Sterling Energy plc
Annual Report 2015

Plain-text annual report

Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements Year ended 31 December 2015 CONTENTS OVERVIEW Chairman’s Statement Chief Executive’s Review 2015 Summary 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 4 6 9 12 17 23 24 28 34 37 39 40 50 51 52 53 54 57 60 61 62 63 64 65 66 67 68 98 Professional Advisers 101 3 Sterling Energy plc (‘Sterling’ or 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 primary focus on Africa. The Group has high potential exploration projects in Mauritania, Madagascar, Somaliland and Cameroon together with a production interest in Mauritania. 2 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015OVERVIEW Chairman’s Statement $98.7 million CASH RESOURCES We shall continue to act cautiously with regard to our own investments in new ventures with a bias towards projects that can be appraised and developed via our existing resources. At the beginning of 2015 few would have predicted In February 2015, we acquired a 40.5% interest in Also in Madagascar, Sterling, and ExxonMobil, our joint to date spans 30 years of exploration, new ventures a sustained decline in the global oil price and an E&P production sharing contract (‘PSC’) C-3, a shallow venture partner in the Ampasindava PSC, completed a and business development roles in many of the world’s sector severely affected with developments being water project offshore Mauritania. Tullow Mauritania review of the Sifaka prospect and concluded that the key petroleum basins. Upon Eskil’s appointment, I delayed, exploration deferred and licences being handed Limited (‘Tullow Oil’), the operator, had just completed technical and commercial risks too great to justify the relinquished the role of Interim CEO. back to host governments. As 2015 progressed the the acquisition of a 1,600km 2D seismic programme. drilling of an exploration well; in May 2015 the joint venture speculation of a near term rebound in the oil price We have completed the integration of the new seismic partners elected to withdraw from the Ampasindava PSC. On 13 March 2015 Dr Philip Frank stepped down from diminished to be replaced with the forecast of a ‘lower data with the existing sub-surface data-set and failed the Board and left the Company. Matthew Bowyer was for longer downturn’. Many outside of our sector have to mature any leads to drill-ready prospects. In January In the Odewayne PSC, onshore Somaliland, where Genel appointed as Sterling’s Exploration Manager. benefitted from the lower cost of energy; however, inside 2016 we elected to withdraw from the PSC rather than Energy Somaliland Limited (‘Genel Energy’), the operator, the upstream oil and gas sector we have seen a real slow fund our share of a 3D program and exploration well we carries us for the costs of a seismic programme and one OUTLOOK FOR 2016 AND BEYOND down in activity and a re-alignment of ambitions. considered as high risk. exploration well, the planning for the seismic continues to There appear to be no tangible indications of how the progress whilst the Government of Somaliland; establishes continued volatility in the global oil price may positively In my statement last year I made reference to smaller E&P We acquired a further interest offshore Mauritania during a trained and equipped Oil Protection Unit (‘OPU’). impact the capital market that traditionally invested in the companies moving away from their previous business 2015, a 13.5% interest in PSC C-10, again with Tullow oil and gas sector. We shall continue to act cautiously model of acquiring material acreage positions and then Oil as the operator. The C-10 block has good legacy 3D In Cameroon, we continue to hold our 100% interest in with regard to our own investments in new ventures farm-out, on a promoted basis, to a larger player who seismic coverage and the joint venture (‘JV’) is actively the Ntem block. We maintain our claim of force majeure, with a bias towards projects that can be appraised and would be expected to fund more expensive exploration working towards identifying a drill ready prospect as a declared in May 2014 as a result of the border dispute developed via our existing resources. We will then have activities. We had already adapted our Group strategy step towards fulfilling the outstanding work commitment between Cameroon and Equatorial Guinea. We continue the option to accelerate and/or expand these cash flow and become more cautious about our ability to farm-out of one exploration well. to seek the best way to progress the exploration activity generative ventures via third party project finance. what are sometimes, very large financial commitments. in the Ntem block. During 2015, we further refined our strategy when Also in Mauritania, we retain our financial interest in the it became evident that the capital markets were not Chinguetti oil field in Mauritania. At the prevailing oil FINANCIAL In addition to our strategy for growth, the Group has, via a combination of our own funds and carried interests, the supporting even the appraisal and development activity price, production from Chinguetti is loss making and the The Group had cash resources of $98.7 million at the resources to see our existing projects advance during 2016. associated with exploration success; we concluded we relevant stakeholders are collectively working towards end of 2015, including $1.1 million of partner funds, and should prioritise smaller, value driven opportunities that cessation of production through a compliant, safe and we remain free of debt. Our work programme for 2016 is I would like to thank all our stakeholders for their continuing we could progress with our own finances to the point cost effective decommissioning and abandonment plan. fully funded and we have resources available to progress support for our strategy and all of our management and where the early production could be used to financially justify project debt. In Madagascar we completed the acquisition of 1,175km2 of 3D seismic on the Ambilobe block and are now BOARD AND MANAGEMENT CHANGES both our existing portfolio and add new venture activity. staff for their diligent efforts during 2015. Despite the market downturn, we have made some interpreting the new data in preparation for making a ‘drill On 23 March 2015 the Company announced the progress within our existing portfolio of exploration assets, or drop’ decision due in July 2016; the obligation in the appointment of Eskil Jersing as Chief Executive Officer Alastair Beardsall Chairman however the progress has been slow and cautious. next exploration phase includes the drilling of a well. (‘CEO’) and a Director of the Company. Eskil’s career 10 March 2016 4 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 5 OVERVIEW Chief Executive’s Review Through the last year, Sterling has continued to mature, actively manage and grow our portfolio in a disciplined manner, to succeed in and adapt to, a sustained lower oil price landscape. MARKET LANDSCAPE ASSET ACTIVITY ranked prospect, prior to end November 2017. We Subsequent to a detailed subsurface re-assessment of Over the last year, we have witnessed the continuation We have worked diligently at both maturing and maintain the view that the world class gas discoveries the prospectivity of the Ampasindava block, offshore of a severe supply driven crude oil price downturn. This refreshing our existing portfolio in a disciplined manner. made by Kosmos on the Mauritania – Senegal border Madagascar, by the JV and after discussions with the has led to a broad acceptance of a “lower for longer” Our forward business model remains focused on the further emphasise the infancy and potential upside of Office des Mines Nationales et des Industries Stratégiques price doctrine by the industry as a whole. Market volatility exploration and appraisal phase of the E&P lifecycle, with the analogous hydrocarbon plays in C-10, with both low (‘OMNIS’), ExxonMobil and Sterling relinquished the has continued into 2016, with oil and gas prices at multi- a bias towards capital efficient opportunities in fiscally cost entry exposure and flexible exit options. block in May 2015. We are highly appreciative of the year lows, rising geopolitical tensions, mounting defaults, advantageous jurisdictions with lower lifecycle risk, productive and collaborative nature of our relationship supply overhang, debt restructuring efforts and steep breakeven commodity prices and offering nearer term The Group has a Funding and Royalty Agreement with ExxonMobil and OMNIS throughout the JV project life reductions in corporate work program and budgets. options for commerciality. based economic interest in the offshore Chinguetti oil and relinquishment process. The Group does not expect Importantly, however, the opportunity landscape has also field in Mauritania, amounting to ca. 9% of production. to have any liabilities associated with the relinquishment. opened up for buyers, with regards entry and significantly In Mauritania, we increased our exposure to an emerging At prevailing oil prices, revenues from Chinguetti are reduced seismic acquisition and drilling costs. and underexplored petroleum province, with recent world insufficient to cover field operating costs and hence no RENEWED STRATEGY Cairn (Senegal) through ground floor entries into the C-3 costs. The JV participants (led by the operator, Petronas) class oil and gas discoveries by Kosmos (Mauritania) and longer cover the Company’s administrative overhead During May 2015, Sterling successfully operated a 1,175km2 discretionary 3D seismic survey on time, on budget and without incident over the Ambilobe block, Through the last year, Sterling has continued to mature, and C-10 offshore blocks, both operated by Tullow Oil. and relevant stakeholders are collectively working towards offshore Madagascar. The final processed dataset will actively manage and grow our portfolio in a disciplined These decisions were predicated on the inboard C-3 cessation of production through a safe, compliant and be available in early March 2016. The costs of this 3D manner, to succeed in and adapt to, a sustained lower block providing upside dependent running room for the cost effective decommissioning and abandonment plan. seismic survey have been carried by Sterling’s JV partner oil price landscape. immature, but technically attractive shelfal Cretaceous Pura Vida Mauritius (‘Pura Vida’). The JV is working to and Jurassic plays recognised in C-10. However, In Somaliland, we are hopeful that a regional 2D seismic secure an extension to the current second exploration Smaller exploration focused players such as Sterling, subsequent to detailed in-house evaluation of the 2014 acquisition program in H2 2016 will help de-risk this phase, (due to expire in July 2016) with a view to farming can no longer rely on leveraged cover to execute and 2D seismic data over C-3, we concluded that the new frontier exploration block. The results of a 2015 surface out the block post 3D evaluation from Q2 2016. monetise assets in the early part of the value cycle. data had not sufficiently de-risked the block to enter seep study re-confirmed the outstanding potential offered Equally, our Chinguetti oil field Funding and Royalty into Phase 2 of the PSC, due to begin June 2016. We by this basin scale acreage position, by validating all We are very pleased with the progress of a corporate Agreement revenue no longer provides cover for general therefore took the prudent and disciplined stance to exit elements of a working petroleum system. Sterling is fully social responsibility (‘CSR’) program that the Ambilobe and administrative (‘G&A’) costs at current oil prices, and the C-3 block, effective end of February 2016, subject to carried by the operator Genel Energy for all exploration JV is executing over three separate initiatives, namely: the joint venture works towards end of field life decisions. Government approval; with no additional cost exposure costs during the current third and subsequent fourth the Nosy Be and Ambanja fish market rehabilitation and In response, our capital resources will be allocated to limit to the Group. exploration period, covering the 2D seismic survey and Beramanja school projects. We must not forget our first well commitment. Planning and tendering for the ‘licence to operate’ and be cognisant of the differences or defer our liability exposure and focus on repositioning We continue to work diligently with the operator Tullow 2D survey continues to progress whilst the Government we can make to local communities through such projects. our portfolio to secure above average returns in the near Oil and with Société Mauritanienne Des Hydrocarbures of the Republic of Somaliland establishes a trained and to mid-term. Our aspiration over the next few years will et de Patrimoine Minier (‘SMHPM’), to technically equipped OPU that can provide the level of security In Cameroon, we continue to believe that, in accordance be to gain exposure to a core asset, and execute on a quantify and rank the existing C-10 prospect portfolio, required by in-country operators to ensure all future with the terms of the Ntem Concession, the declaration portfolio with low cost, long-life and investment flexibility. with a view to drilling an exploration well on the top seismic and drilling operations can be conducted safely. of force majeure on 6 May 2014 remains valid, pending 6 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 7 OVERVIEW Chief Executive’s Review (cont.) formal resolution of the overlapping maritime border Sterling is fully funded for our current asset level claims with Equatorial Guinea. commitments, through a strong balance sheet with cash resources of $98.7 million as at 31 December 2015. We will work with the Ministry of Industry, Mines and Technological Development of Cameroon to determine We are well placed to mature our portfolio, using our a forward plan for the Ntem block, given the declaration existing resources and continue to maintain a disciplined of force majeure. In the interim, we maintain our “reserve approach to growth, only acquiring and executing our rights” position on the Ntem block and continue to accretive projects the Company believes will ultimately seek a collaborative, fair and equitable outcome. deliver value for shareholders. OUTLOOK Overall, the Sterling portfolio still has the potential to deliver material exploration outcomes in Mauritania, Eskil Jersing Chief Executive Officer Madagascar, Somaliland, and Cameroon. We continue 10 March 2016 to mature our top ranked assets to drill-ready status, or commercialise our positions as appropriate. On the growth front, we have completed screening exercises on a significant number of opportunities through 2015. However, beyond the Mauritania C-3 and C-10 block entries, a number of technically attractive projects suffered through unacceptable commercial or above-ground risks and were not taken forward to acquisition stage. We have strongly refocused our efforts to proactively evaluate shorter cycle executable opportunities that fit our revised strategy, to benefit from a sector recovery. 2015 SUMMARY Production, net to the Company (including royalty barrels) from the Chinguetti field, averaged 310 barrels of oil per day (‘bopd’) (2014: 432 bopd). Adjusted Earnings before Interest, Tax, Depreciation, Amortisation and Exploration Expense (‘EBITDAX’) loss for the Group of $6.3 million (2014: $5.1 million earnings). Board and Management appointment of Eskil Jersing as CEO in March 2015. Transfer of Murphy’s 50% interest in the Ntem block to Sterling (now 100% and operator), offshore Cameroon, completed in April 2015. Ampasindava block, Madagascar, exit (30% interest) in May 2015. Completed 1,175km2 3D seismic acquisition safely, on time and budget over the Ambilobe block, offshore Madagascar, in June 2015, final processed data expected in-house Q1 2016. Acquisition from Tullow Oil of a 40.5% interest in PSC C-3 exploration block, offshore Mauritania, completed in July 2015. Exited block in February 2016. Acquisition from Tullow Oil of a 13.5% interest in PSC C-10 exploration block, offshore Mauritania, completed in November 2015. Working with Chinguetti oil field stakeholders on a safe, cost effective and technically robust decommissioning and abandonment plan. Cash resources at 31 December 2015 of $98.7 million (2014: $108.1 million), including joint venture partner funds of $1.1 million. The Group remains debt free, with sufficient cash resources to fund all outstanding firm commitments. 8 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 9 Sterling Energy plc Strategic Report Year ended 31 December 2015 STRATEGIC REPORT Operations Review The Group’s African focused asset portfolio provides exposure to exploration opportunities within a number of under-explored basins that have the potential to deliver material hydrocarbon reserves. These frontier and emerging areas have historically seen little activity but offer significant encouragement for the presence of commercially viable, working hydrocarbon systems. (ca. 9% economic MAURITANIA Chinguetti interest through Funding and Royalty Agreements). The Group has economic interests in the Chinguetti oil field through a Funding Agreement with SMHPM, Mauritania’s national oil company, and a Royalty Agreement with Premier Oil (‘Premier’), through the Group’s wholly owned subsidiary Sterling North West Africa Holdings Limited. Chinguetti oil field (ca. 9% economic interest) Overview Gross production for the Chinguetti field during 2015 averaged 5,083 bopd (2014: 5,512 bopd). Average production net to the Group, from the Group’s economic interests during 2015, was 310 bopd (2014: 432 bopd). Production was in steady decline throughout the year, reflecting the maturity of the field, but benefited from a limited requirement for sub-sea or top side interventions. No infill drilling or workover activity took place during 2015. The Group estimates that at the end of 2015, net entitlement 2P reserves stood at 173k barrels of oil equivalent (2014: 292k barrels of oil equivalent). In February 2015, Premier exited from each of PSC A, PSC B (excluding Chinguetti) and PSC C-10 in Mauritania. The Group would have benefited, through the Royalty Agreement with Premier, from any future development on any of the three aforementioned PSC’s. However given Premier’s withdrawal, the Group does not expect any future benefits to materialise. Premier’s exit from these PSC’s does not affect the royalties currently received by the Group over Premier’s interest in production from the Chinguetti field. Outlook The Chinguetti joint venture (Petronas, Tullow Oil, SMHPM, Premier, Kufpec) are evaluating how best to manage the Chinguetti field in a low oil price environment and with end of field life challenges. Formative discussions continue to be held with the Government of Mauritania and relevant stakeholders on how best to manage current operations and agree on a plan for a safe, cost effective and technically robust, decommissioning and abandonment phase. A summary of Chinguetti interests and Group resource summary are provided on pages 17 and 23 of the Strategic Report. its Mauritanian In 2015, the Group bolstered footprint via low cost ground floor entries into two exploration blocks, C-3 and C-10. The rationale underlying the C-3 and C-10 entries was that both blocks provided flexibility on work programme commitment decisions, as well as offering exposure to material exploration upside in a re-emerging petroleum province on the West African margin. The entry into block C-3 was predicated on it being protection acreage in the event of a commercial discovery on block C-10, however subsequent work on C-3 following receipt of new 2D seismic data in 2015 ultimately did not support further capital expenditure on a proposed 3D survey. As a result a swift disciplined, data-driven exit decision was made to limit further capital exposure. C-10 (WI 13.5%) Exploration block Overview Block C-10 covers an area of approximately 8,025km² and lies in water depths of 50 to 2,400m within the Nouakchott sub-basin, offshore Mauritania, surrounding the Chinguetti field. The C-10 block PSC is held by the Company’s wholly owned subsidiary Sterling Energy Mauritania Limited (‘SEML’) (13.5% working interest), Tullow Oil (76.5% working interest and operator) and SMHPM (10% working interest). SMHPM is carried by SEML and Tullow Oil, pro-rata to their working interests, during the exploration phases. The PSC is in the second phase of the exploration period, which is due to expire on 30 November 2017 and has a minimum work obligation of one exploration well. The block is fully covered by legacy 3D seismic coverage and lies within a proven petroleum basin offering exposure to multiple play-types from under-explored Jurassic and lower Mauritania Cameroon Somaliland Madagascar Cretaceous shelfal carbonates to Cretaceous and Tertiary clastic plays. Within the block confines a successful exploration campaign in 2000-2003 targeting the Miocene play, yielded four oil and gas discoveries, including the Chinguetti oil field. term) with a minimum work obligation of a further two exploration wells. A summary of the C-10 asset is provided on page 18 of the Strategic Report. Since 2014, Kosmos Energy, in deep water block C-8, immediately outboard of C-10 has discovered and appraised several world class LNG scale gas discoveries of Albian to Cenomanian age, with the Tortue West (Ahmeyim) structure alone reported to have Pmean gas resources of ca.15 Tcf. Further south in Senegal, the Albian clastic shelf margin play has also been successful with commercial oil and gas discovered at the SNE field, currently being appraised with best estimate 2C contingent resources of 385 million barrels of oil per Cairn Energy’s press release in March 2016. In the C-10 block, Tullow Oil and the JV have matured a drill ready, Lower Cretaceous Neocomian age carbonate prospect, Lamina, located in water depths of approximately 100m. The joint venture anticipates that an exploration well to test this prospect in 2017 would have a gross dry hole cost in the order of $50 million ($7.5 million net to SEML), substantively lower than the originally proposed $77 million in 2015. Outlook Following entry into the C-10 block in mid-2015, Sterling and its JV partners have been maturing and ranking the technical description of the play, prospect and lead portfolio on the merged, reprocessed and depth-migrated 3D seismic dataset. The joint venture will work towards selecting the prospect for drilling in 2017, with Lamina the currently highest ranked option, to meet the minimum work obligations. Sterling will continue to work on de- risking and ranking the remaining prospectivity within the three key remaining plays on block, through 2016. Should the joint venture not fulfil the minimum work obligations, the gross liability owing to the Mauritanian government would be $7.5 million ($1.1 million net to SEML). Following the completion of Phase 2 the joint venture may elect to enter into Phase 3 (with a 3 year C-3 (WI 40.5%) Exploration block Overview Block C-3 is located in shallow water within the Nouakchott sub-basin, offshore Mauritania and covers an area of 9,825km². The PSC for block C-3 is held by SEML (40.5% working interest), Tullow Oil (49.5% working interest and operator) and SMHPM (10% working interest). SMHPM is carried by SEML and Tullow Oil, 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. The C-3 block was acquired as protection acreage for the adjacent C-10 block in the case of success on C-10, given that similar promising plays cover both blocks. In late 2014, the operator acquired 1,600km of regional and infill 2D seismic data over block C-3 satisfying the minimum work obligations for the current phase. During 2015 SEML completed a detailed interpretation of the newly acquired 2D data. The resulting technical evaluation of the remaining play and lead potential was deemed by Sterling to be insufficiently de-risked by the 2D to justify entering into Phase 2 of the PSC; entailing a commitment to acquire 700km² of 3D seismic and drill one exploration well. Outlook In January 2016, SEML submitted a notice of withdrawal to Tullow Oil and SMHPM to reassign to Tullow Oil its 40.5% working interest share of block C-3 effective end February 2016. Completion of the withdrawal remains subject to approval by the Government of the Islamic Republic of Mauritania. A summary of the C-3 asset is provided on page 19 of the Strategic Report. 12 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 13 STRATEGIC REPORT Operations Review (cont.) MADAGASCAR The Group’s Ambilobe block is located in the Ambilobe deep water basin, offshore north-west Madagascar. In May 2015, the Group relinquished the offshore Ampasindava block, located in the Majunga basin, north-west Madagascar. Ambilobe (WI 50% & operator) Exploration block Overview The Ambilobe block covers some 17,650km² and is located in the Ambilobe basin, offshore north-west 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. Sterling Energy (UK) Limited (‘SE(UK)L’) completed a farm- out agreement in December 2013 with Pura Vida under which Pura Vida assumed a 50% interest in the Ambilobe PSC and paid all costs associated with a discretionary 3D seismic survey subsequently acquired in 2015. Following the farm-out, SE(UK)L retained a 50% interest in the PSC and remains as operator. The Ambilobe block is covered by an extensive database of vintage 2D data that led to the identification of a number of Cretaceous and Tertiary aged plays and leads, located in both shallow and deep waters. In June 2015 SE(UK)L as operator of the Ambilobe PSC completed a 1,175km2 3D seismic survey to improve the technical description of the high graded lead area prior to a “drill or drop” decision mid- 2016. The 3D survey acquired by CGG Services SA was completed on time and budget, without incident and fully compliant with all environmental regulatory requirements. Processing of the seismic data by ION Geophysical Company commenced in the second half of 2015, with interim products having been made available and reviewed in-house prior to year-end. Corporate Social Responsibility Affiliated with the Ambilobe 3D survey, the Ambilobe JV has worked closely with the local communities and authorities of the region to undertake three CSR projects, one in each of the districts of Nosy Be, Ambanja and Ambilobe. In the Ambilobe district, the Ambilobe JV will support the renovation and rebuilding of two primary school classrooms. In each of Nosy Be and Ambanja districts, the Ambilobe JV will support the construction of a new fish market. The existing facilities for the local fisherman in these areas are currently inadequate and overcrowded. Building new, dedicated markets, will improve local traffic and sanitary conditions, contribute towards a safer environment for the local population and ultimately improve the livelihoods of the local fishermen. The Ambilobe JV will work in close collaboration with the local communities, with the aim of delivering the completed projects by mid-2016. Outlook Continued processing of the 2015 3D seismic to Pre Stack Depth Migration stage with final deliverables expected in Q1 2016. Interpretation of interim data products is progressing and will focus on high-grading the lead inventory to help inform the decision on entry into Phase 3, which carries a one well commitment. With Phase 2 of the Ambilobe PSC due to expire in July 2016, the joint venture will seek an extension to give sufficient time to complete the subsurface technical description and seek a farm-in partner prior to a decision whether to enter into Phase 3. A summary of the Ambilobe asset is provided on page 20 of the Strategic Report. Ampasindava (WI 30%) Exploration block Overview Following a detailed subsurface re-assessment of the prospectivity of the Ampasindava block and after discussions with OMNIS, the joint venture, ExxonMobil (70% working interest) and Sterling (30% working interest), relinquished the Ampasindava block in May 2015. SOMALILAND The onshore basins of Somaliland offer one of the last opportunities to target an undrilled Mesozoic basin 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 sedimentary basin underlying the block has encouraging evidence of a working hydrocarbon system. Odewayne (WI 40%) Exploration block Overview This large, unexplored frontier 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. Extensive geological field data provide strong encouragement for the presence of a deep sedimentary basin and has highlighted the presence of oil seeps at the surface indicating 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 OPU to be established. 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 (‘SE(EA)L’), currently holds a 40% working interest in the PSA. SE(EA)L acquired an original 10% from Petrosoma Limited (‘Petrosoma’) in November 2013 and an additional 30% from Jacka Resources Somaliland Limited (‘Jacka’) in two transactions during 2014. In aggregate, as consideration, SE(EA)L 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. SE(EA)L is fully carried by Genel Energy for its share of the costs of all exploration activities during the Third Period and Fourth Period of the PSA. Outlook Operational activities in Somaliland have been delayed while the Government of the Republic of Somaliland establishes a trained and equipped OPU that can provide the level of security required by in-country operators to ensure all future seismic and drilling operations are conducted safely. A 2D seismic acquisition program is currently scheduled to commence in H2 2016. A summary of the Odewayne asset is provided on page 21 of the Strategic Report. CAMEROON Ntem is a large deep water concession 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 multiple deep water discoveries to the north. Ntem (WI 100% & operator) Exploration block Overview The Ntem Concession lies adjacent to the southern maritime border of Cameroon. Water depths range from 400 to 2,000m across this 2,319km² block. This block is well positioned with respect to both Tertiary and Upper Cretaceous play potential, both of which have proved commercially successful in Cameroon and Equatorial Guinea. The Ntem Concession was subject to force majeure from June 2005 to January 2014, as a result of overlapping maritime border claims (referred to as the ‘Affected Area’) by the Republic of Cameroon and the Republic of Equatorial Guinea. Following the lifting of force majeure, the current exploration period (‘First Renewal Period’) of the Ntem Concession re-commenced on 22 January 2014. At that date, the remaining term of the First Renewal Period was approximately 15 months (expiring April 2015). The minimum work obligation (one exploration well) was satisfied by the drilling of the Bamboo-1 exploration well in February 2014. On 6 May 2014, the Ntem joint venture partners notified Société Nationale des Hydrocarbures the national oil company of Cameroon, of the joint venture’s declaration of force majeure pending formal resolution of the overlapping maritime border claims. SNH has advised that “Cameroon does not recognise that any situation of force majeure exists in the Ntem Permit”. (‘SNH’) In April 2015, Murphy Cameroon Ntem Oil Co. Ltd (‘Murphy’) and Sterling Cameroon Limited (‘SCL’) completed the transfer of Murphy’s 50% interest in, and operatorship of the Ntem Concession, to SCL. SCL received written notice, dated 22 April 2015, from SNH that it considered the First Renewal Period of the Ntem Concession to have expired on 22 April 2015 and the Ntem Concession to have lapsed. The Group believes that, in accordance with the terms of the Ntem Concession, the declaration of force majeure on 6 May 2014 remains valid. As such, the First Renewal Period has been suspended since 6 May 2014 and therefore has not expired. In December 2015, SCL became aware that SNH publicised the Ntem Concession as an “open block”, SCL disputes this claim and reserves its rights to the Ntem Concession. Outlook SCL will work with the Ministry of Industry, Mines and Technological Development of Cameroon to determine a forward plan for the Ntem Concession, given the declaration of force majeure, the 22 April 2015 notice from the Ministry and the listing of the Ntem Concession as an open block. A summary of the Ntem asset is provided on page 22 of the Strategic Report. 14 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 15 STRATEGIC REPORT Schedule of Interests Year ended 31 December 2015 Location Size (km²) Licence Name Sterling Working Interest % Sterling Net Revenue Interest % Operated/ Non-operated Mauritania: Offshore 29 PSC B - Chinguetti Field n/a Sliding scale royalty from 6% WI 1 Non-operated Economic interest for approximately 8% of Chinguetti project 2 Mauritania: Offshore Mauritania: Offshore Cameroon: Offshore 9,825 8,025 2,319 PSC C-3 3 PSC C-10 Ntem 4 Madagascar: Offshore 17,650 Ambilobe Somaliland: Onshore 22,840 Odewayne Block 5 40.5% 13.5% 100% 50% 40% Non-operated Non-operated Operated Operated Non-operated 1 The Company’s royalty interest derives from Premier’s working interest of 6% in PSC B. The Company’s royalty is up to 6% of Premier’s working interest. 2 The Company’s interest derives from the Funding Agreement with SMHPM. 3 On 29 January 2016, the Group notified its joint venture partners and the Government of Mauritania of its withdrawal from PSC C-3, which remains subject to Mauritanian Ministerial approval. 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 and together with the Ministry considers the Ntem Concession to have expired on 22 April 2015. 5 Carried for the minimum work obligation of current period and next period of PSA. 16 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 17 STRATEGIC REPORT Mauritania We increased our exposure to an emerging and underexplored petroleum province, with recent world class oil and gas discoveries. Block C-10 (WI 13.5%) PSC 27 October 2011 30 November 2011 8,025km2 76.5% 13.5% 10%* CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area Participants Tullow Mauritania Limited (Operator) Sterling Energy Mauritania Limited Société Mauritanienne Des Hydrocarbures Et De Patrimoine Minier Exploration term Current Phase 2: To 30 November 2017 Phase 2 work commitment: One well Phase 3 (optional): To 30 November 2020 Phase 3 work commitment: Two wells Production term Twenty five years State participation The State may back in for up to a maximum of 14% participating interest (to include their 10% carried interest in the exploration phase) in any development and production area Licence status In November 2015, Sterling Energy Mauritania Limited completed the acquisition of a 13.5% working interest in PSC C-10. 18 Sterling Energy plc Report and Financial Statements 2015 * Carried through exploration Block C-3 (WI 40.5%) CONTRACT SUMMARY Contract type Contract signed Contract effective date Contract area PSC 17 April 2013 30 June 2013 9,825km2 Participants Tullow Mauritania Limited (Operator) Sterling Energy Mauritania Limited Société Mauritanienne Des Hydrocarbures Et De Patrimoine Minier 49.5% 40.5%* 10%** Exploration term Current 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 Licence status In July 2015, Sterling Energy Mauritania Limited completed the acquisition of a 40.5% working interest in block C-3. In January 2016, Sterling Energy Mauritania Limited submitted a notice of withdrawal to Tullow Oil and SMHPM to reassign to Tullow Oil its 40.5% working interest share of block C-3. * Subject to withdrawal notice issued by Sterling in January 2016 ** Carried through exploration Sterling Energy plc Report and Financial Statements 2015 19 STRATEGIC REPORT Madagascar Sterling operated 1,175 km2 3D seismic survey over untested frontier basin. STRATEGIC REPORT Somaliland Sterling is fully carried by the operator Genel Energy for all exploration costs during the current third and subsequent fourth exploration period. Ambilobe (WI 50%) 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) Pura Vida Mauritius 50% 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 Licence status The joint venture will seek an extension to the current phase to give sufficient time to complete the subsurface technical description and to seek a partner prior to the decision whether to enter into Phase 3. Odewayne (WI 40%) 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 50% 40% 10% Exploration term Current Period 3: To 2 November 2016 Period 3 work commitment: 500km 2D seismic acquisition Period 4 (optional): To 2 May 2018 Period 4 work commitment: 1,000km 2D seismic acquisition and one exploration well Period 5 (optional): To 2 May 2019 Period 5 work commitment: 500km 2D seismic acquisition and one exploration well Period 6 (optional): To 2 May 2020 Period 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 Licence status The block is in Period 3 of the exploration period with an outstanding work commitment of 500km of 2D seismic. The Group’s costs associated with the Period 3 and 4 work programmes are carried by Genel Energy. 20 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 21 STRATEGIC REPORT Reserves Summary Year ended 31 December 2015 2015 Oil (000 boe) 2015 Gas (mcf) 2015 Reserves (000 boe) 2014 Oil (000 boe) 2014 Gas (mcf) 2014 Reserves (000 boe) Volumes of Proven plus Probable Reserves At 1 January Revision – Chinguetti (1-3) Production At 31 December 292 (6) (113) 173 - - - - 292 (6) (113) 173 559 (109) (158) 292 - - - - 559 (109) (158) 292 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 2015. 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 20 years, is the qualified person that has reviewed the technical information set out above. Matthew Bowyer Exploration Manager 10 March 2016 STRATEGIC REPORT Cameroon We continue to seek the best way to progress the exploration activity in the Ntem block. Beramanja primary school CSR project Ntem (WI 100%) 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% 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 Licence status The Company will work with the Government of Cameroon to determine a forward plan for the Ntem Concession, given the declaration of force majeure by SCL, the Governments’ non-acceptance of the declaration of force majeure and the Government’s listing of the Ntem Concession as an open block. 22 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 23 STRATEGIC REPORT Financial Review Year ended 31 December 2015 Selected Financial Data Chinguetti production 1 Year end 2P reserves 1 Revenue Adjusted EBITDAX 1 Loss after tax Net cash investment in oil & gas assets bopd kboe $million $million $million $million Year-end cash (including share of partner funds) $million Average realised oil price Total cash operating costs (produced) Year-end share price Share price change 1 Debt 1 Key performance indicators (‘KPIs’) $/bbl $/bbl Pence % $million 2015 310 173 5.0 (6.3) (16.0) 4.8 98.7 50.3 75.3 15 (26) – 2014 432 292 16.0 5.1 (12.3) 14.1 108.1 94.2 57.4 20 (55) – A summary of revenue, cost of sales and lifting volumes are provided below: Liftings (bbls) 1 Revenue ($million) Revenue/bbl ($) Lifting cost ($million) Lifting cost/bbl ($) 1 Net Sterling production during the year totalled 113,085 (2014: 157,751) Loss for Year The 2015 loss totalled $16.0 million (2014: loss $12.3 million). Loss for year 2014 Decrease in revenue Decrease in operating costs (excluding other obligations for 2014) Revenue and Cost of Sales Currently, all of the Group’s production is from the Chinguetti field and totalled 266 bopd for the month of December 2015 (December 2014: 388 bopd). 2015 Chinguetti production, net to the Group, averaged 310 bopd, including royalty barrels, a decrease of 28% from the 432 bopd averaged in 2014; the reduced volumes reflect the lower oil price realised and increased production decline rates. Gross volumes lifted and sold during the year from the Chinguetti field were down by 29% to 1.5 million barrels (2014: 2.1 million barrels). The lifting cost per barrel has increased in 2015 by $24.2 to $94.2 (2014: $70.0). This was principally due to low levels of production consistent with a mature field production profile. Increase in G&A Impairment of Ntem (2015) Impairment of Chinguetti FA and RA (2014) Impairment of Ampasindava (2014) Chinguetti cessation costs Increase in other obligations (2015) Other obligations (2014) Decrease in finance net expense Loss for year 2015 2015 2014 99,948 169,699 5.0 50.3 (9.4) (94.2) 16.0 94.2 (11.9) (70.0) $ (million) (12.3) (11.0) 2.5 (0.3) (8.2) 6.0 1.9 2.2 (0.3) 3.4 0.1 (16.0) 24 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 25 STRATEGIC REPORT Financial Review (cont.) Year ended 31 December 2015 Cost of sales for the Group for 2015 (excluding the onerous commitment of $3.4 million) decreased by $2.5 million mainly due to a per unit decrease in depletion & amortisation, following the full impairment of the Chinguetti asset in 2014. During 2015, the Group fully impaired the Ntem block, in Cameroon, resulting in a charge of $8.2 million. The Group has made a provision of $3.7 million in the 2015 accounts to recognise anticipated future net onerous commitments for 2016 under the Chinguetti Funding Agreement (2014: $3.4 million). This reflects the expectation of an ongoing gap between unit revenues and costs on the field in 2016. Group administrative overhead increased during the year to $2.3 million (2014: $2.1 million). Included within this charge is $297k (2014: $659k) with respect to share-based payment charges. In 2015, a portion of the Group’s staff costs and associated overheads have been recharged to joint venture partners ($452k), expensed as pre-licence expenditure ($2.0 million), or capitalised ($1.1 million) where they are directly assigned to capital projects. This totals $3.6 million in the year (2014: $4.1 million). A summary of these movements are provided below. Group administrative overhead (page 61) Costs capitalised Costs recharged to JV partners Pre-licence expenditure Share based payment expense Other non-cash expenditure Group cash G&A expense 2015 $ (million) 2014 $ (million) (2.3) (1.1) (0.5) (2.0) (3.6) 0.3 0.1 (5.5) (2.1) (1.5) (0.6) (2.0) (4.1) 0.7 0.1 (5.4) Adjusted EBITDAX and Net Loss Group Adjusted EBITDAX (as defined within the Definitions and Glossary of Terms on pages 98 - 100) loss totalled $6.3 million (2014: $5.1 million earnings). Net loss after tax totalled $16.0 million (2014: loss $12.3 million). The basic loss per share was $0.07 per share (2014: loss $0.06 per share). Interest received and finance expenses result in a net expense of $712k (2014: $878k) which includes exchange losses of $89k (2014: $181k) on GBP cash deposits held at 31 December 2015 reported in US dollars, a non-cash finance expense of $1.0 million (2014: $1.1 million) relating to the unwinding of the Chinguetti decommissioning provision (see Note 9 on page 81 and Note 21 on page 88), interest received totalled $356k (2014: $398k) and other finance expenses totalling $13k (2014: $16k). No dividend is proposed to be paid for the year ended 31 December 2015 (2014: $nil). Cash Flow Net Group cash outflow generated from operating activities was $4.9 million (2014: $1.4 million inflow); a full reconciliation of which is provided in the Consolidated Statement of Cash Flows. Net cash investments in oil and gas assets totalled $4.8 million (2014: $14.1 million) and are summarised below: Mauritania Somaliland Madagascar Cameroon 2015 $ (million) 2014 $ (million) 4.0 0.1 0.6 0.1 4.8 - 12.4 1.0 0.7 14.1 Statement of Financial Position At the year end, cash and cash equivalents totalled $98.7 million (2014: $108.1 million) of which $1.1 million (2014: $1.1 million) were held on behalf of partners, leaving a cash balance of $97.6 million (2014: $107.0 million). There are currently no restricted funds in the Group. At the end of 2015, net assets/total equity stood at $86.8 million (2014: $102.4 million), and non-current assets totalled $25.1 million (2014: $28.5 million). Net current assets reduced to $94.1 million (2014: $96.6 million). The Group’s Chinguetti decommissioning provision increased during the year by $9.7 million to $32.4 million (2014: $22.7 million) reflecting an increase in the Group’s estimate of gross decommissioning costs based on a provisional plan presented to the JV by the operator, further provided to the Group by SMHPM. 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. 26 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 27 STRATEGIC REPORT Business Risk PRINCIPAL BUSINESS RISKS The long-term commercial success of the Group depends on its ability to manage its existing asset portfolio and to find, acquire, develop and commercially produce oil and natural gas reserves. The Directors regularly monitor all risks to the Company using information obtained or developed from external and internal sources, and will take actions as appropriate to mitigate these. The Group has developed a risk management system that identifies key business risks and measures to mitigate these risks. The Company proactively implements such measures considered appropriate on a case by case basis. Other significant elements of the risk management approach include regular Board review of the business, a defined process for preparation and approval of the annual work programme and budget, monthly management reporting, financial operating procedures, HSSE and anti-bribery management systems. The relative importance and impact of risks faced by the Group can, and are likely to change with progress in the Group’s strategy and developments in the external business environment. As such the Group reviews its business risks and management systems on a regular basis. The Directors have identified the following principal risks and mitigants in relation to the Group’s future performance. Category Financial Risk Mitigation Change • Low oil & gas commodity prices and • Group maintains a strong balance • Low commodity • Difficulty in capital raising for market volatility. prices • Market volatility • Counterparty distress new acquisitions and/or to fund development activities. • Counterparty default. • Cost escalation and budget overruns (including Chinguetti decommissioning). • Fiscal stability. • Foreign currency risk. • Financial control of operated and non- operated assets. • Fraud and corruption / increased third party exposure. sheet and remains fully funded for its existing commitments. • Continually assess all existing asset and proposed new acquisitions in light of future capital requirements from a disciplined lifecycle investment perspective. • Regularly monitor and amend cost structure, investment strategy and tactics to include countercyclical investments and leverage low service costs for seismic and drilling. • Regularly review business plans, G&A expenses, ongoing strategy reviews, monthly reporting and regular Board meetings. • Regularly engage with partners to influence cost effective capital expenditure and decommissioning expenditure. ▲ External • The Group’s assets are located in • Country risk • Climate change • Legal compliance non-OECD countries. Governments, regulations, and the security environment may adversely change, including the use of tax claims, real or not. The Group’s assets in Cameroon, Madagascar, Somaliland and Mauritania have been or are affected by country-specific situations. • The regulation of the energy industry to address climate change is increasingly international in scope and application. The Group’s activity focuses on finding and producing carbon based fuels often with long investment and production lifecycles. • Legal compliance, regulatory or litigation risk. Strategic • Concentration of portfolio • Competition Operational • Exploration Risk • Operator & Partner Risk • Group’s assets remain concentrated on early stage frontier and emerging basin exploration within the African continent. • Reduction interest to promote/ carry early stage exploration assets – making it more difficult to farm-out the Group’s early stage exploration assets. • Competitors have significantly greater in financial and technical resources. • Exploration activities may not result in a commercial discovery. Producing wells may lead to a financial loss. • For some assets, is dependent on other operators for the performance of E&P activities. the Group • Counterparty misalignment. • Operations under-insured. ▲ Increased ▼ Decreased ► Unchanged • Regular monitoring of political, regulatory and HSSE changes. Engaging in constructive discussions where and when appropriate and introducing third-party expertise as required. The Group has objectives to acquire additional core assets, to assist in diversifying country risk. • New investments are considered in the light of changing environmental regulations. • The Company accords the highest importance to corporate governance matters and upholding the highest ethical standards. • Activities are subject to various different jurisdictional laws, customs, fiscal and administrative regulations. • The Company employs suitably experienced and qualified staff and, when required, external advisors to ensure full compliance. Legal risk assessment and due diligence (where appropriate) is undertaken for all counterparties the Company deals with. • The Board has and will consider diversifying the current exploration portfolio risk, using existing financial resources of the Group. • Retain and acquire lower cost ground floor flexible positions (low exit costs) and where possible, carried positions. • Highly selective in choosing where and when to deploy its business development resources and New Ventures focus. • Diversify and manage risk across a portfolio of assets. Apply the Group’s experience and expertise and appropriate technology to minimise risk. • The Group carefully considers the technical, HSSE and financial capabilities of operators and potential partners during any joint venture farm- out or new acquisition. ▲ ► ► 28 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 29 STRATEGIC REPORT Business Risk (cont.) OTHER BUSINESS RISKS In addition to the principal risks above and general business risks, the Group’s business is subject to risks inherent in oil and gas exploration, development and production activities. A number of potential risks and uncertainties, could have a material impact on the Group’s long-term performance causing 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 • Inappropriate or poorly conceived strategy and plans • Failure to deliver on strategy and plans • Business environment changes • Failure to access new opportunities • Shareholder concentration • HSSE incident or non-compliance under local rules and/or laws • Poor field production (revenue) performance and end of field life decisions • Licences, permits and/or approvals may be difficult to sustain • Delays in conducting exploration work programmes • Failure to maximise value from existing interests • Loss of control of key assets • Dissatisfied stakeholders • Failure to negotiate optimal contract terms • Inexact reserve and production determinations • Complex regulatory compliance Human Resources and Management Processes • Failure to recruit and retain key personnel / human capital deficit • Human error or deliberate negative action(s) • Bribery and corruption • Inadequate management processes • Insufficient timely information available to the management and the Board COMPANY POLICIES The Directors are mindful of the impact of the Company’s business on its employees and contractors, the environment and on the wider community. In particular, it notes the following with respect to corporate responsibility, business integrity, community responsibility, employees and HSSE. 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 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. CORPORATE RESPONSIBILITY The Group is committed to conducting its business in a responsible and sustainable way. The Group has corporate, environmental 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 it’s corporate and social responsibilities with any of these stakeholders. In 2015, the Group commenced three CSR projects in Madagascar, as described in the Operations Review (page 14). BUSINESS INTEGRITY The highest ethical standards are a 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 that they apply and maintain these standards. COMMUNITY RESPONSIBILITY The Company and its subsidiary undertakings are committed to being a good partner in all communities in which it operates. Engagement and dialogue with local stakeholders 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, competencies, career development and opportunities for progression. 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. The Strategic Report was approved by the Board of Directors on 10 March 2016 and signed on its behalf by: Tony Hawkins Company Secretary Eskil Jersing Chief Executive Officer 30 Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Report and Financial Statements 2015 31 Sterling Energy plc Corporate Governance Year ended 31 December 2015 CORPORATE GOVERNANCE Board of Directors Alastair Beardsall, executive Chairman, aged 62 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. Alastair was appointed executive Chairman of Gulfsands Petroleum in April 2015. Eskil Jersing, Chief Executive Officer, aged 52 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 52 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 Remuneration Committee. Keith Henry, non-executive Director, aged 71 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 72 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 2015 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 controls 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 57. 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 Eskil Jersing (appointed 23 March 2015) Philip Frank (resigned 13 March 2015) Keith Henry Nicholas Clayton Malcolm Pattinson Board Meetings Audit Committee1 Remuneration Committee Nominations Committee2 9 9 8 1 9 9 9 4 - - - 4 4 4 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 the Directors during Board Meetings. 34 35 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 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 risk management and internal control systems is provided within the Strategic Report on pages 28 - 31 and also on page 51. 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 and 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 the 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 $98.7 million at 31 December 2015. 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. Whistleblowing was a standing agenda item at all Board meetings and 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 2020 having served for a period of five years. 36 37 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015CORPORATE GOVERNANCE Audit Committee Report (cont.) Nominations Committee 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. These discussions addressed the following topics: • appointment of CEO/Director, • succession planning, • annual retirement and re-election of Directors, • review of skills/experience on the board etc. 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 2016 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. Keith Henry and Nicholas Clayton will retire by rotation and offer themselves for re-election at the 2016 AGM. Their biographical details, provided on page 34, demonstrate the range of experience and skill they bring to the Group. The Nominations Committee and the Board considers that their performance continues to be effective and that they have the necessary commitment to fulfil their respective roles. 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 79. The Committee has reviewed the UK Corporate Governance Code including the best practice for companies to put the external audit contract out to tender at least every ten years. Having considered the Financial Reporting Council’s (‘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 2016 AGM. Nicholas Clayton Chairman of the Audit Committee 10 March 2016 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. 38 39 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015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. The committee awarded no bonuses to the executive Directors during the year: 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 2015 review of achievement of certain corporate objectives (KPIs); and subsequently • the setting of 2016 corporate objectives (KPIs); and • the proposed basic salary uplift for 2016 to reflect general inflation and merit awards for staff and executive management. The safe operation of our activities, the management and maturation of the Group’s assets, and the selective pursuit of new business opportunities, are the main performance criteria on which the Company’s executive team and employees are judged when considering remuneration matters. In Madagascar, the Ampasindava licence was relinquished with no liabilities to the Group in 2015; the Ambilobe licence that previously experienced very limited operational progress saw significant activity in 2015 with the completion and processing of a 1,175km2 3D seismic survey. In Mauritania, the acquisition of a 40.5% interest in block C-3 and the acquisition of a 13.5% interest in block C-10 was completed and added to the Group’s asset portfolio. 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 commercially attractive opportunities to selectively pursue that are a strategic fit for the Company. The Committee was satisfied with the number of opportunities reviewed by management throughout the year and who continue to work hard to short-list and appraise ventures, with a view to only pursuing those where they see material value 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: Director Alastair Beardsall 1 Eskil Jersing 2015 salary 2014 salary % change £100,000 £275,000 £193,400 decrease 48% n/a n/a 1 Alastair Beardsall’s Interim CEO 2015 salary was initially £197,300, this was subsequently reduced following the appointment of Eskil Jersing as CEO. 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 2015 the fees for each non-executive individual were £35,700 (2014: £35,000). 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 2015 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. Director Alastair Beardsall Eskil Jersing Philip Frank 2015 bonus 2014 bonus % change - - - - n/a - n/a 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: Director Alastair Beardsall Eskil Jersing Philip Frank 2015 LTIP Award 2014 LTIP Award % change - - - 727,100 n/a 936,100 n/a n/a n/a 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. These represent 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 vesting criteria of the All Staff LTIP, options granted will only vest if the Company Share Price meets the criteria set out in Note 25 on pages 94 - 96. Under these criteria, if the Company Share Price underperforms the FTSE 350 Index (‘Index’), by more than 10% then no options will vest. For 100% of the options to vest the Company Share Price must outperform the Index by more than 50%. No LTIPs vested in the year. 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 25. 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. 40 41 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 CORPORATE GOVERNANCE Remuneration Committee Report (cont.) The Company made considerable progress during 2015 which will hopefully act as the springboard for future success in 2016 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 10 March 2016 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 25. 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. 42 43 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015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 2016: • Alastair Beardsall, Executive Chairman, will receive a base salary, effective 1/1/2016, of £100,000, 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 1/1/2016, of £277,800, 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 2016 and will be based on achievement of certain corporate KPIs and individual performance, the principles of the bonus scheme are set out on page 43. 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 43, 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 2016 is set at £36,057. All Staff and NED LTIPs Directors’ interests in LTIPs are accounted for under International Financial Reporting Standards (‘IFRS’) 2 - Share-Based Payments; accounting charges in the period are detailed in Note 25 on pages 94 - 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 2015 Lapsed Granted Exercised 31 December 2015 Exercise price Earliest exercise date 1 Latest exercise date 1 No gains were made on the exercise of options during the year (2014: 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 2015 2 Lapsed Granted Exercised 31 December 2015 Exercise price Earliest exercise date 1 Latest exercise date 1 Nicholas Clayton Keith Henry 103,150 103,150 - - Malcolm Pattinson 186,483 (83,333) 392,783 (83,333) - - - - - - - - 103,150 103,150 103,150 309,450 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 40p 40p 01.10.15 30.09.17 01.10.15 30.09.17 01.10.15 30.09.17 The rules of the LTIP schemes and a full list of performance conditions and vesting criteria are summarised in Note 25 on pages 94 - 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 2015 salary review was implemented on 1 January 2016 and is incorporated within the numbers below: Director Alastair Beardsall Eskil Jersing Commencement of appointment Date of current contract Base annual salary Notice period 8 September 2009 1 January 2011 £100,000 6 months 23 March 2015 23 March 2015 £277,800 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 £36,057 £36,057 £36,057 Alastair Beardsall 2,384,600 2,384,600 40p 01.11.16 30.09.19 Malcolm Pattinson 15 November 2010 15 November 2010 Eskil Jersing Philip Frank Philip Frank - - - 2,337,350 (2,337,350) 69,500 (69,500) 4,791,450 (2,406,850) - - - - - - - - - - - - - n/a 40p 43p n/a n/a 01.10.15 30.09.19 10.12.16 09.12.18 2,384,600 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. 1 If the Company is in a closed period, the earliest and latest date of exercise may vary. 44 45 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 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: Ordinary shares of 40p each Alastair Beardsall 1 Eskil Jersing 1 (appointed 23 March 2015) Philip Frank 1 (resigned 13 March 2015) Keith Henry 2 Nicholas Clayton 2 Malcolm Pattinson 2 1 Executive Director. 8 March 2016 1,062,500 - n/a 500,000 132,500 62,810 31 December 2015 31 December 2014 1,062,500 1,062,500 - n/a 500,000 132,500 62,810 n/a 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. 2014 Remuneration 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. Fees and basic salary £ 212,740 1 249,000 35,000 35,000 35,000 566,740 933,728 Bonus £ - - - - - - - Defined contribution pension £ Benefits in kind £ Single figure remuneration Total 2014 £ - 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 Fees and basic salary Base fees and salary remain the foundation 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 Remuneration Committee will take into account: The Company provides limited Directors’ and Officers’ liability insurance, at a cost of approximately $27k in 2015 (2014: $26k). • the Director’s performance, individual responsibilities, authorities and experience; and • comparisons with salary levels in peer group companies gathered from disclosure in various public documents such as Aggregate Remuneration The single figure of total remuneration paid to Directors in 2015 and 2014 is summarised below (audited): 2015 Remuneration Executive Directors: Alastair Beardsall Fees and basic salary £ 163,515 1 Eskil Jersing (appointed 23 March 2015) 213,654 Philip Frank (resigned 13 March 2015) 70,176 Non-executive Directors: Nicholas Clayton Keith Henry Malcolm Pattinson Aggregate remuneration 2015 (£) Aggregate remuneration 2015 (US$) 1 Includes pension contributions paid as cash. 35,700 35,700 35,700 554,445 847,518 Bonus £ - - - - - - - - Defined contribution pension £ Benefits in kind £ Single figure remuneration Total 2015 £ - 21,365 7,018 - - - 9,413 5,521 3,693 - - - 28,383 43,386 18,627 28,473 172,928 240,540 80,887 35,700 35,700 35,700 601,455 919,377 peer group annual reports and accounts. 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 two parts, (i) corporate performance as measured against pre-determined objectives (KPIs), and (ii) individual performance; refer to page 43 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 2015 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 2015. As a comparison, in 2014 the Remuneration Committee noted that it had not met any of its key objectives and accordingly no executive bonuses were awarded to the executive Directors. 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 2015 are similar to those adopted in 2014. Non-executive Directors are not eligible to receive bonus payments. 46 47 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 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 Philip 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 table below sets out the total remuneration for the Company’s CEO for the past six years: Year CEO % change CEO single figure of total remuneration (£) Annual bonus pay-out against maximum opportunity (%) Long-term incentive vesting rates against maximum opportunity (%) 2015 2014 2013 2012 2011 2010 Alastair Beardsall 1 / Eskil Jersing 290,184 32.0% 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%) Graeme Thomson / Angus MacAskill 366,377 (51.2%) - - - - 23% - - - - - - - 1 Part-time. 2 Includes £74,745 paid as compensation for loss of office. Since August 2013, Alastair Beardsall had acted as interim CEO (until Eskil Jersing’s appointment) in addition to being executive Chairman (his remuneration as relating to his appointment in 2013 had been prorated accordingly). The annual percentage change in CEO single figure remuneration for years 2010 to 2015 compares with that of all employees: 1.3%, (23.9%), (20.5%), 8.5%, (19.8%) and 11.1% respectively. The graphs below show the value of the executive Director packages for 2015 together with minimum and maximum remuneration attainable: Alastair Beardsall (executive Chairman and interim CEO) Eskil Jersing (Chief Executive) Maximum Actual Minimum £0 £100,000 £200,000 £300,000 £400,000 £500,000 Philip Frank (Exploration Director) Maximum Actual Minimum Basic salary Bonus Pension provision Other benefits Basic salary Bonus Pension provision Other benefits £0 £100,000 £200,000 £300,000 £400,000 £500,000 Performance Graph The graph below shows a comparison between the TSR for the Company’s shares for the five-year period to 31 December 2015 and the TSR for the companies comprising the 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 SEY FTSE 350 January 10 December 10 December 11 December 12 December 13 December 14 December 15 140% 120% 100% 80% 60% 40% 20% 0% Maximum Actual Minimum 48 Basic salary Bonus Pension provision Other benefits The table below shows the total Group remuneration compared to the total distribution to shareholders: Total Group remuneration (£) Total distribution to shareholders £0 £100,000 £200,000 £300,000 £400,000 £500,000 2015 2014 2,011,139 1,810,941 - - 49 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015CORPORATE GOVERNANCE Communications with Shareholders Internal Controls The Board is directly 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 25 April 2016, can be found in the notice of the meeting on the Company’s website. 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. 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. 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. 50 51 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015CORPORATE GOVERNANCE Conflicts of Interest Extractive Industries Transparency Initiative (‘EITI’) 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. 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 2015: Madagascar: Ambilobe Madagascar: Ampasindava 1 Cameroon 2 Mauritania 3 Somaliland 4 2015 $000 166 - - 104 75 345 2014 $000 146 108 500 104 75 933 1 Payment in 2014 made by Exxon Mobil. 2 Payment in 2014 made by Murphy Oil Corporation. 3 Included within payments made to SMHPM under the terms of the Chinguetti Funding Agreement, relating to Chinguetti field operating costs and PSC obligations, totalling $8.8 million in 2015 (2014: $9.5 million). 4 Payments made by Genel Energy. 52 53 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015CORPORATE GOVERNANCE Directors’ Report The Directors present their Annual Report and Financial Statements on the affairs of the Company and its subsidiaries, together with the independent Auditors’ Report for the year ended 31 December 2015. DIRECTORS The Directors who served during the year were as follows: PRINCIPLE ACTIVITY AND BUSINESS REVIEW The principal activity of the Group and Company throughout the year remained the exploration for and production of oil and gas in Africa. The significant developments during 2015 and the other activities of the Group, as well as the future strategy and prospects for the Group, are reviewed in detail in the Chairman’s Statement, Chief Executive’s statement and the Strategic Report section of this report. Mr. Alastair Beardsall Mr. Eskil Jersing (appointed 23 March 2015) Dr. Philip Frank (resigned 13 March 2015) Mr. Keith Henry Mr. Nicholas Clayton Mr. Malcolm Pattinson The Group operates through overseas branches and subsidiary undertakings as appropriate to the fiscal environment. Subsidiary undertakings of the Group are set out in Note 17 to the financial statements. Biographical details of serving Directors can be found in the Board of Directors section of this report on page 34. The Group uses a number of key performance indicators to assess the business performance against strategy. Some of these relate to net debt ($), reserves (million boe). Adjusted EBITDAX ($), production (bopd) and share price growth. Analysis of the KPIs can be found in the Financial Review on pages 24 - 27. RESULTS AND DIVIDENDS The Group loss for the financial year was $16.0 million (2014: loss $12.3 million). This leaves an accumulated Group retained deficit of $440.9 million (2014: deficit $425.2 million) to be carried forward. The Directors do not recommend the payment of a dividend (2014: $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 12 - 15. The financial position of the Group and Company, its cash flows and liquidity position are described in the Financial Review on pages 24 - 27. In addition, Note 24 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 19 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 25. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. 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, Keith Henry and Nicholas Clayton retire by rotation and offer themselves for re-election at the forthcoming AGM on 25 April 2016. 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 10 March 2016: Waterford Finance & Investment Ltd Mistyvale Limited YF Finance Limited Denis O'Brien Banque Heritage Sprott Asset Management Number 65,785,517 34,467,790 26,387,105 15,750,000 14,930,358 6,871,638 % 29.90 15.66 11.99 7.16 6.78 3.12 BUSINESS RISK A summary of the principle and general business risks can be found within the Strategic Report on pages 28 - 31. FINANCIAL INSTRUMENTS Information about the use of financial instruments, the Group’s policy and objectives for financial risk management is given in Note 24 to the financial statements. 54 55 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 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 25 April 2016. In preparing these financial statements, the Directors are required to: Eskil Jersing Chief Executive Officer 10 March 2016 • 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. Eskil Jersing Chief Executive Officer 10 March 2016 56 57 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015 Sterling Energy plc Group Accounts Year ended 31 December 2015 Independent Auditors’ Report to the members of Sterling Energy plc We have audited the financial statements of Sterling Energy plc for the year ended 31 December 2015 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. responsible RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As explained more fully in the Statement of Directors’ responsibilities, for the Directors are 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 for Reporting Council’s Auditors. 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. (‘FRC’s’) Ethical Standards 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 60 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 2015 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with 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 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 McNaughton (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London, United Kingdom 10 March 2016 BDO LLP is a limited liability partnership registered in England and Wales. Consolidated Statement of Comprehensive Income Year ended 31 December 2015 Note 31 December 2015 $000 31 December 2014 $000 Revenue Cost of sales Gross (loss)/profit Other administrative expenses Impairment of oil and gas assets Pre-licence costs Onerous contract Chinguetti cessation costs Total administrative expenses Loss from operations Finance income Finance expense Loss before tax Tax Loss for the year attributable to the owners of the parent Other comprehensive income Currency translation adjustments Total other comprehensive income for the year Total comprehensive expense for the year attributable to the owners of the parent Basic loss per share (US cents) Diluted loss per share (US cents) 4 6 3 21 7 5 9 9 10 13 13 5,031 (6,028) (997) (2,305) (8,183) (2,212) (3,700) 2,159 (14,241) (15,238) 356 (1,068) (15,950) - (15,950) 6 6 (15,944) (7.25) (7.25) 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) 24 24 (12,294) (5.60) (5.60) 61 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015GROUP ACCOUNTSGROUP ACCOUNTSConsolidated Statement of Financial Position Year ended 31 December 2015 Consolidated Statement of Changes in Equity Year ended 31 December 2015 At 1 January 2014 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 At 31 December 2014 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 $000 $000 Currency translation reserve $000 Retained deficit 1 Total $000 $000 149,014 378,863 (249) (413,550) 114,078 - - - - - - - - - 24 24 - (12,318) (12,318) - 24 (12,318) (12,294) 659 659 149,014 378,863 (225) (425,209) 102,443 - - - - - - - - - 6 6 - (15,950) (15,950) - 6 (15,950) (15,944) 297 297 At 31 December 2015 149,014 378,863 (219) (440,862) 86,796 1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve. 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 2015 $000 31 December 2014 $000 14 15 16 18 19 21 22 21 - 25,074 34 25,108 1,320 550 98,653 100,523 125,631 149,014 378,863 (219) (440,862) 86,796 32,395 32,395 2,740 3,700 6,440 38,835 125,631 - 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 The financial statements of Sterling Energy plc, registered number 1757721, were approved by the Board of Directors and authorised for issue on 10 March 2016. Signed on behalf of the Board of Directors. Eskil Jersing Chief Executive Officer 10 March 2016 62 63 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015GROUP ACCOUNTSGROUP ACCOUNTSConsolidated Statement of Cash Flows Year ended 31 December 2015 Company Statement of Financial Position Year ended 31 December 2015 2015 $000 2014 $000 Note 31 December 2015 $000 31 December 2014 $000 (15,950) (12,318) Property, plant and equipment Non-current assets Note 14,16 3 16 15 Operating activities Loss before tax Depreciation, depletion & amortisation Impairment expense Chinguetti cessation costs Onerous provision Finance income and gains Finance expense and losses Share-based payment charge Operating cash flow prior to working capital movements Decrease in inventories Decrease/(Increase) in trade and other receivables Decrease in trade and other payables Cash (outflow)/generated from continuing operations Cash outflow from discontinued operations Net cash flow (used in)/generated 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 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 54 8,183 (2,159) 310 (356) 1,056 297 (8,565) 903 2,744 (2) (4,920) (4,877) (43) (4,920) 356 (16) (4,831) (4,491) (9,411) 108,148 (84) 98,653 2,358 7,903 - 3,390 (398) 1,265 659 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 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 16 17 18 19 21a 22 21 - 29,113 29,113 1,320 20,478 97,483 119,281 148,394 149,014 378,863 (451,885) 75,992 32,395 32,395 36,307 3,700 40,007 72,402 148,394 - 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 The financial statements of Sterling Energy plc, registered number 1757721, were approved by the Board of Directors and authorised for issue on 10 March 2016. Signed on behalf of the Board of Directors Eskil Jersing Chief Executive Officer 10 March 2016 64 65 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015GROUP ACCOUNTSGROUP ACCOUNTS                Company Statement of Changes in Equity Year ended 31 December 2015 Company Statement of Cash Flows Year ended 31 December 2015 At 1 January 2014 Total comprehensive expense for the year Share option charge for the year At 31 December 2014 Total comprehensive expense for the year Share option charge for the year At 31 December 2015 Share capital $000 Share premium $000 Retained deficit 1 $000 Total $000 149,014 378,863 (364,232) 163,645 - - - - (84,266) (84,266) 659 659 149,014 378,863 (447,839) 80,038 - - - - (4,343) (4,343) 297 297 149,014 378,863 (451,885) 75,992 1 The share option reserve has been included within the retained deficit reserve and is a non-distributable reserve. Note 16 16 Operating activities Loss before tax Depreciation, depletion & amortisation Impairment expense Impairment of investment Chinguetti cessation costs Onerous provision Finance income and gains Finance expense and losses Share-based payment charge Operating cash flow prior to working capital movements Decrease in inventories (Increase)/decrease in trade and other receivables Decrease in trade and other payables Decrease in provisions Net cash flow used in operating activities Investing activities Interest received Net cash generated from investing activities Net decrease 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 2015 $000 (4,344) - - - (2,159) 310 (356) 1,036 22 (5,491) 903 (705) (4,018) (18) (9,329) 356 356 (8,973) 106,473 (17) 97,483 2014 $000 (84,266) 1,567 3,979 79,604 - 3,390 (398) 1,241 30 5,147 522 5,569 (22,936) (533) (12,231) 398 398 (11,833) 118,498 (192) 106,473 66 67 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015GROUP 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 The Group and Company financial statements have been prepared in accordance with IFRSs as adopted by the EU. (i) New and amended standards adopted by the Group: No standards adopted this year had a material affect. (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 IFRS 11 Description Accounting for Acquisitions of Interests in Joint Operations (Amendments) IAS 16 and IAS 38 Acceptable Methods of Depreciation and Amortisation (Amendments) Effective date 1 January 2016 1 January 2016 IAS 16 and IAS 41 Agriculture: Bearer Plants (Amendments) 1 January 2016 IAS 27 Equity Method in Separate Financial Statements (Amendments) 1 January 2016 Annual Improvements to IFRSs (2012–2014 Cycle) IAS 1 IAS 19 Disclosure Initiative (Amendments) Defined Benefit Plans (Amendments) Annual Improvements to IFRSs (2010-2012 Cycle) 1 January 2016 1 January 2016 1 February 2015 1 February 2015 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 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. 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. 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. In assessing the classification of interests in joint arrangements, the Group considers: • 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. 68 69 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS 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. 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 recognised within the Statement of Comprehensive Income. 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. 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: Impaired assets are reviewed annually to determine whether any substantial change to their fair value amounts previously impaired would require reversal. Computer and office equipment depreciation – 33% straight line. 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. Refer to Note 2 and Note 3 for detailed disclosure of the results of impairments and impairment reviews performed. 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 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 an administrative 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 – Details of these can be found in 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. 70 71 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS 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. 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. 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. 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. 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. 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. 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. 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. 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. 72 73 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS 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. 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 17. Onerous commitment provision A provision for an onerous commitment 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 - Details of these can be found in Note 21. 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. See page 23. Impairment of Assets Management is required to assess oil and gas assets for indicators of impairment and has 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 14, 15 and 16. The carrying value of related investments in the Company Statement of Financial Position is disclosed in Note 17. 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. 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 judgmental. 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. 74 75 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS 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 (2014: 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 $8.2 million in accordance with IAS 36 “Impairment of Assets”. This related to the full impairment of the Ntem block, a decision based on a combination of above ground risks (the current impasse with the Government over the Company’s claim of force majeure) and a risked assessment of the remaining prospectivity on block. During 2014 the Group recognised impairments totalling $7.9 million in accordance with IAS 36 “Impairment of Assets” on the Chinguetti Funding & Royalty Agreement’s ($6.0 million) and the Ampasindava block ($1.9 million). Impairments and associated reversals have been determined by comparing the current value in use to carrying values. 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. Details of these can be found in Note 21. 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 25. 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 2015 and for the year ended 31 December 2014. Africa Note 2015 $000 2014 $000 Middle East (Discontinued) 2014 $000 2015 $000 Total 2015 $000 2014 $000 15 14 16 5,031 15,991 (6,028) (11,873) (997) 4,118 (8,183) (1,863) - - - (2,061) (3,979) - (2,212) (2,196) 2,159 - (3,700) (3,390) (12,933) (9,371) - - - - - - 5 - - - 5 Statement of comprehensive income Revenue 1 Cost of sales Gross (loss)/profit Impairment of E&E assets Impairment of royalty assets Impairment of D&P assets Accruals release Pre-licence costs Chinguetti cessation costs Onerous contract Segment result Unallocated corporate expenses Loss from operations Finance income Finance expense Loss before tax Tax Loss attributable to owners of the parent - - - - - - 5 - - - 5,031 15,991 (6,028) (11,873) (997) 4,118 (8,183) (1,863) - - 5 (2,061) (3,979) 5 (2,212) (2,196) 2,159 - (3,700) (3,390) 5 (12,928) (9,366) (2,310) (2,074) (15,238) (11,440) 356 398 (1,068) (1,276) (15,950) (12,318) - - (15,950) (12,318) 1 Revenue from continuing operations (Mauritania, Africa) includes amounts of $4.7 million (100% external) from one single customer (2014: $14.9 million). 76 77 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS  Corporate Africa 2015 $000 2014 $000 2015 $000 2014 $000 Middle East (Discontinued) 2014 $000 2015 $000 Total 2015 $000 2014 $000 5. LOSS FROM OPERATIONS Loss from operations is stated after charging: Other segment information Capital additions: Property, plant and equipment Exploration and evaluation Depreciation, depletion & amortisation Impairment expense Segment assets and liabilities 16 - (54) - 32 - (58) - - 4,831 17,102 - (2,300) - (8,183) (7,903) Non-current assets 1 34 72 25,074 28,426 Segment assets 2 98,010 107,151 2,503 6,461 Segment liabilities 3 (654) (815) (38,173) (38,877) 16 32 4,831 17,102 (54) (2,358) (8,183) (7,903) Staff costs Share-based payments 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 Note 8 8 14,15,16 16 21 25,108 28,498 Audit of the Company's subsidiaries pursuant to legislation - - - - - - - - - - 10 (8) 53 100,523 113,665 (28) (38,835) (39,720) Audit related assurance services Total audit fees 1 Segment non-current assets include $nil in Cameroon (2014: $8.0 million), $4.0 million in Mauritania (2014: $nil), $3.6 million in Madagascar (2014: $3.0 million) and $17.5 million in Somaliland (2014: $17.4 million). 2 Corporate segment assets include $97.6 million cash and cash equivalents (2014: $106.6 million) and $426k other receivables (2014: $543k). Carrying amounts of segment assets exclude investments in subsidiaries. 3 Carrying amounts of segment liabilities exclude intra-group financing. See Note 2 for details on the above impairment. 6. COST OF SALES 4. REVENUE Revenue from the sale of oil and gas Royalty income Total operating revenue Total 2015 $000 4,670 361 5,031 2014 $000 14,944 1,047 15,991 Amortisation of intangible royalty asset Depletion of property, plant & equipment - oil and gas Operating costs Over lift of product entitlement Onerous contract provision Total 2015 $000 3,623 297 8,183 54 3,700 50 56 - 106 2015 $000 - - 8,514 904 (3,390) 6,028 2014 $000 3,524 659 7,903 58 3,390 53 59 - 112 2014 $000 733 1,567 9,050 523 - 11,873 78 79 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS 7. CHINGUETTI CESSATION COSTS 9. FINANCE INCOME AND FINANCE EXPENSE Increase in decommissioning provision      Reassessment of accrued costs          Note 21 2015 $000 (8,762) 10,921 2,159 2014 $000 - - - 8. EMPLOYEE INFORMATION The average monthly number of employees of the Group (including executive Directors) was: Africa Corporate support staff Group employee costs during the year (including executive Directors) amounted to: Wages and salaries Social security costs Other pension costs Share-based payments 2015 2014 7 10 17 2015 $000 3,023 372 228 297 4 10 14 2014 $000 2,955 367 202 659 3,920 4,183 Key management personnel include directors who have been paid $919k (2014: $1.0 million), see Remuneration Committee Report (pages 40 - 49) 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 2015 this portion amounted to $3.5 million (2014: $4.1 million). Finance income: Interest revenue on short-term deposits Finance expense: Bank charges Unwinding of discount on decommissioning provision Unwinding of discount on production royalty bonus provision Exchange differences 2015 $000 356 356 13 966 - 89 2014 $000 398 398 11 1,079 5 181 1,068 1,276 10. TAXATION The tax charge for the year is calculated by applying the applicable standard rate of tax as follows: Loss before tax Tax on loss on ordinary activities at standard UK corporation tax rate of 20.25% (2014: 21.50%) Effects of: Expenses not deductible for tax purposes Capital allowances in excess of depreciation Adjustment for tax losses Tax charge for the year Total 2015 $000 (15,950) (3,230) 1,572 (785) 2,443 - 2014 $000 (12,318) (2,648) 2,101 102 445 - Deferred Tax At the reporting date the Group had an unrecognised deferred tax asset of $19.0 million (2014: $17.1 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 $15.4 million (2014: $13.4 million) relating primarily to unused losses and unutilised capital allowances. 80 81 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS11. DISCONTINUED OPERATIONS 14. INTANGIBLE ROYALTY ASSETS 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 2015 the Group released accruals totalling $5k. The financial impact of the Group’s discontinued operations is provided below: Net decrease in cash and cash equivalents 12. LOSS ATTRIBUTABLE TO THE COMPANY 2015 $000 (43) 2014 $000 (460) The loss for the financial year within the Company accounts of Sterling Energy plc was $4.3 million (2014: $84.3 million) which includes the investment impairment as detailed in Note 17. As provided by s408 of the Companies Act 2006, no individual statement of comprehensive income and expense is provided in respect of the Company. 13. EARNINGS PER SHARE Basic Diluted 2015 $000 2014 $000 2015 $000 2014 $000 Loss for the year (continuing operations) (15,950) (12,318) (15,950) (12,318) Loss for the year (discontinuing operations) - - - - 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 - - - - Fully diluted average number of ordinary shares during the year 220,053,520 220,053,520 220,053,520 220,053,520 EPS (continuing operations) (US cents) EPS (discontinuing operations) (US cents) (7.25) - (5.60) - (7.25) - (5.60) - 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 7,578,783 (2014: 13,185,433) (see Note 25 on pages 94 - 96). Net book value at 1 January 2014 Amortisation charge for the year Impairment for the year Net book value at 31 December 2014 Net book value at 31 December 2015 15. INTANGIBLE EXPLORATION AND EVALUATION (‘E&E’) ASSETS Net book value at 1 January 2014 Additions during the year Impairment for the year Net book value at 31 December 2014 Additions during the year Impairment for the year Net book value at 31 December 2015 Impairment for the 2015 refers to the full impairment of the Ntem asset (2014: Ampasindava). Group $000 2,794 (733) (2,061) - - Group $000 13,187 17,102 (1,863) 28,426 4,831 (8,183) 25,074 82 83 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS16. PROPERTY, PLANT AND EQUIPMENT Group Cost At 1 January 2014 Additions during the year At 31 December 2014 Additions during the year At 31 December 2015 Accumulated depreciation and impairment At 1 January 2014 Charge for the year Impairment reversal for the year At 31 December 2014 Charge for the year Impairment for the year At 31 December 2015 Net book value at 31 December 2015 Net book value at 31 December 2014 Net book value at 31 December 2013 Oil and Gas assets $000 Computer and office equipment $000 185,802 - 185,802 - 185,802 (180,256) (1,567) (3,979) (185,802) - - 143 32 175 16 191 (45) (58) - (103) (54) - Total $000 185,945 32 185,977 16 185,993 (180,301) (1,625) (3,979) (185,905) (54) - (185,802) (157) (185,959) - - 5,546 34 72 98 34 72 5,644 Company Cost At 1 January 2014 At 31 December 2014 At 31 December 2015 Accumulated depreciation and impairment At 1 January 2014 Charge for the year Impairment for the year At 31 December 2014 At 31 December 2015 Net book value at 31 December 2015 Net book value at 31 December 2014 Net book value at 31 December 2013 Oil and Gas assets $000 Computer and office equipment $000 185,802 185,802 185,802 (180,256) (1,567) (3,979) (185,802) (185,802) - - 5,546 - - - - - - - - - - - Total $000 185,802 185,802 185,802 (180,256) (1,567) (3,979) (185,802) (185,802) - - 5,546 84 85 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS17. INVESTMENT IN SUBSIDIARIES 18. TRADE AND OTHER RECEIVABLES Cost At 1 January 2014 Impairment of investment in subsidiary Additions during the year At 31 December 2014 Additions during the year At 31 December 2015 Company $000 107,834 (79,604) 660 28,890 223 29,113 Trade receivables Amounts owed by subsidiary undertakings Other receivables Amounts due from joint venture partners Prepayments and accrued income Group Company 2015 $000 80 - 130 - 340 550 2014 $000 2,699 - 162 - 433 2015 $000 42 20,366 8 - 62 2014 $000 2,518 17,130 55 - 70 3,294 20,478 19,773 The subsidiary undertakings at 31 December 2015 are as follows (these undertakings are included on consolidation): The Directors consider that the carrying amount of trade and other receivables is a reliable estimate of their fair value. Country of incorporation Class of shares held Proportion of voting rights held 2015 Proportion of voting rights held 2014 Nature of business 19. SHARE CAPITAL Ordinary 100% 100% Ordinary 100% 100% Exploration for oil and gas Exploration for oil and gas Ordinary 100% 100% Investment holding company Authorised, called up, allotted and fully paid 220,053,520 (2014: 220,053,520) ordinary shares of 40p 149,014 149,014 2015 $000 2014 $000 Ordinary 100% 100% Jersey, CI Ordinary 100% 100% Exploration for oil and gas Exploration for oil and gas 20. RESERVES Reserves within equity are as follows: Jersey, CI Ordinary 100% 100% Investment holding company Share Capital Amounts subscribed for share capital at nominal value. United Kingdom United Kingdom United Kingdom United Kingdom 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 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 Sterling Energy Overseas Limited 4 Held directly or indirectly through Sterling Northwest Africa Limited 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 87 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS21. SHORT AND LONG-TERM PROVISIONS 22. TRADE AND OTHER PAYABLES At 31 December 2015, a provision of $3.7 million (2014: $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 Increase in decommissioning provision      Unwinding of discount 2015 $000 2014 $000 32,395 22,667 - - 32,395 22,667 2015 $000 2014 $000 22,667 21,588 8,762 966 32,395 - 1,079 22,667 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. The Company amount of $32.4 million (2014: $22.7 million) represents the amount provided within the Company for future decommissioning expenditure. b) 2003 Production Royalty Bonus Scheme Group At 1 January Unwinding of discount Transferred to current liabilities Foreign exchange movements 2015 $000 2014 $000 - - - - - 63 5 (68) - - 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 25) and no further sums were accrued. The scheme concluded in 2015. Trade payables Amounts owed to subsidiary undertakings Amounts advanced from joint venture partners Accruals Group Company 2015 $000 264 - 1,043 1,433 2,740 2014 $000 356 - 850 12,457 13,663 2015 $000 13 2014 $000 10 35,523 39,120 - 771 36,307 - 12,134 51,264 The Directors consider that the carrying amount of trade and other payables is a reliable estimate of their fair value. 23. OPERATING LEASES AND CAPITAL COMMITMENTS Group Company 2015 $000 2014 $000 2015 $000 2014 $000 Minimum lease payments under operating leases recognised as an expense in the year 6,124 5,220 5,702 4,763 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 Group Company 2015 $000 4,774 422 5,196 2014 $000 5,203 1,554 6,757 2015 $000 4,315 - 4,315 2014 $000 4,809 1,554 6,363 Operating lease payments represent the Group’s share of rentals for the Berge Helene vessel in Mauritania, a BWO operated Floating Production, Storage and Offtake (‘FPSO’) and rentals payable for its office properties. The current FPSO commitment is through the Chinguetti Funding Agreement and has a break clause in 2016; accordingly, included within the $5.1 million is $4.3 million payable on the FPSO within one year. 88 89 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes 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 2015 $000 987 2014 $000 1,081 2015 $000 975 2014 $000 1,065 24. 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 2015 and 31 December 2014. Group Financial assets (classified as loans and receivables) Cash and cash equivalents Cash and cash equivalents held on behalf of partners Trade and other receivables Total Financial liabilities at amortised cost Trade and other payables Total 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 2015 $000 2014 $000 97,553 107,034 1,100 209 1,114 2,861 98,862 111,009 2,740 2,740 13,663 13,663 Carrying amount/Fair value 2015 $000 2014 $000 97,483 20,416 106,473 19,703 117,899 126,176 36,307 36,307 51,264 51,264 90 91 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTSForeign Currency Risk The Group’s and Company’s functional currency is the US dollar, being the currency in which the majority of the Group’s revenue and expenditure is transacted. Small elements of its management, services and treasury functions are held and transacted in pounds sterling. The Group does not enter into derivative transactions to manage its foreign currency. Foreign currency risk is immaterial to the Group and Company – see the following table: Financial Assets Cash and cash equivalents Cash and cash equivalents held in US$ Cash and cash equivalents held in GBP 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 Group Company 2015 $000 97,380 1,273 98,653 2014 $000 106,791 1,357 108,148 2015 $000 96,203 1,280 97,483 2014 $000 105,180 1,293 106,473 Group Company 2015 $000 157 53 210 2014 $000 2,779 82 2,861 2015 $000 2014 $000 20,408 19,699 8 4 20,416 19,703 Group Company 2015 $000 2,202 538 2,740 2014 $000 12,972 691 13,663 2015 $000 30,042 6,265 36,307 2014 $000 45,196 6,068 51,264 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, group or company of counter-parties with similar characteristics. 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% (2014: 99%) 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 $18k (2014: $533k) 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 2015 is nil % (2014: nil %). Less than six months $000 Six months to one year $000 One to six years $000 Total $000 Interest $000 Principal $000 Group Trade payables (2015) Trade payables (2014) 1,197 1,111 Company Trade and other payables (2015) Trade and other payables (2014) 8 4 - - - - - - 1,197 1,111 35,523 35,531 39,120 39,124 - - - - - - - - 92 93 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS  25. 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 $297k (2014: $659k). The Company recognised a total expense, within administration costs, in respect of share-based payments under equity-settled share option plans of $22k (2014: $30k). 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. 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: 2015 Number of share options 2015 Exercise price (pence) 2014 Number of share options 2014 Exercise price (pence) Outstanding at the beginning of the year 11,556,950 Granted during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year - (5,440,450) 6,116,500 - 40 40 40 40 - 12,114,800 4,396,300 (4,954,150) 11,556,950 - 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 2015 have a contractual life of 3.35 years (2014: 3.81 years). The cost of the options is spread over the vesting period of three years. There were no options granted during the year. The fair value of the options granted in 2014 was 5.7 pence. 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. 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 2015 n/a n/a n/a n/a n/a n/a 2014 24 40 61.25% 3 0.66% Nil 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’). The movement during the year, on the share options, was as follows: 2015 Number of share options 2015 Exercise price (pence) 2014 Number of share options 2014 Exercise price (pence) Outstanding at the beginning of the year 1,235,700 Granted during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year - (166,200) 1,069,500 - 42 - 42 42 - 949,900 563,800 (278,000) 1,235,700 - 43 40 43 42 - The options outstanding at 31 December 2015 have a contractual life of 3.33 years (2014: 4.31 years). The cost of the options is spread over the vesting period of three years. There were no options granted during the year. The fair value of the options granted during 2014 was 5.7 pence. 94 95 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes to the Financial StatementsGROUP ACCOUNTS Fair values were measured by use of a modified binomial model. The inputs to the basic binomial model were as follows: 26. RELATED PARTY TRANSACTIONS Details of Directors’ remuneration, which comprise key management personnel, are provided below: Share price (pence) Exercise price (pence) Expected volatility at time of grant Expected life (years) Risk free rate (%) Expected dividends 2015 n/a n/a n/a n/a n/a n/a 2014 24 40 61.25% 3 0.66% 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. Short-term employee benefits Payments on loss of office Defined contribution pension Share-based payments Group Company 2015 $000 876 - 43 (84) 835 2014 $000 960 123 41 416 1,540 2015 $000 163 - - 22 185 2014 $000 173 - - 30 203 Further information on Directors’ remuneration is detailed in the Remuneration Committee Report, on pages 40 - 49. The movement during the year, on the share options, was as follows: The Group and Company has no other disclosed related party transactions. 2015 Number of share options 2015 Exercise price (pence) 2014 Number of share options 2014 Exercise price (pence) Outstanding at the beginning of the year 392,783 Granted during the period Lapsed during the period Outstanding at the end of the year Exercisable at the end of the year - (83,333) 309,450 309,450 40 - 40 40 40 642,783 - (250,000) 392,783 83,333 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. 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 2015 have a contractual life of 1.75 years (2014: 2.33 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 remained employed by the Group when the options are exercised, unless employment is terminated on death, or as a good leaver. 27. SUBSEQUENT EVENTS Mauritania – Withdrawal from block C-3 On 29 January 2016 it was announced that it’s wholly owned subsidiary SEML had submitted a notice of withdrawal to its joint venture partners in relation to block C-3, offshore Mauritania. As part of the withdrawal, SEML will assign its entire 40.5% participating interest in the production sharing contract for block C-3, located offshore in the Islamic Republic of Mauritania to Tullow Oil at no cost to Tullow Oil. The minimum work obligations for block C-3 have been completed. As a result, SEML will have no additional costs associated with the withdrawal. 28. CONTINGENT LIABILITIES The Group has received a claim for VAT from the Madagascan 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 2015, these milestones had not been met. 96 97 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015Year ended 31 December 2015Notes 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 (both proved developed reserves + proved undeveloped reserves) two dimensional 1P (proven reserves) + probable reserves, hence “proved AND probable” three dimensional the sum of 2P (proven reserves + probable reserves) + possible reserves, all 3Ps “proven AND probable AND possible” 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) Company CSOP Directors E&P Adjusted EBITDAX EITI EUR Farm-in & Farm-out Sterling Energy plc Company Share Option Plan (HMRC approved share option scheme) the Directors of the Company exploration and production earnings before interest, taxation, depreciation, depletion and amortisation, impairment, share-based payments, provisions, and pre-licence expenditure Extractive Industries Transparency Initiative the total amount of hydrocarbons expected to be produced from the hydrocarbon accumulation over the life of the project. Estimated ultimate recovery is synonymous with recoverable resource and the terms are used interchangeably. 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. FA FCA FPSO Funding Agreement Financial Conduct Authority Floating, Production, Storage and Offloading vessel G&G GBP geological and geophysical pounds sterling Genel Energy Genel Energy Somaliland Limited Group HMRC HMRC Approved Sub-Plan or HMRC Sub-Plan HSSE hydrocarbons IFRS Index JV K km km2 lead the Company and its subsidiary undertakings Her Majesty’s Revenue and Customs The HMRC approved sub-plan of the All Staff LTIP Health, Safety, Security and Environment organic compounds of carbon and hydrogen International Financial Reporting Standards FTSE 350 Index joint venture thousands kilometre(s) square kilometre(s) indication of a potential exploration prospect London Stock Exchange or LSE London Stock Exchange Plc m mcf Murphy NED LTIP OECD OPU 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 Oil Protection Unit Ordinary Shares ordinary shares of 40 pence each P90 P50 P10 Pmean the value on a probabilistic distribution which is exceeded by 90% of the outcomes. the value on a probabilistic distribution which is exceeded by 50% of the outcomes. The P50 is also the median value of the distribution. the value on a probabilistic distribution which is exceeded by 10% of the outcomes. the average of the values in the probabilistic distribution between defined ‘boundary conditions’. Universally regarded as the best single value to quote or communicate for any uncertain distribution of outcomes involved in repeated trial investigations. Panel or Takeover Panel the Panel on Takeovers and Mergers Petroleum Petroleum system oil, gas, condensate and natural gas liquids geologic components and processes necessary to generate and store hydrocarbons, including a mature source rock, migration pathway, reservoir rock, trap and seal. 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 Petronas Petrosoma Premier Pre Stack Depth Migration Prospect PSA PSC Pura Vida RA Reserves Reservoir Seismic SESP Shares Shareholders SMHPM Subsidiary Tcf TSR PC Mauritania 1 PTY LTD Petrosoma Limited (joint venture partner in Somaliland) Premier Oil process by which seismic events are geometrically re-located in space and depth to the location the event occurred in the subsurface an area of exploration in which hydrocarbons have been predicted to exist in economic quantity. A group of prospects of a similar nature constitutes a play. 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. a porous and permeable rock capable of containing fluids 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 de Patrimoine Minier a subsidiary undertaking as defined in the 2006 Act Trillion cubic feet 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 practice in relation to Board leadership and effectiveness, remuneration, accountability and relations with shareholders 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 HSBC 165 Fleet Street London EC4A 2DY Barclays Commercial Bank 1 Churchill Place London E14 5HP 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 2015Sterling Energy plc Report and Financial Statements 2015Notes 102 Designed and produced by blueasterisk design Tel: 01883 340341 www.blueasterisk.co.uk 103 Sterling Energy plc Report and Financial Statements 2015Sterling Energy plc Report and Financial Statements 2015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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