Sundance Energy Australia Ltd
Annual Report 2015

Plain-text annual report

Sundance Energy Australia Limited Annual Report 31 December 2015 Table of Contents Forward-looking Statements…………………………………….…..1 Competent Persons Statement…………………………………….…1 Abbreviations & Definitions……………………………….………….1 Directors’ Report………………………………………………….….……2 Auditor’s Independence Declaration…………………………...34 Corporate Governance………………………………………………..35 Financial Information…………………………………………………..46 Directors’ Declaration………………………………………………….98 Auditor’s Report………………………………………………………….99 Additional Information……………………………………………...101 Corporate Information……………………………………………...103 Forward-Looking Statements This Annual Report includes forward-looking statements. These statements relate to Sundance’s expectations, beliefs, intentions or strategies regarding the future. These statements can be identified by the use of words like “anticipate”, “believe”, “intend”, “estimate”, “expect”, “may”, “plan”, “project”, “will”, “should”, “seek” and similar words or expressions containing same. The forward-looking statements reflect the Company’s views and assumptions with respect to future events as of the date of this presentation and are subject to a variety of unpredictable risks, uncertainties, and other unknowns. Actual and future results and trends could differ materially from those set forth in such statements due to various factors, many of which are beyond our ability to control or predict. Given these uncertainties, no one should place undue reliance on any forward-looking statements attributable to Sundance, or any of its affiliates or persons acting on its behalf. Although every effort has been made to ensure this report sets forth a fair and accurate view, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Competent Persons Statement This report contains information on Sundance Energy’s reserves and resources which has been reviewed by Sarah Fenton, Professional Engineer, who is licensed in Colorado and is qualified in accordance with ASX Listing Rule 5.11 and has consented to the inclusion of this information in the form and context in which it appears. Abbreviations & Definitions 1P Reserves - proved reserves which have at least a 90% probability that the quantities actually recovered will equal or exceed the estimate 2P Reserves - proved plus probable reserves which have at least a 50% probability that the quantities actually recovered will equal or exceed the estimate 3P Reserves - proved plus probable plus possible reserves which have at least a 10% probability that the quantities actually recovered will equal or exceed the estimate Enterprise Value or EV - market capitalisation less cash plus debt PV10 - discounted cash flows of the Company’s reserves using a 10% discount factor Bbl – one barrel of oil BOE - a barrel of oil equivalent, using the ratio of six Mcf of natural gas to one Bbl of crude oil BOEPD – barrels of oil equivalent per day Constant Case – the reserve report case using first of month average pricing for the trailing 12 months held constant throughout the life of the reserves as prescribed by the US Securities and Exchange Commission (SEC) MBOE - a thousand barrels of oil equivalent MBbl - a thousand barrels of crude oil Mcf – one thousand cubic feet of natural gas MMcf – one million cubic feet of natural gas M - when used with $ equals millions Net Acres – gross acres multiplied by the Company’s working interest Net Wells - gross wells multiplied by the Company’s working interest PDP - proved developed producing reserves PUD – proved undeveloped reserves PV/I – net change in the proved PV10 of the reserve report divided by development capital expenditures during the period under consideration less proceeds from divestitures ROCE – return on capital employed defined as earnings before interest and taxes divided by assets minus current liabilities One barrel of oil is the energy equivalent of six Mcf of natural gas. All oil and gas quantity and revenue amounts presented in this report are net of royalties and transportation. All currency amounts presented in this report are shown in US dollars except per share amounts which are presented in Australian dollars or unless otherwise noted by “A$”, which represents Australian dollars. - 1 - DIRECTORS’ REPORT Your Directors present this report on the Company and its consolidated entities (“Group,” the “Company” or “Consolidated Group”) for the financial year ended 31 December 2015. Directors The names of Directors in office at any time during or since the end of the year are: • Michael D Hannell • Damien A Hannes • Neville W Martin • Eric P McCrady • H. Weldon Holcombe These Directors have been in office since the start of the financial period to the date of this report. Company Secretary At the end of the financial period, Mr Damien Connor held the position of Company Secretary and has served as Company Secretary since August 2013. Mr. Connor has been a member of the Institute of Chartered Accountants of Australia since 2002 and is a member of the Governance Institute of Australia and a graduate of the Australian Institute of Company Directors. He is also Chief Financial Officer and Company Secretary of ASX-listed UraniumSA Limited and Archer Exploration Limited. Principal Activities The principal activities of the Group during the financial year were: • • the exploration for and development and production of oil and natural gas in the United States of America; and, the continued expansion of its portfolio of oil and gas leases in the United States of America. No significant changes in the nature of the activities of the Group occurred during the year. Highlights and Significant Changes in State of Affairs Following is a summary of highlights and significant changes in the state of affairs of the Group during the year ended 31 December 2015: • • Achieved record production in 2015 of 7,915 Boe/d, which included 648 Boe/d of flared gas, a 19% increase compared to prior year; This production increase was achieved while executing a down-cycle development plan which kept drilling and completion capital expenditures substantially within operating cash flow of $64 million; • Brought on 11 gross (10 net) wells during the year with 20 gross (10.5 net) wells waiting on completion at yearend; • Maintained strong EBITDAX as a percentage of revenue of 70% in 2015 compared to 79% in 2014, despite a year-over- • • year reduction in realised commodity prices of over 50%; Acquired 5,500 net acres, 7 producing wells and 2 drilled but uncompleted wells from New Standard Energy, Ltd Proved oil and gas reserves at yearend were 26.2 mmboe, a 1% increase from the prior yearend; PV10 value using NYMEX strip pricing as of 31 December 2015 was $243.4 million. • Oil hedges covered a total of 2.3 million bbls through 2019 with a weighted average floor of $50.08 and ceiling of $80.49. • Continuing focus on safety and the environment resulted in no recordable safety incidents or material environmental breaches during the year. There were no other material changes in the state of affairs of the Company. - 2 - Review of Operations Revenues and Production. The following table provides the components of our revenues for the year ended 31 December 2015 and 2014, as well as each year’s respective sales volumes: Year ended 31 December 2015 2014 Change in $ Change as % Revenue (US$‘000) Oil sales ................................................................................ 82,949 144,994 (62,045) Natural gas sales .................................................................. Natural gas liquids (NGL) sales ............................................. 4,720 4,522 6,161 8,638 (1,441) (4,116) Product revenue .................................................................. 92,191 159,793 (67,602) (42.8) (23.4) (47.6) (42.3) Year ended 31 December Change in 2015 2014 Volume Change as % Net sales volumes: Oil (Bbls) ............................................................................... 1,828,955 1,675,078 Natural gas (Mcf) ................................................................. 2,580,682 1,803,000 NGL (Bbls) ............................................................................ 393,211 267,952 Oil equivalent (Boe) ............................................................. 2,652,280 2,243,529 Average daily production (Boe/d) 7,267 6,147 153,877 777,682 125,259 408,750 1,120 9.2 43.1 46.7 18.2 18.2 Barrel of oil equivalent (Boe) and average net daily production (Boe/d). Sales volume increased by 408,750 Boe (18.2%) to 2,652,280 Boe (7,267 Boe/d) for the year ended 31 December 2015 compared to 2,243,529 Boe (6,147 Boe/d) for the prior year due to the Company’s back-loaded 2014 development in which 20.9 of the 26.1 net Eagle Ford wells brought into production in 2014 had initial product in the second half of 2014. Production in 2015 included a full year of production for these wells which had less than a half year of production in 2014. The Eagle Ford contributed 6,167 Boe/d (85%) of total sales volume during the year ended 31 December 2015 compared to 4,187 Boe/d (68%) during the prior year. Mississippian/Woodford contributed 1,100 Boe/d (15%) of total sales volume during the year ended 31 December 2015 compared to 1,433 Boe/d (23%) during the prior year. Our sales volume is oil-weighted, with oil representing 69% and 75% of total sales volume for the year ended 31 December 2015 and 2014, respectively. Oil sales. Oil sales decreased by $62.0 million (42.8%) to $82.9 million for the year ended 31 December 2015 from $145.0 million for the prior year. The decrease in oil revenues was the result of the decrease in product pricing ($75.4 million), offset by increased oil production ($13.3 million). The average price we realised on the sale of our oil decreased by 47.6% to $45.35 per Bbl for the year ended 31 December 2015 from $86.56 per Bbl for the prior year. Oil production volumes increased 9.2% to 1,828,955 Bbls for the year ended 31 December 2015 compared to 1,675,078 Bbls for the prior year. Natural gas sales. Natural gas sales decreased by $1.4 million (30.7%) to $4.7 million for the year ended 31 December 2015 from $6.2 million for the prior year. The decrease in natural gas revenues was primarily the result of worse product pricing ($4.6 million), offset by increased production volumes ($2.7 million). The average price we realised on the sale of our natural gas decreased by 52.0% to $1.83 per Mcf for the year ended 31 December 2015 from $3.42 per Mcf for the prior year. Natural gas production volumes increased 777,682 Mcf (43.1%) to 2,580,682 Mcf for the year ended 31 December 2015 compared to 1,803,000 Mcf for the prior year. Natural gas liquids sales (NGL). NGL sales decreased by $4.1 million (47.6%) to $4.5 million for the year ended 31 December 2015 from $8.6 million for the prior year. The decrease in NGL revenues was primarily the result of worse product pricing ($8.2 million), offset by increased production volumes ($4.0 million). The average price we realised on the sale of our natural gas liquids decreased by 60.5% to $11.50 per Bbl for the year ended 31 December 2015 from $32.24 per Bbl for the prior year. NGL production volumes increased 125,259 Bbls (46.7%) to 393,211 Bbls for the year ended 31 December 2015 compared to 267,952 Bbls for the prior year. - 3 - Year ended 31 December Selected per Boe metrics (US$) 2015 2014 Total oil, natural gas and NGL revenue ................................... Lease operating expense ......................................................... Production tax expense ........................................................... Depreciation and amortisation expense ................................. General and administrative expense ....................................... 34.76 (6.96) (2.33) (35.66) (6.48) 71.22 (6.03) (3.10) (38.15) (6.92) Change in $ Change as % (36.46) 0.93 (0.78) (2.49) (0.45) (51.2) 15.4 (25.1) (6.5) (6.4) Lease operating expenses. Our lease operating expenses (LOE) increased by $4.9 million (36.4%) to $18.4 million for the year ended 31 December 2015 from $13.5 million in the prior year and increased $0.93 per Boe to $6.96 per Boe from $6.03 per Boe. During 2015, certain operational changes were implemented to begin treating natural gas from a significant number of our wells in Texas so that it meets pipeline specifications and can be sold. This gas had previously been flared. The increase in LOE per BOE is primarily due to costs associated with treating the gas. Production taxes. Our production taxes decreased by $0.9 million (13.2%) to $6.0 million for the year ended 31 December 2015 from $7.0 million for the prior year but as a percent of revenue increased to 6.7% from 4.4%. The decrease in production taxes is due to the decrease in revenue. The increase in production taxes as a percentage of revenue is primarily the result of ad valorem tax as a percentage of revenue. Texas ad valorem amounts are assessed by the counties based on estimated value of developed reserves as at 1 January of each year. To the extent that realized revenue pricing varies from beginning of year product prices used to assess the ad valorem amounts, the effective ad valorem rate can fluctuate significantly. Depreciation and amortisation expense, including depletion. Our depreciation and amortisation expense increased by $9.0 million (10.5%) to $94.6 million for the year ended 31 December 2015 from $85.6 million for the prior year, but decreased $2.49 per Boe to $35.66 per Boe from $38.15 per Boe. The increase reflects our increase in production, offset by a lower depletable asset base due to prior-year and mid-year impairments. General and administrative expenses. General and administrative expenses per Boe decreased by 6.4% to $6.48 for the year ended 31 December 2015 as compared to $6.92 per Boe for the prior year. The decrease in general and administrative expenses per Boe is primarily due to a decrease in cash general and administrative expenses (excluding equity based compensation) and increased production levels diluting fixed general and administrative costs. Cash general and administrative expenses per Boe decreased by 18.7% to $4.93 for the year ended 31 December 2015 as compared to $6.07 per Boe for the prior year. Impairment expense. The Company recorded impairment expense of $321.9 million for the year ended 31 December 2015 on the Company’s oil and gas assets as the recoverable amounts were less than the carrying value primarily as a result of continued lower commodity pricing. See Note 19 of the Notes to the Consolidated Financial Statements for further discussion. Exploration expense. The Company incurred exploration expense of $7.9 million for the year ended 31 December 2015 on two unsuccessful exploratory wells. The Company incurred exploratory expense of $10.9 million in 2014 related to three unsuccessful exploratory wells. - 4 - Finance costs. Finance costs, net of amounts capitalised to exploration and development, increased by $8.7 million to $9.4 million for the year ended 31 December 2015 as compared to $0.7 million in the prior year. The increase primarily relates to additional interest incurred on a larger average outstanding debt balance and lower capitalised interest as a result of less drilling and completion activity throughout 2015. Gain on derivative financial instruments. The gain on derivative financial instruments increased by $4.3 million to a $15.3 million gain for the year ended 31 December 2015 as compared to $11.0 million in the prior year. The gain on commodity hedging consisted of $12.4 million of realised gains on commodity derivative contracts and $2.9 of unrealised gains on commodity derivative contracts in the year ended 31 December 2015. The prior year gain on commodity hedging consisted of $9.7 million of unrealised gains on commodity derivative contracts and $1.3 of realised gains on commodity derivative contracts. Following is a summary of the Company’s open oil and natural gas derivative contracts at 31 December 2015: Oil Contracts (Weighted Average) Natural Gas Contracts (Weighted Average) Contract Year 2016 2017 2018 2019 Total Units (Bbl) 1,037,063 624,000 444,000 168,000 2,273,063 Floor $ 50.63 $ 47.53 $ 51.47 $ 52.51 $ 50.08 Ceiling Units (Mmbtu) $ 76.14 $79.92 $ 81.53 $ 87.71 $ 80.49 2,040,000 1,320,000 930,000 360,000 4,650,000 Floor $ 2.54 $2.85 $ 3.00 $ 3.27 $ 2.78 Ceiling $ 3.58 $ 3.91 $ 4.32 $ 4.65 $ 4.01 Income taxes. The components of our provision for income taxes are as follows: (In US$‘000s) Year ended 31 December 2015 2014 Current tax (expense)/benefit ..................................................................... Deferred tax benefit/(expense) ................................................................... Total income tax benefit/(expense) ............................................................. Combined Federal and state effective tax rate 6,572 94,606 101,178 27.3% (17) 858 841 (5.8)% Our combined Federal and state effective tax rates differ from the Group’s statutory tax rate of 30% primarily due to an increase in unrecognised tax losses, offset by US federal and state tax rates. See Note 7 in the Notes to the Consolidated Financial Statements of this report for further information regarding our income taxes. Adjusted EBITDAX. Adjusted EBITDAX is defined as earnings before interest expense, income taxes, depreciation, depletion and amortisation, property impairments, gain/(loss) on sale of non-current assets, exploration expense, share-based compensation and gains and losses on commodity hedging, net of settlements of commodity hedging. For the year ended 31 December 2015, adjusted EBITDAX was $64.8 million, or 70% of revenue, compared to $126.4 million, or 79% of revenue, from the prior year. - 5 - The following table presents a reconciliation of the profit (loss) attributable to owners of Sundance to Adjusted EBITDAX: (In US$‘000s) IFRS Profit (Loss) Reconciliation to Adjusted EBITDAX: Profit (loss) attributable to owners of Sundance ......................................... Income tax (benefit)/expense ...................................................................... Finance costs, net of amounts capitalised and interest received ................ Loss on debt extinguishment ....................................................................... (Gain) Loss on derivative financial instruments ........................................... Settlement of derivative financial instruments............................................ Depreciation and amortisation expense ...................................................... Impairment of non-current assets ............................................................... Exploration expense..................................................................................... Stock compensation, value of services ........................................................ Gain on sale of non-current assets .............................................................. Adjusted EBITDAX ....................................................................................... EBITDAX Margin .......................................................................................... Year ended 31 December 2015 2014 (269,795) (101,178) 9,418 1,451 (15,256) 12,404 94,584 321,918 7,925 4,100 (790) 64,781 70% 15,321 (841) 494 - (10,792) 1,150 85,584 71,212 10,934 1,915 (48,604) 126,373 79% Exploration and Development For the year ended 31 December 2015, the Company achieved record production of 7,915 Boe/d, which included 648 Boe/d of flared gas. During the year ended 31 December 2015, the Company produced 2.9 MMBoe, which included 0.2 MMBoe of flared gas. This resulted in a 19.3% increase in production from prior year. The Company’s exploration and development activities are focused in the Eagle Ford and the Mississippian/Woodford Formations. Costs incurred for development and production expenditures for the Eagle Ford and Mississippian/Woodford Formations during the year ended 31 December 2015 totalled $72.7 million, which included $48.6 million of drilling and development expenditure, $22.9 million on facilities and infrastructure, and $1.2 million related to special projects that are expected to decrease operating expenses or increase production and have relatively short pay-back periods. This investment resulted in the addition of 11 gross (10.0 net) wells into production, all of which are Sundance-operated horizontal wells. An additional 20 gross (10.5 net) wells were being prepared for fracture stimulation as at 31 December 2015. Acquisitions In August 2015, the Company acquired New Standard Energy’s Eagle Ford assets and its 17.5 percent working interest in the PEL 570 concession in the Cooper Basin for an initial purchase price of approximately $16.4 million. The Eagle Ford assets included approximately 5,500 net acres, 7 gross producing wells and 2 wells that had been drilled, but not yet completed. - 6 - Dispositions The Company had no significant dispositions in 2015. Reserves The Company’s reserves at 31 December 2015 were announced on 8 March 2016. Despite further reductions to oil prices throughout 2015, the Company’s Total Proved Reserves volumes remained relatively flat as compared to reserves at 31 December 2014. The Company’s reserve estimates are calculated by Ryder Scott Company, L.P. (Ryder Scott) as at 31 December 2015 in accordance with SEC guidelines, except that NYMEX strip prices and various anticipated operating and capital cost reductions were applied. The reserve estimates are based on, and fairly represent, information, supporting documentation prepared by, or under supervision of, Mr. Stephen E. Gardner. Mr. Gardner is a Licensed Professional Engineer in the States of Colorado and Texas (Colorado No. 44720) with over 10 years of practical experience in estimation and evaluation of petroleum reserves. Mr. Gardner meets or exceeds the education, training and experience requirements set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. We believe that he is proficient in judiciously applying industry standard practices to engineering and geoscience evaluations as well as applying SEC and other industry reserves definitions and guidelines. Mr. Gardner consents to the inclusion in this report of the information and context in which it appears. Summary reserve information presented in Ryder Scott’ evaluation is provided below. PV10 value is calculated using NYMEX strip pricing as of 31 December 2015. For management’s case reserve report assumptions, see Note 19 to the financial statements for further information. Sundance Total Oil (Mbbls) NGL (Mbbls) Gas (Mmcf) (1) Mboe PV10 ($ '000) Proved Developed Producing 6,719 2,197 14,575 11,345 $ 160.6 Proved Undeveloped 11,164 1,500 13,420 14,901 82.8 Total Proved Reserves 17,883 3,697 27,995 26,246 $ 243.4 (1) One barrel of oil is the energy equivalent of six Mcf of natural gas. - 7 - Financial Position In May 2015, the Company refinanced its previous Credit Facilities with Wells Fargo to new Credit Facilities with Morgan Stanley, increasing its total borrowing capacity from an aggregate of $135 million to $250 million; comprised of a $125 million term loan, a reserve based revolver of up to $75 million and a $50 million accordion feature. Throughout 2015, the Company increased its borrowings to $192 million ($125 million term loan and $67 million outstanding on the reserve based revolver). On 30 December 2015, the Company’s reserve based revolver borrowing capacity was reduced from $75 million to $67 million. As at year-end the Company was fully drawn on its term loan and reserve based revolver. The $50 million accordion was available to the Company at year end, subject to certain restrictions, such as maintaining adequate proved reserve value to total debt ratio. As at 31 December 2015, the Company was in compliance with all of its covenants and is forecasting to remain compliant for the remainder of 2016. As at 31 December 2015, certain of the Company’s assets held for sale were included in the Borrowing Base Value under the Company’s Credit Agreement. Upon the sale of these assets, the Lender may elect to reduce the then effective Borrowing Base by an amount equal to the value attributed to those assets if the value of the remaining assets doesn’t meet the prescribed asset coverage thresholds. As at 31 December 2015, 25% of the Company’s Eagle Ford assets represented approximately 24% of the Borrowing Base Value so, if the valuation was unchanged at the time of the sale, the lender could elect to require repayment of that pro rata portion of the outstanding debt which equates to approximately $45 million. That being said, there many variables that affect the Lender’s determination of Borrowing Base Value at any point in time and therefore it is difficult for the Company to estimate the Borrowing Base Value at an undetermined point in the future so the amount that would be required to be repaid, if any, is uncertain. Cashflow Cash provided by operating activities for the year ended 31 December 2015 was $64.0 million, a decrease of $64.0 million compared to the prior year ($128.1 million). This decrease was primarily due to receipts from sales decreasing $71.0 million, to $99.4 million. See Review of Operations for more information. Cash used in investing activities for the year ended 31 December 2015 decreased significantly to $180.8 million (including $66 million of payments related to 2014 development) as compared to $323.2 million in prior year (net of $115.3 million cash source from sale of non-current assets). This decrease is due to the Company’s down-cycle development plan to drill and complete within operating cash flow. Due to the continued depressed crude oil prices, the Company expects to continue its down-cycle development program through much of 2016. Cash provided by financing activities for the year ended 31 December 2015 decreased to $50.4 million. This decrease is a result of the lower net draws on the Company’s credit facilities ($62.0 million in 2015 compared to $100.0 million in prior year) and no equity raises in 2015 (compared to a net of $68.7 million in prior year). Matters Subsequent to the End of the Financial Year No significant matters occurred subsequent to 31 December 2015, but prior to the issuance of this Report Future Developments, Prospects and Business Strategies The Group’s business strategies and prospects for growth in future financial years are presently concentrated on growing the value of the Group’s current resource plays through direct leasing from mineral owners, small acquisitions of producing properties, drilling inventory within the Group’s current balance sheet capabilities, and development of the Group’s current acreage. The Company’s 2016 capital program is expected to be funded with cash flow from operations. - 8 - Environmental Issues The Group is committed to the environmentally sustainable development of its operations and, while the Group’s operations are subject to significant environmental regulation under the laws of the states in which we operate and the United States of America, no notice of any material breach has been received and the Directors believe no material breach of any environment regulations has occurred. The Company maintains strict internal performance and reporting guidelines to capture all spills and emissions. Additionally, a third party firm is used to conduct environmental inspections to ensure the company is meeting both internal and external standards. In the Group’s Oklahoma asset, significant company and regulatory scrutiny has been placed on seismic events in proximity to salt water disposal wells (“SWDs”). Prior to the development and operation of our SWDs, the company undertook a study of the state approved disposal zones and successfully drilled and completed its SWDs in state approved zones that accept sufficient volumes of water to meet the company’s operational objectives while minimizing the potential risk of seismic events. We have three SWDs that were not in compliance with new regulations enacted in 2015. Those SWDs are currently shut in. Health and Safety The Company is committed to providing a best in class health and safety environment for its employees, contractors and communities with a zero-defect target. The Company tracks both company and company plus contractor incident rates. During 2015, the Company had an Occupational Safety and Health Administration (“OSHA”) Recordable Incident Rate (“ORIR”) of 0.0 per 200,000 man hours and company plus contractor ORIR of 0.78 per 200,000 man hours. The Company maintains a comprehensive safety program that includes training of employees and regular monitoring of employee and contractor safety certifications. The Company uses a third party expert to conduct random safety audits of its key operational activities and implements any changes identified by these audits. The Company uses subcontractors and vendors (“Contractors”) for execution of a significant portion of its operating activities. Prior to utilising the Contractors, the Company investigates the historical safety ratings of the Contractor utilizing the Contractor’s Workers Compensation Experience Modification Ratio (“EMR”). Only contractors with EMRs below 1.0 are utilized unless executive exception is granted. The Company investigates the safety certifications and experience of key Contractor employees expected to work on the Company’s assets. As part of the Company’s policy all Contractors must provide written documentation that they will comply with the Company’s comprehensive written Health, Safety and Environmental Plan. The Company actively encourages its employees to participate in a variety of health and wellness programs, either self-directed or those sponsored by the Company. As a result, many employees utilize the Company’s dedicated wellness centre to assist in achievement of their individual health and wellness goals. Market Volatility Continued depressed commodity prices have significantly reduced the revenue and profitability of oil and gas companies, including Sundance. Although we are unable to control fluctuations in commodity prices, we have been and will continue to focus on cost reductions and improving efficiency throughout our operations. Dividends No dividends were declared or paid during the financial year. No recommendation for payment of dividends has been made. - 9 - Information on Directors Michael Damer Hannell Chairman, BSc Eng (Hons), FIEAust Experience Mike has been a Director of Sundance since March 2006 and chairman of our board of directors since December 2008. Mr. Hannell has over 45 years of experience in the oil and gas industry, initially in the downstream sector and subsequently in the upstream sector. His extensive experience has been in a wide range of design and construction, engineering, operations, exploration and development, marketing and commercial, financial and corporate areas in the United States, United Kingdom, continental Europe and Australia at the senior executive level with Mobil Oil (now Exxon) and Santos Ltd. Mr. Hannell has previously held a number of board appointments the most recent being the chairman of Rees Operations Pty Ltd (doing business as Milford Industries Pty Ltd), an Australian automotive components and transportation container manufacturer and supplier; And the chairman of Sydac Pty Ltd, a designer and producer of simulation training products for industry. Mr. Hannell has also served on a number of not-for-profit boards, with appointments as president of the Adelaide-based Chamber of Mines and Energy, president of Business SA (formerly the South Australian Chamber of Commerce and Industry), chairman of the Investigator Science and Technology Centre, chairman of the Adelaide Graduate School of Business, and a member of the South Australian Legal Practitioners Conduct Board. Mr. Hannell holds a Bachelor of Science degree in Engineering (with Honors) from the University of London and is a Fellow of the Institution of Engineers Australia. Interest in Shares: 1,148,500 ordinary shares in Sundance Energy Australia Limited Special Responsibilities: -Chairman of the Board of Directors -Chairman of the Remuneration and Nominations Committee -Member of the Audit and Risk Management Committee -Member of the Reserves Committee Other Directorships: Nil Eric P. McCrady Director, BS in Business Administration Experience Eric has been our Chief Executive Officer since April 2011 and Managing Director of our board of directors since November 2011. He also served as our Chief Financial Officer from June 2010 until becoming Chief Executive Officer in 2011. Mr. McCrady has served in numerous positions in the energy, private investment and retail industries. From 2004 to 2010, Mr. McCrady was employed by The Broe Group, a private investment firm, in various financial and executive management positions across a variety of industry investment platforms, including energy, transportation and real estate. From 1997 to 2003, Mr. McCrady was employed by American Coin Merchandising, Inc. in various corporate finance roles. Mr. McCrady holds a degree in Business Administration from the University of Colorado, Boulder. Interest in Shares, Restricted Share Units and Options: 2,435,140 Ordinary Shares in Sundance Energy Australia Limited and 3,620,228 Restricted Share Units Special Responsibilities: Managing Director and Chief Executive Officer of the Company Other Directorships: Nil - 10 - Damien Ashley Hannes Director, BBs Experience Damien has been a Director since August 2009. Mr. Hannes has over 25 years of finance, operations, sales and management experience. He has most recently served over 15 years as a managing director and a member of the operating committee, among other senior management positions, for Credit Suisse’s listed derivatives business in equities, commodities and fixed income in its Asia and Pacific region. From 1986 to 1993, Damien was a director for Fay Richwhite Australia, a New Zealand merchant bank. Prior to his tenure with Fay Richwhite, Damien was the director of operations and chief financial officer of Donaldson, Lufkin and Jenrette Futures Ltd, a U.S. investment bank. He has successfully raised capital and developed and managed mining, commodities trading and manufacturing businesses in the global market. He holds a Bachelor of Business degree from the NSW University of Technology in Australia and subsequently completed the Institute of Chartered Accounts Professional Year before being seconded into the commercial sector. Interest in Shares: 5,901,561 Ordinary Shares in Sundance Energy Australia Limited Special Responsibilities: -Chairman of the Audit and Risk Management Committee -Member of the Remuneration and Nominations Committee Other Directorships: -Chairman of the Board of Directors of Australia Gold Corporation Ltd Neville Wayne Martin Director, LLB Experience Neville has been a Director since January 2012. Prior to his election, he was an alternate director on our board of directors. Mr. Martin has over 40 years of experience as a lawyer specializing in corporate law and mining, oil and gas law. He is currently a consultant to the Australian law firm, Minter Ellison. Mr. Martin has served as a director on the boards of several Australian companies listed on the Australian Securities Exchange, including Stuart Petroleum Ltd from 1999 to 2002, Austin Exploration Ltd. from 2005 to 2008 and Adelaide Energy Ltd from 2005 to 2011. Mr. Martin is the former state president of the Australian Resource and Energy Law Association. Mr. Martin holds a Bachelor of Laws degree from Adelaide University. Interest in Shares: 502,800 Ordinary Shares in Sundance Energy Australia Limited Special Responsibilities: -Member of the Audit and Risk Management Committee -Member of the Reserves Committee Other Directorships: Nil - 11 - H. Weldon Holcombe Director, BS in Civil Engineering Experience Weldon has been a Director since December 2012. Mr. Holcombe has over 30 years of onshore and offshore U.S. oil and gas including technology, reservoir engineering, drilling and completions, production operations, industry experience, construction, field development and optimization, Health, Safety and Environmental (“HSE”), and management of office, field and contract personnel. Most recently, Mr. Holcombe served as the Executive Vice President, Mid Continental Region, for Petrohawk Energy Corporation from 2006 until its acquisition by BHP Billiton in 2011, after which Mr. Holcombe served as Vice President of New Technology Development for BHP Billiton. In his capacity as Executive Vice President for Petrohawk Energy Corporation, Mr. Holcombe managed development of leading unconventional resource plays, including the Haynesville, Fayetteville and Permian areas. In addition, Mr. Holcombe served as President of Big Hawk LLC, a subsidiary of Petrohawk Energy Corporation, a provider of basic oil and gas construction, logistics and rental services. Mr. Holcombe also served as corporate HSE officer for Petrohawk and joint chairperson of the steering committee that managed construction and operation of a gathering system in Petrohawk’s Haynesville field with one billion cubic feet of natural gas of production per day. Prior to Petrohawk, Mr. Holcombe served in a variety of senior level management, operations and engineering roles for KCS Energy and Exxon. Mr. Holcombe holds a Bachelor of Science degree in civil engineering from the University of Auburn. Interest in Shares: 596,700 Ordinary Shares in Sundance Energy Australia Limited Special Responsibilities: -Chairman of the Reserves Committee -Member of the Remuneration and Nominations Committee Other Directorships: Nil Meetings of Directors The table below shows the number of meetings held during each Director’s tenure and the attendance by each Director and respective members of the Committees. In addition to the formal meetings held and noted below, a number of informal meetings were also held. Board of Directors Meetings Audit and Risk Management Committee Remuneration and Nominations Committee Held Attended Held Attended Held Attended M Hannell E McCrady D Hannes N Martin W Holcombe 10 10 10 10 10 10 10 9 10 10 6 - 6 6 - 6 - 6 6 - 5 - 5 - 5 5 - 5 - 5 Reserves Committee Held 2 Attended 2 - - 2 2 - - 2 2 The Audit and Risk Management, the Remuneration and Nominations, and the Reserves Committees both have charters approved by the Committees and, subsequently, the Board, which sets out the Committees’ objectives, composition, meeting frequency, access, duties and responsibilities. Minutes are kept of all meetings and are tabled for adoption at the following Committee meetings. These minutes are subsequently provided to the Board for information and any discussion that may be necessary. The Audit and Risk Management Committee meets with the external auditor at least twice a year. - 12 - Board Committees Chairmanship and current membership of each of the board committees at the date of this report are as follows: Committee Chairman Members Audit and Risk Management D. Hannes N. Martin, M. Hannell Remuneration and Nominations M. Hannell D. Hannes, H. W. Holcombe Reserves H. W. Holcombe M. Hannell, N. Martin Indemnifying Officers The Company has paid premiums to insure each of the directors, officers and consultants against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director or executive of the Company, other than conduct involving a wilful breach of duty in relation to the Company. The policy does not specify the individual premium for each officer covered and the amount paid is confidential. During or since the end of the reporting period, the Company has given an indemnity or entered into an agreement to indemnify, paid or agreed to pay insurance premiums as follows: • Michael Hannell • Eric McCrady • Neville Martin • Damien A Hannes • Weldon Holcombe • Cathy L. Anderson • Grace L. Ford • Damien Connor The Company has not indemnified its auditors. Unlisted Options At the date of this report, no options were outstanding. No person, or entity entitled to exercise the option had or has any right by virtue of the option to participate in any share issue of any other body corporate. Unlisted Restricted Share Units At 31 December 2015, 12,434,338 unlisted restricted share units remain unvested and will primarily vest over the next three years. Upon vesting, RSUs will be converted to ordinary shares. - 13 - Proceedings on Behalf of Company No person has applied to the Court for leave to bring proceedings on behalf of the Company or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-Audit Services The Board of Directors is satisfied that the provision of non-audit services during the reporting period is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • all non-audit services are reviewed and approved by the Board prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and the nature of the services provided do not compromise the general principles relating to auditor independence in accordance with APES 10 : Code of Ethics for Professional Accountants set by the Accounting Professional Ethics Standards Board. • The following fees for non-audit services were incurred related to services performed by the external auditors during the year ended 31 December 2015: • Australian taxation services - $62,000 Rounding of Amounts The Company is an entity to which ASIC Class Order 98/100, issued by the Australian Securities and Investments Commission, applies relating to the rounding off of amounts in the Directors’ Report. Accordingly, amounts in the Directors’ Report have been rounded to the nearest thousand dollars, unless shown otherwise. - 14 - REMUNERATION REPORT (audited) The Directors present the Remuneration Report prepared in accordance with Section 30 of the Corporations Act 2001 (Corporations Act) for the consolidated entity for the year ended 31 December 2015. This Remuneration Report has been audited as required by Section 308(3C) of the Corporations Act and forms part of the Directors’ Report. An important change from last year’s report is that the incentive compensation awarded for the reporting year (2015) is covered in this report, rather than a year in arrears as was the practice in previous years. Accordingly, this report details the key incentive remuneration activities for the year ended 31 December 2015 and provides remuneration information for the Company’s non-executive Directors (NEDs), Managing Director and other key management personnel (KMP) of the consolidated entity. It also covers the key incentive remuneration activities for the year ended 31 December 2014 which have not been previously reported for the reason stated above. All amounts are in USD unless explicitly stated otherwise. Table of Content A. Key Fiscal Year 2015 Remuneration and Key Changes for Fiscal Year 2016 B. Executive Summary C. Directors and Key Management Personnel (KMP) D. Remuneration Governance E. Remuneration Policy and Framework o o o Fixed Pay and Benefits Short Term Incentives (STI) Long Term Incentives (LTI) F. Company Performance and Shareholder Wealth G. Non-executive Director Remuneration Policy H. Voting and Comments Made at Company’s Year Ended 31 December 2014 Annual General Meeting I. J. Details of Remuneration K. Outstanding KMP Options and Restricted Share Units (RSUs) L. Employment Contracts Shareholdings - 15 - A. Key Fiscal Year 2015 Remuneration and Key Changes for Fiscal Year 2016 Remuneration 2015 Action 2016 Action Rationale Fixed Remuneration No increases to the CEO or KMP’s base salary. CEO’s salary reduced from $370,000 (fiscal 2015) to $333,000 per year. The CFO and COO’s salaries were reduced from $295,000 (fiscal 2015) to $265,500. Cash Short-Term Incentive STI payments earned for 2014 were paid out in Restricted Stock Units. No STI awards for 2015 performance. In January 2016, the CEO, CFO and COO voluntarily agreed to reduce their base salaries indefinitely to help the Company reduce expenses and improve its cash flow during this time of low commodity prices. During 2015, the Board elected to pay out the STI earned in 2014 in Restricted Stock Units (“RSUs) to assist in preserving liquidity in light of the low commodity price environment. For 2016, no STI paid out for 2015 performance as a result of the further decline in commodity prices. Equity Long-Term Incentive LTI RSUs granted to KMPs (earned for 2014 and granted in 2015) with 50% time-based vesting and 50% vesting tied to Total Shareholder Return compared to a designated peer group over a three year period. Non-executive Director Compensation No increase to base Director compensation. LTI incentives granted to KMPs (earned for 2015 and granted in 2016) comprised of: - 50% of award value granted in RSUs with vesting tied to Absolute Total Shareholder Return over a three-year period -50% of award value granted as deferred cash compensation which will be paid out only if specified share price targets are achieved during 2017 and 2018. Annual long-term equity awards further align management with shareholder interest. The 2016 award (earned for 2015) removes the time- based vesting concept, making the award 100% performance-based. Splitting the LTI award in 2016 between RSUs and deferred cash allows the executive to participate in a portion of any future share price appreciation while limiting dilution. Chairman’s base compensation reduced from A$132,500 to A$119,250. Non-executive Director base compensation reduced from A$100,000 to A$90,000. Committee fees were also reduced 10%. In January 2016, the NEDs resolved to reduce their 2016 compensation by 10% for an indefinite period of time to help the Company reduce expenses and improve its cash flow during this time of low commodity prices. - 16 - COMPENSATION (cont’d) B. Executive Summary What We Do: What We Don’t Do: • Pay for Performance – STI awards are based on historical Company performance and vesting of LTI awards is aligned with shareholder outcomes. • Utilize a Quantitative Process for STI Performance Bonuses – The Remuneration and Nominations Committee establishes Company performance measures and goals at the beginning of the performance year that are assigned individual weightings. In considering bonus awards for the year, the Committee scores the Company’s performance on each measure in arriving at an overall weighted score that determines the amount of any cash bonus pool. • Require Share Ownership by Executive Officers – Board-adopted guidelines establish robust minimum share ownership levels for our executive officers to ensure appropriate alignment with shareholders. • Provide for Clawback of Compensation - The Committee may require reimbursement or forfeiture of all or a portion of any performance cash bonus or LTI in the event the Company is required to restate financial statements or if the Company relied on materially inaccurate information in making its incentive compensation decisions. • Enter into Egregious Employment Contracts – The Company does not enter into contracts containing multi- year guarantees for salary increases, non-performance based bonuses or equity compensation. • Provide Excessive Severance and/or Change in Control Provisions – No liberal change in control definition in individual contracts or equity plans that could result in payments to executives without an actual change in control or job loss occurring. • Provide Tax Gross-Ups – The Company does not include tax gross-up payments for any STI or LTI Plans. • Allow Speculation on Our Company’s Ordinary Shares – Company policy prohibits our executives from engaging in short-term or speculative transactions involving our ordinary shares. This policy prohibits trading in our shares on a short-term basis, engaging in short sales, buying and selling puts and calls, and discourages the practice of purchasing the Company’s shares on margin. • Permit Abusive Perquisites Practices - Perquisites made available to our executives are strictly limited. • Equity Grant Practices - The Company does not backdate or re-price equity awards retroactively. Remuneration Practices and Policies Our Board of Directors recognizes that attracting and retaining high-caliber directors and executives with appropriate incentives is critical to generating shareholder value. We have designed our remuneration program to provide rewards for individual performance and corporate results and to encourage an ownership mentality among our executives and other key employees. We believe a significant portion of our executives’ pay should be at-risk to performance. We have also progressively adapted the design of the program to recognize the business environment in which we operate, emerging practices in the US oil and gas industry, and balancing the interests of shareholders. Sundance shares are traded on the Australian Securities Exchange (ASX) and all of our management team and operations are located in the United States. In order to retain our current talent and continue to attract highly skilled talent in the U.S., we have adopted remuneration programs that are competitive with our peers in the U.S. marketplace while also meeting ASX listing requirements. The objectives of our remuneration program are to: • Attract and retain highly trained, experienced, and committed executives who have the skills, education, business acumen, and background to lead a mid-tier oil and gas business; • Motivate and reward executives to drive and achieve our goal of increasing shareholder value; • Provide balanced incentives for the achievement of near-term and long-term objectives, without motivating executives to take excessive risk; and Track and respond to developments such as the tightening in the labor market or changes in competitive pay practices. • - 17 - The primary components of our executive remuneration program consist of long-term equity incentive awards, the opportunity to receive an annual performance cash bonus, and base salary. We generally target each component, as well as the aggregate of the components, at between approximately the 25th and 50th percentile of market remuneration comparable within a group of similarly-sized ASX and U.S. listed oil and gas exploration and production companies. Individual remuneration levels may vary from these targets based on performance, expertise, experience, or other factors unique to the individual or the Company. We also provide retirement and other benefits typical for our peer group. C. Directors and Key Management Personnel • Michael D Hannell (Chairman) • Eric P McCrady (Managing Director and Chief Executive Officer) • Damien A Hannes (Non-executive Director) • Neville W Martin (Non-executive Director) • • • H. Weldon Holcombe (Non-executive Director) Cathy L Anderson (Chief Financial Officer) Grace Ford (Chief Operating Officer) D. Remuneration Governance In assessing total remuneration, our objective is to be competitive with industry remuneration while considering individual and company performance. The majority of each executive's potential remuneration is performance based and "at risk." We believe that equity ownership is an important element of remuneration and that, over time, more of the executives' remuneration should be equity-based rather than cash-based so as to better align executive remuneration with shareholder return. For the year ended 31 December 2015, the targeted "at risk" remuneration relating to performance variability with cash bonuses and LTI represents approximately 81% for the Managing Director and approximately 75% for all other KMP’s, as illustrated in the tables below. Managing Director Other KMPs 19% 81% STI 19% LTI 62% 25% 75% STI 19% LTI 56% Base Pay Total At Risk Base Pay Total At Risk Basic Principles While our shares are traded on the Australian Securities Exchange (ASX), all of our management team and operations are located in the United States. As such, we have adopted the following considerations for managing executive remuneration: • • • • • Recognition that Sundance Energy is a publicly listed Australian company, with mainly Australian shareholders; Recognition that remuneration must be competitive within the local working environment in order to attract and to retain the necessary people to grow the company according to the Board’s approved strategy; The remuneration must achieve the appropriate balance between shareholder interests and management motivation and retention; Due recognition and observance of the ASX listing rules and the Corporations Act must be made; The Committee should be advised by an appropriate independent industry expert; - 18 - • • The remuneration is to include three basic elements: o o Base salaries (which are reviewed at the end of each fiscal year); Short term incentives in the form of annual cash bonuses based on predetermined targets recommended by the Remuneration and Nominations Committee and approved by the Board; Long term incentives in the form of equity and/or deferred cash compensation based on predetermined targets recommended by the Remuneration and Nominations Committee and approved by the Board. o The STI is to include a discretionary component, which allows the Remuneration and Nominations Committee to recommend to the Board the awarding of bonuses to executives where the Remuneration and Nominations Committee believes they are warranted based on strong individual performance and meeting predetermined Company objectives. Share Ownership Guidelines Ownership of our shares by our executives aligns their interests with the interests of our shareholders. Accordingly, the Board of Directors maintains share ownership guidelines for certain key management personnel. An executive’s failure to meet the share ownership guidelines may influence an executive’s future mix of cash and non-cash compensation awarded by the Committee. The Remuneration and Nominations Committee intends to review these guidelines in 2016. Executives are not permitted to invest in derivatives involving Company shares. Claw Back Provisions The Board, in its sole discretion, shall reserve the right to claw back any incentive awards issued if any of the following conditions apply: • The Company’s financial statements are required to be restated due to material non-compliance with any financial reporting requirements under the federal securities laws (other than a restatement due to a change in accounting rules); and o As a result of such restatement, a performance measure which was a material factor in determining the award is restated, and In the discretion of the Board, a lower payment would have been made to the executive officer based upon the restated financial results; o • • Should it subsequently be found that the information or assumptions are materially erroneous; In the event that there is evidence of fraud by any employee resulting in material adverse change in the Company’s financial statements. E. Remuneration Policy and Framework The Remuneration and Nominations Committee The Remuneration and Nominations Committee makes recommendations to our Board of Directors in relation to total remuneration of Directors and executives and reviews their remuneration annually. The Committee members are all independent Directors, and independent external advice is sought when required. Remuneration Consultant Given the unique structure of being traded on the ASX but having a U.S.-based management team and operations, the Remuneration and Nominations Committee retained Meridian Compensation Partners, LLC (Meridian) as its independent remuneration consultant for the 2014 and 2015 fiscal years. Meridian was retained to provide executive and Director remuneration consulting services to the Committee, including advice regarding the design and implementation of remuneration programs that are competitive and common among the U.S. oil and gas exploration and production industry, competitive market information, comparison advice with Australian companies and practice, regulatory updates and analyses and trends on executive base salary, short-term incentives, long-term incentives, benefits and perquisites. Amounts paid to Meridian for these services during fiscal year 2014 and 2015 were approximately $70,000 and $133,000, respectively. Meridian did not provide any other services to the Company during these periods. - 19 - In order to ensure that any remuneration recommendations made by Meridian were free from undue influence by management, the Remuneration and Nominations Committee engaged Meridian and any advice, work or recommendations made by Meridian were provided directly to the committee chairman. The Board is satisfied that Meridian remains free from undue influence by management. Elements of Remuneration Cash Remuneration Component Base Salary (Fixed) Short-Term Incentives (Performance Based) Equity Remuneration Long-Term Incentives (Performance Based) Deferred Cash Long-Term Incentives (Performance Based) Other Benefits Health and Welfare Benefit Plans (Other) Description Competitive pay to attract and retain talented executives. Annual incentive plan designed to provide executives with an opportunity to earn an annual cash incentive based on Company financial and operational performance. Restricted share awards intended to motivate and to promote the retention of management with outcomes reflecting Company performance over the three-year vesting period. Equity awards further align the interests of our executives with those of our shareholders. Deferred cash awards intended to motivate and to promote the retention of management with outcomes reflecting Company performance over a two to three-year time frame. Deferred cash awards align the interests of our executives with those of our shareholders. Executives are eligible to participate in health and welfare benefit plans generally available to other employees. Base Salary Base salaries for executives recognize their qualifications, experience and responsibilities as well as their unique value and historical and expected contributions to the Company. In addition to being important to attracting and retaining executives, setting base salaries at appropriate levels motivates employees to aspire to and accept enlarged opportunities. We do not consider base salaries to be part of performance-based remuneration. In setting the amount, the individuals' performance is considered as well as the length of time in their current position without a salary increase. There were no changes to base salaries in 2015. In January 2016, the MD, CFO and COO voluntarily agreed to a 10% decrease in their base salaries to help the Company reduce expenses and improve its cash flow during this time of low commodity prices. The reductions in base salary were effective 23 January 2016 and are for an indefinite period of time. The salaries of the MD and KMPs that were in effect prior to the reduction will be used for all other purposes, including calculating LTI and any termination payments due. Incentive Remuneration Our incentive remuneration program is designed to incentivize and to motivate management and senior employees to achieve short and long-term goals to improve shareholder value. This plan represents the performance-based, at-risk component of each executive's total remuneration. The incentive remuneration program is designed to: 1) align management and shareholder interests, and 2) attract and retain management and senior employees to execute strategic business plans to grow the Company as approved by our Board of Directors. It is the practice of the Remuneration and Nominations Committee to carefully monitor the incentive remuneration program to ensure its ongoing effectiveness. The incentive remuneration program has provisions for an annual bonus of cash and/or equity in addition to the base salary levels. The annual bonus STI is established to reward short-term performance towards the Company’s goal of increasing shareholder value. The equity and deferred cash components of LTI are intended to reward progress towards our long-term goals and to motivate and retain management to make decisions benefiting long-term value creation. On an annual basis, targets are established and agreed by the Remuneration and Nominations Committee, subject to approval by the Board of Directors. The targets are used to determine the bonus pool, but both the STI and LTI bonuses for the Key Management Personnel require approval by the Remuneration and Nominations Committee and are fully discretionary. Bonuses earned under the STI are normally paid in cash, but may be paid by means of awarding RSUs. Bonuses under the LTI are generally awarded with RSUs but at the Board’s discretion may include other features such as the deferred cash awards that were made in 2016 relative to 2015 performance. - 20 - Based on an assessment of the overall management team and Company performance achievement relative to financial metrics, a bonus pool is formed, based on a percentage of each employee’s annual base salary, for allocating awards relative to the individual performance category. The Managing Director recommends to the Remuneration and Nominations Committee the allocation of such awards for Key Management Personnel other than himself. The Remuneration and Nominations Committee determines the allocation of the Managing Director’s individual performance bonus, along with any adjustments (either positive or negative) to the recommendations made by the Managing Director for other Key Management Personnel. The grant of RSUs to the Managing Director (as a Director) is subject to shareholder approval at the AGM, in accordance with the ASX Listing Rules. The Committee has put in place a ceiling on short-term incentive awards with specific metrics that are aligned with the interests of shareholders. Annual incentive payouts should not exceed 10% of Net Operating Cash Flow (defined as Net Income adjusted for changes in Working Capital and Non-Cash Operating Expenses). 2015 STI For the 2015 fiscal year, STI bonus targets ranged from 75% to 100% of base salaries. However, the Board determined there would be no STI payout for the 2015 performance year as a result of the sustained depressed commodity price environment. 2014 STI The table below contains the payout leverage for performance achievement as a percent of target. Level Performance Achievement Payout Earned Threshold Target Maximum Performance <90% results in zero payout 90% 50% Every 1% increase in performance above threshold yields a 5% increase in payout up to target. Every 1% increase in performance above target yields a 2% increase in payout up to maximum. 100% 100% 125% 150% - 21 - Performance Scorecard The Company’s key financial performance metrics were chosen as achievement of these capital efficiency focused metrics are highly correlated to long-term total shareholder returns. The bonus targets, performance and results below were related to performance during the year ended 31 December 2014. Financial Performance Metric Production / 1,000 weighted average debt adjusted share (1) Cash margin Net asset value / debt adjusted share PV/I (2) Health, safety and environmental Discretionary Total Weighted Achievements Rationale Increased production per debt adjusted share promotes capital efficient growth of profitability and cash flow Efficient operations drive cash flow for reinvestment and long term sustainability Increases in net asset value per debt adjusted share increase the long- term value of each shareholders investment Efficient capital expenditure provides business sustainability Sundance is committed to the safety of all involved in its business activities Reward achievement of Company goals such as acreage and asset growth, cost control, balance sheet liquidity and treasury management, financial reporting, acquisitions/divestitures and process improvement A B C Performance Target Actual Performance Target Weighting Year Ended 31 December 2014 E D F = C x E Percent of Target Achieved Performance Modification Modified Weighted Score 3.847 3.615 17.5% 94% 70% 12.2% 72.6% 75.9% 17.5% 105% 109% 19.1% 0.84 0.79 17.5% 94% 67% 11.8% 1.25 1.39 17.5% 112% 123% 21.5% Qualitative 25% 10% 25% 25% 2.5% Qualitative 75% 20% 75% 75% 15.0% 100% 82.1% Debt adjusted shares are defined by the weighted average shares during the year; plus the debt balance outstanding (1) at the end of the period adjusted for working capital, divided by the closing share price. (2) acquisitions and dispositions. Increase in PV10 of proved reserves divided by the capital spent to generate that growth during the period excluding - 22 - Resulting Payouts for the year ended 31 December 2014: During 2015, the Board elected to pay out the STI incentive for 2014 in RSUs rather than cash in order to assist in preserving liquidity as a result of the decline in commodity prices. At that same time, the Board also approved an STI incentive award for Mr. McCrady in the amount of $300,000 to be paid out by the grant of 770,950 fully vested RSUs. Since equity grants to Mr. McCrady require shareholder approval and it was past the deadline to submit a resolution for inclusion in the 2015 AGM Notice, it was agreed that the resolution soliciting approval of this grant would be included in the 2016 AGM Notice. If shareholder approval is not obtained at the 2016 AGM, the award will be settled in cash. Name C. Anderson G. Ford 2014 Gross Pay $291,770 $292,000 Long-Term Incentives STI Target (% of Salary) 75.0% 75.0% Total STI Payout Value ($) $180,000 $180,000 # of RSUs 462,570 462,570 STI Payout as a Percent of Target 82.1% 82.1% The Company has two active equity incentive plans under the LTI component of the incentive remuneration program. These are the Sundance Employee Option Plan ("ESOP") and the Sundance Energy Australia Limited Restricted Share Units available only to our U.S. employees under the Incentive Remuneration Plan (the "RSU Plan"). ESOP Plan The ESOP provides for the issuance of stock options at an exercise price determined at the time of the issue by a committee designated by the Board (the "Plan Committee"). Options under the ESOP may be granted to eligible employees, as determined by the Plan Committee, and typically include our executive officers and key employees. Historically, the Plan Committee has granted options in connection with attracting new key employees upon commencement of employment. It is within the discretion of the Remuneration and Nominations Committee, however, to authorize additional option grants during the tenure of employment. Historically, an option generally vests 20 percent on the 90th day following the grant date, with an additional 20 percent vesting on the first, second, third and fourth anniversaries thereof. Options are valued using the Black-Scholes methodology and recognized as remuneration in accordance with their vesting conditions. The Company may amend the ESOP or any portion thereof, or waive or modify the application of the ESOP rules in relation to a participant, at any time. Certain amendments to the ESOP may require the approval of the option holders. No stock options were granted during fiscal year 2015. During 2015, it was determined that all outstanding options would be converted to RSUs with the same vesting terms as the associated underlying options. The conversion was finalized in early 2016 and shares were issued for RSUs that were vested at that time. The remainder of these RSUs will vest in 2016. No additional stock options were granted in 2015 and the Company does not plan to issue stock options in the future. RSU Plan The RSU Plan provides for the issuance of restricted share units ("RSUs") to our U.S. employees. The RSU Plan is administered by the Board. RSUs may be granted to eligible employees from a bonus pool established at the sole discretion of our Board. The bonus pool is subject to Board and management review of both the Company and the individual employee's performance over a measured period determined by the Remuneration and Nominations Committee and the Board. The RSUs may be settled in cash or shares at the discretion of the Board. We may amend, suspend or terminate the RSU Plan or any portion thereof at any time. Certain amendments to the RSU Plan may require approval of the holders of the RSUs who will be affected by the amendment LTI Award in 2016 For the 2015 fiscal year, the LTI bonus targets ranged from 225% to 325% of base salary. LTI incentives granted to KMPs were comprised of: - 50% of award value granted in RSUs which vest based upon the movement in Sundance ordinary share price over a three-year period (Absolute Total Shareholder Return); and -50% of award value granted as two tranches of deferred cash, earned through appreciation in the price of Sundance’s ordinary shares during 2017 and 2018. - 23 - The LTI grant in 2016 was as follows: 2015 Base Salary $370,000 LTI Target (% of Salary) 325% Grant Date 15/3/2016 LTI Value $1,202,500 # of RSUs granted for 2015 (in 2016) (1)(2) 4,342,331 (3) Grant Date Fair Value of RSU Award (4) $681,729 Deferred Cash Tranche 1 Target $300,625 Deferred Cash Tranche 2 Target $300,625 Grant Date Fair Value of Deferred Cash Award(4) $210,438 $295,000 225% 15/3/2016 $ 663,750 2,396,858 $331,875 $165,937 $165,937 $116,156 $295,000 $ 663,750 The number of LTI RSUs granted to the MD and KMP’s for 2015 (in 2016) was determined as: 15/3/2016 2,396,858 $331,875 225% $165,937 $165,937 $116,156 Name E. McCrady C. Anderson G. Ford (1) Base Salary * LTI Target % * 50% Volume weighted average share price for the last 20 trading days in 2015(*) (*) Calculated to be US$0.1384625 (2) Represents number of target shares. Each KMP may earn up to 133% of the target shares (up to 10,820,943 shares as a group) if performance targets are met or exceeded. (3) Mr. McCrady’s shares are subject to shareholder approval at the AGM. Accordingly, the grant date value of the award is an estimate as at 15 March 2016. The actual grant date fair value will be determined on the date of shareholder approval. The grant date fair value was calculated using a Monte Carlo simulation model. The grant date fair value is not related to or indicative of the benefit (if any) the individuals may ultimately realize should the award vest. (4) Absolute Total Shareholder Return Absolute total shareholder return (A-TSR) is calculated by the change in the Company’s ordinary share price plus dividends paid, if any, over the specified time period. The number of shares that can be earned under the A-TSR component of the award, ranges from 0% to 133% of the target share grant, based on A-TSR calculated at the end of the three-year assessment period according to the following multiples: Absolute TSR Goal 1.95x (equivalent to a 25% preferred return) 1.52x (equivalent to a 15% preferred return) 1.26x (equivalent to a 8% preferred return) < 1.26x Payout % of Target 133% 100% 50% 0% No proration will be applied to the above thresholds Deferred Cash The base deferred cash target awards are paid only after achieving the following share performance targets: Tranche 1- A 20 day volume weighted average (20-day VWAP) of A$0.297 per share for the last 20-day period in the year ending 31 December 2017. This equates to a 25% preferred return over a two-year period. Tranche 2- A 20 day volume weighted average (20-day VWAP) of A$0.371 per share for the last 20-day period in the year ending 31 December 2018. This equates to a 25% preferred return over a three-year period. • • • If a 20-day VWAP exceeds target prices of $A0.297 for 2017 and $A0.371 for 2018 an increased payment will be awarded based on outperformance of the base compensation target. The maximum payout of 300% of the base award will be achieved if the 20- day VWAP in the year ending 31 December 2017 and 2018 is a minimum of $A0.891 and $A1.113 respectively. - 24 - The range of potential deferred cash awards payable for the 2015 fiscal year for each tranche is as follows: • Eric McCrady $0 - $901,875 • Cathy Anderson $0 - $497,811 • Grace Ford $0 - $497,811 LTI Award in 2015 For the 2014 fiscal year (granted in 2015), the LTI bonus targets ranged from 225% to 325% of base salary. LTI incentives granted to KMPs were comprised of: - 50% of award value granted in RSUs with time-based vesting (vest 1/3 on each of 31 January 2016, 2017 and 2018 subject to continued employment); and -50% of award value granted in RSUs which vest based upon the movement in the Company’s ordinary share price as compared to a defined peer group (Relative Total Shareholder Return, or R-TSR) over a three-year period. The LTI grant in 2015 was as follows: 2014 Base Salary $370,000 LTI Target (% of Salary) 325% Grant Date 28/5/2015 $1,202,500 LTI Value # of RSUs granted – Time Based Vesting (1) 1,545,113 Grant Date Fair Value – Time Based Vesting (3) $692,827 # of RSUs granted – R-TSR (1)(2) 1,545,113 Grant Date Fair Value – R-TSR (3) $1,039,238 $295,000 225% 24/6/2015 $ 663,750 852,864 $342,347 852,864 $487,224 $295,000 225% 24/6/2015 $ 663,750 852,864 $342,374 852,864 $487,224 Name E. McCrady C. Anderson G. Ford (1) The total number of LTI RSUs granted to the MD and KMP’s for 2014 (in 2015) was determined as: Base Salary * LTI Target % Volume weighted average share price for the last 20 trading days in 2014(*) (*) Calculated to be US$0.3891 (2) (3) Represents number of target shares. Each KMP may earn up to 200% of the target shares (up to 6,501,682 shares as a group) if performance targets are met or exceeded. The grant date fair value of the services received in return for the time-based RSUs was determined by multiplying the number of shares granted by the closing price of the shares on the grant date. The fair value of the R-TSR shares has been determined using a Monte Carlo simulation model, as further discussed in Note 31 to the Financial Report. The amount included in remuneration is not related to or indicative of the benefit (if any) the individuals may ultimately realize should the RSUs vest. - 25 - Relative Total Shareholder Return R-TSR is calculated as the Company’s total shareholder return as compared to a designated peer group over a specified three- year time period. The Company’s 2014 LTI included an R-TSR component with potential payouts ranging from 0% to 200% of the target share grant, based on Sundance’s percentile rank among its peer set at the end of the three-year period (31 December 2017). If Sundance’s TSR is negative for the three-year period, but the percentile rank is above the 75th percentile, the payout will be capped at 100%. If Sundance’s TSR is between any of the percentile ranks listed in the table below, the payout as a percent of target will be on a pro-rata basis. TSR Percentile Rank 90th and above 50th 30th Below 30th Payout % of Target 200% 100% 50% 0% R-TSR, as defined in the LTI grant, will be based on the performance of the Company’s share price as compared to the share price performance of a set of 22 oil and gas exploration and production companies headquartered in the United States or Australia. The 2014 peer group was as follows: Abraxas Petroleum Corp/NV Diamondback Energy Ltd Red Fork Energy Ltd* Approach Resources Inc. Drillsearch Energy Ltd* Rex Energy Corp Austex Oil Ltd* Beach Energy Ltd* Emerald Oil Inc Sanchez Energy Corp Goodrich Petroleum Corp Senex Energy Ltd* Bonanza Creek Energy Inc. Lonestar Resources Ltd* Synergy Resources Corp Callon Petroleum CO/DE Matador Resources Co Triangle Petroleum Corp Carrizo Oil & Gas Inc Midstates Petroleum Co Inc Contango Oil & Gas Co Panhandle Oil & Gas Inc *Designates Australian-headquartered company. The LTI Plan provides criteria for substitution in the event of merger, acquisition and/or bankruptcy of any of the designated peers. The final determination of the peer group will be made at the end of the measurement period (31 December 2017). Retirement and Other Benefits Executive management participates in the same benefit plans and on the same basis as other employees. Those plans include health, dental and vision insurance (for which a premium contribution is required by the participant) and a 401(k) retirement plan under which the Company makes an annual contribution equal to 3 percent of the participant’s eligible compensation. Post-Termination and Change In Control Benefits The Chief Executive Officer’s employment contract provides for payment of his base salary through the end of the contract term in the event he is terminated as a result of a change in control event. Additionally, in the event of a corporate take-over or change in control (as defined in the RSU Plan), our Board, in its sole discretion, may cause all unvested RSUs to vest and be satisfied by the issuance of one share each or provide for the cancellation of outstanding RSUs and a cash payment equal to the then-fair market value of the RSUs. - 26 - F. Company Performance and Shareholder Wealth The following table sets out the Company’s performance during the years ended 31 December 2015, 2014, 2013, the six month period ended 31 December 2012 and the year ended 30 June 2012 in respect to several key financial indicators (in US thousands, except where otherwise stated): Metric Revenue 3P Reserves (MBOE) Production (BOEPD) EBITDAX Earnings (loss) per share** Dividends or other returns on capital Period end share price 31 December 2015 31 December 2014 31 December 2013 31 December 2012* 92,191 52,818 7,267 64,781 (0.49) Nil 159,793 147,723 6,147 15,321 126,373 0.03 Nil 85,345 92,780 2,956 15,942 52,594 0.04 Nil 17,724 46,501 1,298 76,210 9,223 0.27 Nil 30 June 2012 29,787 50,138 1,163 6,012 17,093 0.02 Nil A$0.17 A$0.52 A$1.00 A$0.77 A$0.56 Net profit (loss) after tax (269,795) * Six month period ended (all other periods shown are for full year periods) ** Basic and diluted G. Remuneration of Non-Executive Directors The non-executive Directors receive a basic annual fee for Board membership and annual fees for committee service and chairmanships. For the Australian non-executive Directors this is inclusive of the superannuation guarantee contribution required by the Australian government, which is currently 9.50%. In accordance with ASX corporate governance principles, they do not receive any other retirement benefits or any performance-related incentive payments by means of cash or equity. Some individuals, however, have chosen to contribute part of their salary to superannuation in order to access the available favourable tax advantage of doing so. In order to align Directors' interests with shareholder interests the company has a policy whereby the NEDs are required to hold a certain amount of our ordinary shares over a period of time. This policy will be reviewed in 2016. A review of NEDs fees by Meridian was commissioned by the Remuneration and Nominations Committee in September 2015. This review illustrated that the remuneration per NED is below the 25th percentile of the US peer group and above the 75th percentile of the Australian peer group. The review was conducted before the NEDs resolved to apply a 10% reduction in total fees commencing at the beginning of 2016. - 27 - Summary of Non-Executive Director Pay Elements Non-executive Directors’ fees are determined within an aggregate Directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum fees paid to NEDs is currently limited to $950,000 per annum which was approved by shareholders at the Annual General Meeting in 2013. The Directors’ fees for the 2015 fiscal year were: Base fees Board Service Chairman Non-executive Director Committee Service Audit and Risk Management Committee Chair Remuneration and Nominations Committee Chair Reserves Committee Chair Member of the Audit and Risk Management or Remuneration and Nominations Committee Member of the Reserves Committee Amount A$132,500 A$100,000 A$29,500 A$20,250 A$17,500 A$11,000 A$8,250 (Note: The above amounts are paid to the Australian non-executive Directors in Australian dollars. For the US based non- executive Director the same nominal amounts were paid in US dollars.) Effective January 2016, the NED’s resolved to apply a 10% total fee reduction for an indefinite period of time. H. Voting and Comments made at the Company’s Year Ended 31 December 2014 Annual General Meeting The Company received more than 96% of ‘yes’ votes on its remuneration report for the financial year ended 31 December 2014. The Committee values feedback from the shareholders and engages in conversations with key shareholders and their advisors on a regular basis. I. Employment Contracts During 2015, the Company had an employment contract in place with its Chief Executive Officer. The details of Mr. McCrady’s contract are as follows: • • • Three year term commencing 1 January 2014 with base remuneration of $370,000 per year which is reviewed annually by the Remuneration and Nominations Committee. He is eligible to participate in the incentive compensation program. The CEO is entitled to the specified remuneration and benefits through the term of the agreement. The Company may terminate the CEO’s employment at any time for good cause (for example, material breach of contract, gross negligence) without notice or the CEO may give 90 days’ notice to terminate the employment contract, both of which result in the CEO receiving pay through the period of services performed. If the Company terminates the CEO for any reason other than good cause, he is entitled to the specified remuneration and benefits through the term of the agreement. In the instance of a change in control of the Company at the instigation of the Board of Directors, if the CEO’s title and duties are substantially reduced then the CEO, within two months of such reduction in status, may provide two weeks written notice to the Company as being terminated by the Company for other than good cause and he will receive his base salary through the end of the contract term. The Remuneration and Nomination Committee expects to finalize employment agreements with the other KMPs during 2016. - 28 - Potential payments Upon Termination of Employment or Change of Control The following tables show the estimated potential payments and benefits that would be received by the CEO in the event of his termination of employment as a result of various circumstances discussed within his employment contract and assumes that any termination was effective as at 31 December 2015. The actual amounts to be paid can only be determined at the time of the CEO’s actual termination. The other KMP’s were not entitled to any termination benefits as at 31 December 2015. Executive Benefits and Payments Upon Termination Cash Severance RSUs (1) (2) Health Benefits Total Voluntary Termination $ - - - $ - Early Retirement $ - - - $ - Normal Retirement $ - - - $ - Disability $152,055 - 7,844 $159,899 Death $ - - - $ - Involuntary Termination (for cause) $ - - $ - Involuntary Termination (without cause) $ 371,989 - 19,087 $ 391,076 Change in Control $ 371,989 - 19,087 $ 391,076 (1) (2) In the event of retirement, disability or death, the awards granted as part of the 2014 LTI and 2015 LTI would be prorated at the end of the performance cycle based on actual performance achievement. In the event of a change in control of the Company, the Board, in its absolute discretion, may elect to vest any and all outstanding awards under the 2014 LTI, or cancel the RSUs and provide a cash payment equal to the fair market value of the RSUs immediately prior to the closing of the change in control transaction. For awards granted under the 2015 LTI, the Board must vest the outstanding RSUs if the acquiring company does not convert or make-up the award. J. Details of Remuneration The table below details Director and KMP remuneration paid in accordance with Accounting Standards for fiscal years ended 31 December 2015 and 2014. The STI award amounts shown were awarded under the STI for services performed during the reporting period but issued subsequent to the reporting period. 2015 Director E McCrady M Hannell D Hannes N Martin W Holcombe Fixed Based Remuneration Share Based Payments Performance Based Cash Salary and Fees Non-monetary Benefits (1) Post-employment Benefits $ 7,950 $ 21,307 - - - - - - - - Superannuation Options (2) $ - - - - - $ - 11,228 9,172 7,784 - $ 384,231 118,189 96,544 81,942 128,500 $ 809,406 RSU (3) STI- Bonus (4) LTI – Share Based (4) Total - $ - $ 849,856 $ 1,263,344 - - - - - - - - - - - 129,417 105,716 89,726 128,500 $ 849,856 $ 1,716,703 $ 21,307 $ 7,950 $ 28,184 $ - $ - $ - Key Management Personnel C Anderson G Ford $ 306,346 306,346 612,692 $ 1,422,098 $ 15,063 8,325 23,388 $ 44,695 $ 7,950 7,950 15,900 $ 23,850 $ - - - $ 14,087 $96,149 $ - $ 393,438 $ 833,033 37,598 112,835 51,685 208,984 $ 28,184 $ 51,685 $ 208,984 $ - - - 395,908 789,346 1,701,996 868,963 $ 1,639,202 $ 3,418,699 (1) Non-monetary benefits includes car parking and payment of healthcare premiums. (2) Fair value of services received in return for the options granted is measured using the Black-Scholes Option Pricing Model, as further discussed in Note 31 to the Financial Report, and represents the portion of the grant date fair value expense of the option during the year. Options were granted to Anderson and Ford in December 2011 and September 2011, respectively. (3) Fair value of services received in return for the conversion of options to RSUs. (4) The fair value of the services received in return for the LTI share based awards is based on the allocable portion of aggregate fair value expense recognized under AASB 2 for the year. The fair value of the services received in return for the time-based RSUs was determined by multiplying the number of shares granted by the closing price of the shares on the grant date. The fair value of the R-TSR shares has determined using a Monte Carlo simulation model, as further discussed in Note 31 to the Financial Report. The amount included in remuneration is not related to or indicative of the benefit (if any) the individuals may ultimately realize should the RSUs vest. - 29 - 2014 Director E McCrady M Hannell D Hannes N Martin W Holcombe Fixed Based Remuneration Share Based Payments( Performance Based Cash Salary and Fees Non-monetary Benefits (2) $ 365,615 141,958 115,956 98,414 117,792 $ 839,735 Post-employment Benefits $ 7,800 - - - - $ 18,816 - - - - $ 18,816 $ 7,800 STI- Share Based (1)(4) $ 300,000 LTI – Share Based (5) $ 542,310 $ 1,234,541 Total Superannuation $ - 13,334 10,896 9,252 - Options (3) $ - - - - - 155,292 126,852 107,666 117,792 $ 33,482 $ - $ 300,000 $ 542,310 $ 1,742,143 - - - - - - - - Key Management Personnel C Anderson G Ford $ 291,770 292,000 583,770 $ 1,423,505 $ 7,800 7,800 15,600 $ 23,400 (1) The 2014 remuneration presented in this report has been restated from what was presented within the 2014 Remuneration Report in order to reflect STI related to 2014 performance that was granted in 2015. The 2014 Remuneration Report presented STI paid in 2014 related to 2013 performance. 48,385 74,784 $ 33,482 $ 74,784 $ 292,885 298,010 590,895 $ 1,133,205 $ 14,144 8,428 22,572 $ 41,388 185,766 371,532 $ 671,532 $ - - - $ 26,399 $ 185,766 $ 818,764 840,389 1,659,153 $ 3,401,296 (2) Non-monetary benefits include car parking and payment of healthcare premiums. (3) Fair value of services received in return for the options granted is measured using the Black-Scholes Option Pricing Model, as further discussed in Note 31 to the Financial Report, and represents the portion of the grant date fair value expense of the option during the year. Options were granted to Anderson and Ford in December 2011 and September 2011, respectively. (4) The 2014 STI was issued in the form of fully vested RSUs. The value of the award was determined by multiplying the number of shares granted by the closing price of the shares on the grant date. The STI incentive for Mr. McCrady consists of 770,950 fully vested RSUs and is subject to shareholder approval at the 2016 AGM. The grant-date fair value of the award will vary based upon the share price at the time of grant. If the award is not approved by shareholders, the award will be paid to Mr. McCrady in cash. (5) The fair value of the services received in return for the LTI share based awards is based on the allocable portion of aggregate fair value expense recognized under AASB 2 for the year. The fair value of the services received in return for the time-based RSUs was determined by multiplying the number of shares granted by the closing price of the shares on the grant date. The amount included in remuneration is not related to or indicative of the benefit (if any) the individuals may ultimately realize should the RSUs vest. - 30 - K. Outstanding KMP Options and Restricted Share Units Number of Options held by Key Management Personnel Key Management Personnel E McCrady C Anderson G Ford Total Balance 31.12.2014 - 1,000,000 1,200,000 2,200,000 Options Exercised - - - - Options Cancelled/Lapsed /Converted (1) - (1,000,000) (1,200,000) (2,200,000) Balance 31.12.2015 - - - - Total Vested 31.12.2015 - - - - Total Unvested 31.12.2015 - - - - (1) On July 17, 2015, the Company approved the conversion of its outstanding stock options into RSUs, which vest in accordance with the original grant terms (the associated RSUs were issued in early 2016). The market price of Sundance’s ordinary shares on the date of conversion was A$0.53. The table below shows a summary of the grants before and after the conversion: Name C Anderson G Ford Vesting Terms (1) 200,000 each 5 March, beginning 2012 200,000 each 7 October beginning 2011 Expiration (1) 5 March 2019 31 December 2018 Number of Options Prior to Conversion 1,000,000 Fair Value Prior to Conversion $80,467 Number of RSUs After Conversion 469,000 Fair Value After Conversion $182,108 Incrementa l increase in FV(2) $101,641 1,200,000 $92,380 563,000 $218,607 $126,227 (1) No changes were made to vesting or expiration terms of original award. (2) $96,149 and $112,835 of incremental expense was recognized in 2015 related to Ms. Anderson and Ms. Ford’s option conversion, respectively. Number of Restricted Shares Units held by Key Management Personnel Key Management Personnel E McCrady(3) C Anderson G Ford Total Balance 31.12.2014 791,561 480,557 488,473 1,760,591 Issued or Issuable as Compensation 3,090,226 2,637,298 2,731,298 8,458,822 Forfeited RSUs - - - - RSUs converted to ordinary shares (261,559) (621,185) (624,015) (1,506,759) Balance at 31.12.2015 (1) 3,620,228 2,496,670 2,595,756 8,712,654 Market Value of Unvested RSUs 31.12.15 (2) $ 436,685 263,202 263,837 $ 963,725 (1) Of the balance as at 31 December 2015, 100,446, 375,200 and 469,167 of the RSUs were vested for Mr. McCrady, Ms. Anderson and Ms. Ford, respectively. The vested shares were issued in February 2016. (2) Market value based on the Company’s closing share price on 31 December 2015 or USD $0.12 based on the foreign currency exchange spot rate published by the Reserve Bank of Australia (3) Mr. McCrady’s RSUs were approved by the shareholders at the AGM held on 28 May 2015. - 31 - Shareholdings L. Number of Shares held by Key Management Personnel Key Management Personnel M Hannell D Hannes N Martin W Holcombe E McCrady C Anderson G Ford Total Balance 31.12.2014 1,059,000 5,801,561 422,800 596,700 1,908,581 275,370 376,403 10,440,415 Exercised Share Options - - - - - - - Value Realised Upon Option Exercise $ - - - - - - $ - RSUs converted to ordinary shares - - - - 261,559 621,185 624,015 1,506,759 Value Realised Upon RSU Vesting $ - - - - 101,465 247,297 247,619 $596,380 Net Other Changes (1) 89,500 100,000 80,000 - 265,000 (222,464) (217,890) 94,146 Balance 31.12.2015 1,148,500 5,901,561 502,800 596,700 2,435,140 674,091 782,528 12,041,320 (1) Includes market purchases and sales of shares to cover tax withholding liability related to shares issued on option exercises and vesting of RSUs. - 32 - Auditor’s Declaration The auditor’s independence declaration for the year ended 31 December 2015 has been received and can be found on page 34 of this report. Signed in accordance with a resolution of the Board of Directors. Michael Hannell Chairman Adelaide Dated this 31 s t day of March 2016 - 33 - Ernst & Young 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Sundance Energy Australia Limited As lead auditor for the audit of Sundance Energy Australia Limited for the year ended 31 December 2015, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Sundance Energy Australia Limited and the entities it controlled during the financial year. Ernst & Young Scott Jarrett Partner Sydney 31 March 2016 - 34 - CORPORATE GOVERNANCE The Board of Sundance Energy Australia Limited (“Sundance” or “the Company”) is committed to the Principles and Recommendations underpinning best practices in corporate governance as specified by the Australian Securities Exchange (the “ASX”) Corporate Governance Council’s 3rd Edition of Corporate Governance Principles and Recommendations. This is the Corporate Governance Statement for Sundance for fiscal year 2015, as at 31 December 2015. Sundance’s Board has carefully reviewed the Corporate Governance Principles and Recommendations. The Board considers that the Company’s corporate governance practices follow the ASX Corporate Governance Principles unless otherwise stated in this Corporate Governance Statement. In a few instances, the Company has adopted hybrid methodologies of compliance, which the Board has deemed appropriate for its size, structure and situation. In some instances disclosures recommended by the ASX have been made in other areas of the Annual Report, namely the Directors’ Report, and therefore will not be restated under this section. This Corporate Governance Statement has been approved by the Board of Directors as at 31 March 2016. Principle 1: Lay Solid Foundations for Management and Oversight The respective roles and responsibilities of the Board and management, including those matters expressly reserved to the Board, are set out in the Board Charter, which is available on the Company’s website at www.sundanceenergy.com.au/governance.cfm. 1.1 Roles and Responsibilities The Board is responsible for the corporate governance of the Company, including the setting and monitoring of objectives, goals and corporate strategy. Management is responsible for the implementation of the strategy and running the day to day business of the Company’s affairs. Responsibilities of the Board include: • Providing input into and final approval of management’s development of corporate strategy and performance objectives; Approving and monitoring the business plan, budget and corporate policies; • Monitoring senior executives’ performance and implementation of the Company’s strategy; • • Monitoring and the approval of financial and other reporting; • • • • • • Ensuring an effective system of internal controls exists and is functioning as required; Establishing the Company’s vision, mission, values and ethical standards as reflected in the Code of Conduct; Delegating an appropriate level of authority to management and approving change to those delegations; Ensuring appropriate resources are available to senior executives; Appointment, succession, performance assessment, remuneration and dismissal of the Managing Director; Reviewing, ratifying and monitoring systems of risk management and internal control, codes of conduct, and legal compliance; and Approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and divestitures. • The Board has delegated responsibility to the Managing Director (“MD”) to manage the day-to-day operations and administration of the Company. In carrying out this delegation, the MD, supported by the senior executive management team, routinely reports to the Board regarding Sundance’s progress on achieving both the short and long-term plans for the Company. The MD is accountable to the Board for the authority that is delegated by the Board. - 35 - Responsibilities of the senior executive management team include: • • • • • Implement the corporate strategy set by the Board; Achieve the performance targets set by the Board; Develop, implement and manage risk and internal control frameworks; Develop, implement and update policies and procedures; Provide sufficient, relevant and timely information to the Board to enable the Board to effectively perform its responsibilities; and • Manage human, physical and financial resources to achieve the Company’s objectives – in other words to run the day to day business in an effective way. 1.2 Information in Relation to Board Candidates Currently, no formal description of the procedure for the selection and appointment of new Directors or the re-election of incumbent Directors exists as due to the size of the Company it is considered that this process is effectively managed by the Board. However, the Remuneration and Nomination Committee is responsible for ensuring that appropriate checks are performed for any person that is appointed as a Director, or before a person is put forward to shareholders as a candidate for election as a Director. The Company ensures that all material information in its possession relevant to a shareholder’s decision whether to elect or re- elect a director, including the information referred to in Recommendation 1.2, is provided to shareholders in the Company’s Notice of Annual General Meeting. 1.3 Written Agreements with Directors and Senior Executives The Company has signed letters of appointment in place with each non-executive Director. The letters of appointment, cover topics including the term of appointment, remuneration, disclosure requirements and indemnity and insurance arrangements. The Company had a written employment contract in place with the MD throughout 2015, which expires 2 January 2017. The Company is in the process of entering into written employment contracts with its other Key Management Personnel (“KMPs”) that are expected to be finalized shortly. The employment contracts set forth a description of job duties and responsibilities, reporting lines, remuneration, and termination rights and payment entitlements and are described in detail in the Company’s remuneration report for the year ended 31 December 2015 beginning on page 15. - 36 - 1.4 Company Secretary The Company Secretary is D Connor. The responsibilities of the Company Secretary include: • • • Providing assistance to the Chairman in the development of the agenda in a timely and effective manner; In liaison with the Chairman, coordinating, organizing and attending meetings of the Board and shareholders, and ensuring that the correct procedures are followed; Assisting in the drafting and the maintaining of the agendas and minutes of the Board, Committees and Company meetings; • Working with the Chairman, Managing Director and Chief Financial Officer to ensure that governance practices meet all ASX requirements, including all financial and other regular reporting requirements. The Company Secretary is accountable to the Board through the Chairman and accessible to all Directors. The appointment and removal of the Company Secretary is a matter for decision by the Board as a whole. 1.5 Diversity Sundance is committed to a workplace culture that promotes the engagement of well qualified, diverse and motivated people across all levels to assist Sundance to meet its business objectives. Sundance employs people on the basis of the needs of the business, their skills, qualifications, abilities and past track record of their achievements. Within this framework, Sundance believes it is important to maintain a diverse, empowered and inclusive workforce in order to gain valuable input from people of different gender, race, religion, marital status, disability or national origin. The Company’s Diversity Policy is available on the Company’s website at with http://www.sundanceenergy.com.au/governance.cfm. - 37 - Key principles of this policy are: • • • • • Recruiting on the basis of skills, qualifications, abilities and track record; Encouraging participation of its people in professional development to benefit both the Company and the individual; Encouraging personal development to benefit both the Company and the individual; Aiming to be an employer of choice and to provide a family friendly work environment; and Promoting diversity through awareness. The Directors are of the view that the Company has already achieved a broad diversity of people across its operations in accordance with the company’s Diversity Policy. Given the size of the Company and the business environment in which it operates, the directors believe that it is not appropriate at this stage to set measurable diversity objectives. The Board, at least annually, reviews with management the effectiveness of the Diversity Policy, including gender diversity, and whether any changes need to be implemented. Historically, the oil and gas industry in the US is a male dominated work force. Nevertheless, the Board believes that there exists a well-balanced proportion of women and men employed throughout the Company as illustrated by the following table: As at 31 December 2015 Males Females Total Percent Male Board (1) Senior Management (2) Professionals Support and Field Total 5 - 5 100% 2 22 3 5 40% 60% 21 43 51% 49% 12 5 17 71% 29% 41 29 70 59% 41% Percent Female - (1) The Board does not currently have female representation, and believes that the existing range of skills and experience of the Directors is well suited to provide the necessary governance and expertise to meet the Company’s current business objectives. Should a requirement arise to appoint a new Director, the Board will review the availability of female candidates within the policy of appointing on skills and merit and applying the Diversity Policy. (2) The Company defines “Senior Management” as employees who directly report to the MD and have the the authority and responsibility for planning, directing and controlling major activities of the Company. 1.6 Process for Evaluating Board Performance The Chairman has the responsibility for reviewing the performance of the Board and Committees with the Directors on a periodic basis, but not less than once per year. The criteria for the review includes an evaluation of the range of skills and expertise that are in place for the Company to meet its current business objectives, and a review of any new requirements as the Company evolves and develops. The assessment is supplemented by input from the Remuneration and Nominations Committee deliberations. The Chairman has the responsibility for coordinating the review of the individual non-executive Directors performance on a periodic basis, but not less than once per year. This review is carried out on a one-on-one basis, with feedback provided from the Chairman to each Director, and also from each Director to the Chairman. The last of such reviews occurred in November 2015. The Board will continue to consider the need to use an external facilitator to conduct its performance reviews; to date the Board has not felt that the additional formality was necessary given the Board size and structure. - 38 - 1.7 Process for Evaluating Managing Director and Senior Management Performance The Company’s Chairman, with non-executive Director input, is responsible for providing feedback to the MD on his performance assessed against the responsibilities discussed above. The MD, with Chairman and non-executive Directors input, is responsible for providing feedback to senior management and assessing their performance against the responsibilities discussed in Item 1.1. An annual performance evaluation of the MD was completed in November 2015. The review of senior management was completed in connection with the Company’s incentive compensation program in March of 2015, with the next review expected to be completed in April 2016. The MD also has periodic one-on-one discussions with each senior executive throughout the year. Principle 2: Structure the Board to Add Value 2.1 Remuneration and Nomination Committee The Company has established the Remuneration and Nominations Committee, which is structured so that it: Consists of a majority of independent Directors; Is chaired by an independent Director; and • • • Has at least three members. The responsibilities of the Committee include recommendations to the Board about: • • • • • Remuneration practices and levels of MD, non-executive Directors and senior management; The necessary and desirable competencies of Directors; Board succession plans; The development of a process for evaluation of the performance of the Board, its Committees and Directors; and, The appointment and re-election of Directors. The current membership of the Remuneration and Nominations Committee is set out on page 13 of the Directors’ Report. Details of the number of Committee meetings held during 2015, and attendance by Committee members, is set out on page 12 of the Directors’ Report. The charter http://www.sundanceenergy.com.au/governance.cfm. the Remuneration and Nomination Committee for is available on the Company website at 2.2 Board Skills Matrix The Board is committed to achieving a membership that, collectively, has the appropriate level of personal qualities, skills, experience, and time commitment to properly fulfill its responsibilities or have ready access to such skills which are not available. - 39 - The composition of skills and experience of the Board (out of 5 Directors) is shown in the table below: Skills and Experience Industry experience Resources including oil & gas/minerals Infrastructure Engineering or science qualification • • • • Membership of industry related organisations • Major projects (including mergers & acquisitions) Executive leadership/management • Outside Directorships • Senior management positions Financial acumen Financial literacy • • Accounting or finance qualification Health safety and environment • Experience related to managing HS&E issues in an organisation Governance and regulation • Experience in the governance of organisations • Membership of governance industry bodies or organisations Strategy • Experience to analyse information, think strategically and review and challenge management in order to make informed decisions and assess performance against strategy International experience • • Risk • Experience in a global organisation Experience with partners, cultures and communities international assets, business Experience in risk management and oversight 5 5 3 2 2 5 2 3 The Directors review the composition and skill sets of the Board on a regular basis, and consider that the current composition, size and skills of the Board to be appropriate. - 40 - 2.3 Director Independence The Company considers an independent Director to be a non-executive Director who is not a member of management and who is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgement. The Board has determined that each of its Non-executive Directors are independent, and were independent during the year ended 31 December 2015. The composition of the Board at the date of this report and the length of service of each Director as at 31 December 2015 is as follows: M D Hannell E McCrady N Martin D Hannes Chairman, Independent Non-Executive Director 9 years, 9 months Managing Director and Chief Executive Officer 4 years, 10 months Independent Non-Executive Director 4 years* W Holcombe Independent Non-Executive Director Independent Non-Executive Director 6 years, 5 months 3 years, 1 month *In addition, Mr. Martin served as an alternate to the Board for 10 months prior to his appointment as a non-executive Director. The Board has assessed the capacity of Mr. Hannell who has served more than nine years as a Director to exercise an independent judgment on issues brought before the Board and to act in the best interests of the company and its shareholders. The Board is satisfied that this requirement has been fully met. 2.4 Director Independence As noted above in relation to Recommendation 2.3, at all times during the year ended 31 December 2015, the majority of the Board was comprised of independent Directors. 2.5 Independence of Board Chairman Sundance maintains a bright line division of responsibility between the Chairman and the MD as clearly specified in the Board at Charter http://www.sundanceenergy.com.au/governance.cfm. document maintained of Management Company’s website Role and the on 2.6 Director Induction and Professional Development The Board does not have a formal process in place to induct new Directors, as it is not considered practicable for the size of the Company and financial resources available. However, the Board believes that new Directors are sufficiently informed of the Company’s financial, strategic, operational and risk management position; the culture and values of the Company; and the role of the Board’s Committees. No formal process exists for Directors to access continuing education, as this is not considered practicable for the size of the Company and the financial resources available. However the four non-executive Directors have diverse experience, previous Board and/or senior management experience and either have been or currently are involved in a variety of outside business and professional activities that add to their knowledge and professional competency. Principle 3: Promote Ethical and Responsible Decision-Making 3.1 Code of Conduct The Company has a Code of Conduct and Ethics, which establishes the practices that Directors, senior management and employees must follow in order to comply with the law, meet shareholder expectations, maintain public confidence in the Company’s integrity, and provide a process for reporting and investigating unethical practices. The Code of Conduct is available on the Company’s website at http://www.sundanceenergy.com.au/governance.cfm. - 41 - In December 2015, the Company redistributed its Code of Conduct and Ethics to all employees and each was required to acknowledge that they had received and understood the policy. The Company has also incorporated the formal acknowledgement of the Code of Conduct and Ethics into the new hire on-boarding process. Principle 4: Safeguard Integrity in Corporate Reporting 4.1 Audit and Risk Management Committee The Audit and Risk Management Committee has three members, D Hannes (chairman), M D Hannell, and N Martin, all whom are independent Non-Executive Directors. The MD as well as the Chief Financial Officer are non-voting management representatives who advise the Committee as appropriate. • • The responsibilities of the Audit and Risk Management Committee is to assist the Board in: Ensuring the quality of financial controls is appropriate to the Company; Ensuring that the Company has in place a Risk Management strategy that fully addresses the full suite of risks that the Company is exposed to in meeting its business objectives. Making informed decisions regarding accounting , policies, practices and disclosures; Reviewing the adequacy of the accounting and reporting systems; Reviewing matters of significance affecting the financial welfare and risk exposure of the Company; Reviewing the scope and results of external audits; • • • • Maintaining open lines of communication between the Board, management and external auditors, thus enabling information and points of view to be freely exchanged; and • Meeting its compliance obligations imposed by the relevant regulators and legislative requirements. The Audit charter http://www.sundanceenergy.com.au/governance.cfm. and Risk Management Committee’s is available on the Company’s website at The specific attributes of the Audit and Risk Management Committee members that are relevant to this committee include financial acumen, technical industry knowledge, experience in risk management and oversight. The qualifications of each Audit and Risk Management Committee member can be found in the Director biographies beginning on page 10 of the Director’s Report. Details of the number of Committee meetings held during 2015, and attendance by Committee members, is set out on page 12 of the Directors’ Report. In addition, the Board has established a Reserves Committee to assist the Board in monitoring: • • • The integrity of the Company’s oil, natural gas, and natural gas liquid reserves reporting (the “Reserves”); The independence, qualifications and performance of the Company’s independent reservoir engineers; and The compliance by the Company with legal and regulatory requirements. The current membership of the Reserves Committee is set out on page 13 of the Directors’ Report. Details of the number of committee meetings held during 2015, and attendance by Committee members, is set out on page 12 of the Directors’ Report. Reserves The is http://www.sundanceenergy.com.au/governance.cfm. Committee Charter available on the Company’s website at 4.2 Statement from the Chief Executive Officer and the Chief Financial Officer Prior to giving their Director’s declaration in respect of the half-year and annual financial statements, the Board receives a declaration from the Chief Executive Officer and the Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 that, in their opinion, the financial records of the Company have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the Company, and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. - 42 - 4.3 Auditor Attendance at the Annual General Meeting The Board requires the external auditor to attend the Company’s Annual General Meeting and be available to answer questions from shareholders about the conduct of the audit and the preparation and content of the audit report. Principle 5: Make Timely and Balanced Disclosure The Company has adopted a Market Disclosure Policy to ensure compliance with its continuous disclosure obligations whereby relevant information that could cause a reasonable person to expect a material effect on, or lead to a substantial movement in, the value of the Company’s share price, is immediately made available to shareholders and the public as a release to the ASX. The Company Secretary has been nominated as the person primarily responsible for communications with the ASX. All material information concerning the Company, including its financial situation, performance, ownership and governance is posted on the Company’s web site to ensure all investors have equal and timely access. The Market Disclosure Policy is available on the Company’s website at http://www.sundanceenergy.com.au/governance.cfm. Principle 6: Respect the Rights of Shareholders 6.1 Information on the Company’s Website The Company provides information about itself and its corporate governance practices to its shareholders via the Company’s website, http://www.sundanceenergy.com.au/ 6.2 Investor Relations Program The Board fully recognises its responsibility to ensure that its shareholders are informed of all major developments affecting the Company. All shareholders, who have elected to do so, receive a copy of the Company’s Annual Report and the Annual, Half Yearly and Quarterly Reports are prepared and posted on the Company’s website in accordance with the ASX Listing Rules. Regular updates on operations are made via ASX releases. All information disclosed to the ASX is posted on the Company’s website as soon as possible after it is disclosed to the ASX. When analysts are briefed on aspects of the Company’s operation, the material used in the presentation is concurrently released to the ASX and posted on the Company’s website. The Company generally hosts conference calls following the Company’s major periodic releases as a forum for investors and other market participants to ask questions. The Company does not currently webcast its investor relations activities or the Annual at however, www.sundanceenergy.com.au/presentations. General Meeting, Company’s recordings website posted the are to 6.3 Encouraging Shareholder Participation at the Annual General Meeting The Company encourages its shareholders to attend its annual general meeting to allow them the opportunity to discuss and question its Board and management. 6.4 Electronic Communications The Company gives shareholders the option to receive communications from, and to send communications to, the Company electronically. The Company also periodically sends communications to those shareholders who have provided an email address. The Company encourages shareholders to sign up for email alerts at www.sundanceenergy.com.au/alerts. In addition, there is an email link on the Company’s website for shareholders to communicate with the Company electronically. - 43 - Principle 7: Recognise and Manage Risk 7.1 Risk Management Committee The Audit and Risk Management Committee is responsible for approving and monitoring the overall financial and operational business risk profile of the Company, and reporting its findings to the Board. The Audit and Risk Management Committee consists of three Independent Directors. The current membership of the Audit and Risk Management Committee is set out on page 13 of the Directors’ Report. Details of the number of committee meetings held during 2015, and attendance by Committee members, is set out on page 12 of the Directors’ Report. 7.2 Risk Management Framework Sundance recognises that the effective identification, evaluation, monitoring and management of risk is central to the ongoing success of the Company. The Company has established a Risk Management Policy, which provides the framework for oversight and management of its business risks. The Risk Management Policy ensures that: • • • • Appropriate systems are in place to identify, to the extent that is reasonably practical, all material risks that the Company faces in conducting its business; The financial impact of those risks is understood and appropriate controls are in place to limit exposures to them; Appropriate responsibilities are delegated to control the risks; and Any material changes to the Company’s risk profile are disclosed in accordance with the Company’s continuous Market Disclosure Policy. The Board requires senior management to design and implement the risk management and internal control system to manage the Company, and to report its effectiveness to the Board. By the nature of the upstream oil and gas business, the topic of risk management is intrinsically covered during each Board meeting. 7.3 Internal Audit The Company does not currently have a formal internal audit program in place. Given the Company’s current size and structure, the Board has determined that the finance department, under the supervision of the Chief Financial Officer and direction of the Audit and Risk Management Committee, can sufficiently manage the Company’s financial risks. During 2015, the Company adopted a formal internal control framework, Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of Treadway Commission (COSO), under which, the Company undertook a detailed review of the design and operating effectiveness of its internal controls over key financial processes, the safeguarding of assets, the maintenance of proper accounting records, and the reliability of financial information. 7.4 Economic, Environmental and Social Sustainability Risks The Company undertakes oil and gas exploration, development and production activities and as such, faces risks inherent to its business, including economic, environmental and social sustainability risks, which may materially impact the Company’s ability to create or preserve value for shareholders over the short, medium or long term. Health, safety and environmental responsibilities are top priorities of the Company. The Company believes sustainable and responsible business practices are an important long-term driver of performance and shareholder value and is committed to transparency, fair dealing, responsible treatment of employees and partners and positive interaction with the community in which it operates. The Company is committed to continual review of its status with respect of the materiality of its economic, environmental and social sustainability risks, and to take appropriate action to address, as circumstances require. - 44 - Details regarding material financial risks applicable to the Company and its business, including mitigating factors and the actions being taken by the Company to seek to manage its exposure to those risks, are set out in the Director’s Report and Note 33 to the financial statements. Principle 8: Remunerate Fairly and Responsibly 8.1 Remuneration and Nominations Committee The Remuneration and nominations Committee has three members, M D Hannell (chairman), D Hannes and H W Holcombe, all whom are independent non-executive Directors, and reports its recommendations to the Board for approval. The Committee determines remuneration levels of senior management on an individual basis. Advice is sought from an independent consultant based in the U.S. When nominations matters are discussed, M D Hannell hands over the chairmanship to one of the other Committee members. Details of the number of Committee meetings held during 2015, and attendance by Committee members, is set out on page 12 of the Directors’ Report. The Remuneration http://www.sundanceenergy.com.au/governance.cfm. and Nominations Committee Charter is available on the Company’s website at 8.2 Remuneration of Non-executive Directors, Executive Directors and Senior Management The remuneration of non-executive Directors is structured separately from that of the Managing Director and senior management. The Remuneration Report at pages 15 to 32 of this Annual Report sets out details of the Company’s policies and practices for remunerating Directors (MD and non-executive) and KMP. 8.3 Use of Derivatives and Similar Transactions Sundance has a Securities Trading Policy that regulates dealing in its securities by Directors, Senior Management and all other employees (including companies and persons closely related to such persons). The Policy prohibits Directors and employees from acting on inside information that is not generally available, and if it were generally available, would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the relevant securities. The Securities Trading Policy also: • Outlines when personnel may and may not deal in shares of the Company, • Outlines procedures for obtaining prior clearance in exceptional circumstances for trading that would otherwise be • • contrary to the Securities Trading Policy Provides procedures to reduce the risk of inside trading; and Prohibits personnel from engaging in in short-term or speculative transactions involving the Company’s shares over those shares and any other financial products of the Company traded on the ASX (Company Securities): Recommendation 8.3 of the ASX Corporate Governance Principles provides that a listed entity which has an equity-based remuneration scheme should have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme. Although the Company’s Security Trading Policy does not explicitly meet the requirements of recommendation 8.3, the Board is satisfied that the Company meets the requirements of recommendation 8.3 through company policy which prohibits Directors and Senior Management from trading in Company shares on a short-term basis, engaging in short sales, buying and selling puts and calls, and discourages the practice of purchasing the Company’s shares on margin. The Securities Trading Policy is available on the Company’s website at http://www.sundanceenergy.com.au/governance.cfm. - 45 - Financial Information - 46 - CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December Oil and natural gas revenue Lease operating and production tax expense General and administrative expense Depreciation and amortisation expense Impairment expense Exploration expense Finance costs, net of amounts capitalized Loss on debt extinguishment Gain on sale of non-current assets Gain on derivative financial instruments Other income (loss) Note 3 4 5 17, 20 19 18 6 2015 US$’000 92,191 (24,498) (17,176) (94,584) (321,918) (7,925) (9,418) (1,451) 790 15,256 (2,240) 2014 US$’000 159,793 (20,489) (15,527) (85,584) (71,212) (10,934) (699) 48,604 11,009 (481) Profit (loss) before income tax (370,973) 14,480 Income tax recovery 7 101,178 841 Profit (loss) attributable to owners of the Company Other comprehensive income (loss) Items that may be reclassified subsequently to profit or loss: Exchange differences arising on translation of foreign operations (no income tax effect) Other comprehensive income (loss) Total comprehensive income (loss) attributable to owners of the Company Earnings (loss) per share (cents) Basic earnings Diluted earnings (269,795) 15,321 (478) (478) 684 684 (270,273) 16,005 10 10 (48.8) (48.8) 2.9 2.9 The accompanying notes are an integral part of these consolidated financial statements - 47 - CONSOLIDATED STATEMENT OF FINANCIAL POSITION For the year ended 31 December CURRENT ASSETS Cash and cash equivalents Trade and other receivables Derivative financial instruments Income tax receivable Other current assets Assets held for sale TOTAL CURRENT ASSETS NON-CURRENT ASSETS Development and production assets Exploration and evaluation expenditure Property and equipment Derivative financial instruments Deferred tax assets Other non-current assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Accrued expenses Derivative financial instruments Liabilities held for sale TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Credit facilities, net of deferred financing fees Restoration provision Deferred tax liabilities Other non-current liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Share option reserve Foreign currency translation Retained earnings (accumulated deficit) TOTAL EQUITY Note 11 12 13 16 14 16 18 19 13 24 21 21 13 14 22 23 24 25 26 26 2015 US$’000 3,468 11,508 9,967 5,997 4,154 90,632 125,726 250,922 26,323 1,382 3,950 1,913 - 284,490 410,216 21,588 19,883 - 744 42,215 187,743 3,088 6,341 420 197,592 2014 US$’000 69,217 25,994 7,801 2,697 8,336 - 114,045 519,013 155,130 1,554 1,782 3,998 998 682,475 796,520 46,861 72,333 130 - 119,324 128,805 8,866 102,668 1,851 242,190 239,807 361,514 170,409 435,006 308,429 11,650 (1,310) (148,360) 170,409 306,853 7,550 (832) 121,435 435,006 The accompanying notes are an integral part of these consolidated financial statements - 48 - CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued Capital US$’000 Share Option Reserve US$’000 Foreign Currency Translation Reserve US$’000 Retained Earnings (Accumulated Deficit) US$’000 Total US$’000 Balance at 31 December 2013 237,008 5,635 (1,516) 106,114 347,241 Profit attributable to owners of the Company 15,321 15,321 Other comprehensive income for the year - - 684 - 684 Total comprehensive income Shares issued in connection with: a) Private placement b) Exercise of stock options Cost of capital raising, net of tax - 72,178 260 (2,593) - - - - 684 15,321 16,005 - - - - - - 72,178 260 (2,593) Stock compensation value of services - 1,915 - - 1,915 Balance at 31 December 2014 306,853 7,550 (832) 121,435 435,006 Loss attributable to owners of the Company - - - (269,795) (269,795) Other comprehensive loss for the year - - (478) - (478) Total comprehensive loss - Shares issued in connection with business combinations (Note 2) 1,576 (478) - - (269,795) (270,273) - - 1,576 Stock compensation value of services - 4,100 - - 4,100 Balance at 31 December 2015 308,429 11,650 (1,310) (148,360) 170,409 The accompanying notes are an integral part of these consolidated financial statements - 49 - CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December Note 2015 US$’000 2014 US$’000 30 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from sales Payments to suppliers and employees Settlements of restoration provision Interest received Receipts from commodity derivatives, net Payments to acquire commodity derivatives Income taxes received (paid), net NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Payments for development expenditure Payments for exploration expenditure Payments for acquisition of oil and gas properties Payments to acquire available-for-sale financial assets Sale of non-current assets Transaction costs related to sale of non-current assets Payments for acquisition related costs Cash (paid) received from escrow and deposit accounts, net Payments for property and equipment NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issuance of shares Payments for costs of capital raisings Borrowing costs paid, net of capitalized portion Deferred financing fees capitalized Proceeds from borrowings Repayments from borrowings NET CASH PROVIDED BY FINANCING ACTIVITIES 99,423 (49,639) (71) 107 11,736 (690) 3,603 64,469 (144,316) (20,339) (15,023) (185) 41 - (578) - (371) (180,771) - - (6,889) (4,708) 207,000 (145,000) 50,403 170,442 (29,967) - 201 (3) - (12,586) 128,087 (361,950) (39,616) (35,606) - 115,284 (278) - (102) (967) (323,235) 72,438 (3,778) (1,065) - 165,000 (65,000) 167,595 Net decrease in cash held (65,899) (27,553) Cash at beginning of period Effect of exchange rates on cash CASH AT END OF PERIOD 69,217 150 3,468 96,871 (101) 69,217 11 The accompanying notes are an integral part of these consolidated financial statements - 50 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial report of Sundance Energy Australia Limited (“SEAL”) and its wholly owned subsidiaries, (collectively, the “Company”, “Consolidated Group” or “Group”), for the year ended 31 December 2015 was authorised for issuance in accordance with a resolution of the Board of Directors on 31 March 2016. The Group is a for-profit entity for the purpose of preparing the financial report. The principal activities of the Group during the financial year are the exploration for, development and production of oil and natural gas in the United States of America, and the continued expansion of its mineral acreage portfolio in the United States of America. Basis of Preparation The consolidated financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. These consolidated financial statements comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Material accounting policies adopted in the preparation of this financial report are presented below. They have been consistently applied unless otherwise stated. The consolidated financial statements are prepared on a historical basis, except for the revaluation of certain non- current assets and financial instruments, as explained in the accounting policies below. The consolidated financial statements are presented in US dollars and all values are rounded to the nearest thousand (US$’000), except where stated otherwise. Principles of Consolidation A controlled entity is any entity over which Sundance Energy Australia Limited (SEAL) is exposed, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The consolidated financial statements incorporate the assets and liabilities of all entities controlled by SEAL as at 31 December 2015 and 2014 and the results of all controlled entities for the years then ended. All inter-group balances and transactions between entities in the Group, including any recognised profits or losses, are eliminated on consolidation. Income Tax a) The income tax expense for the period comprises current income tax expense/(income) and deferred income tax expense/(income). Current income tax expense charged to the statement of profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at the reporting date. Current tax liabilities/(assets) are therefore measured at the amounts expected to be paid to/(recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the period. Current and deferred income tax expense/(income) is charged or credited directly to equity instead of the statement of profit or loss when the tax relates to items that are credited or charged directly to equity. - 51 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset recognised or the liability is settled, based on tax rates enacted or substantively enacted at the reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilized. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Tax Consolidation Sundance Energy Australia Limited and its wholly-owned Australian controlled entities have implemented the income tax consolidation regime, with Sundance Energy Australia Limited being the head company of the newly consolidated group. Under this regime the group entities are taxed as a single taxpayer. The head entity of the income tax consolidated group and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Sundance Energy Australia Limited, as head company, also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. - 52 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued b) Exploration and Evaluation Expenditure Exploration and evaluation expenditures incurred are accumulated in respect of each identifiable area of interest. These costs are capitalised to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Any such estimates and assumptions may change as new information becomes available. If, after the expenditure is capitalized, information becomes available suggesting that the recovery of the expenditure is unlikely, for example a dry hole, the relevant capitalized amount is written off in the consolidated statement of profit or loss and other comprehensive income in the period in which new information becomes available. The costs of assets constructed within the Group includes the leasehold cost, geological and geophysical costs, and an appropriate proportion of fixed and variable overheads directly attributable to the exploration and acquisition of undeveloped oil and gas properties. When approval of commercial development of a discovered oil or gas field occurs, the accumulated costs for the relevant area of interest are transferred to development and production assets. The costs of developed and producing assets are amortised over the life of the area according to the rate of depletion of the proved and probable developed reserves. The costs associated with the undeveloped acreage are not subject to depletion. The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting date, in conjunction with the impairment review process referred to in Note 1(f), to determine whether any of impairment indicators exists. Impairment indicators could include i) tenure over the licence area has expired during the period or will expire in the near future, and is not expected to be renewed, ii) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is not budgeted or planned, iii) exploration for and evaluation of resources in the specific area have not led to the discovery of commercially viable quantities of resources, and the Group has decided to discontinue activities in the specific area, or iv) sufficient data exist to indicate that although a development is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or from sale. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made and any resulting impairment loss is recognized in the consolidated statement of profit or loss and other comprehensive income c) Development and Production Assets and Property and Equipment Development and production assets, and property and equipment are carried at cost less, where applicable, any accumulated depreciation, amortisation and impairment losses. The costs of assets constructed within the Group includes the cost of materials, direct labor, borrowing costs and an appropriate proportion of fixed and variable overheads directly attributable to the acquisition or development of oil and gas properties and facilities necessary for the extraction of resources. The carrying amount of development and production assets and property and equipment are reviewed at each reporting date to ensure that they are not in excess of the recoverable amount from these assets. Development and production assets are assessed for impairment on a cash-generating unit basis. A cash-generating unit is the smallest grouping of assets that generates independent cash inflows. Management has assessed its CGUs as being an individual basin, which is the lowest level for which cash inflows are largely independent of those of other assets. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of the assets in the unit on a pro-rata basis. - 53 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued An impairment loss is recognized in the consolidated statement of profit or loss and other comprehensive income whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell and its value-in-use. In assessing value-in-use, an asset’s estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the assets/CGUs. In addition, the Group considers market data related to recent transactions for similar assets. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the consolidated statement of profit or loss and comprehensive income during the financial period in which are they are incurred. Depreciation and Amortisation Expense Property and equipment are depreciated on a straight-line basis over their useful lives from the time the asset is held and ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful life of the improvement. The depreciation rates used for each class of depreciable assets are: Class of Non-Current Asset Depreciation Rate Basis of Depreciation Plant and Equipment 10 – 33% Straight Line The Group uses the units-of-production method to amortise costs carried forward in relation to its development and production assets. For this approach, the calculation is based upon economically recoverable reserves over the life of an asset or group of assets. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount, and recorded as impairment expense within the consolidated statement of profit or loss and other comprehensive income. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of profit or loss. d) Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at date of inception. The arrangement is assessed to determine whether its fulfillment is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership to the entities in the Group. All other leases are classified as operating leases. - 54 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Assets under financing leases are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. e) Financial Instruments Recognition and Initial Measurement Financial instruments, incorporating financial assets and financial liabilities, are recognised when the entity becomes a party to the contractual provisions of the instrument. Trade date accounting is adopted for financial assets that are delivered within timeframes established by marketplace convention. Financial instruments are initially measured at fair value plus transactions costs where the instrument is not classified at fair value through profit or loss. Transaction costs related to instruments classified at fair value through profit or loss are expensed to profit or loss immediately. Financial instruments are classified and measured as set out below. Derivative Financial Instruments The Group uses derivative financial instruments to economically hedge its exposure to changes in commodity prices arising in the normal course of business. The principal derivatives that may be used are commodity crude oil price swap, option and costless collar contracts and interest rate swaps. Their use is subject to policies and procedures as approved by the Board of Directors. The Group does not trade in derivative financial instruments for speculative purposes. Derivative financial instruments are recognised at fair value. Subsequent to initial recognition, derivative financial instruments are recognised at fair value. The fair value of these derivative financial instruments is the estimated amount that the Group would receive or pay to terminate the contracts at the reporting date, taking into account current market prices and the current creditworthiness of the contract counterparties. The derivatives are valued on a mark to market valuation and the gain or loss on re-measurement to fair value is recognised through the statement of profit or loss and other comprehensive income. i) Financial assets at fair value through profit or loss Financial assets are classified at fair value through profit or loss when they are held for trading for the purpose of short term profit taking, when they are derivatives not held for hedging purposes, or designated as such to avoid an accounting mismatch or to enable performance evaluation where a group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Realised and unrealised gains and losses arising from changes in fair value are included in profit or loss in the period in which they arise. - 55 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost using the effective interest rate method. iii) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets that have fixed maturities and fixed or determinable payments, and it is the Group’s intention to hold these investments to maturity. They are subsequently measured at amortised cost using the effective interest rate method. iv) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated as such or that are not classified in any of the other categories. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed determinable payments. v) Financial liabilities Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost using the effective interest rate method. Derecognition Financial assets are derecognised when the contractual right to receipt of cash flows expires or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised when the related obligations are either discharged, cancelled or expire. The difference between the carrying value of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss. Classification The Group has classified its debt as non-current based on the terms of the credit facilities agreement and the definitions of current and non-current as defined under IAS 1 rather than classifying a portion of its non-current debt as current debt based on the Group’s expectations regarding the timing of a possible repayment should the Group’s assets held for sale be sold within one year of the balance sheet date. See further discussion in Note 14 Assets Held for Sale. Impairment of Non-Financial Assets f) The carrying amounts of the Group’s assets are reviewed at each reporting date to determine whether there is any indication of impairment. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made. Exploration and evaluation assets are assessed for impairment in accordance with Note 1(b). - 56 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued Development and production assets are assessed for impairment on a cash-generating unit basis. A cash-generating unit is the smallest grouping of assets that generates independent cash inflows. Management has assessed its CGUs as being an individual basin, which is the lowest level for which cash inflows are largely independent of those of other assets. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of the assets in the unit on a pro-rata basis. An impairment loss is recognized in the income statement whenever the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. The recoverable amount of an asset is the greater of its fair value less costs to sell (FVLCS) and its value-in-use (VIU). In assessing VIU, an asset’s estimated future cash flows are discounted to their present value using an appropriate discount rate that reflects current market assessments of the time value of money and the risks specific to the assets/CGUs. In addition, the Group considers market data related to recent transactions for similar assets. In determining the fair value of the Group's investment in shale properties, the Group considers a variety of valuation metrics from recent comparable transactions in the market. These metrics include price per flowing barrel of oil equivalent and undeveloped land values per net acre held. Where an asset does not generate cash flows that are largely independent from other assets or groups of assets, the recoverable amount is determined for the cash- generating unit to which the asset belongs. For development and production assets, the estimated future cash flows for the VIU calculation are based on estimates, the most significant of which are hydrocarbon reserves, future production profiles, commodity prices, operating costs and any future development costs necessary to produce the reserves. Under a FVLCS calculation, future cash flows are based on estimates of hydrocarbon reserves in addition to other relevant factors such as value attributable to additional reserves based on production plans. Estimates of future commodity prices are based on the Group’s best estimates of future market prices with reference to bank price surveys, external market analysts’ forecasts, and forward curves. At 31 December 2015, the Company estimated the price/Bbl to be $40 in 2016, $50 in 2017 and $60 for 2018 and then gradually increased up to $70/bbl in 2019 and thereafter. The discount rates applied to the future forecast cash flows are based on a third party participant’s post-tax weighted average cost of capital, adjusted for the risk profile of the asset. The range of pre-tax discounts applied were between 9% and 20%. An impairment loss is reversed if there has been an increase in the estimated recoverable amount of a previously impaired assets. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or depletion if no impairment loss had been recognized. The Company has not reversed an impairment loss during the years ended 31 December 2015 or 2014. g) Foreign Currency Transactions and Balances Functional and presentation currency Both the functional currency and the presentation currency of the Group is US dollars. Some subsidiaries have Australian dollar functional currencies which are translated to the presentation currency. All operations of the Group are incurred at subsidiaries where the functional currency is the US dollar as all oil and gas properties are located in North America. - 57 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the year-end exchange rate. Non- monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the consolidated statement of profit or loss and other comprehensive income. Group Companies The financial results and position of foreign subsidiaries whose functional currency is different from the Group’s presentation currency are translated as follows: - - - assets and liabilities are translated at year-end exchange rates prevailing at that reporting date; income and expenses are translated at average exchange rates for the period; and retained profits, issued capital and paid-in-capital are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve. These differences are recognised in the statement of profit or loss and other comprehensive income upon disposal of the foreign operation. h) Employee Benefits A provision is made for the Group’s liability for employee benefits arising from services rendered by employees to the balance sheet date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for these benefits. Those cash flows are discounted using market yields on national government bonds with terms to maturity that match the expected timing of cash flows. Equity - Settled Compensation The Group has an incentive compensation plan where employees may be issued shares and/or options. The fair value of the equity to which employees become entitled is measured at grant date and recognized as an expense over the vesting period with a corresponding increase in equity. The fair value of shares issued is determined with reference to the latest ASX share price. Options are fair valued using an appropriate valuation technique which takes into account the vesting conditions. - 58 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued The group has a restricted share unit (“RSU”) plan to motivate management and employees to make decisions benefiting long-term value creation, retain management and employees and reward the achievement of the Group’s long-term goals. The target RSUs are generally based on goals established by the Remuneration and Nominations Committee and approved by the Board. The fair value of time-lapse RSUs is determined based on the price of Company ordinary shares on the date of grant and expense is recognized over the vesting period. Certain of its RSUs vest based on the achievement of metrics related to the Company’s 3-year total shareholder return as compared to its peer group, as defined. The Company uses a Monte Carlo valuation model to determine the fair value of such RSUs and the expense is recognized over the vesting period. The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. i) Provisions Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. j) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, unrestricted escrow accounts that management expects to be used to settle current liabilities, capital or operating expenditures, or complete acquisitions and bank overdrafts. k) Revenue Revenue from the sale of goods is recognised upon the delivery of goods to the customer. Revenue from the rendering of a service is recognised upon the delivery of the service to the customers. All revenue is stated net of the amount of goods and services tax (“GST”). l) Borrowing Costs Borrowing costs, including interest, directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale. Borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, borrowings are stated as amortised cost with any difference between cost and redemption being recognised in the consolidated statement of profit or loss and other comprehensive income over the period of the borrowings on an effective interest basis. The Company capitalised eligible borrowing costs of $1.6 million and $3.4 million for the years ended 31 December 2015 and 2014, respectively. All other borrowing costs are recognised in the consolidated statement of profit or loss and other comprehensive income in the period in which they are incurred. m) Goods and Services Tax Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the consolidated statement of cash flows on a gross basis except for the GST component of investing and financing activities, which are disclosed as operating cash flows. - 59 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued n) Business Combinations A business combination is a transaction in which an acquirer obtains control of one or more businesses. The acquisition method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. The acquisition method is only applied to a business combination when control over the business is obtained. Subsequent changes in interests in a business where control already exists are accounted for as transactions between owners. The cost of the business combination is measured at fair value of the assets given, shares issued and liabilities incurred or assumed at the date of acquisition. Costs directly attributable to the business combination are expensed as incurred, except those directly and incrementally attributable to equity issuance. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the net identifiable asset acquired, if any, is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the consolidated statement of profit or loss and other comprehensive income as a gain on bargain purchase. Adjustments to the purchase price and excess on consideration transferred may be made up to one year from the acquisition date. o) Assets Held for Sale The Company classifies property as held for sale when management commits to a plan to sell the property, the plan has appropriate approvals, the sale of the property is highly probable within the next twelve months, and certain other criteria are met. At such time, the respective assets and liabilities are presented separately on the Company’s consolidated statement of financial position and amortisation is no longer recognized. Assets held for sale are reported at the lower of their carrying amount or their estimated fair value, less the costs to sell the assets. The Company recognizes an impairment loss if the current net book value of the property exceeds its fair value, less selling costs. As at 31 December 2015, based upon the Company’s intent and anticipated ability to sell an interest in these properties, the Company had classified 25% of its Eagle Ford assets and 100% of its Cooper Basin assets as held for sale. The Company did not have any assets classified as held for sale as at 31 December 2014. The Company has elected not to reclassify the portion of debt related to the collateralised assets held for sale to current debt, but has appropriately disclosed in Note 14. p) Critical Accounting Estimates and Judgements The Directors evaluate estimates and judgements incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data obtained both externally and within the Group. 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. Management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated financial statements. - 60 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued Estimates of reserve quantities The estimated quantities of hydrocarbon reserves reported by the Group are integral to the calculation of amortisation (depletion) and to assessments of possible impairment of assets. Estimated reserve quantities are based upon interpretations of geological and geophysical models and assessment of the technical feasibility and commercial viability of producing the reserves. Management prepares reserve estimates which conform to guidelines prepared by the Society of Petroleum Engineers. Management also prepares reserve estimates under SEC guidelines. Reserve estimates conforming to the guidelines prepared by the Society of Petroleum Engineers are utilized for accounting purposes. These assessments require assumptions to be made regarding future development and production costs, commodity prices, exchange rates and fiscal regimes. The estimates of reserves may change from period to period as the economic assumptions used to estimate the reserves can change from period to period, and as additional geological data is generated during the course of operations. Impairment of Non-Financial Assets The Group assesses impairment at each reporting date by evaluating conditions specific to the Group that may lead to impairment of assets. Where an indicator of impairment exists, the recoverable amount of the cash-generating unit to which the assets belong is then estimated based on the present value of future discounted cash flows. For development and production assets, the expected future cash flow estimation is always based on a number of factors, variables and assumptions, the most important of which are estimates of reserves, future production profiles, commodity prices and costs. In most cases, the present value of future cash flows is most sensitive to estimates of future oil price and discount rates. A change in the modeled assumptions in isolation could materially change the recoverable amount. However, due to the interrelated nature of the assumptions, movements in any one variable can have an indirect impact on others and individual variables rarely change in isolation. Additional, management can be expected to respond to some movements, to mitigate downsides and take advantage of upsides, as circumstances allow. Consequently, it is impracticable to estimate the indirect impact that a change in one assumption has on other variables and therefore, on the extent of impairments under different sets of assumptions in subsequent reporting periods. In the event that future circumstances vary from these assumptions, the recoverable amount of the Group’s development and production assets could change materially and result in impairment losses or the reversal of previous impairment losses. Exploration and Evaluation The Company’s policy for exploration and evaluation is discussed in Note 1 (b). The application of this policy requires the Company to make certain estimates and assumptions as to future events and circumstances, particularly in relation to the assessment of whether economic quantities of reserves have been found. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised exploration and evaluation expenditure, management concludes that the capitalised expenditure is unlikely to be recovered by future sale or exploitation, then the relevant capitalised amount will be written off through the consolidated statement of profit or loss and other comprehensive income. Restoration Provision A provision for rehabilitation and restoration is provided by the Group to meet all future obligations for the restoration and rehabilitation of oil and gas producing areas when oil and gas reserves are exhausted and the oil and gas fields are abandoned. Restoration liabilities are discounted to present value and capitalised as a component part of capitalised development expenditure. The capitalised costs are amortised over the units of production and the provision is revised at each balance sheet date through the consolidated statement of profit or loss and other comprehensive income as the discounting of the liability unwinds. - 61 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued In most instances, the removal of the assets associated with these oil and gas producing areas will occur many years in the future. The estimate of future removal costs therefore requires management to make significant judgements regarding removal date or well lives, the extent of restoration activities required, discount and inflation rates. Units of Production Depletion Development and production assets are depleted using the units of production method over economically recoverable reserves. This results in a depletion or amortisation charge proportional to the depletion of the anticipated remaining production from the area of interest. The life of each item has regard to both its physical life limitations and present assessments of economically recoverable reserves of the field at which the asset is located. These calculations require the use of estimates and assumptions, including the amount of recoverable reserves and estimates of future capital expenditure. The calculation of the units of production rate of depletion or amortisation could be impacted to the extent that actual production in the future is different from current forecast production based on total economically recoverable reserves, or future capital expenditure estimates change. Changes to economically recoverable reserves could arise due to change in the factors or assumptions used in estimating reserves, including the effect on economically recoverable reserves of differences between actual commodity prices and commodity price assumptions and unforeseen operational issues. Changes in estimates are accounted for prospectively. Share-based Compensation The Group’s policy for share-based compensation is discussed in Note 1 (h). The application of this policy requires management to make certain estimates and assumptions as to future events and circumstances. Share-based compensation related to options use estimates for expected volatility of the Company’s ordinary share price and expected term, including a forfeiture rate, if appropriate. Certain of the Company’s restricted share units vest based on the Company’s 3-year total shareholder return as compared to its peer group, as defined. Share-based compensation related to these awards use estimates for the expected volatility of both the Company’s ordinary share price and each of its peer’s ordinary share price. q) Rounding of Amounts In accordance with Class Order 98/100 issued by the Australian Securities and Investment Commission, amounts in the financial statements have been rounded to the nearest thousand. r) Parent Entity Financial Information The financial information for the parent entity, SEAL (“Parent Company”), also the ultimate parent, discussed in Note 34, has been prepared on the same basis, using the same accounting policies as the consolidated financial statements, except for its investments in subsidiaries which are accounted for at cost in the individual financial statements of the parent entity less any impairment. s) Earnings (loss) Per Share The group presents basic and diluted earnings (loss) per share for its ordinary shares. Basic earnings (loss) per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings (loss) per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares for the dilutive effect, if any, of outstanding share rights and share options which have been issued to employees. - 62 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES continued t) Recently issued accounting standards to be applied in future reporting periods The following Standards and Interpretations have been issued but are not yet effective. These are the standards that the Group reasonably expects will have an impact on its disclosures, financial position or performance with applied at a future date. The Group’s assessment of the impact of these new standards, amendments to standards, and interpretations is set out below. AASB 9/IFRS 9 – Financial Instruments AASB 9/IFRS 9 introduces new requirements for the classification, measurement, and derecognition of financial assets and financial liabilities. The final version of IFRS 9 supersedes all previous versions of the standard. However, for annual periods beginning before 1 January 2018, an entity may elect to apply those earlier versions of IFRS 9 if the entity’s relevant date of initial application is before 1 February 2015. The effective date of this standard is for fiscal years beginning on or after 1 January 2018. Management is currently assessing the impact of the new standard but it is not expected to have a material impact on the Group’s consolidated financial statements. AASB 15/IFRS 15 – Revenue from Contracts with Customers In May 2014, AASB 15/IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Specifically, the standard introduces a 5-step approach to revenue recognition: • • • • • Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contracts. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. Under AASB 15/IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. The effective date of this standard is for fiscal years beginning on or after 1 January 2018. Management is currently assessing the impact of the new standard and plans to adopt the new standard on the required effective date. AASB 16/IFRS 16 – Leases In January 2016, AASB 16/IFRS 16 was issued which changes the current accounting for leases to eliminate the operating/finance lease designation and require entities to recognize most leases on the balance sheet, initially recorded at the fair value of unavoidable lease payments. The entity will then recognize depreciation of the lease assets and interest on the income statement. The effective date of this standard is for fiscal years beginning on or after 1 January 2019. Management is currently assessing the impact of the new standard and plans to adopt the standard on the required effective date. - 63 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – BUSINESS COMBINATIONS Acquisitions in 2015 On 7 August 2015, the Company completed its acquisition of New Standard Energy Ltd’s (“NSE”) U.S. (Eagle Ford) and Cooper Basin (Australia PEL570) assets for an aggregate purchase price of $16.4 million. The Eagle Ford assets acquired included approximately 5,500 net acres in Atascosa County, 7 gross producing wells and 2 wells that had been drilled, but not yet completed (one of which was subsequently completed by the Company). The Cooper Basin asset acquired included a 17.5% working interest in the Petroleum Exploration License (PEL) 570 concession, with drilling commitments of up to approximately AUD$10.6 million, of which AUD$3.9 million has been incurred through 31 December 2015. The Company plans to sell 100% of its acquired interest in PEL570 and 25% of the Eagle Ford assets within the next twelve months. These assets are included in assets held for sale as of 31 December 2015. Consideration paid for the assets included payment of $15.0 million to repay NSE’s outstanding debt and the issuance of 6 million new fully paid ordinary Company shares, offset by cash acquired of $0.2 million. Approximately 1.5 million of the 6 million Company shares were held in escrow and are expected to be returned to the Company in satisfaction of certain unresolved working capital adjustments and were not valued as part of consideration paid. The following table reflects the fair value of the assets acquired and the liabilities as at the date of acquisition (in thousands): Fair value of assets acquired: Trade and other receivables Other current assets Development and production assets PEL 570 concession (1) Other non-current assets Amount attributable to assets acquired Fair value of liabilities assumed: Trade and other payables Accrued expenses Restoration provision Amount attributable to liabilities assumed Net assets acquired Purchase price: Cash consideration to payoff NSE’s outstanding debt, net of cash acquired Issued capital Total consideration paid $ 119 686 13,170 4,586 213 18,774 1,511 518 334 2,363 $ 16,411 $ 14,835 1,576 $ 16,411 (1) As at the acquisition date, the Company planned to sell the Cooper Basin assets, and therefore it was classified as held for sale. - 64 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – BUSINESS COMBINATIONS continued Revenues of $0.4 million and net income of $31 thousand before impairment and income taxes were generated from the acquired properties from 7 August 2015 through 31 December 2015. Impairment expense is booked at the CGU basis and cannot be attributed to specific wells. The Company incurred $0.5 million for the year ended 31 December 2015 in acquisition related costs primarily for professional fees and services. These amounts are included in general and administrative expense and financing activities in the consolidated statements of profit or loss and other comprehensive income and the consolidated statement of cash flows, respectively. Acquisition in 2014 There were no business acquisitions for the year ended 31 December 2014. NOTE 3 – REVENUE Year ended 31 December Oil revenue Natural gas revenue Natural gas liquid (NGL) revenue Total revenue (net of royalties and transportation costs) NOTE 4 – LEASE OPERATING AND PRODUCTION TAX EXPENSE Year ended 31 December Lease operating expense Workover expense Production tax expense 2015 US$’000 82,949 4,720 4,522 92,191 2015 US$’000 (16,667) (1,788) (6,043) 2014 US$’000 144,994 6,161 8,638 159,793 2014 US$’000 (12,466) (1,058) (6,965) Total lease operating and production tax expense (24,498) (20,489) - 65 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 – GENERAL AND ADMINISTRATIVE EXPENSES Year ended 31 December Employee benefits expense, including salaries and wages, net of capitalised overhead Share based payments expense General legal and professional fees Corporate fees Rent Regulatory expenses Acquisition related costs Other expenses Total general and administrative expenses 2015 US$’000 2014 US$’000 (4,849) (4,100) (3,347) (1,986) (993) (203) (540) (1,158) (17,176) (3,064) (1,915) (4,661) (2,676) (631) (1,374) - (1,206) (15,527) The Company capitalised overhead costs, including salaries, wages benefits and consulting fees, directly attributable to the exploration, acquisition and development of oil and gas properties of $3.0 million and $4.5 million for the years ended 31 December 2015 and 2014, respectively. NOTE 6 – GAIN ON SALE OF NON-CURRENT ASSETS Disposals in 2014 In July 2014, the Company sold its remaining Denver-Julesburg Basin assets for net proceeds of $108.8 million in cash, which includes the reimbursement of capital expenditures incurred on 8 gross (3.1 net) non-operated horizontal wells. The sale resulted in a pre-tax gain of $47.7 million, which is included in the gain on sale of non- current assets in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2014. In July 2014, the Company sold its remaining Bakken assets, located in the Williston Basin, for approximately $14.0 million, which included $10 million in cash and approximately $4.0 million in settlement of a net liability due to the buyer. The sale resulted in a pre-tax gain of $1.6 million, which is included in the gain on sale of non-current assets in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2014. For the Denver-Julesburg Basin sales proceeds, the Company elected to apply Section 1031 “like-kind exchange” treatment under the US tax rules, which allow deferral of the gain if the proceeds are used to acquire “like-kind property” within six months of the closing date of the transaction. In addition, the US tax rules allow the deduction of all intangible drilling costs (“IDCs”) in the period incurred. In January 2015, the Company deferred majority of the taxable gain on the sale of the Denver-Julesburg Basin by acquiring qualified replacement properties. - 66 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – INCOME TAX EXPENSE Year ended 31 December a) The components of income tax expense comprise: Current tax benefit/(expense) Deferred tax benefit Total income tax benefit b) The prima facie tax on income (loss) from ordinary activities before income tax is reconciled to the income tax as follows: 2015 US$’000 2014 US$’000 6,572 94,606 101,178 (17) 858 841 Profit (loss) before income tax (370,973) 14,480 Prima facie tax expense (benefit) at the Group’s statutory income tax rate of 30% (2014:30%) (111,292) 4,344 Increase (decrease) in tax expense resulting from: - Difference of tax rate in US controlled entities Impact of direct accounting from US controlled entities (1) - Share based compensation - Excess depletion - - Other allowable items - - Tax adjustments relating to prior years Change in apportioned state tax rates in US controlled entities (2) Tax consolidation election (3) Current year tax losses not recognised - - (20,422) (3,165) 747 - 77 - 220 (3,044) 428 (489) 295 (1,063) (84) - 32,961 (992) (3,058) 2,518 Total Income tax benefit (101,178) (841) - 67 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 – INCOME TAX EXPENSE continued Year ended 31 December US$’000 US$’000 c) Unused tax losses and temporary differences for which no deferred tax asset has been recognised at 30% d) Deferred tax charged directly to equity: - Equity raising costs - Currency translation adjustment 35,649 - (362) 2,685 1,147 (268) 1) The Oklahoma US state tax jurisdiction computes income taxes on a direct accounting basis. A significant portion of the 2015 and 2014 impairments related to this jurisdiction resulting in a deferred tax benefit of $3,165 creating deferred tax assets, all of which were unrecognized. 2) 3) In 2014, the change in apportioned state tax rate in US controlled entities is a result of the Company disposing of its property in Colorado (income tax rate of 4.63%). As the Texas margin tax computation is similar in nature to an income tax computation, it is treated as an income tax for financial reporting purposes. In 2014, the this income tax benefit resulted from the election to consolidate certain Australian subsidiaries for income tax purposes effective 1 January 2014, making previously unrecognized deferred tax assets of one of these Australian subsidiaries available for utilization against future income of the consolidated Australian entities. These deferred tax assets were previously unrecognized due to the lack of evidence of future taxable income for these Australian subsidiaries on a stand-alone basis. - 68 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 – KEY MANAGEMENT PERSONNEL COMPENSATION a) Directors and Key Management Personnel Compensation The total cash remuneration paid to Directors and Key Management Personnel (“KMP”) of the Group during the year is as follows: Year ended 31 December Short term wages and benefits Share based payments (1) Post-employment benefit 2015 US$ 1,466,793 2,271,404 52,034 3,790,231 2014 US$ 1,464,893 1,207,989 56,883 2,729,765 (1) The 2014 short-term incentive bonus for its KMP was paid out in the form of RSUs and was recognized as expense in 2015. The associated expense is included in 2015 share based payment amount in the table above. As the proposed 2014 short-term incentive award to Eric McCrady is subject to shareholder approval at the 2016 AGM, it has been excluded from the 2015 and 2014 figures above. b) Options Granted as Compensation No options were granted as compensation during each of the years ended 31 December 2015 and 2014 to KMP from the Sundance Energy Employee Stock Option Plan. During 2015, the option holders were notified that all of the Company’s options would be converted to RSUs, including 2.2 million options held by KMP, which were converted into 1.0 million RSUs ($0.2 million of incremental fair value). The details of the conversion are described in more detail in the Remuneration Report section of the Directors’ Report of the Company’s Annual Report for the year ended 31 December 2015. c) Restricted Share Units Granted as Compensation RSUs awarded as compensation were 7,426,596 ($3.8 million fair value) and 1,451,917 ($1.4 million fair value) during the years ended 31 December 2015 and 2014, respectively, to KMP. The vesting provisions of the RSUs vary and may vest immediately, based upon the passage of time or based on achievement of metrics related to the Company’s 3-year total shareholder return (TSR) as compared to its peer group. The details of the plan and TSR RSUs are described in more detail in the Remuneration Report of the Directors’ Report of the Company’s Annual Report for the year ended 31 December 2015. NOTE 9 – AUDITORS’ REMUNERATION Year ended 31 December Cash remuneration of the auditor for: 2015 US$ 2014 US$ Auditing or review of the financial report Professional services related to filing of various Forms with the US Securities and Exchange Commission Taxation services provided by the practice of auditor Total remuneration of the auditor 462,950 428,888 13,000 61,535 537,485 244,754 68,815 742,457 - 69 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – EARNINGS (LOSS) PER SHARE (EPS) Year ended 31 December 2015 US$’000 2014 US$’000 Profit/(loss) for periods used to calculate basic and diluted EPS (269,795) 15,321 Number of shares Number of shares -Weighted average number of ordinary shares outstanding during the period used in calculation of basic EPS(1) 552,847,289 531,391,405 -Incremental shares related to options and restricted share units -Weighted average number of ordinary shares outstanding - 3,208,214 during the period used in calculation of diluted EPS 552,847,289 534,599,619 (1) Calculation excludes approximately 1.5 million ordinary shares held in escrow as at 31 December 2015. The shares were issued as part of the NSE acquisition and are expected to be returned to the Company in satisfaction of certain working capital adjustments. Incremental shares related to options and restricted share units were excluded from 31 December 2015 weighted average number of ordinary shares outstanding during the period used in calculation of diluted EPS as the outstanding shares would be anti-dilutive to the loss per share calculation for the period then ended. NOTE 11 – CASH AND CASH EQUIVALENTS Year ended 31 December Cash at bank and on hand Cash equivalents in escrow accounts (1) Total cash and cash equivalents 2015 US$’000 2014 US$’000 3,468 - 3,468 18,222 50,995 69,217 (1) As at 31 December 2014, the Company had approximately $51.0 million in Section 1031 escrow accounts which are not limited in use, except that the timing of tax payments will be accelerated if not used on qualified “like-kind property.” As such, the balances were included in the Company’s cash and cash equivalents in the consolidated statement of financial position and consolidated statement of cash flows as at 31 December 2014. - 70 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 – TRADE AND OTHER RECEIVABLES Year ended 31 December Oil, natural gas and NGL sales Joint interest billing receivables Commodity hedge contract receivables Other Total trade and other receivables 2015 US$’000 5,684 4,108 1,653 63 11,508 2014 US$’000 13,246 11,587 1,153 8 25,994 Due to the short-term nature of trade and other receivables, their carrying amounts are assumed to approximate fair value. No receivables were outside of normal trading terms as at 31 December 2015 and 2014. NOTE 13 – DERIVATIVE FINANCIAL INSTRUMENTS Year ended 31 December FINANCIAL ASSETS: Current Derivative financial instruments – commodity contracts Non-current Derivative financial instruments – commodity contracts Derivative financial instruments – interest rate swaps Total financial assets FINANCIAL LIABILITIES: Current Derivative financial instruments – interest rate swaps Total financial liabilities 2015 US$’000 2014 US$’000 9,967 7,801 3,950 - 13,917 1,675 107 9,583 - - (130) (130) - 71 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 – ASSETS HELD FOR SALE As at 31 December 2015, the consolidated statement of financial position includes $90.6 million of assets and $0.7 million of liabilities as held for sale, respectively, comprised of the following: Year ended 31 December Eagle Ford Development and production assets (25%) Exploration and evaluation expenditure (25%) Cooper Basin Exploration and evaluation expenditure (100%) Total assets held for sale Restoration provision for Eagle Ford developed assets (25%) Total liabilities held for sale 2015 US$ $ 77,021 8,377 5,234 $ 90,632 $ (744) $ (744) In late 2015, the Company’s management committed to a plan to sell a minimum of a 25% non-operated working interest in its Eagle Ford assets. The Company acquired the Cooper Basin assets, which fall outside the Company’s strategic focus, as part of the NSE acquisition in 2015. The Company believes the sale of the aforementioned assets is highly probably in 2016. As at 31 December 2015, certain of the Company’s assets held for sale were included in the Borrowing Base Value under the Company’s Credit Agreement. Upon the sale of these assets, the Lender may elect to reduce the then effective Borrowing Base by an amount equal to the value attributed to those assets if the value of the remaining assets doesn’t meet the prescribed asset coverage thresholds. As at 31 December 2015, 25% of the Company’s Eagle Ford assets represented approximately 24% of the Borrowing Base Value so, if the valuation was unchanged at the time of the sale, the lender could elect to require repayment of that pro rata portion of the outstanding debt which equates to approximately $45 million. That being said, there many variables that affect the Lender’s determination of Borrowing Base Value at any point in time and therefore it is difficult for the Company to estimate the Borrowing Base Value at an undetermined point in the future so the amount that would be required to be repaid, if any, is uncertain. NOTE 15 – FAIR VALUE MEASUREMENT The following table presents financial assets and liabilities measured at fair value in the consolidated statement of financial position in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). - 72 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 – FAIR VALUE MEASUREMENT continued The Level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows: Consolidated 31 December 2015 (US$’000) Assets measured at fair value Derivative commodity contracts Available-for-sale securities (included in other current assets) Assets held for sale Development and production assets Exploration and evaluation assets Level 1 Level 2 Level 3 Total - 13,917 - 13,917 89 - - - - - - - - 90,632 250,922 26,323 89 90,632 250,922 26,323 Net fair value 89 13,917 367,877 381,883 Consolidated 31 December 2014 (US$’000) Assets measured at fair value Derivative commodity contracts Interest rate swap contract – current Development and production assets (1) Liabilities measured at fair value Interest rate swap contracts – long term Level 1 Level 2 Level 3 Total - - - 9,476 107 - - - 455,084 9,476 107 455,084 - (130) - (130) Net fair value - 9,453 455,084 464,537 (1) Excludes work-in-progress and restoration provision assets totaling $63.9 million. During the years ended 31 December 2015 and 2014, respectively, there were no transfers between level 1 and level 2 fair value measurements, and no transfer into or out of level 3 fair value measurements. - 73 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 – FAIR VALUE MEASUREMENT continued Measurement of Fair Value a) Derivatives Derivatives entered into by the Company consist of commodity contracts and interest rate swaps. The Company utilises present value techniques and option-pricing models for valuing its derivatives. Inputs to these valuation techniques include published forward prices, volatilities, and credit risk considerations, including the incorporation of published interest rates and credit spreads. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy. b) Available-for-sale securities The Company purchased 122 million shares of Elixer Petroleum (ASX: EXR) in conjunction with its purchase of NSE. The fair value of the securities was determined using ASX trade data, which is directly observable by the Company, and has been included with the Level 1 fair value hierarchy. c) Development and Production Assets, Exploration and Evaluation Assets and Assets Held for Sale At 31 December 2015, the Company recorded impairment expense to present all of its exploration and evaluation expenditures and its development and production assets, including its assets held for sale, at the estimated recoverable amount. The estimate of the recoverable amount includes Level 3 inputs described in detail in Note 19. d) Credit Facilities As at 31 December 2015, the Company had $125 million and $67 million of principal debt outstanding on its Term Loan and Revolving Facility, respectively. The estimated fair value of the Term Loan was approximately $179 million, based on indirect, observable inputs (Level 2) regarding interest rates available to the Company. The fair value of the Term Loan was determined by using a discounted cash flow model using a discount rate that reflects the Company’s assumed borrowing rate at the end of the reporting period. The estimated fair value of the Revolving Facility approximated its carrying amount due to the floating interest rate paid on such debt to be set for a period of three months or less. e) Other Financial Instruments The carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short-term nature. NOTE 16 – OTHER CURRENT ASSETS Year ended 31 December Cash advances to other operators Escrow accounts Oil inventory on hand, lesser of cost or market Equipment inventory, lesser of cost or market Prepaid expenses Available-for-sale securities Other Total other current assets - 74 - 2015 US$’000 27 - 632 783 2,578 89 45 4,154 2014 US$’000 3,270 1,000 1,331 1,315 1,401 - 19 8,336 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 – DEVELOPMENT AND PRODUCTION ASSETS Year ended 31 December Costs carried forward in respect of areas of interest in: Development and production assets, at cost: Producing assets Wells-in-progress Undeveloped assets -Development and production assets, at cost: Accumulated depletion Accumulated impairment Total development and production expenditure Less amount classified as asset held for sale Total Development and Production Expenditure, net of assets held for sale a) Movements in carrying amounts: Development expenditure Balance at the beginning of the period Amounts capitalised during the period Amounts transferred from exploration phase Fair value of assets acquired Allocation of working interest assets acquired Exploratory dry hole costs previously included in wells-in progress Revision to restoration provision Depletion expense Impairment expense Development and production assets, net of accumulated amortization, sold during the period Reclassifications to assets held for sale Balance at end of period 2015 US$’000 2014 US$’000 694,111 38,210 62,781 795,102 (211,123) (256,036) 327,943 (77,021) 250,922 519,013 76,831 4,898 13,170 - (2,416) (5,715) (93,429) (184,408) - (77,021) 250,922 652,035 56,043 - 708,078 (117,613) (71,452) 519,013 - 519,013 312,230 350,196 59,209 - 2,244 - - (85,357) (71,212) (48,297) - 519,013 Borrowing costs relating to drilling of development wells that have been capitalized as part of oil and gas properties during the year ended 31 December 2014 was $1.6 million (2014: $3.4 million). The interest capitalized as a percent of bank interest for years ended 31 December 2015 and 2014 was 14.1% and 100%, respectively. - 75 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 – EXPLORATION AND EVALUATION EXPENDITURE Year ended 31 December Costs carried forward in respect of areas of interest in: Exploration and evaluation phase, at cost Provision for impairment Total exploration and evaluation expenditures Less amount classified as asset held for sale Total Exploration and Evaluation Expenditure, net of assets held for sale a) Movements in carrying amounts: Exploration and evaluation Balance at the beginning of the period Amounts capitalised during the period Fair value of assets acquired (1) Allocation of working interest assets acquired(2) Exploration costs expensed (3) Amounts transferred to development phase Exploration tenements sold during the period Impairment expense Reclassifications to assets held for sale (4) Balance at end of period 2015 US$’000 2014 US$’000 178,693 (138,759) 39,934 (13,611) 26,323 155,130 22,508 4,586 - (183) (4,898) - (137,209) (13,611) 26,323 156,680 (1,550) 155,130 - 155,130 166,144 39,670 - 34,184 (10,934) (59,209) (14,725) - - 155,130 (1) As part of the Company’s acquisition of NSE in August 2015, the Company acquired a 17.5% WI in the PEL570 concession in the Cooper Basin. (2) In July 2014, the Company acquired the working interest in approximately 9,200 gross (5,700 net) in Dimmit County, Texas. The purchase price included an initial cash payment of $35.5 million and a commitment to drill four Eagle Ford wells. The purchase price was allocated between exploration and evaluation and development and production assets based on discounted cash flows of developed producing wells. (3) In 2015, the Company expensed costs associated with two exploratory wells located in the Eagle Ford that did not have economically recoverable reserves (i.e. dry hole wells). In 2014, the Company drilled three exploratory wells in the Anadarko Basin that did not have economically recoverable reserves and as such, all associated costs were expensed as exploration expense on the consolidated statement of profit or loss. (4) The Company has committed to a plan to sell its interest in the Cooper Basin and 25% of its Eagle Ford assets in 2016. As of 31 December 2015, the fair value of the exploration and evaluation expenditure assets held for sale were $13.6 million. The ultimate recoupment of costs carried forward for exploration phase is dependent on the successful development and commercial exploitation or sale of respective areas. - 76 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 – IMPAIRMENT OF NON-CURRENT ASSETS At 31 December 2015, the Group reviewed its non-current assets for indicators of impairment in accordance with the Group’s accounting policy. Due to the further decline in the oil pricing environment at year-end, the Company determined that there was an indication of impairment for all of its exploration and evaluation expenditures and its development and production assets. Each of the Group’s development and production asset CGUs include all of its developed producing properties, shared infrastructure supporting its production and undeveloped acreage that the Group considers technically feasible and commercially viable. Estimates of recoverable amounts are based on the higher of an asset’s value-in-use or fair value less costs to sell (level 3 fair value hierarchy), using a discounted cash flow method, and are most sensitive to the key assumptions such as pricing, discount rates, and reserve risk factors. For its development and production assets, the Group has used the FVLCS calculation whereby future cash flows are based on estimates of hydrocarbon reserves in addition to other relevant factors such as value attributable to additional reserves based on production plans. For its exploration and evaluation expenditures, the Group has used the FVLCS calculation determined by the probability weighted combination of a discounted cash flow method and market transactions for comparable undeveloped acreage. Estimates of future commodity prices are based on the Group’s best estimates of future market prices with reference to bank price surveys, external market analysts’ forecasts, and forward curves. Future prices ($/bbl) used for the 31 December 2015 FVLCS calculation were as follows: 2016 $40.00 2017 $50.00 2018 $60.00 2019 and thereafter $70.00 As at 31 December 2015, the post-tax discount rate that has been applied to the above non-current assets were 9.0% and 10.0% for proved developed producing and proved undeveloped properties, respectively. As at 31 December 2015, the Group also applied further risk-adjustments appropriate for risks associated with its proved undeveloped reserves using a risk-adjustment rate of 20% based on the risk associated with the undeveloped reserve category. As at 31 December 2015, the post-tax discount rate that has been applied to the exploration and evaluation expenditures was 15.0% and 20.0% for its probable and possible reserves, respectively. As at 31 December 2015, the Group also applied further risk-adjustments appropriate for risks associated with its probable and possible reserves using a risk-adjustment rate of 30% and 40%, respectively, based on the risk associated with each reserve category. - 77 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 – IMPAIRMENT OF NON-CURRENT ASSETS continued Recoverable amounts and resulting impairment recognized in the Consolidated Statements of Profit or Loss and Other Comprehensive Income as at 31 December 2015 and 2014 and recorded in the years then ended are presented in the table below. In the first half of the year ended 31 December 2015, the Company impaired its Mississippian/Woodford development and production assets and exploration and evaluation by $2.6 million and $13.4 million for a total of $16.0 million. The total impairment expense for the year ended 31 December 2015 was $321.6 million. 31 December 2015 Cash-generating unit Exploration and evaluation expenditures: Eagle Ford Mississippian/Woodford Cooper Basin Total exploration and evaluation Development and production assets: Eagle Ford Mississippian/Woodford Total development and production assets Carrying costs US$’000 Recoverable amount (1) US$’000 Impairment US$’000 151,171 5,164 7,436 163,771 431,796 77,940 509,736 33,511 1,190 5,234 39,935 308,083 19,859 327,942 (117,660) (3,974) (2,202) (123,836) (123,713) (58,081) (181,794) (1) Before reclassification of assets held for sale 31 December 2014 Cash-generating unit Development and production assets: Eagle Ford Mississippian/Woodford Total development and production assets Carrying costs (1) US$’000 Recoverable amount US$’000 Impairment US$’000 400,761 125,535 526,296 389,764 65,320 455,084 10,997 60,215 71,212 (1) Carrying costs exclude work-in-progress that was not subject to impairment analysis. The impairment charges of $321.9 million and $71.2 million for the years ended 31 December 2015 and 2014, respectively, were primarily the result of the lower oil price environment. Any further adverse changes in any of the key assumptions may result in future impairments. - 78 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 – PROPERTY AND EQUIPMENT Year ended 31 December Property and equipment, at cost Accumulated depreciation Total Property and Equipment a) Movements in carrying amounts: Balance at the beginning of the period Amounts capitalised during the period Depreciation expense Balance at end of period NOTE 21 – TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES Year ended 31 December Oil and natural gas property and operating related Administrative expenses, including salaries and wages Accrued interest payable Total trade, other payables and accrued expenses NOTE 22 – CREDIT FACILITIES Morgan Stanley Revolving Facility Morgan Stanley Term Loan Wells Fargo Senior Credit Facility Wells Fargo Junior Credit Facility Total Credit Facilities Deferred financing fees, net of accumulated amortisation Total credit facilities, net of deferred financing fees 2015 US$’000 2,942 (1,560) 1,382 1,554 372 (544) 1,382 2015 US$’000 37,167 1,253 3,051 41,471 2015 US$000 67,000 125,000 - ______- 192,000 (4,257) 187,743 2014 US$’000 2,570 (1,016) 1,554 1,047 967 (460) 1,554 2014 US$’000 117,117 1,689 388 119,194 2014 US$000 - - 95,000 35,000 130,000 (1,195) 128,805 On May 14, 2015, Sundance Energy Australia Limited and Sundance Energy, Inc. entered into a Credit Agreement (the “Credit Agreement”) with Morgan Stanley Energy Capital, Inc., as administrative agent (“Agent”) and the lenders from time to time party thereto, which provides for a $300 million senior secured revolving credit facility (the “Revolving Facility”) and term loans of $125 million (the “Term Loans), with an accordion feature providing for additional term loans of up to $50 million, subject to certain conditions. The Revolving Facility is subject to a borrowing base, which was set initially at $75 million and was subsequently reduced to $67 million, as a result of its 4th quarter borrowing base redetermination. The Revolving Facility has a five year term (matures in May 2020) and the Term Loan has a 5 ½ year term (matures in November 2020). - 79 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 22 – CREDIT FACILITIES continued The Revolving Facility and Term Loans refinanced the Company’s credit facilities with Wells Fargo Bank, N.A. and Wells Fargo Energy Capital, Inc., respectively. At closing, the Company used $145.0 million of the proceeds to pay off its previous credit facilities, which are fully paid-off. Approximately $1.1 million of deferred financing fees related to the previous credit facilities were written off due to the refinance. In addition, the Company paid Wells Fargo et al $0.4 million of early termination fees at closing, for a total of $1.5 million of loss on debt extinguishment recorded in the statement of profit or loss and other comprehensive income. The Company is required under our Credit Agreement to maintain the following financial ratios: • • • a minimum current ratio, consisting of consolidated current assets including undrawn borrowing capacity to consolidated current liabilities, of not less than 1.0 to 1.0 as of the last day of any fiscal quarter; a maximum leverage ratio, consisting of consolidated Revolving Facility Debt to adjusted consolidated EBITDAX (as defined in the Credit Facility), of not greater than 4.0 to 1.0 as of the last day of any fiscal quarter; a minimum interest coverage ratio, consisting of EBITDAX to Consolidated Interest Expense (as defined in the Credit Facility), of not less than 2.0 to 1.0 as of the last day of any fiscal quarter; and • An asset coverage ratio, consisting of PV9% to Total Debt (as defined in the Credit Facility), of not less than 1.25 to 1.0, through 30 September 2016 and not less than 1.50 to 1.0 thereafter. As at 31 December 2015, the Company was in compliance with all financial and other covenants under the Credit Agreement. NOTE 23 – RESTORATION PROVISION The restoration provision represents the best estimate of the present value of restoration costs relating to the Company’s oil and natural gas interests, which are expected to be incurred up to 2044. Assumptions, based on the current economic environment, have been made which management believes are a reasonable basis upon which to estimate the future liability. The estimate of future removal costs requires management to make significant judgments regarding removal date or well lives, the extent of restoration activities required, discount and inflation rates. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual restoration costs will reflect market conditions at the relevant time. Furthermore, the timing of restoration is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend on future oil and natural gas prices, which are inherently uncertain. Year ended 31 December Balance at the beginning of the period New provisions Changes in estimates (1) Disposals Settlements New provisions assumed from acquisition Unwinding of discount Reclassification to liabilities held for sale Balance at end of period 2015 US$’000 8,866 560 (5,661) - (290) 334 23 (744) 3,088 2014 US$’000 5,074 3,677 1,541 (2,314) - 822 66 - 8,866 (1) The change in estimates is primarily the result of lower estimated third-party service provider costs to perform restoration work. - 80 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 24 – DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and liabilities are attributable to the following: Year ended 31 December Net deferred tax assets: Share issuance costs Net operating loss carried forward Accrued interest Development and production expenditure Total net deferred tax assets Deferred tax liabilities: Development and production expenditure Derivatives Other Offset by deferred tax assets with legally enforceable right of set-off: Net operating loss carried forward Credits Accrued interest Other Total net deferred tax liabilities NOTE 25 – ISSUED CAPITAL 2015 US$’000 2014 US$’000 1,342 3,659 (2,847) (241) 1,913 (10,338) (4,371) (32) 1,396 3,567 3,437 - (6,341) 2,172 1,826 - - 3,998 (106,343) (3,351) - 5,943 1,070 - 12 (102,668) Total ordinary shares issued and outstanding at each period end are fully paid. All shares issued are authorized. Shares have no par value. a) Ordinary Shares Number of Shares Total shares issued and outstanding at 31 December 2013 Shares issued during the year Total shares issued and outstanding at 31 December 2014 Shares issued during the year (1) Total shares issued and outstanding at 31 December 2015 463,173,668 86,122,171 549,295,839 9,807,723 559,103,562 (1) Includes 1.5 million shares held in escrow related to the Company’s acquisition of NSE. The shares are expected to be returned to the Company in satisfaction of certain unresolved due diligence defects. - 81 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 – ISSUED CAPITAL continued Ordinary shares participate in dividends and the proceeds on winding up of the Parent Company in proportion to the number of shares held. At shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Year ended 31 December b) Issued Capital Beginning of the period Shares issued in connection with: Share consideration paid in business combination Private placement Exercise of stock options Total shares issued during the period Cost of capital raising during the period, net of tax benefit Closing balance at end of period 2015 US$’000 2014 US$’000 306,853 237,008 1,576 - - 1,576 - 308,429 - 72,178 260 72,438 (2,593) 306,853 c) Options on Issue In 2015, the holders of all of the outstanding options (2,730,000) were notified the options would be converted to 1,275,000 restricted share units (RSUs), which vest in accordance with the original options’ terms. Refer to Note 31 for additional information regarding this conversion. - 82 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 – ISSUED CAPITAL continued d) Restricted Share Units on Issue Details of the restricted share units issued or issuable as at 31 December: Grant Date 15 Oct 2012 (1) 19 April 2013 28 May 2013 15 April 2014 5 May 2014 12 May 2014 30 May 2014 27 April 2015(3) 28 May 2015 28 May 2015 (2) 24 June 2015(3) 24 June 2015(2) (3) 17 July 2015(4) 1 August 2015(3) Total RSUs outstanding 2015 No. of RSUs 352,676 204,914 93,562 658,080 45,000 63,332 503,991 28,874 1,545,113 1,545,113 4,267,002 2,815,681 1,275,000 321,000 13,719,338 2014 No. of RSUs 352,676 411,769 187,124 1,291,951 90,000 126,666 503,991 - - - - - - - 2,964,177 (1) RSUs vested in 2015 and ordinary shares were issued in early 2016. (2) TSR RSUs are described in more detail in the Remuneration Report on page 26. (3) RSUs were granted during 2015 and will be formally issued in early 2016. The Company began expensing the award at its grant date in 2015. (4) RSUs issuable from option conversion described above. 1,087,367 vested during 2015 and ordinary shares were issued in early 2016. e) Capital Management Management controls the capital of the Group in order to maintain an appropriate debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern. The Group’s debt and capital includes ordinary share capital and financial liabilities, supported by financial assets. Other than the covenants described in Note 21, the Group has no externally imposed capital requirements. Management effectively manages the Group’s capital by assessing the Group’s financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels, distributions to shareholders and shareholder issues. There have been no changes in the strategy adopted by management to control the capital of the Group since the prior period. The strategy is to ensure that any significant increases to the Group’s debt or equity through additional draws or raises have minimal impact to its gearing ratio. As at 31 December 2015 and 2014, the Company had $192 million and $130 million of outstanding debt, respectively. - 83 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 26 – RESERVES a) Share Option Reserve The share option reserve records items recognised as expenses on valuation of employee share options and restricted share units. b) Foreign Currency Translation Reserve The foreign currency translation reserve records exchange differences arising on translation of the Parent Company. NOTE 27 – CAPITAL AND OTHER EXPENDITURE COMMITMENTS Capital commitments relating to tenements As at 31 December 2015, all of the Company’s core exploration and evaluation and development and production assets are located in the United States of America (“US”). In addition, the Company has exploration and evaluation assets located in Australia. The Australian assets are currently classified as held for sale. The mineral leases in the exploration prospects in the US have primary terms ranging from 3 years to 5 years and generally have no specific capital expenditure requirements. However, mineral leases that are not successfully drilled and included within a spacing unit for a producing well within the primary term will expire at the end of the primary term unless re-leased. The Company is committed to fund exploratory drilling in the Cooper Basin (Australia) of up to approximately A$10.6 million through 2019, of which A$3.9 million (US$2.8 million) had been incurred as at 31 December 2015. The following tables summarize the Group’s contractual commitments not provided for in the consolidated financial statements: As at 31 December 2015 Cooper Basin capital commitments (1) Operating lease commitments (2) Employment commitments (3) Total expenditure commitments Total US$’000 Less than 1 year 5,098 5,892 372 11,362 2,549 1,372 372 4,293 1 – 5 years 2,549 4,520 - 7,069 More than 5 years - - - - As at 31 December 2014 Drilling rig commitments (4) Operating lease commitments (2) Employment commitments (3) Total expenditure commitments Total US$’000 1,460 2,363 742 4,565 Less than 1 year 1,460 430 370 1 – 5 years - 1,933 372 More than 5 years - - - 2,260 2,305 - - 84 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 27 – CAPITAL AND OTHER EXPENDITURE COMMITMENTS continued (1) The Company has capital commitments to fund exploratory drilling in the Cooper Basin (Australia) of up to approximately A$10.6 million through 2019 (commitment amounts in table shown in USD translated at 31 December 2015). Timing of commitment may vary based on drilling activity by the operator. (2) Represents commitments for minimum lease payments in relation to non-cancellable operating leases for office space and the Company’s amine treatment facility not provided for in the consolidated financial statements. (3) Represents commitments for the payment of salaries and other remuneration under long-term employment and consultant contracts not provided for in the consolidated financial statements. Details relating to the employment contracts are set out in the Company’s Remuneration Report. (4) As at 31 December 2014 the Company had one outstanding drilling rig contracts to explore and develop the Company’s properties. The contracts historically have had terms of 6 months. Amounts represent minimum expenditure commitments should the Company have elected to terminate these contracts prior to term. NOTE 28 – CONTINGENT ASSETS AND LIABILITIES In August 2015, the Company received notice from the buyer of its non-operated Phoenix properties sold in December 2013 that they filed a lawsuit against the Company. The claim of $0.9 million relates to costs not included by the buyer on the final post-closing settlement, for which it seeks reimbursement from the Company. The Company does not believe the case has merit and, should the lawsuit be filed, intends to vigorously defend itself. At the date of signing this report, the Group is not aware of any other contingent assets or liabilities that should be recognized or disclosed in accordance with AASB 137/IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. NOTE 29 – OPERATING SEGMENTS The Company’s strategic focus is the exploration, development and production of large, repeatable onshore resource plays in North America. All of the basins and/or formations in which the Company operates in North America have common operational characteristics, challenges and economic characteristics. As such, Management has determined, based upon the reports reviewed and used to make strategic decisions by the Chief Operating Decision Maker (“CODM”), whom is the Company’s Managing Director and Chief Executive Officer, that the Company has one reportable segment being oil and natural gas exploration and production in North America. As at 31 December 2015, all statement of profit or loss and other comprehensive income activity was attributed to its reportable segment with the exception of $2.2 million of pre-tax impairment expense. Geographic Information The operations of the Group are located in two geographic locations, North America and Australia. The Company’s Australian assets (Cooper Basin) were acquired in 2015 from NSE and were immediately classified as held for sale. All revenue is generated from sales to customers located in North America. Revenue from three major customers exceeded 10 percent of Group consolidated revenue for the year ended 31 December 2015 and accounted for 30%, 29% and 22% percent, respectively (2014: one major customer accounted for 65 percent) of our consolidated oil, natural gas and NGL revenues. - 85 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 30 – CASH FLOW INFORMATION Year ended 31 December a) Reconciliation of cash flows from operations with income from ordinary activities after income tax Profit from ordinary activities after income tax Adjustments to reconcile net profit to net operating cash flows: Depreciation and amortisation expense Share options expensed Unrealised (gains) losses on derivatives Net gain on sale of properties Decrease in fair value of securities available for sale Impairment of development and production assets Unsuccessful exploration and evaluation expense Loss on debt extinguishment Add: Interest expense and financing costs(disclosed in investing and financing activities) Recognition of DTA on items directly within equity Other Changes in assets and liabilities: - (Decrease) increase in current and deferred income tax - Decrease in other current assets - Decrease (increase) in trade and other receivables - Increase (decrease) in trade and other payables - Increase in tax receivable - Decrease in non-current liability Net cash provided by operating activities b) Non Cash Financing and Investing Activities 2015 US$’000 2014 US$’000 (269,795) 15,321 94,584 4,100 (3,444) (790) 90 321,918 - 1,151 9,418 - 2,240 (94,242) 2,742 7,007 (2,177) (6,903) (1,430) 64,469 85,584 1,915 (9,642) (48,604) - 71,212 10,934 316 383 879 126 (14,606) 28 8,679 5,562 - - 128,087 - During the year ended 31 December 2015, the net gain on sale of properties primarily related to an ad valorem tax true-up related to properties sold in 2014. - During the year ended 31 December 2014 the net gain on sale of properties for the disposition of the Company’s remaining Williston assets included the relief of a net payable due to the buyer of $4.0 million ($17.1 million payable and $13.1 million receivable). - 86 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 – SHARE BASED PAYMENTS Options During 2015, all Option holders were notified that the conversion of all outstanding options would be converted into 1,275,000 RSUs, which vest in accordance with the original options’ terms. The incremental fair value of the award was calculated as the difference between the original stock option valued using the Black Scholes model as at the date of conversion, and the RSU value on the conversion date. The incremental fair value attributed to the conversion was $0.3 million, of which $0.2 million was recognized during 2015 and the remaining incremental fair value will be recognized over the remaining term of the RSU awards. No options were granted during the years ended 31 December 2015 and 2014, and a total of nil and 431,666 previously issued options were exercised, respectively. Year ended 31 December 2015 2014 Number of Options Weighted Average Exercise Price A$ Number of Options Weighted Average Exercise Price A$ Outstanding at start of period Formally issued Forfeited Exercised Converted to RSUs (1) Outstanding at end of period Exercisable at end of period (1) Conversion of the options was approved in 2015; the associated RSUs were issued in early 2016. 2,730,000 - - - (2,730,000) - - 5,051,666 - (1,890,000) (431,666) - 2,730,000 1,930,000 0.90 - - - 0.90 - - 1.02 - 1.29 0.62 - 0.90 0.87 Share based payments expense related to options is determined pursuant to AASB 2 - Share Based Payments (“AASB 2”) / IFRS 2 – Share Based Payments (“IFRS 2”), and is recognised pursuant to the attached vesting conditions. - 87 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 – SHARE BASED PAYMENTS continued Restricted Share Units During the years ended 31 December 2015 and 2014, the Board of Directors awarded 13,322,262 and 2,839,626 RSUs, respectively, to certain employees (of which 3,090,000 and 671,988, respectively, granted to the Company’s Managing Director were approved by shareholders). These awards were made in accordance with the long-term equity component of the Company’s incentive compensation plan, the details of which are described in more detail in the Remuneration Report of the Directors’ Report. Share based payment expense for RSUs awarded was calculated pursuant to AASB 2 / IFRS 2. The fair values of RSUs were estimated at the date they were approved by the Board of Directors (the measurement dates) based on the Company’s share price at the date of grant. The value of the vested portion of these awards has been recognised within the financial statements. This information is summarised for the Group for the years ended 31 December 2015 and 2014, respectively, below: Outstanding at 31 December 2013 Issued Converted to ordinary shares Forfeited Outstanding at 31 December 2014 Issued or Issuable Converted to ordinary shares Forfeited Outstanding at 31 December 2015 Number of RSUs 1,704,307 2,839,626 (1,479,978) (99,778) 2,964,177 13,322,262 (3,805,789) (46,312) 12,434,338 Weighted Average Fair Value at Measurement Date A$ 0.83 0.97 0.89 0.92 0.93 0.53 0.63 0.93 0.55 (1) The Company began recognizing the expense related to the conversion of all outstanding options to RSUs during 2015. These RSUs were formally issued in early 2016, but were excluded from the outstanding RSUs above as at 31 December 2015. The following tables summarise the RSUs issued and their related grant date, fair value and vesting conditions: RSUs awarded during the year ended 31 December 2015: Grant Date 27 April 2015 28 May 2015 28 May 2015 24 June 2015 24 June 2015 24 June 2015 1 September 2015 Number of RSUs 28,874 1,545,113 1,545,113 Estimated Fair Value (US$’000) 15 693 1,039 4,267,002 2,815,681 2,809,479 321,000 13,332,262 1,713 1,609 1,128 82 6,279 Vesting Conditions 25% on 27 April 2016, 2017, 2018 and 2019 33% on 31 January 2016, 2017 and 2018 0% - 200% based on 3 year total shareholder return as compared to peers 33% on 31 January 2016, 2017 and 2018 0% - 200% based on 3 year total shareholder return as compared to peers 100% vested upon issuance 33% on 31 January 2016, 2017 and 2018 - 88 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 31 – SHARE BASED PAYMENTS continued RSUs awarded during the year ended 31 December 2014: Grant Date 15 April 2014 5 May 2014 12 May 2014 30 May 2014 Number of RSUs 1,842,638 135,000 190,000 671,988 2,839,626 Estimated Fair Value (US$’000) $1,611 123 172 680 $ 2,586 Vesting Conditions 25% issuance date, 25% first three anniversaries 33% issuance date, 33% on 1 January 2015 and 2016 33% issuance date, 33% first two anniversaries 25% issuance date, 25% first three anniversaries Upon vesting, and after a certain administrative period, the RSUs are converted to ordinary shares of the Company. Once converted to ordinary shares, the RSUs are no longer restricted. As the daily closing price of the Company’s ordinary shares approximates its estimated fair value at that time, the Company used the grant date closing price to estimate the fair value of the RSUs. The total share based compensation expense for the years ended 31 December 2015 and 2014 was $4.1 million and $1.9 million, respectively. Subsequent to 31 December 2015, the Board granted 9,136,047 RSUs that vest between 0% and 133% based on Company’s three year absolute total shareholder return. NOTE 32 – RELATED PARTY TRANSACTIONS N Martin was previously a partner of Minter Ellison Lawyers and is now a consultant for Minter Ellison Lawyers as well as a Director of the Company. Minter Ellison Lawyers were paid an immaterial amount for legal services for the years ended 31 December 2015 and 2014. NOTE 33 – FINANCIAL RISK MANAGEMENT a) Financial Risk Management Policies The Group is exposed to a variety of financial market risks including interest rate, commodity prices, foreign exchange and liquidity risk. The Group’s risk management strategy focuses on the volatility of commodity markets and protecting cash flow in the event of declines in commodity pricing. The Group has historically used derivative financial instruments to hedge exposure to fluctuations in interest rates and commodity prices. The Group’s financial instruments consist mainly of deposits with banks, short term investments, accounts receivable, derivative financial instruments, finance facility, and payables. The main purpose of non-derivative financial instruments is to raise finance for the Group operations. i) Treasury Risk Management Financial risk management is carried out by Management. The Board sets financial risk management policies and procedures by which Management are to adhere. Management identifies and evaluates all financial risks and enters into financial risk instruments to mitigate these risk exposures in accordance with the policies and procedures outlined by the Board. - 89 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 33 – FINANCIAL RISK MANAGEMENT continued ii) Financial Risk Exposure and Management The Group’s interest rate risk arises from its borrowings. Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates. The Company did not have any interest rate swaps in place as at 31 December 2015. As at 31 December 2014, the Group had interest rate swaps with a notional contract amount of $15.0 million. The net fair value of interest rate swaps at 31 December 2014 was relatively immaterial, comprising long-term assets of $0.1 million (2013: $0.2 million) and current liabilities of $0.1 million (2013: 0.1 million). These amounts were recognised as Level 2 fair value derivatives. (See Note 14) iii) Commodity Price Risk Exposure and Management The Board actively reviews oil and natural gas hedging on a monthly basis. Reports providing detailed analysis of the Group’s hedging activity are continually monitored against Group policy. The Group sells its oil on market using Nymex West Texas Intermediary (WTI) and Louisiana Light Sweet (LLS) market spot rates reduced for basis differentials in the basins from which the Company produces. Gas is sold using Henry Hub (HH) and Houston Ship Channel (HSC) market spot prices. Forward contracts are used by the Group to manage its forward commodity price risk exposure. The Group’s policy is to hedge at least 50% of its proved developed reserves through 2019 and for a rolling 36 month period thereafter, as required by its Credit Agreement. The Group has not elected to utilise hedge accounting treatment and changes in fair value are recognised in the statement of profit or loss and other comprehensive income. A summary of the Company’s outstanding hedge positions as at 31 December 2015 is below: Oil Derivatives (WTI) Weighted Average Year 2016 2017 2018 2019 Total Units (Bbls) 1,037,063 624,000 444,000 168,000 2,273,063 Floor (1) $50.63 $47.53 $51.47 $52.51 $50.08 Ceiling $76.14 $79.92 $81.53 $87.71 $80.49 Gas Derivatives (HH) Weighted Average Year 2016 2017 2018 2019 Total Units (Mcf) 2,040,000 1,320,000 930,000 360,000 4,650,000 Floor (1) $ 2.54 $ 2.85 $ 3.00 $ 3.27 $ 2.78 Ceiling $ 3.58 $ 3.91 $ 4.32 $ 4.65 $ 4.01 (1) The Company’s outstanding derivative positions include swaps totaling 1,491,063 Bbls and 2,610,000 Mcf, which are included in the weighted average floor value, but have no corresponding ceiling. - 90 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 33 – FINANCIAL RISK MANAGEMENT continued b) Net Fair Value of Financial Assets and Liabilities The net fair value of cash and cash equivalent and non-interest bearing monetary financial assets and financial liabilities of the consolidated entity approximate their carrying value. The net fair value of other monetary financial assets and financial liabilities is based on discounting future cash flows by the current interest rates for assets and liabilities with similar risk profiles. Other than the Junior Credit Facility, the balances are not materially different from those disclosed in the consolidated statement of financial position of the Group. c) Credit Risk Credit risk for the Group arises from investments in cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers including outstanding receivables and committed transactions, and represents the potential financial loss if counterparties fail to perform as contracted. The Group trades only with recognised, creditworthy third parties. The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognise the financial assets, is the carrying amount, net of any impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Receivable balances are monitored on an ongoing basis at the individual customer level. At 31 December 2015, the Group had one customer that owed the Group approximately $4.8 million and accounted for approximately 83% of total accrued revenue receivables. For joint interest billing receivables, if payment is not made, the Group can withhold future payments of revenue, as such, there is minimal to no credit risk associated with these receivables. d) Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities as they become due, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by maintaining adequate reserves and banking facilities by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities. As at 31 December 2015, certain of the Company’s assets held for sale were included in the Borrowing Base Value under the Company’s Credit Agreement. Upon the sale of these assets, the Lender may elect to reduce the then effective Borrowing Base by an amount equal to the value attributed to those assets if the value of the remaining assets doesn’t meet the prescribed asset coverage thresholds. As at 31 December 2015, 25% of the Company’s Eagle Ford assets represented approximately 24% of the Borrowing Base Value so, if the valuation was unchanged at the time of the sale, the lender could elect to require repayment of that pro rata portion of the outstanding debt which equates to approximately $45 million. That being said, there many variables that affect the Lender’s determination of Borrowing Base Value at any point in time and therefore it is difficult for the Company to estimate the Borrowing Base Value at an undetermined point in the future so the amount that would be required to be repaid, if any, is uncertain. - 91 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 33 – FINANCIAL RISK MANAGEMENT continued The Company has the following commitments related to its financial liabilities (US$’000): Year ended 31 December 2015 Total Less than 1 year 1 – 5 years More than 5 years Trade and other payable Accrued expenses Credit facilities payments, including interest (1) Total 21,588 19,883 21,588 19,883 - - 247,259 288,730 12,420 53,891 234,839 234,839 - - - - Year ended 31 December 2014 Total Less than 1 year 1 – 5 years More than 5 years Trade and other payable Accrued expenses Derivative financial liabilities Credit facilities payments, including interest Total 46,861 72,333 130 46,861 72,333 130 - - - 147,994 267,318 5,502 124,826 142,492 142,492 - - - - - (1) Assumes credit facilities are held to maturity. However, if the Company sells its assets held for sale, it may be required to repay a portion of the credit facilities from the sales proceeds. e) Market Risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: commodity price risk, interest rate risk and foreign currency risk. Financial instruments affected by market risk include loans and borrowings, deposits, trade receivables, trade payables, accrued liabilities and derivative financial instruments. Commodity Price Risk The Group is exposed to the risk of fluctuations in prevailing market commodity prices on the mix of oil and gas products it produce. Commodity Price Risk Sensitivity Analysis The table below summarises the impact on profit before tax for changes in commodity prices on the fair value of derivative financial instruments. The impact on equity is the same as the impact on profit before tax as these derivative financial instruments have not been designated as hedges and are and therefore adjusted to fair value through profit and loss. The analysis assumes that the crude oil and natural gas price moves $10 per barrel and $0.50 per mcf, with all other variables remaining constant, respectively. - 92 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 33 – FINANCIAL RISK MANAGEMENT continued Year ended 31 December Effect on profit before tax Increase / (Decrease) Oil 2015 US$’000 2014 US$’000 - improvement in US$ oil price of $10 per barrel - decline in US$ oil price of $10 per barrel Gas - improvement in US$ gas price of $0.50 per mcf - decline in US$ gas price of $0.50 per mcf (22,731) 22,731 (2,325) 2,325 (2,400) 3,041 (120) 120 Interest Rate Risk Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with floating interest rates. Interest Rate Sensitivity Analysis Based on the net debt position as at 31 December 2015 and 2014 (taking into account the 2014 interest rate swap) with all other variables remaining constant, the following table represents the effect on income as a result of changes in the interest rate. The impact on equity is the same as the impact on profit before tax. Year ended 31 December Effect on profit before tax Increase / (Decrease) - - increase in interest rates + 2% decrease in interest rates - 2% 2015 US$’000 2014 US$’000 (1,140) 112 (906) 184 This assumes that the change in interest rates is effective from the beginning of the financial year and the net debt position and fixed/floating mix is constant over the year. However, interest rates and the debt profile of the Group are unlikely to remain constant and therefore the above sensitivity analysis will be subject to change. - 93 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 34 – PARENT COMPANY INFORMATION Year ended 31 December Parent Entity Assets Current assets Investment in subsidiaries Deferred tax assets Related party note receivable Total assets Liabilities Current liabilities Non-current liabilities Total Liabilities Total net assets Equity Issued capital Share options reserve Foreign currency translation Retained earnings (loss) Total equity Financial Performance Profit/(loss) for the year Other comprehensive income Total profit or loss and other comprehensive income 2015 US$’000 2014 US$’000 18,131 37,937 1,913 112,481 170,463 53 - 53 170,409 308,430 386 (48,215) (90,192) 170,409 (98,651) (17,675) (116,326) 9,108 159,606 3,998 112,481 285,193 34 - 34 285,159 306,853 386 (30,539) 8,459 285,159 7,334 (10,030) (2,696) NOTE 35 – DEED OF CROSS GUARANTEE Pursuant to Class Order 98/1418, the wholly-owned subsidiary, Armadillo Petroleum Limited (“APL”), is relieved from the Corporations Act 2001 requirements for preparation, audit and lodgment of its financial reports. As a condition of the Class Order, SEAL and APL (“the Closed Group”) have entered into a Deed of Cross Guarantee (“Deed”). The effect of the Deed is that SEAL has guaranteed to pay any deficiency in the event of the winding up of APL under certain provision of the Corporations Act 2001. APL has also given a similar guarantee in the event that SEAL is wound up. - 94 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 35 – DEED OF CROSS GUARANTEE continued Set out below is a consolidated statement of profit or loss and other comprehensive income and retained earnings of the Closed Group: Year ended 31 December 2015 US$’000 2014 US$’000 Profit / (loss) before income tax (99,132) 7,764 Income tax (expense)/benefit (1,723) (324) Profit attributable to members of SEAL (100,855) 7,440 Total comprehensive loss attributable to members of SEAL (118,526) (2,813) Retained earnings at 1 January Retained earnings (accumulated deficit) at 31 December 8,572 (92,284) 1,132 8,572 - 95 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 35 – DEED OF CROSS GUARANTEE continued Set out below is a condensed consolidated statement of financial position of the Closed Group: 2015 US$’000 2014 US$’000 245 3,426 10,001 5,234 18,906 40 112,481 1,913 36,543 150,977 11,506 - 185 ________ 11,691 45 112,481 3,998 158,047 274,571 169,883 286,262 31 1,542 1,573 988 13 1,001 3 3 3 3 1,576 1,004 168,307 285,258 308,429 386 (48,224) (92,284) 168,307 306,853 386 (30,553) 8,572 285,258 Year ended 31 December Current assets Cash and cash equivalents Trade and other receivables Other current assets Assets held for sale Total current assets Non-current assets Exploration and evaluation expenditure Related party note receivable Deferred tax assets Investment in subsidiaries Total non-current assets Total assets Current liabilities Trade and other payables Accrued expenses Total current liabilities Non-current liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Share option reserve Foreign currency translation Retained earnings (accumulated deficit) Total equity - 96 - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 36 – EVENTS AFTER THE BALANCE SHEET DATE No significant matters occurred subsequent to 31 December 2015, but prior to the issuance of this Report. - 97 - Directors’ Declaration The Directors of the Group declare that: 1 2 3 the Financial Statements and Notes as set out on pages 46 to 97 are in accordance with the Corporations Act 2001 and: a) comply with Australian Accounting Standards and the Corporations Regulations 2001 and International Financial Reporting Standards as disclosed in Note 1; and b) give a true and fair view of the consolidated entity’s financial position as at 31 December 2015 and of the performance for the financial year ended on that date; the Chief Executive Officer and Chief Financial Officer have declared that: a) the financial records of the Group for the year ended have been properly maintained in accordance with section 286 of the Corporations Act 2001; the financial statements and notes for the financial period comply with the Accounting Standards; and the financial statements and notes give a true and fair view; b) c) in the Directors’ opinion there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Michael Hannell Chairman Adelaide Dated this 31st day of March 2016 - 98 - Independent auditor's report to the members of Sundance Energy Australia Limited Report on the financial report We have audited the accompanying financial report of Sundance Energy Australia Limited, which comprises the consolidated statement of financial position as at 31 December 2015 the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company Sundance Energy Australia Limited and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company Sundance Energy Australia Limited are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. - 99 - Opinion In our opinion: a. the financial report of Sundance Energy Australia is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the consolidated entity's financial position as at 31 December 2015 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards issued by the IASB as disclosed in Note 1. Report on the remuneration report We have audited the Remuneration Report included in pages 15 to 32 of the directors' report for the year ended 31 December 2015. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Sundance Energy Australia Limited for the year ended 31 December 2015, complies with section 300A of the Corporations Act 2001. Ernst & Young Scott Jarrett Partner Sydney 31 March 2016 - 100 - Additional Information compiled as at 14 March 2016 Shareholding Substantial Shareholders The names of the substantial shareholders in the Company, the number of equity securities to which each substantial shareholder and substantial holder’s associates have a relevant interest, as disclosed in substantial holding notices given to the Company: Name No of Ordinary Shares ADVISORY RESEARCH, INC GAFFWICK PTY LTD IOOF HOLDINGS LIMITED 58,024,156 55,000,000 28,356,640 %_ 10.02 9.84 5.072 Distribution of Equity Securities Size of Holding Range 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-9,999,999 Total Total Holders 641 1,163 761 1,541 313 4,419 Units 271,455 3,557,405 6,146,135 51,314,431 499,254,179 560,543,605 % Issued Capital 0.05 0.63 1.10 9.15 89.07 100.00 Unlisted RSUs 4 8 8 13 6 39 There are 883 shareholders with less than a marketable parcel of shares. Voting Rights Fully paid ordinary shares At meetings of members or classes of members: a) b) Each member entitled to vote may vote in person or by proxy, attorney or representative; on a show of hands, every person present who is a member or proxy, attorney or representative of a member has one vote; and, on a poll, every person present who is a member or a proxy, attorney or representative of a member has: i) for each fully paid share held by him, or in respect of which he is appointed a proxy, attorney or representative, one vote for the share; and, for each partly paid share, only the fraction of one vote which the amount paid (not credited) on the share bears to the total amounts paid and payable on the share (excluding amounts credited) subject to any rights or restrictions attached to any shares or class or classes of shares. c) ii) Unvested RSUs No voting rights. - 101 - Twenty largest holders of fully paid Ordinary Shares Rank Name s Units % Issued Capital 1 NATIONAL NOMINEES LIMITED 2 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED 3 4 CITICORP NOMINEES PTY LIMITED 5 GAFFWICK PTY LTD 6 GAFFWICK PTY LTD 7 PROVIDENT MINERALS PTE LTD 8 BNP PARIBAS NOMS PTY LTD 9 MR JAMES DAVID TAYLOR ZERO NOMINEES PTY LTD 10 UBS NOMINEES PTY LTD 11 WILLIAM TAYLOR NOMINEES PTY LTD 12 CITICORP NOMINEES PTY LIMITED 13 GROUP INVESTMENT AUSTRALIA PTY LTD 14 15 MR JAMES DAVID TAYLOR + MRS MARION AMY TAYLOR 16 MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED 17 MR MARCUS JAMES TAYLOR 18 CS FOURTH NOMINEES PTY LIMITED

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