The Progressive Corporation Annual Report 2018

Plain-text annual report

Unlocking potential Annual Report and Accounts 2018 P h o e n i x G l o b a l R e s o u r c e s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 CONTENTS Highlights Unlocking potential Chairman’s statement Strategic report 1 2 8 10 Our investment case 14 Executive management report 18 Market drivers 22 Our business model 24 Our strategy and KPIs 26 Key performance indicators 28 Operating review 38 Chief financial officer’s review 42 Risk review 50 Viability statement 51 Sustainability review Governance 56 Chairman’s statement on corporate governance 58 Board of directors 61 Corporate governance report 65 Nomination committee report 67 Audit and risk committee report 70 Letter from the remuneration committee chairman 72 Remuneration policy report 81 Annual report on remuneration 89 Directors’ report 93 Statement of directors’ responsibilities Financial statements 96 Independent auditors’ report 102 Consolidated income statement 103 Consolidated statement of comprehensive income 104 Consolidated statement of financial position 105 Consolidated statement of changes in equity 106 Consolidated statement of cash flows 107 Notes to the consolidated financial statements 145 Company statement of financial position 146 Company statement of changes in equity 147 Company statement of cash flows 148 Notes to the company financial statements Other information 162 Glossary 163 Registered offices 164 Officers and advisers Phoenix has a material operated acreage position in Argentina’s promising unconventional oil & gas resources. The company is poised to participate in the future production ramp-up as these resources are developed HIGHLIGHTS US$177.0m Revenue 2017: US$ 141.8m US$59.26/bbl* Average crude price realised *before hedge 2017: US$50.46/bbl 10,249 boepd Production 2017: 11,070 boepd US$39.2m Adjusted EBITDAX 2017: US$40.6m US$78.3m Loss for the year 2017: US$270.1m 57.1 MMboe 2P reserves 2017: 57.2 MMboe 1 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONUNLOCKING POTENTIAL 1 Vaca Muerta and Argentina unconventional Moving from appraisal towards development The best comparison for Argentina unconventional development is the history of shale development in the United States. The Eagle Ford area in South Texas provides the closest comparison as it contains three distinct, highly prospective thermal maturity windows: oil, a mix of condensate and volatile oil, and dry gas. Much of the recent activity at Vaca Muerta has focused on the deeper dry gas window that is currently yielding production. At Eagle Ford the dry gas window has proved not to be commercial. HORIZONTAL WELLS COMPLETED IN EARLY DEVELOPMENT YEARS Vaca Muerta is at a relatively early stage in its development. The acceleration seen in the early development period at Eagle Ford and in the Permian has not yet been replicated in the Vaca Muerta. A number of operators including YPF, Shell, Tecpetrol, Pan American and Total are now entering or preparing to enter the development phase on key concessions with drilling and unconventional completion activity set to increase accordingly. Graphs show years one to six of development 4000 3500 3000 2500 2000 1500 1000 500 0 Y1 Y2 Y3 Y4 Y5 Y6 Y1 Y2 Y3 Y4 Y5 Y6 Y1 Y2 Y3 Y4 Y5 Y6 Y1 Y2 Y3 Y4 Y5 Y6 Y1 Y2 Y3 Y4 Y5 Y6 Y1 Y2 Y3 Y4 Y5 Y6 Permian-Midland Permian-Delaware Eagle Ford Marcellus Haynesville Vaca Muerta Source: Rystad Energy Shale Intel – Vaca Muerta study 2018 2 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTTHE GROWING IMPORTANCE OF UNCONVENTIONALS IN THE PRODUCTION MIX Argentina unconventional oil and gas production continues to increase and shale, as a component of unconventional, has increased significantly and particularly in gas production. The unconventional sector is still at an early stage of development. The pace of development is expected to increase over the next several years as Dollars committed to projects are invested in the ground. In addition, infrastructure development is planned including rail access for equipment to Vaca Muerta, additional pipelines and oil ducts. Oil mmbbl/day Gas MMm3/day 9 42 7 78 100% 80% 60% 40% 20% 0% 430 416 Jan 2018 Jan 2019 Conventional Shale Other conventional Cumulative investment commitments in Argentina shale of more than US$165.0 billion US$165.0bn S&P Global Platts, January 2019 27 9 24 29 87 76 Jan 2018 Jan 2019 Source: Argentina Government investment presentation January 2019 OIL PLAYS: WELL COST PER LATERAL FOOT 2017 > Much of the unconventional activity to > Cost reduction is key to successful date in the oil window has been focused on appraisal with limited well count. > Vaca Muerta drilling costs are high per lateral foot in the evaluation stage but are expected to reduce as development accelerates. and profitable development of unconventionals. > The target breakeven price for development needs to be below US$40/boe. > Costs per lateral foot are 48% lower at Eagle Ford. US$’000 Vaca Muerta (Oil Window) Permian-Delaware Permian-Midland Eagle Ford Bakken DJ Basin US$1,631 US$1,111 US$806 US$791 US$674 US$530 0 500 1000 1500 2000 Source: Rystad Energy Shale Intel – Vaca Muerta study 2018 RISKS TO DEVELOPMENT VELOCITY AT VACA MUERTA > Political risk > Access to capital > Scarcity of oilfield services > Availability of proppant > Logistics and transport > Labour 3 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONUNLOCKING POTENTIAL 2 Puesto Rojas focus Increasing our unconventional activity 2017 — 2019 PROGRESS 1 2 3 4 5 Phoenix’s first Vaca Muerta vertical well drilled Q1 2017. Flow rates > 200 boepd Significant upgrade in Cerro Mollar gathering and processing facility Total of eight unconventional appraisal wells drilled Appraisal completions in four distinct, prospective horizons Initial evaluation phase concluding IN A STACKED DEVELOPMENT PLAY MULTIPLE FORMATIONS ARE PRESENT AT VARYING DEPTHS PUESTO ROJAS CONTAINS FOUR DEFINED UNCONVENTIONAL OPPORTUNITIES: Efficiencies can be gained on stacked development plays where multiple wells are drilled into different formations and horizons from a single well pad. 4 Phoenix has identified four potential target horizons for testing and appraisal at Puesto Rojas. The initial development will target the folded Agrio with vertical unconventional wells. Activity will then move to additional technical work to appraise potential for horizontal development. The current expected program following the folded Agrio is: > Testing and Appraisal > Horizontal Vaca Muerta > Horizontal Agrio > Chachao Folded Agrio Tight Agrio Organic chachao Vaca Muerta ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTINDICATIVE DEVELOPMENT TIMELINE Activity summary 2018 2019 2020 2021 Appraisal Develop folded Agrio Appraisal continuing into Q1 2020 Vertical Agrio into production Horizontal Vaca Muerta technical work and appraisal 2025+ Production from at least two Horizons COMMERCIALISING PUESTO ROJAS Puesto Rojas Phoenix gathering and processing facility Ph.1 truck 1 2 3 Existing processing and storage facility at Cerro Mollar was upgraded and expanded in 2017 Existing production is delivered to YPF pipeline inlet point in MalargÜe city by tanker that is approximately 20km from the processing facility As volumes grow, a dedicated line will be constructed to provide direct access to the YPF trunkline from Cerro Mollar DRILLING SIGNIFICANTLY INCREASES IN DEVELOPMENT PHASE Development of the unconventional opportunities at Puesto Rojas will require a significant increase in drilling and completion activity. Indicative well counts (by area) for the development of the vertical Agrio development are shown below. Long term contracts for multiple wells are typically used to reduce development well cost. Injection point Ph.2 pipeline PUESTO ROJAS AGRIO DEVELOPMENT POTENTIAL Potential Agrio vertical well count by area and risk type: Highway Oil trunkline Malargüe Not to scale Reserve Low Risk Resource Medium Risk Resource High Risk Resource Cerro Mollar Norte El Manzano 1 — — — — 1 — — La Brea 40 47 39 137 Puesto Rojas 14 19 59 171 Rio Atuel — 11 133 506 5 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONUNLOCKING POTENTIAL 3 Mata Mora focus De-risking significant potential The Mata Mora concession has significant Vaca Muerta potential proximate to existing production from Shell’s Sierras Blancas concession and nearby development plays operated by both Vista and Pan American. Sierras Blancas phased development decision was announced by Shell in December 2018 and is planned to take current production and processing capacity of 12 mboe per day to more than 40 mboe per day by 2021 and to over 70 mboe per day thereafter. COMMERCIALISING MATA MORA Mata Mora is one of a contiguous set of four licences located in an area that is highly prospective for Vaca Muerta. The concentration of assets in a relatively compact geographical area can bring efficiencies to development including efficiencies related to infrastructure, potential shared facilities and other collaboration. 1 Multiple potential offtake routes A number of exiting pipelines are proximate to Mata Mora and its neighbouring concessions. While capacity may need to be upgraded in the future, this pipeline network gives multiple access routes to markets. 2 Potential for shared facilities or throughput agreements for processing In-field processing facilities could be shared in the initial stages of development or access to neighbouring facilities agreed on a tolling basis. 3 Good road access, near to a major highway The Mata Mora area is served by a major highway, easing the logistics of getting drilling, frac sets and other heavy machinery to site. Multiple operators in the same geographic area may provide efficiency opportunities in regard to mobilisation and demobilisation costs in the early stages of evaluation and development. 6 Highway Pipeline Sierras Blancas Not to scale Mata Mora ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTINDICATIVE DEVELOPMENT TIMELINE Activity summary 2018 2019 De-risking 2020 2021 Development Phase 1 production 2025+ Full production ANNOUNCED PRODUCTION CAPACITY PROGRESSION AT SIERRAS BLANCAS Current Phase 1 (by 2020) Phase 2 (by mid 2020’s) 12m boepd >40m boepd >70m boepd Highway Pipeline Source: Royal Dutch Shell Press release 2018 APPLYING THE LATEST US TECHNOLOGY Mata Mora 1 Mata Mora 2 N Two evaluation wells were drilled on the Mata Mora block in late 2018 and early 2019. These wells represented the company’s first two unconventional horizontal wells. The wells will be completed in a simultaneous zipper frac that is a relatively new technique developed in the United States. Further evaluation drilling is planned at Mata Mora pending the results from the frac of the initial two wells. Zipper frac In a ‘zipper-frac’ performed on adjacent wells, the frac stages are completed on the two wells in a simultaneous operation with the stages completed in an alternating sequence along the lateral portion of the well. Applying frac stages to two adjacent wells in this manner helps to promote constructive interference between the two wells in a phenomenon known as stress shadowing. This allows for more complete fracture coverage and a higher stimulated rock volume. Where frac stages are applied to two wells consecutively, i.e. fracking the entire length of the first well before initiating fracking on the second well, then the frac stages deployed in the second well could negatively interfere with those on the first well resulting in reduced performance from one or other of the wells. 7 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCHAIRMAN’S STATEMENT The development of unconventional oil and gas is vital for Argentina’s economic future Sir Michael Rake Non-executive chairman 8 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTIn support of the IMF plan, the government announced a zero-deficit budget for 2019 that was approved by congress in late 2018. The budget is aimed at achieving a primary balance of payments by 2020 where government income and expenditure is balanced before taking account of interest payments on historic debt. The government has a clear objective of strengthening the credibility of monetary policy and controlling inflation. Whilst we saw some intervention in commodity prices during the year, these measures were short term in nature and focused on specific temporary economic issues. Maintaining the focus on free-market principles will be fundamental to the success or failure of the arrangements in place with the IMF. To date, the Argentine government has responded to market pressure in an open, transparent and consistent manner. The upcoming national elections that are due to take place in October 2019 bring an element of uncertainty in the coming year, however the response from the administration to economic pressure, with some minor exceptions, has been consistent and has been prosecuted openly and with clarity. This provides Phoenix with the confidence to continue to invest in Argentina. The coming year is set to be an exciting one for your company with significant evaluation and development projects continuing across our core assets at Puesto Rojas, Mata Mora and Corralera. I look forward to updating you on our progress as this exciting story unfolds during the year. Sir Michael Rake Non-executive chairman 2 May 2019 Dear shareholders, 2018 has been an important year in the development of Phoenix as a leading independent player in the Argentine unconventional oil and gas industry. Our company was formed in 2017 based around a significant portfolio of onshore unconventional exploration and appraisal assets in Argentina. Our focus this year has been on securing the foundations for the future growth and success of your company and on de-risking key assets. On 23 April 2019, Anuj Sharma served a notice on the company, which the company is treating as a notice terminating his employment in accordance with his service agreement and resigning from his position as chief executive officer and a director of the company with immediate effect. Pending the recruitment of a new chief executive officer, Tim Harrington, a non- executive director of the company, will be appointed interim chairman of the executive committee, working closely with the chief financial officer and chief operating officer. Mendoza province established a regulatory framework for unconventional oil and gas operations that is both environmentally responsible and provides a sensible economic framework for the province, federal government and operators alike. The industry now has a clear set of rules for both the permitting for and the execution of unconventional oil and gas projects in Mendoza. Related to our licence portfolio, we formalised title to the important Mata Mora and Corralera concessions previously held under memoranda of understanding with Neuquén province. These assets, together with Puesto Rojas, represent the cornerstone assets for the future development of your company. We have also taken the opportunity to selectively add additional acreage that is complementary to our unconventional portfolio in both the Mendoza and Neuquén province bid-rounds. Importantly, we have now secured all the individual concessions that comprise the Corralera block, acquiring Corralera Noroeste in early 2019. In late 2018, we successfully divested several licences that we previously held in Colombia, further concentrating our focus on Argentina. I believe the actions we have taken as a company in 2018 have been important to secure the foundations of the future growth of Phoenix. The Argentine economy however had something of a turbulent year. In April, Argentina’s financial markets came under sudden and significant pressure as several conditions negatively affecting the economy manifested themselves concurrently. In the agriculture sector, a severe drought resulted in lower crop yields and a consequent fall in export revenue. World energy prices increased through the year with the Brent crude benchmark opening the year at a US$65/ barrel level and continuing to strengthen through 2018. The consistent increase in Brent pricing through much of the year placed further pressure on Argentina in its current position as a net importer of energy. In addition, financial markets tightened globally as the US Dollar appreciated in value following an upward shift in US interest rates. The principal impact of these factors was to place significant downward pressure on the Argentine Peso and to increase market anxiety about the ability of the Macri administration to roll over short- term central bank paper. This also led to an increase in the sovereign risk premium. As a result of this pressure on the Argentine economy, the government approached the International Monetary Fund in May 2018 to discuss potential support. In June 2018, a package of measures aimed at stabilising the economy was announced. The key feature of this package was the provision of a standby loan arrangement of US$50.0 billion that was subsequently upgraded to US$56.0 billion in October 2018. The provision of the standby arrangement by the IMF underscores the positive progress made under the Macri administration in terms of market reform, continued deregulation, establishing the autonomy of the central bank and other economic measures that have been put in place since the election of the Cambiemos in 2015. The economic plan for the country that underpins the provision of support by the IMF sees a consistent macroeconomic programme established that puts Argentina’s public debt balance on a firm downward trajectory. It also strengthens the plan to reduce inflation by setting more realistic inflation targets and enforces the independence of the central bank. The initial plan put in place also sought to protect society’s most vulnerable by maintaining social spending and providing for increases should the economy further deteriorate. 9 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOUR INVESTMENT CASE Phoenix seeks to secure a partnership with significant working interest on acreage that is prospective for Vaca Muerta and other unconventional opportunities Phoenix acres under licence Phoenix existing production >700,000 >10,000 BOEPD 5 PROSPECTIVE HORIZONS Experienced international board of directors Read more on page 58 to 60 3 KEY ASSETS MULTINATIONAL OPERATIONS USA UK US UNCONVENTIONAL TECHNOLOGY TRANSFER Technical centre in Houston with subsurface, reservoir and drilling specialists LISTED PURE PLAY IN LONDON AND BUENOS AIRES Focus on onshore Argentina unconventional development opportunities Management and technical staff have decades of unconventional experience of US shale development Positioned for unconventional upside with significant acreage under licence Applying the latest shale and unconventional technology and expertise to crack the Vaca Muerta code more quickly Listed on London Stock Exchange (AIM: PGR) and Buenos Aires Stock Exchange (BCBA: PGR) ARGENTINA GLOBAL IN-COUNTRY OPERATOR Operational centre in Mendoza, administrative centre also dealing with government and partner affairs in Buenos Aires FINANCIAL STRENGTH AND ACCESS TO CAPITAL Strong financial backing and commitment to highest standards of governance Proven operator of both conventional and unconventional oil and gas projects Ability to access to global equity from UK, US, Europe, Asia and Latin America Strong relationships with government and partners Ability to source local and international finance 10 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTVaca Muerta/ US comparison Early stage opportunities available: C H A R AC T E R I S T I C S VAC A M U E R TA E AG L E F O R D Oil and liquid rich gas Oil and liquid rich gas > The seven most advanced plays cover only 8% of total acreage 7.5 million acres Area (million acres) Total organic content (%) Thickness of shale horizon (ft) Reservoir pressure (Kpsi) 7.5 3-10 ~1,000 4.5-9.5 3.00 3-5 ~250 7.0-12.0 1 Gas window 2 Condensate window 3 Oil window 3 distinct thermal maturity windows Close comparison to Eagle Ford in Texas 1 2 3 Source: US EIA Continuing programme of market deregulation > Currency > Commodity > Capital markets Chair of successful 2018 G20 summit Oil & Gas and Agriculture sectors provide foundation for economic recovery and solving balance of trade STAND BY LOAN ARRANGEMENT IN PLACE WITH IMF US$56 billion Argentina Cuyana basin BUENOS AIRES Neuquina basin San Jorge basin Austral basin Long history in conventional oil and gas, established industry and workforce Autonomy of central bank reinforced, active programme for managing Peso/ USD exchange rate C U Y A N A B A S I N Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 528 83,687 70,964 6,303 2,136 1,819 N E U Q U I N A B A S I N Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 8,572 869,470 603,660 34,723 5,062 4,471 A R G E N T I N A G O L F O S A N J O R G E B A S I N A U S T R A L B A S I N Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 5,625 529,718 – 16,055 3,898 3,960 STRATEGIC REPORTEXECUTIVE MANAGEMENT REPORT We are applying technology to de-risk our world class resource base and move towards development De-risking and consolidating Phoenix’s asset position The primary focus for Phoenix in 2018 has been on de-risking and consolidating our unconventional asset and licence positions in Argentina. De-risking is important in terms of geology, subsurface understanding and reserves but also in terms of title and operatorship, and in relation to the regulatory environment in which we operate. We have consolidated our operated activity in 2018 around our three key prospective licence areas of Puesto Rojas, Mata Mora and Corralera. In addition, we have successfully participated in bid- rounds with the objective of acquiring acreage that is complementary to our unconventional portfolio in Argentina. Unconventional regulation and permitting in Mendoza province In the first half of the year, we consulted with Mendoza Province and its advisors as they finalised regulations for unconventional oil and gas activity in the province. While regulations for oil and gas activity had been in place in the province for some time, those regulations did not specifically address the nuances of unconventional activity. It is important for the Province and for Phoenix that unconventional activity is undertaken economically and in a manner that is both safe and environmentally 14 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTresponsible. The unconventional regulations that were formally issued in March 2018 provide a clear framework for unconventional operations in Mendoza province. A process for obtaining unconventional permits for individual projects has also been established and was followed by Phoenix to obtain the necessary unconventional permits for activity undertaken at Puesto Rojas in the second half of the year. Securing Mata Mora and Corralera with increased participation In April 2018, the company successfully renegotiated its interests on both the Mata Mora and Corralera blocks that were previously held under a memorandum of understanding with GyP, the province-owned oil and gas company. Phoenix’s interest in the blocks was increased from 27% to 90% and the company was awarded operatorship of the area. Mata Mora is a particularly important block for the company given it directly neighbours the Sierras Blancas block that is operated by Shell. Sierras Blancas is one of the most prolific blocks currently producing from the Vaca Muerta formation. The proximity to other producing areas can give more options related to access to and development of offtake and transport infrastructure. In February 2019, the company was awarded the Corralera Noroeste licence. This is the third of three licences comprising the Corralera block. The award unifies all of Corralera under Phoenix operatorship with a 90% working interest. SUMMARY OF RESERVES BY BASIN PHOENIX’S GROWTH POTENTIAL 2P RESERVES1 57.1 MMboe 1 3 2 CONTINGENT RESOURCES (3C)2 426: +106% MMboe CONTINGENT AND PROSPECTIVE RESOURCES (3C + 3U)1 3,314: +85% MMboe 1 Source: Gaffney, Cline & Associates reserves statement as of 31 December 2018 2 Source: Various reports compiled by Gaffney, Cline and Associates, W.D. Von Gonten & Co., Netherland Sewell & Associates, ASR and OPG 31 December 2017 Production Revision to estimate 31 December 2018 Oil Mbbl Gas MMscf Total Mboe Oil Mbbl Gas* MMscf Total Mboe Oil Mbbl Gas MMscf Total Mboe Oil Mbbl Gas MMscf Total Mboe Neuquina 1P 18,043 2,492 18,458 (1,489) (856) (1,632) 3,998 7,096 5,181 20,552 8,732 22,007 2P 28,831 10,224 30,535 (1,489) (856) (1,632) 4,367 8,716 5,820 31,709 18,084 34,723 3P 36,416 13,815 38,719 (1,489) (856) (1,632) 6,346 10,149 8,037 41,273 23,108 45,124 Austral 1P 3,040 72,223 15,077 (388) (6,347) (1,446) (861) (39,973) (7,523) 1,791 25,903 6,108 2P 4,272 98,512 20,691 (388) (6,347) (1,446) (49) (18,844) (3,190) 3,835 73,321 16,055 3P 4,640 106,568 22,401 (388) (6,347) (1,446) (242) (24,757) (4,368) 4,010 75,464 16,587 Cuyana 1P 5,602 2P 6,000 3P 6,287 – – – 5,602 (648) (92) (664) 1,137 6,000 (648) (92) (664) 951 6,287 (648) (92) (664) 795 – – – 1,153 6,091 967 6,303 811 6,434 – – – 6,091 6,303 6,434 Source: Gaffney, Cline & Associates reserves statement as of 31 December 2018 and 2017 *Gas: all produced gas at Cuyana is used in operations, hence no reserve volumes are attributed to gas in the basin Figures may not add due to rounding 15 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONEXECUTIVE MANAGEMENT REPORT CONTINUED Puesto Rojas unconventional completions campaign Following the issuance of the unconventional regulations and establishment of the associated permitting process, the company undertook an eight-well unconventional completions campaign in the Puesto Rojas area. The objective of the campaign was to continue the evaluation work already undertaken at Puesto Rojas and to de-risk the area in respect of technical feasibility and in terms of reserves potential. Of the eight wells that were completed, four were new wells drilled specifically for evaluation of the unconventional potential and four were from previous campaigns where limited tests of specific stages were undertaken. All the wells are currently on test and producing. As a result of the work performed at Puesto Rojas, three prospective unconventional opportunities have been identified in this important stacked play. These opportunities are in the Vaca Muerta, where the company found initial success, and in both the folded and the tight Agrio formations. There is also longer-term potential in the organic Chachao formation. The delineation of these individual significant opportunities plays an important part in de-risking the Puesto Rojas area for development. This work has identified the folded Agrio as the primary near-term unconventional development prospect at Puesto Rojas with the other formations subject to further testing and appraisal before moving to development. First horizontal well at Mata Mora The company’s first unconventional horizontal well, MMx-1001, was spudded at Mata Mora in September 2018, with drilling of the lateral section concluded in January 2019. The well had a measured depth of 5,259 metres with the lateral section drilled to a total length of 1,969 metres. The lateral section was successfully held within a 7-metre window in the Vaca Muerta across 99.3% of the total length of the well. The second horizontal well at Mata Mora was spudded in late January 2019 and drilling of the vertical section completed at a total depth of approximately 2,400 metres at the end of February. Drilling of the lateral portion of the well concluded in late March 2019. The well is now awaiting completion together with MMx-1001. 16 Both wells will be completed in a simultaneous hydraulic fracture operation. Whilst we await the results from the completion of the two wells, the success of the drilling operation is positive for our future operations at Mata Mara, substantially de-risking the drilling process for horizontal wells in the block. Reserves progression Reserves volumes remained consistent year-on-year with production almost entirely offset by revisions to estimates on key assets, particularly at Puesto Rojas reflecting the work done there in the year. The reserves replacement ratio achieved was 96.2%, a significant increase on the prior year. High case contingent resources more than doubled in the year to 426 million barrels of oil equivalent. Substantially all contingent resource gains relate to the Corralera Noreste and Sur concessions and result from both a structured analysis of data in 2018 and the increase in the working interest participation from 27% to 90%. These gains exclude Corralera Noroeste that was awarded in early 2019. High case prospective and contingent resources taken as a whole increased similarly posting gains of 85% over the figure reported in 2017. Focused evaluation and development plan The work done in 2018 in de-risking and consolidating the company’s interests has focused the evaluation and development plan around three key assets and five specific opportunities within those assets. The Puesto Rojas folded Agrio play is now considered sufficiently de-risked to move to development and represents a lower risk, less capital-intensive project with promising economics, and relatively high initial production. The results from the completion of the two Mata Mora wells will be used to determine the development decision for that block during 2019. Our team has worked hard to progress our assets and move our company forward in 2018. Our success through this evaluation stage will be measured in the results of the evaluation work performed on the blocks that should result in the net migration of reserves and an increase in resources. We have built our acreage position both in terms of new blocks and, importantly, by increasing our working interest on the key Mata Mora and Corralera concessions. We have de-risked acreage through technical PLANNED CAPITAL EXPENDITURE FOR 2019 $100.0m+ FOCUSED ON UNCONVENTIONAL APPRAISAL AND EVOLUTION c.70% evaluation and through drilling to define a succinct population of potentially lucrative development opportunities. We have secured key acreage and have divested non-core Colombian assets to focus on Argentina unconventional development. Our thanks go to our team for their continued dedication and hard work. We look forward to the challenge of developing our exploration and development opportunities into world class production assets. Kevin Dennehy Chief financial officer Javier Vallesi Chief operating officer 2 May 2019 OUR DEVELOPMENT PORTFOLIO s t e s s a y e k e e r h T Puesto Rojas Vertical Agrio Mata Mora Vaca Muerta Corralera Puesto Rojas Vaca Muerta Puesto Rojas Horizontal Agrio s e i t i n u t r o p p o e v i t c e p s o r p e v F i ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT FUTURE PRIORITIES Our overriding objective is to build value over the medium to long term, focusing our efforts on the following priority areas: Proving up and de-risking our extensive unconventional acreage. Phoenix is one of the largest independent holders of acreage with unconventional potential in Argentina. The company’s initial focus is on appraising, de-risking this large unconventional asset base. We plan to progressively move our assets towards development phase as we appraise and de-risk, working across our substantial asset portfolio. Building our organisation to prepare for large-scale development of our unconventional resources. We will continue to strengthen our organisation, adding expertise through specific appointments and developing our people through training programmes, as we prepare for the large-scale development of our unconventional resources. Bringing the right expertise from the US independents’ shale experience remains key to the efficient development of Argentina’s vast unconventional resources. Phoenix will continue to access that experience through our Houston technical centre. Opportunistic inorganic growth through farm-ins, joint ventures, partnerships and portfolio rationalisation. While Phoenix holds a large portfolio of both unconventional and conventional assets and is well set for long-term organic growth, the group remains open to working with others to develop our own portfolio or to add new prospects to our portfolio. This may be through acquisition, farm-in/out opportunities, joint ventures or partnerships in the Neuquina basin and other attractive basins throughout Argentina. We will focus on opportunities where we can realise attractive synergies, share know-how, or where such arrangements have clear strategic and operational alignment with other operators. 17 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONMARKET DRIVERS M A R K E T M A R K E T I SS U E S O U R R E S P O N S E The energy commodity markets in Argentina were previously subject to government regulation. The current administration has a stated objective to move towards market-based pricing and to substantially reduce or eliminate market intervention. In October 2017, the Argentina government removed regulation of the domestic crude price with the objective of moving to a Brent-minus basis for pricing. Pricing is on a Brent-minus basis due to location and quality differentials versus the Brent benchmark. YPF, the Argentina state-owned oil and gas company, sets prices for domestic crude deliveries monthly by reference to the Brent crude benchmark price. The pricing mechanism uses the arithmetical of the average quoted Brent price for the fifteen days immediately prior to the pricing month and the first fifteen days within the pricing month. Brent pricing was soft in 2017, fluctuating within the US$45/bbl to US$55/bbl range. Prices remained volatile within this band through much of the year with little support for a sustained run or rally in prices. Towards the end of 2017, pricing began to firm up with consensus support building for prices around the US$65/bbl level going into 2018. In Q2 2018, crude prices started to trend upward, breaching US$70/bbl in early April 2018 and going on to exceed US$85/bbl in September 2018. This upward pressure on crude prices that started in April 2018 began to translate into higher prices for oil products at the refinery gate, further exacerbated by the devaluation of the Peso. In response to rising prices for transport fuel and lubricants, the government introduced capped prices for crude for the months of May, June and July in 2018. Oil prices L I N K TO S T R AT E GY Control and consolidate Explore and develop Profitable production Whilst easing inflationary pressure on The company’s exploration and While the company has a policy to fix the end consumer, capped pricing limits evaluation activity is capital intensive. prices when it is commercial to do so and exposure to upside gains for producers. The Brent crude price had strengthened hedge relationships can be shown to be Reactive intervention by the government in the latter part of 2017 and into 2018 effective, it is not expected that further also impacts on the ability of producers to however the forward curve in January hedges will be entered in the near term. effectively plan and budget, and prevents was showing flat or downward trending The monthly pricing mechanism in the effective hedging of production prices for 2018. Given that forward Argentina together with the introduction and sales. pricing continued to look uncertain of export duties complicates the and, as the Argentina domestic price relationship between domestic prices In September 2018, a 10% export duty was now based on a Brent-minus and Brent, reducing the company’s was established for all exports from Argentina. The duty applies to crude benchmark, the board considered it ability to enter into an effective hedge. appropriate to hedge a modest portion oil and was introduced by the federal of the company’s production in order The company will continue to monitor government as part of a package of to support part of the planned capital domestic pricing and the relationship measures to support a zero fiscal-deficit expenditure programme. to the Brent crude benchmark. budget for 2019. The zero deficit budget was one of the conditions agreed with the The capped pricing introduced for IMF as part of the US$56.0 billion standby May, June and July of 2018 broke the loan package. Refer also to currency and relationship between the Argentina inflation section. domestic crude price and Brent, rendering the hedge ineffective. As Brent prices increased above US$65.97/bbl, the value of the hedge payments made on the instrument were not compensated by corresponding gains in the domestic price in Argentina, resulting in a net cash loss on the hedge instrument. Despite being the largest dry gas producer in South America and having the world’s second-largest shale gas resource Argentina is a net importer of natural gas. Several incentive schemes have previously been in place under which a producer could receive a higher price for gas sold in certain circumstances. The country relies on imports of gas from Bolivia together with LNG cargoes from the international market. Argentina has almost no coal reserves and relies heavily on gas to generate power for domestic and industrial use. The import price for gas remains high, with both pipeline imports from Bolivia and LNG landed cargoes priced higher per MMbtu than the price charged to the end user. Although the Macri administration has sought to reduce subsidies, particularly on domestic gas, this differential between import prices and the domestic market price negatively impacts the country’s balance of trade. These schemes were focused primarily on conventional gas production and had been established in order to encourage domestic production and reduce the reliance on imported gas. By the end of 2018, substantially all the incentive schemes have been withdrawn. The schemes had become increasingly expensive, with the cost of providing incentive almost outweighing the benefit gained from not importing gas. The 2017 Article 46 incentive programme that incentivised the development of the Vaca Muerta shale gas resource has also been withdrawn, with only one independent producer accepted to the scheme before it was terminated. Gas prices L I N K TO S T R AT E GY Control and consolidate Explore and develop Profitable production 18 Phoenix remains a price-taker for gas Our operated oil production activity and does not seek to hedge production. results in associated gas that is produced The majority of Phoenix’s current gas alongside oil, albeit in smaller quantities. production is derived from conventional Where volumes of associated gas are assets in the Santa Cruz Sur and Tierra commercial and the cost of getting del Fuego areas. The company’s objective for gas production in the long term is to develop the unconventional gas gas into the transmission system is not prohibitive, we seek to sell the gas into the grid. Where the volume of associated gas resources within the asset portfolio produced is not commercial for market where it is commercially viable to do so. sale, we seek to use the gas as fuel for infield power generation, reducing the We will continue to work with our use of purchased diesel. partner, ROCH S.A., to maximise Santa Cruz and Tierra del Fuego production. The company will participate in gas incentive arrangements where possible. ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTM A R K E T M A R K E T I SS U E S O U R R E S P O N S E The energy commodity markets in Brent pricing was soft in 2017, fluctuating Argentina were previously subject to within the US$45/bbl to US$55/bbl government regulation. The current range. Prices remained volatile within administration has a stated objective this band through much of the year with to move towards market-based pricing little support for a sustained run or rally and to substantially reduce or eliminate in prices. Towards the end of 2017, pricing market intervention. began to firm up with consensus support building for prices around the US$65/bbl In October 2017, the Argentina government level going into 2018. removed regulation of the domestic crude price with the objective of moving to a In Q2 2018, crude prices started to trend Brent-minus basis for pricing. Pricing is upward, breaching US$70/bbl in early on a Brent-minus basis due to location April 2018 and going on to exceed and quality differentials versus the US$85/bbl in September 2018. Brent benchmark. This upward pressure on crude prices that YPF, the Argentina state-owned oil and started in April 2018 began to translate gas company, sets prices for domestic into higher prices for oil products at the crude deliveries monthly by reference to refinery gate, further exacerbated by the Brent crude benchmark price. The the devaluation of the Peso. In response pricing mechanism uses the arithmetical to rising prices for transport fuel and of the average quoted Brent price for lubricants, the government introduced the fifteen days immediately prior to the capped prices for crude for the months pricing month and the first fifteen days of May, June and July in 2018. within the pricing month. Despite being the largest dry gas Several incentive schemes have previously producer in South America and having the been in place under which a producer world’s second-largest shale gas resource could receive a higher price for gas sold Argentina is a net importer of natural gas. in certain circumstances. The country relies on imports of gas from These schemes were focused primarily Bolivia together with LNG cargoes from on conventional gas production and had the international market. been established in order to encourage domestic production and reduce the Argentina has almost no coal reserves and reliance on imported gas. relies heavily on gas to generate power for domestic and industrial use. The import By the end of 2018, substantially all the price for gas remains high, with both incentive schemes have been withdrawn. pipeline imports from Bolivia and LNG The schemes had become increasingly landed cargoes priced higher per MMbtu expensive, with the cost of providing than the price charged to the end user. incentive almost outweighing the benefit gained from not importing gas. Although the Macri administration has sought to reduce subsidies, particularly The 2017 Article 46 incentive programme on domestic gas, this differential between that incentivised the development of import prices and the domestic market the Vaca Muerta shale gas resource price negatively impacts the country’s has also been withdrawn, with only one balance of trade. independent producer accepted to the scheme before it was terminated. L I N K TO S T R AT E GY Oil prices Control and consolidate Explore and develop Profitable production Gas prices L I N K TO S T R AT E GY Control and consolidate Explore and develop Profitable production Whilst easing inflationary pressure on the end consumer, capped pricing limits exposure to upside gains for producers. Reactive intervention by the government also impacts on the ability of producers to effectively plan and budget, and prevents the effective hedging of production and sales. In September 2018, a 10% export duty was established for all exports from Argentina. The duty applies to crude oil and was introduced by the federal government as part of a package of measures to support a zero fiscal-deficit budget for 2019. The zero deficit budget was one of the conditions agreed with the IMF as part of the US$56.0 billion standby loan package. Refer also to currency and inflation section. The company’s exploration and evaluation activity is capital intensive. The Brent crude price had strengthened in the latter part of 2017 and into 2018 however the forward curve in January was showing flat or downward trending prices for 2018. Given that forward pricing continued to look uncertain and, as the Argentina domestic price was now based on a Brent-minus benchmark, the board considered it appropriate to hedge a modest portion of the company’s production in order to support part of the planned capital expenditure programme. While the company has a policy to fix prices when it is commercial to do so and hedge relationships can be shown to be effective, it is not expected that further hedges will be entered in the near term. The monthly pricing mechanism in Argentina together with the introduction of export duties complicates the relationship between domestic prices and Brent, reducing the company’s ability to enter into an effective hedge. The company will continue to monitor domestic pricing and the relationship to the Brent crude benchmark. The capped pricing introduced for May, June and July of 2018 broke the relationship between the Argentina domestic crude price and Brent, rendering the hedge ineffective. As Brent prices increased above US$65.97/bbl, the value of the hedge payments made on the instrument were not compensated by corresponding gains in the domestic price in Argentina, resulting in a net cash loss on the hedge instrument. Phoenix remains a price-taker for gas and does not seek to hedge production. The majority of Phoenix’s current gas production is derived from conventional assets in the Santa Cruz Sur and Tierra del Fuego areas. The company’s objective for gas production in the long term is to develop the unconventional gas resources within the asset portfolio where it is commercially viable to do so. We will continue to work with our partner, ROCH S.A., to maximise Santa Cruz and Tierra del Fuego production. The company will participate in gas incentive arrangements where possible. Our operated oil production activity results in associated gas that is produced alongside oil, albeit in smaller quantities. Where volumes of associated gas are commercial and the cost of getting gas into the transmission system is not prohibitive, we seek to sell the gas into the grid. Where the volume of associated gas produced is not commercial for market sale, we seek to use the gas as fuel for infield power generation, reducing the use of purchased diesel. 19 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONMARKET DRIVERS CONTINUED M A R K E T M A R K E T I SS U E S O U R R E S P O N S E The Argentine Peso and Turkish Lira performed particularly poorly in 2018, largely due to high levels of historic US Dollar denominated debt held by both countries. Notwithstanding, the economic crisis in 2018 was primarily a currency crisis and did not translate to a debt or sovereign crisis as has happened in the past. Arguably, the Peso was overvalued going into the crisis with its value now being a more reasonable reflection of its underlying fair value. The Argentine Peso has historically been volatile and has suffered from extended periods of devaluation. 2018 was a particularly turbulent year for the Argentine economy with the Peso devaluing by more than 100% against the US Dollar, annual cost inflation of more than 40% and a central bank lending rate higher than 60%. The catalyst for the devaluation of the Peso was the move by the US Federal Reserve to increase US interest rates. This caused capital to move away from emerging markets, putting pressure on the domestic currencies of those markets with a consequential impact on cost inflation. The increase in cost inflation caused central banks to intervene by raising lending rates to support currencies. Currency and inflation L I N K TO S T R AT E GY Profitable production Realise value In 2018, the Argentine government The oil and gas industry in Argentina Whilst priced by reference to the secured a US$50.0 billion standby loan benefits from a degree of natural hedge US Dollar, contracts for oil sales and package from the IMF that was increased protection from currency risk as sales oilfield services are settled in Peso. to US$56.0 million following the currency contracts for oil are denominated in The company currently generates crisis. Certain commitments have been US Dollars by reference to the Brent enough Pesos from the US Dollar made by the administration in order to benchmark price. secure the support of the IMF. Primary denominated sales contracts to allow it to settle all of its operating costs amongst these are a commitment to a Oilfield service contracts, for example and a portion of its exploration and zero fiscal-deficit budget for 2018 and a those related to drilling and completion, evaluation costs using Pesos generated pledge to manage the value of the Peso are also predominantly denominated in from operations. within a refined band of exchange rates, US Dollars. currently between 38 and 44 Pesos to the US Dollar. Cost inflation affects the company in relation to salaries and wages that are denominated in Pesos. Peso salaries are adjusted for inflation periodically before performance or other increases. In addition, contracts for parts, materials, services or property sourced domestically will increase year-on-year due to inflation. The unconventional oil and gas industry in Argentina has seen a significant increase in investment, both domestically and by international oil and gas companies, over the last several years. Exploration and development activity related to the Vaca Muerta and other unconventional resources in Argentina has increased concurrently over the same period. The technical and physical resources to prosecute unconventional drilling and completions campaigns in-country is limited, this has resulted in competition for services and potential delays to activity as operators wait for the right resources to become available. There are a limited number of drilling The company seeks to form relationships rigs in Argentina capable of drilling the with trusted service providers and long lateral horizontal wells that are individual crews. Contracts for drilling required for evaluation and, ultimately, and completion services are put in place development and large-scale production in advance with campaigns scheduled of unconventional oil and gas. In addition, to maximise operational efficiencies and the number of unconventional completion crew and equipment mobilisation and crews with international experience is demobilisation synergies where possible. limited and their availability is driven by demand. Competition for skills and services L I N K TO S T R AT E GY Explore and develop Realise value 20 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTM A R K E T M A R K E T I SS U E S The Argentine Peso has historically been The Argentine Peso and Turkish Lira volatile and has suffered from extended performed particularly poorly in 2018, periods of devaluation. largely due to high levels of historic US Dollar denominated debt held by 2018 was a particularly turbulent year both countries. for the Argentine economy with the Peso devaluing by more than 100% against the Notwithstanding, the economic crisis US Dollar, annual cost inflation of more in 2018 was primarily a currency crisis than 40% and a central bank lending rate and did not translate to a debt or higher than 60%. sovereign crisis as has happened in the past. Arguably, the Peso was overvalued The catalyst for the devaluation of the going into the crisis with its value now Peso was the move by the US Federal being a more reasonable reflection of Reserve to increase US interest rates. its underlying fair value. Currency and inflation L I N K TO S T R AT E GY Profitable production Realise value This caused capital to move away from emerging markets, putting pressure on the domestic currencies of those markets with a consequential impact on cost inflation. The increase in cost inflation caused central banks to intervene by raising lending rates to support currencies. In 2018, the Argentine government secured a US$50.0 billion standby loan package from the IMF that was increased to US$56.0 million following the currency crisis. Certain commitments have been made by the administration in order to secure the support of the IMF. Primary amongst these are a commitment to a zero fiscal-deficit budget for 2018 and a pledge to manage the value of the Peso within a refined band of exchange rates, currently between 38 and 44 Pesos to the US Dollar. O U R R E S P O N S E The oil and gas industry in Argentina benefits from a degree of natural hedge protection from currency risk as sales contracts for oil are denominated in US Dollars by reference to the Brent benchmark price. Oilfield service contracts, for example those related to drilling and completion, are also predominantly denominated in US Dollars. Whilst priced by reference to the US Dollar, contracts for oil sales and oilfield services are settled in Peso. The company currently generates enough Pesos from the US Dollar denominated sales contracts to allow it to settle all of its operating costs and a portion of its exploration and evaluation costs using Pesos generated from operations. Cost inflation affects the company in relation to salaries and wages that are denominated in Pesos. Peso salaries are adjusted for inflation periodically before performance or other increases. In addition, contracts for parts, materials, services or property sourced domestically will increase year-on-year due to inflation. The unconventional oil and gas industry in The technical and physical resources to Argentina has seen a significant increase prosecute unconventional drilling and in investment, both domestically and completions campaigns in-country is by international oil and gas companies, limited, this has resulted in competition over the last several years. Exploration for services and potential delays to and development activity related to the activity as operators wait for the Vaca Muerta and other unconventional right resources to become available. resources in Argentina has increased concurrently over the same period. There are a limited number of drilling rigs in Argentina capable of drilling the long lateral horizontal wells that are required for evaluation and, ultimately, development and large-scale production of unconventional oil and gas. In addition, the number of unconventional completion crews with international experience is limited and their availability is driven by demand. The company seeks to form relationships with trusted service providers and individual crews. Contracts for drilling and completion services are put in place in advance with campaigns scheduled to maximise operational efficiencies and crew and equipment mobilisation and demobilisation synergies where possible. Competition for skills and services L I N K TO S T R AT E GY Explore and develop Realise value 21 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOUR BUSINESS MODEL Unconventional technology and expertise unlock the value of our assets 1 OUR VALUE ENABLERS Technology We use the latest international technology to appraise and develop our assets. Our Houston technical office puts us in the engine room of the US shale industry, alongside the best and most knowledgeable shale industry expertise. People Our technical and operational teams combine deep knowledge of the Argentina oil and gas industry with unconventional specialism and the cutting edge industry expertise from the US. 2 THE RIGHT ASSETS Identify assets We seek to secure operatorship on the assets that we participate in. We acquire acreage positions that are contiguous with our existing licence areas and have unconventional potential or acreage positions that are proximate to or on trend with our existing unconventional producing areas. Financial capital We benefit from strong financial backing from a supportive major shareholder and have a history of securing financing in Argentina. Our dual listing in London and Buenos Aires gives us access to domestic and international equity markets. Supported by a robust governance framework 6 OUTPUTS AND OUTCOMES Reinvestment Reinvesting cash from operations into our assets in the medium term to achieve financing self-sufficiency. Other stakeholders As our operations grow we expect to recruit more people and create jobs in our key operating locations. A greater level of activity will provide opportunities to new and existing employees alike. Returns to shareholders Our ultimate objective is to build a sustainable portfolio of unconventional production assets that delivers capital for shareholder return. As our production increases and, with it, our profitability then our contribution to taxes at the provincial and at the federal level will likely increase. S T U P N I S T U P T U O 22 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTOur business Phoenix is working in one of the most prospective unconventional oil and gas basins globally. The level of investment in Vaca Muerta and other unconventional opportunities in Argentina is substantial and is growing. We are proud to be playing our part in the energy future of Argentina and to be creating value for our stakeholders. 3 EXPLORATION AND APPRAISAL Combining local knowledge and experience with the best international technology to evaluate the potential of our assets 5 PRODUCTION AND SALE Optimising cost, upgrading and enhancing our production and infrastructure assets, maximising margins and participating in production incentive schemes where possible HOW WE CREATE VALUE 4 DEVELOPMENT Enhancing and adapting drilling and completion techniques to support the large-scale development of our unconventional resource base 23 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOUR STRATEGY AND KPIS Strategy and capital allocation O U R S T R AT E G I C O B J E C T I V E S Control and consolidate Explore and develop Phoenix holds significant licence acreage in Argentina. Our focus is to secure operatorship and consolidate our ownership position of that acreage. We will seek to strategically add additional acres with exposure to unconventional resources, including the Vaca Muerta. Our exploration and development activity is focused on appraising and evaluating the group’s unconventional acreage. We apply the latest US shale technologies on our Argentina assets to define a consistent, repeatable drilling and completion solution for our unconventional resources. In April 2018, the group participated in the Neuquén province licensing round and secured four additional operated blocks. Phoenix also reached agreement with GyP, the Neuquén province-owned oil and gas company and our partner in the Corralera and Mata Mora concessions, to increase our participation in these blocks from 27% to 90% and to assume operatorship. We focus our exploration and evaluation work where we have significant contiguous acreage positions, such as the Puesto Rojas area. Activity is also focused where our acreage is proximate to areas where others have found success – such as at both Mata Mora and Corralera, which sit close to a number of successful Vaca Muerta producing licences, including Sierras Blancas and Loma Campana. In January 2019, GyP confirmed the award of the Corralera Noroeste licence to the company at a 90% participation level with GyP holding the remaining 10% non-operated interest. The acquisition of Corralera Noroeste unifies all three licences comprising this significant block under the company’s operatorship. In November 2018, the company divested its 70% operated interest in eight onshore licences in Colombia. The licences carried potentially significant licence commitments. The divestiture allows the company to focus on its core objective of developing the Vaca Muerta shale and other unconventional resources in Argentina. We have continued the unconventional completions campaign on our Puesto Rojas and neighbouring concessions in relation to the well stock that we drilled in 2017. In 2018, we successfully completed eight unconventional wells designed to evaluate multiple horizons and targets in the Puesto Rojas area. In 2019, we completed the drilling of the company’s first horizontal wells that are located at the Mata Mora concession. > Total Vaca Muerta and other unconventional acreage > Percentage of acreage operated by Phoenix > Absolute reserve and resources volumes > Year-on-year reserves growth > Migration of resource and reserve categories We continue to exploit and develop our In February 2018, the group announced high margin conventional assets, providing the restructuring of its financing us with a conventional production arrangements with the Mercuria Group base and cash from operations, as we that underpinned the appraisal activity evaluate unconventional opportunities and business development work in 2018. for development. The facility was extended through a Tranche B element initially put in place for In 2017, the group had net production US$25.0 million in December 2018, further of 11,070 boepd – sourced principally extended to US$75.0 million in early 2019. from conventional assets. This production fell by 7% to 10,249 boepd in 2018 as The disposal of certain of our non-core natural decline continued on conventional Colombian licences in November 2018 assets which has not yet been offset by avoids the need to fulfil potentially unconventional production. In addition, significant licence commitments and certain wells were taken offline while preserves shareholder value. unconventional operations were undertaken nearby. Through enhanced data analysis and technical study, we have increased the We continued to perform workovers on reported resources at Corralera from existing conventional wells and drilled a previous high case of 1,087 MMboe a number of in-fill wells targeting high of prospective resources assessed for margin areas, notably at Chachahuen. Corralera as a whole to 244 MMboe of contingent and 1,578 MMboe of Our unconventional activity will continue prospective resources for Corralera Sur to be accretive to production as we and Noreste only. Adding volumes through complete new appraisal wells. better analysis and skilled personnel is core to our business model and delivers value for shareholders. > Year-on-year production volumes > EBITDAX > Opex per boe produced > Total shareholder return 2 6 1 2 6 1 3 4 5 6 2 3 4 5 6 > Competition for acreage (especially Vaca Muerta and other unconventional acreage) > May not be possible to obtain operatorship > Ability to fulfil licence commitments > Exploration and development risk > The timely availability of capital to fund operations > Availability of experienced service crews > Competition for services and related costs > Formation integrity and ability to > Fiscal risk achieve design type-curve > Commodity prices and volatility > Financing risk > Final decommissioning costs > Impact of inflation and foreign and obligations exchange risk > Ability to optimise the asset portfolio through acquisition, divestment, licencing rounds and farm-in/out H OW W E D O T H I S A N D W H AT W E H AV E D O N E M E A S U R I N G O U R P R O G R E SS L I N K TO K P I s P OT E N T I A L R I S K S 24 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT O U R K PI S For performance measurement and management remuneration. We measure our performance and management remuneration is influenced by the following key performance indicators (KPIs). 1 2 3 4 5 Number of reportable HSE incidents Year-on-year growth of reserves and resources by category Operating cost per boe Production volume increase/decrease EBITDAX – earnings before interest, taxation, depreciation, amortisation and exploration expense 6 Personal/group project delivery and milestone targets Read more on pages 26 and 27 Profitable production Realise value Phoenix has existing economic production from our conventional oil assets in the Neuquina and Cuyana basins and our gas assets in the Austral basin. Our conventional production objectives will be balanced with high growth unconventional development objectives. Realising value for all of our shareholders is fundamental to what we do. Demonstrating the commerciality of our assets and bringing forward production through accelerating asset development is key to creating value. We continue to exploit and develop our high margin conventional assets, providing us with a conventional production base and cash from operations, as we evaluate unconventional opportunities for development. In 2017, the group had net production of 11,070 boepd – sourced principally from conventional assets. This production fell by 7% to 10,249 boepd in 2018 as natural decline continued on conventional assets which has not yet been offset by unconventional production. In addition, certain wells were taken offline while unconventional operations were undertaken nearby. We continued to perform workovers on existing conventional wells and drilled a number of in-fill wells targeting high margin areas, notably at Chachahuen. Our unconventional activity will continue to be accretive to production as we complete new appraisal wells. In February 2018, the group announced the restructuring of its financing arrangements with the Mercuria Group that underpinned the appraisal activity and business development work in 2018. The facility was extended through a Tranche B element initially put in place for US$25.0 million in December 2018, further extended to US$75.0 million in early 2019. The disposal of certain of our non-core Colombian licences in November 2018 avoids the need to fulfil potentially significant licence commitments and preserves shareholder value. Through enhanced data analysis and technical study, we have increased the reported resources at Corralera from a previous high case of 1,087 MMboe of prospective resources assessed for Corralera as a whole to 244 MMboe of contingent and 1,578 MMboe of prospective resources for Corralera Sur and Noreste only. Adding volumes through better analysis and skilled personnel is core to our business model and delivers value for shareholders. > Year-on-year production volumes > Opex per boe produced > EBITDAX > Total shareholder return 2 6 1 2 6 1 3 4 5 6 2 3 4 5 6 P OT E N T I A L R I S K S > Competition for acreage > Exploration and development risk (especially Vaca Muerta and other unconventional acreage) > May not be possible to obtain operatorship > The timely availability of capital to fund operations > Availability of experienced service crews > Competition for services and > Ability to fulfil licence commitments related costs > Formation integrity and ability to achieve design type-curve > Commodity prices and volatility > Impact of inflation and foreign exchange risk > Fiscal risk > Financing risk > Final decommissioning costs and obligations > Ability to optimise the asset portfolio through acquisition, divestment, licencing rounds and farm-in/out 25 H OW W E D O T H I S A N D W H AT W E H AV E D O N E M E A S U R I N G O U R P R O G R E SS L I N K TO K P I s In April 2018, the group participated in We focus our exploration and evaluation the Neuquén province licensing round and work where we have significant secured four additional operated blocks. contiguous acreage positions, such as the Phoenix also reached agreement with GyP, Puesto Rojas area. Activity is also focused the Neuquén province-owned oil and gas where our acreage is proximate to areas company and our partner in the Corralera where others have found success – such and Mata Mora concessions, to increase as at both Mata Mora and Corralera, our participation in these blocks from 27% which sit close to a number of successful to 90% and to assume operatorship. Vaca Muerta producing licences, including Sierras Blancas and Loma Campana. In January 2019, GyP confirmed the award of the Corralera Noroeste licence We have continued the unconventional to the company at a 90% participation completions campaign on our Puesto level with GyP holding the remaining 10% Rojas and neighbouring concessions in non-operated interest. The acquisition relation to the well stock that we drilled of Corralera Noroeste unifies all three in 2017. licences comprising this significant block under the company’s operatorship. In 2018, we successfully completed In November 2018, the company eight unconventional wells designed to evaluate multiple horizons and targets divested its 70% operated interest in in the Puesto Rojas area. In 2019, we eight onshore licences in Colombia. The completed the drilling of the company’s licences carried potentially significant first horizontal wells that are located at licence commitments. The divestiture the Mata Mora concession. allows the company to focus on its core objective of developing the Vaca Muerta shale and other unconventional resources in Argentina. > Total Vaca Muerta and other > Absolute reserve and resources volumes unconventional acreage > Percentage of acreage operated by Phoenix > Year-on-year reserves growth > Migration of resource and reserve categories Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION KEY PERFORMANCE INDICATORS Measuring progress across our business KPIs are used to measure the performance of the company. The performance measures used to assess performance may change over time as the company’s activities develop. LOST-TIME INCIDENT RATE (LTIR) 1 2 YEAR-ON-YEAR GROWTH IN RESERVES AND RESOURCES 3 OPERATING COST PER BOE (US$) PRODUCTION VOLUMES (MMboe) 4 5 EBITDAX (US$M) 6 PERSONAL AND COLLECTIVE PERFORMANCE TARGETS 0.6 2018 2017 96.2% RESERVE REPLACEMENT RATIO -5.8% (excludes depreciation) -7.9% -3.4% Measured based on individual performance. 0.6 2018 1.0 2017 -11.1 96.2 2018 2017 17.66 18.85 2018 2017 3,741 3,961 2018 2017 39.2 40.6 Definition The company measures its safety performance under the Incident Statistics Program issued by the International Association of Drilling Contractors (IADC) that was last updated in 2014. The measure that the company uses is lost-time incident rate (LTIR) that is defined by the IADC as: Number of LTI’s * 200,000 total hours worked The company calculates total hours worked, including contractor hours, on a monthly basis. Lost-time incidents are reported by line managers or supervisors to the HSE manager and are documented. Comment The LTIR fell from 1.0 in 2017 to 0.6 in 2018, demonstrating improved safety performance year-on-year. The improvement in safety performance is notable given the level of physical activity at the field level during the year, including undertaking the seismic survey over La Brea and southern Puesto Rojas, the unconventional completions campaign at Puesto Rojas and drilling activity at Mata Mora. Definition The year-on-year growth in reserves and resources is calculated by reference to reserves statements issued by independent reservoir engineers. The company currently commissions reserve statements annually. In-house engineers also maintain the company’s own estimates of reserve volumes. There are several measures that can be used to assess reserve performance. One measure is to monitor the migration of resources through risked categories into reserves. This demonstrates the physical de-risking of properties as volumes move progressively from technical volumetric resource categories into reserve categories with defined probability of economic production. Another commonly used measure is the reserve replacement ratio that calculates how much of the previous year’s production has been replaced by new reserves and looks to the sustainability of production. Comment Phoenix is in the evaluation stage on much of its unconventional portfolio and is now starting to de-risk acreage. This includes at Corralera where mid-case contingent resources of 126 MMboe have been booked (the first contingent resources booked on the concession). Notwithstanding, the company is in the early stages of de-risking its unconventional acreage and so has measured reserve performance in 2018 by reference to the reserve replacement ratio. The 96.2% replacement ratio demonstrates that substantially all the 2018 production has been replaced by new reserve additions. Definition Operating cost per boe is a measure of production efficiency and is calculated by dividing total cash production costs by the volume of boe produced. Operating costs include both fixed and variable elements, so as production increases, the fixed costs are spread over a larger volume base therefore resulting in a lower unit cost. In addition, process efficiencies, new technologies and optimisation of production infrastructure can also result in cost savings on a per boe produced basis. Comment Our target is to maintain or reduce production costs per boe. There will be instances however where production costs per boe can rise for legitimate reasons. These may include where costs are semi- fixed in nature or in mature areas where the per-unit costs increase as production suffers natural decline and additional workover and other intervention activity is required. In 2018, the operating cost per boe fell by 5.8% despite aging assets in both Cuyana and Austral basins. Definition Definition Definition Production performance is measured by EBITDAX is defined as earnings Personal and collective performance reference to the absolute and percentage before interest, taxation, depreciation, targets are set for employees and groups increase/decrease in boe production amortisation and exploration expense. by line managers. These performance year-on-year. targets are often qualitative in nature and focused on performance individually and collectively and in relation to systems, processes and operations. EBITDAX is used as a proxy for cash generated from operations in measuring performance. EBITDAX is like the EBITDA measure used in non-oil and gas businesses but takes account of exploration cost that is often high value and can also be treated differently between companies. Removing the exploration cost looks to the cash generating capability of the underlying operations. Comment Comment Comment The generation of cash from operations Key aspects of personal performance supports the company’s debt capacity targets in 2018 included the permitting for development, provides funds for re-investment and, ultimately, shareholder return. of unconventional projects in Mendoza province, the execution of the completions campaign at Puesto Rojas and the drilling of the first horizontal well at Mata EBITDAX performance was largely Mora. Administrative targets related to flat year-on-year with US$39.2 million the enhancement of systems and the generated in 2018 compared with improvement of the control environment US$40.6 million in 2017. and IT infrastructure for the group. The company generates its revenue and hence cash from operations from sales of oil and gas production volumes. Production growth over time is fundamental to the financial performance of the group and shareholder return. Production was lower in 2018 compared with 2017 on both a gross production basis and a boepd basis. This was largely due to the production decline as a result of natural decline not being offset by new production as a result of the delays experienced in the unconventional completions campaign at Puesto Rojas and the focus on appraisal projects in the year. Read more on pages 51–53 Read more on pages 14–16 Read more on pages 38–41 Read more on pages 28–37 Read more on pages 38–41 26 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT LOST-TIME INCIDENT RATE (LTIR) 1 2 YEAR-ON-YEAR GROWTH IN RESERVES AND RESOURCES 3 OPERATING COST PER BOE (US$) PRODUCTION VOLUMES (MMboe) 4 5 EBITDAX (US$M) 6 PERSONAL AND COLLECTIVE PERFORMANCE TARGETS 0.6 2018 2017 96.2% RESERVE REPLACEMENT RATIO -5.8% (excludes depreciation) -7.9% -3.4% Measured based on individual performance. 0.6 2018 1.0 2017 -11.1 96.2 2018 2017 17.66 18.85 2018 2017 3,741 3,961 2018 2017 39.2 40.6 Definition Definition Definition The company measures its safety performance under the Incident Statistics Program issued by the International Association of Drilling Contractors (IADC) that was last updated in 2014. The measure that the company uses is lost-time incident rate (LTIR) that is defined by the IADC as: Number of LTI’s * 200,000 total hours worked The company calculates total hours worked, including contractor hours, on a monthly basis. Lost-time incidents are reported by line managers or supervisors to the HSE manager and are documented. The year-on-year growth in reserves and resources is calculated by reference to reserves statements issued by independent reservoir engineers. The company currently commissions reserve statements annually. In-house engineers also maintain the company’s own estimates of reserve volumes. There are several measures that can be used to assess reserve performance. One measure is to monitor the migration of resources through risked categories into reserves. This demonstrates the physical de-risking of properties as volumes move progressively from Operating cost per boe is a measure of production efficiency and is calculated by dividing total cash production costs by the volume of boe produced. Operating costs include both fixed and variable elements, so as production increases, the fixed costs are spread over a larger volume base therefore resulting in a lower unit cost. In addition, process efficiencies, new technologies and optimisation of production infrastructure can also result in cost savings on a per boe technical volumetric resource categories produced basis. into reserve categories with defined probability of economic production. Another commonly used measure is the reserve replacement ratio that calculates how much of the previous year’s production has been replaced by new reserves and looks to the sustainability of production. Definition Production performance is measured by reference to the absolute and percentage increase/decrease in boe production year-on-year. Definition Personal and collective performance targets are set for employees and groups by line managers. These performance targets are often qualitative in nature and focused on performance individually and collectively and in relation to systems, processes and operations. Definition EBITDAX is defined as earnings before interest, taxation, depreciation, amortisation and exploration expense. EBITDAX is used as a proxy for cash generated from operations in measuring performance. EBITDAX is like the EBITDA measure used in non-oil and gas businesses but takes account of exploration cost that is often high value and can also be treated differently between companies. Removing the exploration cost looks to the cash generating capability of the underlying operations. Comment Comment Comment The LTIR fell from 1.0 in 2017 to 0.6 in Phoenix is in the evaluation stage on much Our target is to maintain or reduce 2018, demonstrating improved safety of its unconventional portfolio and is now production costs per boe. There will be performance year-on-year. starting to de-risk acreage. This includes instances however where production costs at Corralera where mid-case contingent per boe can rise for legitimate reasons. The improvement in safety performance resources of 126 MMboe have been These may include where costs are semi- is notable given the level of physical booked (the first contingent resources fixed in nature or in mature areas where activity at the field level during the year, booked on the concession). including undertaking the seismic survey the per-unit costs increase as production suffers natural decline and additional over La Brea and southern Puesto Rojas, Notwithstanding, the company is in the workover and other intervention activity the unconventional completions campaign early stages of de-risking its unconventional is required. at Puesto Rojas and drilling activity at acreage and so has measured reserve Mata Mora. performance in 2018 by reference to the In 2018, the operating cost per boe fell by reserve replacement ratio. The 96.2% 5.8% despite aging assets in both Cuyana replacement ratio demonstrates that and Austral basins. substantially all the 2018 production has been replaced by new reserve additions. Comment The company generates its revenue and hence cash from operations from sales of oil and gas production volumes. Production growth over time is fundamental to the financial performance of the group and shareholder return. Production was lower in 2018 compared with 2017 on both a gross production basis and a boepd basis. This was largely due to the production decline as a result of natural decline not being offset by new production as a result of the delays experienced in the unconventional completions campaign at Puesto Rojas and the focus on appraisal projects in the year. Comment The generation of cash from operations supports the company’s debt capacity for development, provides funds for re-investment and, ultimately, shareholder return. EBITDAX performance was largely flat year-on-year with US$39.2 million generated in 2018 compared with US$40.6 million in 2017. Comment Key aspects of personal performance targets in 2018 included the permitting of unconventional projects in Mendoza province, the execution of the completions campaign at Puesto Rojas and the drilling of the first horizontal well at Mata Mora. Administrative targets related to the enhancement of systems and the improvement of the control environment and IT infrastructure for the group. Read more on pages 51–53 Read more on pages 14–16 Read more on pages 38–41 Read more on pages 28–37 Read more on pages 38–41 27 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION OPERATING REVIEW Appraisal focused on the key Puesto Rojas and Mata Mora concessions in preparation for development Javier Vallesi Chief operating officer 28 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTN E U Q U I N A BA S I N N O R T H N E U Q U I N A B A S I N La Paloma Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 8,572 869,470 603,660 34,723 5,062 4,471 Vega Grande Rio Atuel Cerro Alquitran Cerro Mollar Oeste La Brea Malargue Loma Cortaderal- Co Dona Juaña El Manzano Oeste Puesto Rojas Cerro Mollar Norte Cajon de los Caballos Key Basin boundary Phoenix area Production area Production Average daily production from the Neuquina basin was 591 boepd or 11.7% lower in 2018 compared with 2017. The overall decline in average daily production was primarily due to losses at Puesto Rojas of 743 boepd offset by gains at Chachahuen of 343 boepd. The losses at Puesto Rojas were due to a combination of natural decline from conventional wells together with the impact of downtime as production wells were taken offline while hydraulic fracturing operations were carried out nearby as part of the eight-well unconventional completions campaign undertaken in H2 2018. Business development activity In April 2018, the company entered three joint venture agreements with GyP, the Neuquén province oil and gas company, related to Corralera and Mata Mora. These agreements formalised the participation of the company in the Mata Mora, Corralera Sur and Corralera Noreste licences that were previously held under memoranda of understanding. In addition to formalising the arrangements, the company’s working interest was increased from 27% to 90% with Phoenix as operator. Agreement was also reached with Integra Oil & Gas S.A. related to the relinquishment of its non-participating interest in the licences. The company also submitted bids on four additional blocks as part of the Q1 2018 Neuquén province bid round. These bids were successful and licences for La Tropilla I, Aguada de Castro I & II and Santo Domingo I were awarded in April 2018. La Tropilla is proximate to unconventional activity being undertaken by Vista and Equinor on offset blocks. The Aguada de Castro and Santo Domingo licences represent a closely grouped series of licences with unconventional exposure. Commitments associated with these licences are modest and mainly comprise seismic reprocessing and other geological and geophysical work on the completion of which the results will be assessed and, pending that assessment, evaluation wells may be drilled on the acreage. The company is operator of each of the four additional licences obtained in the bid round and participates at a 90% working interest level in all the licences with GyP as 10% partner. In Q2 2018, the company participated in the Mendoza province bid round where it was successful in obtaining the Loma Cortaderal-Cerra Dona Juaña concession. The company holds a 100% working interest in the licence and is the operator. In Q3 2018 and as part of the Neuquén province open bid round, the company submitted a bid for the Corralera Noroeste licence which is the third of the three licences comprising the Corralera block. The company was successful in its bid and the licence was awarded by GyP in January 2019, pending ratification by the governor of Neuquén province. This award unifies the three licences comprising Corralera with Phoenix as operator and holding a 90% working interest. The remaining 10% interest in each of the licences is held by GyP. 29 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOPERATING REVIEW CONTINUED N E U Q U I N A B A S I N : P U E S T O R OJA S A R E A Licence Operator Puesto Rojas Cerro Mollar Norte Cerro Mollar Oeste Phoenix Phoenix Phoenix Production/exploration Production Production Production Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry 100 100 100 46,038 1,186 26,781 2,488 1,744 23 20,234 105 91 3 152 107 88 4 253 Jan-27 Jul-22 Jul-27 Production Production from Puesto Rojas fell 28.8% in the period with 2018 average daily production at 1,923 boepd compared with 2,700 boepd in 2017. The decrease in production year-on-year was primarily due to natural decline on existing production wells that was not offset by production from new wells. This was largely due to the suspension of completion activities by the company in the first half of the year as Mendoza province undertook the process of developing and implementing new unconventional regulations and associated permitting processes. In addition, certain production wells were temporarily taken offline in the second half of 2018 where unconventional completions were being performed on neighbouring wells. The wells were returned to production on conclusion of the completions activity. Drilling and completion activity The company’s focus in 2018 was on the unconventional completions campaign at Puesto Rojas. In March 2018, the Mendoza province issued its unconventional oil and gas regulations, providing the framework for unconventional activity in the province. Two additional wells, CDM-3007 and CDM-3023, were drilled in H1 2018 ahead of the completions campaign that was undertaken in the second half of the year. A comprehensive suite of logging data and core wall samples was obtained during the drilling of these wells. This information was analysed using external specialists to help to determine the optimum completions methodology for the various unconventional horizons. This analysis is important given the stacked nature of the plays in the Puesto Rojas area that gives multiple potential development opportunities. In August 2018, the company secured the necessary unconventional permits from Mendoza province to allow the unconventional completion of wells already drilled and to undertake further drilling at the Puesto Rojas area. A total of eight wells were completed in the second half of 2018, comprising four new wells and four wells from previous campaigns. All eight wells are currently on test and are producing. Three of the completed wells are testing the full interval from the base of the Vaca Muerta formation through the shallower tight Agrio formation. The five remaining completions were aimed at productive intervals in the tight Agrio and selective testing in the tight Agrio and Vaca Muerta sections. 30 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTThe four new wells completed in the period are all located at the Cerro del Medio concession. The initial performance of these completions is summarised as follows: CDM-3001 flowed back the tight Agrio, organic Agrio, and organic Chachao sections comingled at a rate of 92 bopd and as of 2 January 2019 was flowing back Vaca Muerta stages in the well. CDM-3007 flowed back the tight Agrio, organic Agrio, and organic Chachao sections comingled at a peak rate of 84 bopd. As of 8 December 2018, the well was flowing back Vaca Muerta stages at a peak rate of 96 bopd. This well also has behind-pipe potential in the folded Agrio section which will be completed later. CDM-3023 flowed back the folded Agrio and tight Agrio sections together with a peak rate of 351 bopd. The well has been flowing back Vaca Muerta stages since 8 November 2018 with a peak rate of 153 bopd. During the Vaca Muerta flowback, the Agrio stages were allowed to continue producing up the annulus and have continued to flow naturally at over 350 bopd. CDM-3012 is currently testing the Vaca Muerta formation and has achieved a peak rate to date during pumping operations of 88 bopd. It is likely that the rate will continue to increase as pump rate is increased and water cut decreases. ClCh.x-2001 was a more selective test of tight Agrio and Vaca Muerta stages. The Vaca Muerta stages produced at a peak rate of 30 bopd. On 16 September 2018, the Agrio stages were put online and reached a peak rate of 37 bopd. Based on the very encouraging results of CDM-3023, the folded Agrio has been identified as a target development with vertical unconventional wells. The remaining wells show promise for horizontal development of the formations under test, given that each is flowing from vertical completions at rates in excess of the 40-50 bopd, the approximate economic level for horizontal unconventional development. The older wells completed in the 2018 campaign were located at the Cerro Pencal, Cerro los Choiques and Puesto Rojas fields. The initial performance of these completions is summarised as follows: CP-1013 and CP-1017 were limited tests of tight Agrio stages and flowed back at a peak rate of 25 bopd and 20 bopd respectively. PR-53, an older Chachao well, was completed in the Vaca Muerta section. The well is now currently on test in the Agrio stages, with results pending. Each of these wells provides valuable information related to the formations being tested that will be used to determine the most appropriate drilling and completion methodologies. In April 2018, the company completed the acquisition of 59,000 acres of 3D seismic data across the south of Puesto Rojas and part of La Brea. The completed suite of seismic volumes from the shoot was delivered in October 2018. The seismic volumes are being analysed by the company to appraise the resource potential of the area and to inform future drilling programmes. The company hopes to find structures similar to those that were found and have been developed in the Cerro Pencal area in the northern portion of the Puesto Rojas block. Future appraisal and development activity Up to eight additional unconventional vertical wells are planned for 2019 as part of the initial development of the Puesto Rojas folded Agrio formation. 31 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOPERATING REVIEW CONTINUED S O U T H N E U Q U I N A B A S I N Chachahuen Chihuido de la Sierra Negra La Tropilla I Aguada Federal Bandurrias Sur Cruz de Lorena Key Basin boundary Phoenix area Production area Unconventional areas Laguna el Loro Mata Mora Corralera Noreste Corralera Noroeste Corralera Sur Phoenix Phoenix Phoenix Phoenix Exploration Exploration Exploration Exploration 90 90 90 90 51,956 23,469 24,789 26,234 — — — — — — — — — — — — — — — — Aug-21 Aug-21 TBD Aug-21 Corralera Noreste Corralera Noroeste Corralera Sur Bajo del Toro Aguada de Castro I Aguada Pichana Aguada de Castro II Santo Domingo I Bajada de Añelo Loma Campana Sierras Blancas Mata Mora El Orejano Bandurrias Norte N E U Q U I N A B A S I N : M ATA M O R A A N D CO R R A L E R A Licence Operator Production/exploration Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry 32 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTDrilling and completion activity The primary focus at Mata Mora in the year was on the drilling of the two initial horizontal wells on the licence, which also represented the company’s first ever unconventional horizontal wells. The MM.x-1001 well successfully reached its total depth of 5,259 metres on 2 January 2019 and was subsequently cased and cemented. The well was drilled to a total lateral length of 1,969 metres, with 99.3% of the lateral section successfully drilled within a seven-metre window in the Vaca Muerta and a significant portion of the lateral remaining within a narrower three- metre window. The second horizontal well at Mata Mora, the MM.x-1002 well, was spud in late January 2019 and drilling of the vertical section completed at a depth of approximately 2,400 metres in late February. Drilling of the lateral portion concluded at the end of March 2019 and the well is now awaiting completion together with MMx-1001. Future appraisal and development activity MM.x- 1001 and MM.x- 1002 will be completed in a simultaneous hydraulic fracturing operation. This operation is planned for Q2 2019. The performance of these wells will then be evaluated ahead of drilling further wells in the block. The initial appraisal plan for Corralera contemplates two horizontal wells that will be completed in tandem. The objective of these wells is to move towards the de-risking of the Vaca Muerta and Agrio formations at Corralera. The wells are tentatively planned in the second half of 2019. N E U Q U I N A B A S I N : C H AC H A H U E N Licence Operator Production/exploration Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry Chachahuen YPF S.A. Production 20 130,911 2,005 2,348 287 6,778 Oct-38 Production Chachahuen represents the company’s most significant non-operated production block in terms of activity and production. Average daily production increased by 17.1% compared with 2017 reflecting the contribution of the 92 production wells that came online in 2017. These wells were accretive to production in 2018. Wells drilled in 2018 were also accretive to production albeit at a lower level, with only 59 wells coming online as producers in 2018 as drilling activity reduces in relation to the main production area which is now substantially drilled out. Drilling and completion activity The rate of production drilling at Chachahuen has slowed in 2018 as the main production area is increasingly drilled out. YPF continues to selectively convert certain producing wells to water injectors to improve water-flood performance as well as drilling new water injection wells. Overall recoveries are expected to be greater over time due to improved secondary recovery. This activity is part of the field-wide enhanced recovery efforts and is aimed at improving water- flood conformance that looks at the effectiveness of water injection wells in pushing oil volumes towards producing wells in order to ultimately increase the recovery factor from the area. Future appraisal and development activity In December 2018, the province of Mendoza granted the Cerro Morado Este part of the original Chachahuen concession as a separate exploitation concession. YPF is operator of the concession and is currently drawing up plans to develop the concession over the next several years. Any development decision will require the company’s approval and the company is in discussion with YPF through a regular programme of operating committee meetings to understand the plans, economics of the play and the associated capital requirements, in advance of any capital investment sanction. 33 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOPERATING REVIEW CONTINUED AUS T R A L BA S I N Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 5,625 529,718 – 16,055 3,898 3,960 Puesto Peter Maria Ines Santa Cruz I Block C Campo Bremen La Terraza Moy Aike Oceano Santa Cruz II Block C Palermo Aike Chorrillos Cañadon Alfa Rio Cullen Tierra del Fuego Block A Angostura Tierra del Fuego Block A Las Violetas Key Basin boundary Phoenix area Production area AU S T R A L B A S I N : T I E R R A D E L F U E G O A R E A Licence Operator Las Violetas Angostura Rio Cullen ROCH S.A. ROCH S.A. ROCH S.A. Production/exploration Production Production Production Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry 12.615 12.615 12.615 39,394 13,166 11,453 646 563 53 50 352 3 2,382 24 22 3 Aug-26 Aug-26 Aug-26 34 Average daily working interest production from the Austral basin was largely flat compared to 2017. Increases in production from the Angostura field in Tierra del Fuego were offset by losses from Las Violetas and Chorillos. We continue to work with the operator ROCH S.A. on options to further develop the South Argentina assets and maximise shareholder value. Production Production gains were made at Angostora due to the success of the LFE-1004 well drilled in the Tobifera formation in October 2018. This added to success seen in the same formation from the SM.x- 1002 well that came online in August 2018, adding approximately 1,877 boepd of gross production. Also, during Q3 2018, the newly drilled May.x-1 well was tested at 1,836 Mscfpd (312 boepd). The well is currently awaiting pipeline connection to commence commercial production. ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTAU S T R A L B A S I N : S A N TA C R U Z S U R A R E A Licence Operator Chorrillos Campo Bremen Oceano Moy Aike Palermo Aike ROCH S.A. ROCH S.A. ROCH S.A. ROCH S.A. ROCH S.A. Production/exploration Production Production Production Production Production Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry 70 70 70 70 70 111,540 118,935 19,095 124,653 91,373 2,102 1,999 57 573 538 14 399 389 10 13,673 105 98 11 — — — Apr-26 Apr-26 Aug-26 Apr-26 Aug-26 Production Production decreases at Santa Cruz Sur were driven largely by natural decline in the Chorillos area. Future appraisal and development activity The continued development plans for both Santa Cruz Sur and Tierra del Fuego remain under discussion between Phoenix and the asset operator, ROCH S.A. 35 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOPERATING REVIEW CONTINUED CU YA N A BA S I N Gross km² Phoenix WI acres Operated WI acres 2P reserves Net WI production (boepd) 2017 Net WI production (boepd) 2018 528 83,687 70,964 6,303 Piedras Coloradas 2,136 1,819 Tupungato- Refugio Chañares Herrados Barrancas Ceferino Atamisqui La Ventana Vizcacheras Key Basin boundary Phoenix area Production area S U M M A RY O F O T H E R CO N C E S S I O N S BY B A S I N Licence Operator Cajon del los Caballos Cajon Oriental La Paloma Cerro Alquitrán El Manzano Oeste ROCH S.A. YPF S.A. Phoenix Phoenix Phoenix/YPF S.A. La Brea Malargüe Phoenix YPF S.A. Loma Cortaderal- Rio Atuel Grande Juana Tropilla I Domingo I Castro I Castro II Confluencia San Bernado Deseado Este Vega Cerra Doña La Santa Aguada de Aguada de Sur Rio Phoenix Phoenix Phoenix Phoenix Phoenix Phoenix Phoenix YPF S.A. YPF S.A. ROCH S.A. N E U Q U I N A G O L F O S A N J O R G E Production/exploration Production Exploration Exploration Exploration Production Production Exploration Exploration Production Exploration Exploration Exploration Exploration Exploration Exploration Exploration Production Phoenix WI (%) 37.5 15 Area (WI) 7,449 24,659 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) 2018 activity summary 159 121 15 261 — — — — 100 600 4 1 1 673 100 100 (Agrio) 40 (other) 100 20 66.67 100 100 90 90 90 90 30 30 24.9175 801 26,161 35,259 76,631 164,882 72,602 75,211 11,022 24,944 23,247 18,236 84,646 227,816 19,770 — — — — 59 28 5 289 67 37 3 6,083 3D seismic survey shot and data processed — — — — — — — — 68 12 3 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 8 6 — — —Licence awarded in period— Expiry Sep-2025 Sep-2025 Nov-2040 Nov-2040 Oct-2027 Oct-2027 In process of renegotiation Oct-2019 Dec-2019 Aug-2021 Mar-2022 Mar-2022 Mar-2022 Mar-2022 Jun-2047 Jun-2047 Mar-2021 36 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTC U YA N A B A S I N Licence Operator Production/exploration Phoenix WI (%) Area (WI) 2017 production (net WI) (boepd) 2018 production (net WI) (boepd) Active production wells 2P reserves (Mboe) Expiry Production Average daily working interest production from the Cuyana basin was 15.0% or 318 boepd lower than in 2017 due to the relinquishment of the Puesto Pozo Cercados concession in the prior year that contributed 274 production barrels in 2017. Production from the Cuyana basin licences is largely flat year-on-year with natural decline managed through pulling jobs and other workover activities. The assets produce relatively stable production and contribute positive cash from operations. Future appraisal and development activity In 2018, a single conventional vertical exploration well was drilled at Atamisqui. The well targeted the Rio Blanco formation that had been identified in the 3D seismic survey. Evaluation of the well log and preliminary test data indicated that, while having discovered hydrocarbons and thus being a geologic success, the well is tight and will require fracture stimulation before its commerciality can be determined. Refugio- Tupungato Atamisqui Chanares Herrados Phoenix Phoenix Medanito Production Production Production 100 100 78 6,781 64,184 7,762 1,014 1,002 40 3,246 333 318 15 751 514 499 22 2,306 Jan-26 Sep-25 Nov-27 Given that a fracture stimulation is required to fully evaluate the success or otherwise of the well, it has been treated as a suspended well with the costs carried in the balance sheet until such time as this work can be undertaken. S U M M A RY O F O T H E R CO N C E S S I O N S BY B A S I N Licence Operator Phoenix WI (%) Area (WI) (boepd) (boepd) 2017 production (net WI) 2018 production (net WI) Active production wells 2P reserves (Mboe) 2018 activity summary S.A. (other) 59 28 5 289 — — — — 100 600 4 1 1 673 159 121 15 261 — — — — — — — — 67 37 3 6,083 3D seismic survey shot and data processed renegotiation Cajon del los Caballos Cajon Oriental La Paloma Alquitrán Oeste La Brea Malargüe Cerro El Manzano N E U Q U I N A G O L F O S A N J O R G E Rio Atuel Vega Grande Loma Cortaderal- Cerra Doña Juana La Tropilla I Santa Domingo I Aguada de Castro I Aguada de Castro II Confluencia San Bernado Sur Rio Deseado Este ROCH S.A. YPF S.A. Phoenix Phoenix Phoenix/YPF Phoenix YPF S.A. Phoenix Phoenix Phoenix Phoenix Phoenix Phoenix Phoenix YPF S.A. YPF S.A. ROCH S.A. Production/exploration Production Exploration Exploration Exploration Production Production Exploration Exploration Production Exploration Exploration Exploration Exploration Exploration Exploration Exploration Production 37.5 15 100 100 (Agrio) 40 100 20 66.67 100 100 90 90 90 90 30 30 24.9175 7,449 24,659 801 26,161 35,259 76,631 164,882 72,602 75,211 11,022 24,944 23,247 18,236 84,646 227,816 19,770 — — — — 68 12 3 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 8 6 — — —Licence awarded in period— Expiry Sep-2025 Sep-2025 Nov-2040 Nov-2040 Oct-2027 Oct-2027 In process of Oct-2019 Dec-2019 Aug-2021 Mar-2022 Mar-2022 Mar-2022 Mar-2022 Jun-2047 Jun-2047 Mar-2021 37 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCHIEF FINANCIAL OFFICER’S REVIEW Strategically pacing investment to balance production and reserves growth with the development of infrastructure and deployment of technology Kevin Dennehy Chief financial officer 38 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTFinancial overview Revenue Gross profit Operating loss EBITDAX Loss for the year Net assets Investment in fixed assets Net cash from operations Overview The 2018 financial statements include the performance of the combined group for the full year. The comparative financial information for 2017 presents the performance of Trefoil for the full year with the results and performance of the legacy Andes group consolidated from 10 August 2017, being the date of the combination transaction. Revenue and gross margin Total revenue increased from US$141.8 million in 2017 to US$177.0 million in 2018, driven primarily by revenue from oil sales of US$154.5 million compared to US$117.0 million in the prior year. Revenue from gas sales was US$22.5 million compared to US$24.8 million in 2017. The realised price achieved per barrel of oil was US$59.26 in 2018 compared to US$50.46 in 2017, an increase of US$8.80 per barrel and reflecting the uptick in Brent pricing seen in 2018. The Brent crude benchmark strengthened through the year resulting in an increase in the Argentina domestic price that looks to the Brent benchmark as a reference price. The increase in revenue compared to 2017 that was attributable to the increase in oil prices was US$20.4 million while the increase in volumes of oil sold accounted for US$17.0 million. Total oil sales volume was greater in 2018 than in 2017 due to the inclusion of legacy Andes sales for the full year. On an average boepd basis however, overall sales volumes were marginally lower in 2018 as natural decline from the existing well portfolio was not fully compensated by production from new wells. This was primarily due to the time taken for Mendoza province to establish its unconventional regulations and permitting processes which delayed the unconventional completions campaign at Puesto Rojas to the second half of the year. The primary focus of the completions campaign was to appraise the unconventional potential at Puesto Rojas with production as a by-product rather than the focus. 2018 US$’000 2017 US$’000 177.0 21.3 (34.9) 39.2 (78.3) 336.2 81.4 20.2 141.8 8.4 (275.0) 40.6 (270.1) 282.5 82.8 7.0 Gas revenues were US$2.3 million lower in 2018 at US$22.5 million compared to US$24.8 million in 2017. Substantially all the company’s gas production operations are in the Austral basin where ROCH S.A. is the operator. The fall in revenue from gas sales is caused by a decrease in gas production volumes where natural decline from existing wells was not offset by production from new drilling. Realised prices for gas were marginally higher in 2018 at 4.09/MMcf compared to 4.07/MMcf in the prior year. Netback analysis Netback is the measure of cash proceeds that, after operating costs and taxes, are retained by the company. The highest netback continues to be generated in the Neuquina basin where the company has most of its production and where oil is the main constituent of the production mix. The mature Cuyana basin continues to generate cash from operations and has benefited from the increase in oil prices in the year. Netback in Cuyana is lower than in Neuquina despite better pricing as a result of higher operating costs associated with maintaining later- life production assets. Production in the Austral basin is similarly cash generative though at a lower level both overall and on a per barrel basis. Like Cuyana, this is due to due to higher operating costs as assets mature but Austral also has a greater proportion of lower value gas in the production mix. Operating costs used in the netback calculation comprise cost of sales less depreciation and selling expenses. Operating costs Operating costs were largely consistent year on year at US$17.66/boe in 2018 compared to US$18.85/boe in the preceding year. Operating cost per boe rose marginally in Neuquina basin as conventional wells experienced natural decline. In addition, several production wells proximate to hydraulic fracturing activity were taken offline for operational and safety reasons while that work was undertaken. This had the effect of reducing production resulting in the fixed element of production costs being spread over lower volumes giving higher operating costs on a per boe basis. 39 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCHIEF FINANCIAL OFFICER’S REVIEW CONTINUED 2018 US$/boe Oil revenue (US$/bbl) Gas revenue (US$/MMcf) Gross revenue Royalties and turnover tax Net revenues Operating cost Netback 2017 US$/boe Oil revenue (US$/bbl) Gas revenue (US$/MMcf) Gross revenue Royalties and turnover tax Net revenues Operating cost Netback Neuquina Austral Cuyana Total 58.12 2.47 58.04 (11.46) 46.58 (13.00) 61.73 4.10 36.34 (6.41) 29.93 (16.83) 60.19 – 60.19 (12.04) 48.15 (29.20) 59.26 4.09 50.24 (9.66) 40.58 (17.66) 33.58 13.10 18.95 22.92 Neuquina Austral Cuyana Total 49.76 4.69 49.74 (9.72) 40.02 (11.04) 28.98 51.51 4.07 31.02 (5.04) 25.98 (20.62) 51.36 – 51.36 (10.00) 41.36 (31.05) 50.46 4.07 42.53 (7.89) 34.64 (18.85) 5.36 10.31 15.79 T R O P E R C I G E T A R T S Depreciation in the year was US$15.4 million higher than in 2017 at US$64.7 million for 2018 compared to US$49.3 million in 2017. This was primarily due to the inclusion of a full year’s depreciation charge on the legacy Andes assets in 2018 offset by a slight decline in average daily production volumes. The increase in gross profit from US$8.4 million in 2017 to US$21.3 million in 2018 is mainly due to the impact of the increase in realised oil prices in the year. Other operating costs Other operating costs before impairment charges were US$56.2 million in 2018 compared to US$51.0 million in 2017. Exploration expenses in 2018 primarily relate to the write-off of two unsuccessful exploration wells. Exploration expenses also include costs related to geological and geophysical work that is not specific to a particular asset and was expensed in the period. In Austral basin, costs of US$3.4 million were expensed that related to the company’s share of the unsuccessful Orkeke well drilled by ROCH S.A.. A further US$4.8 million was expensed related to an unsuccessful commitment well at the company’s 100% operated Laguna el Loro concession in the Neuquina basin. The well has satisfied the exploration commitment on the block, however. The decrease in administrative expenses in 2018 compared to 2017 is mainly due to a reduction in professional fees of US$20.6 million compared to 2017 that was offset by increased staff costs of US$5.4 million. The increase in staff costs was due to an increase in headcount resulting from senior appointments made in key technical positions in 2018 together with a full year of costs related to the executive management team. Staff costs in 2018 also include the impact of deal bonuses related to the 2017 combination transaction that were paid in 2018 together with accruals made for normal incentive payments in respect of personal performance in the 2018 calendar year. In 2017, professional fees included approximately US$24.1 million of advisory and other transaction related costs that did not recur in 2018. These costs included technical and professional consulting costs, legal fees and other deal costs related to the combination transaction, of which US$5.5 million was settled in ordinary shares of the company during 2018. Other operating expenses in 2018 include US$7.6 million related to realised hedge losses on the Brent crude swap contract entered in January 2018 that expired in December 2018. Finance income and costs Finance income was US$4.1 million in 2018 compared to US$2.0 million in 2017. Substantially all the increase year-on-year related to exchange gains recognised on Peso denominated borrowings held in Argentina. The Peso weakened significantly against the US Dollar in 2018 reducing the amount payable under these loans in Dollar terms and giving rise to a gain. Finance costs were US$30.7 million in 2018 compared to US$13.7 million in 2017, an increase of US$17.0 million. Of this increase US$3.1 million related to an increase in interest cost on borrowings due to the higher average debt balance during 2018 of US$196.4 million compared to 2017 where the average outstanding debt balance was US$118.8 million. In addition, foreign exchange differences increased by US$10.1 million compared to 2017 and primarily related to exchange losses on Peso related receivable balances. Whilst contracts for oil sales are priced by reference to the US Dollar, they are Other operating costs Exploration expenses Selling and distribution expenses Administrative expenses Other operating expense 40 2018 US$’000 2017 US$’000 9,359 5,758 24,561 16,568 56,246 931 5,036 39,978 5,040 50,985 ANNUAL REPORT AND ACCOUNTS 2018 settled in Peso. The devaluation of the Peso in 2018 resulted in lower collections in Dollar terms from receivables for oil sales. However, it should be noted that Peso collections for sales are used to satisfy in-country Peso related costs with substantially all Peso denominated operating costs satisfied using cash generated from operations at the current level of activity. Taxation In 2018, the company recorded a tax charge of US$16.8 million compared to a credit of US$16.6 million in 2017. The principal reason for the change was related to the devaluation of the Peso in the period. The devaluation significantly reduced the Peso denominated tax- deductible value of fixed assets which, when compared to their carrying value for accounting purposes, gave rise to a deferred tax charge for the period of US$17.0 million. The tax charge also increased due to the non-recognition of deferred tax assets that would have offset tax losses by US$10.9 million. An asset was not recorded for the tax losses because it is not certain that the company will be able to use the tax losses over the period before they expire. Balance sheet Net assets are US$336.2 million at 31 December 2018 compared to US$282.5 million at 31 December 2017, representing an increase of US$53.7 million. This is primarily due to the debt to equity conversion where US$100.0 million of the bridging and working capital facility entered into on completion of the combination transaction was converted to equity at a price of £0.37 per share. In addition, new ordinary shares were issued in the period as a result of the exercise of warrants and giving proceeds of US$4.9 million. Offsetting this was the recognised loss for the year of US$78.3 million. Property plant and equipment increased by US$12.0 million consisting additions of US$80.1 million offset by depreciation of US$64.7 million and the write-off of exploration costs amounting to US$3.4 million. Additions to property, plant and equipment primarily relate to costs associated with the completions campaign at Puesto Rojas, the initial horizontal well at Mata Mora and ongoing drilling investment at Chachahuen. Additions to intangible exploration and evaluation assets in the period totalled US$59.0 million and mainly related to licence acquisition costs from the Neuquén and Mendoza province bid rounds, in addition to the costs associated with securing the company’s rights related to Mata Mora and Corralera and increasing its participation in these areas. Funds advanced under the credit facilities have been used to invest in exploration, evaluation and development work across the company’s core licence areas and to satisfy an element of general corporate costs. At 31 December 2018 the company’s net debt position was US$179.2 million compared to US$168.8 million at 31 December 2017. Working capital Current assets comprise inventories, trade and other receivables and cash. At 31 December 2018 inventories are US$2.9 million higher than the prior year. This is mainly due to drilling inventory on hand related to the horizontal well at Mata Mora where drilling was underway over the period end. Trade and other receivables primarily consist of receivables from the sale of oil and gas whose value fluctuates related to the timing of payments received for invoices over the year end period. Current liabilities mostly comprise trade and other payables for equipment and services. Trade and other payables are US$34.9 million lower at 31 December 2018 compared to the prior year. The trade payable balance at 31 December 2017 included costs for drilling undertaken in the second half of 2017 at Puesto Rojas in preparation for the completions campaign undertaken in 2018, together with approximately US$20.0 million related to cash calls due to YPF at Chachahuen which were repaid during 2018. The other balance sheet movements in the period related to movements in working capital items and borrowings. Financing and liquidity On completion of the combination transaction, Mercuria Energy Trading Group advanced a bridging and working capital facility to the company in the amount of US$160.0 million. In February 2018, US$100.0 million of this facility was converted to equity at a price of £0.37 per share with the remaining US$60.0 million restructured as a new convertible rolling credit facility bearing interest at 4% over three-month LIBOR. As part of the restructuring of the facility, new funds of US$100.0 million were made available to the company. In December 2018, the new convertible rolling credit facility was further amended to include a tranche B element of US$25.0 million. In February 2019, tranche B was extended by a further US$50.0 million. The balance sheet at 31 December 2018 shows net current liabilities of US$50.3 million. In addition, the company has current commitments under its various licence agreements that require it to invest in drilling and other activities. Failure to do so could result in the termination of those licences. Funding status and going concern The company is currently evaluating options for financing its ongoing exploration, evaluation and development activity. Accordingly, the company’s major shareholder, Mercuria Energy Group Limited, has provided the company with a letter of support that states that it will provide sufficient funds for the company to meet its obligations over a period of at least 12 months from the date of this annual report or until such time as the company has secured sufficient financing to fund its planned appraisal activities and meet its other obligations, whichever is sooner. Dividend Given the company’s high growth objectives, the directors do not recommend the payment of a dividend. Kevin Dennehy Chief financial officer 2 May 2019 41 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONRISK REVIEW: RISK MANAGEMENT Managing risk to deliver our operational and commercial goals Managing business risks Understanding our principal risks and ensuring that we have the appropriate controls in place to manage those risks is critical to our growth and success. Managing business risks and opportunities is a key consideration in determining and then delivering against the group’s strategy. The group’s approach to risk management is not intended to eliminate risk entirely, but provides the means to identify, prioritise and manage risks and opportunities. This, in turn, enables the group to effectively deliver on its strategic objectives in line with its appetite for risk. The board’s responsibility for risk management The board has overall responsibility for ensuring the group’s risk management and internal control frameworks are appropriate and are embedded at all levels throughout the organisation. Principal risks are reviewed by the board and are specifically discussed in relation to setting the group strategy, developing the business plan to deliver that strategy and in agreeing annual work programmes and budgets. An enhanced focus on risk management at the board level Several changes have been made to the composition of the board during the year as the company ramps up unconventional activity in its licence areas. Unconventional oil and gas operations represent a fundamentally different discipline to conventional operations. The unconventional industry has developed rapidly over the last decade, driven largely by advancements made in the United States. Technologies, together with drilling and completion techniques, have evolved rapidly as the industry players sought to reduce costs and increase the efficiency of production. While the unconventional sector has transformed the industry and the oil and gas market in a relatively short period of time, it remains a specialist area that, to date, has largely been driven by the independent sector. The sector is being further transformed as the ‘oil majors’ move into the unconventional sector and particularly into prospective basins such as the Neuquina basin in Argentina. Providing robust challenge to management in relation to operating activity requires an understanding of and experience in the sector. Reflecting this, Tim Harrington joined the board in November 2018 bringing significant experience of unconventional oil and gas operations from the United States and providing support and challenge to the executive management team. Group risk management framework T O P D OW N Set strategy Define strategic objectives Determine risk appetite Identify principal risks Risk assessment Deliver strategic objectives B O T T O M U P 42 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTIn addition, Kevin Dennehy joined the board as Chief Financial Officer bringing significant international experience of running finance organisations and implementing and enhancing internal control procedures. With the potential move to the main market in London deferred, Kevin’s experience in internal control and reporting will be important in ensuring the company meets the standards expected of a main market listed company in regard to internal control, reporting and risk management. The role of the audit and risk committee The audit and risk committee assists the board in monitoring risk and in discharging its risk management responsibilities. A number of performance measures are set in order to assist in objectively assessing business performance and risk management. Performance measures are specific and are defined in relation to the business operation or activity to which they relate. Periodic reports provided to management and to the board contain an assessment of these performance measures. Several business performance measures have been established as key performance indicators for the group. Management will measure itself against those key performance indicators when evaluating performance against strategic objectives. Key performance indicators used as performance measures for setting compensation may differ from those presented here. Performance related pay is set based on a number of factors and in collaboration with the remuneration committee before being recommended to the board for approval. Principal risks and uncertainties The principal risks facing the group at the end of 2018 together with a description of the potential impacts, mitigation measures and the appetite for the risk are presented below. The analysis includes an assessment of the potential likelihood of the risks occurring and the potential impact. The directors also consider the evolution of risk year-on-year. Identified risks are segregated between those that we can influence and those outside our control. Where we can influence risks, we have more control over outcomes. Where risks are external to the business, we focus on how we control the consequences of those risks materialising Mapping our principal risks Almost certain Probability Rare Risks we can influence 1 Health, safety and environment 2 Exploration, development and production 3 Reserve and resource estimation and migration of volumes 9 5 4 Portfolio concentration 8 5 Joint venture partners 10 6 7 2 4 3 6 Financing 7 Bribery and corruption Risks outside our control 8 Commodity prices 9 Competition 1 10 Fiscal and political Risk evolution in 2018 Low Impact High 43 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION RISK REVIEW: PRINCIPAL RISKS AND UNCERTAINTIES Risks we can influence Risk appetite Link to strategy Mitigation The group strives to ensure the safety of its employees, contractors and visitors. We are very conscious of the natural environment that we operate in and seek to minimise our environmental impact and footprint. We actively promote strict adherence to regulations that govern our operations and the robust application of our own HSE policies and procedures. There is no reason for anyone associated with our business to take unnecessary risks related to their personal safety, the safety of others or the environment that we are privileged to work in. The group has a very low appetite for risks associated with HSE and strives to achieve a zero-incident rate. The likelihood of incident will increase as our activity increases. The group recognises that the initial development of new unconventional assets is complex and technically challenging. This can expose the group to higher levels of risk, particularly in the early stages of exploration and appraisal and into initial development. The group has some tolerance of this risk and acknowledges the need to have effective controls in place in this area. Control and consolidate Explore and develop Profitable production Realise value Explore and develop Profitable production The growth in absolute reserve volumes and the migration of reserves and resources through the different categorisations is one element of the group’s success. The group has some tolerance of risk in relation to the key activities required to deliver reserve growth, such as drilling and the ability to secure additional acreage. Profitable production Realise value 1 Health, safety and environment (HSE) Oil and gas exploration, development and production activities are complex and physical in nature. HSE risks cover many areas including major accidents, personal health and safety, compliance with regulations and potential environmental harm. Potential impact High Potential likelihood Low 2 Exploration, development and production The ultimate success of the group is based largely on its ability to successfully develop its assets and to produce oil and gas profitably from its unconventional asset base. The ability to develop a consistent, repeatable and cost-efficient method for drilling and completing horizontal wells is core to the successful development of unconventional oil and gas assets. Potential impact Potential likelihood Medium High 3 Reserve and resource estimation and migration of volumes The estimation of oil and gas reserves and resources involves a high level of subjective judgement based on available geological, technical and economic information. Potential impact Potential likelihood Medium High Key to risk change No change Reduced risk Increased risk 44 Relevant KPI by priority/significance 1 Number of reportable HSE incidents The group maintains a programme of HSE, Notwithstanding the increase in activity our lost- asset integrity, upgrade and maintenance time incident rate metric decreased in the year activity. This activity is supported by a core due to the care and attention of our people and group of specifically selected specialist the contractors working with us in applying our contractors. The group has also implemented HSE framework to the operations undertaken. a continual improvement programme focused on its infrastructure and processing assets. The group has an active and continuous HSE training programme for its own staff and The risk of physical injuries or fatalities increases as ensures that contractors are HSE trained on physical operations such as drilling and completion an ongoing basis. The group promotes an open activity increase. In 2018, we completed a seismic and transparent culture related to HSE matters survey covering a wide area on the southern and incident reporting. HSE performance is Puesto Rojas and La Brea concessions. We also communicated to the board through the monthly commenced drilling operations at Mata Mora and operating and financial summary and is also undertook an eight-well completions campaign at discussed at each board meeting. Puesto Rojas. The group understands the importance of We undertook an eight-well completions campaign technology and operational experience in at Puesto Rojas in 2018 and completed drilling developing unconventional resources. Our Houston of the company’s first horizontal well at Mata office also remains the fulcrum for the transfer Mora. The first horizontal well was completed in of technology and experience from the US market, accordance with the drilling plan, with 99.3% of with the objective of accelerating the appraisal the lateral section successfully drilled within a and development of our unconventional assets seven-metre window in the Vaca Muerta formation. Year-on-year growth of reserves and resources by category Production volume Project delivery/ defined milestones in Argentina. In March 2018, we added a senior drilling engineer to that team to augment the skills we already had in subsurface evaluation. The second horizontal well was spud at Mata Mora in January 2019, with drilling completed in February. The completions campaign for both wells was successful and has provided the information and data that was the objective of the campaign. The wells are due to be completed in a simultaneous hydraulic fracture in Q2 2019. Our ability to execute drilling and completions campaigns according to plan reduces the risk associated with exploration and development activity. Reserve and resource volumes are estimated The reserve and resource analysis performed is using the Petroleum Reservoir Management subject to internal review and, where appropriate, System developed by the Society of Petroleum external review. External review is undertaken by Engineers. The group has a strong focus on an internationally recognised reservoir engineering subsurface analysis and employs industry firm and led within that firm by a nominated technical specialists and qualified reservoir competent person. engineers. Technical specialists work together with the operational teams responsible for delivering asset performance to estimate reserve and resource volumes and when determining detailed development programmes for the group’s assets. The group participates in licensing rounds in Argentina that are organised at the provincial level. In addition, Phoenix has an internal business development group that is focused on optimising existing acreage positions through purchase, swap or sale of assets. Year-on-year growth of reserves and resources by category Operating cost per boe Project delivery/ defined milestones 2 4 6 2 3 6 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT Risks we can influence Risk appetite Link to strategy Mitigation 1 Health, safety and environment (HSE) Oil and gas exploration, development and The group strives to ensure the safety of its employees, contractors and visitors. We are very conscious of the natural environment that we operate in and seek to minimise our environmental impact and footprint. We actively promote strict production activities are complex and physical adherence to regulations that govern our operations in nature. HSE risks cover many areas including and the robust application of our own HSE policies major accidents, personal health and safety, and procedures. There is no reason for anyone compliance with regulations and potential environmental harm. Potential impact High Potential likelihood Low associated with our business to take unnecessary risks related to their personal safety, the safety of others or the environment that we are privileged to work in. The group has a very low appetite for risks associated with HSE and strives to achieve a zero-incident rate. The likelihood of incident will increase as our activity increases. 2 Exploration, development and production The group recognises that the initial development of new unconventional assets is complex and technically challenging. This can expose the group to higher levels of risk, particularly in the early The ultimate success of the group is based stages of exploration and appraisal and into initial largely on its ability to successfully develop its development. The group has some tolerance of this assets and to produce oil and gas profitably risk and acknowledges the need to have effective from its unconventional asset base. controls in place in this area. Control and consolidate Explore and develop Profitable production Realise value Explore and develop Profitable production The ability to develop a consistent, repeatable and cost-efficient method for drilling and completing horizontal wells is core to the successful development of unconventional oil and gas assets. Potential impact High Potential likelihood Medium 3 Reserve and resource estimation and migration of volumes The estimation of oil and gas reserves and resources involves a high level of subjective judgement based on available geological, technical and economic information. Potential impact High Potential likelihood Medium The growth in absolute reserve volumes and the migration of reserves and resources through the different categorisations is one element of the group’s success. The group has some tolerance of risk in relation to the key activities required to deliver reserve growth, such as drilling and the ability to secure additional acreage. Profitable production Realise value The group maintains a programme of HSE, asset integrity, upgrade and maintenance activity. This activity is supported by a core group of specifically selected specialist contractors. The group has also implemented a continual improvement programme focused on its infrastructure and processing assets. The risk of physical injuries or fatalities increases as physical operations such as drilling and completion activity increase. In 2018, we completed a seismic survey covering a wide area on the southern Puesto Rojas and La Brea concessions. We also commenced drilling operations at Mata Mora and undertook an eight-well completions campaign at Puesto Rojas. Notwithstanding the increase in activity our lost- time incident rate metric decreased in the year due to the care and attention of our people and the contractors working with us in applying our HSE framework to the operations undertaken. The group has an active and continuous HSE training programme for its own staff and ensures that contractors are HSE trained on an ongoing basis. The group promotes an open and transparent culture related to HSE matters and incident reporting. HSE performance is communicated to the board through the monthly operating and financial summary and is also discussed at each board meeting. The group understands the importance of technology and operational experience in developing unconventional resources. Our Houston office also remains the fulcrum for the transfer of technology and experience from the US market, with the objective of accelerating the appraisal and development of our unconventional assets in Argentina. In March 2018, we added a senior drilling engineer to that team to augment the skills we already had in subsurface evaluation. We undertook an eight-well completions campaign at Puesto Rojas in 2018 and completed drilling of the company’s first horizontal well at Mata Mora. The first horizontal well was completed in accordance with the drilling plan, with 99.3% of the lateral section successfully drilled within a seven-metre window in the Vaca Muerta formation. The second horizontal well was spud at Mata Mora in January 2019, with drilling completed in February. The completions campaign for both wells was successful and has provided the information and data that was the objective of the campaign. The wells are due to be completed in a simultaneous hydraulic fracture in Q2 2019. Our ability to execute drilling and completions campaigns according to plan reduces the risk associated with exploration and development activity. Reserve and resource volumes are estimated using the Petroleum Reservoir Management System developed by the Society of Petroleum Engineers. The group has a strong focus on subsurface analysis and employs industry technical specialists and qualified reservoir engineers. Technical specialists work together with the operational teams responsible for delivering asset performance to estimate reserve and resource volumes and when determining detailed development programmes for the group’s assets. The reserve and resource analysis performed is subject to internal review and, where appropriate, external review. External review is undertaken by an internationally recognised reservoir engineering firm and led within that firm by a nominated competent person. The group participates in licensing rounds in Argentina that are organised at the provincial level. In addition, Phoenix has an internal business development group that is focused on optimising existing acreage positions through purchase, swap or sale of assets. Relevant KPI by priority/significance 1 Number of reportable HSE incidents 2 4 6 2 3 6 Year-on-year growth of reserves and resources by category Production volume Project delivery/ defined milestones Year-on-year growth of reserves and resources by category Operating cost per boe Project delivery/ defined milestones Key to our KPIs 1 Number of reportable HSE incidents 2 Year-on-year growth of reserves and resources by category 3 Operating cost per boe 4 Production volume increase/decrease 5 EBITDAX — earnings before interest, taxation, depreciation, amortisation and exploration expense 6 Personal/group project delivery and milestone targets Read more about our strategy and KPIs on pages 24 to 27 45 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION RISK REVIEW: PRINCIPAL RISKS AND UNCERTAINTIES RISK REVIEW: PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED CONTINUED Risks we can influence Risk appetite Link to strategy Mitigation Relevant KPI by priority/significance 4 Portfolio concentration The group’s assets are concentrated in Argentina. Existing production is principally from conventional assets with the main exploration and development opportunities in unconventional assets. This places emphasis on the group’s ability to successfully develop its unconventional resources, with the main long-term growth opportunity being in the exploration for and development of our unconventional oil and gas resources. Potential impact Potential likelihood Medium High The group as it exists now was formed with the specific objective of exploiting its early entrant position in the Argentina unconventional sector. This position is derived from licence areas where the focus has historically been on conventional production, but where the unconventional opportunities are substantial. Argentina has the largest producing shale oil and gas resources outside of the US and is open to inward investment. The strategic focus of the group and the positive investment climate in Argentina means the group has a high appetite for this risk. We accept this risk as our strategy is Argentina focused. We diversify in terms of basin, multiple licences and areas within each basin, and also in terms of production objective. 5 Joint venture partners The inability of joint venture partners to fund their obligations can impact the group’s operations. The group’s dependence on others is increased where it is not the operator. Potential impact Potential likelihood Low Medium In certain of its operations, the group has joint venture partners, acting as either operator or non-operators. The group requires high quality partners. It recognises that it must accept a degree of exposure to the creditworthiness of its partners and evaluates this aspect carefully as part of each investment decision. Where we are not the operator, we have less influence on the rate of capital expenditure for development. 6 Financing The inability to fund financial commitments, including licence obligations, could significantly delay the development of the group’s assets. Financial or operational commitments are often a pre-condition to the grant of a licence. The group’s inability to satisfy these could result in financial penalty and/or termination of such licence. Potential impact Potential likelihood Medium High 7 Bribery and corruption Risk that third parties or staff could be encouraged to become involved in corrupt practices. Potential impact Potential likelihood Medium High The development of unconventional oil and gas assets is capital intensive and production returns from new development activity are not immediate. The group has used both debt and equity to fund the development of its assets and benefited from the support of its major shareholder in doing so. The global oil and gas industry, in common with other extractive industries, has a higher than average risk of bribery and corruption. Argentina has historically had a medium to high perceived risk of bribery and corruption. The current government is focused on tackling corruption and enacted new anti-corruption legislation in 2017. We have zero-tolerance of bribery and corruption that is set by the board and communicated clearly to all employees. Control and consolidate Explore and develop Profitable production Realise value Realise value Explore and develop Profitable production Realise value Explore and develop Profitable production Realise value The licensing and regulation of oil and gas In addition, the group has also secured its rights in Argentina is governed at the provincial to a 90% operated interest in the Mata Mora and level. Whilst the group is exposed to macro- Corralera concessions during the year. n/a The group participates in industry groups and initiatives in Argentina and maintains open communication with the provincial governments and key stakeholders, including labour unions. economic and fiscal risk at the country level, its asset and regulatory risk is distributed among a number of provinces. The group’s unconventional assets are principally in the Mendoza and Neuquén provinces. In 2018, the company has been successful in securing additional unconventional licences in the provincial bid rounds. The group selectively bids on acreage that is proximate to or on trend with our existing prospective acreage. The group’s primary joint venture partner in its The group maintains regular dialogue with its conventional oil operations is YPF, the Argentina partners to anticipate and react to potential state-owned oil and gas company. YPF is well operational or financial issues. capitalised and has a strategic objective on behalf of the government to develop the industry in Argentina. In 2018, the group undertook a number of reviews of operators’ systems and processes, exercising it’s joint venture audit rights contained in the joint The group has a non-operated interest in gas agreements that govern the joint ventures. licences in the Austral basin where it partners with ROCH S.A., which also fulfils the role of operator. Phoenix has the option to take over operatorship of Santa Cruz Sur at its election. The information sharing process has been improved in the year with regular OCMs taking place and enhancements made to financial and operating information shared between partners. In February 2018, the revolving credit facility Further details on the group’s funding provided by Mercuria on completion of the 2017 arrangements are included in note 23 combination transaction was refinanced with to the financial statements. US$100 million of the original facility converted into share capital of the group and an additional US$100 million committed which, together with US$60 million of the original facility, comprises a new convertible revolving credit facility. As the group moves towards the development of the Puesto Rojas folded Agrio and the Vaca Muerta formation at Mata Mora, the capital requirements of the group will increase substantially. The group expects to secure suitable The facility has subsequently been amended funding either through existing arrangements, to include a Tranche B under which a further farm-in at the asset level or through the issuance US$75 million has been advanced to the of equity to fund its development plans. The company to fund evaluation activities. inability to secure funding could significantly impact the valuation of the group. The group has an established anti-bribery and pursued a zero-tolerance approach to corruption corruption policy that requires all new hires to that had resulted in the arrest and imprisonment confirm that they have read and understood of senior figures within the government and the contents and personal requirements of the previous administrations. policy. The group ensures that our third-party contractors and advisers follow our procedure and policy. This increase in profile of the zero-tolerance policy at the government level together with the increase in the number of prosecutions has drawn In 2018 and as a result of several high profile attention to the issue of corruption in Argentina corruption cases at the national and provincial and raised awareness of the implication of being government level, the Macri administration has found guilty of such behaviour. 2 3 4 5 3 4 5 n/a Year-on-year growth of reserves and resources by category Operating cost per boe Production volume EBITDAX Operating cost per boe Production volume EBITDAX Key – change in risk No change Reduced risk Increased risk 46 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT Risks we can influence Risk appetite Link to strategy Mitigation Relevant KPI by priority/significance 4 Portfolio concentration The group’s assets are concentrated in Argentina. Existing production is principally from conventional assets with the main exploration and development opportunities in unconventional assets. This places emphasis on the group’s ability to successfully develop its unconventional resources, with the main long-term growth opportunity being in the exploration for and development of our unconventional oil and gas resources. Potential impact High Potential likelihood Medium The group as it exists now was formed with the specific objective of exploiting its early entrant position in the Argentina unconventional sector. This position is derived from licence areas where the focus has historically been on conventional production, but where the unconventional opportunities are substantial. Argentina has the largest producing shale oil and gas resources outside of the US and is open to inward investment. The strategic focus of the group and the positive investment climate in Argentina means the group has a high appetite for this risk. We accept this risk as our strategy is Argentina focused. We diversify in terms of basin, multiple licences and areas within each basin, and also in terms of production objective. 5 Joint venture partners The inability of joint venture partners to fund their obligations can impact the group’s operations. The group’s dependence on others is increased where it is not the operator. Potential impact Medium Potential likelihood Low In certain of its operations, the group has joint venture partners, acting as either operator or non-operators. The group requires high quality partners. It recognises that it must accept a degree of exposure to the creditworthiness of its partners and evaluates this aspect carefully as part of each investment decision. Where we are not the operator, we have less influence on the rate of capital expenditure for development. 6 Financing The inability to fund financial commitments, including licence obligations, could significantly delay the development of the group’s assets. Financial or operational commitments are often a pre-condition to the grant of a licence. The group’s inability to satisfy these could result in financial penalty and/or termination of such licence. Potential impact High Potential likelihood Medium 7 Bribery and corruption Risk that third parties or staff could be encouraged to become involved in corrupt practices. Potential impact High Potential likelihood Medium The development of unconventional oil and gas assets is capital intensive and production returns from new development activity are not immediate. The group has used both debt and equity to fund the development of its assets and benefited from the support of its major shareholder in doing so. The global oil and gas industry, in common with other extractive industries, has a higher than average risk of bribery and corruption. Argentina has historically had a medium to high perceived risk of bribery and corruption. The current government is focused on tackling corruption and enacted new anti-corruption legislation in 2017. We have zero-tolerance of bribery and corruption that is set by the board and communicated clearly to all employees. Control and consolidate Explore and develop Profitable production Realise value Realise value Explore and develop Profitable production Realise value Explore and develop Profitable production Realise value The licensing and regulation of oil and gas in Argentina is governed at the provincial level. Whilst the group is exposed to macro- economic and fiscal risk at the country level, its asset and regulatory risk is distributed among a number of provinces. The group’s unconventional assets are principally in the Mendoza and Neuquén provinces. In 2018, the company has been successful in securing additional unconventional licences in the provincial bid rounds. The group selectively bids on acreage that is proximate to or on trend with our existing prospective acreage. In addition, the group has also secured its rights to a 90% operated interest in the Mata Mora and Corralera concessions during the year. n/a The group participates in industry groups and initiatives in Argentina and maintains open communication with the provincial governments and key stakeholders, including labour unions. The group’s primary joint venture partner in its conventional oil operations is YPF, the Argentina state-owned oil and gas company. YPF is well capitalised and has a strategic objective on behalf of the government to develop the industry in Argentina. The group has a non-operated interest in gas licences in the Austral basin where it partners with ROCH S.A., which also fulfils the role of operator. Phoenix has the option to take over operatorship of Santa Cruz Sur at its election. The group maintains regular dialogue with its partners to anticipate and react to potential operational or financial issues. In 2018, the group undertook a number of reviews of operators’ systems and processes, exercising it’s joint venture audit rights contained in the joint agreements that govern the joint ventures. The information sharing process has been improved in the year with regular OCMs taking place and enhancements made to financial and operating information shared between partners. In February 2018, the revolving credit facility provided by Mercuria on completion of the 2017 combination transaction was refinanced with US$100 million of the original facility converted into share capital of the group and an additional US$100 million committed which, together with US$60 million of the original facility, comprises a new convertible revolving credit facility. The facility has subsequently been amended to include a Tranche B under which a further US$75 million has been advanced to the company to fund evaluation activities. Further details on the group’s funding arrangements are included in note 23 to the financial statements. As the group moves towards the development of the Puesto Rojas folded Agrio and the Vaca Muerta formation at Mata Mora, the capital requirements of the group will increase substantially. The group expects to secure suitable funding either through existing arrangements, farm-in at the asset level or through the issuance of equity to fund its development plans. The inability to secure funding could significantly impact the valuation of the group. 2 3 4 5 Year-on-year growth of reserves and resources by category Operating cost per boe Production volume EBITDAX 3 4 5 Operating cost per boe Production volume EBITDAX The group has an established anti-bribery and corruption policy that requires all new hires to confirm that they have read and understood the contents and personal requirements of the policy. The group ensures that our third-party contractors and advisers follow our procedure and policy. In 2018 and as a result of several high profile corruption cases at the national and provincial government level, the Macri administration has pursued a zero-tolerance approach to corruption that had resulted in the arrest and imprisonment of senior figures within the government and previous administrations. This increase in profile of the zero-tolerance policy at the government level together with the increase in the number of prosecutions has drawn attention to the issue of corruption in Argentina and raised awareness of the implication of being found guilty of such behaviour. n/a Key to our KPIs 1 Number of reportable HSE incidents 2 Year-on-year growth of reserves and resources by category 3 Operating cost per boe 4 Production volume increase/decrease 5 EBITDAX — earnings before interest, taxation, depreciation, amortisation and exploration expense 6 Personal/group project delivery and milestone targets 47 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION Relevant KPI by priority/significance 5 EBITDAX RISK REVIEW: PRINCIPAL RISKS AND UNCERTAINTIES RISK REVIEW: PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED CONTINUED Risks we cannot influence Risk appetite Link to strategy Mitigation Argentina moved away from regulated While the price caps expired at the end of July pricing and towards market-based pricing for 2018, their use has brought some uncertainty to commodities in late 2017. Contracts for crude the market. In addition the zero-deficit budget moved to a Brent-minus basis in early 2018, for 2019 required, as a condition for the IMF with the discount applied relating to quality advancing a standby loan package, a 10% export and location differentials. The group monitors oil price sensitivity relative to its capital commitments and in January 2018 implemented a policy that allows hedging. The tax to be introduced in 2019. This tax applies to all exports, including oil, and has resulted in a further discount being applied to domestic crude prices based on export-parity. group hedged approximately 1.2 million barrels These two interventions by the government for 2018 through a swap contract that was in 2018 have broken the confidence in the priced at US$65.97 per barrel. relationship between domestic crude prices and In May 2018 and in response to rising Brent crude prices, the government introduced price caps on crude sales which impacted May, June and July deliveries. This was done in an attempt to mitigate the impact of rising Brent prices on Brent and have reduced our hedging options for Argentina crude production to the selling of dated put contracts. Due to the volatility in the market however such contracts carry significant premiums. the end consumer of refined products. Until there is more clarity on Brent-minus pricing, the board has elected not to enter any further hedging relationships. n/a Control and consolidate Explore and develop Profitable production Realise value Control and consolidate Explore and develop Control and consolidate The group employs appropriately qualified Fiscal and political risk will be heightened in 2019 and experienced staff across all disciplines following a turbulent year for Argentina’s economy (operational, commercial and administrative) in 2018 and the upcoming presidential and in Argentina and works with reputable and gubernatorial elections in November 2019. n/a The group has a substantial acreage position with a focus on operatorship of its key assets. Key assets are characterised as assets where the group holds multiple contiguous licences that provide exposure to unconventional prospects and those that are proximate to existing successful unconventional development assets and areas. The group maintains good relations with oil and gas service providers that have unconventional expertise and crews based in Argentina. The group constantly keeps the market under review. high quality advisors in order to anticipate and comply with changes in the legislative or fiscal environment. We participate in appropriate industry groups and maintain dialogue with national and provincial government. 8 Commodity prices A material decline in oil and gas prices adversely affects the group’s operations and financial position. Potential impact High Potential likelihood High Considerable exposure to commodity price risk is inherent in the business. We will seek to mitigate this risk through hedging where appropriate, particularly when doing so provides firm support for near-term capital expenditure budgets. 9 Competition The group operates in a competitive environment. Competition exists in relation to the acquisition of acreage, securing oil and gas services and attracting the right talent and experience to the group. Potential impact Medium Potential likelihood Medium 10 Fiscal and political Argentina has a history of political instability and economic uncertainty that has been characterised by high inflation and significant currency devaluation. Potential impact Potential likelihood Medium High The unconventional oil and gas industry in Argentina has emerged rapidly, with significant investment commitments being made by a number of major international oil companies and national oil companies. In the US, the unconventional oil and gas industry developed quickly over a relatively short space of time driven by continual innovation and technical developments that provided the cost efficiencies required for economic production. The relatively early stage of the unconventional oil and gas industry in Argentina and the opportunity to establish the group as a leading operator translates to a high appetite for this risk. We cannot influence demand by others but can ensure we have the right relationships with suppliers and contractors. In December 2015, the current administration was elected into government. This has resulted in a significant and marked shift in policy direction that is now firmly pro-business and pro-investment. The reintegration of Argentina into the international community is central to the current political agenda. The government has made many changes in the past two years, including fiscal, tax, capital markets and labour reforms. Given the nature and location of its operations, this country specific risk is intrinsic to the group. Key – change in risk No change Reduced risk Increased risk 48 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORT 8 Commodity prices A material decline in oil and gas prices adversely affects the group’s operations and financial position. Potential impact High Potential likelihood High Considerable exposure to commodity price risk is inherent in the business. We will seek to mitigate this risk through hedging where appropriate, particularly when doing so provides firm support for near-term capital expenditure budgets. 9 Competition The group operates in a competitive environment. Competition exists in relation to the acquisition of acreage, securing oil and gas services and attracting the right talent and experience to the group. Potential impact Medium Potential likelihood Medium 10 Fiscal and political Argentina has a history of political instability and economic uncertainty that has been characterised by high inflation and significant currency devaluation. Potential impact High Potential likelihood Medium The unconventional oil and gas industry in Argentina has emerged rapidly, with significant investment commitments being made by a number of major international oil companies and national oil companies. In the US, the unconventional oil and gas industry developed quickly over a relatively short space of time driven by continual innovation and technical developments that provided the cost efficiencies required for economic production. The relatively early stage of the unconventional oil and gas industry in Argentina and the opportunity to establish the group as a leading operator translates to a high appetite for this risk. We cannot influence demand by others but can ensure we have the right relationships with suppliers and contractors. In December 2015, the current administration was elected into government. This has resulted in a significant and marked shift in policy direction that is now firmly pro-business and pro-investment. The reintegration of Argentina into the international community is central to the current political agenda. The government has made many changes in the past two years, including fiscal, tax, capital markets and labour reforms. Given the nature and location of its operations, this country specific risk is intrinsic to the group. Control and consolidate Explore and develop Profitable production Realise value Control and consolidate Explore and develop Control and consolidate Risks we cannot influence Risk appetite Link to strategy Mitigation Argentina moved away from regulated pricing and towards market-based pricing for commodities in late 2017. Contracts for crude moved to a Brent-minus basis in early 2018, with the discount applied relating to quality and location differentials. The group monitors oil price sensitivity relative to its capital commitments and in January 2018 implemented a policy that allows hedging. The group hedged approximately 1.2 million barrels for 2018 through a swap contract that was priced at US$65.97 per barrel. In May 2018 and in response to rising Brent crude prices, the government introduced price caps on crude sales which impacted May, June and July deliveries. This was done in an attempt to mitigate the impact of rising Brent prices on the end consumer of refined products. While the price caps expired at the end of July 2018, their use has brought some uncertainty to the market. In addition the zero-deficit budget for 2019 required, as a condition for the IMF advancing a standby loan package, a 10% export tax to be introduced in 2019. This tax applies to all exports, including oil, and has resulted in a further discount being applied to domestic crude prices based on export-parity. These two interventions by the government in 2018 have broken the confidence in the relationship between domestic crude prices and Brent and have reduced our hedging options for Argentina crude production to the selling of dated put contracts. Due to the volatility in the market however such contracts carry significant premiums. Until there is more clarity on Brent-minus pricing, the board has elected not to enter any further hedging relationships. The group has a substantial acreage position with a focus on operatorship of its key assets. Key assets are characterised as assets where the group holds multiple contiguous licences that provide exposure to unconventional prospects and those that are proximate to existing successful unconventional development assets and areas. The group maintains good relations with oil and gas service providers that have unconventional expertise and crews based in Argentina. The group constantly keeps the market under review. Relevant KPI by priority/significance 5 EBITDAX n/a Fiscal and political risk will be heightened in 2019 following a turbulent year for Argentina’s economy in 2018 and the upcoming presidential and gubernatorial elections in November 2019. n/a The group employs appropriately qualified and experienced staff across all disciplines (operational, commercial and administrative) in Argentina and works with reputable and high quality advisors in order to anticipate and comply with changes in the legislative or fiscal environment. We participate in appropriate industry groups and maintain dialogue with national and provincial government. Key to our KPIs 1 Number of reportable HSE incidents 2 Year-on-year growth of reserves and resources by category 3 Operating cost per boe 4 Production volume increase/decrease 5 EBITDAX — earnings before interest, taxation, depreciation, amortisation and exploration expense 6 Personal/group project delivery and milestone targets 49 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION VIABILITY STATEMENT In accordance with the UK Corporate Governance Code, the board has addressed the prospects and viability of Phoenix. The directors have assessed the viability of the group over a three-year period to April 2022. This assessment has considered the group’s financial position at March 2019, the future operating and financial projections together with the principal risks and uncertainties facing the company. Assessment of prospects The company has built a significant portfolio of licence interests in Argentina that is specifically focused on the country’s nascent unconventional oil and gas sector. The licence areas held by the company cover more than 560,000 acres of land and contain multiple unconventional oil and gas appraisal opportunities. The assessment of contingent and prospective resources associated with these evaluation interests is an indicator of the ultimate production potential of the licence areas, should the company be successful in its efforts to develop the prospects it holds. At 31 December 2018 the company has reported contingent resources of 426 MMboe and prospective resources of 2,888 MMboe. While these resources relate to a subset of the overall evaluation prospects, it should be noted that the transition of resources to reserves is not barrel-for- barrel. If the company is successful in the development of its core assets then it will yield substantially fewer reserve barrels due, amongst other matters, to the application of economic assumptions and the determination of likelihood of production to the technical resource volumes when assessing the viability of each individual play. This development risk is mitigated by the number of opportunities present within each of the company’s licence areas and the number of licences that the company holds that are prospective for unconventional oil and gas. As already announced, the results of initial drilling have been in line with expectation and the wells drilled have provided the information and data that the company was seeking to obtain from them in terms of the nature and characteristics of the formations tested. This information is used to inform the evaluation of the licence areas and informs the budget, forecast and business planning activities of the company. 50 The company’s strategy and business model are set out on pages 22 to 25 of this annual report. Timeframe The company has an established budgeting and forecasting process that is undertaken annually in Q4 and looks to forecasting of the following year’s operational and financial performance as well as capital expenditure needs. The budget for a given year is updated or re-forecast periodically through the performance year as circumstances dictate. The company also maintains a five- year plan that is updated annually in the budgeting cycle. The five-year plan seeks to forecast the performance of the business and its capital requirements over a five-year timeframe. Because exploration and evaluation activities are speculative in nature, the forecast results and planned operational activities will be more specific in the first two to three years of the five-year plan. In addition, the nature of exploration and evaluation means that activities planned in the latter portion of the five-year plan are often contingent on the results of activities in the near-term portion. In addition, the planned development cycle for the unconventional opportunities included in the five-year plan typically contemplates individual projects becoming cash positive from operations and after capital expenditure over a period of three to four years from the start of development. Taking these factors into account, the board believes that the viability of the business should be assessed over a three-year period. This is based on the expectation that individual development projects initiated at the start of the plan period will be cash generative overall on or shortly after the third anniversary of the commencement of development. Assessing viability Oil and gas exploration, evaluation and development activity is capital intensive and requires significant investment in the early stages of the asset lifecycle before yielding production returns and, ultimately, cash from operations. The planned capital expenditure in 2019 – 2021 totals more than US$1.0 billion with a funding requirement of more than US$750.0 million. If the company is unable to source funding to meet the development expenditure requirements, then it may not be able to ensure that the various unconventional opportunities it is targeting will move to development and production and ultimately yield net cash from operations after taking account of capital expenditure. The company is evaluating its funding strategy with the major shareholder. The statement of going concern is made based on a letter of support received from Mercuria Energy Group Limited while that funding strategy is finalised. Principal risks The board’s assessment of the principal risks and uncertainties facing the group are discussed on pages 42 to 49 of this annual report. The board considers the key factors that could impact the delivery of the company’s operational and financial targets to be as follows: > A significant period of sustained low commodity prices > Delays in or significant changes to the unconventional oil and gas permitting processes in the provinces that the company operates in > Failure to secure the services of appropriately experienced and qualified contractors > Cost overruns on capital projects > An inability to gain sufficient access to key pipelines or other infrastructure to evacuate production The directors’ assessment of viability For the reasons articulated in this viability statement, the directors consider it appropriate to assess the viability of the company over a three-year period. The directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the next three years. This expectation is based on the company’s ability to continue to secure financing to fund its activities over this period. ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTSUSTAINABILITY REVIEW Investing to maintain our competitive advantage Our people Phoenix has a responsibility and a duty of care to the people who work for us and the contractors and suppliers who work alongside us in our operations. We are responsible for the health, wellbeing and personal safety of our people when they are with us and for our contractors and others who work alongside us to deliver our complex operational projects. We understand and value how diversity benefits our business and how the individual experiences of our people contribute to a positive environment in our company. We are committed to promoting an environment where our people learn and develop in a collaborative manner regardless of who they are. We are responsible for the personal and professional development of our people in the roles that they perform for us. Developing our people is a cornerstone to the growth of our business and we are committed to supporting and developing talent while promoting a collaborative and rewarding working environment. Our objective is to create a working environment that supports our people while challenging them to deliver their best and to develop their own skills and experiences. The success and wellbeing of our people and their own personal and professional development is the foundation of all that we do. We recognise the importance of diversity to our business. Diversity may relate to gender, nationality, faith, personal background or any other factor. Modern slavery Personal freedom is a fundamental human right. The UK Modern Slavery Act was brought into law in 2015 and Phoenix fully supports the principles it promotes and the personal rights and freedoms it protects. We have zero tolerance for any form of slavery or any practices that could constitute or be perceived as slavery, whether they be in our own business or those of our suppliers, partners or consultants. OUR KEY STAKEHOLDERS We define our key stakeholders as: > Our people > The communities where we work > The provinces we work with Gender diversity (total group1) 1 Including directors Anti-bribery and corruption (ABC) We have zero tolerance for bribery, corruption or unethical conduct in our business. Our policies require compliance across our businesses with all applicable ABC laws, in particular, the UK Bribery Act, the US Foreign Corrupt Practices Act and the Argentine Foreign Corrupt Practices Act. Substantially all of our operations and people are based in Argentina. In 2018, Transparency International’s corruption perception index (CPI) ranked Argentina 85 out of 180 participating countries worldwide. This ranking was the same as in the prior year however the country’s CPI score has improved from 39 to 40. To give context within our own operations, this compares to the UK ranked at 11 with a score of 80 and the USA ranked at 22 with a score of 71. The CPI assesses corruption in the public sector when ranking different countries. In 2018, both the UK and the US slipped in terms of their ranking and their CPI scores. The potential for public sector corruption increases where democratic institutions are weakened. In recent periods there has been a rise globally in the number of political candidates running on populist platforms who seek to undermine public institutions. Candidates and campaigns often focus on public disillusionment and corruption scandals to advance their agenda. The issue of corruption has been firmly on the agenda in Argentina throughout 2018. The widely publicised ‘notebook scandal’ has dominated headlines and has led to a number of high-profile arrests that have resulted in charges made against individuals and, in many cases, the imprisonment of offenders. 51 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSUSTAINABILITY REVIEW CONTINUED As a business, Phoenix operates in a competitive market and faces competition in securing and maintaining licence interests with the provinces, attracting and retaining the best service providers and in dealing with unions to secure and retain the right people for our business. We are very aware of the pressures and challenges that we face. However, we are committed to upholding the highest levels of corporate and operational behaviour and our objective is to develop our business responsibly and with integrity at all levels. We have a system of documented ABC policies and procedures that provide a consistent policy framework across the group and help to ensure appropriate governance of ABC matters. Our documented policies and supporting procedures are maintained in both Spanish and English and cover: > anti-bribery and corruption > gifts and entertainment > third-party representatives > whistle blowing We also maintain training in Spanish and English. The reporting processes, most importantly in respect of whistle blowing, are also dual language, and we provide our staff the opportunity to report concerns or potential non-compliant behaviour through our external legal counsel as an alternative to reporting internally. The policy documents are issued to each member of staff by the relevant department head or supervisor and a system of positive confirmation, that everyone within the company has read and understood the policies, has been implemented that is updated and reconfirmed at least annually. Tendering and supply chain Our focus on our tendering process and supplier management will increase as our evaluation and development activity increases. We have an established tendering process and strive to select the best service providers to work with us on delivering our capital projects. Drilling and completions activity is capital intensive and it is important to us and for shareholder value that we execute those operations with partners who are capable and whose objectives are aligned with our own. We place contracts with local suppliers where possible and where we can be sure that the quality of service and delivery meets our standards – as with any supplier we work with. In 2019, we are focusing on our procurement processes and controls ahead of the expected increase in operational activity, with a focus on the pre-approval of a selection of preferred suppliers who will be asked to tender for contracts/work as we develop our assets. Environment We are very conscious of the natural environment that we operate in and work hard to minimise our impact on that environment. Phoenix is committed to the responsible stewardship of the environment and, on the conclusion of our operations, to return our sites to the condition in which we found them. Most of our exploration and production operations are in high-altitude desert areas. Site preparation mainly consists of clearance of scrub and levelling off the ground to allow safe access. We seek to operate from compact drill sites in order to minimise disruption to the natural habitat and plan multiple drill pads at single locations, thereby reducing the number of locations that we prepare. Water usage Unconventional oil and gas operations can also use significant amounts of water. We have developed a fracture fluid system that uses produced water that is a natural by-product when we produce oil and gas. This produced water is separated out and stored in tanks for use in operations. This system has helped us to minimise the use of fresh water in our operations. Phoenix is also subject to strict operating procedures imposed on us by the provinces in which we work and related to our in- field pipeline networks and river crossings. We are required to maintain a system of pressure gauges to monitor pressure across the pipeline network because a drop in pressure is one of the main indicators that a line may have been breached. We have installed automatic shut-off or line break valves at points where our lines cross rivers that automatically and immediately shut off the line when a drop in pressure is detected. For our more mature fields, we have been actively fulfilling all remediation activity required by the provinces where we operate, including remediation related to activity prior to our ownership or operatorship. Health and safety The health and safety of our employees, contractors and visitors to our sites is paramount. Anyone working at, or visiting, a Phoenix operational site is provided with Acting with transparency and integrity while investing in our people and the communities we work in are fundamental to the success of our operations 52 ANNUAL REPORT AND ACCOUNTS 2018STRATEGIC REPORTpersonal protective equipment appropriate to the location and will also be allocated to a supervisor or guide who is responsible for their safety while on site. When there are active operations taking place, such as drilling operations or facility upgrades, we establish clear boundaries to limit access to operational areas. We have also established a system for the regular monitoring of noxious or flammable gases at our gathering or loading facilities and at our operational sites and regularly check lines and transmission networks for leaks. Our objective is for zero lost-time injuries or incidents and zero spills or leaks. In 2018 we achieved a lost-time incident rate of 0.6. Taxation Phoenix is a responsible operator and corporate citizen and is committed to adhering to all relevant tax laws in all our jurisdictions. This includes compliance at the national, provincial or municipal level. Our operations in Argentina are subject to a complex fiscal system that includes corporate income taxes, royalties, sales taxes, VAT, payroll taxes and certain banking taxes amongst others. In addition, we are required to deduct and remit withholding taxes in respect of contractor payments direct to the Argentine tax authorities. In 2018, we have implemented a new accounting system across our business that will improve the timeliness and accuracy of our management reporting and, importantly, that has been specifically tailored to the unique taxation system in Argentina. Compliance with tax laws and regulations is fundamental to our licence to operate and is an obligation that we take seriously. In 2018, we paid approximately US$30 million in cash taxes in Argentina with approximately US$25 million paid at the provincial level and the balance at the federal level. The strategic report from pages 1 to 53 was approved by the board and signed on its behalf by Kevin Dennehy, chief financial officer, on 2 May 2019. CASE STUDY Protecting the environment that we work in The company has worked closely with the water authorities in Mendoza province during the year to make sure that we take every step required to meet their environmental requirements. In 2018, we have undertaken a significant water project together with the authorities in order that we can monitor any impact that our operations could have on the environment and on the water resources nearby where we work. A major part of this work relates to monitoring water quality in aquifers that are situated underneath the company’s concessions. The work we are required to do involves drilling water monitoring wells into the aquifer structures prior to starting unconventional operations. This allows us to define the water quality baseline before the commencement of operations. This work confirmed that the quality of the aquifers has not changed following the unconventional operations already performed. The water monitoring wells will be used to continually test water quality as our work progresses. In addition, besides the water monitoring program that the company has in place, representatives of the provincial water authority take their own readings every other second month as well as supervising our sampling process. We are committed to the highest environmental standards in the work that we do and are committed to work closely with the provinces and their various agencies to make sure that we are satisfying environmental and other regulations as we undertake our work. 53 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION54 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEGovernance IN THIS SECTION 56 Chairman’s statement on corporate governance 58 Board of directors 61 Corporate governance report 65 Nomination committee report 67 Audit and risk committee report 70 Letter from the remuneration committee chairman 72 Remuneration policy report 81 Annual report on remuneration 89 Directors’ report 93 Statement of directors’ responsibilities 55 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCHAIRMAN’S STATEMENT ON CORPORATE GOVERNANCE I am pleased to present our 2018 corporate governance report to our shareholders. The year has been one of consolidation and re-evaluation around the key tenets of our governance arrangements. We have made a number of changes and refinements to make sure that our governance keeps pace with the development of our activities both in nature and scope. In 2018, we have added significant assets to our operated portfolio and have commenced appraisal work in key areas of the operated asset portfolio, most notably related to unconventional opportunities at Puesto Rojas and Mata Mora. We have also been working more closely with our partners across our non-operated portfolio as investment and development decisions are made at Chachahuen with YPF and at Santa Cruz Sur with ROCH S.A. These development opportunities bring with them the need to ensure that robust governance procedures are in place as we begin to invest significant financial capital and dedicate resource to the business. As our business, asset base and activities have evolved through 2018, our governance priorities have been focused on: > consolidating our financial and non-financial reporting systems and processes; > ensuring that your board and senior management teams have an appropriate balance of skills for the stage of development of our business; and > working closely with our external stakeholders as we set the strategy for the development of our substantial unconventional asset base in Argentina. We are committed to the highest levels of corporate governance and have continued to measure ourselves against the UK Corporate Governance Code. In 2018, AIM companies were required to adopt a recognised corporate governance code. Where we previously made a commitment to substantially comply and measure ourselves against the Code, we have now formally adopted it. The Code was updated in 2018 and a revised version published that is focused on an updated set of principles and an increased focus on stakeholder engagement. This new Code was formally issued in July 2018 and is effective from 1 January 2019. We will undertake an evaluation of our compliance with the revised principles and may make further changes to our governance procedures as a result. We will report our compliance with the principles of the revised 2018 code in our 2019 annual report. Sir Michael Rake 2 May 2019 Good governance is the foundation of our business Sir Michael Rake Non-executive chairman 56 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCECORPORATE GOVERNANCE HIGHLIGHTS Leadership and effectiveness Accountability Stakeholder engagement We have continued to assess the performance of the board and the skills that are represented on the board related to the stage of development and the strategic objectives of the group. In recognition of the deferral of the originally planned move to the main market we re-evaluated the CFO role. Philip Wolfe who joined the group given his significant experience of raising finance for oil and gas companies stepped down from the board. Philip is succeeded as CFO by Kevin Dennehy who has more than 30 years’ experience of running international operational finance organisations with BP. In November 2018, Tim Harrington joined the Board adding significant operational experience in unconventional oil and gas exploration and development. In his role, Tim will bring challenge, oversight and support to the executive management team and adds to the industry insight of the board. The directors have consistently made a clear and explicit statement of the group’s commitment to the highest standards of corporate governance. On the formation of Phoenix, we made a pledge to substantially comply with and measure ourselves against the requirements of the UK Corporate Governance Code despite the fact that doing so was not required by the AIM Rules for Companies at that time. In 2018, AIM Rule 26 was revised and now requires the application of a recognised governance framework. Companies must also state the framework that has been applied. We have elected to apply the UK Corporate Governance Code and fully explain any areas of non-compliance. Whilst we could have elected to adopt an alternate governance framework, the directors determined that adopting the UK Corporate Governance Code in full was the most appropriate action given our stated commitment to the highest standards of governance. Our licence to operate depends on the communities and the provinces in which we operate in. In 2018, we have consulted with the Province of Mendoza as it has established its regulations for unconventional oil and gas activities in the province together with drafting the associated permitting procedures. This is fundamental to our business. We are committed to being a responsible operator and working with the province to produce oil and gas in a safe and efficient manner that respects the environment and creates jobs. Protecting the environment is a core value of the group. During 2018, we worked with the water authorities in Mendoza on a significant water quality project to establish that the aquifers nearby our Puesto Rojas operations were not contaminated and contained only clean potable water. Our commitment to the environment underpins our ability to continue to work in the areas that we do. Requirement Board response Compliance with the UK Corporate Governance code In accordance with the revised AIM rules, the company has elected to comply with the requirements of the UK Corporate Governance Code Going concern statement The directors have conducted their assessment of going concern and have made a positive statement Viability statement The directors have considered the viability of the group and have made a statement related to the period that they consider the business to be viable Where to find out more Corporate governance report Directors’ report Strategic report Statement of directors’ responsibilities The directors have acknowledged their responsibilities as they relate to the annual report and accounts Statement of directors’ responsibilities Independence Experience Excluding the shareholder representatives and the chairman, the board consists of just less than 50% independent directors Corporate governance report The board is comprised of individuals with varied and relevant experience. Specific appointments have been made in the year to enhance the experience of the board related to key aspects of our operational and financial activities Board of directors Accountability and board roles The roles of the directors are clearly defined and documented Corporate governance report Composition of committees The composition of each of the committees of the board is in compliance with the requirements of the code Committee reports Attendance Relationship agreement Internal audit The attendance of each of the board members at board and committees is at an acceptable level for each meeting Committee reports A relationship agreement is in place between the company and Mercuria Energy Trading Group to protect the interests of the minority shareholders The board does not consider it appropriate to have a dedicated internal audit function at this time. Specific reviews will be commissioned as determined appropriate Corporate governance report Audit and risk committee report Remuneration and reward Our remuneration policy has been designed to incentivise and motivate the executive team to achieve the group’s operational and financial strategy as laid out in this report Directors’ remuneration policy report 57 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONBOARD OF DIRECTORS The right balance of skills and expertise Committee membership A Audit and risk committee N Nomination committee R Remuneration committee Chair Observer 58 Sir Michael Rake (age 71) A N R Non-executive chairman Tim Harrington (age 60) A R Non-executive director First appointed 19 September 2016 First appointed 14 November 2018 Skills and experience Sir Michael Rake is the former Chairman of BT Group plc as well as Chairman of payment processing firm Worldpay Group plc, a director of S&P Global and chairman of Majid Al Futtaim Holdings LLC. Sir Michael was President of the CBI from 2013 to 2015; a member of the Prime Minister’s Business Advisory Group from 2010 to 2015; non-executive director of Barclays plc from 2008, becoming Deputy Chairman from 2012 to 2015; Chairman of the private equity oversight group, the Guidelines Monitoring Committee, from 2008 to 2013; Chairman of EasyJet plc from 2010 to 2013 and the first Chairman of the UK Commission for Employment and Skills from 2007 to 2010. He was a director of the Financial Reporting Council from 2004 to 2007. From May 2002 to September 2007, Sir Michael was International Chairman of KPMG. Prior to his appointment as International Chairman, he was Chairman of KPMG in Europe and Senior Partner of KPMG in the UK. Sir Michael was knighted in 2007. In 2011 he received the British American Business UK Transatlantic Business Award in recognition of outstanding business leadership. In 2013, he received the Channing Award for Corporate Citizenship, was voted the FTSE 100 non-executive director of the year and received the ICAEW outstanding achievement award. External appointments > Chairman, WorldpayGroup plc. > Director, S&P Global > Chairman, Majid Al Futtaim Holdings LLC > Director, British Argentine Chamber of Commerce Qualifications Chartered accountant Skills and experience Tim Harrington has over 37 years of oil and gas experience and spent 31 years with BP PLC in various commercial, financial, and operating leadership positions around the globe including postings in Houston, Anchorage, London, and Bogota. In his final two roles with BP, he served as CFO and then later as President of BP America Production Company, BP’s Lower 48 onshore E&P business focused on unconventional resources. Since leaving BP, he has been working with private equity and various start- ups in the US and currently serves as a Senior Energy Advisor to Trilantic Capital Partners, Mercuria Energy Trading, and Bayswater Exploration & Production. Additionally, Tim sits on the board of directors for three privately funded oil and gas industry related start-ups operating in the onshore US. He is also a member of the National Association of Corporate Directors (NACD) in the US and was a past director and executive committee member for the Texas Oil and Gas Association (TXOGA). External appointments > Director, DJR Energy LLC > Director, TRP Energy LLC > Director, EnergyFlo Chemical Applications LLC Qualifications BSc, Accounting, Miami University (Ohio) MBA, Xavier University Certified Public Accountant, Texas (inactive) ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEKevin Dennehy (age 60) Chief financial officer John Bentley (age 71) N R Independent non-executive director Senior independent director Garrett Soden (age 44) A R Independent non-executive director First appointed 1 October 2018 First appointed 10 August 2017 First appointed 10 August 2017 Skills and experience Kevin has over 38 years’ experience in the oil and gas industry and was appointed as the CFO and to the board on 1 October, 2018. Kevin, who is based in our Buenos Aires office, has had a 35 year career in the oil industry with BP. Between 2016 and 2018, Kevin was CFO of Pan American Energy, BP’s Argentine JV and between 2013 and 2015 he was Country Manager BP Iraq. He has held senior Finance roles at BP in Iraq, Colombia, Russia, Angola, Kuwait, the UK and the USA. Prior to BP, Kevin worked for El Paso Natural Gas Company. His experience includes exposure to the full lifecycle of upstream operations from new business access and exploration success to project developments and mature operations. External appointments > None Skills and experience John has over 40 years’ experience in the natural resources sector. He is an experienced board member being a past managing director of Gencor’s Brazilian mining company, Sao Bento Mineracao and chief executive of Engen’s exploration and production division. In 1996, John was instrumental in floating Energy Africa Ltd on the Johannesburg stock exchange and was chief executive for the following five years. More recently, he was chairman of Faroe Petroleum plc, executive chairman of First Africa Oil plc and served on the boards of Rift Oil plc, Adastra Minerals Ltd, Caracal Energy Inc and Scotgold Resources Limited. He is currently on the board of a number of E&P companies acting as senior independent director of Wentworth Resources Ltd and non-executive director of Africa Energy Corp. Qualifications B.S. Accounting (Hons) Thomas College External appointments > Senior independent director, Wentworth MBA Houston Baptist University Resources Ltd > Non-executive director, Africa Certified Public Accountant, Texas Energy Corp. Skills and experience Garrett has extensive experience as a senior executive and board member of various public companies in the natural resources sector. He has worked with the Lundin Group for over a decade. He is currently President and CEO of Africa Energy Corp., a Canadian oil and gas company with exploration assets in Africa. He is also a non-executive director of Etrion Corporation, Gulf Keystone Petroleum Ltd. and Panoro Energy ASA. Previously, he was chairman and CEO of RusForest AB, CFO of Etrion and PetroFalcon Corporation and a non-executive director of PA Resources AB and Petropavlosk plc. Prior to joining the Lundin Group, Garrett worked at Lehman Brothers in equity research and at Salomon Brothers in mergers and acquisitions. He also previously served as senior policy advisor to the U.S. Secretary of Energy. External appointments > President and CEO, Africa Energy Corp. > Non-executive director, Etrion Corporation > Non-executive director, Gulf Keystone Qualifications B.Tech (Hons) Metallurgy, Brunel University Petroleum Ltd. > Non-executive director, Panoro Energy ASA Qualifications BSc (Hons), London School of Economics MBA, Columbia Business School 59 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONBOARD OF DIRECTORS CONTINUED David Jackson (age 70) A R Independent non-executive director Javier Alvarez (age 47) A N Independent non-executive director Nominated shareholder representative directors First appointed 17 July 2012 First appointed 17 July 2012 Skills and experience David has more than 30 years’ experience in international banking and finance having held senior positions in investment banking and investment management in Standard Chartered Bank from 1990– 2008, where he was a managing director in London and Hong Kong, Scandinavian Bank from 1977–1990 in London, Bahrain, Singapore and Hong Kong, where he was an executive director and a member of the bank’s general management committee. David served as senior legal adviser to Finance for Industry, now 3i, from 1973–1977. External appointments > Director, Burges Grove Management Company Limited > Chairman, Emergex Vaccines Holding Limited Qualifications LL.B, (Hons), Leeds University Barrister Skills and experience Javier is an Agricultural Engineer and holds a master’s degree in Environmental Politics and Globalisation from King’s College, University of London. Javier’s career, which is based on his skills on building projects with diverse stakeholders and on his experience in fundraising, was developed in the private sector in London; he was Executive Director of the British Argentine Chamber of Commerce BACC from 2007 to 2011 (he is currently Overseas Director and Member of the Board of the BACC) and he was Business Development Director at a family office in Cambridge dealing with investments in the primary sector. External appointments > Overseas Director, British Argentine Chamber of Commerce > Member of the Board, British Argentine Chamber of Commerce Qualifications Masters, Environmental Politics and Globalisation, King’s College Daniel Jaeggi (age 58) Non-executive director First appointed 14 November 2018 Skills and experience Daniel is co-founder and President of Mercuria Energy Group Limited. Daniel is the nominated majority shareholder representative to the Board. Nicolás Mallo Huergo (age 49) N R Non-executive director First appointed 2 October 2007 Skills and experience Nicolás was Chairman of Andes Energia plc until August 2017 and is a director of both Integra Investment S.A. and Integra Capital S.A. Nicolás is the nominated minority shareholder representative to the Board. 60 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCECORPORATE GOVERNANCE REPORT Corporate governance and the UK Corporate Governance Code (‘the Code’) The directors of the company are committed to the highest standards of corporate governance and have evaluated the group’s corporate governance arrangements by reference to the Code since the formation of Phoenix. In 2018, the AIM rules were amended to require companies to state which recognised code of governance they will apply. The directors have elected to apply the requirements of the Code. The directors consider that the company has been in compliance with the Code throughout the period other than in respect of the following: > Code provision B.1.2.: Excluding the chairman, four of the nine directors have been determined to be independent, representing just less than 50% of the board. Notwithstanding, a relationship agreement is in place between the company and its major shareholder that governs how the major shareholder representatives to the board participate in certain matters, thereby increasing the influence of the non-executive directors. > We will continue to reassess the independence of the board through 2019. > Code provision B.6.1.: The performance of the board and of the individual directors has not been formally assessed during the year. Changes to the board composition have been made with the involvement of the nominations committee. These changes were made to address a perceived gap in experience of unconventional oil and gas among the non-executive directors and to bring operational oil and gas finance experience to the board. > We will continue to assess the performance of individual directors throughout 2019. Enhancements to governance made in the year > Code provision A.4.4.: John Bentley has been appointed as the Senior Independent Director. We have presented this governance report using the Code as a framework to articulate our activities in the year and to frame our focus for the coming year. The structure of this report follows the structure and key principles of the Code which are: > Leadership and effectiveness > Accountability > Stakeholder engagement and relationship 1. Leadership and effectiveness The role of the board Phoenix is led and controlled by the board which is collectively responsible for the long-term and sustainable performance of Phoenix. The roles of the Chairman and CEO are separate and clearly defined, with the division of responsibilities between and amongst the board set out below. The responsibilities of the board Role Principal responsibilities Chairman Chief executive officer > Manages and provides leadership to the board > Acts as a direct liaison between the board and management, working with the CEO to assist the flow of information > The chairman develops and sets the agendas for board meetings working with the CEO and the company secretary > Recommends an annual schedule of board and > Ensures that the directors have sufficient information committee meetings to enable them to make informed judgements > Ensures effective communication with shareholders and other stakeholders > Responsible for the day-to-day management > Oversees delivery against plan and other key of Phoenix > Together with the executive committee, is responsible for executing strategy once it has been approved by the board > Creates a framework that optimises resource allocation to deliver strategic objectives over varying timelines business objectives, allocating decision making responsibilities accordingly > Together with the executive committee, identifies and executes new business opportunities and assesses potential acquisitions and disposals Senior independent director > An independent non-executive director > Provides a sounding board for the chairman > Serves as an intermediary for the other directors as necessary and the CEO > Is available to shareholders should they have concerns Non-executive directors > Provide constructive challenge to the > Satisfy themselves on the integrity of financial executive directors > Help develop proposals on strategy > Scrutinise management’s performance in meeting agreed goals and objectives > Monitor performance reports information and that controls and risk management systems are robust and defensible > Determine appropriate levels of remuneration for the executive directors > Appoint and remove executive directors as required and review succession planning Chief financial officer > Overall management of the financial risks of > Ensures effective financial compliance and control, the group > Responsible for financial planning and record keeping as well as financial reporting to the board and shareholders while responding to regulatory developments, including financial reporting, capital requirements and corporate responsibility 61 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE REPORT CONTINUED Provision of information to directors Board and committee agendas are distributed to board members by the company secretary in advance of meetings. Any supporting information or analysis related to agenda items is distributed at the same time. The directors are able to request that management prepares any additional analysis that they believe is required for the assessment of issues or risks facing the group or to support board discussion related to specific topics. The board receives a monthly operational and financial update that includes key metrics related to business performance, production and sales and financial performance, including liquidity. This report includes a discursive summary of the activities of the operations and finance team for the month, together with key items or activities upcoming. Appointment of directors All directors were initially appointed for a period of three years however, in accordance with the revised Code, all directors will be put forward for re-election annually at the AGM. The independence and objectivity of the independent directors will be formally assessed on an annual basis following the fifth anniversary of their original appointment. The independence and objectivity of the board is monitored on an ongoing basis. 62 What we focused on in 2018 In 2018 the board considered, assessed and debated a wide range of matters including: Funding Budget External reporting Specific transactions Operations Financial performance Corporate governance Business planning/strategy Technical briefing, external expert BOARD STRUCTURE 1 2 3 4 5 Number of meetings discussed Board of directors Committees of the board Management of the group Nomination committee Remuneration committee Audit and risk committee Executive management Senior management ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCETraining and access to advice New directors receive an induction to the group on appointment to the board. The induction covers the activities and operations of the group and the key business and financial risks faced. New directors have the opportunity to meet privately with existing directors, members of the senior management team and the company’s advisors prior to appointment. Directors’ other commitments The chairman and non-executive directors have other third-party commitments, including directorships of other companies as disclosed in the individual director biographies. The company is satisfied that these other commitments have no measurable impact on the ability of directors to discharge their responsibilities to Phoenix effectively. Directors’ and officers’ liability insurance The company has directors’ and officers’ liability insurance in place that provides coverage for costs incurred by the directors and officers individually in the event of a legal or regulatory claim being made against the company or the directors. 2. Accountability Committees of the board Three permanent committees of the board have been organised to discharge the board’s delegated responsibilities in relation to director nomination, remuneration and audit and risk matters. Each committee reports to the board though the respective committee chair. The workings of these committees, their activities in the year and details of their membership are included in each of the separate committee reports on pages 65 to 71. BOARD SITE VISIT The company provides additional specific training to directors on topics considered to be relevant to the discharge of their duties as directors. In addition he company will from time-to-time provide the directors specific information sessions related to the assets and operations of the business or the legal, legislative, fiscal and political environment in which it operates. Specific informational sessions During 2018, specific sessions were included in the board agenda related to the fundamentals of unconventional oil and gas operations and how they differ from conventional operations. The session was supported by a comprehensive slide-pack that provided illustrations and examples. Access to external experts and site visits In addition, a key advisor who is widely recognised as a subsurface expert in the unconventional industry was invited to present to the board at a meeting held in Mendoza. As part of the same field visit members of the board were invited to visit both the Puesto Rojas and Mata Mora assets. The Mata Mora trip included a visit to the drill site where the initial horizontal well into the Vaca Muerta formation was being drilled. Access to advice All directors have access to the advice and services of the company secretary who is responsible to the board for ensuring compliance with laws and regulations applicable to the company. The company secretary is also responsible for ensuring that board procedures are followed. The directors, collectively or individually, are able to take independent professional advice if they believe such advice is required in the furtherance of their duties. Where such advice is taken, it is at the company’s expense. Responsibility for the annual report The board charged the audit and risk committee with the responsibility for reviewing the contents of the 2018 annual report to assess, when taken as a whole, whether it is fair balanced and understandable. The audit and risk committee also considers if the annual report provides all the necessary information for shareholders and other stakeholders to assess the financial position of the group and its performance in the context of the business model and strategy that is articulated in that annual report. The audit and risk committee report on pages 67 to 69 discusses the focus of that review together with details of matters discussed with the auditor. The board has responsibility for the overall system of internal control and for reviewing its effectiveness. In assessing effectiveness the board has carried out a robust review of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks facing the group are detailed on pages 42 to 49 together with their potential impact and mitigation. The company held its November 2018 board meeting at its Mendoza office in Argentina. The meeting focused on examining the results of the unconventional campaign undertaken at Puesto Rojas and the implications of both that work and the work planned at Mata Mora on the operational and financial planning process for 2019. At the meeting the board also received a presentation from a key technical advisor to the company. The presentation focused on the subsurface properties of the plays at both Puesto Rojas and Mata Mora and how the work planned at these locations was based on the geological analysis done. During the visit, the members of the board were able to visit the Mata Mora well site at the concession in Neuquén province where drilling of the company’s inaugural horizontal well was underway. In addition, a smaller delegation of the board also visited Puesto Rojas. 63 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE REPORT CONTINUED In 2018 the group has implemented a common integrated financial reporting system across the group. Other than the change in system, there have been no changes to the internal control or risk management frameworks during the period since listing and up to the date of approval of the annual report. It should be noted that the systems of internal control are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and therefore they can only provide reasonable, and not absolute, assurance against material errors, losses, fraud or breaches of law and regulations. 3. Stakeholder relationships and engagement We define our key stakeholders in the sustainability review section on pages 51–53. Protecting minority shareholders rights The Phoenix board recognises our obligation to minority shareholders and we consider that the protection of minority shareholders’ rights is fundamental to responsible corporate governance. A relationship agreement is in place with Mercuria that regulates the influence that Mercuria can exercise over the company. By implementing such a relationship agreement, Phoenix is in line with the UK Financial Conduct Authority’s requirements for premium listed companies where a majority shareholder exists. The agreement governs matters relating to the proposal and appointment of nominee directors, the composition of the board, involvement in the day to day running of the group and transactions between the group and Mercuria that are to be undertaken on an arm’s length basis. Stock market communications Phoenix is committed to ongoing market communications plan that includes comprehensive quarterly operational updates. The objective of the communications plan is to keep all shareholders informed and engaged. 64 Shareholder and other stakeholder relations Communications with stakeholders are given high priority by the board. Phoenix responds promptly to correspondence from stakeholders and the group’s website contains a range of information on the group and its operations, including a dedicated investor relations section where readers can access historical financial reports and presentations as well as RNS announcements issued by the company. The group issues its results promptly and also publishes them in full on its website (www.phoenixglobalresources.com). The board uses the annual general meeting to communicate with private and institutional shareholders and welcomes their participation. 4. Remuneration The remuneration report is presented on pages 81 to 88. Meeting frequency and attendance The board is responsible to the shareholders for the proper management of the group. The board sets the strategy of the group and is responsible for ensuring appropriate funding and financing arrangements are in place to support that strategy. The board reviews and approves the business plan and annual budgets that are compiled by the executive board members, together with the senior management team, and in doing so provides robust challenge. Members of the senior management team are invited to attend specific board meetings where technical or operational matters that affect the delivery of the group strategy are being discussed. Such invitation is made to give the board the opportunity to discuss operational plans directly with those responsible for assisting in formulating and, ultimately, executing those plans. The board meets regularly to review trading performance, monitor strategy, approve annual budgets and major capital expenditure projects, monitor changes to the business environment and the risks facing the group and to examine other significant financing matters. The board reports to the shareholders on these matters as required or where appropriate to provide the shareholders with additional information on the group and its operations. The board delegates authority for the day-to-day business to management under a defined set of delegated authorities that cover routine operational matters, financial authority limits, contract approval procedures, purchasing procedures, banking mandates and the hiring of full time and temporary staff and consultants. Role Meetings attended Sir Michael Rake Non-executive chairman Anuj Sharma Philip Wolfe* Kevin Dennehy** John Bentley Garret Soden Javier Alvarez David Jackson Chief executive officer Chief financial officer Chief financial officer Independent non-executive director Independent non-executive director Independent non-executive director Independent non-executive director Nicolas Mallo Huergo Non-executive director Matthieu Milandri*** Non-executive director Guillaume Vermersch* Non-executive director Daniel Jaeggi** Tim Harrington** * Resigned in the period ** Appointed in the period *** Resigned 31 January 2018 Non-executive director Non-executive director 6/6 6/6 5/5 1/1 6/6 6/6 6/6 6/6 6/6 5/6 2/5 1/1 1/1 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCENOMINATION COMMITTEE REPORT Ensuring a high quality board with the right mix of skills Sir Michael Rake Chairman Nomination committee Phoenix recognises that the role of its nomination committee, working together with the board as a whole, is key to promoting effective board succession and the alignment of board composition with the company’s culture, values and strategy. The nomination committee meets at least twice a year, and more frequently as necessary, and reports on its activities to the full board. Purpose The nomination committee is formed with the purpose of monitoring the balance of skills, knowledge, experience, independence and diversity of the board and its committees. Consideration of diversity includes gender diversity as well as diversity of nationality, background, skills and experience. The committee is charged with ensuring that there is a formal, rigorous and transparent procedure for the nomination and appointment of new directors and that appropriate procedures are in place for their nomination, selection and training of directors. Membership The nomination committee comprises three non-executive directors, two of whom are required to be independent. The committee is chaired by Sir Michael Rake, who is also chairman of the board of directors. The terms of reference of the committee state that it can be chaired by either the group chair or by an independent non-executive director. Where the chair of the committee is also the chair of the board, he or she is required to absent themselves from the discussion or selection of potential successors to the chair of the board to avoid any potential conflict of interest. Similarly, individual members are excused from discussion related to their own appointment as chair of board committees. MEMBERSHIP Members Sir Michael Rake (chair) Javier Alvarez John Bentley Nicolás Mallo Huergo DIVERSITY Gender Board Senior management team Group Nationality Board Senior management team Status Number % Board skills and experience Number Date appointed Quorum Aug 2017 2 members Aug 2017 Aug 2017 Aug 2017 (observer) Male Female 10 9 92 Argentina United Kingdom United States 2 8 4 1 2 1 Independent Non- independent 4 40% Executive 2 20% 4 40% O&G/ Technical – 1 25 France 2 – Total 10 100% Financial Argentina Strategy/ leadership 4 4 2 10 65 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOMINATION COMMITTEE REPORT CONTINUED Responsibilities The principal responsibilities of the nomination committee are to: > review the structure, size and composition of the board, taking account of the group’s strategic objectives, and make recommendations in regard to any changes required; > plan for the succession of directors and other senior executives; > identify, and nominate for board approval, candidates to fill board vacancies as they arise; > annually review the time commitment required of non-executive directors together with the number and type of external appointments held by those directors; > make recommendations to the board in regard to the membership of both the audit and risk committee and the remuneration committee in consultation with the relevant committee chair; and > assist the board with its periodic evaluation of the performance of individual directors and of the board as a whole. Diversity When considering board composition, the group policy continues to be that the group recruits the best candidate available for any position based on merit and against objective criteria in order to achieve the most effective board. The application of this policy is delegated to the nomination committee and applied throughout the group. The experience of the board is very diverse in terms of experience and expertise that covers not only a wealth of oil and gas operational experience, but also extensive technical, operational, financial, governance, legal and commercial expertise. The board recognises the strength that comes with diversity and the different viewpoints and innovative thinking that can come from a combination of diverse life experiences. We are committed to continue to work hard to ensure that we recruit the very best candidates throughout our business regardless of gender, nationality or background. Activity in 2018 The board was formed on the completion of the combination transaction in August 2017. At the time of its formation no senior independent director was appointed. The reasoning being that with, a number of new appointees joining concurrently, it was considered 66 An experienced international Board of Directors prudent to allow the board to operate before nominating the senior independent director. In July 2018, following an evaluation period John Bentley was appointed as the senior independent director. The committee also evaluated the performance of the board and its competencies during the year. The evaluation was informal but highlighted the need to introduce more technical oil and gas capability – and especially hands on operational experience of developing shale and other unconventional oil and gas assets. Together with administrative support from the major shareholder a search process was initiated and culminated with the appointment of Tim Harrington to the board of directors. Tim has had a long career in oil and gas and, latterly, was responsible for BP’s unconventional operations in the United States. The appointment of Tim provides the board with the ability to more effectively challenge and also support operational management in the development of the company’s asset portfolio. Priorities for the coming year In 2019, the committee will continue to assess the skills present on, and the effectiveness of, the Board and will make additional appointments and changes to board composition as determined appropriate. Over-boarding We are aware of, and have considered, recent guidance recommending that shareholders vote against the re-election of directors where shareholders consider that a director is attempting to undertake too many roles in addition to the responsibilities that come with being a member of the company’s board. While we are satisfied that the members of the board do have sufficient time to fulfil their duties, we recognise that some directors currently hold a number of external appointments. We will continue to monitor the workload and external commitments of our board members as the group’s activities and the level of its operations grow and develop in order to make sure that each member of our board is able to commit sufficient time to fulfil their responsibility to the shareholders and to their fellow directors in an effective manner. Conflicts of interest The board operates a policy to identify and, where appropriate, manage conflicts or potential conflicts with the group’s interests. In accordance with the directors’ interest provisions in the Companies Act 2006, all of the directors are required to submit details to the company secretary of any situations that might give rise to a conflict or potential conflict of interest. The board monitors and reviews potential conflicts of interest on a regular basis. Sir Michael Rake Chairman, nomination committee 2 May 2019 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEAUDIT AND RISK COMMITTEE REPORT Ensuring the integrity and clarity of financial reporting Garrett Soden Chairman Audit and risk committee MEMBERSHIP Members Garrett Soden (chair) Sir Michael Rake Javier Alvarez David Jackson MEETING FREQUENCY Date appointed Aug 2017 Aug 2017 Aug 2017 Aug 2017 Quorum 2 members Meetings attended 2017 audit cycle 4/4 4/4 3/4 4/4 Jan 2018 May 2018 Jul 2018 Sep 2018 Mar 2019 2017 audit update Review status of financial system implementation – Argentina and integration update Update on key judgements related to the audit and 2017 annual report and accounts Review and approve 2017 annual report and accounts Review proposed 2018 external audit fees Interim review planning Discussion of key risks and uncertainties for the interim financial statements including areas of judgment Approval of interim financial statements Presentation of 2018 draft audit plan including update on key risks and uncertainties and preliminary financial statement materiality Approval of external audit fees for 2018 Review and approve 2018 annual report and accounts including discussion of significant accounting issues, key judgments and narrative disclosures Update to assessment of financial statement materiality Consideration of appropriateness of going concern assumption Presentation of external auditor’s report   – – – – – – – – – – – – – –   – – – – – – – – – – – – – – –    – – – – – – – – – –  – – –   – – – – – – – – – – – –     67 Purpose The main function of the audit and risk committee is to assist the board in fulfilling its financial oversight responsibilities by reviewing and monitoring the integrity of the financial information provided to shareholders and the group’s system of internal control and risk management. These systems have been established for the purpose of providing relevant, accurate and timely information for both external reporting and internal management purposes. As part of this role, the committee is also responsible for the internal and external audit processes and the group’s compliance with laws, regulations and other ethical codes of practice. Membership As required by the UK Corporate Governance Code, the audit and risk committee consists exclusively of non- executive directors. The terms of reference for the committee require that it has at least three members, the majority of whom are independent. The members are all appointed by the board on the recommendation of the nomination committee and in consultation with the committee chair. The chair of the board may be a member of the committee, though only where he or she is considered independent on appointment as chair of the board, but cannot chair the committee. Sir Michael Rake currently sits on the audit and risk committee. Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION AUDIT AND RISK COMMITTEE REPORT CONTINUED In accordance with Code provision C.3.1, at least one member of the committee is required to have recent and relevant financial experience. The board is satisfied that Garrett Soden fulfils this requirement. Meetings are normally attended by the chief financial officer and key members of the finance team as appropriate and at the invitation of the committee. In addition, representatives of the external auditor are invited to attend meetings. The committee chair maintains an ongoing dialogue with key individuals involved in the company’s governance, including the external auditor. The chair also meets privately with the external auditor at least once per year, but will meet more frequently as circumstances dictate. Responsibilities The principal responsibilities of the audit and risk committee are: > to monitor the integrity of the financial statements, including the annual and interim financial statement reporting required by both the London and Buenos Aires stock exchanges, together with any other formal or informal reporting regarding financial reporting, such as analyst and investor presentations, annual results presentations and financial information contained in press releases and other communications; > to report to the board on financial reporting issues and significant judgments, including matters discussed with the external auditor; > to provide oversight of the work of the external auditor and make recommendations to the board in relation to their appointment or reappointment, including related to the re-tendering or termination of the external audit contract; > to provide oversight of the relationship with the external auditor, including agreeing terms of reference, scope and remuneration (including both audit and non-audit fees); > to maintain internal controls and risk management systems together with arrangements for internal audit; and > to monitor policies and procedures related to ethics, fraud and whistle- blowing. 68 Embedding high quality systems and processes Meeting frequency The committee will meet at least four times per year with the calendar of meetings specifically designed around the key phases of the external financial reporting cycle, including audit planning, interim results, full year results and the conclusion of the annual financial statement audit. In relation to the 2018 reporting cycle, the committee has met four times. A summary of the items discussed at each meeting is set out on page 67. Internal audit The group does not currently have an internal audit function and no internal audit reviews were undertaken in 2018. The board did not commission any specific internal audit reviews in 2018. This was to allow group management to focus on integrating the accounting system that was implemented in Argentina in 2017 across all group locations. Management was also focused on developing and enhancing internal financial reporting and control procedures. In late 2018, the finance team in Argentina initiated joint venture reviews over partner-operated assets with a focus on cost allocation to the joint account. Such charges are levied on Phoenix through periodic joint interest billings. These reviews were conducted by members of the group finance team and were undertaken under our partner audit rights embedded within the joint venture contracts. The group remains relatively small in terms of finance and administration and the number of projects being undertaken concurrently is low and also focused on initial evaluation drilling and related activity. The development and production operations are not extensive at this time. It is therefore likely that any operational or financial internal audits determined appropriate during 2019 will be undertaken using a specialist external provider of audit services. External audit The group has elected to comply with the provisions of the UK Corporate Governance Code that require FTSE 350 companies to put the external audit contract out to tender at least every ten years. The committee’s terms of reference require the group to consider whether to put the audit out to tender after five years and annually thereafter. PwC was first appointed as external auditor for the year ended 31 December 2012 and their appointment was reconsidered in light of the tendering requirements after both the 2016 and 2017 audits and will be considered again on conclusion of the 2018 audit. ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCENon-audit services The audit and risk committee has established a policy for the provision of non-audit services by the external auditor to ensure that these services do not impair the auditor’s independence or objectivity. The policy identifies those services that the auditor may provide, services that are precluded in normal circumstances and sets guidance around the level of non-audit fees that the committee considers to be acceptable depending on the type of service being proposed and the circumstances related to the provision of that service. Non-audit work undertaken by the auditor in 2018 primarily related to an intercompany transfer pricing study in Argentina with fees of less than US$5,000. In addition, two of the directors use PwC to prepare their personal US tax filings for which the fees are settled by the directors themselves. In considering which services the external auditor can and cannot provide, the governing principles applied by the audit and risk committee are that the auditor cannot: > audit its own work; > perform management functions; or > act as an advocate for the group. Nevertheless, each piece of work proposed for the external auditor is formally assessed and approved by the committee prior to commencement. In addition, the scope of individual projects is monitored throughout their delivery to identify any potential conflicts as work progresses. Garrett Soden Chairman, audit and risk committee 2 May 2019 2018 year-end significant accounting issues The significant issues considered by the audit and risk committee in 2018 in relation to the financial statements and how each of these were addressed are shown below. Significant accounting issue Consideration and conclusion Liquidity and going concern In preparing the financial statements management is required to assess the company’s ability to continue as a going concern and to meet its obligations as they fall due. Carrying value of long-lived assets and goodwill To date, funding for exploration and evaluation activity has been provided by the major shareholder. The company is currently evaluating the potential of three licence areas that are at varying stages of evaluation. The company is in the process of determining both the scale and pace of appraisal and development activity that would be required if the areas were to be developed consecutively, concurrently or individually. The determination of the preferred financing method for these options is dependent on the activity plan for the assets in the next several years. Mercuria Energy Group Limited has provided the company with a letter of support while the directors determine the appropriate method of financing for the next stage of activity. The committee reviewed the letter that has been provided and considered that it was sufficiently comprehensive and satisfied the requirement for the directors to be able to make a positive statement as to the company’s ability to continue as a going concern. The committee also considered Mercuria’s ability to honour the letter and, given the history of financing provided to the group by Mercuria, had no significant concerns in this regard. The company has made significant investments in property plant and equipment and also in intangible licence interests. In addition, the assets acquired in the 2017 combination transaction were recorded at their fair values, which can often be higher than the historic cot of the asset acquired. In addition, goodwill recognised in respect of the combination was allocated to three of the prospective licences acquired in that transaction. The committee considered the recoverability of the long-lived assets and goodwill and in doing so considered the NPV10 valuation for 2P reserves from the year end reserves statement, the cash flow generated from producing assets, the oil price and outlook going forward and other factors related to the continued investment by others in unconventional opportunities in Argentina and specifically those proximate to the company’s assets. No matters were identified by the committee that would indicate a potential impairment of the long- lived assets and goodwill. Specifically, the committee was satisfied that the carrying value of goodwill could be supported by the assets it had been allocated to. 69 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONLETTER FROM THE REMUNERATION COMMITTEE CHAIRMAN John Bentley Chairman Remuneration committee Dear Shareholder As chairman of the remuneration committee, I am pleased to present the directors’ remuneration report for Phoenix for the year ended 31 December 2018. Our approach to developing Phoenix’s remuneration policy Our aim is for executive remuneration at Phoenix to: Although Phoenix is currently quoted on the London Stock Exchange’s Alternative Investment Market (AIM), the board recognises the importance of shareholder transparency and standards of governance. In 2017, following the combination of Andes Energia plc and Trefoil Holdings B.V., the board decided to follow the principal provisions of the UK Corporate Governance Code (“the Code”) on a comply or explain basis, commensurate with the standards expected by stakeholders of companies listed on the premium segment of the London Stock Exchange’s Main Market. Our report for 2018 covers the following matters: > how the company’s executive remuneration policy has been implemented in the year ended 31 December 2018; and > the company’s intended policy for 2019 and beyond. > attract, retain and motivate individuals of a high calibre and appropriate experience; > align incentives with the company’s strategic goals and business plans; > deliver rewards for strong and sustainable business performance whilst avoiding rewarding for failure; and > align the interests of the executive directors with those of shareholders. The committee intends to keep its approach to remuneration under regular review for continued appropriateness and in light of market practice and regulatory requirements and corporate governance best-practice as applicable to the company over time. The committee also acknowledges the updated remuneration reporting regulations that were published in 2018 and take effect for financial years beginning 1 January 2019. We will be reviewing how to appropriately reflect these revised requirements in next year’s remuneration report. The directors’ remuneration policy (set out on pages 72 to 80) has been developed to reinforce these objectives. The committee believes that its approach to remuneration will support the delivery of these aims while remaining appropriately flexible so as to evolve as the group establishes itself. Key decisions and pay outcomes in 2018 Key items in 2018 were as follows: > during the year Philip Wolfe the CFO stepped down from the board and was replaced by Kevin Dennehy. The committee applied the directors’ remuneration policy and exit payment policy when determining joining and separation remuneration arrangements for these executives. > the company has made significant progress during the year in developing a strong platform for the future. In particular, our work with the local provinces to address the environmental, social and operational issues associated with unconventional operations enabled us to start our unconventional activities in Mendoza. The company was also successful in renegotiating and acquiring additional assets in Mendoza and Neuquén, increasing our unconventional exposure to the Vaca Muerta. > the 2018 annual bonuses are based on a combination of quantitative and subjective key performance indicators including corporate, operational (including HSE and growth in resources and reserves), financial and personal performance. Whilst the committee agree that generally performance targets should be set for each performance measure at the start of the year, given the company’s stage of development the committee did not feel this was appropriate for 2018, with awards determined predominantly on a discretionary basis. 70 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCE > awards were granted under the company’s long-term incentive plan as detailed in the remuneration report. Post balance sheet event On 23 April 2019, Anuj Sharma served a notice on the company, which the company is treating as a notice terminating his employment in accordance with the terms of his service agreement and resigning from his position as chief executive officer and a director of the company with immediate effect. The information contained in this report is based on the terms of Anuj Sharma’s service agreement prevailing at the date of his resignation. Looking ahead to 2019 Base salary No increase in base salaries is recommended in 2019. Annual Base salary Executive director 2019 (US$) 2018 (US$) % increase CEO CFO 620,000 620,000 400,000 400,000 0% 0% Annual bonus For 2019, the executive directors have a maximum bonus opportunity of 100% of salary. The on-target bonus opportunity is 50% of the maximum for the CEO and 75% of the maximum for the CFO. Two-thirds of any bonus earned will be paid in cash, with the remainder being paid in deferred Phoenix shares over a further three-year period, vesting pro- rata annually. > Consistent with 2018, given the Company’s stage of development, whilst the annual bonus for 2019 will be based on a combination of quantitative and subjective key performance indicators including corporate, operational (including HSE and growth in resources and reserves), financial and personal performance, performance targets for each performance measure will not be set at the start of the year, with awards predominantly determined on a discretionary basis. Long-Term Incentive Plan (LTIP) In 2019, the executive directors will receive conditional awards of shares under the Phoenix LTIP, with a face value of 200% of salary for the CEO and 112.5% of salary for the CFO. The 2019 LTIP will vest after three years, subject to the company’s three-year relative and absolute TSR performance as detailed on page 88. Relative TSR has been selected by the committee to closely align executive interests with those of shareholders. Phoenix TSR performance will be measured over the three-year period beginning on the date of grant and compared to a peer group of sector comparators (see page 88 for details of the peer group) on the basis of TSR rank. Workforce remuneration The committee’s main focus is to ensure that the company’s remuneration policy is implemented and applied in a such a way as to attract, retain and motivate the company’s leadership to promote the long-term success of the company. However, when making decisions the committee takes into consideration the impact on the wider workforce. In 2019 the committee will be looking at ways of increasing and improving the committee’s interaction with the wider workforce to facilitate this objective. Absolute TSR has been selected by the committee to align LTIP outcomes directly with long-term shareholder returns. The performance target ranges have been set at stretching levels considered commensurate with the targets set for the relative TSR element of the LTIP (median to 75th percentile). To provide further alignment with shareholders, LTIP awards will be subject to an additional post-vesting holding period. To the extent an award vests subject to three-year performance, net vested shares will be required to be held for a further two years (i.e. until the fifth anniversary of the date of grant). In line with our policy, LTIP awards will also be subject to the group’s malus and clawback provisions. Non-executive director fees No increase in annual fees is recommended in 2019. Daniel Jaeggi has waived his right to receive a fee in connection with his appointment as non- executive director of the company. Annual fees 2019 (US$) 2018 (US$) % increase NE chairman fee 213,600 213,600 NED base fee 66,750 66,750 0% 0% Additional fees: Senior Independent Director Chairman of the Audit and Risk committee Chairman of the Remuneration committee 13,350 13,350 0% 13,350 13,350 0% 13,350 13,350 0% Use of discretion The committee may apply its discretion (as set out in the report below) when agreeing remuneration outcomes, to help ensure that the implementation of our remuneration policy is consistent with the guiding principles for Phoenix remuneration. For the year ending 31 December 2018, the committee’s discretion was used, in line with the company’s exit payment policy, in determining the payment to be made to Philip Wolfe who stepped down from the board and was deemed a “good leaver”. Furthermore, as appropriate for a company in its development phase, discretion was used in determining the 2018 bonus awards. Further details on the use of committee discretion are provided on pages 73 and 74. Anuj Sharma’s termination arrangements will be subject to and in accordance with the terms of his service agreement and LTIP and DBP plan rules. Details of any arrangements entered into will be disclosed in next year’s remuneration report. We trust that you find that this report sets out clearly our policy and how we intend to implement it, as well as the rationale for our decisions. The committee believes that the policy and the approach to its implementation in 2019 are in the best interests of all shareholders. John Bentley Chairman, remuneration committee 2 May 2019 Where applicable a rate of exchange of US$/£1.335 has been used for 2018 and 2019 and a rate of exchange of US$/£1.290 for 2017. Where salaries and fees are denominated in £, changes in annual fees reported in US$ may partly be due to changes in the rate of exchange. 71 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONREMUNERATION POLICY REPORT Although the company (being AIM quoted) is not subject to the Directors’ Remuneration Regulations 2008 (the “Regulations”), the committee recognises the importance of transparency and standards of governance. This report has therefore been prepared largely in accordance with the provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2013, as though the company were listed on the main market of the London Stock Exchange. This section of the report sets out the remuneration policy for the directors that has been developed to reflect our remuneration principles. Remuneration policy for the executive directors Operation Opportunity Performance measures Base salaries will be reviewed by the committee annually and benchmarked periodically against comparable roles at international exploration & production peers, as well as UK-listed companies of similar size and complexity. In deciding base salary levels, the committee considers personal performance including the individual’s contribution to the achievement of the group’s strategic objectives. The committee will also consider employment conditions and salary levels across the group and prevailing market conditions. Salaries are set on a case- by-case basis to reflect the role and the experience and qualifications of the individual. n/a Base salary increases for the executive directors will not normally exceed the average increase awarded to the wider workforce, other than in exceptional circumstances such as a material change in responsibilities, size or complexity of the role, or if a director was intentionally appointed on a below- market salary. Base salaries are disclosed in the annual report on remuneration. Executive directors may receive a contribution to a personal pension plan, a cash allowance in lieu, or a combination thereof. Salary is the only element of remuneration that is pensionable. n/a Executive directors are eligible for a company contribution from the group of up to 10% of base salary and to participate in the 401k plan offered to US based employees. Details of the pension contributions made to executive directors during the year are disclosed in the annual report on remuneration. Purpose and link to strategy Base salary To attract and retain talented executive directors to deliver the group’s strategy by ensuring base salaries and the implied total package are competitive in relevant talent markets, while not overpaying. Pension To provide an appropriate structure and level of post- retirement benefit for executive directors in a cost-efficient manner that reflects local market norms in the relevant jurisdiction. 72 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEPurpose and link to strategy Other benefits To provide non-cash benefits which are competitive in the market in which the executive director is employed. Annual bonus To incentivise executive directors to deliver strong financial and operational performance on an annual basis and reward the delivery of the group’s strategic aims that will underpin the longer-term health and growth of the business. Deferral into shares enhances alignment with shareholders. Operation Opportunity Performance measures The group may provide benefits in kind including, but not limited to, a company car or car allowance, private medical insurance (or allowance in lieu for the executive directors and their family), permanent health insurance and life insurance. Executive directors may also be provided certain other benefits to take account of individual circumstances such as, but not limited to, payment of tax, financial and/or legal adviser fees, expatriate allowance, relocation expenses, housing allowance and tax equalisation (including associated interest, penalties or fees plus, in certain circumstances or where the committee consider it appropriate, any tax incurred on such benefits). Executive directors may also be offered any other future benefits made available either to all senior employees globally or in the region in which the executive director is employed. Performance measures, targets and weightings are set by the committee at the start of the year. After the end of the financial year, the committee determines the level of bonus to be paid, taking into account the extent to which these targets have been achieved. To the extent that the performance criteria have been met, one-third of the annual bonus earned will normally be compulsorily deferred into shares under the Deferred Bonus Plan. Deferred shares vest pro- rata annually over three years. The remainder of the bonus will be paid in cash. Dividends may accrue on deferred bonus shares over the deferral period and, if so, will be paid (in cash or additional shares) on deferred shares that vest at the time these are released to the executive director. Malus provisions apply to the deferred bonus in certain circumstances (as set out in the notes to the policy table). n/a Benefits for executive directors are set at a level which the committee considers appropriate compared to wider employee benefits, as well as competitive practices in relevant markets. It is not anticipated that the costs of benefits provided will increase significantly in the financial years over which this policy will apply, although the committee retains discretion to approve non-material increases in cost. In addition, the committee retains discretion to approve a higher cost in exceptional circumstances (e.g. to facilitate recruitment, relocation, expatriation, etc.) or in circumstances where factors outside the group’s control have changed (e.g. market increases in insurance costs). Benefits in respect of the year under review are disclosed in the annual report on remuneration. The maximum annual bonus opportunity is 100% of base salary. The pay-out for on-target performance is normally 50% of maximum; threshold performance results in zero pay out. Bonuses will be based primarily on a combination of stretching annual business and individual objectives. Business objectives (whether financial, operational or non-financial/strategic) will be selected to reflect the group’s short-term KPIs, financial goals and strategic drivers. The weighting of measures will be determined by the committee but will always include a strong focus on business performance. The committee may adjust the formulaic annual bonus outcomes (including to zero) to avoid unintended outcomes, align pay outcomes with underlying group performance and ensure fairness to shareholders and participants. Further details will be disclosed in the relevant annual report on remuneration. Performance targets set for each year will be disclosed retrospectively (to the extent they are considered not to be commercially sensitive), usually in the annual report on remuneration in respect of the year to which such performance targets relate. 73 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONREMUNERATION POLICY REPORT CONTINUED Purpose and link to strategy Operation Opportunity Performance measures Long-Term Incentive Plan (LTIP) To align the interests of executive directors and shareholders in growing the value of the group over the long term. Executive directors are eligible to receive annual awards over Phoenix shares under the LTIP either in the form of conditional share awards or nil cost options. Awards granted under the LTIP to executive directors will have a performance period of at least three years. If no entitlement has been earned at the end of the relevant performance period, awards will not vest. Shares received as a result of an award vesting (net of those sold to cover tax liabilities arising on vesting) will normally be subject to an additional two-year holding period. Dividends may accrue on LTIP awards over the vesting period and, if so, will be paid (in additional shares or in cash) on shares that vest at the end of the vesting period. LTIP awards granted to executive directors will be subject to malus and clawback provisions, as set out in the notes to the policy table. The maximum annual LTIP opportunity is 200% of base salary. In exceptional circumstances, the remuneration committee has discretion to make awards of up to 300% of base salary. 25% of an award will vest if performance against each performance condition is at threshold and 100% if it is at maximum, with straight-line vesting in between. Further details of the LTIP awards granted to each of the executive directors will be disclosed in the relevant annual report on remuneration. Vesting of the LTIP is subject to continued employment during the performance period and the achievement of performance conditions aligned with the group’s strategic plan and shareholder value creation. The performance conditions may include market- based measures, such as total shareholder return and internal measures of financial or operational performance. Performance measures will be selected by the remuneration committee at the start of each cycle. The committee may adjust the formulaic LTIP outcome to ensure it takes account of any major changes to the group (e.g. as a result of merger and acquisitions activity) and is a fair reflection of the underlying financial performance of the group over the performance period. Further details, including the performance targets attached to the LTIP in respect of each year will be disclosed in the relevant annual report on remuneration (subject to these being considered not to be commercially sensitive). Notes to the policy table Malus and clawback policy Malus and clawback may be applied to the deferred bonus share element of the annual bonus and LTIP awards in cases of gross misconduct by the executive director or material financial misstatement in the audited financial results of the group. Deferred bonus shares will be subject to malus over the deferral period and LTIP awards will be subject to malus over the vesting period and clawback from the vesting date to the second anniversary of the relevant vesting date. Share ownership guidelines The committee recognises the importance of aligning executive directors’ and shareholders’ interests through significant shareholdings in the group. The group’s policy (as published in the admission document) is to require the CEO to build up a shareholding of 200% of base salary (150% of salary for other executive directors) and to retain these shares until retirement from the board of directors. 50% of any net vested share awards (i.e. after sales to meet tax liabilities) must be retained until the minimum shareholding requirements are met. Use of discretion The committee may apply its discretion (as set out below) when agreeing remuneration outcomes, to help ensure that the implementation of our remuneration policy is consistent with the guiding principles for Phoenix remuneration. 74 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEPayments from outstanding awards The committee reserves the right in certain circumstances to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) where the terms of the payment were agreed before the policy came into effect; or at a time when the relevant individual was not a director of the group provided, that in the opinion of the committee, the payment was not agreed in consideration of the individual becoming a director of the group. For these purposes, payments include the satisfaction of variable remuneration awards previously granted, but not vested, to an individual. Minor changes to policy The committee retains discretion to make minor, non-significant changes to the policy set out above (for reasons including, but not limited to, regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without reverting to shareholders for approval for that amendment, where seeking such shareholder approval would be disproportionate to the discretion being exercised. LTIP awards The committee may exercise its discretion as provided for in the LTIP rules. The committee may also adjust the number of shares comprising an LTIP award (or the exercise price if the award comprises options) in the event of a variation of share capital, demerger, special dividend, distribution or any other corporate event which may affect the current or future value of an award. It is intended that any adjustment will be made on a neutral basis, i.e. to not be to the benefit or detriment of participants. Remuneration policy for the wider workforce The remuneration policy for other employees is based on principles that are broadly consistent with those applied to executive director remuneration, with a common objective of driving financial performance and the achievement of strategic objectives and contributing to the long-term success of the group. Remuneration supports our ability to attract, motivate and retain skilled and dedicated individuals, whose contribution continues to be a key factor in the group’s success. Annual salary reviews take into account group performance, local pay and market conditions and salary levels for similar roles in comparable companies. Pension entitlements and other benefits vary according to jurisdiction, to ensure these remain appropriately competitive for the local market. Some employees below executive level are eligible to participate in annual bonus schemes; opportunities and performance measures vary by organisational level, geographical region and an individual’s role. Employee ownership of Phoenix shares is promoted across the group. Senior executives are eligible for LTIP awards on similar terms as the executive directors, although award opportunities are lower and vary by organisational level. Other executives are eligible for restricted share awards on a discretionary basis. Phoenix is considering offering all employees the opportunity to participate in a share purchase plan, to be reviewed in 2019. Approach to target setting and performance measure selection The committee considers carefully the selection of performance measures at the start of each performance cycle, taking into consideration the group’s strategic objectives and the macroeconomic environment. Annual bonus measures are selected to align with the group’s short-term KPIs. LTIP performance measures are selected to ensure they align with the group’s strategy and long-term shareholder value creation. Measures may change from cycle to cycle (subject to the remuneration policy) and details of the bonus and LTIP measures selected will therefore be disclosed in the relevant annual report on remuneration. Targets are set to be stretching but achievable over the performance period, taking account of multiple relevant reference points, including typical performance ranges for those measures at other industry peers and FTSE-listed companies of comparable size and complexity. Pay-for-performance: scenario analysis The charts overleaf provide an estimate of the potential future reward opportunities for the executive directors and the potential split between the different elements of remuneration under three different performance scenarios: ‘Maximum’, ‘On-target’ and ‘Minimum’. Potential reward opportunities are based on the forward-looking policy, applied to 2019 base salaries and incentive opportunities. Note that the LTIP awards granted in a year will not normally vest until the third anniversary of the date of grant and the projected values exclude the impact of share price movement. 75 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONREMUNERATION POLICY REPORT CONTINUED Pay scenarios CEO – (US$’000) Maximum CFO – (US$’000) Maximum 28% 24% 48% US$2,573 40% 28% 32% US$1,420 On-Target On-Target 61% 26% 13% US$1,178 59% 31% 10% US$970 Minimum 100% Minimum US$713 100% US$570 Fixed pay Bonus LTIP Fixed pay Bonus LTIP Assumptions: ‘Maximum’: fixed remuneration (salary plus pension contribution and other benefits), plus maximum bonus (100% of salary) and full vesting of LTIP awards (200% of salary for the CEO; 112.5% of salary for the CFO). ‘On-target’: fixed remuneration as above, plus target bonus (50% of maximum for CEO; 75% of maximum for CFO) and threshold LTIP vesting (25% of maximum). ‘Minimum’: fixed remuneration only, being the only element of executive directors’ remuneration not linked to performance. Executive Director service contracts In accordance with general market practice, each of the executive directors has a rolling service contract. The resigning CEO’s service contract was terminable on 12 months’ notice from the group and 12 months’ notice from the executive director. The resigning CFO’s service contract was terminable on 12 months’ notice from the group and 12 months’ notice from the executive director and the newly appointed CFO’s service contract is terminable on 6 months’ notice from the group and 6 months’ notice from the executive director. These contracts are subject to the company serving an immediate termination notice, in specified circumstances for constructive dismissal. Copies of the service contracts are available to view at the group’s registered office. The following table shows the date of the service contract for each executive director that served during the year: Executive director Position Date of appointment Date of service agreement Anuj Sharma1 Philip Wolfe2 Kevin Dennehy3 CEO CFO CFO 10 August 2017 10 August 2017 1 October 2018 24 July 2017 24 July 2017 8 August 2018 1 Resigned 23 April 2019 2 Resigned 1 October 2018 3 Start date 15 August 2018 but date of appointment to the board 1 October 2018 Exit payments policy The group’s policy on termination payments is to consider the circumstances on a case-by-case basis, taking into account the relevant contractual terms in the executive’s service contract and the circumstances of termination. Executive directors’ contracts provide for the payment of a pre-determined sum in the event of termination of employment in certain circumstances (but excluding circumstances where the group is entitled to dismiss without compensation), comprising base salary in respect of the unexpired portion of the notice period. Termination payments may take the form of payments in lieu of notice. Payments would normally be made on a phased basis and subject to mitigation. In addition to contractual provisions, the table below summarises how awards under each discretionary incentive plan are typically treated in specific circumstances, with the final treatment remaining subject to the committee’s discretion as provided under the rules of the plan. In the event of termination, any outstanding shares or option granted under all-employee schemes will be treated in accordance with the rules of the scheme, which typically do not include discretion. 76 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCETreatment of awards on cessation of employment Reason for cessation Annual bonus Injury, disability, ill-health, death, redundancy, retirement, or other such event as the committee determines. Calculation of vesting/payment Timing of vesting/payment Following the end of the relevant financial year. The committee may determine that a bonus is payable on cessation of employment (normally pro-rated for the proportion of the performance year worked) and the committee retains discretion to determine that the bonus should be paid wholly in cash. The bonus payable will be determined based on the performance of the group and of the individual over the relevant period and the circumstances of the director’s loss of office. All other reasons (including voluntary resignation). Deferred bonus shares No bonus will be paid for the financial year. Not applicable. Resignation or dismissal for cause Awards normally lapse. Not applicable. All other reasons (e.g. injury, disability, ill-health, death, redundancy, retirement, or other such event as the committee determines). Awards will normally vest in full (i.e. not pro-rated for time) unless the committee determines that time pro-rating should apply. At the normal vesting date, unless the committee decides that awards should vest earlier (e.g. in the event of death). Change of control. LTIP awards Awards will normally be pro-rated for time (unless the committee exercises discretion to disapply time pro-rating). Awards may alternatively be exchanged for equivalent replacement awards, where appropriate. On change of control. Resignation or dismissal for cause. Awards normally lapse. Not applicable. All other reasons (e.g. injury, disability, ill-health, death, redundancy, retirement, or other such event as the committee determines). Change of control. At the normal vesting date, unless the committee decides that awards should vest earlier (e.g. in the event of death). Awards subject to a holding period remain subject to this holding period after leaving. On change of control. Awards will normally be pro-rated for time (unless the committee exercises discretion to disapply time pro-rating) and will vest based on performance over the original performance period (unless the committee decides to measure performance to the date of cessation). LTIP awards will normally be pro-rated for time (unless the committee exercises discretion to disapply time pro-rating) and will vest subject to performance over the period to the change of control. LTIP awards may alternatively be exchanged for equivalent replacement awards, where appropriate. 77 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONREMUNERATION POLICY REPORT CONTINUED Approach to remuneration on recruitment External appointments In cases of hiring or appointing a new executive director from outside the group, the committee may make use of all existing components of remuneration set out in the policy table, up to the disclosed maximum opportunities (where applicable). When determining the remuneration package for a new executive director, the committee will take into account all relevant factors based on the circumstances at that time to ensure that arrangements are in the best interests of the group and its shareholders. This may include factors such as the experience and skills of the individual, internal comparisons and relevant market data. The committee may also make an award in respect of a new appointment to ‘buy out’ incentive arrangements forfeited on leaving a previous employer, i.e. over and above the maximum limits on incentive opportunities set out in the policy table. In doing so, the committee will consider relevant factors, including any performance conditions attached to these awards, the likelihood of those conditions being met and the time over which they would have vested. The intention is that the expected value of any buy-out award would be no higher than the expected value of the forfeited arrangements and that the structure will replicate (as far as reasonably possible) that of the awards being forfeited. The committee may consider it appropriate to structure ‘buy-out’ awards differently from the structure described in the policy table, exercising its discretion under the LTIP rules to structure awards in other forms (including market value options, restricted shares, forfeitable shares or phantom awards) as the remuneration committee may determine in this context. Internal promotion Where a new executive director is appointed by way of internal promotion, the policy will be consistent with that for external appointees, as detailed above (other than in relation to ‘buy-out’ awards). Any commitments made prior to an individual’s promotion will continue to be honoured even if they would not otherwise be consistent with the policy prevailing when the commitment is fulfilled, although the group may, where appropriate, seek to revise an individual’s existing service contract on promotion to ensure it aligns with other executive directors and good practice. Disclosure on the remuneration structure of any new executive director, including details of any ‘buy-out’ awards, will be disclosed in the annual report on remuneration for the year in which recruitment occurred. External appointments held by executive directors Executive directors may not accept any external appointment without the consent of the board, there being no conflicts of interest and the appointment not leading to deterioration in the individual’s performance. Executive directors may retain the fees paid for such roles. Details of external appointments will be included in the annual report on remuneration. Consideration of conditions elsewhere in the group The committee seeks to promote and maintain good relations with employees as part of its broader employee engagement strategy, considers pay practices across the group and is mindful of the salary increases applying across the rest of the business in relevant markets when considering any increases to salaries for executive directors. However, whilst the committee does not currently consult with employees on its executive remuneration policy, in 2019 the committee will be looking at ways of increasing and improving the committee’s interaction with the wider workforce, in relation to the company’s remuneration policy. Consideration of shareholder views The committee will take into consideration all shareholder views received during the year and at the annual general meeting each year, as well as guidance from shareholder representative bodies more broadly, in shaping the group’s implementation of its remuneration policy, as well as any future changes to policy. 78 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCERemuneration policy for the non-executive directors Details of the policy on fees paid to our non-executive directors are set out in the table below: Purpose and link to strategy Operation Opportunity Performance measures Fee increases will be applied taking into account the outcome of the annual review. Not applicable The maximum aggregate annual fee for all non-executive directors (including the non-executive chairman) as provided in the group’s articles of association is £750,000. Non-executive director fees To attract and retain non-executive directors of the highest calibre with broad commercial and other experience relevant to the group. The fees of the non-executive chairman are determined by the committee. The fees paid to non-executive directors are determined by the non-executive chairman and executive directors. Additional fees may be payable for acting as senior independent director and for chairing or being a member of the audit and risk committee, the remuneration committee and any other board committees. Fee levels are reviewed annually taking into account external advice on best practice and competitive levels, in particular at other FTSE companies of comparable size and complexity. Time commitment and responsibility are also taken into account when reviewing fees. The non-executive chairman and non- executive director fees are paid in cash. The committee reimburses the non- executive chairman and non executive directors for reasonable expenses in performing their duties and may settle any tax incurred in relation to these expenses. Non-executive directors will be reimbursed by the group for expenses (including travel and accommodation) as required to fulfil their non-executive duties. The fees paid to the non-executive chairman and non-executive directors are disclosed in the annual report on remuneration. Non-executive directors are not eligible to join the group’s pension, incentives or share schemes or to participate in any of the group’s other benefit arrangements. In recruiting a new non-executive director, the committee will use the policy set out above. 79 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONREMUNERATION POLICY REPORT CONTINUED Non-executive director letters of appointment None of the non-executive directors has a service contract with the group. They do have letters of appointment and will be submitted for re-election annually. The dates relating to the appointments of the non-executive chairman and non-executive directors who served during year are as follows: Director Role Date of appointment Date of letter of appointment Sir Michael Rake Non-executive chairman 19 September 2016 John Bentley Garrett Soden Javier Alvarez David Jackson Independent non-executive director 10 August 2017 Independent non-executive director 10 August 2017 Independent non-executive director 16 July 2012 Independent non-executive director 16 July 2012 Nicolás Mallo Huergo Non-executive director 2 October 2007 24 July 2017 24 July 2017 24 July 2017 24 July 2017 24 July 2017 24 July 2017 Daniel Jaeggi Tim Harrington Non-executive director Non-executive director Matthieu Milandri1 Non-executive director Guillaume Vermersch2 Non-executive director 14 November 2018 14 November 2018 14 November 2018 14 November 2018 21 August 2013 10 August 2017 24 July 2017 24 July 2017 1 Resigned 31 January 2019 2 Resigned 14 November 2018 80 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEANNUAL REPORT ON REMUNERATION This section of the remuneration report provides details of how our remuneration policy was implemented during the year ending 31 December 2018 and how it will be implemented during the year ending 31 December 2019. Committee membership in 2018 The committee is currently composed of four non-executive directors: Committee chairman (independent) John Bentley Sir Michael Rake Non-executive chairman Garrett Soden David Jackson Non-executive director (independent) Non-executive director (independent) The company secretary acts as secretary to the committee. The committee met formally on four occasions during the year ending 31 December 2018. The attendance of members of the committee during the year is set out below. Member John Bentley (Chair) Sir Michael Rake Garrett Soden David Jackson Meetings attended 4/4 4/4 4/4 4/4 The committee operates within agreed terms of reference, which are available on our website at www.phoenixglobalresources.com. The committee is responsible for determining the remuneration policy and packages for the executive directors and other selected senior executives. The committee is also responsible for agreeing the fees for the non-executive chairman. The CEO and CFO attend meetings of the committee by invitation. The members of the committee and any person attending its meetings do not participate in any discussion or decision on their own remuneration. Advisers The committee formally appointed Mercer as its independent advisor to support the group on remuneration-related matters. Mercer reports to the committee chairman. Mercer is a member of the Remuneration Consultants’ Group and as such, voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK (www.remunerationconsultantsgroup.com). Mercer does not have any other connection with the group and is considered to be independent by the committee. Fees paid to Mercer are determined on a time and materials basis and totalled US$24,234 (excluding expenses and VAT) for the year ending 31 December 2018, in their capacity as advisers to the committee. 81 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONANNUAL REPORT ON REMUNERATION CONTINUED Single total figure of remuneration for executive directors The table below sets out a single figure for the total remuneration received by each executive director. Anuj Sharma and Philip Wolfe were appointed as executive directors of Phoenix on 10 August 2017. Kevin Dennehy was appointed as an executive director on 1 October 2018. Philip Wolfe resigned as an executive director on 1 October 2018 and Anuj Sharma resigned as an executive director on 23 April 2019. The values of each element of remuneration are based on the actual value delivered, where known. Director Anuj Sharma6 Philip Wolfe7 2018 2017 2018 2017 Kevin Dennehy 2018 Base salary1 US$‘000 Taxable benefits2 US$‘000 Annual Bonus3 US$‘000 LTIP US$‘000 Pension benefit4 US$‘000 Other5 US$‘000 Total US$‘000 620 247 300 152 100 26 10 19 6 8 TBC – 200 165 100 – – – – – 81 25 30 15 17 – – – 52 25 TBC 282 549 390 250 1 The salaries of our executive directors were set in the context of salaries for comparable roles at other international E&P companies and FTSE-listed companies of comparable size to Phoenix. For 2017, Anuj Sharma’s base salary figure reflects his annualised salary of US$620,000, pro-rata for the period from 10 August 2017 (his date of appointment) to the year-end. For 2017, Philip Wolfe’s base salary figure reflects his annualised salary of £300,000, pro-rata for the period from 10 August 2017 (his date of appointment) to the year-end. For 2018, Philip Wolfe’s salary figure reflects his annualised salary of £300,000, pro-rata for the period from the beginning of the year to 1 October (his date of resignation). For 2018, Kevin Dennehy’s base salary figure reflects his annualised salary of US$400,000, pro-rata for the period from 1 October 2018 (his date of appointment) to the year-end. 2 Consists primarily of private medical insurance, life assurance and permanent health insurance. 3 Payment for performance during the year, pro-rated for the period where applicable. Two-thirds paid in cash and one-third deferred as an award under the terms of the company’s Deferred Bonus Plan. See below and overleaf for further details. 4 Pension benefits in the year, equivalent to 10% of base salary paid in that year and the company’s matching contribution to the company’s 401k plan where applicable. 5 For 2017, Philip Wolfe received a sign on bonus in August 2017. Kevin Dennehy received an annual foreign living and service allowance of USD$70,000, pro-rata for the period from 1 October 2018 (his date of appointment) to the year-end. 6 Anuj Sharma resigned as CEO on 23 April 2019. His annualised base salary at the time of his resignation as CEO was $620,000 and he received a pension benefit equivalent to 10% of his salary. 7 Philip Wolfe resigned as CFO on 1 October 2018. His annualised base salary at the time of his resignation as CFO was £300,000 and he received a pension benefit equivalent to 10% of his salary. Single total figure of remuneration for non-executive directors The table below sets out a single figure for the total remuneration received by each non-executive director. The 2017 figures reflect the fees paid from 10 August 2017 (the date of admission) to 31 December 2017. As appointees of the group’s substantial shareholder, Matthieu Milandri, Guillaume Vermersch and Daniel Jaeggi have waived their right to receive fees in connection with their appointments. Director Sir Michael Rake John Bentley1 Garret Soden2 Javier Alvarez David Jackson Nicolas Mallo Huergo Matthieu Milandri6 Guillaume Vermersch3,6 Daniel Jaeggi4,6 Tim Harrington5 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Basic fees US$‘000 Additional fees US$‘000 Total US$‘000 214 81 67 25 67 26 67 25 67 25 67 25 – – – – – – 9 – – – 19 5 13 5 – – – – – – – – – – – – – – 214 81 86 30 80 31 67 25 67 25 67 25 – – – – – – 9 – 1 Additional fees paid for his appointment as the Senior Independent Director and Chairman of the Remuneration Committee. 2 Additional fees paid for his appointment as the Chairman of the Audit Committee. 3 Resigned 14 November 2018. 4 Appointed 14 November 2018. 5 Appointed 14 November 2018. 6 Waived rights to fees. 82 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCE Incentive outcomes for the year ended 31 December 2018 Annual bonus in respect of performance in the 2018 financial year Whilst 2018 annual bonuses are based on a combination of quantitative and subjective key performance indicators including corporate, operational (including HSE and growth in resources and reserves), financial and personal performance, given the company’s stage of development, explicit performance targets were not set for each performance measure with the awards predominantly determined on a discretionary basis by the committee taking into account performance against the indicators during the year. One-third of the award will be deferred as an award over shares that will vest pro-rata annually over three years. The balance of the award will be paid in cash. The CEO had a maximum opportunity of 100% of salary and on-target opportunity of 50% of maximum. The maximum opportunity for the CFO is 100% of salary, the on-target opportunity was 50% of maximum for Philip Wolfe and 75% of maximum for Kevin Dennehy. The table below summarises the annual bonus payments for the executive directors and includes the cash element of the bonus and the value of any deferred element that was granted during the year: Director Maximum opportunity Anuj Sharma 100% of salary Philip Wolfe1 100% of salary Kevin Dennehy2 100% of salary Bonus outcome (% of maximum) Salary earned for the year to 31 December 2018 US$‘000 Cash element of bonus for the year to 31 December 2018 US$‘000 Deferred element of bonus for the year to 31 December 20183 US$‘000 TBC 50% 100% 620 400 100 TBC 133 67 TBC 67 33 1 Philip Wolfe’s salary reflects his annual salary for the year even though he resigned from the board on 1 October 2018. Further details of Mr Wolfe’s treatment as a good leaver are included on page 86. 2 Kevin Dennehy’s salary reflects his annual salary of US$400,000 paid by the group from 1 October 2018 (his date of appointment to the board). 3 The value has been calculated using the market price of the shares at the date of grant. LTIP awards granted in 2018 Delayed 2017 LTIP On the 27 June 2018, the committee made the first grant of awards under the company’s LTIP. The performance period for this award starts on 10 August 2017, being the date of admission following the business combination with Trefoil: Director Year of grant Anuj Sharma3 2018 Philip Wolfe4 2018 Type of award Nil cost Nil cost Basis of award 200% of salary 200% of salary Face value of award1 US$‘000 Number of awards No. 1,251,247 4,260,290 801,000 2,727,273 End of performance period2 US$‘000 9 August 2020 9 August 2020 Exercise price US$‘000 Performance conditions 0.00 See below 0.00 See below 1 Calculated as the number of awards granted multiplied by the mid-closing price preceding the date of grant of 22 pence. 2 Any awards that vest at the end of the performance period will be required to be held for an additional two-year holding period, subject to the rules of the plan. 3 The terms of Anuj Sharma’s entitlements under the terms of the LTIP will be determined in accordance with the LTIP rules. 4 The committee determined Philip Wolfe to be a ‘good leaver’, therefore shares awarded to Philip under the LTIP will continue to be capable of vesting on the normal vesting dates, subject to the performance conditions and the LTIP rules. 83 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONANNUAL REPORT ON REMUNERATION CONTINUED Vesting of the awards will be based on two equally weighted performance conditions, as set out in the following table: Performance threshold Below target Target At or above stretch Vesting level (% of maximum Opportunity at grant1 Relative TSR (50% weighting)2 Absolute TSR (50% weighting) 0% 25% 100% Below median Median Upper quartile Below 8% per annum 8% per annum 16% per annum 1 Vesting will be calculated on a straight-line basis between each vesting level. 2 Comparator group: Company Country of listing Company Amerisur Resource PLC United Kingdom Nostrum Oil & Gas PLC Cairn Energy PLC United Kingdom Canacol Energy Ltd Canada EnQuest PLC United Kingdom Ophir Energy PLC Parex resources Inc Premier Oil PLC Country of listing United Kingdom United Kingdom Canada United Kingdom Faroe Petroleum PLC United Kingdom SOCO International PLC United Kingdom Frontera Energy Corp Canada Gran Tierra Energy Inc United States Hurricane Energy PLC United Kingdom Sound Energy PLC Tullow Oil PLC United Kingdom United Kingdom 2018 LTIP On the 24 September 2018, the committee made a grant of awards outside the company’s LTIP but on terms identical to the plan. The awards were made to address a timing conflict that arose as a result of the delay in the grant of the first awards due to the company being in a close period at the time they were due to be awarded. Director Year of grant Anuj Sharma3 2018 Philip Wolfe4 2018 Kevin Dennehy 2018 Type of award Nil cost Nil cost Nil cost Basis of award 200% of salary 200% of salary 112.5% of salary Face value of award1 US$‘000 Number of awards No. 1,266,763 4,037,814 89,000 283,687 459,712 1,465,335 End of performance period2 US$‘000 23 September 2021 23 September 2021 23 September 2021 Exercise price US$‘000 Performance conditions 0.00 See below 0.00 See below 0.00 See below 1 Calculated as the number of awards granted multiplied by the mid-closing price preceding the date of grant of 23.5 pence. 2 Any awards that vest at the end of the performance period will be required to be held for an additional two-year holding period, subject to the rules of the LTIP. 3 The terms of Anuj Sharma’s entitlements under the terms of the LTIP will be determined in accordance with the LTIP rules. 4 Adjusted pro-rata. The committee determined Philip Wolfe to be a ‘good leaver’, therefore shares awarded to Philip under the LTIP will continue to be capable of vesting on the normal vesting dates, subject to the performance conditions and the LTIP rules. 84 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEVesting of the awards will be based on two equally weighted performance conditions, as set out in the following table: Performance threshold Below target Target At or above stretch Vesting level (% of maximum Opportunity at grant1 0% 25% 100% Relative TSR (50% weighting)2 Absolute TSR (50% weighting) Below median Median Upper quartile Below 8% per annum 8% per annum 16% per annum 1 Vesting will be calculated on a straight-line basis between each vesting level. 2 Comparator Group: Company Country of listing Company Amerisur Resource PLC United Kingdom Nostrum Oil & Gas PLC Cairn Energy PLC United Kingdom Canacol Energy Ltd Canada EnQuest PLC United Kingdom Ophir Energy PLC Parex resources Inc Premier Oil PLC Country of listing United Kingdom United Kingdom Canada United Kingdom Faroe Petroleum PLC United Kingdom SOCO International PLC United Kingdom Frontera Energy Corp Canada Gran Tierra Energy Inc United States Hurricane Energy PLC United Kingdom Sound Energy PLC Tullow Oil PLC United Kingdom United Kingdom Statement of shareholdings and share interests of directors who served during the year Share interests as at 30 April 2019 are set out below: Director Sir Michael Rake Anuj Sharma3 Kevin Dennehy John Bentley Garrett Soden Javier Alvarez David Jackson Nicolas Mallo Huergo Matthieu Milandri Daniel Jaeggi4 Tim Harrington Guillaume Vermersch Philip Wolfe Number of beneficially owned shares1 No. DBP awards subject to vesting No. LTP awards subject to conditions No. Warrants (see note 15)2 No. 330,000 42,000 40,000 42,000 – – 1,221,575 966,323 – – – – – – – – – – – – – – – – – 8,298,104 1,465,335 – – – – – – – – – 41,666 193,637 3,010,960 Total interests held as at 30 April 2019 No. Total interests held as at 31 December 2018 No. 330,000 128,003 8,340,104 8,340,104 1,505,335 1,505,335 42,000 42,000 – – – – 1,221,575 1,221,575 – – – – – – – 606,000 1,572,323 1,572,323 – – – – – – – – – – – – – 3,246,263 3,246,263 1 Beneficial interest include shares held directly or indirectly by connected persons. 2 Company financial statements. 3 The terms of Anuj Sharma’s entitlements under the terms of the LTIP will be determined in accordance with the LTIP rules. 4 Daniel Jaeggi has an indirect interest in the company via Mercuria Energy Group Holding Limited, which holds approximately 84.4% of the company’s share capital. 85 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONANNUAL REPORT ON REMUNERATION CONTINUED Relative importance of spend on pay There were no dividends paid or share buybacks implemented or other significant distributions, payments or other uses of profit or cash flow in the 2018 financial year which the directors consider relevant in assisting an understanding of the relative importance of spend on pay. Payments to past directors and payments for loss of office The committee’s approach when exercising its discretion under the company’s remuneration policy, is to be mindful of the particular circumstances of the departure and the contribution the individual made to the group. Philip Wolfe Philip Wolfe stepped down as CFO and a board director with effect from 1 October 2018. His remuneration arrangements were in line with the provisions in his service contract, which entitles him to a payment of lieu of notice for a 12 month period, subject to mitigation. The remuneration policy and the remuneration he received as an executive director is set out in the 2018 single figure table. The committee determined Philip a “good leaver” and in recognition of his contribution to the company, his 2018 bonus will pay out £150,000 at the “on target” level. Shares awarded in 2018 under the LTIP were subject to a time pro-rating. Shares awarded under the LTIP and DBP will continue to be capable of vesting on the normal vesting dates, subject to any applicable performance conditions and the respective LTIP and DBP rules and remain subject to malus and clawback provisions. Anuj Sharma On 23 April 2019, Anuj Sharma served a notice on the company, which the company is treating as a notice terminating his employment in accordance with his service agreement and resigning from his position as chief executive officer and a director of the company with immediate effect. Anuj Sharma’s termination arrangements will be subject to and in accordance with his service agreement and LTIP and DBP plan rules. Details of any arrangements entered into will be disclosed in next year’s remuneration report. External appointments The executive directors do not currently hold any external appointments. Review of past performance and CEO remuneration This graph shows the group’s total shareholder return (TSR) compared to the FTSE 250 Index as if the group was listed on the main market. Performance, in line with the requirements of the reporting regulations, is measured by TSR over the period from admission (10 August 2017) to 31 December 2018, rebased to £100 on admission. £150 £135 £120 £105 £90 £75 £60 £45 £30 9 Aug 2017 31 Jan 2018 31 Jul 2018 31 Dec 2018 Phoenix Global Resources FTSE 250 Index The table below details the CEO’s single total figure of remuneration and incentive outcomes over the same period: CEO CEO single figure (US$‘000) Annual bonus (% max) LTIP vesting (% max) 1 Period from 1 August 2017 to the end of the year. 2 Anuj Sharma’s termination arrangements will be subject to and in accordance with his service agreement and the LTIP and DBP rules. 86 2017 2018 Anuj Sharma¹ Anuj Sharma2 282 n/a n/a TBC TBC TBC ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEPercentage change in CEO remuneration This section is not applicable as the CEO was only appointed on 10 August 2017; no full prior year comparison can be made. Implementation of director remuneration policy for 2019 Executive Directors’ base salaries Following a review of executive directors’ salary levels the committee do not recommend an increase in the executive directors’ salaries in 2019. The salaries for 2019 are as follows: Director CEO CFO Base salary US$’000 620 400 Executive Directors’ pensions Both executive directors will continue to receive a cash allowance of 10% of base salary in lieu of a contribution to a 401k scheme (US pension scheme) and are eligible to participate in the 401k plan offered to all US employees. Non-executive Directors’ fees Following a review of non-executive directors’ fees the committee do not recommend an increase in the non-executive chairman’s fee in 2019. Separately, the non-executive chairman and executive directors do not recommend an increase to the non-executive director fees. The fees for 2019 are as follows: Director Sir Michael Rake John Bentley Garret Soden Javier Alvarez David Jackson Nicolas Mallo Huergo Daniel Jaeggi Tim Harrington Base fee US$’000 214 93 80 67 67 67 – 67 Annual bonus For 2019, the executive directors will each have a maximum bonus opportunity of 100% of salary. The on-target bonus opportunity is 50% of maximum for the CEO and 75% for the CFO. Two-thirds of any bonus earned will be paid in cash, with the remainder deferred into Phoenix shares for a further three-year period, vesting pro-rata annually. Consistent with 2018, given the company’s stage of development, whilst the annual bonus for 2019 will be based on a combination of quantitative and subjective key performance indicators including corporate, operational (including HSE and growth in resources and reserves), financial and personal performance, performance targets for each performance measure will not be set at the start of the year, with awards predominantly determined on a discretionary basis. In line with our policy, deferred bonuses in respect of the 2019 financial year will be subject to the group’s malus provisions (see page 74 for further details). Long-Term Incentive Plan (LTIP) In 2019, the executive directors will each receive conditional awards of shares under the Phoenix LTIP, with face values of 200% of salary for the CEO and 112.5% of salary for the CFO, subject to the committee using its discretion to make awards of up to 300% of base salary in exceptional circumstances. The 2019 LTIP will vest after three years, subject to the following performance measures and targets: Measure 3-year relative TSR 3-year absolute TSR Weighting Threshold (25% vesting) 50% Median Maximum 75th percentile 50% 8% p.a. 16% p.a. 87 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONANNUAL REPORT ON REMUNERATION CONTINUED Phoenix’s TSR performance will be measured over the three-year period commencing on the date of grant and compared to the following companies on the basis of TSR rank: Company Country of listing Company Amerisur Resources plc United Kingdom Ophir Energy plc Country of listing United Kingdom Cairn Energy PLC United Kingdom Parex Resources Inc Canada Canacol Energy Ltd Canada EnQuest plc United Kingdom Premier Oil plc President Energy United Kingdom United Kingdom Frontera Energy Corp Canada SOCO International plc United Kingdom Geo Park United States Sound Energy plc Gran Tierra Energy Inc United States Hurricane Energy plc United Kingdom Nostrum Oil & Gas PLC United Kingdom Tullow Oil plc Vista Oil & Gas United Kingdom United Kingdom Mexico To provide further alignment with shareholders, LTIP awards will be subject to an additional post-vesting holding period. To the extent an award vests subject to three-year performance, shares will be required to be held for a further two years (i.e. until the fifth anniversary of the date of grant). In line with our policy, LTIP awards will also be subject to the group’s malus and clawback provisions. The directors’ remuneration report has been approved by the board and signed on its behalf by: John Bentley Chairman, remuneration committee 2 May 2019 Where applicable a rate of exchange of US$/£1.335 has been used for 2018 and 2019 and a rate of exchange of US$/£1.290 for 2017. Where salaries and fees are denominated in £ changes in annual fees reported in US$, may partly be due to changes in the rate of exchange. 88 ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEDIRECTORS’ REPORT Group directors’ report for the year ended 31 December 2018 The directors of Phoenix Global Resources plc present their Annual Report and audited financial statements of the group for the year ended 31 December 2018. These will be laid before the shareholders at the AGM to be held on 25 June 2019. General information The company is a public limited company incorporated in England and Wales under the Companies Act 2006 (Registered no. 05083946). The company operates two overseas branches, one each in Mendoza (Argentina) and in Bogota (Colombia). Mercuria Energy Group Limited is the ultimate majority shareholder of the group. Share capital The company’s share capital during the year consisted of ordinary shares of £0.10 each (ordinary shares). Each ordinary share carries one vote. At 1 January 2018 there were 2,537,178,226 ordinary shares in issue. Placement of shares On 16 February 2018, the company announced the conversion of US$100.0 million of the previously existing bridging and working capital facility from Mercuria Energy Trading S.A. to new ordinary shares at £0.37 per share. As a result, 194,387,299 additional shares were issued to Mercuria Asset Holdings (Hong Kong) Limited, a subsidiary of Mercuria Energy Group Limited (“Mercuria Group”). A further 15,679,597 shares were issued during the year following the exercise of warrants and options held by both Upstream Capital Partners VI Limited and Mercuria Asset Holdings (Hong Kong) Limited. On 27 June 2018, 7,156,625 shares were issued to Integra Capital S.A. at a subscription price of £0.58 per share and in satisfaction of the second instalment due under the transaction fee services agreement that was associated with the 10 August 2017 combination transaction. The sale and purchase agreement related to the original combination transaction included provision that for each share issued to a third party where the issue related to an agreement, option, warrant or other instrument outstanding at the time of the transaction then Upstream Capital Partners VI would be entitled to receive a number of new shares such as to give effect to the original exchange ratio applied in the combination transaction being 3.06147 new ordinary shares being issued to Mercuria for each share issued to a third party. In respect of the shares issued to Integra Capital S.A. the right to receive shares in accordance with the original exchange ratio was voluntarily limited by Upstream Capital Partners such that only one share was received by it received for each share issued to Integra Capital S.A.. As a result 7,156, 625 shares were also issued to Upstream Capital Partners VI Limited. A further 535,714 shares were issued on exercise of outstanding options during the year. Finally, 86,337 shares were issued to Sir Michael Rake at a subscription price of £0.30 per share. These shares were in compensation for fees accrued pursuant to the terms of his appointment as a non-executive director for the period up to the completion of the August 2017 combination transaction with Trefoil Holdings B.V. On 19 September 2018, the company reached an agreement with Integra Oil & Gas S.A. to settle the remaining amount due in respect of the Mata Mora and Corralera exploration concessions through the issue of 25,000,000 new ordinary shares at a subscription price of £0.45 each. At 31 March 2019, a total of 2,786,644,709 ordinary shares were in issue. Substantial and significant interests in shares Name Mercuria Energy Group Limited1 José Luis Manzano and family2 Number of ordinary shares3 As a % of the issued ordinary shares 2,322,950,277 83.36% 111,446,170 4.0% 1 Mercuria Energy Group holds the above shares in the company through its subsidiaries Upstream Capital Partners VI Limited (1,924,634,982 shares), Mercuria Asset Holdings (Hong Kong) Limited (334,126,990 shares) and Mercuria Energy Asset Management B.V. (64,188,305 shares) 2 These shares in the company are held through Vetalir International S.A. (established as a trust, the beneficiaries of which are the family of José Luis Manzano) (79,328,285 shares), Integra Capital USA LLC (12,162,250 shares), Integra Capital S.A. (7,156,625) and directly by José Luis Manzano (12,799,010 shares) 3 At 22 January 2019 89 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONDIRECTORS’ REPORT CONTINUED In addition to ordinary shares of the company, Upstream Capital Partners VI Limited also received 179,838,924 warrants to subscribe for ordinary shares of the company. The number of warrants issued to Upstream Capital Partners VI Limited was calculated by reference to the original exchange ratio in order to allow it the option to maintain its post-combination shareholding percentage in Phoenix in the event that holders of warrants that existed prior to the combination elected to exercise their warrants. The warrants held by Upstream Capital Partners VI Limited following the combination transaction are exercisable pro-rata and conditional on the exercise of a previously existing warrant and have exercise prices reflecting the exercise price of those warrants. At 31 May 2018, Upstream Capital Partners VI Limited has exercised 10,228,089 of the warrants received by it as part of the combination transaction. Majority shareholder Mercuria Energy Group Limited is the ultimate majority shareholder of the group. A relationship agreement is in place between and amongst the company and Mercuria Energy Group companies. This relationship agreement restricts shareholder rights with respect to board composition, voting on director appointments and removal and the day to day running of the business by the executive directors. The board of directors is composed of a majority of independent directors. Matters related to governance are discussed further in the corporate governance report on pages 61 to 64. Contracts of significance At 1 January 2018, the company was participant to a bridging and working capital agreement advanced by Mercuria Energy Group with aggregate value of US$160.0 million. Funds received under the agreement were used to redeem approximately US$87.0 million of existing credit facilities outstanding at the date of the August 2017 combination transaction with the remainder being made available for general and working capital purposes. On 16 February 2018, US$100.0 million of this facility was converted into 194,387,299 ordinary shares of the company at a price of £0.37 per share. The remaining US$60.0 million was refinanced as part of a new convertible revolving credit facility from Mercuria, details of which are included in note 23 to the consolidated financial statements. On 22 January 2018, the company entered a commodity price swap agreement with Mercuria Energy Trading S.A. under which the company fixed the price it received per barrel for a portion of oil sales over an 11-month period effective 15 January 2018. The contract was priced by reference to a Brent benchmark of US$65.97 per barrel and was in place in respect of 1,215,954 barrels in total. The contract expired on 14 December 2018. Significant contracts with related parties are discussed in note 29 to the consolidated financial statements. Dividends The directors do not recommend the payment of a dividend for the year. Directors Details of the directors who have served the company during the year including their dates of their appointment and, where relevant, their resignation are as follows: Nicolás Mallo Huergo Javier Alvarez David Jackson Matthieu Milandri Sir Michael Rake John Bentley Anuj Sharma Garrett Soden Board role Non-executive Non-executive (independent) Non-executive (independent) Non-executive First appointed 2 October 2007 17 July 2012 17 July 2012 Resigned n/a n/a n/a 21 August 2013 31 January 2019 Non-executive chairman 19 September 2016 Non-executive (independent) Chief executive officer Non-executive (independent) 10 August 2017 10 August 2017 10 August 2017 n/a n/a 23 April 2019 n/a Guillaume Vermersch Non-executive Philip Wolfe Kevin Dennehy Daniel Jaeggi Tim Harrington 90 Chief financial officer Chief financial officer Non-executive Non-executive 10 August 2017 14 November2018 10 August 2017 1 October 2018 1 October 2018 14 November 2018 14 November 2018 n/a n/a n/a ANNUAL REPORT AND ACCOUNTS 2018GOVERNANCEThe current directors were appointed to the board with a three-year service term and will not be proposed for re-election at AGM prior to the expiration of that term. The directors who joined the board in August 2017 were appointed at a meeting of the board of directors of the company. Accordingly, resolutions to reappoint these directors will be proposed at the upcoming AGM. Directors’ interests in share capital The directors’ interests in the share capital of the company are shown in the annual report on remuneration on page 85. Directors’ indemnities As permitted by the articles of association of the company, the directors have been given the benefit of an indemnity, which is a qualifying third-party indemnity provision as defined in section 234 of the Companies Act 2006. The indemnity was in place throughout the year and continues to be so. The company has directors’ and officer’s liability insurance in place that provides insurance cover to the directors in the event of a claim or legal action. This insurance was also in place throughout the year and remains in place. Political and charitable donations No political or charitable donations were made, nor was any political expenditure incurred by any group company in the year ended 31 December 2017 (2016: nil). Auditors and disclosure of relevant audit information As far as each director is aware, there is no relevant audit information of which the company’s auditor is unaware. In addition, each director has taken all the steps that ought to have been taken in order to make themselves aware of any relevant audit information and to establish that PwC, the company’s auditor in the period, is aware of that information. Following a review of both the independence and the effectiveness of the auditor; and the indication from PricewaterhouseCoopers LLP of its willingness to continue in office, a resolution that PwC be reappointed will be proposed at the annual general meeting. Corporate governance The company’s statement on corporate governance can be found in the corporate governance report on pages 61 to 64 of this annual report. The corporate governance report forms part of this directors’ report and is incorporated by reference here. Annual general meeting The company’s AGM will be held at Herbert Smith Freehills LLP, Exchange House, Primrose Street, London EC2A 2EG on 25 June 2019. Formal notice of the AGM, including details of special business, is set out in the notice of AGM which accompanies this annual report and is available on the company’s website at www.phoenixglobalresources.com. 91 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONDIRECTORS’ REPORT CONTINUED Going concern The group’s business activities, together with a description of the factors likely to affect its future development are set out in the group strategic report. The financial position of the group, its cash flows and liquidity position and borrowing facilities are described in the financial review set out in this annual report. Details of the group’s commitments are set out in note 28 to the group financial statements. In addition, note 24 to the group financial statements includes details of the group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of financial instruments held; and its exposure to credit and liquidity risk. The group principally generates cash from its existing conventional oil and gas production operations. Nevertheless, Phoenix was formed with the stated intention of undertaking a significant exploration, evaluation and development programme focused on the group’s unconventional oil and gas assets in Argentina, including the Vaca Muerta formation. In order to appraise and develop its significant unconventional asset portfolio and generate shareholder value however, the company will need to invest significant amounts of capital over the next several years. The group’s business plan and exploration programme for 2019 contemplates further evaluation work related to unconventional prospects with the objective of progressing at least one prospect towards the development stage. This work will require funding. In addition, the company has payment obligations related to the wells drilled at Mata Mora in late 2018 and early 2019. These wells are currently awaiting completion. To date, the funding required to support the activities of the group has been provided by subsidiaries Mercuria Energy Group. The company is currently assessing funding options to finance the next stage of its operations. While that funding assessment is ongoing Mercuria Energy Group Limited has provided the company with a letter of support that states Mercuria’s intention to make funds available to the company for a period of not less than twelve months from the date of this annual report or until such time as sufficient funding to support the business plan for 2019 and into 2020 has been secured. E C N A N R E V O G The directors therefore have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Consequently the directors continue to adopt the going concern basis of accounting in preparing the financial statements. The financial statements do not include any adjustments that would be required if the group was unable to continue as a going concern. The application of the going concern basis of preparation of the financial statements included in this annual report is based on the letter of support that has been received. Further disclosures Further disclosure requirements as required by the Companies Act 2006, Schedule 7 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and the FCA’s Listing Rules and Disclosure and Transparency Rules are found on the following pages of the company’s annual report and are incorporated into the directors’ report by reference: Page number 2–7 127–128 51 61–64 51 134–138 144 Disclosure Future developments Acquisitions and disposals Anti-slavery disclosure Corporate governance statement Gender diversity Financial risk and financial instruments Important events subsequent to the year end On behalf of the board Kevin Dennehy Chief financial officer 2 May 2019 92 ANNUAL REPORT AND ACCOUNTS 2018STATEMENT OF DIRECTORS’ RESPONSIBILITIES The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulation. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group and company financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to: > select suitable accounting policies and then apply them consistently; > state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and IFRSs as adopted by the European Union have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements; > make judgements and accounting estimates that are reasonable and prudent; and > prepare the group and company financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements comply with the Companies Act 2006. The directors are responsible for the maintenance and integrity of the group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ confirmations The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and company’s position and performance, business model and strategy. In the case of each director in office at the date the directors’ report is approved: > so far as the director is aware, there is no relevant audit information of which the group and company’s auditors are unaware; and > they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the group and company’s auditors are aware of that information. On behalf of the board Kevin Dennehy Chief financial officer 2 May 2019 93 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION94 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTSFinancial statements IN THIS SECTION 96 Independent auditors’ report 102 Consolidated income statement 103 Consolidated statement of comprehensive income 104 Consolidated statement of financial position 105 Consolidated statement of changes in equity 106 Consolidated statement of cash flows 107 Notes to the consolidated financial statements 145 Company statement of financial position 146 Company statement of changes in equity 147 Company statement of cash flows 148 Notes to the company financial statements Phoenix Global Resources plc 95 STRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONINDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF PHOENIX GLOBAL RESOURCES PLC Report on the audit of the financial statements Opinion In our opinion, Phoenix Global Resources plc’s group financial statements and company financial statements (the “financial statements”): > give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2018 and of the group’s loss and the group’s and the company’s cash flows for the year then ended; > have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and > have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the Annual Report and Accounts 2018 (the ‘Annual Report’), which comprise: the consolidated and company statements of financial position as at 31 December 2018; the consolidated income statement and consolidated statement of comprehensive income, the consolidated and company statements of cash flows and the consolidated and company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview Materiality > Overall group materiality: $3.4 million (2017: $1.6 million), based on 1% of net assets. > Overall company materiality: $1.1 million (2017: £0.8 million), based on 1% of net assets. Audit scope > We conducted a full scope audit at four significant components based on their size and risk characteristics; three operating entities in Argentina and the parent company in London. Our scope enabled us to obtain 94% coverage of consolidated revenue, 89% of consolidated total assets and 82% of consolidated net assets for the group. > Senior members of the audit team visited Argentina during the year end audit in order to have sufficient oversight of the work of our component auditors in Argentina. Key audit matters > Going concern (group and parent). > Impairment of long term assets and goodwill (group). > Impairment of investments (parent). The scope of our audit As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. Key audit matters Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. 96 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTSKey audit matter How our audit addressed the key audit matter We obtained management’s five year plan including the cash flow forecast for 2019 and 2020, which supports their use of the going concern basis of accounting for the group’s and the company’s financial statements. We tested the integrity of the forecast, including mathematical accuracy. The model includes a number of key assumptions such as sales revenues, operating costs and capital expenditure as well as successful exploration results transforming into production. We have held extensive discussions with management and reviewed the key assumptions and have also considered the historical accuracy of management’s forecasting and performed sensitivity testing for reasonable possible changes in the key assumptions. Management has been provided with a letter of support from Mercuria Energy Group Limited for the next 12 months. As part of our evaluation of management’s going concern assessment, we have considered the ability of Mercuria Energy Group Limited to support the group. Going Concern (group and parent) As explained in note 2 on page 107, oil and gas exploration, evaluation and development activity is capital intensive and requires significant investment in the early stages of the asset lifecycle before yielding production returns and, ultimately, cash from operations. The planned capex for the group over the next 12 months requires further future funding and therefore securing funding is a key area of focus for management. The group is dependent on the willingness of the lender, who is the major shareholder of the group, to continue their support of the group by providing access to additional financing in future periods to enable the group to realise its business plan and exploration programme and satisfy the capital requirements which underpin this. Due to the level of funding requirements needed in the next 12 months to appraise the contingent and prospective resources, the controlling shareholder, Mercuria Energy Group Limited, has committed to provide financial support, for a period of not less than twelve months from the date of these financial statements to support the business plan for 2019 and into 2020. If the company is unable to access funding from its major shareholder, or from alternative sources, to meet the development capex requirements, then it may not be able to ensure that the various unconventional opportunities it is targeting will move to development and production and ultimately yield net cash from operations after capex. Impairment of long term assets and goodwill (group) Impairment assessments require significant judgement and there is the risk that the valuation of the assets may be incorrect and any potential impairment charge or reversal miscalculated. As such, this was a key focus for our audit due to the material nature of the balance. For the Chachahuen CGU, which has goodwill allocated to it, we assessed the reasonableness of management’s future forecasts of capital and operating expenses, included in the cash flow forecasts, in light of the historical accuracy of such forecasts and the current operational results. As disclosed in note 13 and note 14, the group has property, plant and equipment of US$366.2 million and exploration and evaluation assets of US$225.2 million as at 31 December 2018. The group also has goodwill of US$35.8 million which arose as part of the RTO in 2017. This goodwill was allocated between the Chachahuen, Mata Mora and Corralera cash generating units (“CGUs”) and is required to be tested for impairment on an annual basis. Management has determined that the recoverable amount of the goodwill balance exceeded the carrying value and no impairment has been recognised. In addition, management has performed an impairment trigger assessment for the other CGUs and intangible assets. The carrying values of the group’s assets are supported by value in use calculations, which are based on future cash flow forecasts. New reserve estimates have been obtained for all CGUs and have been used by management as part of their impairment assessment providing further support for the carrying values. As Mata Mora and Corralera are non-producing CGUs, we have assessed the expected well economics in the business plan based on drilling results to date as well as comparable transactions on a per acre basis and consider these to support the recoverable amount of the CGUs. In assessing the valuation of the other CGUs, we challenged management’s impairment trigger analysis and in particular considered changes in key assumptions such as commodity prices, reserves and discount rates. We obtained management’s third party reserve reports to confirm there have been no significant downgrades in reserve volumes and therefore confirmed the carrying values were recoverable. We assessed the competence and objectivity of the experts by considering factors including professional qualifications and experience. We held discussions with the experts regarding the key judgements and estimates taken during the preparation of the reserve estimates. Management has determined that there were no triggers for impairment in any of the CGUs, having considered factors such as long term prices, interest rates, reserves and production. We concur with management’s view that there were no triggers identified and with their sensitivity disclosure included in note 13. 97 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONINDEPENDENT AUDITORS’ REPORT CONTINUED Key audit matter How our audit addressed the key audit matter Impairment of investments (parent) Impairment assessments require significant judgement and there is the risk that the valuation of the assets may be incorrect and any potential impairment charge or reversal miscalculated. As such, this was a key focus for our audit due to the material nature of the balance. We challenged management’s assessment of the carrying value of the investments in the company and compared each investment to its fair value. We considered this assessment to be consistent with the approach taken for the group impairment assessment and therefore reasonable. As disclosed in note 4 to the company financial statements, the company has investments of US$1.1 billion after current year impairment charges of US$32.3 million as at 31 December 2018. We concur with management’s treatment of the impairment in the investment in Andes Energia Argentina S.A. and Grecoil y Cia. S.A. which are discussed further in note 4 to the company financial statements. Management has considered the recoverability of the investments in subsidiaries held in the company financial statements through determining the recoverable amount of each investment using the assumptions consistent with the group impairment analysis. Based on our analysis of management’s assessment of the recoverable amount of each investment, we concur that the remaining investments are recoverable. We consider management’s impairment conclusions, the impairment charges recognised and the associated disclosures to be appropriate. An impairment charge of US$21.5 million has been recognised in respect of the sale of Andes Energia Argentina S.A. representing the difference between the carrying value of the investment and the consideration received. A further impairment charge of US$10.8 million has been recognised in relation to Grecoil y Cia. S.A. as the underlying assets do not support the carrying value of the investment. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls, and the industry in which they operate. In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at the statutory reporting unit level by us, as the group audit team, or through involvement of our component auditors in Argentina. The group’s assets and operations are primarily located within three oil and gas basins in Argentina. Financial reporting is undertaken in offices in London, Buenos Aires, Mendoza and Houston. Where work was performed by our component auditors in Argentina, we determined the level of involvement we needed to have in the audit work for each reporting unit to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the group financial statements as a whole. As part of our year end audit, the group team’s involvement comprised of site visits, conference calls, review of component auditor work papers, attendance at component audit clearance meetings and other forms of communication as considered necessary. The group audit team directly performed the work over the parent company, the intermediate holding companies as well as the consolidation. We identified four units which, in our view, required an audit of their complete financial information, either due to their size or risk characteristics. This included the three main operating subsidiaries in Argentina, as well as the parent company in the United Kingdom. The above gave us coverage of 94% over consolidated revenue, 89% of consolidated total assets and 82% of consolidated net assets. This, together with additional procedures performed at the Group level, gave us the evidence we needed for our opinion on the Group financial statements as a whole. 98 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTSMateriality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group financial statements Company financial statements Overall materiality $3.4 million (2017: $1.6 million). $1.1 million (2017: £0.8 million). How we determined it 1% of net assets. 1% of net assets. Rationale for benchmark applied We have concluded that net assets are the most appropriate benchmark, given the size and nature of the current operations and the fact that the group is largely in an investment stage. In these circumstances a profit based measure, such as EBITDA, would not be an appropriate benchmark to use. We have assessed that the most appropriate benchmark for the company, which is primarily a holding company, is net assets. For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range of materiality allocated across components was between $1.1 million and $3.2 million. Certain components were audited to a local statutory audit materiality that was also less than our overall group materiality. We agreed with the audit committee that we would report to them misstatements identified during our audit above $167,570 (Group audit) (2017: $100,000) and $53,300 (company audit) (2017: £44,100) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the group’s and the company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements. We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s and company’s ability to continue as a going concern. For example, the terms on which the United Kingdom may withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the group’s trade, customers, suppliers and the wider economy. 99 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONINDEPENDENT AUDITORS’ REPORT CONTINUED Reporting on other information The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the strategic report and directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06) and ISAs (UK) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated). Strategic report and directors’ report In our opinion, based on the work undertaken in the course of the audit, the information given in the strategic report and directors’ report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06) In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit, we did not identify any material misstatements in the strategic report and directors’ report. (CA06) The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group As a result of the directors’ voluntary reporting on how they have applied the UK Corporate Governance Code (the ‘Code’), we are required to report to you if we have anything material to add or draw attention to regarding: > The directors’ confirmation on page 43 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. > The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. > The directors’ explanation on page 50 of the Annual Report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report in respect of this responsibility. Other Code Provisions As a result of the directors’ voluntary reporting on how they have applied the Code, we are required to report to you if, in our opinion: > The statement given by the directors, on page 93, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the group’s and company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the group and company obtained in the course of performing our audit. > The section of the Annual Report on page 67 to 69 describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee. We have nothing to report in respect of this responsibility. 100 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTSResponsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the statement of directors’ responsibilities set out on page 93, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: > we have not received all the information and explanations we require for our audit; or > adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or > certain disclosures of directors’ remuneration specified by law are not made; or > the company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Timothy McAllister (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 2 May 2019 101 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2018 Revenue Cost of sales Gross profit Exploration expenses Impairment charge Selling and distribution expenses Administrative expenses Other operating expenses Operating loss Presented as: Adjusted EBITDAX Non-recurring expenses EBITDAX Impairment charge Depreciation, depletion and amortisation Exploration costs written off Operating loss Finance income Finance costs Loss before taxation Taxation Loss for the year Loss per ordinary share Basic and diluted loss per share Note 7 8 13, 14 9 10 2018 US$’000 2017 US$’000 176,972 (155,638) 141,799 (133,387) 21,334 8,412 (9,359) – (5,758) (24,561) (16,568) (931) (232,407) (5,036) (39,978) (5,040) (34,912) (274,980) 39,173 – 39,173 – (64,726) (9,359) 40,555 (32,900) 7,655 (232,407) (49,297) (931) (34,912) (274,980) 17 17 4,098 (30,702) 1,976 (13,726) (61,516) (286,730) 18 (16,797) 16,635 (78,313) (270,095) 30 US$ (0.03) US$ (0.19) The above consolidated income statement should be read in conjunction with the accompanying notes. 102 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 Loss for the year Translation differences Total comprehensive loss for the year 2018 US$’000 (78,313) (361) 2017 US$’000 (270,095) 546 (78,674) (269,549) The above items will not be subsequently reclassified to profit and loss. There are no impairment losses on revalued assets recognised directly in equity. The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 103 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2018 Non-current assets Property, plant and equipment Intangible assets and goodwill Other receivables Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Non-current liabilities Trade and other payables Borrowings Deferred tax liabilities Provisions Total non-current liabilities Current liabilities Trade and other payables Income tax liability Borrowings Provisions Total current liabilities Total liabilities Net assets Equity Share capital and share premium Other reserves Retained (deficit)/ earnings Total equity Note 2018 US$’000 2017 US$’000 13 14 20 25 26 20 21 22 23 25 27 22 23 27 366,191 261,010 5,085 9,001 354,245 207,231 8,322 11,629 641,287 581,427 17,279 30,407 21,085 68,771 14,375 44,925 23,696 82,996 710,058 664,423 3,256 135,919 99,374 16,236 7,168 162,502 81,714 17,215 254,785 268,599 51,410 1,595 64,365 1,733 82,355 654 29,974 367 119,103 113,350 373,888 381,949 336,170 282,474 457,198 (112,150) (8,878) 329,877 (116,299) 68,896 336,170 282,474 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. The financial statements on pages 102 to 144 were approved by the board of directors and authorised for issue on 2 May 2019 and were signed on its behalf by: Kevin Dennehy Chief financial officer 104 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 Capital and reserves At 1 January 2017 Loss for the year Other comprehensive income Total comprehensive (loss)/profit for the year Effect of change of functional currency Acquisition of subsidiary Capital reduction Transaction with owners Fair value of share based payments Issue of ordinary shares At 31 December 2017 Loss for the year Other comprehensive income Total comprehensive loss for the year Fair value of share based payments Issue of ordinary shares Fair value of warrants Debt to equity conversion At 31 December 2018 Other reserves At 1 January 2017 Translation differences Effect of change of functional currency Acquisition of subsidiary Capital reduction At 31 December 2017 Translation differences Issue of ordinary shares At 31 December 2018 Share premium account US$’000 52,467 – – – (9,162) – (50,549) – – 7,244 – – – – – 20,050 – 72,973 93,023 Retained (deflcit)/ earnings US$’000 (3,376) (270,095) – (270,095) – – 310,549 31,713 105 – Other reserves US$’000 (21,961) – 546 546 28,861 136,255 (260,000) – – – Total equity US$’000 125,544 (270,095) 546 (269,549) – 385,058 – 31,713 105 9,603 68,896 (116,299) 282,474 (78,313) – (78,313) 305 – 234 – – (361) (361) – 4,510 – – (78,313) (361) (78,674) 305 31,831 234 100,000 (8,878) (112,150) 336,170 Warrant reserve US$’000 Translation reserve US$’000 Deferred consideration US$’000 Total other reserves US$’000 2,105 (2,440) 4,473 (21,961) Called up share capital US$’000 98,414 – – – (19,699) 248,803 – – – 2,359 329,877 – – – – 7,271 – 27,027 364,175 Merger reserve US$’000 (26,099) – 29,446 140,143 (260,000) – – – – 546 – – – (116,510) 2,105 (1,894) – 4,510 – – (361) – (112,000) 2,105 (2,255) – (585) (3,888) 546 28,861 136,255 – – – – – (260,000) (116,299) (361) 4,510 (112,150) The above statement of consolidated changes in equity should be read in conjunction with the accompanying notes. 105 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED 31 DECEMBER 2018 Cash flows from operating activities Cash generated from operations Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Proceeds from sale of non current assets Recovery of restricted cash Net cash acquired from acquisition of subsidiary Net cash outflow from investing activities Cash flows from financing activities Proceeds from issues of shares and other equity instruments Proceeds from borrowings Repayment of borrowings Interest paid Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rates on cash and cash equivalents Cash and cash equivalents at end of year Note 31 2018 US$’000 2017 US$’000 21,014 (842) 20,172 9,042 (2,006) 7,036 (80,531) (43,188) 39 377 – (79,539) (3,148) – – 1,062 (123,303) (81,625) 15 4,925 116,210 (7,556) (8,852) 9,603 178,607 (89,875) (4,215) 104,727 94,120 1,596 23,696 (4,207) 21 21,085 19,531 5,243 (1,078) 23,696 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 106 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information The company is a Public Limited Company (‘plc’) incorporated in England and Wales and is domiciled in the United Kingdom. The Registered Office address is 6th Floor, King’s House, 10 Haymarket, London SW1Y 4BP. The company is listed on the AIM market of the London Stock Exchange and maintains a secondary listing on the Buenos Aires Stock Exchange. The principal activities of the company and its subsidiaries (together ‘the group’) are the exploration for and the development and production of oil and gas in Argentina. 2. Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, the associated interpretations issued by the IFRS Interpretations Committee (together ‘IFRS’) and the Companies Act 2006. The significant accounting policies applied in preparing these consolidated financial statements are set out below. These policies have been consistently applied throughout the period and to each subsidiary of the group. The financial statements have been prepared under the historical cost convention except as where stated. Going concern The group principally generates cash from its existing conventional oil and gas production operations. Nevertheless, it was formed with the stated intention of undertaking a significant exploration, evaluation and development programme focused on the group’s unconventional oil and gas assets in Argentina, including the Vaca Muerta formation. In order to appraise and develop its significant unconventional asset portfolio and generate shareholder value, the company will need to invest significant amounts of capital over the next several years. The group’s business plan and exploration programme for 2019 contemplates further evaluation work related to unconventional prospects with the objective of progressing at least one prospect towards the development stage. This work will require funding. In addition, the company has payment obligations related to the wells drilled at Mata Mora in late 2018 and early 2019 that are currently awaiting completion. To date, the funding required to support the activities of the group has been provided by subsidiaries of Mercuria Energy Group. The group is currently assessing funding options to finance the next stage of its operations. While that funding assessment is ongoing, a letter of support has been received from Mercuria Energy Group Limited that states its intention to make funds available to the group for a period of not less than twelve months from the date of these financial statements or until such time as sufficient funding to support the business plan for 2019 and into 2020 has been secured. The going concern basis of preparation of these financial statements is based on the letter of support that has been received as the directors have a reasonable expectation that the group has access to adequate resources to continue in operational existence for the foreseeable future. Consequently the directors continue to adopt the going concern basis of accounting in preparing the financial statements. The financial statements do not include any adjustments that would be required if the group was unable to continue as a going concern. Foreign currency Functional currency – items included in the financial information of the individual companies that comprise the group are measured using the currency of the primary economic environment in which the entity operates (its functional currency). The primary economic environment is often related to the country of operations and, in many cases, the functional currency of an entity will be the same as the currency of the country in which it operates. There is no concept of a group functional currency and therefore individual entities within a group may have functional currencies that are different to each other. In some circumstances the functional currency may be different to the currency of the country in which an entity operates. This can happen when significant contracts (sales, services, funding, etc.) are denominated in or by reference to a currency that is different to that of the country of operation. For instance, in the oil and gas industry many sales and service contracts are denominated in or priced by reference to the US Dollar given that the benchmark prices for crude oil (Brent, WTI, etc.) are quoted in US Dollars and hence pricing is often referenced to the US Dollar. Presentation currency – the consolidated financial statements are presented in US Dollars rounded to the nearest thousand (US$’000), except where otherwise indicated. Foreign currency transactions – transactions in currencies other than an entity’s functional currency (foreign currencies) are translated using the exchange rate on the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the balance sheet date of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income within either finance income (gains) or finance costs (losses). 107 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 2. Basis of preparation continued Consolidation The consolidated financial statements include the financial information of Phoenix Global Resources plc as well as its subsidiary undertakings. Non-controlling interests There is no non-controlling interest at either 31 December 2018 or 2017. Subsidiaries Subsidiaries are all entities over which the company has control. The company controls an entity when it is exposed to, or has rights over, variable returns from its involvement with the entity and has the ability to affect those returns through its ability to exercise control over the entity. Subsidiaries are consolidated in the group financial statements from the date at which control is transferred to the company. They are deconsolidated from the date that control ceases. Joint arrangements Oil and gas operations are often conducted by the group as co-licencees in unincorporated joint operations with other companies. The group’s financial statements reflect the relevant proportion of production, assets, liabilities, income and expenses of the joint operation applicable to the group’s interests. The group’s current interests in joint operations are detailed in the operating review on pages 28 to 37 and typically represent a percentage-based working interest in the joint operation. Acquisitions The group allocates the purchase consideration relating to the acquisition of a subsidiary to the assets and liabilities acquired on the basis of fair value at the date of acquisition. Any excess of the cost of the acquisition over the fair value of assets and liabilities is recognised as goodwill. Goodwill is recognised as an asset and is subject to annual review for impairment. Goodwill is written off where circumstances indicate that the recoverable value of the underlying cash generating unit (CGU) including the asset may no longer support the carrying value of goodwill. Any such impairment loss is recognised in the income statement for the year. Impairment losses relating to goodwill cannot be reversed in future years. Comparative financial information On 10 August 2017, the company completed a business combination transaction with the Trefoil Holdings B.V. group of companies (Trefoil) whereby the company issued new ordinary shares to the shareholders of Trefoil in return for 100% of the issued share capital of Trefoil Holdings B.V. As a result of this transaction the former shareholders of the Trefoil group hold the majority of the issued share capital of the company and accordingly the combination transaction represents a reverse takeover for accounting purposes. When a business combination is determined to be a reverse takeover for accounting purposes, the company that is acquired (the legal acquiree) is determined to be the accounting acquirer. Conversely the legal parent, the company that issued the purchase consideration, is determined to be the acquired company for accounting purposes. The comparative financial information that is presented in these group financial statements is the comparative financial information of the Trefoil group up to the date of the combination as it is the Trefoil group that was the acquiring entity for accounting purposes. The former Andes Energia plc group is determined to be the acquired party and therefore its assets, liabilities, revenues, costs and cash flows are consolidated in these group financial statements from the date of acquisition, being 10 August 2017. 3. Significant accounting policies 3.1 New standards, amendments and interpretations adopted in 2018 IFRS 9: Financial Instruments (IFRS 9) Overview IFRS 9 became effective for accounting periods that started on or after 1 January 2018 and deals with the classification and measurement of financial instruments and has been adopted by the group. Financial instruments include loans receivable/payable, derivative financial instruments and accounts payable and receivable balances. Measurement principles remained broadly consistent with previous guidance with the main options being to recognise financial assets and liabilities at fair value or amortised cost. Where financial assets and liabilities are carried at fair value, the standard provides guidance on where to recognise periodic changes in fair value with the primary options being through the income statement or directly to reserves. The standard also provides guidance on hedge accounting where a company elects to apply hedge accounting. The most significant change in the new standard that impacted the group relates to the measurement of credit risk and the recognition of that risk through adjusting the carrying value of the underlying instrument. The standard requires the assessment of the ’12-month expected credit losses’ on inception of a financial instrument (generally an asset) and to recognise those expected losses in the income statement by way of an allowance. Where the expected credit risk increases significantly and is not considered to be low, the full credit loss that is expected over the lifetime of the asset is recorded. 108 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS3. Significant accounting policies continued 3.1 New standards, amendments and interpretations adopted in 2018 continued IFRS 9: Financial Instruments (IFRS 9) (continued) How the standard applies to Phoenix Global Resources plc The table below summarises the principal financial instruments that the group is party to together with an assessment of the impact of the provisions of IFRS 9 on the consolidated financial statements. Type of instrument Loans payable. Previous accounting model IFRS 9 impact assessment Impact of adoption Amortised cost. The primary loans payable relate to the convertible revolving credit facility with Mercuria. The assessed credit risk of Mercuria is low and the group intends to hold the loans to maturity. No impact. Continue to record at amortised cost. Loans receivable. Amortised cost/capital contribution. Financing advanced to Argentinian subsidiaries by the company is treated as capital contributions. No impact. Continue to record at amortised cost/capital contribution. Intra-group credit risk is assessed as low as the majority of subsidiaries are 100% owned. Refer to the notes to the company only financial statements for further detail on the impact of the standard on subsidiary loan accounting. Trade accounts receivable. Amortised cost. Oil sales are typically invoiced monthly with 20–30 day payment terms. There is no significant history of default. Gas sales are invoiced monthly on payment terms of 70–90 days with no significant history of default. Where a customer enters a default position, its account is moved to a prepayment basis with cargoes paid in full before delivery. No impact. Some provision may be required based on facts and circumstances but the impact on the financial statements is not material, if any adjustment is required at all. The Group has assessed its actual credit losses in 2016 – 2018 to be 0.3% of total sales over those periods. The experiences of credit losses related to sales to independent companies that the group no longer deals with. The group has not adjusted 2018 revenue for expected credit losses due to the change in the customer profile whereby it no longer sells oil and gas to independent companies together with the materiality of actual recent credit losses. Trade accounts payable. Amortised cost. Trade accounts payable balances are No impact. made on normal credit terms. IFRS 15: Revenue from Contracts with Customers (IFRS 15) Overview IFRS 15 became effective for accounting periods that started on or after 1 January 2018 and seeks to provide more meaningful information regarding revenue to users of financial statements. The standard describes a five-step approach to be taken to the assessment of revenue that requires companies to: identify the customer party to each contract; 1. 2. understand the performance obligations in the contract; 3. determine the transaction price; 4. allocate that price to the identifiable performance obligations; and 5. recognise revenue when (or as) a performance obligation is met. The standard could result in a change in the pattern of revenue recognition for certain types of contract that (typically) contain multiple performance elements and are delivered over a period of time. 109 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 3. Significant accounting policies continued 3.1 New standards, amendments and interpretations adopted in 2018 continued IFRS 15: Revenue from Contracts with Customers (IFRS 15) continued How the standard applies to Phoenix Global Resources plc There is no difference to revenue recognition for the group under the new standard. Consistent with industry practice the group makes sales of crude oil and natural gas which are commodity products. Contracts define a specific delivery point where physical custody is transferred and title passes. There is a single performance obligation being physical delivery at a specified point. The group receives revenue that is calculated by multiplying actual delivery volume by the market price of the specific commodity on the day of delivery. Conclusion The implementation of IFRS 15 had no effect on revenue recognition (timing or quantum) for oil and gas sales. 3.2 New accounting standards issued but not yet effective The only new accounting standard relevant to the group that has been issued but is not yet effective at the date of these group financial statements is IFRS 16, ‘Leases’ (IFRS 16). This is the only new standard that the group reasonably expects to be applicable to the financial statements in the future. No discussion is included in respect of those standards or interpretations that the directors consider will not be relevant to the group. IFRS 16: Leases (IFRS 16) The IASB published IFRS 16 in January 2016. The standard is effective for accounting periods starting on or after 1 January 2019 and therefore will be adopted by the group in the interim financial information and the annual financial statements for the year ended 31 December 2019. The standard seeks to clarify the accounting treatment for leased assets that are accounted for under the current leasing standard as either finance leases or operating leases. Under the current accounting rules for finance leases, leased assets and corresponding lease obligations are capitalised in the statement of financial position and amortised over the life of the lease contract. Operating leases are accounted for on an income statement model with the monthly rental cost for using an asset charged to the income statement, typically on a straight line basis. The criteria for classifying a lease as either a finance lease or an operating lease are very specific and involve the application of a number of ‘bright line’ rules that determine the final treatment. This specificity can result in the opportunity to specifically design contracts for rental which, while substantially similar, can result in different classification of the underlying asset. IFRS 16 seeks to examine the commercial substance of arrangements and, on application, it is anticipated that many more lease contracts or similar arrangements will result in balance sheet treatment under the new standard. This will likely result in more leased assets and lease obligations being capitalised in companies’ statements of financial position. The group is in the process of assessing its lease and rental arrangements. Arrangements where regular payments of consistent amounts are paid to a supplier of goods or services have also been assessed. As a result of these reviews, it has been determined that the group does not lease significant assets in either quantum or value. The principal lease agreements that the group is party to relate to office space in London, Houston and Buenos Aires and to minor items of office equipment such as photocopiers and map plotters. The group also rents certain low value operational items but such items are typically not covered by contracts and their use is committed to on a monthly basis through purchase orders. As a result, the impact of adopting the new standard is expected to have an immaterial effect on the financial statements of both the group and the company. It is not expected that the change in the accounting rules for leases will result in a different presentation in the statement of financial position or a different profile of charges in respect of leased assets in the income statement. 4. Critical accounting estimates and judgements The preparation of the financial statements in conformity with generally accepted accounting practice requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical judgements Determination of functional currency The determination of a company’s functional currency can require significant judgement. There is no concept of a group-wide functional currency but rather functional currency is assessed on an entity-by-entity basis. A company’s functional currency is defined as the currency of the primary economic environment in which the entity operates. In this regard the default assumption is that a company’s functional currency will be that in which it is registered or that where the majority of its operations are located. 110 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS4. Critical accounting estimates and judgements continued Critical judgements continued Determination of functional currency continued This assumption can be challenged or rebutted where it can be demonstrated that a currency other than that of the country of registration or operations can be shown to have a greater influence over the revenue, costs, assets and liabilities of a company. For instance, in the oil and gas industry contracts for the sale of production and for the provision of operational services are often priced in or by reference to the US Dollar. This is because the main international benchmark prices used for pricing crude cargoes, such as Brent and WTI, are quoted in US Dollars. With industry-wide revenues being heavily influenced by the US Dollar, service contracts, particularly those for services provided by international service companies, are often also denominated in priced by reference to the US Dollar. Notwithstanding the above, and the fact that the group operates exclusively in the oil and gas industry, the assessment of functional currency is made on an entity-by-entity basis by examining the specific circumstances of each entity. Care must be taken when examining holding companies and intermediate holding companies to determine if their activity is an extension of that of their holding company or subsidiary or if the company operates independently in its own right. The assessment of functional currency can be complex and requires the application of a number of criteria and indicators proscribed by IAS 21, ‘The effects of changes in foreign exchange rates’ (IAS 21). In certain circumstances the evaluation of the criteria in IAS 21 does not result in a clear answer one way or another and hence judgement is applied in determining the functional currency of an entity. The assessment of functional currency can have a significant effect on both the income statement and the statement of financial position of a company and of the group of which it is a member. The impact of foreign exchange gains and losses on net income as calculated by reference to the functional currency of each company within the group is presented in the statement of comprehensive income as part of finance income and finance costs. The functional currency of the company and its subsidiaries in Argentina was determined to be the US Dollar. The functional currency of the company’s subsidiaries domiciled outside of Argentina is US Dollar, Euro or Swiss Francs and is assessed based on the main operating cash flows to which the subsidiary is exposed. The group presents its financial statements in US Dollars. Determination of joint control Judgement is required to determine when joint control exists over an arrangement or business activity. Such judgement requires the assessment of the relevant activities of the arrangement or of the business activity and when decisions in relation to those activities require unanimous consent. The requirement for unanimous consent means that each participant has an equal say in relation to the activities of the arrangement and, hence, joint control exists. The group has determined that the relevant activities for its joint arrangements are those related to the operating and capital decisions of the arrangement. These will include the approval of the annual capital and operating expenditure work programme and budget for the joint arrangement. This will also relate to matters such as the approval of chosen service providers for major capital activity as required by the joint operating agreements that govern the joint arrangement. These considerations are similar to those necessary to determine control over subsidiaries. Classifying an arrangement or business activity requires assessment of the rights and obligations arising from the arrangement and may include: > the structure of the joint arrangement including whether or not a legal entity exists and the terms of a contractual arrangement; > the rights and obligations arising from ownership; > contractual rights and obligations; and > other facts and circumstances on a case-by-case basis. This assessment often requires significant judgement. A different conclusion about both joint control and whether an arrangement represents a joint venture or a joint operation may materially affect the accounting for a joint arrangement. For instance, the determination of an arrangement as a joint venture or joint operation results in a line-by-line inclusion of the group’s proportionate interest in the assets, liabilities, revenues and costs of the arrangement. Conversely, where joint control is determined not to exist the group’s interest in the net income and net assets of the arrangement are presented in a single line in each of the consolidated income statement and statement of financial position. Critical estimates Future oil and gas prices The estimation of future oil and gas prices has a significant impact throughout the financial statements. Future prices for oil and gas have a direct impact on the estimation of the recoverable value of property, plant and equipment and intangible assets associated with oil and gas assets. Details of the oil and gas prices achieved in the years ended 31 December 2018 and 2017 are included in the segment information (note 6). 111 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 4. Critical accounting estimates and judgements continued Critical estimates continued Estimation of oil and gas reserve volumes Oil and gas reserves are the quantities of oil and gas that management considers are commercially recoverable in the future from known accumulations within the group’s licence areas and under defined economic and operating conditions. The estimation of reserve volumes is inherently imprecise, requires the application of judgement and is subject to future revision. Because the production of reserves is required to be commercially viable, variations in future sales prices, cost estimates or actual production volumes can affect the absolute quantity of estimated reserve volumes from one period to the next. Commercial viability is assessed by reference to the point at which the cash cost to produce a barrel of oil (or equivalent) is greater than the sales price that can be achieved for that barrel. This point is generally referred to as the ‘economic limit’. No reserves are recorded in respect of the period after which the economic limit is estimated to occur. Decreases in sales prices, increases in cash operating costs or variations in the expected production profile for wells, as compared to the assumptions applied in the estimation of reserve volumes, can cause variation from those estimates. Variations can be positive or negative. Subsurface conditions and other engineering factors can also affect estimated reserve volumes. An impairment may also exist where revisions to estimated reserve volumes result in a reduction to estimated reserves for a given field or licence area. The prospective value of oil and gas reserves is not recorded in the statement of financial position. Intangible oil and gas assets and associated property plant and equipment included in the statement of financial position relate to the cost of acquisition of those properties together with cumulative exploration or development expenditure. Oil and gas reserve volumes are estimated by management together with the in-house reservoir engineer and are subject to periodic independent estimation by external reservoir engineering experts as events or circumstances dictate. The estimation of reserve volumes primarily influences the depreciation, depletion and amortisation charge for the year. This is included in the analysis of property, plant and equipment (note 13). Reserve volumes are also used to assess fair value in business combinations (below) and in calculating whether an impairment charge should be recorded where an impairment indicator exists. Accounting for business combinations and fair value Business combinations are accounted for at fair value. The assessment of fair value is subjective and depends on a number of assumptions. These assumptions include assessment of discount rates, taxation rules, and both the amount and the timing of expected future cash flows from assets and liabilities. In addition, the selection of specific valuation methods for individual assets and liabilities requires judgement. The specific valuation methods applied will be driven by the nature of the asset or liability being assessed. The consideration given to a seller for the purchase of a business or a company is accounted for at its fair value. When the consideration given includes elements that are not cash, such as shares, then the fair value of the consideration given is calculated by reference to the specific elements of the consideration given to the seller. In business combinations fair value may need to be applied to items that are not recorded in financial statements under the historic cost convention. These items may include certain contingent liabilities, contracts that have terms that may be more or less beneficial compared to current market practice, warranties given by the seller or value that could be gained from inherent characteristics of the business being acquired. Where these items represent benefits they are recorded as intangible assets and separately identified. Items that could result in payments being made in the future are recorded as either long term or short term liabilities. Goodwill is recognised where the fair value of the purchase consideration given to the seller is more than the fair value of the assets acquired and liabilities assumed. Determining what goodwill relates to requires judgement. Where the value of goodwill cannot be supported the goodwill is not recognised and a corresponding amount is recorded as an impairment loss in the income statement. The company was party to a business combination in the year ended 31 December 2017 whereby it acquired 100% of the issued share capital of Trefoil Holdings B.V. The combination, which represented a reverse takeover under IFRS 3, ‘Business Combinations’, is discussed in note 15. 112 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS4. Critical accounting estimates and judgements continued Critical estimates continued Provision for asset retirement and decommissioning obligations The group has an obligation to plug and abandon wells at the end of their productive life. In addition, the group is required to remove any surface field infrastructure and equipment and to remediate or re-cultivate land that has been affected by the group’s activities and return it to its natural state. Provision is made for such obligations at the time at which the obligation is incurred. This is normally as wells are drilled or infrastructure is put in place. Provisions are based on cost estimates of the remediation activity that will be needed. These estimates require judgment. Inflation is applied to cost estimates and these estimates are then discounted at a rate that reflects the time value of money. The application of both inflation and discount rates represent significant estimates. Where licence terms do not require the group to remediate wells on rescission of a licence then no provision is made. This can occur when the relevant province that issued the licence considers that wells could be remediated or that they may be of geological interest to future licence holders. Details of provisions held for asset retirement obligations together with movements recognised in the year are included in the analysis of provisions in note 27. 5. Accounting policies 5.1 Revenue Revenue represents the proceeds, excluding VAT and sales taxes, earned from the sale of oil and gas. Revenue from contracts with customers is recognised when or as the group satisfies its performance obligation by transferring control of a promised good or service to a customer. The transfer of control of oil and gas usually coincides with title passing to the customer and the customer taking physical possession. The group principally satisfies its performance obligations at a point in time; the amounts of revenue recognised relating to performance obligations satisfied over time are not significant. Revenue is recognised to the extent that it is probable that sales proceeds will be received and the revenue can be reliably measured. Contracts for the sale of oil and gas are typically priced by reference to quoted benchmark prices. Revenue is recognised when the significant risks and rewards of ownership have been passed to the buyer. Contracts define a specific delivery point where physical custody is transferred and title passes. This is typically at the point at which the product passes into the customer’s pipeline, truck or refinery. There is a single performance obligation being physical delivery at a specified point. The group receives revenue that is calculated by multiplying actual delivery volume by the market price of the specific commodity on the day of delivery. 5.2 Finance costs and income Finance income comprises interest income on cash invested, foreign currency gains and the unwind of discount on any assets held at amortised cost. Interest income is recognised as it accrues using the effective interest rate method. Finance expense comprises interest expense on borrowings, foreign currency losses and the unwind of discount on any liabilities held at amortised cost, which is principally the unwind of the discount related to the asset retirement obligation. Borrowing costs Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalised as a part of that asset. This reduces the finance charge in the income statement and results in a corresponding increase to the asset cost. Capitalisation of borrowing costs stops when the asset is substantially ready for its intended use. The time at which an asset is substantially ready for its intended use may be earlier than the time at which it is actually put into use. 5.3 Employee benefits Short-term benefits Benefits given to employees that are short-term in nature are recognised as expenses in the statement of comprehensive income as the related service is provided. The principal short-term benefits are salaries, associated holiday pay and other periodic benefits such as healthcare and pension contributions made by the company for the benefit of the employee. A liability is recognised for the amount expected to be paid under short-term cash bonus plans if there is either a present legal or constructive obligation to pay the amount and the amount can be reliably estimated. 113 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Accounting policies continued 5.4 Share-based payments The group operates a number of equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for equity instruments, deferred share awards or options to subscribe for ordinary shares of the company. The fair value of the employee services received in exchange for the grant of the equity instruments, shares or options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: > including any market performance conditions (for example, an entity’s share price); > excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and > including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement and the grant date. At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When share awards vest or options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. No proceeds are received by the company in respect of direct share awards or deferred share awards. The grant by the company of equity instruments or options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity financial statements. Any social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction. 5.5 Taxes The total tax charge or credit recognised in the statement of comprehensive income is made up of both current and deferred taxes. The current tax charge or credit is based on the taxable profit or loss for the year. Taxable profit or loss is different to the profit or loss reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable nor deductible. Deferred tax is the tax that is expected to be payable or recoverable on differences between the carrying value of assets and liabilities in the financial statements and the corresponding tax amounts for those assets and liabilities used to calculate taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences that exist only where it is probable that taxable profits will be generated against which the carrying value of the deferred tax asset can be recovered. Deductible temporary differences exist where there is a difference in the timing of the recognition of an item of income or expense between the income statement and the calculation of taxable profit or loss. Deferred tax assets and liabilities are recognised using the liability method, for all taxable temporary differences except in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint operations. Deferred tax liabilities are not recorded for these items where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset or liability is not recognised if a temporary difference arises on initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Current and deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date. 114 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS5. Accounting policies continued 5.5 Taxes continued Minimum notional income tax – Argentina Argentinian tax law requires companies to calculate tax on ‘notional presumed income’ at a rate equal to 1% of a company’s assets at the balance sheet date. The company’s tax obligation for each year will be the higher of the notional presumed income tax and the actual calculated tax charge for the period. Where the notional amount is greater than the calculated amount the excess of taxes paid can be used to offset future income tax in any of the next ten years. 5.6 Intangible assets Goodwill The group allocates the fair value of the purchase consideration on the acquisition of a subsidiary to the assets acquired and liabilities assumed based on an assessment of fair value at the acquisition date. Any excess of the purchase consideration (the ‘cost’ of the acquisition) over the fair value of those assets and liabilities is recognised as goodwill. Where goodwill is recognised, it is allocated to cash generating units in a systematic manner reflective of how the group expects to recover the value of the goodwill. Any goodwill arising is recognised as an asset and is subject to annual review for impairment. Goodwill is written off or impaired where circumstances indicate that the recoverable amount of the underlying CGU including the asset may no longer support the carrying value of the goodwill. Any such impairment is recognised in the income statement for the period. Impairment losses related to goodwill are permanent and cannot be reversed in future periods. In testing for impairment, goodwill arising on business combinations at the date of acquisition is allocated to the group of CGUs representing the lowest level at which it will be monitored. The group’s policy is to monitor goodwill at an operating segment level before combining segments for reporting. The recoverable amount of a CGU, or group of CGUs, within the segment is based on the higher of its fair value less costs of disposal or value in use. Value in use is calculated by reference to the expected future cash flows from the CGU after discounting to take account of the time value of money. Fair value less costs to sell can be based on a similar cash flow measure adjusted for disposal costs or can be estimated by reference to similar comparable reference transactions. Where cash flows are used they are risk weighted in order to reflect an assessment of future exploration success. The key assumptions in assessing cash flows are the sensitivity to market fluctuations, such as commodity prices, and the success of future exploration drilling programmes. The most likely factor that will result in a material change to the recoverable amount of the cash-generating unit is the result of future exploration drilling, which will ultimately determine the licence area’s future economic potential. 5.7 Exploration and appraisal assets Capitalisation The group follows an accounting policy for exploration and appraisal assets that is based on the successful-efforts accounting method. Costs incurred prior to obtaining the legal right to explore an area are expensed as incurred in the income statement. This includes all costs that pre-date the award of a licence. Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence-by-licence basis. Costs are held within intangible assets and are not depreciated until the exploration phase on the licence area is complete or commercial reserves have been discovered. Exploration and evaluation costs may include the costs of initial licence acquisition; geological and geophysical studies (such as seismic studies); and direct labour, equipment and service costs associated with drilling exploratory wells. Costs incurred are capitalised by well, field or exploration area based on the nature of the cost. Drilling costs are written off on completion of a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercial. Where the results of exploration drilling indicate the presence of hydrocarbons which are ultimately not considered commercially viable, all related costs are written off to the income statement as exploration cost. On conclusion of a successful evaluation phase where commercial reserves have been established, the associated exploration and evaluation costs are tested for impairment and their carrying value adjusted if necessary. The exploration and evaluation costs are then transferred to the property, plant and equipment category ‘development and production assets’ and are held within a single field cost centre. 115 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Accounting policies continued 5.7 Exploration and appraisal assets continued Impairment Capitalised intangible exploration and evaluation costs are reviewed regularly for indicators of impairment and are tested for impairment where these indicators exist. Indicators of impairment for exploration and appraisal assets may include: > exploration drilling has not resulted in the discovery of commercial volumes of hydrocarbons; > changes in oil and gas prices or other market conditions that indicate the discoveries may not be commercial; > the anticipated cost of development indicates that it is unlikely the carrying value of the exploration and evaluation asset will be recovered in full; > there are no plans to conduct further exploration activities in the area; or > the exploration licence period has expired or is due to expire. Where an indicator of impairment has been identified, the intangible exploration and evaluation asset is allocated to a development asset within property, plant and equipment for the purpose of impairment testing. This allocation is made because the exploration and evaluation asset has no cash inflows of its own. If there are no development assets within the CGU, the excess of the carrying amount of the exploration and evaluation over its recoverable amount is immediately written off in the income statement. 5.8 Property, plant and equipment – development and production assets Capitalisation The costs associated with determining the existence of commercial reserves are capitalised in accordance with the preceding policy and transferred to property, plant and equipment as development assets following impairment testing. All costs incurred after the technical feasibility and commercial viability of producing hydrocarbons has been demonstrated are capitalised within development assets on a field-by-field basis. Subsequent expenditure is only capitalised where it either enhances the economic benefits of the development asset or replaces part of the existing development asset (where the remaining cost of the original part is expensed through the income statement). Costs of borrowing related to the ongoing construction of development and production assets and facilities are capitalised during the construction phase. Capitalisation of interest ceases once an asset is ready for production. Depreciation Capitalised oil and gas assets are not subject to depreciation until commercial production starts. Depreciation is calculated on a unit-of-production basis in order to write off the cost of an asset as the reserves that it represents are produced and sold. Any periodic reassessment of reserves will affect the depreciation rate on a prospective basis. The unit-of-production depreciation rate is calculated on a field-by-field basis using proved, developed reserves as the denominator and capitalised costs as the numerator. The numerator includes an estimate of the costs expected to be incurred to bring proved, developed, not-producing reserves into production. Infrastructure that is common to a number of fields, such as gathering systems, treatment plants and pipelines is depreciated on a unit-of-production basis using an aggregate measure of reserves or on a straight line basis depending on the expected pattern of use of the underlying asset. Impairment The group assesses development and production assets for impairment where there is an indication that an impairment may exist. Indicators of impairment may include: > a significant fall in realised prices for oil and gas; > a significant downward movement in the forward curve for quoted oil price benchmarks such as Brent or West Texas Intermediate; > an increase in cash operating costs; > a significant downward revision to reserve volumes or values; > an increase in rates calculated for depreciation, depletion and amortisation (DD&A); or > unforeseen engineering subsurface problems that cannot be overcome satisfactorily. An impairment indicator exists where revisions to estimated reserve volumes result in a reduction to those estimates for a given field or licence area. In addition, variations in reserve estimates cause changes to the unit-of-production depreciation rates applied to oil and gas properties. Depreciation rates for fields or licence areas are calculated using estimated reserve volumes as the denominator with capitalised costs as the numerator. An impairment review of development and production assets is undertaken on an asset-by-asset basis, typically at the field or licence level, and involves comparing the carrying value of an asset with its recoverable amount. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and its value in use. Value in use is determined by reference to expected future net cash flows. Any impairment loss identified is recorded in the income statement. 116 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS5. Accounting policies continued 5.8 Property, plant and equipment – development and production assets continued Impairment continued The future cash flows are adjusted for risks specific to the cash generating unit and are discounted using a pre-tax discount rate. The discount rate is derived from the group’s post-tax weighted average cost of capital. The calculation of value in use is most sensitive to the following assumptions: > production volumes and estimates of recoverable reserves; > quoted commodity benchmark prices and realised sales prices; > the level of fixed and/or variable operating costs; > estimates of capital expenditure required to develop assets; and > discount and inflation rates applied. 5.9 Decommissioning The discounted cost of expected decommissioning activity is recorded when an obligation to rectify the environmental impact of the group’s oil and gas activity exists. The obligation can arise from contractual licence arrangements, the laws and regulations of the country or province of operation or be constructive based on established practice. The amount that is recognised as a provision for decommissioning activities is the present value of the estimated future remediation expenditure that is determined by reference to the nature of the asset, the group’s operational policy in regard to decommissioning, local conditions and associated regulatory requirements. A corresponding decommissioning asset is recorded within property, plant and equipment at the same discounted value as the provision. The costs recognised in the income statement in each period comprise two elements: > depreciation of the decommissioning asset calculated on a unit-of-production basis consistent with the underlying asset to which it relates that is recorded in operating expenses; and > the unwind of the discount on the decommissioning provision that is recorded as interest expense as time passes. Any change in the present value of the estimated future decommissioning expenditure is reflected as an adjustment to the decommissioning provision and related decommissioning asset. 5.10 Other assets Other assets are capitalised on the basis of purchase price or construction cost. Depreciation on other elements of property, plant and equipment is charged on a straight line basis at the following rates that reflect the expected useful life of each asset category: > Fixtures and fittings > Vehicles > Other equipment 20% to 33% 20% 20% to 33% 5.11 Business combinations and goodwill Acquired businesses are included in the financial statements from the transaction date which is defined as the date at which the company achieves control over the assets being acquired and liabilities assumed. The cost of an acquisition is calculated as the fair value of the consideration given including equity instruments given, contingent or deferred elements of consideration and any liabilities assumed in connection with the transfer of control. The cost of an acquisition is allocated to the identifiable assets acquired and liabilities assumed on the basis of their relative fair values at the acquisition date. If the acquisition cost at the time of the acquisition exceeds the fair value of the net assets acquired, goodwill is recognised. Conversely, if the fair value of the net assets acquired exceeds the consideration given, the difference is recognised as gain in the income statement on the acquisition date. Goodwill is allocated to the cash generating units or groups of cash generating units that are expected to benefit from the business combination and is subject to annual impairment testing. Goodwill may also be recognised as a result of the application of deferred tax accounting to the fair values of assets acquired. The fair value allocation process often results in an increase to the carrying value of depreciable assets. Given that the tax deductible value of such assets does not change, the difference between the book value and the tax value of the asset increases, which results in an additional deferred tax liability. The increased deferred tax liability is recorded in purchase accounting with a corresponding entry to goodwill. Goodwill arising on the action of deferred taxes is allocated to cash generating units and assessed for impairment accordingly. 117 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Accounting policies continued 5.12 Inventories The group’s stocks of crude oil on hand that result from its production operations are carried at the lower of cost and net realisable value. Cost is calculated as the per-unit production cost for each barrel of oil held in inventory. Net realisable value is measured by reference to the market price for crude oil prevailing in Argentina plus or minus applicable quality and location premium or discount. Operational inventory and spare parts are carried at the lower of cost or net realisable value where cost represents the weighted average unit cost for inventory items on a line by line basis. 5.13 Investments and other financial assets Classification Financial assets are initially recognised at fair value, usually being the transaction price. In the case of financial assets not at fair value through profit or loss, directly attributable transaction costs are also included. The subsequent measurement of financial assets depends on their classification. The group classifies its financial assets in the following categories: > financial assets measured at amortised cost; > financial assets measured at fair value through other comprehensive income; and > financial assets measured at fair value through profit or loss. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held to maturity, re-evaluates this designation at the end of each reporting period. Recognition and derecognition Regular-way purchases and sales of financial assets are recognised on the trade date, being the date on which the group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership. Measurement Financial assets measured at amortised cost Financial assets are classified and measured at amortised cost when the objective of the asset is to collect contractual cash flows and the contractual cash flows represent solely payments of principal and interest. Such assets are carried at amortised cost using the effective interest method if the time value of money is significant. Gains and losses are recognised in profit or loss when the assets are derecognised or impaired and when interest is recognised using the effective interest method. This category of financial assets includes trade and other receivables. Financial assets measured at fair value through other comprehensive income Financial assets are classified and measured at fair value through other comprehensive income when the objective of holding the asset is both to collect contractual cash flows and sell the financial assets, and the contractual cash flows represent solely payments of principal and interest. The group does not have any financial assets classified in this category. Financial assets measured at fair value through profit or loss Financial assets are classified and measured at fair value through profit or loss when the asset does not meet the criteria to be measured at amortised cost or fair value through other comprehensive income. Such assets are carried on the balance sheet at fair value with gains or losses recognised in the income statement. Derivatives, other than those designated as effective hedging instruments, and equity instruments are included in this category. Interest income from financial assets at fair value through profit or loss is included in net gains/(losses). Interest on assets held at amortised cost is calculated using the effective interest method is recognised in the statement of profit or loss as part of revenue from continuing operations. Impairment – general Credit risk arises from the group’s financial assets which are carried at amortised cost, at fair value through other comprehensive income (‘FVOCI’) and at fair value through profit or loss (‘FVPL’), including cash and cash equivalents and outstanding receivables with oil and gas customers. The group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired based on the credit loss model set out in IFRS 9. 118 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 5. Accounting policies continued 5.13 Investments and other financial assets continued Impairment – assets carried at amortised cost For loans and receivables, the group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance. The expected loss rates are based on the payment profiles of sales over a period of 36 months prior to the reporting date. These historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of customers to settle the receivables as they fall due. Loans and receivables are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a failure to make contractual payments for a period of greater than 120 days past due. Impairment losses are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. Previous accounting policy: Impairment – assets carried at amortised cost: For loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan or held to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the group may measure impairment on the basis of an instrument’s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss. Impairment – other short term investments All of the groups other short term investments are considered to have low credit risk, and the loss allowance recognised during the period is therefore limited to 12 months’ expected losses. Any loss allowance determined for the period is recognised in profit or loss and reduces the fair value loss otherwise recognised in OCI. Previous accounting policy: Impairment – assets classified as available for sale: If there is objective evidence of impairment for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments that were recognised in profit or loss are not reversed through profit or loss in a subsequent period. If the fair value of a debt instrument classified as available-for-sale increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss. 5.14 Trade and other receivables Trade receivables and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method less provision for impairment. The group applies the IFRS 9 simplified approach to measuring expected credit losses to calculate impairment, which uses a lifetime expected loss allowance based on a 36 month assessment period. Any resulting impairment loss is recognised immediately in the income statement. Trade and other receivables are classified as current assets if receipt is due within one year or less. If not, they are presented as non-current assets. 5.15 Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with financial institutions that can be called on demand together with other short-term, highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash. Cash equivalents also include restricted amounts pledged as securities for work commitments. Cash equivalents are classified as financial assets measured at amortised cost or fair value through profit or loss. 119 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5. Accounting policies continued 5.16 Trade and other payables Trade and other payables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method. Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Accruals are recognised in respect of goods or services delivered but not yet invoiced. 5.17 Provisions Provision is made for asset retirement obligations and legal claims when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be incurred in settling the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision as the discount unwinds due to the passage of time is recognised in the income statement as interest expense. 6. Segment information The group’s executive management team comprising the chief executive officer, the chief financial officer and the chief operating officer has been determined collectively as the chief operating decision maker for the group. The information reported to the group’s executive management team for the purposes of resource allocation and assessment of segment performance is focused on the basins in which the group operates. The strategy of the group is focused on the development of the Vaca Muerta shale and other unconventional opportunities in the Neuquina basin while optimising conventional production from that basin. In addition, the group is present in the Austral basin in south Argentina where its operations with its partner, Roch S.A., are targeted at exploiting gas resources in the group’s licence areas within the basin. The group also has production activities in the Cuyana basin. Segments that are not currently material to the operations or result of the group are aggregated within ’Corporate – unallocated’. The Neuquina, Austral and Cuyana basins have been determined by the group to represent the reportable segments of the business based on the level of activity across these basins and the information provided to the executive management. The group’s executive management primarily uses a measure of earnings before interest, tax, depreciation and exploration expenses (EBITDAX) to assess the performance of the operating segments. However, the chief executive officer also receives information about segment revenue and capital expenditure on a monthly basis. 2018 Revenue Profit/(loss) for the year Add: depreciation, depletion and amortisation Add: exploration costs written off Less: finance income Add: finance costs Add: taxation EBITDAX Oil revenues bbls sold Realised price (US$/bbl) Gas revenues MMcf sold Realised price (US$/MMcf) Neuquina basin US$’000 Austral basin US$’000 Cuyana basin US$’000 Corporate – unallocated US$’000 Total US$’000 86,435 10,162 39,849 5,613 – 557 – 56,181 48,515 42,022 – 176,972 7 15,879 3,377 – 178 – 19,441 5,042 8,264 – – 125 – (93,524) (78,313) 734 369 (4,098) 29,842 16,797 64,726 9,359 (4,098) 30,702 16,797 13,431 (49,880) 39,173 86,392 1,486,470 58.12 26,061 422,152 61.73 42,022 698,133 60.19 43 17 2.58 22,454 5,477 4.10 – – – – – – – – – 154,475 2,606,755 59.26 22,497 5,494 4.10 Capital expenditure Property, plant and equipment Intangible exploration and evaluation assets Total capital expenditure 67,377 56,521 123,898 9,445 345 9,790 3,752 – 3,752 918 702 81,492 57,568 1,620 139,060 120 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 6. Segment information continued Exploration costs incurred in the Neuquina basin include US$4.8 million related to the write-off of an unsuccessful exploration well at the Laguna el Loro concession. The well satisfied the commitments associated with the licence which has now been relinquished. The remaining US$0.8 million exploration costs in the Neuquina basin are related to geological or geophysical work that is not related to a specific prospect or area and is general in nature. Exploration costs incurred in the Austral basin of US$3.4 million related to the company’s share of costs related to the unsuccessful Orkeke well drilled by the company’s partner, ROCH S.A., during the year. 2017 Revenue Loss for the year Add: depreciation, depletion and amortisation Add: exploration costs written off Add: impairment Less: finance income Add: finance costs Less: taxation EBITDAX Add: non-recurring expenses Adjusted EBITDAX Oil revenues bbls sold Realised price (US$/bbl) Gas revenues MMcf sold Realised price (US$/MMcf) Capital expenditure Property, plant and equipment Intangible exploration and evaluation assets Total capital expenditure Neuquina basin US$’000 Austral basin US$’000 Cuyana basin US$’000 Corporate – unallocated US$’000 Total US$’000 66,331 41,608 33,860 – 141,799 (222,801) (7,716) (9,146) (30,432) (270,095) 30,399 931 224,169 – 3,635 – 36,333 – 36,333 8,645 – – (248) – – 681 – 681 8,791 – 8,238 (948) – – 6,935 1,462 – – (780) 10,091 (16,635) (36,294) – 32,900 49,297 931 232,407 (1,976) 13,726 (16,635) 7,655 32,900 6,935 (3,394) 40,555 66,293 1,332,289 49.76 16,878 327,633 51.51 33,860 659,262 51.36 38 8 4.69 24,730 6,076 4.07 – – – – – – – – – 62,037 3,148 65,185 9,312 – 9,312 9,574 – 9,574 1,882 – 1,882 117,031 2,319,184 50.46 24,768 6,084 4.07 82,805 3,148 85,953 In August 2017, the company relinquished its interest in the Puesto Pozo Cercado block. The accumulated capitalised costs associated with Puesto Pozo Cercado of US$8.2 million were expensed accordingly. The impairment of US$224.2 million recognised in respect of the Neuquina segment related to goodwill that arose on the combination transaction as a function of the closing share price used to calculate the purchase consideration. The directors determined that the goodwill was not supportable and, accordingly, an impairment charge was recorded. All of the goodwill impairment is attributable to the Neuquina basin assets as all of the goodwill had been allocated to Neuquina basin assets. Non-recurring expenses of US$32.9 million primarily related to costs incurred in relation to the reverse takeover transaction during 2017, non-recurring professional fees and severance payments made to former employees. The substantial majority of costs incurred related to legal and professional fees associated with the financial and legal diligence and costs related to the preparation of the AIM admission document required for the readmission of the enlarged group to trading on the AIM market. The non-recurring transaction expenses also included advisory fees related to structuring and Argentina market advice associated with the transaction. There are no intersegment revenues in either period presented. All revenues represent sales to external customers and all sales are made in Argentina. The significant majority of oil and gas sales are made to the Argentinian state-owned oil company, YPF. 121 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 7. Total revenue Crude oil revenue Gas revenue Total revenue 2018 US$’000 154,475 22,497 2017 US$’000 117,031 24,768 176,972 141,799 The group makes all sales to external customers located within Argentina. Substantially all of its oil production is sold to the Argentina state-owned oil company, YPF. More than half of gas production is sold to Grupo Albanesi. 8. Cost of sales Production costs Depreciation of oil and gas assets Movements in crude inventory Total cost of sales 9. Administrative expenses Staff costs Depreciation Professional fees Other general and administrative expenses Total administrative expenses 10. Other operating income and expenses Income Staff seconded to joint operations Reversed provisions Other income Expense Hedging loss Loss on disposal of assets Share based payment Impaired receivables Argentine bank transaction taxes Other expenses 2018 US$’000 2017 US$’000 89,892 64,726 1,020 82,806 49,291 1,290 155,638 133,387 2018 US$’000 2017 US$’000 13,413 – 5,181 5,967 24,561 8,018 6 25,813 6,141 39,978 2018 US$’000 2017 US$’000 423 890 364 (7,632) (1,125) (5,451) – (2,487) (1,550) 839 – – – – – (5,355) – (524) Total other items of income or expense (16,568) (5,040) Hedging loss On 22 January 2018, the company entered a swap agreement with Mercuria Energy Trading S.A. (Mercuria) in order to fix the price received for a fixed amount of 2018 production at US$65.97/bbl. The swap agreement was entered to support the 2018 capital expenditure investment programme and was put in place over a defined amount of production to be derived from proved developed producing reserves, being the reserve category that is most certain of resulting in production. Through much of 2017, Brent pricing had been soft and fluctuated between the US$40.00/bbl and US$60.00/bbl. In January 2018, as the Brent benchmark breached the US65.00/bbl level, the directors considered it appropriate to fix the price received for a portion of the company’s production. The total volume under the contract was 1,215,954 barrels representing 47% of total 2018 production. The effective term of the agreement commenced on 15 January and expired on 14 December 2018. The total volume under the contract was subdivided in to monthly delivery volumes. A loss was recognised in relation to the hedge agreement as the Brent benchmark price exceeded the US$65.97/bbl contract price for much of the year from the end of March 2018. In addition, in May 2018 the Argentine government imposed temporary caps on domestic crude prices in Argentina thereby breaking the relationship between domestic crude prices and the Brent benchmark. This had the effect that cash losses incurred on the swap agreement as Brent rose above the contracted swap price of US$65.97/bbl were not compensated by increased realisations in Argentina. 122 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 10. Other operating income and expenses continued Loss on disposal of assets On 8 November 2018 the company sold its 100% shareholding in Andes Energia Argentina S.A. to Ocean Energy Services LLC for consideration of US$2.6 million. The realised loss on sale was US$1.1 million. Details of the sale transaction are described in note 16. Share-based payments In June 2018, the company exercised its right to settle the second fee instalment due under the Transaction Fee Services Agreement (TFSA) between the company and Integra Capital S.A.(‘Integra’) in ordinary shares. The TFSA was entered as part of the 2017 combination transaction and also provided that Mercuria was entitled to receive 3.06147 ordinary shares for each ordinary share issued to Integra under the agreement. Notwithstanding, Mercuria agreed for this transaction, for no consideration, to limit its entitlement to one ordinary share for each ordinary share issued to Integra. This resulted in 7,156,625 new ordinary shares being issued to Mercuria, with a corresponding charge of US$5.5 million recognised in the income statement in the period. 11. Auditors’ remuneration Fees payable to the company’s auditor and its associates for the audit of the parent company and consolidated financial statements Fees payable to the company’s auditor and its associates for other services: The audit of the company’s subsidiaries Review of the interim financial statements Audit related assurance services Tax compliance services Other taxation services Corporate finance related services Other services Total auditors’ remuneration 2018 US$’000 2017 US$’000 230 194 276 61 – 4 8 – 15 594 191 – 49 182 6 2,016 174 2,812 The group has a policy in place for the award of non-audit work to the auditors which requires audit committee approval (refer to the audit committee report on pages 67 to 69). 12. Staff costs and headcount Staff costs Wages and salaries Social security costs Other benefits Share-based payments Average headcount Argentina United Kingdom United States of America Key management compensation Short-term employee benefits Total key management compensation Detailed remuneration disclosures are provided in the remuneration report on pages 70 to 88. 2018 US$’000 16,555 2,495 810 305 2017 US$’000 9,271 852 792 105 20,165 11,020 2018 No. 100 4 5 109 2017 No. 97 3 2 102 2018 US$’000 2017 US$’000 2,356 2,356 1,081 1,081 123 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 13. Property, plant and equipment Non-current assets At 1 January 2017 Cost Accumulated amortisation Net book amount Year ended 31 December 2017 Opening net book amount Acquisition of subsidiaries Transfers from intangible assets Additions Depreciation charge Impairment charge Closing net book amount At 31 December 2017 Cost Accumulated depreciation and impairment Net book amount Fixtures, fittings, equipment and vehicles US$’000 Development and production assets US$’000 Assets under construction US$’000 Total US$’000 4,420 (4,356) 387,209 (217,440) 18,057 – 409,686 (221,796) 64 169,769 18,057 187,890 64 153 – 2,747 (252) – 169,769 140,613 319 79,874 (49,045) (8,238) 18,057 – – 184 – – 187,890 140,766 319 82,805 (49,297) (8,238) 2,712 333,292 18,241 354,245 7,320 (4,608) 608,015 (274,723) 18,241 – 633,576 (279,331) 2,712 333,292 18,241 354,245 In August 2017, the company relinquished its interest in the Puesto Pozo Cercado block. Accordingly, the accumulated capitalised costs of US$8.2 million associated with Puesto Pozo Cercado were impaired. Non-current assets At 1 January 2018 Cost Accumulated depreciation Net book amount Year ended 31 December 2018 Opening net book amount Additions Transfers Transfers to intangible assets Exploration costs written off Depreciation charge Closing net book amount At 31 December 2018 Cost Accumulated depreciation and impairment Net book amount Fixtures, fittings, equipment and vehicles US$’000 Development and production assets US$’000 Assets under construction US$’000 Total US$’000 7,320 (4,608) 608,015 (274,723) 2,712 333,292 18,241 – 18,241 633,576 (279,331) 354,245 2,712 2,111 – – – (1,072) 333,292 – 91,552 (1,413) (3,407) (63,654) 18,241 79,381 (91,552) – – – 354,245 81,492 – (1,413) (3,407) (64,726) 3,751 356,370 6,070 366,191 9,431 (5,680) 694,747 (338,377) 3,751 356,370 6,070 – 6,070 710,248 (344,057) 366,191 Additions to property, plant and equipment in the year ended 31 December 2018 include US$0.7 million of interest capitalised in respect of qualifying assets (2017: US$0.7 million). The total amount of interest capitalised within property, plant and equipment at 31 December 2018 is US$2.8million (2017: US$2.1 million). Exploration costs written off in 2018 of US$3.4 million include the company’s share of costs related to the unsuccessful Orkeke well drilled by the company’s partner, ROCH S.A., in the Austral basin during the year. 124 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS13. Property, plant and equipment continued The company has assessed its licence interests for potential impairment. The initial assessment is undertaken by comparing the book value of each asset to its respective NPV10 value that is independently assessed by the external reservoir engineers using the Petroleum Resources Management System guidance. Where the NPV10 value is lower than the carrying value of an asset an impairment test is performed. Assets are tested for impairment by calculating their value-in-use using a discounted cash flow model or their fair value less costs of disposal, whichever is determined to be the higher. The NPV10 assessment showed that the La Brea concession was potentially impaired. An impairment test was performed using a discounted cash flow model and no impairment charge was considered necessary. The impairment test uses several assumptions but is most sensitive to assumptions related to oil price, discount rate and production volumes. An impairment charge may be required in future periods if actual performance is not consistent with the assumptions used in the discounted cash flow model. The sensitivity of the model for La Brea to these to specific assumptions is as follows: Assumption Oil price Discount rate Production Sensitivity +/- 5% +/- 1% +/- 10% Fair value, +/- US$ million 8.3 2.5 16.7 14. Intangible assets Exploration and evaluation assets are primarily the group’s licence interests in exploration and evaluation assets located in Argentina. The exploration and evaluation assets consist of both conventional and unconventional oil and gas properties. Non-current assets At 1 January 2017 Cost Net book amount At 31 December 2017 Opening net book amount Acquisition of subsidiaries Additions Transfers to property, plant and equipment Impairment of goodwill Closing net book amount At 31 December 2017 Cost Accumulated amortisation and impairment charges Net book amount Exploration and evaluation assets US$’000 Goodwill US$’000 Total US$’000 – – 6,804 6,804 6,804 6,804 – 260,007 – – (224,169) 6,804 161,760 3,148 (319) – 6,804 421,767 3,148 (319) (224,169) 35,838 171,393 207,231 260,007 (224,169) 171,393 – 431,400 (224,169) 35,838 171,393 207,231 The increase in exploration and evaluation assets of US$161.8 million in 2017 relates to the fair value assessed for the licences acquired and associated exploration upside as part of the combination transaction that completed on 10 August 2017. The fair value of exploration and evaluation acreage acquired in the combination was assessed on a comparative transaction basis by reference to Dollars-per-acre paid in other observable market transactions that took place around the date of the business combination. All of the exploration and evaluation assets recognised as part of the combination related to licence areas in the Neuquina basin. 125 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 14. Intangible assets continued Non-current assets At 1 January 2018 Cost Accumulated amortisation and impairment charges Net book amount Year ended 31 December 2018 Opening net book amount Additions Transfers from property, plant and equipment Exploration cost written off Closing net book amount At 31 December 2018 Cost Accumulated amortisation and impairment charges Net book amount Exploration and evaluation assets US$’000 Goodwill US$’000 Total US$’000 260,007 (224,169) 171,393 – 431,400 (224,169) 35,838 171,393 207,231 35,838 – – – 35,838 171,393 57,568 1,413 (5,202) 207,231 57,568 1,413 (5,202) 225,172 261,010 260,007 (224,169) 225,172 – 485,179 (224,169) 35,838 225,172 261,010 Additions to intangible assets during 2018 relate to amounts paid to secure additional acreage with unconventional exposure as part of open bid rounds held in both the Neuquén and Mendoza provinces. Additions in the period also include costs associated with securing the group’s interests in the Mata Mora and Corralera blocks and increasing its working interest participation from 27% to 90%. Exploration costs written off in 2018 include US$4.8 million related to the write-off of an unsuccessful exploration well at the Laguna el Loro concession. The well satisfied the commitments associated with the licence which has now been relinquished. Impairment tests for exploration and evaluation assets Exploration and evaluation assets are subject to impairment testing prior to reclassification as tangible fixed assets where commercially viable reserves are confirmed. Where commercially viable reserves are not encountered at the end of the exploration phase for an area the accumulated exploration costs are written off in the income statement. Impairment tests for goodwill Goodwill is monitored by management at the level of the operating segments identified in note 6. A segment level summary of the goodwill allocation at the time of the acquisition is presented below. At acquisition Chachahuen Corralera Mata Mora Neuquina basin US$’000 Austral basin US$’000 Cuyana basin US$’000 Corporate – unallocated US$’000 15,223 16,780 3,835 35,838 – – – – – – – – – – – – Total US$’000 15,223 16,780 3,835 35,838 No goodwill was recognised prior to 2017. All goodwill presented relates to the allocation of technical goodwill arising as a result of accounting for deferred tax on the business combination in the prior year, see note 15. Goodwill of US$224.2 million that was related to the excess of the purchase consideration given over the fair value of assets acquired and liabilities assumed at the acquisition date was impaired in full on completion of the business combination in 2017 as discussed in note 15. The carrying value of goodwill has been assessed for impairment at the period end. The discount rate used in the carrying value assessment was the group’s calculated weighted average cost of capital of 14.0%. Prices used in the assessment were the Energy Information Administration’s forecast of Brent crude prices. The assessment determined that fair value of the assets to which goodwill has been allocated was in excess of their carrying values as at 31 December 2018 and consequently no impairment charge has been recorded in 2018. 126 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS15. Business combination Summary of acquisition On 10 August 2017 the parent entity acquired 100% of the issued share capital of the Trefoil Holdings B.V. group (‘Trefoil’) of companies by way of a reverse takeover. The acquisition significantly increased the group’s licensed acreage position in Argentina and, in particular, related to the Vaca Muerta shale formation and other unconventional oil and gas prospects that are present in much of the combined group’s acreage in the Neuquina basin. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Ordinary shares issued US$’000 385,058 Both the assessed fair value of Trefoil and its oil and gas reserves were greater than those of Andes Energia Plc (Andes) and therefore the transaction represented a reverse takeover under the AIM Rules for Companies. Because of the reverse nature of the transaction, and although Andes was the legal acquirer, Trefoil was determined to be the accounting acquirer for the purposes of purchase accounting. Accordingly the transaction was accounted for under IFRS 3, ‘Business Combinations’ in 2017. The purchase consideration was valued by reference to the number of shares held by Andes shareholders at the transaction date multiplied by the Andes share price on that day. This represents the value ‘given up’ by Andes shareholders in exchange for an interest in the enlarged group. The assets and liabilities that were recognised as a result of the acquisition were as follows: Cash Trade receivables Inventory Available for sale financial assets Property, plant and equipment: development and production assets Property, plant and equipment: facilities Property, plant and equipment: fixtures, fittings equipment and vehicles Intangible assets: exploration and evaluation assets Trade payables Borrowings Contingent liability Provisions Deferred tax liability Net identifiable assets acquired Add: goodwill Net assets acquired Fair value US$’000 1,062 22,826 409 12,812 132,173 8,440 153 161,760 (67,683) (86,574) (4,680) (2,141) (53,506) 125,051 260,007 385,058 The fair values recorded in the initial purchase price allocation were assessed with the assistance of an external professional valuation firm. The inputs used for the evaluation included: > asset level cash flow forecasts based on the production, revenue, capital expenditure and operational expenditure assessed by reference to the information used to compile the competent persons’ reports prepared as part of the AIM readmission process; > an assessment of the group’s weighted average cost of capital; > commodity price forecasts based on information published by the Energy Information Administration; and > comparable transaction values based on a US Dollar per acre value were used to assess the fair value of non-producing assets and unconventional exploration upside associated with producing assets. Under IFRS 3, the fair values of assets acquired and liabilities assumed can be adjusted during a ‘measurement period’ that concludes 12 months following the date of the business combination. That measurement period ended on 10 August 2018 and the purchase price allocation recorded at the time of the acquisition is now final. Goodwill on the acquisition was US$260.0 million. Of this amount US$224.2 million related to the difference between the fair value of the purchase consideration given and the fair value of the net assets acquired and liabilities assumed. On completion of the transaction the directors assessed this element of the goodwill and determined there was no basis to recognise it in the balance sheet. Accordingly the full US$224.2 million was written-off on conclusion of the transaction. The remaining goodwill of US$35.8 million arose as a result of the application of deferred tax accounting to the fair values recorded in respect of the assets acquired. The company incurred costs of US$24.1 million related to the combination transaction, primarily consisting of advisory costs. All deal related advisory costs were expensed in the income statement for the year ended 31 December 2017 within administrative expenses. 127 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 16. Disposal of non current assets On 8 November 2018 the company sold its 100% shareholding in Andes Energia Argentina S.A. (‘AEA S.A.’) to Ocean Energy Services LLC (‘OES’) for consideration of US$2.6 million. AEA S.A. was an intermediate holding company of the group incorporated in Argentina. The entity held a 70% interest in eight oil and gas licences in Colombia that had been determined by management to be non-core to the group, in addition to shareholdings in various group subsidiaries. The sale and purchase agreement (‘SPA’) was concluded for the sale of the AEA S.A. entity which held the title to the Colombian licences. Therefore in order to facilitate the sale, in advance of the completion date, AEA S.A. sold all the investments it held in group subsidiaries to PGR plc for consideration of US$6.6 million. Refer to note 4 of the company only financial statements for further discussion. The sale of AEA S.A. completed on 8 November 2018. The realised loss on sale recognised in the consolidated income statement was US$1.1 million, which is broken down per the table below: Loss on sale Consideration Contingent consideration Costs to sell Fair value of total consideration Net assets of AEA S.A. Loss on sale of non-current assets USD $’000 900 1,742 (1,124) 1,518 (2,643) (1,125) * Loss on sale has been presented within other operating income and expenses in the consolidated statement of comprehensive income. At 31 December 2018, US$0.4 million of the cash consideration had been received by the company, with the balance of US$0.5 million held within other receivables at the balance sheet date. The contingent consideration represents the fair value attributed to restricted cash held in escrow in respect of commitments under the Colombian licences. The escrow accounts were put in place by the company at the time that the licences were originally awarded and are in favour of the Agencia Nacional de Hidrocarburos (‘ANH’) in Colombia. Release of the restricted cash amounts is dependant on the fulfilment of exploration commitments related to the licences that have now been sold to OES. The SPA in place between the company and OES provided that, as OES satisfies the licence commitments on the Colombian licences, 25% of any amounts released from escrow by the ANH will be to the benefit of the company. At the date of sale, the total restricted cash balance held in respect of the Colombia licenses was US$11.9 million, of which US$6.1 million was held in an account maintained by the company (see note 21) and $5.8 million was held in an account maintained by AEA S.A.. The fair value of the portion of the restricted cash due to the group at the sale date of US$1.7 million was assessed by reference to OES’ stated plans for work to be performed on the licences. The fair value assessment was reconsidered at 31 December 2018 with no change made to the carrying value. The contingent consideration recognised at 31 December 2018 is split between other receivables (US$0.8 million) for the element of contingent consideration related to the account maintained by AEA S.A. and cash and cash equivalents (US$0.9 million) for the element related to the account maintained by the company. 128 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS17. Finance income and costs Finance income Interest income Income from short-term investments Net exchange gains on foreign currency borrowings Other finance gains Finance income Finance costs Interest on borrowings Accretion of discount on asset retirement obligation Loan arrangement fees Other finance costs Exchange differences Finance costs Net finance income 2018 US$’000 2017 US$’000 321 390 2,743 644 4,098 (11,335) (860) (1,875) (5,227) (11,405) 572 572 832 – 1,976 (8,207) (142) – (4,039) (1,338) (30,702) (13,726) (26,604) (11,750) Capitalised borrowing costs The capitalisation rate used to determine the amount of borrowing costs to be capitalised is the weighted average interest rate applicable to the entity’s general borrowings during the year, in this case 6.41% for US$ denominated borrowings (2017: 7.7%). In the prior year the group also held AR$ denominated borrowings which had an applicable weighted average interest rate of 22.6%. In the year to 31 December 2018, US$0.7 million (2017: US$0.7 million) of interest expense in respect of qualifying assets was capitalised as part of additions to property, plant and equipment. 18. Income tax expense This note provides an analysis of the group’s income tax expense, shows what amounts are recognised directly in equity and how the tax expense is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the group’s tax position. Income tax expense Current tax Current tax credit/ (expense) on profits for the year Total current tax expense Deferred income tax (Decrease)/ increase in deferred tax Total deferred tax (expense)/ benefit Income tax (expense)/ benefit Reconciliation of income tax expense to notional tax charge calculated using corporate tax rate Loss from continuing operations before income tax expense Tax at the Argentina tax rate of 30% (2017: 35%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Goodwill impairment Effect of currency translation on tax values Effect of change in tax rate Expenses not deductible for taxation Deferred tax assets not recognised Fiscal assessment Other Total income tax (expense)/ benefit 2018 US$’000 2017 US$’000 201 201 (4,794) (4,794) (16,998) 21,429 (16,998) (16,797) 21,429 16,635 2018 US$’000 (61,516) 18,455 – (26,556) 3,400 343 (10,904) – (1,535) 2017 US$’000 (286,730) 100,356 (78,459) (11,660) 10,084 (1,776) (1,690) 525 (745) (16,797) 16,635 129 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18. Income tax expense continued The corporate income tax rate in Argentina in 2018 was 30% (2017: 35%) and applies to profits earned and losses suffered in the year to 31 December 2018. Under the December 2017 tax reform plan implemented by the Argentina tax authorities (AFIP), the corporate income tax rate will be maintained at 30% for the year ended 31 December 2019 and will be further reduced to 25% for years ended 31 December 2020 and forward. The reduction in the corporate income tax rate articulated in the tax reform plan relates only to profits reinvested in Argentina. An additional tax is applied to dividends to revert the aggregate tax rate in respect of the profits used to make the dividend to 35%. 19. Financial assets and liabilities Financial assets 2018 Trade and other receivables Cash and cash equivalents Financial assets 2017 Trade and other receivables Cash and cash equivalents Financial liabilities 2018 Trade and other payables Borrowings Financial liabilities 2017 Trade and other payables Borrowings Assets at FV-OCI US$’000 Assets at FV-P&L US$’000 – – – 794 – 794 Assets at amortised cost US$’000 20,660 21,085 Total US$’000 21,454 21,085 41,745 42,539 Assets at FV-OCI US$’000 Assets at FV-P&L US$’000 – – – – – – Derivatives FV-P&L US$’000 Derivatives hedging US$’000 – – – – – – Derivatives FV-P&L US$’000 Derivatives hedging US$’000 – – – – – – Assets at amortised cost US$’000 37,111 23,696 60,807 Liabilities at amortised cost US$’000 54,666 200,284 Total US$’000 37,111 23,696 60,807 Total US$’000 54,666 200,284 254,950 254,950 Liabilities at amortised cost US$’000 89,523 192,476 Total US$’000 89,523 192,476 281,999 281,999 On 22 January 2018, the group entered a swap agreement with Mercuria Energy Trading S.A. in order to fix the price received over a fixed amount of 2018 production at a price of US$65.97/ bbl. The effective term of the agreement commenced on 15 January and expired on 14 December 2018. The company was not party to any derivative instruments at 31 December 2018. The group’s maximum exposure to various risks associated with the financial instruments is discussed in note 24. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. 130 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS20. Trade and other receivables Contingent consideration Financial assets at fair value through profit and loss Trade receivables Less: provision for impairment Receivables from related parties Other receivables Financial assets at amortised cost Prepayments and other receivables Tax credits Total trade and other receivables 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 794 794 21,152 (3,651) 17,501 – 1,403 18,904 1,404 9,305 30,407 – – – – – – 1,756 1,756 – 3,329 5,085 794 794 – – – – – – 21,152 (3,651) 26,930 (2,942) 981 (589) 27,911 (3,531) 17,501 – 3,159 20,660 1,404 12,634 35,492 23,988 241 9,657 33,886 689 10,350 44,925 392 – 2,833 3,225 – 5,097 8,322 24,380 241 12,490 37,111 689 15,447 53,247 Trade receivables are amounts due from customers for sales of crude oil and natural gas in the ordinary course of business. Trade receivables are non-interest bearing and generally have, on average, 30-day terms and are therefore all classified as current. Due to their short maturities, the book value of trade receivables approximates fair value. Taxation, government related and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. If collection of amounts is expected in one year or less they are classified as current assets. The lifetime expected credit loss rate of the group’s trade receivables was assessed based on the payment profiles of sales over a period of 36 months before 31 December 2018 and 1 January 2018 respectively and the corresponding historical credit losses experienced within this period. No material adjusting macroeconomic factors were identified for either assessment period. The actual credit loss over both periods was determined to be 0.3% of total sales which is immaterial to the group financial statements. No loss allowance has therefore been recognised in either period presented. Other receivables are determined to be low credit risk and no loss allowance has been recorded against this balance in the period. Other receivables in 2017 included confirmed balances related to historic transactions with Integra Capital S.A. and with the Andina group of companies that were settled in full in 2018. For prior years a provision for impairment of trade receivables was established where there was objective evidence that the group would not be able to recover all amounts outstanding on the original terms. In 2016, a provision of US$0.7 million was established related to an outstanding receivable from a customer that had entered administration proceedings. The value of the provision established was equivalent to 60% of the outstanding balance from the customer (AR$18.3 million). In 2018, the remaining 40% of the outstanding balance was written off as there is no prospect of recovery from the administration. Contingent consideration Contingent consideration relates to the sale of AEA S.A. in November 2018. Contingent consideration represents the fair value attributed to restricted cash held in escrow in respect of the licence guarantees in Colombia and held in favour of the ANH. The fair value of the restricted cash assumed at the sale date was US$1.7 million. Funds held in escrow in respect of the Colombian licences are held in two bank accounts, one maintained by AEA S.A. and one by the company. The element of contingent consideration related to the account maintained by AEA S.A. is recognised in other receivables, with the element related to the account maintained by the company held in restricted cash. For further details on the sale transaction refer to note 16. 131 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21. Cash and cash equivalents Cash at bank and in hand Short-term investments Restricted cash 2018 US$’000 2017 US$’000 16,497 796 3,792 21,085 23,678 18 – 23,696 Short-term investments Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition and are repayable with 24 hours’ notice with no loss of interest. Restricted cash Restricted cash comprises the cash held in escrow in relation to licence obligations on the 70% interest in eight licences in Colombia sold to OES in the period (see note 16). Release of the restricted cash is subject to OES fulfilling work commitments under the licences. The company is entitled to receive 25% of any amounts released from restricted cash as OES fulfils these commitments. At the sale date, the company completed a fair value assessment and has recognised its share of expected receipts based on details received from OES regarding work to be performed. A payable has also been recorded related to the element owed to OES should the commitments be fulfilled. Any restricted funds released from this account will initially be received by the company and will then be allocated 75% to OES with the remaining 25% retained by the company. 22. Trade and other payables Trade payables Accrued staff costs Social security and other taxes Royalties Accrued expenses Other payables 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 20,720 4,356 3,579 1,390 15,257 6,108 51,410 – – 3,256 – – – 3,256 20,720 4,356 6,835 1,390 15,257 6,108 54,666 59,091 1,899 9,476 1,617 7,570 2,702 82,355 – – 7,168 – – – 7,168 59,091 1,899 16,644 1,617 7,570 2,702 89,523 Trade payables are unsecured and are usually paid within 30 days of recognition. The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature. Social security and other taxes include amounts related to tax plans agreed with the Administratión Federal de Ingresos Públicos (‘AFIP’), the Argentinian federal tax authority. Under tax plan arrangements taxes due are paid in instalments with interest charged on the outstanding principal. The group historically participated in tax plans on a selective basis and where the level of currency depreciation and the interest rate on outstanding amounts resulted in an acceptable finance cost. Obligations falling due from tax plans within the next 12 months have been presented within current liabilities at 31 December 2018, with the remaining obligations presented as non-current. Other payables include amounts owed to OES related to their fulfilment of licence commitments in Colombia and backed by restricted cash held in a bank account maintained by the company. 132 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 23. Borrowings Secured Bank loans Total secured borrowings Unsecured Bank loans Loans from related parties Other loans Bank overdraft Total unsecured borrowings Total borrowings 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 17,523 17,523 709 46,090 43 – 46,842 64,365 – – 17,523 17,523 19,694 19,694 2,502 2,502 22,196 22,196 – 135,919 – – 709 182,009 43 – 3,802 2,616 3,857 5 – 160,000 – – 3,802 162,616 3,857 5 135,919 182,761 10,280 160,000 170,280 135,919 200,284 29,974 162,502 192,476 Secured liabilities and assets pledged as security Secured liabilities relate to US Dollar denominated loans totalling US$17.5 million with interest rates ranging from 6.2-8.25% (2017: US$17.2 million). At 31 December 2018 the group held no AR$ denominated loans (2017: US$5.0 million). All AR$ denominated loans were repaid in full during the year. Loans from related parties The related party loan at 31 December 2018 relates to a bridging and working capital facility provided to the group by Mercuria Energy Netherlands B.V., a subsidiary within the Mercuria Group (‘Mercuria’). In February 2018, US$100.0 million of the original Mercuria facility was converted to equity in the company at a price of £0.37 per share. At the same time the facility was restructured as a new convertible rolling credit facility (‘RCF’) in the amount of US$160.0 million with an additional US$100.0 million of new funds made available to the company. The new convertible RCF bears interest at three-month LIBOR+4% and is repayable by 31 December 2021. The new convertible RCF has a 17-month repayment grace period and will be amortised in eleven equal quarterly repayment instalments from 30 June 2019 until maturity. In December 2018, Mercuria advanced an additional US$25.0 million as a Tranche B element to the facility. In February 2019, a further US$50.0 million was made available under the RCF facility. The original facility of US$160.0 million became Tranche A. Mercuria Group has the right to convert all or part of the outstanding principal of Tranche A into additional new ordinary shares of the company at a price of £0.45 per share. This conversion right can be exercised at any time from 30 June 2018 until 10 business days prior to the maturity for Tranche A. A similar conversion feature exists in relation to Tranche B at a price of £0.28 per share. The conversion right under Tranche B is subject to appropriate shareholder resolutions in relation to the authority to allot and disapplication of pre-emption rights in relation to such shares having been approved. Fair value For the majority of the borrowings, the fair values are not materially different to their carrying amounts, since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short-term nature. Differences identified between the fair values and carrying amounts of borrowings are as follows: Bank loans Other loans Bank overdraft Loans from related parties 2018 2017 Carrying amount US$’000 18,232 43 – 182,009 Fair value US$’000 17,924 43 – 182,009 Carrying amount US$’000 25,998 3,857 5 162,616 Fair value US$’000 21,593 3,306 5 162,616 200,284 199,976 192,476 187,520 The fair values of non-current borrowings are based on discounted cash flows using a current borrowing rate. They are classified as Level 3 fair values in the fair value hierarchy due to the use of unobservable inputs, including own credit risk. 133 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 23. Borrowings continued Recognised fair value measurements The group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the group is the current bid price. These instruments are included in Level 1. Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity- specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. This is the case for unlisted equity securities. The group does not currently hold any financial instruments whose fair value is assessed by reference to Level 1 or Level 2 inputs (2017: Nil). 24. Financial risk management The group’s exposure to financial risks and how those risks could affect the group’s future financial performance is summarised below. Risk Exposure arising from Measurement Management Market risk – foreign exchange. Future commercial transactions. Cash flow forecasting and budgeting. Financial assets and liabilities recognised in the balance sheet that are not denominated in US Dollars. Sensitivity analysis. Market risk – commodity prices. Future revenue transactions. Cash flow forecasting and budgeting. Market risk – interest rate. Long term borrowings held at variable rates. Sensitivity analysis. Credit risk. Cash and cash equivalents and trade receivables. Aging analysis. Credit checks and credit ratings. Liquidity risk. Borrowings and other liabilities. Rolling cash flow forecasts. The majority of the group’s cash is held in US Dollars. The group draws progressively on available facilities as cash is needed to fund development. Due to the influence of the US Dollar on the companies within the group, the US Dollar has been determined to be the functional currency of the operating subsidiaries and the parent. This determination also reduces the exposure to forex gains and losses. The group considers the use of hedging instruments and enters into hedge arrangements where appropriate in order to protect downside price exposure and, particularly, to support budgeted capex requirements. The group has an active treasury management function and places excess cash on hand on overnight or term deposit. The group actively monitors outstanding receivables. Where a customer shows risk of default then no credit is extended and all sales are made on a prepaid basis. The group maintains an active treasury management function. 134 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS24. Financial risk management continued Market risk – foreign exchange risk and commodity price risk The group’s operations are solely focused on Argentina and wholly relate to the exploration for and the development and production of oil and gas reserves. The foreign currency that has the most influence on the financial performance of the group is the Argentine Peso. The group is exposed to quoted prices for oil and gas which are both traded commodities, the prices of which can also significantly influence financial performance. Argentina has historically been subject to exchange controls that prevented effective currency management. The exchange controls were lifted in December 2015. In addition, as part of a policy to encourage the production of oil and gas in a low price environment the Argentina government had previously implemented commodity price controls. As the international crude benchmark prices recovered during the course of 2017, the government progressively lowered the regulated price for domestic crude to allow domestic prices to float in line with international prices. The regulated price regime was removed completely in October 2017, although in May 2018 the government imposed capped prices for domestic crude for May, June and July deliveries. The introduction of price caps was in response to the increase in the Brent Crude benchmark and the consequential pressure on refined product pricing that would result from Brent linked pricing. The government has stated that this intervention was due to temporary market conditions and that the administration remains committed to market based pricing in the long term. Capped pricing was removed in August 2018 however the relationship between domestic prices and Brent remains imperfect. The previous exchange and commodity price controls reduced the ability to manage exchange risk and commodity price risk effectively. In January 2018, the company entered into a swap agreement over a fixed amount of 2018 production to support planned capital expenditure. The increase in the Brent price from March 2018 combined with the price cap on oil sales introduced in Argentina in May 2018 however, caused the swap to become less effective as it meant that cash losses on the swap agreement were not compensated by increased realisations in Argentina as Brent rose above the swap price US$65.97/ bbl. As a result, the company recognised a net cash loss in respect of barrels subject to the agreement when the Brent benchmark price exceeded US$65.97/ bbl. The total hedge loss recognised in 2018 was US$7.6 million. The swap contract expired on 14 December 2018. The company is no longer party to any derivative commodity contracts. The group did not use derivative financial instruments to manage currency risk in the year ended 31 December 2018 or in the prior year. The group is primarily exposed to foreign exchange risk related to bank deposits, debtors or creditors that are denominated in Argentine Peso or Pound Sterling. The group’s exposure to foreign exchange risk at the end of the reporting period, expressed in US Dollars, was as follows: US$’000 Trade and other receivables Cash and cash equivalents Trade and other payables Borrowings Denominated in: £GBP 310 130 (1,911) – (1,471) AR$ 31,592 4,262 (39,856) – (4,002) Sensitivity – exchange rates As shown in the table above the group is primarily exposed to changes in the US$/AR$ exchange rate. The sensitivity of profit and loss to changes in the exchange rates arises mainly from AR$ denominated financial instruments. There is no impact on other components of equity as the group is not party to any financial instruments, such as hedging instruments, where currency gains and losses would be recognised in other comprehensive income (2017: none). US$/AR$ exchange rate increase by 10%1 US$/AR$ exchange rate decrease by 10%1 1 Assumes all other variables held constant Impact on post tax profit and loss Impact on other components of equity 2018 US$’000 2017 US$’000 2018 US$’000 2017 US$’000 (547) 547 (684) 684 – – – – 135 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24. Financial risk management continued Sensitivity – commodity prices The impact of an increase or decrease in commodity prices on the group’s oil revenues is as follows: Increase by 10%1 Decrease by 10%1 1 Assumes all other variables held constant Market risk – cash flow and fair value interest rate risk Impact on revenue – crude oil prices Impact on revenue – natural gas prices 2018 US$’000 15,448 (15,448) 2017 US$’000 11,703 (11,703) 2018 US$’000 2017 US$’000 2,250 (2,250) 2,477 (2,477) Market risk – interest rate risk The group’s main interest rate risk arises from long term borrowings with fixed or semi fixed interest rates that expose the group to fair value risk on the underlying borrowing instrument. The group borrows money in both US Dollar and Argentine Peso. Argentina has historically been subject to high levels of currency devaluation as well as high inflation. The group maintains a portion of its borrowings in Argentine Peso and balances its portfolio of borrowings between fixed Argentine Peso and fixed US Dollar in order to manage its exposure to the combination of inflation, currency devaluation and interest rate risk. The group does not currently use swap instruments or other derivatives to manage its interest rate or fair value risk exposure. The exposure of the group’s borrowings to interest rate changes and the contractual repricing dates of the borrowings held at the end of the reporting period were as follows: Variable rate borrowings 2018 US$’000 182,000 182,000 % of total loans US$’000 91 91 2017 US$’000 160,000 160,000 % of total loans US$’000 88 88 Sensitivity Profit or loss is sensitive to higher/lower interest income from cash and cash equivalents or higher/lower interest expense on borrowings resulting from movements in the interest rate. The following table demonstrates the sensitivity of the group’s financial instruments to reasonably possible movements in interest rates: Interest rate increase by 100 basis points1 Interest rate decrease by 100 basis points1 1 Assumes all other variables held constant Impact on post tax profit and loss Impact on other components of equity 2018 US$’000 2,003 (2,003) 2017 S$’000 1,925 (1,925) 2018 US$’000 2017 US$’000 – – – – Credit risk Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions. The group is also exposed to credit risk related to its customers and outstanding receivables with them. Credit risk on cash and cash equivalents is managed by only maintaining bank accounts or placing funds on deposit with recognised, reputable financial institutions with a minimum credit rating of B2 (Moody’s). The group sells substantially all of its oil production to the Argentina state-owned oil company, YPF. At 31 December 2018 YPF maintained a credit rating of B2 (Moody’s). There is no recent history of credit loss, non-payment or default by YPF in relation to oil and gas sales. The credit rating would indicate that a credit risk loss should be recorded in respect of sales to YPF; however, given the recent payment history related to such sales, the calculated amount of the potential 12 month credit risk loss is not material. The group undertakes credit and other checks before accepting new customers. Where there are concerns about creditworthiness of a counterparty the group requires that the full amount/substantially all of any sale be paid in full before delivery. 136 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS24. Financial risk management continued Credit risk continued The credit quality of financial assets that are neither past due or impaired can be assessed by reference to external credit ratings (where available) or to historical information about default rates. Trade receivables – counterparty without external credit rating1 Group 1 Group 2 Group 3 Cash at bank and short-term deposits (Moody’s) Aaa Aa3 Aa2 A1 Baa1 Baa3 Ba3 B2 Other 1 Group 1 – new customers (less than six months) Group 2 – existing customers (more than six months) with no past default Group 3 – existing customers with past default. All defaults were fully recovered 2018 US$’000 2017 US$’000 – 2,885 – 2,885 – 16,999 – 16,999 186 16,602 – 43 9 210 1,366 2,666 3 21,085 1,053 12,570 23 44 – 1,049 1,599 7,171 187 23,696 Past due but not impaired At 31 December 2018, trade receivables of US$1.0 million were past due but not impaired (2017: US$1.1 million). The aging analysis of these trade receivables is as follows: Up to 3 months 3 to 6 months Over 6 months 2018 US$’000 2017 US$’000 568 453 17 1,038 – – 1,079 1,079 Liquidity risk Liquidity risk relates to the group’s ability to meet its obligations as they fall due. The group generates cash from its operations. Management monitors investment plans, and in particular, those in relation to exploration expenditure that may not be cash generative in the short term, against available cash and cash equivalents, forecast cash from operations and maturity dates of financial liabilities before final sanction and deployment of cash to a project. Undrawn borrowing capacity, where available, is also taken into account. The following table shows the group’s financial liabilities by relevant maturity groupings based on contractual maturities. The amounts included in the analysis are the contractual undiscounted cash flows. 31 December 2018 Trade and other payables Borrowings Less than 1 year US$’000 Between 1 and 2 years US$’000 Between 2 and 5 years US$’000 Over 5 years US$’000 52,510 75,428 127,938 1,712 75,096 76,808 2,197 70,727 72,924 262 – 262 Total contracted cash flows US$’000 56,681 221,251 Carrying amount US$’000 54,666 200,284 277,932 254,950 137 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 24. Financial risk management continued Liquidity risk continued 31 December 2017 Trade and other payables Borrowings 25. Deferred tax balances Deferred tax assets Tax losses Provisions Others Total deferred tax assets Less than 1 year US$’000 Between 1 and 2 years US$’000 Between 2 and 5 years US$’000 Over 5 years US$’000 82,913 42,099 3,732 179,608 125,012 183,340 8,016 – 8,016 558 – 558 Total contracted cash flows US$’000 95,219 221,707 Carrying amount US$’000 89,523 192,476 316,926 281,999 2018 US$’000 2017 US$’000 2,525 3,055 7,151 2,837 8,051 8,118 12,731 19,006 Argentina tax law does not contain the concept of tax groups and therefore deferred tax assets and liabilities cannot be offset between and among companies registered in Argentina and falling under the control of the same shareholder. Outside of Argentina, the group does not have sufficient concentration of subsidiaries in a single tax jurisdiction to warrant seeking tax group status to allow the offset of assets and liabilities. The company did not recognise deferred income tax assets of US$10.9 million (2017: US$1.7 million) in respect of tax losses amounting to US$36.3 million (2017: US$4.8 million) as there is insufficient evidence that the potential assets will be recovered. Assessed tax losses amounting to US$2.5 million (2017: US$2.8 million) will expire between 2020 to 2023 (2017: 2018 to 2022). Under the December 2016 Argentine tax reform, corporate income tax will remain at its current level of 30% for the fiscal year ended 31 December 2019. The rate will further reduce to 25% for fiscal years ended 31 December 2020 and onward. Deferred tax assets and liabilities are calculated at the rate of 25% or 30% taking into consideration the expected time of recovery. The reduction in the corporate income tax rate relates only to profits that are reinvested in Argentina. Where dividends are paid the corporate income tax rates reverts to 35% in respect of the amount of net profit being used to support the dividend. This calculation is done on a first-in/ first-out basis by reference to accumulated net income within retained earnings. Movements At 1 January 2017 Credited/(charged) to profit and loss Acquisition of subsidiary At 31 December 2017 Movements At 1 January 2018 Loss on disposal of assets Credited/(charged) to profit and loss At 31 December 2018 Tax losses US$’000 Provisions US$’000 Inventories US$’000 Other US$’000 Total US$’000 – 331 2,506 2,837 – 2,663 5,388 8,051 1,352 (1,352) – – – 1,511 6,607 8,118 1,352 3,153 14,501 19,006 Tax losses US$’000 Provisions US$’000 Inventories US$’000 Other US$’000 Total US$’000 2,837 (251) (61) 2,525 8,051 (2,127) (2,869) 3,055 – – – – 8,118 (8) (959) 7,151 19,006 (2,386) (3,889) 12,731 The timeframe for expected recovery or settlement of deferred tax assets is as follows: No more than 12 months after the reporting period More than 12 months after the reporting period 2018 US$’000 2017 US$’000 7,150 5,581 12,731 15,197 3,809 19,006 138 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 25. Deferred tax balances continued Deferred tax liabilities The balance comprises temporary differences attributable to: Property, plant and equipment and intangible assets Inventories Others Total deferred tax liabilities 2018 US$’000 (101,310) (42) (1,751) 2017 US$’000 (85,802) (1,108) (2,181) (103,103) (89,091) Movements At 1 January 2017 (Charged)/credited to profit and loss Acquisition of subsidiaries At 31 December 2017 Movements At 1 January 2018 (Charged)/credited to profit and loss Disposal of assets At 31 December 2018 Property, plant and equipment and intangible assets US$’000 (35,572) 16,248 (66,478) (85,802) Property, plant and equipment and intangible assets US$’000 Inventories US$’000 Other US$’000 Total US$’000 (39,360) 18,276 (68,007) (3,788) 3,136 (1,529) (2,181) (89,091) – (1,108) – (1,108) Inventories US$’000 Other US$’000 (85,802) (14,605) (903) (1,108) 1,066 – (2,181) 430 – Total US$’000 (89,091) (13,109) (903) (101,310) (42) (1,751) (103,103) The above presentation of deferred tax assets and liabilities is prepared showing the aggregate of the gross asset and liability position on a company by company basis. Deferred tax assets and liabilities presented in the balance sheet reflect the offset of deferred tax assets and liabilities where permissible. The deferred tax assets and liabilities, after legal offset, are shown in the table below. Deferred income tax assets Deferred tax liabilities Net deferred income tax liability 26. Inventories Current assets Crude oil Spare parts and equipment Total 2018 US$’000 9,001 (99,374) 2017 US$’000 11,629 (81,714) (90,373) (70,085) 2018 US$’000 2017 US$’000 1,594 15,685 17,279 2,614 11,761 14,375 The costs of individual items of inventory are determined using weighted average costs. Crude oil inventory is recorded using the per-barrel weighted average cost of production for the period. Weighted average cost is determined by dividing the total production costs for the period by the volume of barrels produced in the period. Inventories recognised as an expense in the period relate to the change in crude inventory period-on-period reflecting the timing of the actual sale of the crude as opposed to being expensed based on production volumes in the period. For certain fields, inventory is accumulated in storage pending tanker collection. Depending on the timing of collection, crude produced in one period can be sold in the following period resulting in inventory at the period end. 139 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 27. Provisions and contingent liabilities Decommissioning and site restoration Legal claims Total 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 – 1,733 1,733 13,382 2,854 16,236 13,382 4,587 17,969 – 367 367 12,535 4,680 17,215 12,535 5,047 17,582 Decommissioning and site restoration The group has an obligation to remove its oil and gas production equipment from a field at the end of its useful life. The group is required to securely plug wells that will no longer be used in order to make them environmentally and physically safe. In addition, all land must be returned to its natural state at the cessation of production operations. A provision is established representing the present value of the estimated future cost of this obligation with a corresponding depreciable ‘decommissioning’ asset recorded in property, plant and equipment. The key assumptions applied in calculating the decommissioning provision relate to the extent of the physical decommissioning activity required on a licence-by-licence area, the cost of performing that activity and the timing of when that activity is due to take place. The estimate of the quantum of the provision is most sensitive to the extent of the activity required, which may change over time due to legislation. In addition, the estimate of the provision is sensitive to the timing of the decommissioning activity which is determined by the economically productive life of the related asset. Provinces may not require remediation of wells prior to the relinquishment of licences. This can occur where the province considers wells may be of geologic interest to future licence holders or could be remediated in the future. In these circumstances no provision is made. Provision for legal claims As part of the accounting for the business combination in 2017 provisions were established for certain legal contingencies. The claims mainly relate to disputes arising related to payments for services rendered and the nature of the service rendered. It is uncertain at this time when, or if any cases will come to court and whether any action by a third party would be successful. Because the population of cases is small and the value of each claim is low it was not considered appropriate to risk adjust the provision or apply probability weighting. Movements in provisions Movements in each class of provisions during the financial year are set out below: Decommissioning and site restoration US$’000 Legal claims US$’000 Total US$’000 12,535 5,047 17,582 458 – 860 (471) 797 (890) – (367) 1,255 (890) 860 (838) 13,382 4,587 17,969 At 1 January 2018 Charged/(credited) to profit or loss – Additional provisions recognised – Reversed provisions – Unwinding of discount Amounts used during the year At 31 December 2018 140 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 28. Commitments At 31 December, the group had the following licence commitments: Chachahuen Colombia Laguna el Loro Santa Cruz Sur area Tierra del Fuego Loma Cortaderal y Cerro Dona Juana Rio Atuel La Paloma Cerro Alquitran Mata Mora Corralera Noreste Corralera Sur La Tropilla Aguada de Castro I Aguada de Castro II Santo Domingo I Total 2018 US$’000 2017 US$’000 19,800 – – 7,231 252 4,400 790 3,200 4,100 16,296 16,300 16,300 11,830 5,830 11,095 6,645 9,764 15,000 6,600 8,562 – – – – – – – – – – – – 124,069 39,926 Most licence commitments relate to exploration commitments that are typically required to be satisfied within the exploration period, which is normally 2–3 years from the date of grant of the licence. The group had the following future minimum lease payments under non-cancellable operating leases for each of the following periods: Not later than one year Later than one year and not later than five years Later than five years Total 2018 US$’000 2017 US$’000 420 380 – 800 349 927 19 1,295 Operating lease commitments relate primarily to rented office space, none of which is sublet by the group. There are no contingent payments associated with operating leases that the group is party to. The group does not have any significant contingencies. 29. Related party transactions Significant shareholder Mercuria Energy Group Limited is the ultimate majority shareholder of the group. A relationship agreement is in place between the company and Mercuria Energy Group companies. The relationship agreement has been put in place to protect the rights of minority shareholders and limits the control that Mercuria Energy Group can exercise over the group, primarily through restricting the number of Mercuria appointed directors on the board. Mercuria is also prevented from removing directors from the board. By maintaining a minority of Mercuria appointed directors on the board those directors cannot carry a majority vote individually or in concert. The relationship agreement also requires directors nominated by Mercuria to excuse themselves from certain board decisions. 141 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 29. Related party transactions continued Transactions with owners On 22 January 2018, the company entered a swap agreement with Mercuria Energy Trading S.A. in order to fix the price received for a fixed amount of 2018 production at a price of US$65.97/ bbl. The effective term of the agreement commenced on 15 January and expired on 14 December 2018. The realised hedging loss expensed in the period was US$7.6 million. The company was not party to any derivative instruments at 31 December 2018. Refer to note 10 for further details. On 27 June 2018, the group issued 7,156,625 new ordinary shares being issued to Mercuria in the form of a share-based payment. The payment was triggered by a clause in the SPA held between the group and Upstream Capital Partners VI Limited dated 24 July 2017, which entitled Mercuria to receive 3.06147 ordinary shares for each ordinary share issued to Integra Capital S.A. under the Transaction Fee Services Agreement (“TFSA”) dated 24 July 2017. It was agreed however for this transaction, for no consideration, that Mercuria would reduce its entitlement to one ordinary share for each ordinary share issued to Integra. This resulted in a share- based payment charge of US$5.5 million being recognised in the income statement in 2018. Subsidiaries Interests in subsidiaries are set out in note 4 to the company financial statements. Loan from Mercuria Group As part of the business combination in 2017 Mercuria Energy Trading S.A. advanced a bridging and working capital facility to the group of the amount of US$160.0 million. Mercuria Energy Trading S.A. is a 100% owned subsidiary of Mercuria Energy Group Limited (‘Mercuria’). On 15 February 2018, Mercuria agreed to convert US$100.0 million of the facility into ordinary shares of the company at a conversion price of £0.37 per share. The remaining US$60.0 million of the bridging and working capital facility was restructured into a new convertible revolving credit facility (‘RCF’) of US$160.0 million, providing additional funds of US$100.0 million to support the 2018 capital expenditure programme. The new convertible revolving credit facility has an interest rate of three-month LIBOR +4% through maturity at end of December 2021. On 6 December 2018, the new convertible rolling credit facility was extended by way of a new Tranche B element in the amount of US$25.0 million and bearing interest at the same rate as the existing facility (now Tranche A). Refer to note 23 for further details. Analysis of amounts advanced and interest paid are shown in the table below: Loan from Mercuria Group Beginning of the year Loans advanced Debt conversion Acquisition of subsidiaries Loan repayments made Interest charged Interest paid End of year Loan from Mercuria Energy Asset Management B.V. Analysis of amounts advanced and interest paid are shown in the table below: Loan from Mercuria Energy Asset Management B.V. Beginning of the year Acquisition of subsidiaries Loan repayments made Interest paid End of year 142 2018 US$’000 2017 US$’000 162,561 116,210 (100,000) – – 10,261 (7,023) – 160,000 – 21,238 (20,000) 4,373 (3,050) 182,009 162,561 2018 US$’000 2017 US$’000 – – – – – – 21,305 (15,000) (6,305) – ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 30. Loss per share Basic and diluted loss per share From continuing operations attributable to the ordinary equity holder of the company Total basic loss per share attributable to ordinary equity holders of the company Basic and diluted loss per share Loss attributable to the ordinary equity holders of the company used in calculating basic earnings per share: From continuing operations Weighted average number of shares used as the denominator Number of shares Adjustments for calculation of diluted earnings per share: At 1 January At 31 December Potential dilutive ordinary shares 2018 US$ (0.03) (0.03) 2017 US$ (0.19) (0.19) 2018 US$’000 2017 US$’000 (78,313) (270,095) (78,313) (270,095) 2018 2017 – 2,537,178 2,786,645 3,325 – 605,505 2,537,178 – Weighted average number of shares used as the denominator in calculating diluted earnings per share 2,730,364 1,405,794 31. Cash generated from operations Loss for the year before taxation Finance costs Finance income Other finance results Accretion of discount on asset retirement obligation Net unrealised exchange gains Income on short-term investments Exploration cost written off Loss of disposal of non current assets Impaired receivables Share-based payments Impairment of goodwill Depreciation and amortisation Change in operating assets and liabilities, including net effects from business combination: (Increase) in inventories (Increase) in trade and other receivables Increase in trade and other payables (Decrease)/ increase in provisions Cash generated from operations 2018 US$’000 2017 US$’000 (61,516) (286,730) 12,055 (321) – 860 8,662 (390) 8,609 1,125 – 5,990 – 64,726 8,207 (572) 4,018 142 506 (572) – – 5,355 105 232,407 49,297 (2,904) (15,418) 9 (473) (4,696) (7,122) 6,825 1,872 21,014 9,042 143 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 32. Changes in liabilities arising from financing activities 31 December 2017 US$’000 Cash flows US$’000 Interest paid US$’000 Movements from non-current to current US$’000 Interest charge US$’000 Other movements US$’000 Debt conversion US$’000 Capitalised interest US$’000 Foreign exchange US$’000 31 December 2018 US$’000 Non-cash changes 29,974 (5,054) (1,829) 46,090 (1,476) (1,370) – 720 (2,690) 64,365 162,502 113,708 (7,023) (46,090) 12,822 – (100,000) – – 135,919 192,476 108,654 (8,852) – 11,346 (1,370) (100,000) 720 (2,690) 200,284 Current liabilities Borrowings Non-current liabilities Borrowings Total borrowings 33. Post balance sheet events Convertible revolving credit facility extension On 4 February 2019, the existing convertible revolving credit facility (‘RCF’) held with Mercuria Group was increased by US$50.0 million to US$235.0 million. This provided immediate additional funds of US$50.0 million bearing interest at a rate of LIBOR+4% and repayable on 31 December 2021. The amended convertible RCF has two tranches, a facility A commitment of US$160.0 million which was entered into in February 2018 and a facility B commitment of US$75.0 million. US$25.0 million of the facility B commitment was agreed in December 2018, with the additional $50.0 million of the total facility B commitment being provided from February 2019. Salta licence claim In January 2019, the company received notice from the secretary of energy for Salta province in respect of a claim for compensation in the amount of US$25.0 million related to certain unfulfilled licence obligations. The obligations related to work commitments on three licences that allegedly expired in 2010. The company has refuted the claim. A similar claim in the amount of US$41.0 million had been received in 2012 related to two further Salta licences that had been relinquished in 2010. The company refuted that claim through a series of administrative appeals, the last of which was filed in 2015. No further notice was received since then. No judicial proceedings have been initiated in respect of either claim. The company considers that its legal arguments to defend both claims remains valid. Directorate change On 23 April 2019, Anuj Sharma served a notice on the company, which the company is treating as a notice terminating his employment in accordance with his service agreement and resigning from his position as chief executive officer and a director of the company with immediate effect. Pending the recruitment of a new chief executive officer, Tim Harrington, a non-executive director of the company, will be appointed interim chairman of the executive committee, working closely with the chief financial officer and chief operating officer. 144 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS COMPANY STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2018 Non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Other receivables Total non-current assets Current assets Cash and cash equivalents Equity investments Trade and other receivables Total current assets Total assets Non-current liabilities Trade and other payables Borrowings Total non-current liabilities Current liabilities Trade and other payables Income tax liability Borrowings Provisions Total current liabilities Total liabilities Net assets Equity Called up share capital Share premium account Other reserves Retained earnings Total equity Note 2018 US$’000 2017 US$’000 5 6 4 8 9 7 8 194 21,380 1,063,900 1,546 217 – 973,368 – 1,087,020 973,585 16,601 108 55,798 72,507 12,570 – 103,188 115,758 1,159,527 1,089,343 10 11 17,965 135,919 15,400 160,000 153,884 175,400 10 11 18 14 7,328 600 46,090 1,060 55,078 15,556 – 3,931 – 19,487 208,962 194,887 950,565 894,456 364,175 93,023 329,155 164,212 329,877 – 325,566 239,013 950,565 894,456 The company made a loss for the year of US$74.7 million (2017: US$532.3 million). The above company statement of financial position should be read in conjunction with the accompanying notes. The financial statements on pages 145 to 159 were approved by the board of directors and authorised for issue on 2 May 2019 and were signed on its behalf by: Kevin Dennehy Chief financial officer 145 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 Capital and reserves At 1 January 2017 Loss for the year Translation differences Total comprehensive loss for the year Effect of changes in functional currency Issue of ordinary shares Acquisition of subsidiary Transfer from merger reserve Issue of warrants Capital reduction Distribution of IOX shares Fair value of share-based payments At 31 December 2017 IFRS 9 transition adjustment Loss for the year Translation differences Total comprehensive loss for the year Issue of ordinary shares Distribution of IOX shares Debt to equity conversion Fair value of share-based payments Fair value of warrants Consolidation of the Colombia branch At 31 December 2018 Other reserves At 1 January 2017 Profit for the year Translation differences Total comprehensive profit for the year Effect of changes in functional currency Acquisition of subsidiary Reserves transfer Issue of warrants Capital reduction At 31 December 2017 Translation differences Issue of ordinary shares Consolidation of the Colombia branch At 31 December 2018 Called up share capital US$’000 Note Share premium account US$’000 Retained earnings US$’000 Other reserves US$’000 Total equity US$’000 98,414 52,467 25,125 16,585 192,591 – – – (19,699) 2,359 248,803 – – – – – 329,877 – – – – 7,271 – 27,027 – – – – – (532,330) – – 11,090 (532,330) 11,090 – (9,162) 7,244 – – – (50,549) – – – – – – – 20,050 – 72,973 – – – (532,330) (23,721) – – 463,189 – 310,549 (4,051) 252 11,090 52,582 – 960,928 (463,189) 7,570 (260,000) – – (521,240) – 9,603 1,209,731 – 7,570 – (4,051) 252 239,013 325,566 894,456 (3,270) (71,464) – (74,734) – (606) – 305 234 – – – (18) (18) 4,510 – – – – (903) (3,270) (71,464) (18) (74,752) 31,831 (606) 100,000 305 234 (903) 364,175 93,023 164,212 329,155 950,565 17 Merger reserve US$’000 89,886 – – – (15,648) 964,816 (463,189) 7,570 (260,000) Warrant reserve US$’000 Translation reserve US$’000 Deferred consideration US$’000 Total other reserves US$’000 2,105 (79,879) 4,473 – – – – – – – – – 11,090 11,090 68,815 – – – – 26 (18) – – 8 – – – (585) (3,888) – – – – – – – – 16,585 – 11,090 11,090 52,582 960,928 (463,189) 7,570 (260,000) 325,566 (18) 4,510 (903) 329,155 323,435 2,105 – 4,510 (903) – – – 327,042 2,105 The above statement of changes in the company’s equity should be read in conjunction with the accompanying notes. 146 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTSCOMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018 Cash flows from operating activities Cash used in operations Net cash used in operating activities Cash flows from investing activities Payments for intangible assets Payments for property, plant and equipment Sale of fixed assets Net cash outflow from investing activities Cash flows from financing activities Proceeds from issues of shares and other equity instruments Proceeds from borrowings Interest paid Interest received Repayment of borrowings Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rates on cash and cash equivalents Cash and cash equivalents at end of year Note 2018 US$’000 2017 US$’000 13 (103,438) (102,500) (103,438) (102,500) (7,000) (45) 180 (6,865) – (217) – (217) 4,925 116,210 (7,023) 224 – 9,603 176,054 (16,241) – (55,829) 114,336 113,587 4,033 12,570 (2) 16,601 10,870 1,438 262 12,570 The above statement of cash flows for the company should be read in conjunction with the accompanying notes. 147 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE COMPANY FINANCIAL STATEMENTS 1. Basis of preparation The financial statements have been prepared in accordance with IFRS as adopted by the European Union. The company applies consistent accounting policies to those applied by the group. To the extent that an accounting policy is relevant to both group and company financial statements, refer to the group financial statements for disclosure of the accounting policy. Material policies that apply to the company only are included in these financial statements as appropriate. The company has used the exemption granted under s.408 of the Companies Act 2006 and accordingly has not presented its income statement. The loss attributable to the company for the year ended 31 December 2018 was US$74.7 million (2017: US$532.3 million loss). 2. Critical accounting estimates and judgements Critical judgements Carrying value of investments in subsidiaries The company assesses its investments in subsidiaries for impairment where an indicator that the investment may be impaired exists. Indicators may include poorer operating performance than budgeted, a decrease in the volume of oil and gas reserves booked by operating subsidiaries or a decrease in the NPV10 value of assets assessed under the Petroleum Resource Management System issued by the Society of Petroleum Engineers. In 2017 an impairment charge of US$463.1 million was recorded against the carrying value of the investment in Trefoil Holdings B.V. (“Trefoil”). The company’s investment in Trefoil was acquired in 2017 through the combination transaction with Andes Energia plc. The acquisition was effected through the issue of shares and the pre-impairment carrying value of the investment was calculated by reference to the number of shares issued and the closing price on the date of the transaction (£0.49). The impairment evaluation was performed by comparing the carrying value of the investment with the fair value of the underlying assets acquired and liabilities assumed in the combination transaction. For consolidation accounting, the combination represented a reverse takeover and therefore the fair value exercise and resultant purchase price allocation included in the group financial statements was performed by reference to assets and liabilities of the former Andes Energia plc. The corresponding fair value of the Trefoil assets and liabilities used in the impairment test for the investment held in the company financial statements was calculated using the assessed Andes fair values and applying the share exchange ratio set in the combination. This fair value was then compared with the carrying value of the investment in Trefoil. During 2018, an impairment charge of US$21.5 million was recorded against the investment carrying value in Andes Energia Argentina S.A. (‘AEA S.A.’) following the sale by AEA S.A. of all of its subsidiary investments to the company. Subsequent to the sale the net assets of AEA S.A. related entirely to the Colombia licences and operations which triggered an impairment assessment to be carried out in relation to the carrying value of company’s investment in AEA S.A.. The impairment assessment resulted in the investment value being written down to its fair value less costs to sell of US$1.5 million resulting in the impairment loss. At 31 December 2018 the company performed an assessment of its investments to identify if any impairment indicators existed at the balance sheet date. Refer to note 4 for full details. Determination of functional currency The determination of a company’s functional currency can require significant judgement. Functional currency is defined as the currency of the primary economic environment in which the company operates, assessed on an entity by entity basis. In this regard the default assumption is that a company’s functional currency will be that in which it is registered or that where the majority of its operations are located. This assumption can be challenged or rebutted where it can be demonstrated that a currency other than that of the country of registration or operations can be shown to have a greater influence over the revenue, costs, assets and liabilities of a company. Following the combination transaction in 2017 whereby the company acquired 100% of the share capital of Trefoil Holdings B.V., the functional currency of the company was re-assessed. As part of the transaction, the company entered a bridging and working capital facility agreement with Mercuria Energy Trading S.A. This facility provided US$160.0 million of funding to the company which it, in turn, has used to fund the operations of its subsidiaries in Argentina. This facility was extended by an amount of US$100.0 million in February 2018 following the conversion of US$100.0 million of the initial principal into equity. The facility was then extended by way of a Tranche B of US$25.0 million in December 2018. In February 2019, the facility was further extended by an amount of US$50.0 million. The company transfers cash for operations in US Dollar. As a result of the predominance of the US Dollar denominated funding it was determined that the functional currency of the company had changed from Sterling to US Dollar as of 10 August 2017, being the date of completion of the combination transaction. The financial statements were re-translated to US Dollar using the spot rate on the date of the change, being 10 August 2017. The impact of the change in functional currency on the reserves of the company is shown in the statement of changes in equity for 2017. 148 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS2. Critical accounting estimates and judgments continued Critical judgements continued Amounts due from subsidiary undertakings IFRS 9 ‘Financial Instruments’ (‘IFRS 9’) became effective for accounting periods that started on or after 1 January 2018 and requires the company to assess the carrying value of each of the amounts due from subsidiary undertakings in accordance with the ‘expected credit losses’ impairment model. This is in contrast to IAS 39 under which only ‘incurred credit losses’ were required to be recognised. Under the IFRS 9 model the company is required to assess both the repayment profile of the subsidiary loan and the credit risk of the associated subsidiary for each subsidiary loan held at the balance sheet date. Where the loan is determined to be repayable on demand, or the associated subsidiary is determined to have a high level of credit risk, then the expected credit losses of the subsidiary loan should be determined. In completing this assessment, if the subsidiary has sufficiently liquid assets to repay the loan, if demanded at the reporting date, the expected credit loss is determined to be immaterial. However, if the subsidiary cannot demonstrate the ability to repay the loan, if demanded at the reporting date, the company has calculated an expected credit loss. This credit loss calculation considers the loss given default of the amount due from subsidiary undertakings, which involves judgement around how loan amounts would likely be recovered, and over what timeframe they would be recovered. Despite this new requirement, the company does not intend to demand repayment of any amounts due from subsidiary undertakings in the near future. Refer to note 19 for further details of the financial impact of the implementation of IFRS 9. 3. Significant accounting policies New accounting standards The IASB published IFRS 16 ‘Leases’ (‘IFRS 16’) in January 2016. The standard will be effective for accounting periods starting on or after 1 January 2019. The principal lease agreement that the company participants in is related to rental of office space in London under a three-year lease agreement. Therefore the impact of adopting the new standard is not expected to be material to the company financial statements. Investments in subsidiaries Investments in unquoted subsidiaries are carried at cost unless an indicator of impairment exists, in which case the recoverable value of the investment is assessed by reference to the cash flows it is expected to generate or the fair value of the assets it holds and an impairment loss is recorded as appropriate. Impairment losses are reversed to the extent that the condition giving rise to the impairment reverses in a subsequent period. The company has no investments in subsidiaries that are quoted on an active market. Exploration and appraisal assets The company follows an accounting policy for exploration and appraisal assets that is based on the successful-efforts accounting method. Expenditure incurred on the acquisition of a licence interest is initially capitalised on a licence-by-licence basis. Costs are held within intangible assets and are not depreciated until the exploration phase on the licence area is complete or commercial reserves have been discovered. Capitalised intangible exploration and evaluation costs are reviewed regularly for indicators of impairment and are tested for impairment where these indicators exist. Trade and other receivables Trade receivables and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest rate method less provision for impairment. The group applies the IFRS 9 simplified approach to measuring expected credit losses to calculate impairment, which uses a lifetime expected loss allowance based on a 36 month assessment period. Any resulting impairment loss is recognised immediately in the income statement. Trade and other receivables are classified as current assets if receipt is due within one year or less. If not, they are presented as non-current assets. Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held with financial institutions that can be called on demand together with other short-term, highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash. Cash equivalents also include restricted amounts pledged as securities for licence commitments. Cash equivalents are classified as financial assets measured at amortised cost or fair value through profit or loss. 149 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 3. Significant accounting policies continued Trade and other payables Trade and other payables are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method. Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not they are presented as non-current liabilities. Accruals are recognised in respect of goods or services delivered but not yet invoiced. 4. Investments Investments At 1 January Investment in subsidiaries Effect of change in functional currency Acquisition of subsidiaries Disposal of subsidiaries Revaluation of investment on distribution Distribution to shareholders Impairment of investment Impairment of acquired subsidiaries At 31 December 2018 US$’000 973,368 117,147 – 7,177 (1,518) – – (32,274) – 2017 US$’000 234,134 166 13,313 1,217,301 – 2,157 (4,051) (26,523) (463,129) 1,063,900 973,368 On 18 December 2017, and pursuant to the commitments made in the AIM admission document, the company distributed its investment in Interoil Exploration and Production ASA to the company’s shareholders by way of a dividend in specie. The dividend was made to shareholders on record as of 8 August 2017. On 8 November 2018 the company sold its 100% shareholding in Andes Energia Argentina S.A. (“AEA S.A.”) to Ocean Energy Services LLC (“OES”). The purpose of the sale was to allow the company to divest of its 70% interest in eight licences in Colombia. In order to facilitate the transaction, prior to the sale date the company acquired from AEN Netherlands Cooperatief U.A. (“AEN Net”) its 7.31% shareholding in AEA S.A. for consideration of US$0.6 million. This acquisition increased the company’s shareholding in AEA S.A. to 100%. Immediately following this acquisition, AEA S.A. sold all the investments it held in group subsidiaries to the company for consideration of US$6.6 million. Subsequent to the sale the net assets of AEA S.A. related entirely to the Colombia licences and operations. The change in the net assets held by AEA S.A. resulting from the sale of its subsidiary investments to the company triggered an impairment assessment to be carried out in relation to the carrying value of the company’s investment in AEA S.A.. The impairment assessment resulted in the investment value to be written down to its fair value less costs to sell of US$1.5 million causing an impairment loss of US$21.5 million to be recognised in the 2018 company financial statements. Investment held in AEA S.A. Fair value deemed to be the lower of: Net assets of AEA S.A. at 1 November 2018 Determined fair value less costs to sell Impairment charge USD $’000 23,012 2,643 1,518 21,494 The sale of AEA S.A. completed on 8 November 2018. The realised gain on sale recognised in the company financial statements was US$nil. Further details on the sale can be found in note 16 in the notes to the group financial statements. On 31 December 2018, the company made a capital contribution in certain of its subsidiary holdings in exchange for forgiveness of intercompany debt. The total investment made was $117.1 million. The company completed an assessment of the carrying value of its subsidiary investments at 31 December 2018. As part of this assessment the company identified that the carrying value of its investment in Grecoil y Cia. S.A. (‘Grecoil’) was in excess of the determined fair value of the entity at 31 December 2018. Fair value was assessed in line with the criteria identified for the group impairment assessment. The carrying value of the company’s investment in Grecoil was therefore written down to the net asset value of Grecoil at 31 December 2018, resulting in a $10.8 million impairment loss being recorded. 150 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS4. Investments continued At 31 December 2018, the company had investments in the following subsidiaries. The principal activity of all companies relates to oil and gas exploration, development and production. PGR Operating LLC AEN Energy Holdings S.P.C. AEN Energy Cayman Islands Ltd Andes Energy LLC AEN Netherlands Cooperatief U.A. Trefoil Holdings B.V. San Enrique Petrolera B.V. AEN Energy Latina, S.L. Upstream Latino America S.A. Trefoil (Switzerland) S.A. Trefoil Limited Trefoil GmbH Petrolera El Trebol S.A. MSO Andes Energia S.A. Andes Oil S.A. Andes Oil and Gas S.A. Grecoil y Cia. S.A. AEN Energy Mendoza S.A. AEN Energy Argentina S.A. Patagonia Oil & Gas S.A. Andes Hidrocarburos S.A. Kilwer S.A. Ketsal S.A. CHPPC Andes S.R.L Integra Investment S.A. Andes Interoil Limited Andes Energia Limited Patagonia Oil & Gas Limited Patagonia Energy Limited Principal activity Country of incorporation Proportion of issued shares controlled by the Group Service company USA Dormant Cayman Is. Dormant Cayman Is. USA Dormant Intermediate holding company/services Netherlands Intermediate holding company Netherlands Intermediate holding company Netherlands Spain Dormant Intermediate holding company Spain Intermediate holding company Switzerland Bermuda Intermediate holding company Austria Intermediate holding company Argentina Oil and gas operations Argentina Intermediate holding company/services Argentina Intermediate holding company Argentina Intermediate holding company Argentina Oil and gas operations Argentina Intermediate holding company Argentina Intermediate holding company Argentina Intermediate holding company Argentina Intermediate holding company Argentina Oil and gas operations Argentina Oil and gas operations Argentina Oil and gas operations Argentina Intermediate holding company UK Intermediate holding company UK Dormant UK Dormant UK Dormant 100% 100% 100% 100% 100% 100% 100% 100% 99.96% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 5. Property, plant and equipment The property, plant and equipment balance of US$0.2 million (2017: US$0.2million) relates entirely to leasehold improvements, fixtures and fittings and office equipment. Depreciation is charged on a straight-line basis at rates that reflect the expected useful life of each asset category. Rates applied range between 20 – 35% per annum. 6. Intangible assets The intangible assets acquired in the period relate to licence payments for the Mata Mora and Corralera exploration concessions. In April 2018, the company renegotiated the joint venture contracts previously held under a memorandum of understanding with Gas y Petróleo del Neuquén (‘GyP’), the Neuquen province oil and gas company, that governed the company’s interest in the Mata Mora and Corralera exploration concessions. Following the renegotiation, the company’s working interest two concessions increased from 27% to 90% and the company assumed operatorship. As part of the renegotiation Integra Oil & Gas S.A. (“IOG”) agreed to waive any rights to participate in these concessions in return for consideration of US$21.4 million. The consideration was settled through a cash payment of US$7.0 million and the issue of 25,000,000 new ordinary shares at an issue price of £0.45 per share. 151 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 7. Equity investments Current assets Unlisted equity securities 2018 US$’000 2017 US$’000 108 – Unlisted equity securities are designated at fair value through profits and loss. Any fair value movements in the period are recorded in other income and expenses within the income statement. 8. Trade and other receivables Contingent consideration Financial assets held at fair value through profit and loss Trade and other receivables Less provision for impairment: Loans to subsidiaries Financial assets at amortised cost Prepayments to suppliers Total trade and other receivables 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 794 794 3,925 (2,942) 983 53,695 54,678 326 55,798 – – 1,546 – 1,546 – 1,546 – 1,546 794 794 5,471 (2,942) 2,529 53,695 56,224 326 57,344 – – 5,426 (2,943) 2,483 100,519 103,002 186 103,188 – – – – – – – – – – – 5,426 (2,943) 2,483 100,519 103,002 186 103,188 Contingent consideration was recognised on the sale of AEA S.A. to OES in November 2018. The contingent proceeds represent the fair value attributed to restricted cash held in escrow in respect of the guarantees put in place in favour of the Colombian national oil company, the ANH, and relate to capital commitments on the licences held by AEA S.A.. The fair value of the restricted cash assumed at the sale date was US$1.7 million. As the company still holds title to a portion of the restricted funds, the contingent consideration recognised in other receivables in the period reflects the fair value attributed to the restricted funds held by AEA S.A. at the balance sheet date. The fair value attributed to the restricted cash held by the company is included within cash and cash equivalents. The amounts due from subsidiary undertakings include US$34.5 million (2017: US$27.3 million) that incurs interest at a fixed rate of 7.0% per annum (2017: 7.0%) and US$23.8 million (2017: US$23.1 million) that incurs interest at a fixed rate of 5.0% per annum (2017: 5.0%). The remaining amounts due from subsidiaries accrue no interest. All amounts are repayable on demand. At 31 December 2018, a provision of US$10.7 million (2017: US$nil) was held in respect of the recoverability of amounts due from subsidiary undertakings. The current year provision has resulted from the implementation of IFRS 9 from 1 January 2018 and would have been US$nil had the standard not been implemented in the year. Refer to note 19 for further detail. 9. Cash and cash equivalents Cash at bank and in hand Restricted cash 2018 US$’000 2017 US$’000 12,809 3,792 16,601 12,570 – 12,570 Restricted cash comprises the cash held in escrow in relation to the Colombia licence obligations which were sold to OES in the period (see note 14 in the notes to the group financial statements). Release of the restricted cash is subject to OES fulfilling work commitments under the licences. The company is entitled to receive 25% of any amounts released from restricted cash as OES fulfils these commitments. At the sale date, the company completed a fair value assessment and has recognised its share of expected receipts based on details received from OES regarding work to be performed. A payable has also been recorded related to the element owed to OES should the commitments be fulfilled. Any restricted funds released from this account will initially be received by the company and will then be allocated 75% to OES with the remaining 25% retained by the company. 152 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 10. Trade and other payables Trade payables Employee costs, social security and other taxes Loans from subsidiaries Other payables Trade and other payables 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 Total US$’000 1,237 899 – 5,192 7,328 – – 17,965 – 17,965 1,237 899 17,965 5,192 25,293 12,147 1,629 – 1,780 15,556 – – 15,400 – 15,400 12,147 1,629 15,400 1,780 30,956 All balances held within trade and other payables are held at amortised cost. 11. Borrowings Loans Other borrowings 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 46,090 – 135,919 – 182,009 – 2,561 1,370 160,000 – Total US$’000 162,561 1,370 46,090 135,919 182,009 3,931 160,000 163,931 The loan balance at 31 December 2018 relates to amounts drawn down under the new convertible rolling credit facility (‘RCF’) provided by Mercuria. The RCF bears interest at a rate of 4% over 3-month LIBOR with a maturity date of 31 December 2021. See note 12 for full details. 12. Related party balances Related party balances relate to loans received from the major shareholder and loans advanced to subsidiaries. Amounts outstanding at 31 December 2018 include: Related party loans receivable Amounts advanced to subsidiaries Total related party receivables Related party loans payable Shareholder loan Interest accrued on shareholder loan Amounts payable to subsidiaries Total related party payables 2018 US$’000 2017 US$’000 53,695 53,695 100,519 100,519 182,000 9 17,965 160,000 2,561 15,400 199,974 177,961 The shareholder loan in 2017 relates to a bridging and working capital facility provided to the company by Mercuria Energy Trading S.A., part of the Mercuria Group (‘Mercuria’). In February 2018, US$100.0 million of this facility was converted to equity at a price of £0.37 per share (based on an exchange rate of £1.00: US$1.39). At the same time, an additional US$100.0 million of funds was advanced by Mercuria Group and the combined US$160.0 million facility was renamed as the new convertible rolling credit facility (‘RCF’). The RCF bears interest at LIBOR+4% and is repayable on 31 December 2021. In December 2018, Mercuria advanced an additional US$25.0 million through its subsidiary Mercuria Energy Netherlands B.V. as a Tranche B to the convertible rolling credit facility. This second tranche bears interest at LIBOR+4% and is repayable on 31 December 2021. In February 2019, Tranche B was extended by an additional amount of US$50.0 million. Mercuria Group has the right to convert all or part of the outstanding principal of the facility into additional new ordinary shares of Phoenix. The conversion right has been set at a price of £0.45 per share at any time from 30 June 2018 until 10 business days prior to the maturity for tranche A, and at a price of £0.28 per share at any time from 30 June 2019 until 10 business days prior to the maturity for Tranche B, subject to appropriate shareholder resolutions in relation to the authority to allot and disapplication of pre-emption rights in relation to such shares having been approved by the board. During the year the company made interest payments to Mercuia in relation to the convertible RCF of US$7.0 million. 153 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 12. Related party balances continued The amounts advanced to subsidiaries consist of amounts advanced for working capital purposes that have no fixed repayment dates and no interest burden. The balance also includes two interest bearing loans to subsidiaries. The primary interest bearing loan relates to a US$72.3 million (2017: US$27.3 million) facility advanced to Petrolera el Trebol that carries an interest rate of 7.0%. Transactions with related parties during the period Hedging contracts On 22 January 2018, the company entered a swap agreement with Mercuria Energy Trading S.A. in order to fix the price received for a portion of 2018 production at a price of US$65.97/bbl. The total volume under the contract was 1,215,954 barrels representing 47% of total 2018 production. The effective term of the agreement commenced on 15 January 2018 and expired on 14 December 2018. The realised hedging loss expensed in the period was US$7.6 million. The company was not party to any derivative instruments at 31 December 2018. Refer to note 10 in the group financial statements for further details. Share-based payments During 2018, the company issued 7,156,625 new ordinary shares to Mercuria in the form of a share-based payment. Refer to note 14 for further detail. 13. Cash generated from operations Loss for the year before taxation Depreciation Impairment of investments and other non current assets Revaluation of investment on change of control Provision for credit losses on intercompany loans Provision for restricted cash Finance costs Finance income Share-based payments Other non-cash items (Increase) in trade and other receivable Decrease/(increase) in restricted cash Increase/(decrease) in trade and other payables Net unrealised exchange gains/(losses) Cash used in operations 2018 US$’000 2017 US$’000 (74,734) (532,330) 69 32,563 – 10,680 – 12,636 (2,585) 5,990 385 (92,889) 4,198 700 (451) – 489,652 (2,157) – 6,491 14,631 (7,680) 252 – (75,232) (1,049) 4,927 (5) (103,438) (102,500) 14. Called up share capital The company’s share capital consists of one class of ordinary share. Each ordinary share carries an equal voting right and right to a dividend. Allotted, called up and fully paid Ordinary shares of 10 pence Movements in ordinary shares: At 1 January Effect of change in functional currency Acquisition of subsidiary Issue of ordinary shares Debt to equity conversion At 31 December 2018 2017 No. (‘000) US$’000 No. (‘000) US$’000 2,786,645 364,175 2,537,178 329,877 2018 2017 No. (‘000) US$’000 No. (‘000) US$’000 2,537,178 – – 55,080 194,387 329,877 – – 7,271 27,027 605,505 – 1,913,873 17,800 – 98,414 (19,699) 248,803 2,359 – 2,786,645 364,175 2,537,178 329,877 On 10 August 2017, the company issued 1,899,106,385 ordinary shares with nominal value of £0.10 per share as consideration for 100% of the issued share capital of Trefoil Holdings B.V.. Also on 10 August 2017, a further 14,766,666 shares were issued related to deferred consideration from previous acquisition transactions. On 16 February 2018, the company issued 194,387,299 ordinary shares with nominal value of £0.10 per share to Mercuria upon conversion of US$100.0 million of the bridging and working capital facility into equity. 154 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 14. Called up share capital continued On 6 March 2018, the company received notice from Mercuria to exercise warrants and subscribe for 15,143,833 ordinary shares with nominal value of £0.10 per share. On 27 June 2018, the company exercised the option to settle the second instalment of the payment due under the Transaction Fee Services Agreement (‘TFSA’) dated 24 July 2017, by allotting and issuing 7,156,625 new ordinary shares of nominal value of £0.10 each to Integra Capital SA (‘Integra’) at a price of £0.58 per share in lieu of cash. The exercise of this option by the company triggered a clause in the share purchase agreement held between the company and Upstream Capital Partners VI Limited (part of the Mercuria Group) dated 24 July 2017, which entitles Mercuria to receive 3.06147 ordinary shares for each ordinary share issued to Integra under the TFSA. It was agreed however, for this transaction, that for no consideration Mercuria would reduce its entitlement to one ordinary share for each ordinary share issued to Integra, with the company, therefore, allotting and issuing 7,156,625 new ordinary shares to Mercuria. Also on 27 June 2018, the company allotted and issued 86,337 ordinary shares of nominal value of £0.10 each to one of the company’s directors, in respect of fees accrued pursuant to the terms of his appointment as a non-executive director for the period up to the completion of the business combination with Trefoil Holdings B.V.. A further 535,714 ordinary shares were allotted and issued to senior management on this date in lieu of bonus payments due on the completion of the business combination with Trefoil. On 19 September 2018, the Company reached an agreement with Integra Oil & Gas S.A. to settle the remaining amount due in respect of the Mata Mora and Corralera exploration concessions through the issue of 25,000,000 new ordinary shares of nominal value of £0.10 each. Refer to note 6 for further detail. 15. Employee benefits 15.1 Staff costs As permitted by s408 of the Companies Act 2006, no separate profit and loss account or statement of comprehensive income is presented in respect of the company. The loss attributable to the company is disclosed in the footnote to the company’s balance sheet. The auditors’ remuneration for audit and other services is disclosed in note 11 to the consolidated financial statements. The average monthly number of employees (including executive directors) during the year was 4 (2017: 3). Staff costs Wages and salaries Social security costs Other benefits Share-based payments 2018 US$’000 2017 US$’000 2,168 1,443 296 31 305 140 39 105 2,800 1,727 Staff costs incurred include fees paid to seven of the non-executive directors for services provided to the company. Detailed remuneration disclosures are provided in the remuneration report on pages 70 to 88. 15.2 Share based payments During 2018, the company implemented a Long Term Incentive Plan (‘LTIP’) for directors and a Deferred Share Bonus Plan (‘DBP’) for management. For the year ended 31 December 2018, the total cost recognised by the company for equity-settled share-based payment transactions is US$0.3 million. A credit of US$0.3 million has been recorded in retained earnings for all equity-settled payments of the company. Details of the various share incentive plans currently in operation are set out below: 2018 Long term incentive plan (LTIP) Under the LTIP, directors can be granted nil cost share awards that vest over three years following grant provided the individual remains in employment. Share awards must be held for two years after vesting. The size of awards under the plan depends on the calculation of Total Shareholder Return (‘TSR’) over the three year period from the grant date, which is measured 50% on an absolute basis and 50% relative to a group of listed industry comparators. There are no other post-grant performance conditions. No dividends are paid over the vesting period. Refer to the annual report on remuneration on pages 81 to 88. The following table details the weighted average fair value of awards granted and the assumptions used in the fair value expense calculations. The weighted average remaining contractual life for LTIP awards outstanding at 31 December 2018 was 2.6 years. 155 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 15. Employee benefits continued 15.2 Share based payments continued 2018 Long term incentive plan (LTIP) continued Weighted average fair value of awards granted (pence) Grant date Vesting Weighted average share price at grand date Shares granted Risk free rate of interest PGR TSR Volatility Comparitor TSR Volatility 2018 LTIP 7.82 2018 3 years 22.69 17,124,212 0.78% 46.31% 29% – 72% Deferred bonus plan (DBP) During the year, the company established a DBP through which management is eligible to be granted nil exercise price options as part of their annual bonus. These are exercisable three years following grant. An individual must normally remain in employment for three years from grant for the shares to vest. Awards are not subject to post-grant performance conditions and no dividends are paid over the vesting period. The total number of share granted under the scheme in 2019 was 3,325,406 shares based on a share price at the grant date of £0.18 per share. The weighted average remaining contractual life for DBP awards outstanding at 31 December 2018 was 2.5 years. 15.3 Warrants Details of warrants granted are as follows: January 2013 – January 2018 August 2013 – August 2020 December 2014 – December 2017 February 2015 – February 2018 August 2015 – August 2019 Total 1 Priced by reference to Interoil share price 1 January 2018 No. 73,527,264 10,454,545 8,154,545 3,000,000 4,000,000 22,104,787 121,241,141 Grant No. Lapsed No. 31 December 2018 No. Exercise price pence – (73,527,264) – – – – – – – 10,454,545 (8,154,545) (3,000,000) (4,000,000) – – – (8,144,417) 13,960,370 – (96,826,226) 24,414,915 54 40 43 01 34 26 The weighted average remaining contractual life of the warrants is 1.1 years. None of the warrants described above are accounted for as share-based payments. The number of warrants that are not treated as share-based payments that were outstanding during the year, together with their associated weighted average exercise price (WAEP), are as follows: 2018 2017 No. (‘000) WAEP (p) No. (‘000) WAEP (p) 121,241,141 – – (96,826,226) 24,414,915 24,414,915 45.0 51,278,958 – 151,610,440 – – 50.3 (81,648,257) 44.9 49.8 – 53.9 121,241,141 121,241,141 At 1 January Granted Exercised Lapsed At 31 December – Outstanding – Exercisable 156 ANNUAL REPORT AND ACCOUNTS 2018FINANCIAL STATEMENTS 15. Employee benefits continued 15.3 Warrants continued Warrants – share-based payments Details of warrants that are accounted for as share-based payments are as follows: June 2012 – June 2019 November 2013 – November 2020 Total 1 January 2018 No. Grant No. Lapsed No. 31 December 2018 No. Exercise price pence 20,281,273 9,090,909 29,372,182 – – – – 20,281,273 9,090,909 – – 29,372,182 54 40 – The weighted average remaining contractual life of the warrants that are treated as share-based payments is 0.9 years. The number of warrants that are treated as share-based payments that were outstanding during the year, together with their associated WAEP, are as follows: At 1 January Granted Exercised Lapsed At 31 December – Outstanding – Exercisable 2018 2017 No. ‘000 WAEP (p) No. ‘000 WAEP (p) 29,372,182 – – – 29,372,182 29,372,182 49.7 7,961,880 – 28,228,424 – – – (6,818,122) – 29,372,182 – 29,372,182 50.5 40.4 – 54.0 – – The fair value of the warrants accounted for as share-based payments was calculated using the Black-Scholes model. The estimated fair value of options accounted for as share-based payments and the model inputs used to calculate those fair values are as follows: Date of grant June 2012 November 2013 Number 4,461,880 2,000,000 Estimated fair value pence Share price at date of agreement pence Exercise price pence Expected volatility % Expected life Years Risk free rate % Expected dividends % 23 10 45.25 22.50 54 40 53 53 4.43 5.83 1.80 1.80 – – Nicolás Mallo Huergo Senior management Others Others 1 January Grant Lapsed 31 December pence Exercise date 606,600 822,280 1,415,400 2,000,000 – – – – – – – – 606,600 822,280 1,415,400 2,000,000 54 54 54 40 2019 2019 2019 2020 Exercise price 157 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED 16. Financial risk management Where equivalent disclosures for the requirements of IFRS 7 ‘Financial Instruments: Disclosures’ and IFRS 13 ‘Fair Value Measurements’ have been included in the consolidated financial statements of the group, the company has adopted the disclosure exemptions available to the company’s accounts. The company’s exposure to financial risks and how those risks could affect the group’s future financial performance is summarised below. Risk Exposure arising from Measurement Management Market risk – foreign exchange Future commercial transactions Cash flow forecasting and budgeting Financial assets and liabilities recognised in the balance sheet that are not denominated in US Dollars Sensitivity analysis Market risk – interest rate Long-term borrowings held at variable rates Sensitivity analysis Liquidity risk Borrowings and other liabilities Rolling cash flow forecasts The majority of the company’s cash is held in US Dollars. The company draws progressively on available facilities as cash is needed to fund operating subsidiaries. Due to the influence of the US Dollar on the company and the level of funding obtained in US Dollars, the US Dollar has been determined to be the functional currency of the company. This determination also reduces the exposure to foreign exchange gains and losses. The company has a treasury management function and monitors interest rate movements. The company maintains an active treasury management function. Market risk – cash flow and fair value interest rate risk The company’s main interest rate risk arises from long-term borrowings with floating interest rates that expose the group to interest rate risk. The company’s functional currency is US Dollar and it only holds US Dollar denominated debt, therefore is not exposed to exchange rate risk. The group does not currently use swap instruments or other derivatives to manage its interest rate risk exposure. The exposure of the group’s borrowings to interest rate changes at the end of the reporting period were as follows: 2018 US$’000 182,000 182,000 % of total loans US$’000 100 100 2017 US$’000 160,000 160,000 % of total loans US$’000 100 100 Impact on post-tax profit and loss Impact on other components of equity 2018 US$’000 2017 US$’000 2018 US$’000 2017 US$’000 1,820 (1,820) 1,600 (1,600) – – – – Variable rate borrowings Interest rate increase by 100 basis points Interest rate decrease by 100 basis points 158 ANNUAL REPORT AND ACCOUNTS 2018OTHER INFORMATION17. Commitments and contingencies The company had the following future minimum lease payments under non-cancellable operating leases for each of the following periods: Not later than one year Later than one year and not later than five years Later than five years Total 2018 US$’000 2017 US$’000 130 85 – 215 67 357 – 424 Operating lease commitments relate primarily to rented office space none of which is sublet by the company. There are no contingent payments associated with operating leases that the company is party to. The company does not have any significant contingencies. 18. Provisions Legal claims Other provisions Total 2018 2017 Current US$’000 Non-current US$’000 Total US$’000 Current US$’000 Non-current US$’000 1,060 – 1,060 – – – 1,060 – 1,060 – – – – – – As part of the accounting for the business combination in 2017, provisions were established for certain legal contingencies. An amount of US$1.1 million was provided for in the entity AEA S.A.. When AEA S.A. was sold to OES in 2018 by the company, the terms of the SPA stated that the potential claim would remain the responsibility of PGR plc and consequently, the prior provision held was brought into the company accounts in the year. 19. IFRS 9 transition The implementation of IFRS 9 in the period has had a material impact upon the measurement of financial assets held with group companies in comparison to the previous requirements under IAS 39. The financial asset impairment requirements of IFRS 9 introduce a forward-looking expected credit loss model that results in earlier recognition of credit losses than the incurred loss model of IAS 39. The adjustment to the 2018 opening balance sheet relating to expected credit loss reduced both the carrying amounts of financial assets and retained earnings. There were no differences in classification or carrying amounts for financial liabilities. Current assets Trade and other receivables Net assets Equity Retained Earnings Total Equity Carrying amount under IAS 39 $’000 IFRS 9 transition adjustment $’000 Carrying amount under IFRS 9 $’000 103,188 103,188 239,383 239,383 (3,270) (3,270) 99,918 99,918 (3,270) 236,113 (3,270) 236,113 20. Post balance sheet events Convertible revolving credit facility extension On 4 February 2019, the existing convertible revolving credit facility (‘RCF’) held with Mercuria was increased by US$50.0 million to US$235.0 million. This provided immediate additional funds of US$50.0 million bearing interest at a rate of LIBOR+4% and repayable on 31 December 2021. The amended convertible RCF has two tranches, a facility A commitment of US$160.0 million which was entered into in February 2018 and a facility B commitment of US$75.0 million. US$25.0 million of the facility B commitment was agreed in December 2018, with the additional $50.0 million of the total facility B commitment being provided from February 2019. 159 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION160 ANNUAL REPORT AND ACCOUNTS 2018OTHER INFORMATIONOther information IN THIS SECTION 162 Glossary 163 Registered offices 164 Officers and advisers 161 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONGLOSSARY Mm3 Thousand cubic metres Capex Capital expenditure MMbtu Million British thermal units MMscf Million standard cubic feet Tcf bbl Trillion cubic feet Barrel boe Barrel of oil equivalent 1P 2P 3P Proved reserves Proved plus probable reserves Proved plus probable plus possible reserves HSE Health, safety and the environment boepd Barrel of oil equivalent per day KPI Key performance indicator Bn Billion MM Million LNG Liquefied natural gas WI Working interest Opex Operating expenses EBITDAX Earnings before interest, taxation, depreciation, amortisation and exploration expense bopd Barrels of oil per day mscfpd thousand standard cubic feet per day 162 ANNUAL REPORT AND ACCOUNTS 2018OTHER INFORMATIONREGISTERED OFFICES The registered offices of the group’s subsidiaries are as follows: Company Registered address PGR Operating LLC 20 Greenway Plaza, Suite 1075, Houston, Texas 77046-2011, USA AEN Energy Holdings S.P.C. PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands AEN Energy Cayman Islands Ltd PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands AEN Netherlands Cooperatief U.A. Prins Bernhardplein 200, 1097JB Amsterdam, Netherlands Trefoil Holdings B.V. Herculesplien 108, 3584AA Utrecht, Netherlands San Enrique Petrolera B.V. Herculesplien 108, 3584AA Utrecht, Netherlands AEN Energy Latina, S.L. Calle Hermosilla 11, 4th Piso, Madrid, Spain Upstream Latino America S.A. Valezquez 61, 1 ̊Izquierda, Madrid 28, Spain Trefoil (Switzerland) S.A. Rue Du Rhône 50, 1204 Geneva, Switzerland Trefoil Limited Trefoil GmbH Clarendon House, 2 Church Street, Hamilton, HM 11, Bermuda Schubertring 6, 1010 Vienna, Austria Petrolera El Trebol S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina Andes Energia Argentina S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina MSO Andes Energia S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina Andes Oil S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina Andes Oil and Gas S.A. Maipu 1252, Piso 6 Ciudad Autonoma de Buenos Aires, Argentina Grecoil y Cia. S.A. Tiburcio Benegas 843, Ciudad de Mendoza, Mendoza, Argentina AEN Energy Mendoza S.A. Tiburcio Benegas 843, Ciudad de Mendoza, Mendoza, Argentina Patagonia Oil & Gas S.A. Maipu 1252, Piso 6 Ciudad Autonoma de Buenos Aires, Argentina Andes Hidrocarburos S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina Kilwer S.A. Ketsal S.A. Suipacha 1111, 18th Floor, Ciudad Autonoma de Buenos Aires, Argentina Tiburcio Benegas 843, Ciudad de Mendoza, Mendoza, Argentina CHPPC Andes S.R.L Suipacha 1111, 18th Floor,Ciudad Autonoma de Buenos Aires, Argentina Integra Investment S.A. Maipu 1252, Piso 6 Ciudad Autonoma de Buenos Aires, Argentina Andes Interoil Limited Andes Energia Limited 6th Floor, King’s House, 10 Haymarket, London SW1Y 4BP 6th Floor, King’s House, 10 Haymarket, London SW1Y 4BP Patagonia Oil & Gas Limited 6th Floor, King’s House, 10 Haymarket, London SW1Y 4BP Patagonia Energy Limited 6th Floor, King’s House, 10 Haymarket, London SW1Y 4BP 163 Phoenix Global Resources plcSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOFFICERS AND ADVISERS Non-executive chairman Chief financial officer Non-executive director (independent) Non-executive director (independent) Non-executive director (independent) Non-executive director (independent) Non-executive director (independent) Non-executive director Directors Sir Michael Rake Kevin Dennehy John Bentley Garrett Soden Javier Alvarez David Jackson Tim Harrington Daniel Jaeggi Nicolás Mallo Huergo Non-executive director Nigel Duxbury Company secretary Nominated adviser and joint broker Stockdale Securities Limited 100 Wood Street London EC2V 7AN Joint broker Panmure Gordon One New Change London EC4M 9AF Financial PR Camarco 107 Cheapside London EC2V 6DN Independent auditor PricewaterhouseCoopers LLP 1 Embankment Place London WC2N 6RH Solicitor Herbert Smith Freehills LLP Exchange House Primrose Street London EC2A 2EG Registrars Share Registrars The Courtyard 17 West Street Farnham Surrey GU9 7DR Registered address and corporate office 6th Floor King’s House 10 Haymarket London SW1Y 4BP Company number 5083946 Offices Buenos Aires Torre Alem Plaza 3rd Floor Av. Leandro N. Alem 855 Buenos Aires 6023 Argentina Mendoza Roca 234 Mendoza City 5500 Argentina Houston 20 Greenway Plaza Suite 1075 Houston Texas 77046-2011 USA 164 ANNUAL REPORT AND ACCOUNTS 2018OTHER INFORMATIONBoth the paper manufacturer and printer are registered to the Environmental Management System ISO14001 and are Forest Stewardship Council (FSC) chain-of-custody certified. ® ® The mark of responsible forestry Consultancy, design and production www.luminous.co.uk Design and production www.luminous.co.uk Phoenix Global Resources plc 6th Floor, King’s House 10 Haymarket London SW1Y 4BP United Kingdom Tel: +44 (0) 20 3912 2800 info@phoenixglobalresources.com P h o e n i x G l o b a l R e s o u r c e s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8

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