive notification of news updates and other documents from the Company via email. In addition the executive Directors meet with major shareholders to discuss the progress of the Company. The executive Chairman provides periodic feedback to the Board following meetings with shareholders. The Senior Independent Director also attends some shareholder meetings to ensure the Board is appraised of all feedback provided by such meetings. The Annual General Meeting provides an opportunity for communication with all shareholders and the Board encourages the shareholders to attend and welcomes their participation. The Directors attend the Annual General Meeting and are available to answer questions. Details of resolutions to be proposed at the Annual General Meeting to be held on 29 April 2015 can be found in the notice of the meeting, on the Company’s website. 48 49 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014CORPORATE GOVERNANCE Internal Controls In September 1999 the Turnbull Guidance (Internal Control: Guidance for Directors on the Combined Code) was published, and revised in October 2005. In September 2012 the UK Corporate Governance Code was published for reporting periods beginning on or after 1 October 2012 and subsequently revised in September 2014 for reporting periods beginning on or after 1 October 2014. Extractive Industries Transparency Initiative (‘EITI’) In accordance with the Transparency Criteria as set out by the EITI, the Group has made the following payments to Government bodies during the year ended 31 December 2014: The Directors acknowledge their responsibility for establishing and maintaining the Group and the Company systems of internal control. These are designed to safeguard the assets of the Group and to ensure the reliability of financial information for both internal use and external publication. Madagascar: Ambilobe Madagascar: Ampasindava 1 2014 $000 146 108 - 500 104 75 933 2013 $000 191 150 - 52 104 105 602 Kurdistan Cameroon 2 Mauritania 3 Somaliland 4 1 Payments made by ExxonMobil. 2 Payments made by Murphy Oil Corporation. 3 Included within payments made to SMH (Mauritania’s national oil company) under the terms of the Chinguetti Funding Agreement, relating to Chinguetti field operating costs and PSC obligations, totalling $9.5 million in 2013 (2013: $7.2 million). 4 Payments made by Genel Energy. The Group’s internal control procedures include Board approval for all significant projects. All major expenditures require either senior management or Board approval at the appropriate stages of each transaction. A system of regular reporting covering both technical progress of projects and the state of the Group’s financial affairs provides appropriate information to management to facilitate control. The Board reviews, identifies, evaluates and manages the significant risks that face the Group. Any systems of internal control can only provide reasonable, and not absolute, assurance that material financial irregularities will be detected or that the risk of failure to achieve business objectives is eliminated. The Directors, having reviewed the effectiveness of the system of internal financial, operational and compliance controls and risk management, consider that the system of internal control operated effectively throughout the financial year and up to the date the financial statements were signed. Conflicts of Interest The Group and the Company has in place procedures for the disclosure and review of any conflicts, or potential conflicts of interest, which the Directors may have and for the clearance or otherwise of such conflicts by the Board. In deciding on a conflict or a potential conflict the Directors must have regard to their general duties under the Companies Act 2006. 50 51 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014CORPORATE GOVERNANCE Directors’ Report The Directors present their Annual Report and Financial Statements on the affairs of the Company and its subsidiaries, together with the independent Auditors’ Report for the year ended 31 December 2014. DIRECTORS The Directors who served during the year were as follows: PRINCIPLE ACTIVITY AND BUSINESS REVIEW The principal activity of the Group and Company throughout the year remained the exploration for and production of oil and gas in Africa. The significant developments during 2014 and the other activities of the Group, as well as the future strategy and prospects for the Group, are reviewed in detail in the Chairman’s Statement and the Strategic Report section of this report. Mr Alastair Beardsall Dr Philip Frank Mr Keith Henry Mr Nicholas Clayton Mr Malcolm Pattinson The Group operates through overseas branches and subsidiary undertakings as appropriate to the fiscal environment. Subsidiary undertakings of the Group are set out in Note 16 to the financial statements. In December 2014, the Company announced that Dr. Philip Frank planned to step down from the Board in Q1 2015; Dr. Frank stood down on 13 March 2015. Eskil Jersing joined the Board on 23 March 2015. The Group uses a number of key performance indicators (‘KPIs’) to assess the business performance against strategy. These are net debt ($), reserves (million boe), adjusted EBITDA ($), production (bopd) and share price growth. Analysis of the KPIs can be found in the Financial Review on page 21. RESULTS AND DIVIDENDS The Group loss for the financial year was $12.3 million (2013: profit $8.3 million). This leaves an accumulated Group retained deficit of $425.2 million (2013: deficit $413.6 million) to be carried forward. The Directors do not recommend the payment of a dividend (2013: $nil). GOING CONCERN The Group business activities, together with the factors likely to affect its future development, performance and position are set out in the Operations Review on pages 10 - 13. The financial position of the Group and Company, its cash flows and liquidity position are described in the Financial Review on pages 21 - 24. In addition, Note 23 to the financial statements includes the Group’s objectives, policies and processes for managing its capital financial risk: details of its financial instruments and its exposures to credit risk and liquidity risk. The Group has sufficient cash resources for its working capital needs and its committed capital expenditure programme at least for the next 12 months. As a consequence, the Directors believe that both the Group and Company are well placed to manage their business risks successfully despite the uncertain economic outlook. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. CAPITAL STRUCTURE Details of the issued share capital, together with details of the movements in the Company’s issued share capital during the year, are shown in Note 18 to the financial statements. The Company has one class of ordinary share which carries no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. Details of the employee share schemes are set out in Note 24. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Biographical details of serving Directors can be found in the Board of Directors section of this report on page 32. DIRECTORS AND ELECTION ROTATION With regard to the appointment and re-election of the Directors, the Company is governed by its Articles of Association, the Code, the Companies Acts and related legislation. The powers of Directors are described within this report. In accordance with article 106 of the Company’s Articles of Association, Alastair Beardsall retires by rotation and offers himself for re-election at the forthcoming AGM on 29 April 2015. In accordance with article 110 of the Company’s Articles of Association, Eskil Jersing offers himself for election at the forthcoming AGM on 29 April 2015. SUBSTANTIAL SHAREHOLDINGS Except for the holdings of ordinary shares listed below, the Company has not been notified by or become aware of any persons holding 3% or more of the 220,053,520 issued ordinary shares of 40 pence each of the Company at 23 March 2015: Waterford Finance & Investment Ltd Mistyvale Limited YF Finance Limited Denis O'Brien Sprott Asset Management Number 65,814,217 33,500,755 21,579,689 15,750,000 11,318,432 % 29.91 15.22 9.81 7.16 5.14 BUSINESS RISK A summary of the principle and general business risks can be found within the Strategic Report on pages 25 - 29. FINANCIAL INSTRUMENTS Information about the use of financial instruments, the Group’s policy and objectives for financial risk management is given in Note 23 to the financial statements. 52 53 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014 CORPORATE GOVERNANCE Directors’ Report (cont.) Statement of Directors’ Responsibilities AUDITORS Each of the persons who are a Director at the date of approval of this Report and Financial Statements confirms that: The Directors are responsible for preparing the Directors Report, Strategic Report and Financial Statements in accordance with applicable law and regulations. • so far as the Director is aware, there is no relevant audit information of which the Company’s Auditors are unaware; and • the Directors have 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 Auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group and Company financial statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union. 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 Group and Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. BDO LLP has expressed its willingness to continue in office as Auditors and a resolution to appoint BDO will be proposed at the forthcoming Annual General Meeting to be held on 29 April 2015. In preparing these financial statements, the Directors are required to: Alastair Beardsall Chairman 25 March 2015 • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, 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. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and 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 requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and thus for taking reasonable steps for the prevention and detection of fraud and other irregularities. WEBSITE PUBLICATION The Directors are responsible for ensuring the Report and Financial Statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. DIRECTORS’ RESPONSIBILITY STATEMENT We confirm that to the best of our knowledge that the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Company and the undertakings included in the consolidation taken as a whole; and the Report and Financial Statements include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. For and on behalf of the Board. Alastair Beardsall Chairman 25 March 2015 54 55 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Group Accounts Year ended 31 December 2014 Independent Auditors’ Report to the members of Sterling Energy plc Consolidated Statement of Comprehensive Income Year ended 31 December 2014 We have audited the financial statements of Sterling Energy plc for the year ended 31 December 2014 which comprises the consolidated and Company statement of financial position, the consolidated statement of comprehensive income, the consolidated and Company statement of cash flows, the consolidated and Company statement of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s (‘FRC’s’) Ethical Standards for Auditors. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS A description of the scope of an audit of financial statements is provided on the FRC’s website at: www.frc.org.uk/auditscopeukprivate OPINION ON FINANCIAL STATEMENTS In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the parent Company’s affairs as at 31 December 2014 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. OPINION ON DIRECTORS’ REMUNERATION REPORT WHICH WE HAVE AGREED TO REPORT The company voluntarily prepares a Directors’ Remuneration Report in accordance with the provisions of the Companies Act 2006 that would have applied had the company been a quoted company. We have agreed to audit the part of the Directors’ Remuneration Report that we would have been required to audit under the Companies Act 2006 if the company was a quoted company. In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Scott Knight (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London, United Kingdom 25 March 2015 BDO LLP is a limited liability partnership registered in England and Wales. Note 31 December 2014 $000 31 December 2013 $000 Revenue Cost of sales Gross profit Other administrative expenses (Impairment)/impairment reversal of oil and gas assets Pre-licence costs Onerous contract Total administrative expenses (Loss)/profit from operations Finance income Finance expense (Loss)/profit before tax Tax (Loss)/profit for the year from continuing operations Profit for the year from discontinued operations (Loss)/profit for the year attributable to the owners of the parent Other comprehensive income/(expense) Currency translation adjustments Total other comprehensive income/(expense) for the year Total comprehensive (expense)/income for the year attributable to the owners of the parent Basic (loss)/profit per share (US cents) From continuing operations From continuing and discontinued operations Diluted (loss)/profit per share (US cents) From continuing operations From continuing and discontinued operations 4 6 3 20 5 8 8 9 10 12 12 12 12 15,991 (11,873) 4,118 (2,069) (7,903) (2,196) (3,390) (15,558) (11,440) 398 (1,276) (12,318) - (12,318) - (12,318) 24 24 (12,294) (5.60) (5.60) (5.60) (5.60) 18,370 (9,766) 8,604 (3,177) 4,359 (2,226) - (1,044) 7,560 892 (1,143) 7,309 - 7,309 1,025 8,334 (39) (39) 8,295 3.32 3.79 3.32 3.78 58 59 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014GROUP ACCOUNTSGROUP ACCOUNTSConsolidated Statement of Financial Position Year ended 31 December 2014 Consolidated Statement of Changes in Equity Year ended 31 December 2014 Non-current assets Intangible royalty assets Intangible exploration and evaluation assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity Share capital Share premium Currency translation reserve Retained deficit Total equity Non-current liabilities Long-term provisions Current liabilities Trade and other payables Short-term provisions Total liabilities Total equity and liabilities Note 31 December 2014 $000 31 December 2013 $000 13 14 15 17 18 20 21 20 - 28,426 72 28,498 2,223 3,294 108,148 113,665 142,163 149,014 378,863 (225) (425,209) 102,443 22,667 22,667 13,663 3,390 17,053 39,720 142,163 2,794 13,187 5,644 21,625 2,746 5,935 120,755 129,436 151,061 149,014 378,863 (249) (413,550) 114,078 21,651 21,651 15,332 - 15,332 36,983 151,061 The financial statements of Sterling Energy plc, registered number 1757721 were approved by the Board of Directors and authorised for issue on 25 March 2015. Signed on behalf of the Board of Directors. Alastair Beardsall Chairman 25 March 2015 60 At 1 January 2013 Profit for the year Currency translation adjustments Total comprehensive income for the year attributable to the owners of the parent Share option charge for the year At 31 December 2013 Loss for the year Currency translation adjustments Total comprehensive expense for the year attributable to the owners of the parent Share option charge for the year Share capital Share premium Currency translation reserve Retained deficit 1 Total $000 $000 149,014 378,863 - - - - - - - - $000 (210) - (39) (39) - $000 $000 (423,050) 104,617 8,334 - 8,334 8,334 (39) 8,295 1,166 1,166 149,014 378,863 (249) (413,550) 114,078 - - - - - - - - - 24 24 - (12,318) (12,318) - 24 (12,318) (12,294) 659 659 At 31 December 2014 149,014 378,863 (225) (425,209) 102,443 1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve. 61 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014GROUP ACCOUNTSGROUP ACCOUNTSConsolidated Statement of Cash Flows Year ended 31 December 2014 Company Statement of Financial Position Year ended 31 December 2014 Note 13,15 3 3 15 14 Operating activities (Loss)/profit before tax from continuing operations Profit before tax from discontinued operations Finance income and gains Finance expense and losses Depletion and amortisation Impairment reversal Impairment expense Onerous provision Share-based payment charge Operating cash flow prior to working capital movements Decrease in inventories Increase in trade and other receivables Decrease in trade and other payables Cash generated from continuing operations Cash outflow from discontinued operations Net cash flow from operating activities Investing activities Interest received Purchase of property, plant and equipment Exploration and evaluation costs Net cash used in investing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year 2014 $000 (12,318) - (398) 1,265 2,358 - 7,903 3,390 659 2,859 523 (359) (1,669) 1,354 1,814 (460) 1,354 398 (32) (14,102) (13,736) (12,382) 120,755 (225) 108,148 2013 $000 7,309 1,025 (892) 1,066 2,488 (4,359) - - 1,166 7,803 247 (1,725) (56) 6,269 6,822 (553) 6,269 268 (85) (5,942) (5,759) 510 120,348 (103) 120,755 Non-current assets Property, plant and equipment Investments Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity Share capital Share premium Retained deficit Total equity Non-current liabilities Long-term provisions Current liabilities Trade and other payables Short-term provisions Total liabilities Total equity and liabilities Note 31 December 2014 $000 31 December 2013 $000 15 16 17 18 20a 21 20 - 28,890 28,890 2,223 19,773 106,473 128,469 157,359 149,014 378,863 (447,839) 80,038 22,667 22,667 51,264 3,390 54,654 77,321 157,359 5,546 107,834 113,380 2,746 25,342 118,498 146,586 259,966 149,014 378,863 (364,232) 163,645 21,588 21,588 74,733 - 74,733 96,321 259,966 The financial statements of Sterling Energy plc, registered number 1757721 were approved by the Board of Directors and authorised for issue on 25 March 2015. Signed on behalf of the Board of Directors. Alastair Beardsall Chairman 25 March 2015 62 63 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014GROUP ACCOUNTSGROUP ACCOUNTS                Company Statement of Changes in Equity Year ended 31 December 2014 Company Statement of Cash Flows Year ended 31 December 2014 At 1 January 2013 Total comprehensive income for the year Share option charge for the year At 31 December 2013 Total comprehensive expense for the year Share option charge for the year At 31 December 2014 Share capital Share premium Retained deficit 1 Total $000 $000 $000 $000 149,014 378,863 (375,735) 152,142 - - - - 10,337 10,337 1,166 1,166 Operating activities (Loss)/profit before tax Finance income and gains Finance expense and losses 149,014 378,863 (364,232) 163,645 Depletion and amortisation - - - - (84,266) (84,266) 659 659 Impairment reversal Impairment expense 149,014 378,863 (447,839) 80,038 Impairment of investment Note 15 15 15 1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve. Onerous provision Net movement in investment Share-based payment charge Operating cash flow prior to working capital movements Decrease in inventories Decrease/(increase) in trade and other receivables (Decrease)/increase in trade and other payables (Decrease)/increase in provisions Net cash flow used in operating activities Investing activities Interest received Net cash generated from investing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year 2014 $000 (84,266) (398) 1,241 1,567 - 3,979 79,604 3,390 - 30 5,147 522 5,569 (22,936) (533) (12,231) 398 398 (11,833) 118,498 (192) 106,473 2013 $000 10,337 (892) 1,196 1,638 (3,207) - - - (1,166) 1,166 9,072 247 (10,993) 1,322 155 (197) 268 268 71 118,565 (138) 118,498 64 65 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014GROUP ACCOUNTSGROUP ACCOUNTS1. ACCOUNTING POLICIES a) General Information Sterling Energy plc is a public Company incorporated in the United Kingdom under the UK Companies Act 2006. The address of the registered office is 85 Fleet Street, London, EC4Y 1AE. The Company and the Group are engaged in the exploration, development and production of commercial oil and gas. These financial statements are presented in US dollars as this is the currency in which the majority of the Group’s revenues and expenditure are transacted and the functional currency of the Company. b) Basis of Accounting and Adoption of New and Revised Standards (i) New and amended standards adopted by the Group: The following new standards and amendments to standards are mandatory for the first time for the Group for the financial year beginning 1 January 2014. Except as noted, the implementation of these standards is not expected to have a material effect on the Group. Standard Effective date Impact on initial application IFRS 10 – Consolidated Financial Statements 1 January 2014 No impact IFRS 11 – Joint Arrangements 1 1 January 2014 No impact IFRS 12 – Disclosure of Interests in Other Entities 1 January 2014 No impact IAS 27 – Amendment - Separate Financial Statements 1 January 2014 No impact IAS 28 – Amendment - Investments in Associates and Joint Ventures 1 January 2014 No impact IAS 32 – Offsetting Financial Assets and Financial Liabilities 1 January 2014 No impact IAS 36 – Recoverable amounts disclosures for non-financial assets 1 January 2014 No impact IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting 1 January 2014 No impact IFRIC 21 – Levies 17 June 2014 No impact 1 Under the terms of the Group’s Joint Operating Agreements, the Group is engaged in Joint Arrangements; however, initial application of IFRS 11 has no impact on the Financial Statements. No other IFRS issued and adopted but not yet effective are expected to have an impact on the Group’s financial statements. (ii) Standards, amendments and interpretations, which are effective for reporting periods beginning after the date of these financial statements which have not been adopted early: Standard Description Effective date IAS 11 IAS 19 Presentation of Financial Statements (Amendments) 1 January 2016 Defined Benefit Plans (Amendments) IAS 16 and IAS 381 Acceptable Methods of Depreciation and Amortisation (Amendments) IAS 271 IFRS 91 Separate Financial Statements Financial Instruments 1 February 2015 1 January 2016 1 January 2016 1 January 2018 IFRS 10 and IAS 281 Investments in Associates and Joint Ventures (Amendments) 1 January 2016 IFRS 10, 12 and IAS 28 Investment Entities (Amendments) IFRS 111 IFRS 151 Joint Arrangements (Amendments) Revenue from Contract with Customers Annual Improvements to IFRSs Annual Improvements to IFRSs Annual Improvements to IFRSs1 (2010-2012 Cycle) (2011-2013 Cycle) (2012-2014 Cycle) 1 Not yet endorsed by the EU 1 January 2016 1 January 2016 1 January 2017 1 February 2015 1 January 2015 1 January 2016 The Directors have not fully assessed the impact of all standards but do not expect them to have a material impact. c) Going Concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparation of the financial statements. Further detail is contained in the Directors’ Report. d) Basis of Consolidation (i) Subsidiaries and acquisitions The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is recognised where an investor is exposed, or has rights, to variable returns from its investment with the investee and has the ability to affect these returns through its power over the investee. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair value at the date of acquisition. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as a “fair value” adjustment. If the cost of the acquisition is less than the fair value of net assets of the subsidiary acquired, the difference is recognised directly in profit or loss. The results of subsidiaries acquired or disposed of during the year are included in the Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate. 66 67 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. (ii) Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. As a consolidated Group statement of comprehensive income and expense is published, a separate statement of comprehensive income and expense for the parent Company has not been published in accordance with section 408 of the Companies Act 2006. e) Jointly Controlled Operations The Group is a party to a joint arrangement when there is a contractual arrangement that confers joint control over the relevant activities of the arrangement to the Group and at least one other party. Joint control is assessed under the same principles as control over subsidiaries. The Group classifies its interest in joint arrangements as joint operations as the Group has both the rights to assets and obligations for the liabilities of the joint arrangement. Impairment The Group’s oil and gas assets are analysed into cash generating units (‘CGU’) for impairment reporting purposes, with E&E asset impairment testing being performed at an individual asset level. The current CGU consists of the Group’s whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. The recoverable amount of the individual asset is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the Income Statement. Any impairment loss is separately recognized within the Statement of Comprehensive Income. Impaired assets are reviewed annually to determine whether any substantial change to their fair value amounts previously impaired would require reversal. As previously recognised, impairment loss is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depletion or amortisation) had no impairment loss been recognised in prior periods. Reversal of impairments and impairment charges are credited/(charged) to separate line items under total administration expenses within the statement of comprehensive income. In assessing the classification of interests in joint arrangements, the Group considers: Refer to Note 2 and Note 3 for detailed disclosure of the results of impairments and impairment reviews performed. • the structure of the joint arrangement; • the contractual terms of the joint arrangement; and • any other facts and circumstances The Group accounts for its interests in joint operations by recognising its share of assets, liabilities, revenues and expenses in accordance with its contractually conferred rights and obligations. f) Revenue Sales of oil and gas are recognised, net of any sales taxes, when risks and rewards of ownership have passed to the customer, typically this is at the point of physical lifting. See also section r) below. Royalties and tariff income are recognised as earned on an entitlement basis. g) Oil and Gas Interests Exploration and Evaluation Assets: Capitalisation Pre-acquisition costs on oil and gas assets are recognised in the Income Statement when incurred. Costs incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and commercial appraisal costs, and other directly attributable costs of exploration and appraisal including technical and administrative costs, are capitalised as intangible exploration and evaluation (‘E&E’) assets. The assessment of what constitutes an individual E&E asset is based on technical criteria but essentially either a single licence area or contiguous licence areas with consistent geological features are designated as individual E&E assets. Costs relating to the exploration and evaluation of oil and gas interests are carried forward until the existence, or otherwise, of commercial reserves have been determined. E&E costs are not amortised prior to the conclusion of appraisal activities. Once active exploration is completed the asset is assessed for impairment. If commercial reserves are discovered then the carrying value of the E&E asset is reclassified as a development and production (‘D&P’) asset, following development sanction, but only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If it subsequently assessed that commercial reserves have not been discovered, the E&E asset is written off to the Income Statement. Development and Production Assets: Capitalisation Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset within property, plant and equipment. Normally each individual field development will form an individual D&P asset but there may be cases, such as phased developments, or multiple fields around a single production facility when fields are grouped together to form a single D&P asset. Depreciation All costs relating to a development are accumulated and not depreciated until the commencement of production. Depreciation is calculated on a unit of production basis based on the proven and probable reserves of the asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment will normally be fully depreciated over the life of the field. However these items are assessed to consider if their useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would be charged. The key areas of estimation regarding depreciation and the associated unit of production calculation for oil and gas assets are recoverable reserves and future capital expenditures. Impairment A review is carried out for any indication that the carrying value of the Group’s D&P assets may be impaired. The impairment review of D&P assets is carried out on an annual, asset by asset basis and involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use. The value in use is determined from estimated future net cash flows, being the present value of the future cash flows expected to be derived from production of commercial reserves. Impairment resulting from the impairment testing is charged to a separate line item under total administration expenses within the Statement of Comprehensive Income. The pre-tax future cash flows are adjusted for risks specific to the cash-generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the Group’s post-tax weighted average cost of capital and is adjusted where applicable to take into account any specific risks relating to the country where the cash- generating unit is located, although other rates may be used if appropriate to the specific circumstances. The discount rates applied in assessments of impairment are reassessed each year. 68 69 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSThe cash-generating unit basis is generally the field, however, oil and gas assets, including infrastructure assets, may be accounted for on an aggregated basis where such assets are economically inter-dependent. h) Property, Plant and Equipment Assets other than Oil and Gas Assets: Property, plant and equipment other than oil and gas assets are stated at cost, less accumulated depreciation, and any provision for impairment. Depreciation is provided at rates estimated to write off the cost, less estimated residual value, of each asset over its expected useful life as follows: Computer and office equipment depreciation – 33% straight line. i) Decommissioning Provisions for decommissioning costs are recognised in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Provisions are recorded at the present value of the expenditures expected to be required to settle the Group’s future obligations. Provisions are reviewed at each reporting date to reflect the current best estimate of the cost at present value. Any change in the date on which provisions fall due will change the present value of the provision. These changes are treated as a finance expense. The unwinding of the discount is reflected as a finance expense. A decommissioning asset is also established, since the future cost of decommissioning is regarded as part of the total investment to gain access to future economic benefits, and included as part of the cost of the relevant development and production asset. Depletion on this asset is calculated under the unit of production method based on commercial reserves. j) Intangible Royalty Interests The carrying value of each individual royalty interest is initially stated at cost, and amortised on the unit of production basis relative to the underlying asset. Each royalty asset is assessed individually for impairment when there is an indication that an impairment event may have occurred. See also Impairment of assets – Note 2. k) Foreign Currencies The US dollar is the functional and reporting currency of the Company and the reporting currency of the Group. Transactions denominated in other currencies are translated into US dollars at the rate of exchange ruling at the date of the transaction. Assets and liabilities in other currencies are translated into US dollars at the rate of exchange ruling at the reporting date. All exchange differences arising from such translations are dealt with in current year comprehensive income. The results of entities with a functional currency other than the US dollar are translated at the average rates of exchange during the period and their statement of financial position at the rates ruling at the reporting date. Exchange differences arising on translation of the opening net assets and on translation of the results of such entities are dealt with through the currency translation reserve. l) Taxation Current Tax: Tax is payable based upon taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible on other years and it further excludes items that are never taxable or deductible. Any Group liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred Tax: Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. m) Investments (Company) Non-current investments in subsidiary undertakings are shown in the Company’s Statement of Financial Position at cost less any provision for permanent diminution of value. n) Operating Leases Rentals under operating leases are charged on a straight-line basis over the lease term. o) Financial Instruments The Group’s Financial Instruments comprise of cash and cash equivalents, loans and receivables. There are no other categories of financial instrument. Trade Receivables: Trade receivables are measured at amortised cost, unless the effect of the time value of money is immaterial. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Cash and Cash Equivalents: Cash and cash equivalents comprise demand deposits, and other short-term highly liquid investments, with an original maturity of less than three months, and are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value. The Group has the following financial liabilities; all are classified as held at amortised cost. The Group holds no other categories of financial liability. Trade Payables: Trade payables are stated at their amortised cost. Financial Liabilities and Equity: Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the asset of the Group after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs. 70 71 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSp) Pension Costs The Group operates a number of defined contribution pension schemes. The amount charged to the Statement of Comprehensive Income for these schemes is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the Statement of Financial Position. q) Share-Based Payments The Company and Group have applied the requirements of IFRS 2 Share-based payments. The Company issues equity share-based payments to certain employees. The fair value of these awards has been determined at the date of the grant of the award allowing for the effect of any market-based performance conditions. This fair value, adjusted by the estimate of the number of awards that will eventually vest as a result of non-market conditions, is expensed uniformly over the vesting period. The fair values are calculated using an option pricing model with suitable modifications to allow for employee turnover before vesting and early exercise. The inputs to the model include: the share price at the date of grant; exercise price; expected volatility; expected dividends; risk-free rate of interest; and patterns of exercise of the plan participants. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the Consolidated Statement of Comprehensive Income over the remaining vesting period. r) Over/(Under) Lift of Inventories Lifting or off take arrangements for oil and gas produced in certain of the Group’s operations are such that each participant may not receive and sell its precise share of the overall production in each period. The resulting imbalance between cumulative entitlement and cumulative liftings is ‘underlift’ or ‘overlift’. Underlifts and overlifts are valued at the lower of cost and net realisable value. Adjustments are made to cost of sales and balances included within receivables and payables as appropriate. s) Provisions Provisions are recognised when the Group has a present obligation as a result of a past event and it is probable that the Group would be required to settle that obligation. Provisions are measured at the management’s best estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present value where the effect is material. t) Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision makers. The chief operating decision makers have been identified as the executive Board members. The operating results of each of the geographical segments are regularly reviewed by the Group’s chief operating decision makers in order to make decisions about the allocation of resources and to assess their performance. Africa has exploration and development activities, the Middle East has exploration activities (discontinued) and the United Kingdom office is an administrative cost centre. u) Contingent Consideration Contingent consideration is an obligation of the acquiring entity to transfer additional assets or equity interests to the former owners of an acquiree. The terms, under which this consideration will be calculated and paid, is part of the acquisition agreement. The consideration will only be paid if specified future events occur or conditions are met. 2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described in Note 1, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below. Provision for Onerous Contract A provision for an onerous contract is made where the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under the said contract - see Note 20. Company – Investment If circumstances indicate that impairment may exist, investments in subsidiary undertakings of the Company are evaluated using market values, where available, or the discounted expected future cash flows of the investment. If these cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded in the Company. Evaluation of impairments on such investments involves significant management judgement and may differ from actual results - see Note 16. Onerous Commitments Onerous commitments on future oil and gas activities are only recognised where such commitments are certain. No recognition is given for onerous work programme commitments for specific assets where there remains uncertainty on the outcome of discussions between respective oil and gas operators, government bodies and/ or other stakeholders. Commercial Reserves Commercial reserves are proven and probable oil and gas reserves, calculated on an entitlement basis. Estimates of commercial reserves underpin the calculation of depletion and amortisation on a unit of production basis. Estimates of commercial reserves include estimates of the amount of oil and gas in place, assumptions about reservoir performance over the life of the field and assumptions about commercial factors which, in turn, will be affected by the future oil and gas price. Impairment of Assets Management is required to assess oil and gas assets for indicators of impairment and have considered the economic value of both individual E&E assets and the Chinguetti Funding and Royalty Agreements. The carrying value of oil and gas assets is disclosed in Notes 13, 14 and 15. The carrying value of related investments in the Company Statement of Financial Position is disclosed in Note 16. With reference to the Chinguetti Funding Agreement, as part of the assessment, management has carried out an impairment test whereby the test compares the carrying value at the reporting date with the expected discounted future cash flows. For the discounted cash flows to be calculated, management has used a production profile based on its best estimate of proven and probable reserves and a range of assumptions including a 10% pre-tax discount rate and an internally estimated oil price profile. 72 73 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS With reference to the Chinguetti Royalty Agreement, impairment assessments and any subsequent charges are calculated on an individual royalty interest basis. Future recoverable amounts are estimated by management based upon the present value of future cash flows expected to be derived from the production of commercial reserves in these licences and are compared against the carrying value of these assets. Exploration and evaluation assets are subject to a separate review for indicators of impairment, by reference to the impairment indicators set out in IFRS 6, which is inherently judgemental. Key assumptions used in the value-in-use calculations The calculation of value-in-use for oil and gas assets under development or in production is most sensitive to the following assumptions: • Production volumes; • Commodity prices; • Fixed and variable operating costs; • Capital expenditure; and • Discount rates. Production volumes/recoverable reserves Annual estimates of oil and gas reserves are generated internally by the Group with external input from operator profiles. These are reported annually to the Board. The self-certified estimated future production profiles are used in the life of the fields which in turn are used as a basis in the value-in-use calculation. Commodity prices An average of published forward prices and the long term assumption for natural gas and Brent oil are used for future cash flows in accordance with the Group’s corporate assumptions. Field specific discounts and prices are used where applicable. Fixed and variable operating costs Typical examples of variable operating costs are pipeline tariffs, treatment charges and freight costs. Commercial agreements are in place for most of these costs and the assumptions used in the value-in-use calculation are sourced from these where available. Examples of fixed operating costs are platform costs and operator overheads. Fixed operating costs are based on operator budgets. Capital expenditure Field development is capital intensive and future capital expenditure has a significant bearing on the value of an oil and gas development asset. In addition, capital expenditure may be required for producing fields to increase production and/or extend the life of the field. Cost assumptions are based on operator budgets or specific contracts where available. The Company and Group are currently not exposed to development capital expenditures. Discount rates Discount rates reflect the current market assessment of the risks specific to the oil and gas sector and are based on the weighted average cost of capital for the Group. Where appropriate, the rates are adjusted to reflect the market assessment of any risk specific to the field for which future estimated cash flows have not been adjusted. The Group has applied a discount rate of 10% for the current year (2013: 10%). Sensitivity to changes in assumptions A potential change in any of the above assumptions may cause the estimated recoverable value to be lower than the carrying value, resulting in a further impairment loss. The assumptions which would have the greatest impact on the recoverable amounts of the fields are production volumes and commodity prices. Having reviewed these assumptions, impairment has been recognised in the current year for both the Ampasindava and Chinguetti assets. During the year the Group recognised impairments totalling $7.9 million in accordance with IAS 36 “Impairment of Assets” following a review of forecast field life estimations. This review resulted in the full impairment of both the Chinguetti Funding Agreement ($3.9 million) and the Chinguetti Royalty Agreement ($2.1 million). The operator on the Ampasindava block in Madagascar has identified there is no drillable prospect and the Group’s view is that it intends to exit from the block; accordingly the Ampasindava asset has been fully impaired ($1.9 million). In 2013 the Group reversed impairments totalling $4.4 million in accordance with IAS 36 “Impairment of Assets” following a review by the operator of forecast field life estimations on the Chinguetti field in Mauritania at that time. Impairments and associated reversals have been determined by comparing the current value in use to carrying values. In calculating the 2014 Chinguetti asset impairment, management used a range of assumptions, including a long- term oil price of $55 per barrel (Brent) and a 10% pre-tax discount rate. Oil & gas expenditure – acquisitions and disposals Commercial transactions involving the acquisition of a D&P asset in exchange for an E&E or D&P asset are accounted for at fair value with the difference between the fair value and cost being recognised in the statement of comprehensive income as a gain or loss. When a commercial transaction involves a D&P asset and takes the form of a farm-in or farm-out agreement, the premium expected to be paid/received is treated as part of the consideration. Fair value calculations are not carried out for commercial transactions involving the exchange of E&E assets. The capitalised costs of the disposed asset are transferred to the acquired asset. Farm-in and farm-out transactions of E&E assets are accounted for at cost. Costs are capitalised according to the Group’s cost interest (net of premium received or paid) as costs are incurred. Proceeds from the disposal of an E&E asset, or part of an E&E asset, are deducted from the capitalised costs and the difference recognised in the statement of comprehensive income as a gain or loss. Proceeds from the disposal of a D&P asset, or part of a D&P asset, are recognised in the Income Statement, after deducting the related net book value of the asset. The Company and Group were not exposed to disposal proceeds in the year. Decommissioning The Company has obligations in respect of decommissioning in Mauritania. The extent to which a provision is recognised depends on the legal requirements at the date of decommissioning, the estimated costs and timing of the work and the discount rate applied. Decommissioning estimates for the Chinguetti field are based on a range of operator estimates which are periodically reviewed by the operator and the partnership. Share-based payments Management is required to make assumptions in respect of the inputs used to calculate the fair value of share-based payment arrangements. Details of these can be found in Note 24. 74 75 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS 3. OPERATING SEGMENTS The Group’s two operating segments are its Africa and Middle East (discontinued) segments. The UK corporate office is a technical and administrative cost centre. The operating results of each of these segments are regularly reviewed by the Group’s executive Directors and senior management in order to make decisions about the allocation of resources and to assess their performance. The accounting policies of these segments are in line with those set out in Note 1. The following tables present revenue, profit and certain asset and liability information regarding the Group’s operating segments for the year ended 31 December 2014 and for the year ended 31 December 2013. Africa Middle East (Discontinued) Note 2014 $000 2013 $000 2014 $000 2013 $000 2014 $000 Total 2013 $000 15,991 18,370 (11,873) (9,766) 4,118 8,604 (1,863) - (2,061) 1,152 (3,979) 3,207 - - (2,196) (2,226) (3,390) - (9,371) 10,737 - - - - - - 5 - - 5 Statement of comprehensive income Revenue 1 Cost of sales Gross profit Impairment of E&E assets (Impairment)/impairment reversal royalty assets (Impairment)/impairment reversal of D&P assets 14 13 15 Accruals release Pre-licence costs Onerous contract Segment result Unallocated corporate expenses (Loss)/profit from operations Finance income Finance expense (Loss)/profit before tax Tax (Loss)/profit attributable to owners of the parent (Loss)/profit from continuing operations Profit from discontinued operations 15,991 18,370 (11,873) (9,766) 4,118 8,604 (1,863) - - - - - - - (3,979) 3,207 1,025 5 1,025 - - (2,196) (2,226) (3,390) - 1,025 (9,366) 11,762 (2,074) (3,177) (11,440) 8,585 398 892 (1,276) (1,143) (12,318) 8,334 - - (12,318) 8,334 (12,318) 7,309 - 1,025 (12,318) 8,334 Corporate Africa Middle East (Discontinued) 2014 $000 2013 $000 2014 $000 2013 $000 2014 $000 2013 $000 2014 $000 Total 2013 $000 Other segment information Capital additions: Property, plant and equipment Exploration and evaluation Depreciation and amortisation Impairment reversal Impairment expense Segment assets and liabilities 32 - 85 - - - 17,102 2,942 (58) (69) (2,300) (2,420) - - - - - 4,359 (7,903) - Non-current assets 2 72 97 28,426 21,528 Segment assets 3 107,151 119,146 6,461 9,210 Segment liabilities 4 (815) (1,298) (38,877) (35,179) - - - - - - - - - - - - 32 85 17,102 2,942 (2,358) (2,489) - 4,359 (7,903) - 28,498 21,625 53 (28) 1,080 113,665 129,436 (506) (39,720) (36,983) 2 Segment non-current assets include $8.0 million in Cameroon (2013: $7.3 million), $nil in Kurdistan (2013: $nil), $nil in Mauritania (2013: $8.3 million), $3.0 million in Madagascar (2013: $3.9 million) and $17.4 million in Somaliland (2013: $2.1 million). 3 Corporate segment assets include $106.6 million cash and cash equivalents (2013: $118.7 million) and $543k other receivables (2013: $471k). Carrying amounts of segment assets exclude investments in subsidiaries. 4 Carrying amounts of segment liabilities exclude intra-group financing. 4. REVENUE Revenue from the sale of oil and gas Royalty income Total operating revenue 2014 $000 14,944 1,047 15,991 Total 2013 $000 17,076 1,294 18,370 (2,061) 1,152 (2013: $17.1 million). 1 Revenue from continuing operations (Mauritania, Africa) includes amounts of $14.9 million (100% external) from one single customer 76 77 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS 5. (LOSS)/PROFIT FROM OPERATIONS (Loss)/profit from operations is stated after charging/(crediting): Group employee costs during the year (including executive Directors) amounted to: Staff costs Share-based payments Impairment reversal Impairment Depreciation of other non-current assets Onerous contract An analysis of auditor’s remuneration is as follows: Fees payable to the Group's auditors for the audit of the Group's annual accounts Audit of the Company's subsidiaries pursuant to legislation Audit related assurance services Total audit fees See Note 2 for details on the above impairment. 6. COST OF SALES Amortisation of intangible royalty asset Depletion of property, plant & equipment - oil and gas Operating costs Over lift of product entitlement Note 7 7 13,15 13,14,15 15 20 2014 $000 3,524 659 - 7,903 58 3,390 53 59 - 112 2014 $000 733 1,567 9,050 523 11,873 Total 2013 $000 4,049 1,166 (4,359) - 69 - 48 53 - 101 2013 $000 782 1,638 7,100 246 9,766 7. EMPLOYEE INFORMATION The average monthly number of employees of the Group (including executive Directors) was: Africa and Middle East Corporate support staff 2014 2013 4 10 14 6 11 17 Wages and salaries Social security costs Other pension costs Share-based payments 2014 $000 2,955 367 202 659 4,183 2013 $000 3,407 414 228 1,166 5,215 Key management personnel include Directors who have been paid $1.2 million (2013: $1.6 million), see Remuneration Committee Report (pages 38 - 48) for additional detail. A portion of the Group’s staff costs and associated overheads are recharged to the joint venture partners, expensed as pre-licence expenditure or capitalised where they are directly attributable to ongoing capital projects. In 2014 this portion amounted to $4.1 million (2013: $4.2 million). 8. FINANCE INCOME AND FINANCE EXPENSE Finance income: Interest revenue on short-term deposits Revisions to discount on decommissioning provision at year end Finance expense: Bank charges Unwinding of discount on decommissioning provision Unwinding of discount on production royalty bonus provision Exchange differences 2014 $000 398 - 398 11 1,079 5 181 2013 $000 268 624 892 11 1,058 8 66 1,276 1,143 78 79 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS 9. TAXATION 11. LOSS ATTRIBUTABLE TO THE COMPANY The tax charge for the year is calculated by applying the applicable standard rate of tax as follows: (Loss)/profit before tax Tax on (loss)/profit on ordinary activities at standard UK corporation tax rate of 21.50% (2013: 23.25%) Effects of: Expenses not deductible for tax purposes Capital allowances in excess of depreciation Adjustment for tax losses Tax charge for the year 2014 $000 (12,318) (2,648) 2,101 102 445 - Total 2013 $000 8,334 1,938 27 (1,891) (74) - Deferred Tax At the reporting date the Group had an unrecognised deferred tax asset of $17.1 million (2013: $15.3 million) relating primarily to unused tax losses and unutilised capital allowances. No deferred tax asset has been recognised due to the uncertainty of future profit streams against which these losses could be utilised. At the reporting date the Company had an unrecognised deferred tax asset of $13.4 million (2013: $13.0 million) relating primarily to unused losses and unutilised capital allowances. 10. DISCONTINUED OPERATIONS On 29 January 2013, the Company formally announced the Group’s withdrawal from the Sangaw North licence in Kurdistan. The decision to relinquish was made in December 2012 and all amounts were fully impaired at this date. At the date of the final dissolution, the Group had fully satisfied the work commitment required by the Sangaw North PSC and all other commitments in country. During 2014 the Group released accruals totalling $5k and incurred expenditure totalling $15k. The financial impact of the Group’s discontinued operations is provided below: Profit for the year from discontinued operations (page 59) Net decrease in cash and cash equivalents Basic profit per share from discontinued operations (US cents) (Note 12 page 81) Diluted profit per share from discontinued operations (US cents) (Note 12 page 81) 2014 $000 - (460) 0.00 0.00 2013 $000 1,025 (553) 0.47 0.46 The loss for the financial year within the Company accounts of Sterling Energy plc was $84.3 million (2013: $10.3 million) which includes the investment impairment as detailed in Note 16. As provided by s408 of the Companies Act 2006, no individual statement of comprehensive income and expense is provided in respect of the Company. 12. EARNINGS PER SHARE (Loss)/profit for the year (continuing operations) (12,318) Profit for the year (discontinuing operations) - 2014 $000 Basic 2013 $000 7,309 1,025 2014 $000 (12,318) - Diluted 2013 $000 7,309 1,025 Weighted average number of ordinary shares in issue during the year 220,053,520 220,053,520 220,053,520 220,053,520 Dilutive effect of share options outstanding - - - 367,069 Fully diluted average number of ordinary shares during the year 220,053,520 220,053,520 220,053,520 220,420,589 EPS (continuing operations) (US cents) EPS (discontinuing operations) (US cents) (5.60) - 3.32 0.47 (5.60) - 3.32 0.46 In the current year, the number of potentially dilutive ordinary shares in respect of All staff and NED LTIPs outstanding as at the year-end is 13,185,433 (2013: 13,707,483) (see Note 24 on pages 92 - 96). 13. INTANGIBLE ROYALTY ASSETS Net book value at 1 January 2013 Amortisation charge for the year Impairment reversal Net book value at 31 December 2013 Amortisation charge for the year Impairment for the year Net book value at 31 December 2014 Group $000 2,424 (782) 1,152 2,794 (733) (2,061) - Group net book value at 31 December 2014 comprises the value of rights to future royalties in respect of the Group’s agreements covering licences PSC A, PSC B and PSC C-10 in Mauritania; however see Note 26a. The value of these royalty interests is dependent upon future oil and gas prices and the development and production of the underlying oil and gas reserves. See Note 2 for details on the above impairment. 80 81 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS14. INTANGIBLE EXPLORATION AND EVALUATION (‘E&E’) ASSETS 15. PROPERTY, PLANT AND EQUIPMENT Net book value at 1 January 2013 Additions during the year Reimbursement of back costs on farm-out of Ambilobe licence Net book value at 31 December 2013 Additions during the year Impairment for the year Net book value at 31 December 2014 Group $000 10,245 4,192 (1,250) 13,187 17,102 (1,863) 28,426 Impairment for the year refers to the full impairment of the Ampasindava asset. On 27 January 2014, the Group accounted for $3.0 million toward a 15% interest in the Odewayne block from Jacka Resources Somaliland Limited (Jacka), an Australian company. This had been previously accounted for as a prepayment at 31 December 2013. On 6 May 2014, the Company announced the completion of the acquisition of an additional 15% interest in the Odewayne block from Jacka and paid $12.0 million as consideration for the farm-in and settlement for future commitments under the farm-in agreement. Under the terms of both acquisitions, the Group paid $15.0 million for a 30% interest in the Odewayne block, further to the 10% acquired in 2013 from Petrosoma Limited. Group Cost At 1 January 2013 Additions during the year Adjustments during the year At 31 December 2013 Additions during the year At 31 December 2014 Accumulated depreciation and impairment At 1 January 2013 Charge for the year Impairment reversal for the year Disposals in the year At 31 December 2013 Charge for the year Impairment for the year At 31 December 2014 Net book value at 31 December 2014 Net book value at 31 December 2013 Net book value at 31 December 2012 Oil and Gas assets Computer and office equipment Total $000 $000 $000 185,802 3,064 188,866 - - 185,802 - 185,802 85 (3,006) 143 32 175 85 (3,006) 185,945 32 185,977 (181,825) (2,982) (184,807) (1,638) 3,207 (69) - - 3,006 (180,256) (1,567) (3,979) (45) (58) - (1,707) 3,207 3,006 (180,301) (1,625) (3,979) (185,802) (103) (185,905) - 5,546 3,977 72 98 82 72 5,644 4,059 82 83 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSCompany Cost At 1 January 2013 Disposals in the year At 31 December 2013 At 31 December 2014 Accumulated depreciation and impairment At 1 January 2013 Charge for the year Impairment reversal for the year Disposals in the year At 31 December 2013 Charge for the year Impairment reversal for the year At 31 December 2014 Net book value at 31 December 2014 Net book value at 31 December 2013 Net book value at 31 December 2012 See Note 2 for details on the above impairment. 16. INVESTMENT IN SUBSIDIARIES Cost At 1 January 2013 Additions during the year At 31 December 2013 Impairment of investment in subsidiary Additions during the year At 31 December 2014 Oil and Gas assets Computer and office equipment Total $000 $000 $000 185,802 - 185,802 185,802 150 (150) - - 185,952 (150) 185,802 185,802 (181,825) (150) (181,975) (1,638) 3,207 - (180,256) (1,567) (3,979) (185,802) - 5,546 3,977 - - 150 - - - - - - - (1,638) 3,207 150 (180,256) (1,567) (3,979) (185,802) - 5,546 3,977 Company $000 106,668 1,166 107,834 (79,604) 660 28,890 The subsidiary undertakings at 31 December 2014 are as follows (these undertakings are included on consolidation): Country of incorporation Class of shares held Proportion of voting rights held 2014 Proportion of voting rights held 2013 Nature of business Sterling Energy (UK) Limited 1 Sterling Energy (International) Limited 2 Sterling Energy Overseas Limited 1 Sterling Energy Mauritania Limited 3 Sterling Northwest Africa Holdings Limited 1 Sterling Energy Holdings Limited 4 United Kingdom United Kingdom United Kingdom United Kingdom Ordinary 100% 100% Ordinary 100% 100% Exploration for oil and gas Exploration for oil and gas Ordinary 100% 100% Investment holding company Ordinary 100% 100% Jersey, CI Ordinary 100% 100% Exploration for oil and gas Exploration for oil and gas Jersey, CI Ordinary 100% 100% Investment holding company Sterling Cameroon Limited 4 Jersey, CI Ordinary 100% 100% Sterling Energy (East Africa) Limited 4 Sterling Kenya Limited (Dormant) 4 Jersey, CI Ordinary 100% 100% Jersey, CI Ordinary 100% 100% Exploration for oil and gas Exploration for oil and gas Exploration for oil and gas 1 Held directly by the Company, Sterling Energy Plc 2 Held directly by Sterling Energy (UK) Limited 3 Held directly by the Company, Sterling Energy Overseas Limited 4 Held directly or indirectly through Sterling Northwest Africa Limited 17. TRADE AND OTHER RECEIVABLES Trade receivables Amounts owed by subsidiary undertakings Other receivables Amounts due from joint venture partners Prepayments and accrued income 2014 $000 2,699 - 162 - 433 Group 2013 $000 2,453 - 3,082 - 400 2014 $000 2,518 17,130 55 - 70 Company 2013 $000 2,113 23,149 12 - 68 3,294 5,935 19,773 25,342 The impairment above reflects the Director’s view on the fair value at 31 December 2014 of investments held within its subsidiary undertakings; see Note 2 (Company – Investment) for details on the above impairment assessment methodology. At 31 December 2013, included within other receivables, is a $3.0 million prepayment to Jacka Resources Somaliland Limited. This has been transferred to E&E assets in the year upon completion of the farm-in transaction. The Directors consider that the carrying amount of trade and other receivables is a reliable estimate of their fair value. 84 85 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS18. SHARE CAPITAL 20. SHORT AND LONG-TERM PROVISIONS Authorised, called up, allotted and fully paid 220,053,520 (2013: 220,053,520) ordinary shares of 40p 149,014 149,014 2014 $000 2013 $000 19. RESERVES Reserves within equity are as follows: Share Capital Amounts subscribed for share capital at nominal value. Share Premium Account The share premium account represents the amounts received by the Company on the issue of its shares which were in excess of the nominal value of the shares. Currency Translation Reserve The foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional currencies are not the US dollar. Retained Deficit Cumulative net gains and losses recognised in the Statement of Comprehensive Income less any amounts reflected directly in other reserves. The share option reserve has been included within the retained deficit and is a non-distributable reserve. 86 At 31 December 2014, a provision of $3.4 million has been made in recognition of all expected future net onerous commitments under the Chinguetti Funding Agreement – see also Note 2. Long term provisions are detailed in the table below: Group Decommissioning provision (a) 2003 Production Royalty Bonus Scheme (b) a) Decommissioning Provisions Group/Company At 1 January Revisions at year end Unwinding of discount 2014 $000 2013 $000 22,667 21,588 - 63 22,667 21,651 2013 $000 2012 $000 21,588 21,154 - 1,079 22,667 (624) 1,058 21,588 The amounts shown above represent the estimated costs for decommissioning the Group’s producing interests in respect of its economic interest in the Chinguetti field in Mauritania. It is anticipated that decommissioning payments will be made prior to 31 December 2017. The Company amount of $22.7 million (2013: $21.6 million) represents the amount provided within the Company for future decommissioning expenditure. In 2013 the economic field life was extended following a review by the operator of decline rate performance. The extension of field life resulted in an adjustment to the decommissioning provision of $624k. The full impairment in the year of both the Chinguetti Funding and Royalty Agreements has no impact on the timing of the decommissioning. b) 2003 Production Royalty Bonus Scheme Group At 1 January Unwinding of discount Transferred to current liabilities Foreign exchange movements 2014 $000 2013 $000 63 5 (68) - - 120 8 (68) 3 63 87 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS This scheme was intended to reward key persons for the successful performance of certain assets after financial thresholds had been reached for the period since listing in 2002. The scheme was terminated in 2007 and replaced by the LTIP scheme (‘2007 LTIP’, and the ‘All Staff LTIP’, see Note 24) and no further sums will accrue. The Company has the option to require the one remaining beneficiary to subscribe for new ordinary shares for the net amount arising after tax and national insurance from 2008 onwards. 21. TRADE AND OTHER PAYABLES Trade payables Amounts owed to subsidiary undertakings Amounts advanced from joint venture partners Accruals 2014 $000 356 - 850 12,457 13,663 Group 2013 $000 448 - 1,539 13,345 15,332 Company 2013 $000 35 2014 $000 10 39,120 62,014 - 12,134 51,264 - 12,684 74,733 23. FINANCIAL INSTRUMENTS Capital risk management and liquidity risk The Group and Company is not subject to externally imposed capital requirements. The capital structure of the Group and Company consists of cash and cash equivalents held for working capital purposes and equity attributable to the equity holders of the parent, comprising issued capital, reserves and retained deficit as disclosed in the statement of changes in equity. The Group and Company uses cash flow models and budgets, which are regularly updated, to monitor liquidity risk. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each material class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements. Due to the short-term nature of these assets and liabilities such values approximate their fair values at 31 December 2014 and 31 December 2013. The Directors consider that the carrying amount of trade and other payables is a reliable estimate of their fair value. Group Financial assets (classified as loans and receivables) 22. OPERATING LEASES AND CAPITAL COMMITMENTS 2014 $000 Group 2013 $000 Company 2013 $000 2014 $000 Minimum lease payments under operating leases recognised as an expense in the year 5,220 3,454 4,763 2,783 Total Cash and cash equivalents Trade and other receivables Total Financial liabilities at amortised cost Trade and other payables At the reporting date outstanding commitments for minimum operating leases payments fall due as follows: Within one year In the second to fifth year inclusive 2014 $000 5,203 1,554 6,757 Group 2013 $000 5,765 7,015 12,780 Company 2013 $000 5,314 6,600 11,914 2014 $000 4,809 1,554 6,363 Operating lease payments represent the Group’s share of rentals for a Floating Production, Storage and Offtake (‘FPSO’) vessel in Mauritania and rentals payable for its office properties. The current FPSO commitment is through the Chinguetti Funding Agreement and has a break clause as at end April 2016; accordingly, included within the $6.8 million is $4.8 million and $1.6 million payable on the FPSO within one year and two to five years respectively. Company Financial assets (classified as loans and receivables) Cash and cash equivalents Trade and other receivables Total Financial liabilities at amortised cost Trade and other payables Total Carrying amount/Fair value 2014 $000 2013 $000 108,148 120,755 2,861 5,535 111,009 126,290 13,663 13,663 15,332 15,332 Carrying amount/Fair value 2014 $000 2013 $000 106,473 118,498 19,703 25,274 126,176 143,772 51,264 51,264 74,733 74,733 88 89 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS Financial Risk Management Objectives The Group’s and Company’s objective and policy is to use financial instruments to manage the risk profile of its underlying operations. The Group continually monitors financial risk including oil and gas price risk, interest rate risk, equity price risk, currency translation risk and liquidity risk and takes appropriate measures to ensure such risks are managed in a controlled manner including, where appropriate, through the use of financial derivatives. The Group and Company does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Interest Rate Risk Management The Group and Company does not have any outstanding borrowings and thus, the Group and Company is only exposed to interest rate risk on its short-term cash deposits. Interest Rate Sensitivity Analysis The sensitivity analysis below has been determined based on the exposure to interest rates at the reporting date and assumes the amount of the balances at the reporting date were outstanding for the whole year. A 100 basis point change represents management’s estimate of a possible change in interest rates at the reporting date. If interest rates had been 100 basis points higher and all other variables were held constant the Group’s profits and equity would be impacted as follows: Cash and cash equivalents Group Increase Company Increase 2014 $000 1,081 2013 $000 1,208 2014 $000 1,065 2013 $000 1,185 Foreign Currency Risk The Group’s and Company’s functional currency is the US dollar, being the currency in which the majority of the Group’s revenue and expenditure is transacted. Small elements of its management, services and treasury functions are held and transacted in pounds sterling. The Group does not enter into derivative transactions to manage its foreign currency. Foreign currency risk is immaterial to the Group and Company – see the following table: Financial Assets Cash and cash equivalents 2014 $000 Group 2013 $000 Company 2013 $000 2014 $000 Cash and cash equivalents held in US$ 106,791 116,419 105,180 114,323 Cash and cash equivalents held in GBP 1,357 4,336 1,293 4,175 108,148 120,755 106,473 118,498 Trade and other receivables Trade and other receivables held in US$ Trade and other receivables held in GBP Financial liabilities Trade and other payables Trade and other payables held in US$ Trade and other payables held in GBP 2014 $000 2,779 82 2,861 2014 $000 12,972 691 13,663 Group 2013 $000 5,446 89 5,535 Group 2013 $000 14,163 1,169 15,332 Company 2013 $000 2014 $000 19,699 25,258 4 16 19,703 25,274 2014 $000 45,196 6,068 51,264 Company 2013 $000 68,821 5,912 74,733 Credit Risk Management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group or Company. The Group and Company reviews the credit risk of the entities that it sells its products to or that it enters into contractual arrangements with and will obtain guarantees and commercial letters of credit as may be considered necessary where risks are significant to the Group or Company. The Group’s and Company’s business is diversified in terms of both region and the number of counter-parties and the Group and Company does not have significant exposure to any single counter-party or Group and Company of counter- parties with similar characteristics. 90 91 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSIn relation to its cash and cash equivalents, the Group has to manage its currency exposures and the credit risk associated with the credit quality of the financial institutions in which the Group maintains its cash resources. At the year end the Group held approximately 99% (2013: 96%) of its cash in US dollars. At the year end the Group held the majority of its balances with AA- and A+ Standard & Poors rated institutions. The Group continues to monitor its treasury management to ensure an appropriate balance of the safety of funds and maximisation of yield. During the year the Company reversed previously impaired loans to Sterling Energy (International) Limited totalling $533k (2013: $155k) following the relinquishment of its Sangaw North licence in Kurdistan. Trade and other receivables are non-interest bearing. The Group does not hold any collateral as security and the Group does not hold any significant provision in the impairment account for trade and other receivables as they relate to customers with no default history. There are no financial instruments held at fair value under the level 1, 2 and 3 hierarchy. Liquidity and Interest Rate Tables The following tables detail the remaining contractual maturity for the non-derivative financial assets and liabilities of the Group and Company. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows including rates for loan liabilities and cash deposits on actual contractual arrangements. The weighted average interest rate used in 2014 is nil % (2013: nil %). Less than six months Six months to one year One to six years $000 $000 $000 Group Trade payables (2014) Trade payables (2013) 1,111 1,901 Company Trade payables (2014) Trade payables (2013) 4 28 - - - - - - - - Total $000 1,111 1,901 4 28 Interest Principal $000 $000 - - - - - - - - 24. SHARE-BASED PAYMENTS The Group recognised a total expense, within administration costs, in respect of share-based payments under equity-settled share option plans of $659k (2013: $1.2 million). The Company recognised a total expense, within administration costs, in respect of share-based payments under equity-settled share option plans of $30k (2013: $50k). In 2009 the Company reviewed the existing share-based incentive schemes currently in place to motivate and incentivise Group employees. The Company also took independent advice to support its review. Based on this, the Company proposed a new All Staff Long Term Incentive Plan as being the most effective way to deliver the incentives that the Board believes will continue to align the interests of the employees and shareholders. Shareholders approved this plan at the December EGM held on 22 December 2009. With effect from 2009, all further awards are made under the All Staff Long Term Incentive Plan. Awards are made on similar terms to non-executive Directors of the Company, under a separate plan the NED LTIP. Share options (2002- 2007) Following the introduction of the Long Term Incentive Plan in 2007 (‘2007 LTIP’), no further grants were made under the share option scheme, subsisting grants remained in place and the scheme fully lapsed in 2013. There were no movements during the year on the share options. Outstanding at the beginning of period Forfeited during the period Exercised during the period Outstanding at the end of the year Exercisable at the end of the year 2014 Number of share options 2014 Weighted average exercise price (pence) 2013 Number of share options 2013 Weighted average exercise price (pence) - - - - - - - - - - 236,875 (236,875) - - - 348 348 - - - All Staff Long Term Incentive Plan (‘All Staff LTIP’) In accordance with the approved All Staff LTIP, the Group has granted options to its staff and executive Directors to acquire shares in the Company. The movement during the year, on the share options, was as follows: 2014 Number of share options 2014 Exercise price (pence) 2013 Number of share options 2013 Exercise price (pence) Outstanding at the beginning of the year 12,114,800 Granted during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year 4,396,300 (4,954,150) 11,556,950 - 40 40 40 40 - 10,529,830 3,755,800 (2,170,830) 12,114,800 - 40 40 40 40 - All options are equity settled. The vesting period is three years. If the options remain unexercised after a period of five years from the date of grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest or are exercised. The options outstanding at 31 December 2014 have a contractual life of 3.81 years (2013: 3.80 years). The cost of the options is spread over the vesting period of three years. The fair value of the options granted during the year was 5.7 pence (2013: 16.5 pence). 92 93 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTS  If the Company share price (‘SESP’) under-performs the Index performance by 10% or more, then no share options will be earned and the share options will lapse. The movement during the year, on the share options, was as follows: If the SESP performance is between matching the Index and under-performing by 10%, the amount of the share options that will be earned will be determined by extrapolating on a 2.5:1 straight line basis. If the SESP performance matches the Index performance, then 25% of the share options will be earned. If the SESP performance is between matching the Index and out-performing by 50%, the amount of the share options that will be earned will be determined by extrapolating on a 1.5:1 straight line basis. If the SESP out performs the Index performance by 50% or more, then 100% of the share options will be earned. All performance measures are defined as being the absolute share price performance or absolute index performance, and not the performance relative to each other. Fair values were measured by use of a modified binomial model. The inputs to the basic binomial model were as follows: Share price (pence) Exercise price (pence) Expected volatility at time of grant Expected life (years) Risk free rate (%) Expected dividends 2014 24 40 2013 38 40 61.25% 69.53% 3 0.66% Nil 3 0.46% Nil Expected volatility for grants in the year was estimated by calculating the historical volatility of the Company’s share price over the period 22 December 2009 to 1 October 2014 (2013: over the period 22 December 2009 to 31 October 2013). The Company has overlaid a normal distribution for the FTSE350 condition to assess a range of possible outcomes. The Company has then compared the SESP performance against the range of Index performance to estimate the vested proportions of share options in accordance with the scheme rules. Weighting factors based on probabilities under the normal distribution are then applied to the range of share option values to calculate a weighted-average share option value. All Staff LTIP Sub-Plan In 2013 the Company introduced a HMRC approved sub-plan to the All Staff Long Term Incentive Plan (‘HMRC Sub-Plan’). 2014 Number of share options 2014 Exercise price (pence) 2013 Number of share options 2013 Exercise price (pence) Outstanding at the beginning of the year Granted during the period Exercised during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year 949,900 563,800 - (278,000) 1,235,700 - 43 40 - 43 42 - - 949,900 - - 949,900 - - 43 - - 43 - The options outstanding at 31 December 2014 have a contractual life of 4.31 years (2013: 4.94 years). The cost of the options is spread over the vesting period of three years. The fair value of the options granted during the year was 5.7 pence (2013: 19.3 pence). Fair values were measured by use of a modified binomial model. The inputs to the basic binomial model were as follows: Share price (pence) Exercise price (pence) Expected volatility at time of grant Expected life (years) Risk free rate (%) Expected dividends 2014 24 40 2013 43 43 61.25% 69.53% 3 0.66% Nil 3 0.46% Nil Non-executive Directors Long Term Incentive Plan (‘NED LTIP’) In accordance with the approved NED LTIP, the Group has granted options to its non-executive Directors to acquire shares in the Company. The movement during the year, on the share options, was as follows: 2014 Number of share options 2014 Exercise price (pence) 2013 Number of share options 2013 Exercise price (pence) Outstanding at the beginning of the year 642,783 Granted during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year - (250,000) 392,783 83,333 40 40 40 40 40 642,783 - - 642,783 333,333 40 40 40 40 40 All options are equity settled. The vesting period is three years. If the options remain unexercised after a period of five years from the date of grant, the options expire. 94 95 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSPhase 1 of the PSC is due to expire on 30 June 2016. Completion of the acquisition and processing of 2D seismic data represents the minimum work obligation during Phase 1. Ntem Concession Cameroon On 17 February 2015 it was announced that the Company’s wholly owned subsidiary, Sterling Cameroon Limited, has signed an agreement with Murphy Cameroon Ntem Oil Co. Ltd (‘Murphy’) whereby Murphy will transfer its 50% interest in, and operatorship of, the Ntem Concession, offshore Cameroon to Sterling Cameroon Limited. No consideration is payable for the transfer of Murphy’s interest. Following completion, the Ntem Concession will be held 100% by Sterling Cameroon Limited (‘Operator’). 27. CONTINGENT LIABILITIES The Group has received a claim for VAT from the Malagasy tax authority totalling $946k in respect of its Ampasindava and Ambilobe licences. Having taken professional advice the Group considers the claim to be wholly without foundation and continues to defend its position through the appropriate dispute resolution and legal processes. Following the farm-in to the Odewayne licence in Somaliland, there is a remaining contingent consideration of $8.0 million payable to Petrosoma Limited based upon various operational milestones being met. At 31 December 2014, these milestones had not been met. Furthermore, options are forfeited if the non-executive Director leaves the Group before the options vest or are exercised. The options outstanding at 31 December 2014 have a contractual life of 2.33 years (2013: 2.32 years). The cost of the options is spread over the vesting period of three years. No performance criteria are attached to the outstanding options, other than the requirement that the holders must remain employed by the Group when the options are exercised, unless employment is terminated on death, or as a good leaver. 25. RELATED PARTY TRANSACTIONS Details of Directors’ remuneration, which comprise key management personnel, are provided below: Short-term employee benefits Payments on loss of office Defined contribution pension Share-based payments 2014 $000 960 123 41 416 Group 2013 $000 1,371 117 63 758 1,540 2,309 Company 2013 $000 155 - - 50 205 2014 $000 173 - - 30 203 Further information on Directors’ remuneration is detailed in the Remuneration Committee Report, on pages 38 - 48. The Company has no other disclosed related party transactions. 26. SUBSEQUENT EVENTS Mauritania – Royalty Agreements with Mauritania On 9 February 2015 it was announced that the Company had been notified of changes to Premier Oil plc’s (‘Premier’) interests in PSC A, PSC B (excluding the Chinguetti field) and PSC C-10 offshore Mauritania. Premier’s exit from each of PSC A, PSC B and PSC C-10 does not affect the royalty currently received by the Group from Premier over Premier’s interest in production from the Chinguetti field; however, the Group will no longer benefit from a royalty linked to Premier’s participation in a potential development of Banda, Tiof and/or Tevet. Acquisition of an Interest in block C-3 Mauritania On 10 February 2015 it was announced that Sterling Energy Mauritania Limited signed a sale and purchase agreement with Tullow Mauritania Limited (‘Tullow’) to acquire a 40.5% interest in the Production Sharing Contract (‘PSC’) for block C-3, located offshore in the Islamic Republic of Mauritania. Under the terms of the SPA, on completion: (i) Sterling Energy Mauritania Limited will assume a 40.5% participating interest in the PSC from Tullow, including an entitlement to a corresponding interest in past costs; and (ii) Sterling Energy Mauritania Limited will pay Tullow approximately $2.5 million in consideration and repayment of past costs. 96 97 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Year ended 31 December 2014Notes to the Financial StatementsGROUP ACCOUNTSDefinitions and Glossary of Terms $ 2006 Act 2007 LTIP 1P 2D 2P 3D 3P AIM All Staff LTIP AGM Articles bbl bopd boe Board US dollars The Companies Act 2006, as amended the 2007 Long Term Incentive Plan Proven reserves or in-place quantities depending on the context two dimensional the sum of Proven and Probable reserves or in-place quantities depending on the context three dimensional the sum of Proven, Probable and Possible reserves or in-place quantities depending on the context AIM, a Market of the London Stock Exchange the All Staff Long-Term Incentive Plan adopted in 2009 Annual General Meeting the Articles of Association of the Company barrel, equivalent to 42 US gallons of fluid barrel of oil per day barrel of oil equivalent, a measure of the gas component converted into its equivalence in barrels of oil the Board of Directors of the Company Combined Code or Code UK Corporate Governance Code Companies Act the Companies Act (as amended 2006) HMRC Her Majesty’s Revenue and Customs HMRC Approved Sub-Plan or The HMRC approved sub-plan of the All Staff LTIP HMRC Sub-Plan HSSE hydrocarbons IFRS k km km2 lead Health, Safety, Security and Environment organic compounds of carbon and hydrogen International Financial Reporting Standards thousands kilometre(s) square kilometre(s) indication of a possible exploration prospect London Stock Exchange or LSE London Stock Exchange Plc m mcf Murphy NED LTIP OECD Ordinary Shares P90, P50, P10 metre(s) thousand cubic feet Murphy Cameroon Ntem Oil Co. Ltd non-executive Director Long Term Incentive Plan adopted in 2009 Organisation for Economic Cooperation and Development ordinary shares of 40 pence each 90%, 50% and 10% probabilities respectively that the stated quantities will be equalled or exceeded. The P90, P50 and P10 quantities correspond to the Proved (1P), Proved + Probable (2P) and Proved + Probable + Possible (3P) confidence levels respectively Company CSOP Directors E&E Adjusted EBITDA EITI FA farm-in & farm-out FPSO G&G GBP Genel Energy Group Sterling Energy plc Panel or Takeover Panel The Panel on Takeovers and Mergers Company Share Option Plan (HMRC approved share option scheme) the Directors of the Company exploration and evaluation assets earnings before interest, taxation, depreciation, depletion and amortisation, impairment, share-based payments, provisions, and pre-licence expenditure Extractive Industries Transparency Initiative Funding Agreement a transaction under which one party (farm-out party) transfers part of its interest to a contract to another party (farm-in party) in exchange for a consideration which may comprise the obligation to pay for some of the farm-out party costs relating to the contract and a cash sum for past costs incurred by the farm-out party Floating, Production, Storage and Offloading vessel geological and geophysical pounds sterling Genel Energy Somaliland Limited the Company and its subsidiary undertakings Petroleum Petronas Premier Prospect PSA PSC Pura Vida RA Reserves oil, gas, condensate and natural gas liquids PC Mauritania 1 PTY LTD Premier Oil a potential sub-surface accumulation of hydrocarbons which has been identified but not drilled production sharing agreement production sharing contract Pura Vida Mauritius Royalty Agreement reserves are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Reserves must satisfy four criteria; they must be discovered, recoverable, commercial and remaining based on the development projects applied. Reserves are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by development and production status 98 Sterling Energy plc Report and Financial Statements 2014 Sterling Energy plc Report and Financial Statements 2014 99 Definitions and Glossary of Terms (cont.) Professional Advisers Reservoir RISC Seismic SESP Shares Shareholders SMHPM Subsidiary TSR a porous and permeable rock capable of containing fluids RISC (UK) Limited of 53 Chandos Place, Covent Garden, London WC2N 4HS data, obtained using a sound source and receiver, that is processed to provide a representation of a vertical cross-section through the subsurface layers Sterling Energy plc share price 40p Ordinary Shares Ordinary shareholders of 40p each in the Company Société Mauritanienne Des Hydrocarbures et du Patrimoine Minier a subsidiary undertaking as defined in the 2006 Act Total Shareholder Return (End Share Price – Opening Share Price/Opening Share Price) plus (Sum of Dividends Per Share/Opening Share Price) United Kingdom or UK the United Kingdom of Great Britain and Northern Ireland UK Corporate Governance Code United States or US Working Interest or WI Formerly the Combined Code, sets out standards of good relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders practice in the United States of America a Company’s equity interest in a project before reduction for royalties or production share owed to others under the applicable fiscal terms Nominated Adviser and Corporate Broker Peel Hunt Moor House 120 London Wall London EC2Y 5ET Corporate Bankers Barclays Commercial Bank 1 Churchill Place London E14 5HP HSBC 165 Fleet Street London EC4A 2DY The Royal Bank of Scotland plc 1 Albyn Place Aberdeen AB10 1BR Legal Memery Crystal LLP 44 Southampton Buildings London WC2A 1AP Auditors BDO LLP 55 Baker Street London W1U 7EU Registered Office 85 Fleet Street London EC4Y 1AE 100 101 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Notes 102 Designed and produced by blueasterisk design 103 Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc Report and Financial Statements 2014Sterling Energy plc 85 Fleet Street London EC4Y 1AE Tel: +44 (0)20 7405 4133 Fax: +44 (0)20 7440 9059 Email: info@sterlingenergyuk.com www.sterlingenergyplc.com 

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