Company Registration No: 05299925
UK Oil & Gas PLC
Annual Report and Accounts
For the year ended 30 September 2018
Company Registration No: 05299925
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CONTENTS
Strategic Report For The Year Ended 30 September 2018 .........................................................................................................................1
Our Business .....................................................................................................................................................................................1
Our Strategy .....................................................................................................................................................................................2
Statement From The Chairman .........................................................................................................................................................3
Chief Executive’s Statement ..............................................................................................................................................................4
Principal Risks And Uncertainties ......................................................................................................................................................8
Operational Review And Outlook ......................................................................................................................................................9
Financial Review ............................................................................................................................................................................. 12
Key Performance Indicators ............................................................................................................................................................ 13
Reserves And Oil In Place ................................................................................................................................................................ 14
Health, Safety And The Environment ............................................................................................................................................... 15
Oil Price Environment ..................................................................................................................................................................... 17
Corporate Governance .................................................................................................................................................................... 18
Directors’ Remuneration Report ..................................................................................................................................................... 25
Report Of The Independent Auditor To The Members Of Uk Oil & Gas Plc ....................................................................................... 30
Financial Statements ............................................................................................................................................................................. 34
Consolidated Statement Of Comprehensive Income For Year Ended 30 September 2018 ................................................................ 34
Consolidated Statement Of Financial Position As At 30 September 2018 ......................................................................................... 35
Company Statement Of Financial Position As At 30 September 2018 ............................................................................................... 36
Consolidated Statement Of Changes In Equity For The Year Ended 30 September 2018 .................................................................... 37
Company Statement Of Changes In Equity For The Year Ended 30 September 2018 ......................................................................... 38
Consolidated Statement Of Cash Flow For The Year Ended 30 September 2018 ............................................................................... 39
Company Statement Of Cash Flow For The Year Ended 30 September 2018 ..................................................................................... 40
Notes To The Financial Statements ................................................................................................................................................. 41
Company Information ........................................................................................................................................................................... 70
Forward-looking Statement
This annual report contains ‘forward-looking information’, which may include, but is not limited to, statements with respect to the future financial and operating
performance of UK Oil & Gas PLC, its subsidiaries, investment assets and affiliated companies, the estimation of oil reserves or resources, the realisation of
resource estimates, costs of production, capital and exploration expenditures, costs and timing of the development of new assets, requirements for additional
capital, governmental regulation of operations and exploration operations, timing and receipt of approvals, licenses, environmental risks, title disputes or claims.
Often, but not always, forward-looking statements can be identified by the use of words such as ‘plans’, ‘expects’, ‘is expected’, ‘budget’, ‘scheduled’, ‘estimates’,
‘forecasts’, ‘intends’, ‘anticipates’ or ‘believes’, or variations (including negative variations) of such words and phrases, or state that certain actions, events or
results ‘may’, ‘could’, ‘would’, ‘might’ or ‘will’ be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of UK Oil & Gas PLC and/or its subsidiaries, investment assets and/or its affiliated
companies to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
Such factors include, among others, general business, economic, competitive, political and social uncertainties; the actual results of current exploration activities;
conclusions of economic evaluations and studies; fluctuations in the value of UK Pounds Sterling relative to the United States Dollar, and other foreign currencies;
changes in project parameters as plans continue to be refined; future prices of products; possible variations in recovery rates; failure of plant, equipment or
processes to operate as anticipated; accidents, labour disputes and other risks of the oil and gas industry; political instability, adverse weather conditions,
insurrection or war; delays in obtaining governmental approvals or financing or in the completion of development or construction activities.
Although UK Oil & Gas PLC has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described
in forward-looking statements, there may well be other factors that cause actions, events or results to differ from those currently anticipated, estimated or
intended.
Forward-looking statements contained herein are made as of the date of this annual report and UK Oil & Gas PLC disclaims any obligation to update any forward-
looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements
will prove to be accurate, as actual results and future events could differ materially from those anticipated in such stateme nts. Accordingly, readers should not
place undue reliance on forward-looking statements due to the inherent uncertainty therein. Nothing in this annual report should be construed as a profit
forecast.
STRATEGIC REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2018
OUR BUSINESS
UK Oil & Gas PLC (UKOG) is an oil and gas exploration and production company, which specialises in creating new
geological ideas, concepts and methodologies to find and produce oil from previously unexplored or overlooked
rock formations within established oil-producing basins. Our current operational focus is on the UK onshore
sector where we aim to build a sustainable production base that can act as a springboard to further UK and
world-wide opportunities. UKOG has operated safely and environmentally responsibly in the UK since 2013.
Driven initially by the successful Horse Hill Portland and Kimmeridge oil discoveries in 2014, our numerous
subsequent asset acquisitions, successful drilling and flow testing programme has made UKOG one of the most
recognised and stand-out players in the entire UK onshore sector. As of 1 August 2018, we ceased to be an
investment company and now trade as a fully-fledged operating oil and gas company.
Our portfolio consists of direct and indirect interests in eight UK onshore exploration, appraisal, development
and production assets, all situated within the Weald and Purbeck-Wight Basins of southern England. We are by
far the largest acreage holder in the south of England, and the fourth largest in the overall UK onshore, with
assets covering 792 gross km².
We hold majority interests in four significant oil and gas discoveries, the most notable being at Horse Hill in
Surrey, together with a significant industry-leading position in the Kimmeridge Limestone (KL) oil deposit or
“play”. This exciting play has the potential for exceptional growth in the near and foreseeable future. UKOG, as
the creator of the KL play, holds the largest acreage position within the play’s most prospective area or “sweet
spot”, covering 592 gross km².
Our portfolio contains a good balance of low-risk oil & gas production, appraisal and development assets within
our conventional oil and gas portfolio as well as high upside exploration assets within both the Kimmeridge
Limestone and Portland conventional plays.
In order to move our business forwards, we maintain a high level of operational activity, conducting near
continuous drilling and flow testing operations since May 2017. Our forward programme announced in January
2019 will continue this philosophy with nine further wells and flow tests planned over the next two years.
This operational programme is designed to bring our first operated field, Horse Hill, into long term production
by the end of 2019 and our Arreton oil discovery and Godley Bridge gas discovery, potentially significantly larger
than Horse Hill, into long term production testing during 2020.
Our portfolio has the potential to generate significant returns for the Company and its shareholders.
Company Registration No: 05299925
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OUR STRATEGY
UKOG aims to build a diverse, sustainable and self-funding exploration and production business. Its key strategic
objectives being:
1. Find and Develop Low-Cost and Long-life Assets - continuing to invest in our potential near-term
production assets is a key priority. Once in production the revenues from these assets will provide free
cash flow to re-invest and deliver shareholder returns. This strategy is embodied by the current focus
on Horse Hill, where our goal is to make the field the Weald Basin’s number one oil producer by end
2019 and generating free-cash in 2020.
2. Resource and Reserve Growth - building our recoverable resources, reserves and future production
through targeted and disciplined high-impact exploration, appraisal projects and acquisitions. The
Arreton south exploration prospect and Godley Bridge gas project exemplify this strategy.
3. Targeted Portfolio Management - we continuously review and high-grade our portfolio to either
acquire or divest further stakes in existing assets. We also look to acquire assets at any stage in the life
cycle and are not limited by geography where we can create significant value for shareholders. The
acquisition of further interests in Horse Hill and the relinquishments of Baxters Copse and offshore Isle
of Wight demonstrate our adherence to active portfolio management.
UKOG shares this vision and strategy through internal dialogue with employees and externally with shareholders
and stakeholders via public announcements and dissemination of information through our website and the
annual report and accounts.
Company Registration No: 05299925
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STATEMENT FROM THE CHAIRMAN
I have been involved in UK Oil & Gas PLC since 2015, as a Director since March 2017 and more recently I was
appointed as Non-Executive Chairman in August 2018. This Is my first Annual Report and I am pleased to see the
Company is in a financially strong position with an exciting operational pathway to oil production.
This year the management has been focused on advancing all its assets and importantly changing its listed status
from an investment to an operating company. This is a critical move and allows UKOG to control its own destiny
by being able to manage and operate its assets by implementing its strategic objectives.
I have been extremely encouraged to see the positive strides taken by the management and contractors to push
the limits of our understanding of the Weald Basin, despite the many critics that have come and gone. That push
does not always yield barn storming results like the “Gatwick Gusher”, but at times subtle data points that are
critically valuable in understanding the greater upside picture, as we experienced at Broadford Bridge.
I believe UKOG is an oil and gas business that is going somewhere fast. With current management, there are no
such things as “down time” or “quiet periods”. From where I come from in Texas, that suits me well, as companies
of this size typically have 2 to 3 rigs running a continuous drilling program. Despite the regulatory and social
hurdles, we are leading the onshore UK in asset exploitation, which signals we are rightly perceived as positive
stewards of the locations we are exploring.
As our businesses operate in the onshore UK, we are conscious of the significant responsibility we have, not just
to our shareholders and colleagues, but to the communities in which we operate and the partners with whom
we work. Our focus on health, safety and the environment therefore continue to be a key priority across the
business. We covet the trust that communities have developed in us and endeavour to maintain and improve it
whilst striving to meet our ambitious strategies.
We are diligently working to bridge the technology gaps between the US and the UK to employ best practices in
the exploration, exploitation, and development of our Weald Basin holdings. These efforts afford UKOG a key
advantage to deliver an opportunity to move the needle on decoupling reliance on imported energy and achieve
maximum value for our shareholders. The push to take Horse Hill into production later this year ensures an
exciting 12 months ahead, building on all the hard work and planning during 2018. The Company learned a huge
amount from Broadford Bridge and now it can apply that knowledge to future projects at Godley Bridge, within
the PEDL234 licence and Arreton on the Isle of Wight.
This represents a tremendous schedule of work for UKOG, but I have absolutely no doubt that the Company will
deliver the goods in a logical and strategic way. I want it to be recognised how hard our colleagues have worked
during the past year and thank them for their commitment and resilience through challenging times. I also wish
to thank our shareholders for their continued support.
Allen D Howard
Non-Executive Chairman
14 March 2019
Company Registration No: 05299925
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CHIEF EXECUTIVE’S STATEMENT
The past year has seen significant and positive developments to our corporate structure, operations and
finances. Consequently, the Company is altogether much stronger than at any time in its history and is well
positioned for significant and continued growth in the UK onshore sector. We have a large and high-quality asset
portfolio, significant net discovered oil resources, a clear-cut strategy for monetisation and the expertise and
capital necessary to deliver our goals. UKOG is in a good place.
Overview and goals
Our stated aim is to become the largest oil producer in the Weald Basin and amongst the top three UK onshore
oil producing companies by winter 2019/20. It is an ambitious goal for such a young company. The Company’s
performance, excellent Horse Hill operational results and an unrivalled ability to access and employ significant
capital during the period compared to our UK onshore peers, means we are well positioned to deliver this
important goal.
People
Oil and gas is a supremely collaborative business. Achieving goals, therefore, begins and ends with people. Our
current and future success is, and will remain, down to the efforts and expertise of UKOG’s core team, who are
amongst the best in the business. They deserve much credit, as do the many contractors, consultants, regulators
and stakeholders who support us.
To this end, we have been fortunate to recruit further talented staff to help handle our growing activities and
welcomed a new non-executive director, Nicholas Mardon Taylor, a seasoned finance and oil & gas man to the
board.
Market place
The reporting period saw significant volatility in oil prices, chiefly driven by the interplay of OPEC quota
uncertainty, buoyant US shale oil production, fluctuating US inventory levels, geopolitical fall-out from President
Trump’s foreign policy and general global financial uncertainty. Oil prices have, fortunately, stabilised at around
$65/barrel (bbl).
While UKOG is not immune to such price volatility, the expected high flow rates of high-quality crude around
1,000 bbl of oil per day (bopd) per horizontal production well at Horse Hill, plus our other geologically similar oil
discoveries, means that our production costs per barrel are forecast to be significantly below those of our UK
competitors. The corresponding net-back per barrel (revenues after operating costs), at current Brent prices, is
expected to be in the order of more than $40/bbl.
Payback times for capital costs are also forecast to be correspondingly rapid, being measured in months, much
quicker than the several years many less productive onshore UK wells take to recover costs. Our future
production business, therefore, looks set to be financially solid.
UKOG’s role in the UK
Even factoring in the complete replacement of petrol/diesel cars to electric vehicles, oil import dependence is
forecast to be over 65% of demand by 2030. UKOG believes that UK oil demand will therefore remain strong and
that indigenous UK onshore oil has a significant future role in helping redress the UK’s increasing reliance on
imported oil.
The decline in North Sea oil production means current and future demand must be met by long-distance imports,
often from countries with less rigorous environmental, HSE and political climates than the UK.
Around 50%, or 650,000-700,000 bopd, of current UK daily oil consumption provides feedstocks for essential
petroleum products and powers UK aviation. Petroleum products are essential to our manufacturing sector,
particularly in communications, computing, electrical products, medical technology, consumer goods, cars,
boats, planes, to name a few. We do not see this sector demand diminishing, if anything it could grow via
increased demand for oil-based products and materials in the renewable energy, electric vehicle and aviation
sectors.
Company Registration No: 05299925
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CHIEF EXECUTIVE’S STATEMENT (CONTINUED)
UKOG’s current and future core Kimmeridge and Portland oil production, therefore, has a potentially important
place in helping increase UK energy security, creating wealth and jobs in a post-Brexit world, and injecting a share
of revenue directly into communities surrounding our sites. A healthy onshore sector could help bring the UK
back towards oil independence in our lifetime.
Corporate restructuring
On 1 August 2018 we successfully readmitted to AIM as a fully-fledged oil & gas operating company. The move
was a crucial one, as it enabled the Company to maximise its exposure to success through the ability to hold
controlling interests and operate projects without the need for special derogations from AIM. To reflect the
change, the Company was renamed from UK Oil & Gas Investments PLC to UK Oil & Gas PLC.
We immediately used this new status to gain a majority controlling interest in Horse Hill Developments Ltd
(HHDL), the operator of our flagship Horse Hill production project and the surrounding licences. HHDL is now a
UKOG subsidiary company. Except for our two production assets, Horndean and Avington, we now hold either
100%, or a majority operated interest in all of our oil and gas licences.
Financial strength and excellent access to capital
During and beyond the reporting period, UKOG continued to be one of the largest single traded stocks on the
AIM market. This liquidity enabled us to raise approximately £23 million. This financing was used to fund
successful operations, multiple strategic acquisitions and working capital acquisitions necessary for our growth.
UKOG’s ability to raise funding quickly and in response to good opportunities is one of our underlying strengths.
We also saw significant revenues generated from UKOG’s operated flow test production at Horse Hill. Much of
the production benefitted from oil prices of $70-80/bbl, with test lifting costs of around $20-$27/bbl and full-
scale production costs projected to be below $20/bbl. Current plans envisage Horse Hill test revenues to continue
throughout 2019 with the goal of long-term field production revenues by year end.
We are optimistic that Horse Hill’s horizontal production targets of 720-1,080 bopd per well can be met and that
subject to these production rate and regulatory approval, Horse Hill will be able to generate fee cash flow in
2020. The addition of proven and probable reserves at Horse Hill will could also facilitate possible reserve-based
lending (i.e. debt facilities) which can further help reduce the need for equity dilution.
Operational performance
During and post the reporting period we started the process of maximising value from our leading Weald Basin
acreage position. We commenced near-continuous drilling and testing operations at Broadford Bridge in May
2017. Following our recently announced 9-well production, appraisal and exploration programme, the largest
and most comprehensive in the UK sector, we are set to remain in continuous operational mode beyond 2020.
Operations during and post the reporting period were primarily aimed at converting our significant 15.6 million
barrels (MMbbl) of discovered oil resources into bankable reserves and future expected production revenues.
Note that the 15.6 MMbbl currently excludes the expected upgraded of post-test Horse Hill Portland reserves,
potential PEDL234 Portland gas and Kimmeridge reserves. We therefore expect these additions to significantly
boost net reserves and resources in the next reporting period.
Following the Broadford Bridge Kimmeridge oil discovery, which we plan to appraise and long-term test in 2020,
operations since June 2018 have focussed primarily upon verifying commerciality at Horse Hill and subsequently
moving it towards full-scale production.
Test results to date were beyond our expectations, with over 35,000 bbl total Portland and Kimmeridge
production to date. The tests also confirmed that the Portland is commercially viable with expected recoveries
possibly exceeding 30% of the 30 million barrels of oil in place, provided early reservoir pressure support is
implemented. Portland production now exceeds 10,000bbl.
Company Registration No: 05299925
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CHIEF EXECUTIVE'S STATEMENT (CONTINUED)
The Kimmeridge also performed well, producing over 25,000 bbl of 40° API Brent crude, mostly post the reporting
period. Test data confirmed that the Kimmeridge Limestone 3 (“KL3”) and KL4 horizons are part of one large
single oil reservoir, likely extending downwards a further 300 ft or more below the base of KL3, a 600 ft vertical
extent. This, combined with the absence of any produced formation water, almost certainly means the oil is part
of a continuous oil deposit of considerable vertical and lateral extent.
The determination of the Kimmeridge continuous oil deposit’s extent will be further defined by the forthcoming
HH-1z horizontal well, which we anticipate will be long-term production tested in late spring/early summer after
drilling and completion.
Future operations
Our prime post period 2019 operational focus is to bring Horse Hill into long-term production by our target date
of the end of 2019. The first new horizontal Portland well, HH-2, is anticipated to be drilled in spring 2019 and to
be put on long-term test thereafter. Upon the grant of the necessary long-term production consents, expected
in autumn 2019, test production is planned to switch seamlessly into long term production, to be followed by up
to two further horizontal producers and a reservoir pressure support well.
Attainment of HH-2’s test production target of 720-1080 bopd could make Horse Hill the Weald’s top oil
producing field before the end of 2019, a significant milestone. Target rates from the HH-1z Kimmeridge well
could also boost aggregate field production to above 2,000 bopd, making Horse Hill the second largest oil
producing field in the onshore UK after Perenco’s Wytch Farm.
Following Horse Hill, we are excited by the prospect of drilling and testing Arreton-3 on the Isle of Wight in early
2020, which contains the lion’s share of our discovered oil resources. Arreton is very much a geological look-alike
to the Horse Hill Portland, yet it contains four times the oil in place (OIP) within three stacked Jurassic reservoirs.
Arreton also has significant underlying naturally fractured Kimmeridge potential.
Should Arreton-3 testing prove commercial viability, we plan to move directly to drill the look-alike Arreton South
prospect, which contains almost twice the Portland OIP of Horse Hill’s Portland oil field.
Next year will also see appraisal drilling in PEDL234 in the central Weald. First at the Godley Bridge Portland gas
discovery, where around half of the circa 56 billion cubic ft (“Bcf”) gas in place of this large geological structure
is prognosed to lie, and secondly with a return to the Broadford Bridge Kimmeridge oil discovery, to drill and test
a new Kimmeridge sidetrack.
Further exploration is expected both within the Kimmeridge underlying the Godley Bridge gas discovery and a
new Kimmeridge well in PEDL234 between Godley Bridge and Broadford Bridge.
Regulatory permit activities for future operations are well advanced and significant monies have been allocated
to these crucial activities. It is our aim to build a ‘hopper’ full of permitted drilling opportunities to maintain our
operational momentum.
We also take our responsibility to abandon our sites very seriously. This year we saw the successful plugging and
abandonment of Markwells Wood-1 to high industry standards. Landscaping the site back to its original
woodland setting will be completed before year end.
Company Registration No: 05299925
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CHIEF EXECUTIVE'S STATEMENT (CONTINUED)
Injunction
In direct response to the unlawful and sometimes violent actions of protesters at our Horse Hill site in November
2017 and August 2018, the Company was successfully granted a wide-ranging injunction preventing protesters
from a range of activities aimed directly at causing UKOG harm.
The action was primarily undertaken to protect our interests and to ensure the safety of our staff and contractors,
but also to make a positive stand against those who believe that their viewpoint justifies unlawful acts that deny
others their rights.
We will continue to do all in our power to ensure the safety of our staff and contractors and allow UKOG to carry
out its day-to-day business to fulfil its obligations to its shareholders and stakeholders.
Community
Prior to the start of operations at Broadford Bridge we implemented a policy of open face-to-face engagement
with our neighbours and stakeholders. This was exemplified by the construction of a viewing platform at the site
where residents, councillors, regulators, media and other stakeholders in the community could observe our
actions, be briefed and ask questions. The practice has continued at Horse Hill. To date we have welcomed over
400 visitors to our sites and built many good long-term relationships.
We believe such an open policy is paramount to demonstrate to the community that their concerns are
understood and receive our attention, together with dispelling the many myths and scaremongering
promulgated by our opponents.
UKOG has also committed to set aside around 6% of gross revenues from its production for the community. This
royalty would pay local business rate taxes, with the remainder going into a community fund for the benefit of
those surrounding our sites. We believe it is right that communities benefit from our activities, however
temporary.
Outlook
The prospect of free cash flow and associated proven and probable reserves from Horse Hill in the next financial
year, places the Company in a strong position to deliver its ambitious 2020 drilling plans and the associated
growth. Horse Hill can solidly underpin our future.
Since our projects to date have demonstrated the ability to produce at high flow rates compared to usual onshore
UK wells, we therefore have a significant measure of protection against volatile oil prices. We will, of course,
strive to keep our costs as low as practicable, whilst not being afraid to spend capital sums on new technologies
that can ultimately deliver higher returns and rewards.
The Company will also not stand on its laurels and will continue to optimise its portfolio, rationalise ownership
of key assets and seek further investment opportunities, both in the UK onshore and elsewhere. Whilst much of
our current operational plan could be funded by internally generated future cash flow, we do not rule out the
need for additional funding for new opportunities that could provide a step change in growth.
We look forward to making a significant contribution to the energy security and prosperity of the UK and to
sharing the fruit of the UK’s geological wealth with our closest neighbours.
Stephen Sanderson
Chief Executive
14 March 2019
Company Registration No: 05299925
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PRINCIPAL RISKS AND UNCERTAINTIES
UKOG continuously monitors its risk exposures and reports to the board of directors (“The Board”) on a regular
basis. The Board reviews these risks and focuses on ensuring effective systems of internal financial and non-
financial controls are in place and maintained.
Key risk areas
The high-risk areas surrounding our existing business is tabulated below, the key areas are Strategic, Operational
and Financial.
Risk
Strategic risks
Mitigation
Magnitude and likelihood
Exposure to political risk, due to changes
in government or government policies
UKOG could be exposes to significantly
different regulatory of fiscal
environments which could affect the
ability of UKOG to deliver to its Strategy
Through industry associations and
direct contact, the Group engages with
Government and other appropriate
organisations to ensure the Group is
kept abreast of expected potential
changes and takes an active role in
making appropriate representations.
Magnitude- High
Likelihood - Medium
Operational risks
Permitting risk, planning, environmental,
licensing and other permitting risks
associated with our operations
particularly with exploration drilling
operations.
Exploration risk, The Group fails to
locate and explore hydrocarbon bearing
prospects that have the potential to
deliver commercially, e.g. key wells are
dry or less successful than anticipated
Loss of key staff, Loss of key staff
Financial risks
Liquidity risk, exposure through its
operations to liquidity risks.
The Group has to date been successful
in obtaining the required permits to
operate. Therefore, UKOG considers
that such risks are partially mitigated
through compliance with regulations,
proactive engagement with regulators,
communities and the expertise and
experience of the management teams.
Analysis of available technical
information to determine work
programme. Risk sharing arrangements
entered to reduce downside risk
Magnitude- High
Likelihood – High
Magnitude- High
Likelihood – High
Provide and maintain competitive
remuneration packages to attract the
right calibre of staff. Build a strong and
unified team.
Magnitude- High
Likelihood – Low
The Board regularly reviews UKOG’s
cashflow forecast and the availability
or adequacy of its current facilities to
meet UKOG’s cash flow requirements
Magnitude- High
Likelihood - Medium
Company Registration No: 05299925
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OPERATIONAL REVIEW AND OUTLOOK
This was a busy and exciting operational period for UKOG. It began with extended well tests (EWTs) at Broadford
Bridge in West Sussex, followed by EWTs at Horse Hill in Surrey. After the reporting period, UKOG completed its
first UK well abandonment operation at Markwells Wood located within the South Downs National Park.
Horse Hill, PEDL137 and PEDL246 (UKOG 50.64%)
Horse Hill-1 (HH-1) testing operations began in June 2018 following receipt of regulatory permits. The licence is
operated by our subsidiary company, Horse Hill Developments Ltd (UKOG 77.9% controlling shareholding), which
holds a 65% direct interest in the field and surrounding highly prospective licences.
A test of the HH-1 Portland sandstone discovery was successfully carried out, using the same linear rod pump as
had been previously used at Broadford Bridge. The Portland interval was also successfully re-perforated, leading
to significantly increased oil flow rates. The Portland oil discovery was declared to be commercially viable in
October 2018.
To date, over 10,000 bbl have been produced from the Portland, with production planned to continue until the
commencement of the next well, HH-2 in Spring 2019. Since February 2019, the well has been produced steadily
and continuously averaging around 220 bopd. This rate has been purposefully kept below the maximum
theoretical rate of 360 bopd, for prudent reservoir management reasons.
Testing of the HH-1 Kimmeridge Limestone (KL) oil pool from perforated zones in KL3 and KL4 began in October
2018, following the reporting period and was completed in February 2019. Over 25,000 bbl of oil was produced
and sold from the two Kimmeridge zone. As reservoir pressure data showed the Kimmeridge acts as one single
naturally fractured reservoir, flow was commingled from both zones.
The Kimmeridge pool is currently shut-in for a long term pressure build-up test. To gather further data post shut-
in, production may be resumed for a short duration prior to drilling the planned HH-1z sidetrack, which is planned
to follow HH-2 in late Spring 2019. As a result of learnings from Broadford Bridge, no dilute acid was injected into
the Kimmeridge during the testing sequence.
Total combined Portland and Kimmeridge test production now exceeds 35,000 bbl with all production to date
being being delivered and sold to local UK oil terminals.
Preparations are now well advanced for the next major activities at the HH well site, which will involve the drilling
and testing of a new horizontal Portland well, HH-2, plus drilling and testing of the HH-1z Kimmeridge sidetrack.
Bothe new wells have Surrey County Council (SCC) planning approval and Environment Agency (EA) permits.
Subsequent to the reporting period, a planning application (to SCC) and permit application (to EA) were
submitted for Horse Hill long-term production. The application includes 6 production wells (including HH-1z and
HH-2) plus a reservoir pressure support (i.e. water re-injection) well.
Godley Bridge, Broadford Bridge, PEDL234 (UKOG 100%)
Following drilling and completion of the Broadford Bridge-1z Kimmeridge oil discovery (BB-1z), a comprehensive
series of test operations were undertaken over much of the c. 1000 ft perforated section. Abundant live oil and
wet gas shows were encountered throughout the Kimmeridge section, with oil being recovered to surface from
multiple KL units, notably from the KL5 zone. However, the flow rates obtained were non-commercial.
Post well analysis concluded that the acidisation process, used to clean perforations and the near wellbore, likely
released fine grained clay particles from the rocks, which then either blocked or significantly reduced the flow
potential of the Kimmeridge’s natural fractures. Consequently, we believe that the tests did not access the true
flow potential of the oil saturated Kimmeridge and It is now planned to return to the BB well site to drill and test
a further sidetrack well, BB-1y. No dilute acid will be injected into the Kimmeridge during the testing phase.
There were also many other vital learnings and innovations from the drilling and testing activities, which will be
invaluable in future operations.
Company Registration No: 05299925
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OPERATIONAL REVIEW AND OUTLOOK (CONTINUED)
During the period, technical studies were finalised over the potentially significant Godley Bridge Portland gas
discovery, located in the northwest of the licence within a large geological anticlinal structure of some 40 km²
areal extent.
The extreme western edge of the gas accumulation was discovered by Conoco’s 1980s Godley Bridge-1 well and
shows the Portland sandstone gas reservoir to be of similar reservoir quality to our Horse Hill well. UKOG’s
internal calculations show the discovery likely contains around 56 Bcf of gas in place, around half of which lies
within PEDL234.
We acquired a drilling site, held a community engagement meeting post period and plan to submit a planning
application in spring 2019 to drill Loxley-1, whose primary objective is to drill, core and test the centre or “crest”
of the Portland gas accumulation. If the initial test is successful, the plan is to drill and test a horizontal sidetrack,
Loxley-1z, within the Portland and long term test to establish commercial viability.
We envisage any future gas development will either export gas directly into the national gas grid or will be utilised
to generate electricity which can be fed into the national power grid.
The initial Loxley-1 well is planned to spud in 2020, subject to receipt of regulatory consents and will also drill,
core and test the underlying Kimmeridge section which lies in a geological feature over twice the size of Horse
Hill. Neither the Portland or Kimmeridge sections will utilise acidisation for the reasons given above.
Isle of Wight Arreton oil discovery and Arreton South Prospect, PEDL331 (UKOG 95%)
Since this licence contains the lion’s share of our discovered audited recoverable conventional oil resources
(UKOG net 15.6 MMbbl) preparations for the submission of two planning consent and permit applications for
two well sites are nearing completion. Leases on two sites were finalised with the first application, for the
Arreton-3 appraisal well, expected to be submitted in late Spring, with the Arreton South exploration well to
follow.
Our forward plan is to first drill, core and test an Arreton-3 pilot well which effectively twins the prior Arreton-2
oil discovery made by British Gas in the 1970s. If oil flows are encouraging, we will then drill and long term test
a horizontal sidetrack, Arreton-3z, within one of the three vertically adjacent Jurassic reservoirs, most likely the
Portland, which is a natural-fracture enhanced sandy limestone of better porosity than Horse Hill. Both vertical
pilot wells will also core and test the underlying Kimmeridge section.
Should Arreton-3 results prove encouraging we plan to move directly to drill, core and test a vertical pilot hole
in the geological look alike Arreton- South prospect, which contains around 50 MMbbl of OIP within the Portland
plus significant further upside in the Kimmeridge and Inferior oolite sections. As per Arreton-3, if the initial
results are encouraging, we plan a horizontal sidetrack and long term test.
PEDL143 (UKOG 40%)
Following the Secretary of State for Environment, Food and Rural Affairs refusal in September 2018 to renew
Europa Oil and Gas’ lease for the Coldharbour Lane drilling site, the joint venture group continues to investigate
opportunities to drill elsewhere within the licence to test the significant Horse Hill look-alike Portland and
Kimmeridge prospect underlying the centre of the block. Following consent from the partners and subject to
final Oil and Gas Authority consent, UKOG will assume PEDL143 operatorship and will make best efforts to push
this potentially significant project forwards.
Markwells Wood, PEDL126 (UKOG 100%)
Following a strategic portfolio review, it was decided that the Markwells Wood-1 (MW-1) oil discovery was of
limited potential and not a priority for further UKOG investment. Subsequent to the reporting period, UKOG
demonstrated its environmental credentials by carrying out P&A operations on the MW-1 well.
Three cement plugs were set in the well and the wellhead was removed, leaving the well fully safe and in strict
compliance with Health and Safety Executive, EA and UK oil & gas industry standards. The Markwells Wood site
will now be restored during 2019 to its original woodland condition, using the original topsoil that has been
stored on location.
Company Registration No: 05299925
10
OPERATIONAL REVIEW AND OUTLOOK (CONTINUED)
Other assets
The Horndean oil field in Hampshire (UKOG 10%) continued stable oil production averaging around 140-150 bopd
gross with low water cut during the period.
The P1916 offshore Isle of Wight licence (UKOG 100%) was relinquished on 31 January 2018. The Baxters Copse
licence (PEDL233, IGas Energy operator, UKOG 50%) was relinquished during the reporting period.
Technology
Our operations have incorporated many new UKOG-developed innovations. To reduce the visual impact,
operational footprint and costs of flow testing, we introduced rig-less test operations (using a crane instead of a
workover rig) at both Broadford Bridge and Horse Hill. We also pioneered the UK onshore’s first use of an ultra-
quiet, clean burning enclosed flare at Horse Hill (i.e. the flame is not visible). The flare was developed in
conjunction with PW Well Testing, and Landfill Systems from equipment used in UK landfill sites. It allows full
high temperature combustion of natural gas, leading to reduced air emissions. Residents visiting our site have
commented at how very quiet the flare is.
Matt Cartwright
Chief Operating Officer
14 March 2019
Company Registration No: 05299925
11
FINANCIAL REVIEW
Income statement
In 2018, production continued from Horndean generating revenues of £0.23 million. Cost of Sales during the
period decreased. This was driven by shutting in the Avington well, which had been loss making. The result was
a gross profit of £0.13 (2017: loss £0.05 million).
Administration costs increased from £1.86 million during the period ending 30 September 2017 to £3.24 million
during the period ending September 2018. The main drivers for this was an increase in legal and AIM related
expenses associated with the readmission of UKOG on AIM as an operating company. These costs jointly
contributed £1.1 million in expenses (2017: £0.36 million).
The net effect of the above was to increase the operating loss to £3.76 million compared to £2.40 million in the
previous financial year.
There was also one exceptional charge. This was an exploration and evaluation write-off of £11.56 million. This
was primarily comprised of a £9.25 million write-off of the BB-1 well and the BB-1z test. The BB-1 well was
impaired, as it was determined that as a result of wellbore damage we would be unable to be used for
production. The BB-1z test was impaired because, although oil flowed from the well it was determined that it
was unlikely to be commercial. The larger majority of the remaining exploration write off (£1.21 million) related
to Holmwood where the operator abandoned the site.
This exceptional charge resulted in a loss before taxation of £16.75 million, compared to £2.27 million in the
period ending 30 September 2017.
Cash flow and financing
During the reporting period net cash outflow from operating activities prior to movements in working capital
was £2.82 million (2017: cash outflow of £1.85 million) the increased outflow is primarily attributable to the
increased in administration expenses, as outlined above. After movements in working capital the cash outflows
increased to £7.42 million which was a result of reduction in trade payable of £2.90 million during the period.
The Company raised £21.63 million (net of costs) during the year, which along with the cash and cash equivalents
at the beginning of the period of £1.75 million was primarily used to fund our investing activities.
The cash outflow from investing activities decreased from £8.2 million versus the period ending 30 September
2017 to £3.53 million for the period ending 30 September 2018. The primary driver for this variance was lower
investment in exploration and the net cash acquired (£1.89 million) via the acquisition of Horse Hill
Developments Ltd (“HHDL”).
As a result, the Group had a £10.68 million net increase in cash, and £12.43 million in cash and cash equivalent
at the end of the period.
Balance Sheet
During 2018, non-current assets increased to £31.0 million (2017: £21.71 million), primarily as a result of the net
effect of the gain associated with the Group consolidating the balance sheet of HHDL, and the exploration write
off of £11.56 million. Current assets increased from £5.54 million at the period ended 30 September 2017 to
£13.65 million at the period ended 30 September 2018. The drivers for this variance were the increase in cash
and a corresponding decrease in trade receivables.
Our total liabilities increased to £7.86 million (2017: £4.08 million), as a result of consolidating the HHDL loans
from its shareholders, and an increase in our provisions associated with the rehabilitation of our well sites.
At the end of the period, the Group had £12.43 million (2016: £1.75 million) in cash and cash equivalents.
Kiran Morzaria
Finance Director
14 March 2019
Company Registration No: 05299925
12
KEY PERFORMANCE INDICATORS
Since UKOG was readmitted as an operating company we have adopted both financial and non-financial key
performance indicators (“KPI’s”) to measure progress against our strategy. We have not presented comparable
measurements this year, as we became an operating company during the reporting period. However, we have
presented the KPI’s for the full financial year rather than the period we were an operating company. These KPI’s
will develop and new ones added as we progress our strategy.
Financial KPI’s
Reason for choice
How we measure
Production (bopd)
2018 – 137 bopd
The Group production will
provide operating cashflow to
fund our investments and
deliver shareholder value. At
this point in time we receive
production from our
ownership in the Horndean oil
field which is not under our
control
Daily and weekly production is
monitored for all producing
assets and reported to senior
management. Production
forecasts are prepared during
the year to measure progress
against the production target.
Operating costs (£/bbl)
2018 – £18/bbl
Operating costs per bbl will be
a key focus for our operations
and the focus for the Group
will be to keep these costs low
so as to improve the cash we
can generate from our
producing assets. Currently
the operating costs are in
relation to our ownership of
the Horndean oil field, which
is not under our control.
Operating costs will be
monitored closely, to ensure
that budget targets are being
met.
Operating Cashflow £m
2018 – Outflow £7.43 million
Our cashflow is key to
providing funding investing in
the business and pursue our
strategy. This has to date
predominantly been via
equity and debt funding
Cashflow forecasts are
reported to the board on a
regular basis, to ensure our
progress is within our budget.
Long-term forecasts are also
provided to ensure that the
strategy of the business can
be adequately funded
Non-Financial KPI’s
Reason for choice
How we measure
Lost time injuries (LTI & LTI Frequency)
2018 – 1, LTI Frequency 2.23
Health and Safety is our highest priority and we look to provide the highest level of protection to
all our stakeholders
We track HSE lagging indicators during the year, which are reported to the Board. We aim to
have a zero LTI’s. If we have an LTI it is investigated, and a clear remedial action is identified and
implemented
Company Registration No: 05299925
13
RESERVES AND OIL IN PLACE
UKOG has estimated net attributable P50 reserves of 80,000 barrels of oil (effective 31 December 2018, see Table
1 below). This figure is 19% lower than last year, due to continuing production from the Horndean oil field (UKOG
10%) and Xodus’ independent evaluation of Horndean reserves. It is also expected that during the next period,
once permissions for long term production are received, reserves, significantly greater than the current
contingent resources, will be added from Horse Hill’s Portland and Kimmeridge oil pools.
UKOG also has 25.7 MMbbl of net attributable P50 Contingent and Prospective Resources, 15.7 million barrels
of this is in three non-KL discoveries (see Table 2 below). Table 2 includes net Contingent Resources for the Horse
Hill Portland reservoir. However, Table 2 does not include net Contingent Resources for the PEDL234 Godley
Bridge Portland gas discovery.
Gross unrisked oil in place (“OIP”) for UKOG’s licence interests are shown in Table 3. These OIP volumes are
dominated by the Kimmeridge OIP estimated for the Horse Hill and Broadford Bridge/Godley Bridge licences.
Note that the 28 Bcf UKOG calculated gas in place for Godley Bridge Portland is not included.
Table 1: UKOG’s Producing Fields, Gross and Net Reserves (at 31 December 2018)
UKOG
Interest
10%
5%
Asset
Horndean
Avington1
TOTALS
Gross Reserves (barrels)
P90
P10
P50
340,000
-
800,000 1,240,000
-
-
Net Reserves (barrels)
P50
80,000
-
P90
34,000
-
P10
▪
▪
▪
66,300
93,200
116,900
Source, Date
116,900 Xodus, June 2018
Xodus, June 2018
-
Note: Avington oil field current shut in.
Table 2: UKOG’s Unrisked Gross and Net Resources
Asset
Licence
UKOG's
Interest
Gross Resources
(MMbbl)
Net Resources
(MMbbl) 1
PEDL070
P90 P50 P10 P90
Avington 2,5
0.3
Horse Hill Portland 2 PEDL137 50.64% 0.6
Arreton Main 2
9.9
PEDL331
Arreton Prospects 3 PEDL331
4.0
▪
0.4
0.4
1.5
3.6
15.7 24.1
10.5 21.6
95%
95%
P50 P10
0.02 0.02 0.02
0.8
0.3
1.8
14.9 22.9
9.4
10.0 20.5
3.8
▪
▪
▪
13.5 25.7 48.2
TOTALS
5%
▪
Source, Date
Xodus, June 2018
Xodus, June 2018
Xodus, June 2018
Xodus, June 2018
Notes:
1. UKOG net share.
2. Contingent Resources.
3. Prospective Resources.
4. Contingent Resources are in barrels of oil equivalent, as they include gas.
5. IGas’s internal reserves estimates for Horndean and Avington: proven (“1P”), proven + probable (“2P”), proven + probable
+ possible (“3P”) are deterministic, not probabilistic.
Table 3: UKOG Unrisked Gross OIP
Asset
Licence
Onshore Isle of Wight
Horndean
Avington
Horse Hill Portland
Horse Hill Oil
Horse Hill Oil
Broadford Bridge/
Godley Bridge Oil
PEDL331
PL211
PEDL070
PEDL137
PEDL137/246
PEDL137/246
UKOG's
Interest
65%
10%
5%
31.2%
31.2%
31.2%
OIP (MMbbl) or GIIP (bcf)
High
Best
P10
P50
322
219
110
56
110
59
32
47
9,245
10,993
Low
P90
144
27
25
22
3,131
N/A
N/A
Source & Date
Xodus, January 2016
Northern/RPS, Feb 2010
IGas/Senergy, July 2014
Xodus, January 2017
17,519 Nutech, June 2015
Schlumberger, August 2015
PEDL234
100.0%
3,158
7,120
13,717 Nutech, December 2016
Company Registration No: 05299925
14
HEALTH, SAFETY AND THE ENVIRONMENT
UKOG is committed to providing, so far as is reasonably practicable, a quality working environment that is safe
and one that poses no risks to the health and safety of our employees, contractors, the local community and
stakeholders.
The health and safety of employees and the public, and the protection of the environment are core business
objectives of UKOG. They rank equally with the company’s other business objectives.
Health, safety and environmental (HSE) risks associated with the business practices of UKOG are addressed
through the effective implementation of our HSE Policy, which is designed to ensure that every person associated
with UKOG is responsible for ensuring that health and safety is managed in all aspects of our business.
The Company’s HSE aspirations are: “get it right, first time, every time with no accidents, no harm to people, the
ecology and the environment”.
To achieve the identified objectives, we will ensure that all necessary and reasonable resources are made
available. We will confirm that objectives are being met by reviewing and reporting on performance and auditing
the implementation and operation of UKOG’s HSE Management System.
Our full HSE framework is available on our website: http://www.ukogplc.com/page.php?pID=101
Health and safety review
UKOG has completed well testing operations at Broadford Bridge, continued with extended well tests at Horse
Hill and, subsequent to the reporting period, has plugged and abandoned the Markwells Wood oil discovery well.
Multiple projects have been run simultaneously, as well as advancing planning for future projects.
During the period there was one reported lost time injury (a minor arm injury, involving bruising but no broken
bones), during Broadford Bridge drilling. There were no environmental issues, including zero non-conformities
or findings by the Environment Agency (EA) during their frequent and regular site visits.
UKOG continues to keep good housekeeping standards on its sites. The Company continuously monitors all its
live operations for noise, ensuring noise from its sites is kept to a minimum and is compliant with the levels set
by the relevant site planning approval.
Any complaints received are reviewed and responded to. Communication links have been established with the
residents close to our sites, who can call UKOG at any time.
At Horse Hill, the Company successfully operated an enclosed flare for the well testing programme. The flare,
commonly used at landfill sites, is clean burning, without odour and produces low emissions. It was the first such
clean-burn, fully enclosed flare employed in the UK onshore oil & gas industry.
Security
UKOG employs 24-hour security on its operational sites. In addition, the Company has hired a permanent dog
patrol unit at Horse Hill following protester activities and evictions in December 2017 and August 2018.
Injunction
Following the incidents detailed above, UKOG was pleased that in September 2018 the High Court granted the
Company an injunction covering Broadford Bridge and Horse Hill to prohibit trespass, obstruction of the
entrances and the highway, slow walking in front of vehicles, targeting contractors, locking on or climbing
(surfing) on to vehicles.
The judgement firmly upheld the Company’s collective human, legal and democratic right to conduct its lawful
business, without hindrance from the unlawful actions of activists whose intent is to cause physical, psychological
and financial harm to our company, staff, contractors, supply chain and local residents.
Company Registration No: 05299925
15
HEALTH, SAFETY AND THE ENVIRONMENT (CONTINUED)
This injunction did not seek in any way to remove the right to peaceful protest, freedom of assembly, or freedom
of expression. It sought solely to gain a judicial determination of whether certain damaging actions employed by
activists at our sites constituted peaceful, lawful protest or were unlawful.
The judgement clearly ruled that trespass on UKOG’s sites, interference with access to UKOG sites, obstruction
of the highway (including by slow-walking, lock-ons and lorry surfing), and obstructing or interfering with our
suppliers, do not constitute peaceful protest. UKOG has no issue with peaceful protest, where it does not break
the law.
Community engagement
UKOG continues to attach great importance to being a good neighbour at its current and potential future sites.
We follow a comprehensive community engagement plan, listening to and engaging with our local communities,
including elected officials and residents. Where possible we will change how we operate our sites and equipment
to take into account comments received from the public.
Following the success of our visitor viewing platform at the Broadford Bridge site, we rebuilt it at our Horse Hill
site and have welcomed numerous groups of residents and interested parties onto the site. These have included
representatives from the parish councils of Charlwood and Salford & Sidlow, the Norwood Hill Residents
Association, the leader of Reigate & Banstead District Council, senior figures from the Surrey County Council
planning department and several groups of residents.
UKOG continues to engage with the local Member of Parliament, Crispin Blunt, who visited Horse Hill in July
2018.
The Company has met regularly with Surrey and Sussex Police and gives them frequent operational updates.
In recent weeks, UKOG has held a first Community Engagement Meeting at Dunsfold Village Hall to discuss its
proposed drilling site and has made visits to the Isle of Wight to visit several potential sites and to have initial
conversations with elected officials.
Route to development
UKOG operates within a highly regulated industry, led by the Oil and Gas Authority, a Government agency
reporting to the Department for Business, Energy & Industrial Strategy, who are responsible for checking a
company’s financial and operational competency before issuing a Petroleum Exploration and Development
Licence (PEDL).
Once a potential site has been identified, UKOG must secure landowner consent and a land lease to operate on
the land, before the Environment Agency (EA) assess any risk to water and air quality, as well as the arrangements
for waste management.
In parallel with seeking EA permits, discussions with local planning authorities begin. They in turn seek the views
of the local community and statutory consultees. The Health and Safety Executive also regulates and monitors
all onshore oil & gas exploration and production activities.
Company Registration No: 05299925
16
OIL PRICE ENVIRONMENT
Brent crude oil price ended 2017 at $65/barrel (“bbl”), the highest end-of-year price since 2013. In 2018 it proved
to be another year of mixed fortunes for the oil and gas industry, with prices firming up to levels that were more
common pre-2014, before dipping down in November as fears of global oversupply, amid retrenchment in global
economic growth, began to kick in.
As ever, politics played a key role in shaping oil markets in 2018. The backdrop to the June Vienna meeting was
dominated by accelerating fears that Trump's announcement of the US withdrawal from the Joint
Comprehensive Plan of Action (JCPOA) with Iran would result in a much more significant loss of supply than the
initial expectations of up to 500,000 bbl/d. Inevitably, the market began factoring in a steeper fall in Iranian
output in advance of the November 2018 deadline when full sanctions on Iran would kick in again. With the likes
of Venezuela in meltdown, and other Opec producers such as Angola underperforming, the spectre of supply
shortages began rear its head.
All this seemed to set the stage for a substantial release of Opec+ barrels onto the market. According to the
Oxford Institute of Energy Studies (OIES), production numbers communicated to the Opec Secretariat revealed
that Saudi Arabia started to hike its production even before the June 2018 Opec meeting. With more supply
coming on stream, consumers prepared for bearish price signals to re-emerge. Yet events over the summer
proved that if nothing else, the oil market is never predictable.
The Saudis gave advance warning that the Opec increase's impact would not be felt immediately, even as those
who could boost supply did so: UAE production averaged 2.98 MMbopd in July, an increase of 85,000 bopd from
the previous month and 110,000 bopd more than in May. Another Gulf Opec stalwart, Kuwait, saw crude oil
production rise by 80,000 bopd in July to 2.8 MMbopd. Across the border, Iraqi crude oil production hit its highest
level in 13 months in July at 4.46 MMbopd. Outside of Opec, Russia ramped up its crude production in July by as
much as 250,000 bopd compared to May levels.
The Saudi kingdom itself showed evidence in 2018 that its overwhelming focus was on finding the hallowed
'goldilocks' pricing point, where it is neither too high that it stimulates alternative fuels and not so low that it is
uneconomic in terms of production.
Meanwhile, Iran's exports and production began to wind down over the summer, suggesting pressure from US
sanctions was having an effect in advance of the 4 November deadline imposed by the US for sanctions to restart.
Iran exported just over 2 MMbopd in crude oil and condensate in August, according to Bloomberg tanker
tracking, the lowest since March 2016, and down 28% from April of this year.
Over in the US, oil output was moving upwards, hitting 11 MMbopd by late August, putting it in earshot of
becoming the world's leading producer. US supply growth is currently faster than at any point during the 2011–
15 shale revolution, according to Bank of America-Merrill Lynch (BAML) research. It expects US crude oil output
to exceed 12 MMbopd by the end of 2019 this milestone should turn America into the world's largest crude
producer within the next few quarters.
Yet by November, much of the bullish dynamic that had characterised the oil market in 2018 had dissipated. The
speed of the price decline surprised many, notably the bulls. By 23 November, Brent was trading at just $61/bbl,
the lowest level since early December 2017. In month-on-month terms, this represented a 30% fall from the
October peak of more than $86/bbl.
The cause of the price falls was pretty simple: oversupply. Data from the US Energy Information Administration
in the third week of November revealed that US crude inventories had gone up 4.9 MMbbl from the previous
week to 446.9 MMbbl, the highest level since December 2017. Such bearish indicators prompted Saudi Arabia
to intervene. In November, Riyadh announced a 500,000 bopd cut in December supplies in an effort to halt
downside losses.
By year-end market analysts viewed it likely that oil would rebound from its late 2018 weakness. The big sell off
in November was in large part stimulated by a burst of US supply and favourable market reaction to the US
government's issuance of sanctions waivers to eight major importers of Iranian crude.
Company Registration No: 05299925
17
CORPORATE GOVERNANCE
Introduction to governance
The Directors recognise that good corporate governance is a key foundation for the long-term success of the
Group. As the Company is listed on the AIM market of the London Stock Exchange and is subject to the continuing
requirements of the AIM Rules. The Board has therefore adopted the principles set out in the Corporate
Governance Code for small and midsized companies published by the Quoted Companies Alliance (“QCA Code”).
The principles are listed below with an explanation of how the Company applies each principle, and the reasons
for any aspect of non-compliance.
1. Establish a strategy and business model which promote long- term value for shareholders
UK Oil & Gas PLC provides shareholders with a full discussion of corporate strategy within our Annual Report. A
dedicated section explains how we will establish long term shareholder value, as set out on page 1.
The Company is focused around 3 key strategic goals: Increase production and recovery from its existing asset
portfolio, grow the asset portfolio through select onshore development and appraisal projects, actively manage
costs and risks through operational and management control of the entire process of exploring, appraising and
developing its assets.
The Management team actively evaluates projects that simultaneously de-risk the current portfolio and create
long-term shareholder value. Projects are evaluated based on many characteristics to mitigate risk to our current
activities they include but are not limited to alignment with the Company’s core competencies, geography, time
horizon and value creation. Further, a core component of the Company’s activities include an active dialogue
with our legal and legislative advisors to ensure the Company remains up to date on current legislation, policy
and compliance issues.
Key business challenges and how they may be mitigated are detailed in the Strategic Report on page 8.
2. Seek to understand and meet shareholder needs and expectations
UKOG encourages two-way communication with institutional and private investors. The Group’s major
shareholders maintain an active dialogue to and ensure that their views are communicated fully to the Board.
Where voting decisions are not in line with the company’s expectations the Board will engage with those
shareholders to understand and address any issues. The Company Secretary is the main point of contact for such
matters.
The Company seeks out appropriate platforms to communicate to a broad audience its current activities,
strategic goals and broad view of the sector and other related issues. This includes but is not limited to media
interviews, website videos in -person investor presentations and written content.
Communication to all stakeholders is the direct responsibility of the Senior Management team. Managers work
directly with professionals to ensure all inquiries (through established channels for this specific purpose such as
email or phone) are addressed in a timely matter. And that the Company communicates with clarity on its
proprietary internet platforms. Senior management routinely provides interviews to local media, and business
reporters in support of the company’s activities. The Board routinely reviews the Company communication policy
and programmes to ensure the quality communication with all stakeholders.
3. Take into account wider stakeholder and social responsibilities and their implications for long-term success
In all endeavours, the Company gives due consideration to the impact on its neighbours. The Company seeks out
methodologies, processes and expertise in order to address the concerns of the non-investment community. As
such, it actively identifies the bespoke needs of local communities and their respective planners.
For example, the company provides for local hotlines and establishes community liaison groups to address local
questions and concerns.
Company Registration No: 05299925
18
CORPORATE GOVERNANCE (CONTINUED)
UKOG seeks to maintain positive relationships within the communities we operate. As such, UKOG is dedicated
to ensuring:
• Open and honest dialogue;
• Engagement with stakeholders at all stages of development;
• Proactively address local concerns;
• Actively minimise impact on our neighbours; and
• Adherence to a strict health and safety code of conduct
As a responsible OGA approved and EA permitted UK operator, UKOG is committed to utilising industry best
practices and achieving the highest standards of environmental management and safety.
Our operations:
• Continuously assess and monitor environmental impact;
• Promote internally and across our industry best practices for environmental management and safety; and
• Constant attention to maintaining our exemplary track record of safe oil and gas production.
For more information please refer to page 15 and 16 of the Annual Report as well as the Community section
within the Company’s corporate website.
4. Embed effective risk management, considering both opportunities and threats, throughout the organization
Risk Management on page 23 of the Annual Report details risks to the business, how these are mitigated and the
change in the identified risk over the last reporting period.
The Board considers risk to the business at every Board meeting (at least 4 meetings are held each year) and the
risk register is updated at each meeting. The Company formally reviews and documents the principal risks to the
business at least annually.
Both the Board and senior managers are responsible for reviewing and evaluating risk and the Executive Directors
meet at least monthly to review ongoing trading performance, discuss budgets and forecasts and new risks
associated with ongoing trading.
5. Maintain the board as a well- functioning, balanced team led by the chair
Oversight of UKOG is performed by the Company’s Board of Directors. Allen Howard, the Non-Executive
Chairman, is responsible for the running of the Board and Stephen Sanderson, the Chief Executive, has executive
responsibility for running the Group’s business and implementing Group strategy. All Directors receive regular
and timely information regarding the Group’s operational and financial performance.
Relevant information is circulated to the Directors in advance of meetings. In addition, minutes of the meetings
of the Directors of the UK subsidiaries are circulated to the Group Board of Directors. All Directors have direct
access to the advice and services of the Company Secretary and are able to take independent professional advice
in the furtherance of the duties, if necessary, at the company’s expense.
The Board comprises two Executive Directors and two Non-Executive Directors with a mix of significant industry
and business experience within public companies. The Board considers that all Non-Executive Directors bring an
independent judgement to bear. All Directors must commit the required time and attention to thoroughly fulfil
their duties.
The Board has a formal schedule of matters reserved to it and is supported by the Audit, Remuneration,
Nomination and AIM Rules compliance committee. The Schedule of Matters Reserved and Committee Terms of
Reference are available on the Company’s website and can be accessed on the Corporate Governance page of
the website.
Company Registration No: 05299925
19
CORPORATE GOVERNANCE (CONTINUED)
6. Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities
The Nomination Committee will determine the composition of the Board of the Group and appointment of senior
employees. It will develop succession plans as necessary and report to the Directors. Where new Board
appointments are considered the search for candidates is conducted, and appointments are made, on merit,
against objective criteria and with due regard for the benefits of diversity on the Board, including gender.
The Company Secretary supports the Chairman in addressing the training and development needs of Directors.
As a small company, all members of the Board share responsibility for all Board functions. As such the Board will
from time to time engage outside consultants to provide an independent assessment.
7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement
The Board carries out an evaluation of its performance annually, taking into account the Financial Reporting
Council’s Guidance on Board Effectiveness. All Directors undergo a performance evaluation before being
proposed for re- election to ensure that their performance is and continues to be effective, that where
appropriate they maintain their independence and that they are demonstrating continued commitment to the
role.
Details of the Board performance effectiveness process will be included in the Directors’ Remuneration Report
on pages 25 and 26.
8. Promote a corporate culture that is based on ethical values and behaviours
The Group is committed to maintaining and promoting high standards of business integrity. Company values,
which incorporate the principles of corporate social responsibilities (CSR) and sustainability, guide the Group's
relationships with clients, employees and the communities and environment in which we operate. The Group's
approach to sustainability addresses both our environmental and social impacts, supporting the Group's vision
to remain an employer of choice, while meeting client demands for socially responsible partners.
Company policy strictly adheres to local laws and customs while complying with international laws and
regulations. These policies have been integral in the way group companies have done business in the past and
will continue to play a central role in influencing the Group's practice in the future.
The ethical values of UKOG including health, safety, environmental, social and community and relationships, are
set out on pages 7, 15 and 16 of the Annual Report.
9. Maintain governance structures and processes that are fit for purpose and support good decision- making
by the Board
The Company has adopted a model code for directors' dealings and persons discharging managerial
responsibilities appropriate for an AIM company, considering the requirements of the Market Abuse Regulations
"MAR"), and take reasonable steps to ensure compliance is also applicable to the Group's employees (AIM Rule
21 in relation to directors' dealings).
The Corporate Governance Statement details the company’s governance structures, the role and responsibilities
of each director. Details and members of the Audit Committee, Remuneration Committee, Nomination
Committee and AIM Rules compliance committee can be found on from page 18 to page 24.
10. Communicate how the company is governed and is performing by maintaining a dialogue with
shareholders and other relevant stakeholders
The Company encourages two- way communication with both its institutional and private investors and responds
quickly to all queries received. The Chief Executive talks regularly with the Group’s major shareholders and
ensures that their views are communicated fully to the Board.
The Board recognizes the AGM as an important opportunity to meet private shareholders. The Directors are
available to listen to the views of shareholders informally immediately following the AGM.
Company Registration No: 05299925
20
CORPORATE GOVERNANCE (CONTINUED)
To the extent that voting decisions are not in line with expectations, the Board will engage with shareholders to
understand and address any issues.
In addition to the investor relations activities carried out by the Company as set out above, and other relevant
disclosures included on this Investor Relations section of the Company’s website, reports on the activities of
each of the Committees during the year will be set out in the Annual Report on page
While building a strong governance framework we also try to ensure that we take a proportionate approach and
that our processes remain fit for purpose as well as embedded within the culture of our organisation. We
continue to evolve our approach and make ongoing improvements as part of building a successful and
sustainable company.
Board of Directors
The Board consist of a team of experienced multidisciplinary members whom are committed to delivering
shareholder value.
Allen D Howard, Non-Executive Chairman
Allen Howard was Senior Vice President of Houston-based Premier Oilfield Laboratories, having been Chief
Operating Officer of well analysis experts Nutech. Allen also held senior positions with Schlumberger. He holds a
degree in Chemical Engineering from Texas Tech University and an MBA from Mays Business School in Texas.
Stephen Sanderson, Chief Executive
Stephen Sanderson joined UK Oil & Gas PLC in September 2014 was appointed Executive Chairman and Chief
Executive in July 2015 and in August 2018 ceded his role as Executive Chairmen to Allen D Howard as part of
UKOG improvements
in corporate governance. A highly-experienced petroleum geologist, oil industry
veteran and upstream energy business leader, with over 30 years operating experience, Stephen is a proven oil
finder and has been instrumental in the discovery of more than 12 commercial conventional fields, including the
Norwegian Smorbuk-Midgaard field complex.
Stephen held a variety of senior management roles for ARCO (which was acquired by BP in 2000), Wintershall
AG (a subsidiary of German chemical giant BASF) and three junior start-ups. He created and ran successful new
exploration businesses in Africa, Europe and South America. He has significant technical and commercial
expertise in the petroleum systems of Africa, the North Sea, Norway, onshore UK & Europe, South America, the
South Atlantic, Middle East, Asia, India, Australia and the USA. He is a graduate and Associate of the Royal School
of Mines, Imperial College, London, a Fellow of the Geological Society of London and a member of the American
Association of Petroleum Geologists.
Kiran Morzaria, Finance Director
Kiran Morzaria holds a Bachelor of Engineering (Industrial Geology) from the Camborne School of Mines and an
MBA (Finance) from CASS Business School. He has extensive experience in the mineral resource industry working
in both operational and management roles. Mr Morzaria spent the first four years of his career in exploration,
mining and civil engineering. He then obtained his MBA and became the Finance Director of Vatukoula Gold
Mines Plc for seven years. He has served as a director of a number of public companies in both an executive and
non-executive capacity; he is a non-executive director of European Metals Holdings Ltd and the Chief Executive
Officer for Cadence Minerals Plc.
Nicholas Mardon Taylor, Non-Executive Director (appointed 1 August 2018)
Nicholas Mardon Taylor served as the Chief Financial Officer of Hurricane Energy PLC from May 2012 until
January 2016. He has worked in the oil industry for over 35 years, his first involvement in the North Sea being in
the early licensing rounds. He was with Hurricane from 2005 to January 2016 when he was the Group’s first CFO
and was subsequently responsible for the Group’s Environmental Management System.
Company Registration No: 05299925
21
CORPORATE GOVERNANCE (CONTINUED)
Board and committee membership
Member
Allen D Howard
Stephen Sanderson
Kiran Morzaria
Nicholas Mardon Taylor
Board Title
Non-Executive Chairman
Chief Executive
Finance Director
Non-Executive Director
The Board and its committees
Audit Committee Title
Member
Remuneration Committee Title
Member
Chairman
Chairman
Following the general meeting in July 2018, the Board of the Company consists of two Executive Directors and
two Non-Executive Directors, with Nicholas Mardon Taylor considered to be independent under the Financial
Reporting Council’s Corporate Governance Code (April 2016) (“FRC Code”). Allen D Howard who is the Non-
Executive Chairman of the Board is not considered independent under the FRC Code as he holds options in the
Company. However, the Board considers that Allen Howard is independent of management under all other
measures and is able to exercise independence of judgement.
The Board is responsible for formulating, reviewing and approving the Company’s strategy, financial activities
and operating performance. Day-to-day management is devolved to the executive directors, who are charged
with consulting the Board on all significant financial and operational matters. The Board retains ultimate
accountability for governance and is responsible for monitoring the activities of the executive team.
The roles of Chairman and Chief Executive are split in accordance with best practice. The Chairman has the
responsibility of ensuring that the Board discharges its responsibilities. The Chairman is also responsible for the
leadership and effective working of the Board, for setting the Board agenda, and ensuring that Directors receive
accurate, timely and clear information. No one individual has unfettered powers of decision.
The two Executive Directors are the Chief Executive and Finance Director. The Chief Executive has the overall
responsibility for creating, planning, implementing, and integrating the strategic direction of the Company. This
includes responsibility for all components and departments of the business. The Chief Executive ensures that the
organisation's leadership maintains constant awareness of both the external and internal competitive landscape,
opportunities for expansion, customer base, markets, new industry developments and standards.
The Finance Director works alongside the Chief Executive and has overall control and responsibility for all
financial aspects of company strategy. The Finance Director takes overall responsibility of the Company’s
accounting function and ensures that Company’s financial systems are robust, compliant and support current
activities and future growth. The Finance Director will coordinate corporate finance and manage company
policies regarding capital requirements, debt, taxation, equity and acquisitions as appropriate.
The Board met regularly during the year. Tubulated below is the attendance of Board Members during the
reporting period
Board Member
Allen D Howard (Appointed Chairman 1 August 2018)
Stephen Sanderson (Resigned as Chairman 1 August 2018, remains as CEO)
Kiran Morzaria
Nicholas Mardon Taylor (Appointed to the Board 1 August 2018)
Meetings
attended (out of
a total possible)
5/5
5/5
5/5
1/1
Company Registration No: 05299925
22
CORPORATE GOVERNANCE (CONTINUED)
Audit committee
The audit committee consists of Nicholas Mardon Taylor (Chairman) and Allen D Howard. Prior to 1 August the
audit committee consisted of Allen D Howard (Chairman) and Kiran Morzaria. As part of The Company’s adoption
of the QCA Code on 1 August 2018 it was resolved that the Audit Committee will consist of two Non-Executive
Members of the Board. The Audit Committee meets at least twice a year.
Board member
Allen D Howard
Kiran Morzaria (Resigned 31 July 2018)
Nicholas Mardon Taylor (Appointed as Chairman 1 August 2018)
Meetings
attended (out of
a total possible)
2/2
2/2
0/0
The principal duties and responsibilities of the Audit Committee include:
• Overseeing the Group’s financial reporting disclosure process; this includes the choice of appropriate
accounting policies
• Monitoring the Group’s internal financial controls and assess their adequacy
• Reviewing key estimates, judgements and assumptions applied by management in preparing
published financial statements
• Annually assessing the auditor’s independence and objectivity
• Making recommendations in relation to the appointment, re-appointment and removal of the
company’s external auditor
Remuneration Committee
The Remuneration Committee consists of Nicholas Mardon Taylor (Chairman) and Allen D Howard. Prior to 1
August the Remuneration Committee consisted of Allen D Howard (Chairman) and Kiran Morzaria. As part of The
Company’s adoption of the QCA Code on 1 August it was resolved that the Remuneration Committee will consist
of two Non-Executive Members of the Board. The Remuneration Committee meets at least twice a year.
Board Member
Allen D Howard
Kiran Morzaria (Resigned 31 July 2018)
Nicholas Mardon Taylor (Appointed as Chairman 1 August 2018)
Meetings
attended (out of
a total possible)
1/1
1/1
0/0
The principal duties and responsibilities of the Remuneration Committee include:
Setting the remuneration policy for all Executive Directors
•
• Recommending and monitoring the level and structure of remuneration for senior management
• Approving the design of, and determining targets for, performance related pay schemes operated by
the company and approve the total annual payments made under such schemes
• Reviewing the design of all share incentive plans for approval by the board and shareholders
None of the Committee members have any personal financial interest (other than as shareholders and option
holders), conflicts of interest arising from cross-directorships or day-to-day involvement in the running of the
business. No director plays a part in any financial decision about his or her own remuneration.
Internal controls
The Board is responsible for establishing and maintaining the Group’s system of internal controls and reviewing
its effectiveness. The procedures that include financial, operational, health and safety, compliance matters and
risk management (as detailed in the Strategic Report) are reviewed on an ongoing basis.
Company Registration No: 05299925
23
CORPORATE GOVERNANCE (CONTINUED)
The Group’s internal control procedures include the following:
• Board approval for all significant projects, including corporate transactions and major capital projects;
• The Board receives and reviews regular reports covering both the technical progress of projects and the
Group’s financial affairs to facilitate its control;
• There is a comprehensive budgeting and planning system for all items of expenditure with an annual
budget approved by the Board;
• The Group has in place internal control and risk management systems in relation to the Group's financial
reporting process and the Group's process for preparing consolidated accounts. These systems include
policies and procedures to ensure that adequate accounting records are maintained, and transactions
are recorded accurately and fairly to permit the preparation of consolidated financial statements in
accordance with IFRS; and
• The Audit Committee reviews draft annual and interim reports before recommending their publication
to the Board. The Audit Committee discusses with the Finance Director, Financial Controller and external
auditors the significant accounting policies, estimates and judgements applied in preparing these
reports.
The internal control system can only provide reasonable and not absolute assurance against material
misstatement or loss. The Board has considered the need for a separate internal audit function but, bearing in
mind the present size and composition of the Group, does not consider it necessary at the current time.
UK Bribery Act
UKOG has reviewed the appropriate policies and procedures to ensure compliance with the UK Bribery Act. The
Company continues actively to promote good practice throughout the Group and has initiated a rolling
programme of anti-bribery and corruption training for all relevant employees.
Relations with shareholders
Communications with shareholders are considered important by the Directors. The primary contact with
shareholders, investors and analysts is the Chief Executive. Other senior management, however, regularly speak
to investors and analysts during the year.
Company circulars and press releases have also been issued throughout the year for the purpose of keeping
investors informed about the Group’s progress and in accordance with AIM regulations.
The Company also maintains a website (www.ukogplc.com) that is regularly updated and contains a wide range
of information about the Group.
Company Registration No: 05299925
24
DIRECTORS’ REMUNERATION REPORT
This report explains our remuneration policy for Directors and sets out how decisions regarding Directors’ pay
for the period under review have been taken.
Directors’ remuneration policy
The Company’s policy is to maintain levels of remuneration sufficient to attract, motivate and retain senior
executives of the highest calibre who can deliver growth in shareholder value.
Executive Director remuneration currently consists of basic salary, pensions, annual bonus (based on annually
set targets) and long-term incentives (to reward long term performance).
The Company seeks to strike an appropriate balance between fixed and performance-related reward so that the
total remuneration package is structured to align a significant proportion to the achievement of performance
targets, reinforcing a clear link between pay and performance. The performance targets for staff, senior
executives and the Executive Director are each aligned to the key drivers of the business strategy, thereby
creating a strong alignment of interest between staff, Executive Directors and shareholders.
The Remuneration Committee will continue to review the Company’s remuneration policy and make
amendments, as and when necessary, to ensure it remains fit for purpose and continues to drive high levels of
executive performance and remains both affordable and competitive in the market.
Annual statement
As a result of the Groups change from an investment company to an operating company on 1 August 2018, the
Remuneration Committee is currently in the process of developing a revised remuneration plan for the Executive
Directors which will reflect change in responsibilities and roles as a result of the Group’s change in status.
During the year there were no bonuses paid nor were any new long-term incentive plans awarded.
During a review of option awards in April 2018 the Remuneration Committee approved the extension of the
exercise period of 25 million options previously granted to Stephen Sanderson. The independent directors
determined that to ensure the continued alignment of the interests of shareholders and the option holders and
considering the liquidity of the Company's shares it would be beneficial to extend these options rather than allow
their exercise in the current open period and consider the grant of further options to Stephen Sanderson.
As such the independent directors approved the extension of the term these options may be exercised from
31/12/2017 to 31/12/2019. All other terms and conditions relating to these options, including the exercise price,
remained unchanged. Due to publication of the Company's Annual Accounts on 29/03/2018, the Directors were
deemed to be insiders (as defined in the Criminal Justice Act 1993 and the Financial Services and Markets Act
2000) and were prevented from exercising these options under the provisions of UKOG's Share Dealing Code. In
such an event and as noted in the Company's RNS on 09/01/2018, the exercise period is deemed to be extended
for 10 business days following the date on which the option holder ceases to be an insider. This period was
therefore extended to 13/04/2018.
Remit of the Remuneration Committee
The remit of the Remuneration Committee is provided in the Corporate Governance section.
Share price movements during the year
The Group’s share price as at 28 September 2018 was 1.92p per share. The highest price during the year was
7.38p per share and the lowest share price during the year was 1.11p per share
Company Registration No: 05299925
25
DIRECTORS’ REMUNERATION REPORT (CONTINUED)
Current arrangement in financial year (Audited)
Executive Directors are employed under rolling contracts with notice periods of 12 months of less from the
Company or the executive. The Non-Directors are employed under rolling contracts with notice period of three
months, under which they are not entitled to any pension, benefits or bonuses.
The Directors’ emoluments for the year were as follows:
Year ended 30 September 2018
Year ended 30 September 2017
Salary
Pension
£’000
43
£’000
-
Share
Based
Payments
£’000
-
Total
Salary
Pension
£’000
43
£’000
23
£’000
-
Share
Based
Payments
£’000
39
Total
£’000
62
275
108
9
-
435
-
-
-
-
-
309
584
240
-
-
108
100
9
-
-
309
-
744
65
428
-
-
-
-
-
99
79
-
-
217
339
179
-
65
645
Director
Allen D
Howard
Board Title
Non-
Executive
Chairman
Stephen
Chief
Sanderson
Executive
Kiran
Finance
Morzaria
Director
Nicholas
Non-
Mardon
Executive
Director
Taylor*
Jason Berry ** Director
Total
Directors
* Nicholas Mardon Taylor was appointed to the board on 1 August 2018
** Jason Berry resigned on 16 November 2016
As at the 30 September 2018, the outstanding long-term incentives, in the form of options, held by the Directors
who served during the period are set out in the table below.
At 1
October
2017
Issued
during
the year
No.
million
No.
million
lapsed /
exercised
during the
year
No.
million
Share options
Allen Howard
Kiran Morzaria
Stephen
Sanderson
Stephen
Sanderson
Stephen
Sanderson
Stephen
Sanderson
Total
10
20
25
35
25
-
115
-
-
-
-
-
25
25
At 30
September
2018
Exercise
price
Date from
which
exercisable
Expiry date
No.
million
10
20
-
£
0.0115
0.0115
0.0040
25/05/2017
25/05/2017
21/01/2015
24/05/2022
24/05/2022
31/12/2017
35
0.0182
28/09/2016
28/09/2019
25
0.0115
25/05/2017
24/05/2022
25
0.0040
13/04/2018
31/12/2019
-
-
(25)
-
-
-
(25)
115
Nicholas Mardon Taylor
Chairman Remuneration Committee
14 March 2019
Company Registration No: 05299925
26
REPORT OF THE DIRECTORS
The Directors present their annual report together with the audited consolidated financial statements of the
Group for the Year Ended 30 September 2018.
Business review and future developments
A review of the business and future developments are outlined in the Strategic Report.
Principal activity and business review
The principal activity of the Group is exploring for, appraising and developing oil and gas assets.
Results and dividends
Loss on ordinary activities of the Group after taxation amounted to £16,747,000 (2017: Loss £2,268,000). The
Directors do not recommend the payment of a dividend (2017: £nil). The Company has no plans to adopt a
dividend policy in the immediate future.
Principal risks and uncertainties
Information of the principal risks and uncertainties facing the Group is included in the Principal Risks and
Uncertainties section of the Strategic Report.
Financial risk management objectives and policies
The Group’s principal financial instruments are trade receivables, trade payables and cash at bank, and
borrowings. The main purpose of these financial instruments is to fund the Group's operations.
It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments
shall be undertaken. The main risk arising from the Group’s financial instruments is liquidity risk. The Board
reviews and agrees policies for managing this risk and this is summarised below.
Liquidity risk
The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of
equity and its cash resources. Further details of this are provided in the principal accounting policies, headed
'going concern'.
Key Performance Indicators
During the reporting period the Group readmitted as an operating company and adopted Key Performance
Indicators, which are detailed in the Key Performance Indicator section of the Strategic Report.
Going Concern
The Directors note the substantial losses that the Group has made for the year ended 30 September 2018. The
Directors have prepared cash flow forecasts for the period ending 31 March 2020, which take account of the
current cost and operational structure of the Group.
The cost structure of the Group comprises a high proportion of discretionary spend and therefore in the event
that cash flows become constrained, costs can be quickly reduced to enable the Group to operate within its
available funding.
These forecasts demonstrate that the Group has sufficient cash funds available to allow it to continue in business
for a period of at least twelve months from the date of approval of these financial statements. Accordingly, the
financial statements have been prepared on a going concern basis.
Events after the Reporting Period
Events after the Reporting Period are outlined in Note 25 to the Financial Statements.
Corporate governance
Information in relation to the Corporate Governance of the Group is contained within the Corporate Governance
Section of the Strategic Report.
Company Registration No: 05299925
27
REPORT OF THE DIRECTORS (CONTINUED)
Suppliers’ payment policy
The Group’s policy is to agree terms and conditions with suppliers in advance; payment is then made in
accordance with the agreement provided the supplier has met the terms and conditions. Suppliers are typically
paid within 30 days of issue of invoice.
Charitable contributions
During the year the Group made charitable donations amounting to £Nil (2017 - £Nil).
Substantial shareholdings
As at 26 February 2019, the Company had been notified of the following substantial shareholdings in the ordinary
share capital:
Shareholder
Number of Ordinary Shares
Holding %
Interactive Investor Services Nominees Limited
Hargreaves Lansdown (Nominees) Limited
Barclays Direct Investing Nominees Limited
Hargreaves Lansdown (Nominees) Limited
Hargreaves Lansdown (Nominees) Limited
Interactive Investor Services Nominees Limited
HSDL Nominees Limited
HSDL Nominees Limited
HSBC Client Holdings Nominee (UK) Limited
421,839,126
410,897,345
335,123,598
265,625,006
250,827,819
222,659,495
215,696,083
183,730,054
145,213,074
11.27%
10.98%
8.96%
7.10%
6.70%
5.95%
5.76%
4.91%
3.88%
Current Board & Directors Interests
Allen D Howard
Stephen Sanderson
Kiran Morzaria
Nicholas Mardon Taylor
Non-Executive Chairman
Chief Executive Officer
Finance Director
Non-Executive Director
(Appointed 1 August 2018)
The directors hold options over to purchase new ordinary shares in the company, details of which are specified
in the Renumeration Report on page 25 and 26. In addition Kiran Morzaria holds 4,508,178 ordinary shares in
the Company
Auditor
A resolution to reappoint Chapman Davis LLP as auditor will be proposed at the forthcoming Annual General
Meeting (“AGM”).
Annual General Meeting
Notice of the forthcoming Annual General Meeting will be enclosed separately.
Company Registration No: 05299925
28
REPORT OF THE DIRECTORS (CONTINUED)
Statement of Directors’ responsibilities
The Directors are responsible for preparing the annual report and financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare consolidated financial statements for each financial year. The
Directors have prepared the consolidated accounts in accordance with International Financial Reporting
Standards as adopted by the EU ("adopted IFRS"). The consolidated financial statements are required by law to
give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for that period.
In preparing these financial statements, the Directors are required to:
Select suitable accounting policies and then apply them consistently;
•
• Make judgements and estimates that are reasonable and prudent;
•
State whether applicable IFRS’s have been followed, subject to any material departures disclosed and
explained in the financial statements; and
Prepare the consolidated financial statements on the going concern basis unless it is inappropriate to
presume that the Group will continue in business.
The Directors are responsible for keeping adequate accounting records, which disclose with reasonable accuracy
at any time the financial position of the Group and to enable them to ensure that the consolidated financial
statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the
Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information
included on the Company’s website. The Company’s website is maintained in accordance with AIM Rule 26.
Legislation in the United Kingdom governing the preparation and dissemination of consolidated financial
statements may differ from legislation in other jurisdictions.
Statement as to disclosure of information to the auditor
As at the date of this report the serving directors confirm that:
•
•
So far as each Director is aware, there is no relevant audit information of which the Group’s auditors are
unaware, and
They have taken all the steps that they ought to have taken as Directors’ in order to make themselves aware
of any relevant audit information and to establish that the Group’s auditor are aware of that information.
ON BEHALF OF THE BOARD
Stephen Sanderson
Director
14 March 2019
Company Registration No: 05299925
29
REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC
OPINION
We have audited the financial statements of UK Oil & Gas PLC (the ‘Parent Company’) and its subsidiaries (the
‘Group’) for the year ended 30 September 2018 which comprise the consolidated statement of comprehensive
income, the consolidated and company statements of financial position, the consolidated and company’s
statements of changes in equity, the consolidated and company’s statements of cash flows and notes to the
financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the group and parent company
financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the
European Union.
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs
as at 30 September 2018 and of the Group’s losses for the year then ended;
• the Group and Parent Company financial statements have been properly prepared in accordance with IFRSs as
adopted by the European Union;
• the Parent Company financial statements have been properly prepared in accordance with IFRS as adopted by
the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the financial statements section of our report. We are independent of the Group in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical
Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
CONCLUSIONS RELATING TO GOING CONCERN
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to
report to you where:
•
•
the directors’ use of the going concern basis of accounting in the preparation of the financial statements
is not appropriate; or
the directors have not disclosed in the financial statements any identified material uncertainties that
may cast significant doubt about the company’s ability to continue to adopt the going concern basis of
accounting for a period of at least twelve months from the date when the financial statements are
authorised for issue.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit
of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters included those which had the
greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of
the engagement team. These matters were addressed in the context of our audit of the financial statements as
a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is
not a complete list of all risks identified by our audit.
Company Registration No: 05299925
30
REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC
We have determined the matters described below to be the key audit matters to be communicated in our report.
CARRYING VALUE OF EXPLORATION AND EVALUATION ASSETS
The Group’s exploration and evaluation assets (‘E&E assets’) represent the most significant asset on its statement
of financial position totalling £22.6m as at 30 September 2018.
Management and the Board are required to ensure that only costs which meet the IFRS criteria of an asset and
accord with the Group’s accounting policy are capitalised within the E&E asset. In addition, in accordance with
the requirements of IFRS 6 ‘Exploration for and Evaluation of Mineral Resources’ (‘IFRS 6’) Management and the
Board are required to assess whether there is any indication whether there are any indicators of impairment of
the E&E assets.
Given the significance of the E&E assets on the Group’s statement of financial position and the significant
management judgement involved in the determination of the capitalisation of costs and the assessment of the
carrying values of the E&E asset there is an increased risk of material misstatement.
How the Matter was addressed in the Audit
The procedures included, but were not limited to, assessing and evaluating management's assessment of
whether any impairment indicators in accordance with IFRS 6 have been identified across the Group’s exploration
projects, the indicators being:
• Expiring, or imminently expiring, licence and/or exploration rights
• A lack of budgeted or planned exploration and evaluation spend on the licence areas
• Discontinuation of, or a plan to discontinue, exploration activities in the licence areas
• Sufficient data exists to suggest carrying value of exploration and evaluation assets is unlikely be recovered in
full through successful development or sale.
In addition, we obtained the expenditure budget for the 2019/20 year(s) and assessed that there is reasonable
forecasted expenditure to confirm continued exploration spend into the projects indicating that Management
are committed to the projects. We also reviewed AIM announcements and Board meeting minutes for the year
and subsequent to year end for exploration activity to identify any indicators of impairment.
We also assessed the disclosures included in the financial statements.
Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole.
They were not designed to enable us to express an opinion on these matters individually and we express no such
opinion.
MATERIALITY
In planning and performing our audit we applied the concept of materiality. An item is considered material if it
could reasonably be expected to change the economic decisions of a user of the financial statements. We used
the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified.
Based on professional judgement, we determined overall materiality for the financial statements as a whole to
be £475,000, based on a 1% percentage consideration of the total assets and 10% consideration of an adjusted
loss for the year.
OTHER INFORMATION
The Directors are responsible for the other information. The other information comprises the information
included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion
on the financial statements does not cover the other information and, except to the extent otherwise explicitly
stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit or otherwise appears to be materially misstated.
Company Registration No: 05299925
31
REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC
If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have nothing to report in this regard.
OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ report have been prepared in accordance with applicable legal
requirements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
In the light of the knowledge and understanding of the Group and the Parent Company and its environment
obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the
Directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit
have not been received from branches not visited by us; or
• the Parent Company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
RESPONSIBILITIES OF DIRECTORS
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent
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
Parent Company or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in
accordance with ISAs (UK) or ISA IAASB 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 Financial
Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor’s report.
Company Registration No: 05299925
32
REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF UK OIL & GAS PLC
USE OF OUR REPORT
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Keith Fulton
(Senior Statutory Auditor)
For and on behalf of Chapman Davis LLP, Statutory Auditor
London
Chapman Davis LLP is a limited liability partnership registered in England and Wales (with registered number
OC306037).
Date: 14 March 2019
Company Registration No: 05299925
33
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR YEAR ENDED 30 SEPTEMBER 2018
Revenue
Cost of sales
Gross profit/(loss)
Operating expenses
Administrative expenses
Foreign exchange gains/(losses)
Share based payments expense
Notes
30 Sep 2018
£’000
30 Sep 2017
£’000
4
21
225
(97)
128
207
(254)
(47)
(3,244)
12
(655)
(1,859)
(15)
(474)
Operating (loss)
5
(3,759)
(2,395)
Gain on settlements of financial instruments
Loan Interest received
Convertible loan financing fees
Share of associate loss
Decommissioning Expense
Exploration Write-off
(Loss) before taxation
Taxation
Retained (Loss) for the year
Retained (loss) attributable to;
Equity holders of the Parent
Non Controlling Interests
-
198
(510)
(419)
(697)
(11,560)
18
12
19
9
204
-
-
(77)
-
-
(16,747)
(2,268)
7
-
-
(16,747)
(2,268)
(16,747)
-
(16,747)
(2,268)
-
(2,268)
There are no other comprehensive income or expenses during the two reported periods to disclose.
(Loss) per share
Basic and diluted
Pence
Pence
8
(0.41)
(0.08)
The accompanying accounting policies and notes form an integral part of these financial statements.
Company Registration No: 05299925
34
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2018
Notes
2018
£’000
2017
£’000
Assets
Non-current assets
Exploration & evaluation assets
Decommissioning Asset
Goodwill
Oil & Gas properties
Property, Plant & Equipment
Investment in associate
Total non-current assets
Current assets
Inventory
Trade and other receivables
Cash and cash equivalents
Total current assets
Total Assets
Current liabilities
Trade and other payables
Borrowings
Total current liabilities
Non-current Liabilities
Provisions
Total non-current liabilities
Total liabilities
Net Assets
Equity
Share capital
Share premium account
Share based payment reserve
Accumulated losses
Non-controlling interest
Total shareholders' equity
9
9
9
10
10
12
14
15
16
22,644
362
6,290
1,449
260
-
15,110
-
-
1,428
170
5,003
31,005
21,711
5
1,215
12,427
13,647
4
3,787
1,748
5,539
44,652
27,250
17
18
(2,990)
(3,533)
(3,725)
-
(6,523)
(3,725)
19
(1,341)
(1,341)
(359)
(359)
20
(7,864)
(4,084)
36,788
23,166
12,141
75,799
1,590
(53,393)
36,137
651
11,938
46,939
1,172
(36,883)
23,166
-
36,788
23,166
These financial statements were approved by the Board of Directors on 14 March 2019 and are signed on
its behalf by:
Stephen Sanderson
Director
Kiran Morzaria
Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Company Registration No: 05299925
35
COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2018
Assets
Non-current assets
Exploration & evaluation assets
Investment in subsidiary companies
Investment in associate
Total non-current assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total current assets
Total Assets
Current liabilities
Trade and other payables
Total Current Liabilities
Total liabilities
Net Assets
Shareholders’ Equity
Share capital
Share premium account
Share Based Payment Reserve
Accumulated losses
Total shareholders' equity
Notes
2018
£’000
2017
£’000
9
11
12
15
16
17
20
1,400
12,785
-
1,318
5,019
5,003
14,185
11,340
23,612
9,160
9,735
1,714
32,772
11,449
46,957
22,789
(663)
(663)
(663)
(364)
(364)
(364)
46,294
22,425
12,141
75,799
1,590
(43,236)
11,938
46,939
1,172
(37,624)
46,294
22,425
These financial statements were approved by the Board of Directors on 14 March 2019 and are signed on its
behalf by:
Stephen Sanderson
Director
Kiran Morzaria
Director
The accompanying accounting policies and notes form an integral part of these financial statements.
Company Registration No: 05299925
36
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2018
Balance at 1 October 2016
Loss for the year
Total comprehensive income
Issue of shares
Cost of share issue
Share option exercised
Share option expired
Share based payments
Total transactions with owners
Balance at 30 September 2017
Loss for the year
Total comprehensive income
Issue of shares
Cost of share issue
Share option exercised
Share option expired
Share based payments
Share
capital
£’000
11,842
-
Share
premium
£’000
39,644
-
96
-
-
-
-
96
11,938
-
-
203
-
-
-
-
7,631
(336)
-
-
-
7,295
46,939
-
-
29,627
(767)
-
-
-
Total transactions with owners
Non Controlling Interest on
acquisition of subsidiary
203
28,860
-
-
Balance at 30 September 2018
12,141
75,799
Share based
payment
reserve
Accumulated
losses
£’000
(35,141)
(2,268)
(2,268)
-
-
316
210
-
526
(36,883)
(16,747)
(16,747)
-
-
105
132
-
237
-
Total
£’000
17,569
(2,268)
(2,268)
7,727
(336)
-
-
474
7,865
23,166
(16,747)
(16,747)
29,830
(767)
-
-
655
29,718
-
(53,393)
36,137
Non
Controlling
Interests
£’000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
651
651
Total
£’000
17,569
(2,268)
(2,268)
7,727
(336)
-
-
474
7,865
23,166
(16,747)
(16,747)
29,830
(767)
-
-
655
29,718
651
36,788
£’000
1,224
-
-
-
(316)
(210)
474
(52)
1,172
-
-
-
-
(105)
(132)
655
418
-
1,590
Company Registration No: 05299925
37
COMPANY STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 SEPTEMBER 2018
Balance at 1 October 2016
Loss for the year
Total comprehensive income
Issue of shares
Cost of share issue
Share option exercised
Share option expired
Share based payments
Total transactions with owners
Balance at 30 September 2017
Loss for the year
Total comprehensive income
Issue of shares
Cost of share issue
Share option exercised
Share option expired
Share based payments
Total transactions with owners
Balance at 30 September 2018
Share capital
£’000
11,842
-
-
96
-
-
-
-
96
11,938
-
-
203
-
-
-
-
Share
premium
£’000
39,644
-
-
7,631
(336)
-
-
-
7,295
46,939
-
-
29,627
(767)
-
-
-
203
12,141
28,860
75,799
Share based
payment
reserve
Accumulated
losses
£’000
1,224
-
-
-
-
(316)
(210)
474
(52)
1,172
-
-
-
-
(105)
(132)
655
418
1,590
£’000
(36,080)
(2,070)
(2,070)
-
-
316
210
-
526
(37,624)
(5,849)
(5,849)
-
-
105
132
-
237
(43,236)
Total
£’000
16,630
(2,070)
(2,070)
7,727
(336)
-
-
474
7,865
22,425
(5,849)
(5,849)
29,830
(767)
-
-
655
29,718
46,294
Company Registration No: 05299925
38
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEAR ENDED 30 SEPTEMBER 2018
Cash flows from operating activities
Loss from operations
Depletion & impairment
Share based payment charge
(Increase) in inventories
(Increase) / decrease in trade & other receivables
Increase / (decrease) in trade & other payables
Net cash (outflow) / inflow from operating activities
Cash flows from investing activities
Expenditures on exploration & evaluation assets
Expenditures on oil & gas properties
Expenditures on plant, property & equipment
Payments for acquisition of associate
Net cash acquired on acquisition of subsidiary
Proceeds from sale of Available for Sale Financial Assets
Net cash (outflow) from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Share issue costs
Proceeds from convertible loan financing
Convertible loan financing fees
Net cash inflow from financing activities
2018
£’000
(3,759)
285
655
(1)
(1,702)
(2,901)
(7,423)
(5,237)
(36)
(139)
-
1,885
-
(3,527)
12,906
(767)
10,000
(510)
21,629
2017
£’000
(2,395)
74
474
(1)
(897)
3,134
389
(8,723)
(2)
-
(55)
-
572
(8,208)
7,459
(336)
-
-
7,123
Net change in cash and cash equivalents
10,679
(696)
Cash and cash equivalents at beginning of the period
1,748
2,444
Cash and cash equivalents at end of the period
12,427
1,748
Company Registration No: 05299925
39
COMPANY STATEMENT OF CASH FLOW
FOR THE YEAR ENDED 30 SEPTEMBER 2018
Cash flows from operating activities
(Loss) from operations
Share based payment charge
Decrease in trade & other receivables
Increase in trade & other payables
Net cash (outflow) from operating activities
Cash flows from investing activities
Expenditures on exploration & evaluation assets
Loan advanced to subsidiary
Payments for acquisition of associate
Payments on acquisition of subsidiary
Proceeds from sale of Available for Sale Financial Instrument
Net cash (outflow) from investing activities
Cash flows from financing activities
Proceeds from issue of share capital
Share issue costs
Proceeds from convertible loan financing
Convertible loan financing fees
Net cash inflow from financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
2018
£’000
(3,694)
655
27
299
(2,713)
(517)
(9,738)
-
(1,215)
-
(11,470)
12,906
(767)
10,000
(510)
21,629
7,446
1,714
9,160
2017
£’000
(2,197)
474
128
65
(1,530)
(576)
(6,191)
(55)
-
572
(6,250)
7,459
(336)
-
-
7,123
(657)
2,371
1,714
Company Registration No: 05299925
40
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
Basis of Preparation
UK Oil & Gas PLC is a company incorporated in the United Kingdom. The Company's shares are listed on the AIM
market of the London Stock Exchange. On 31 July 2018, the Company changed its name from UK Oil & Gas
Investments PLC to UK Oil & Gas PLC by way of a statutory notice of change filed at Companies House
The Consolidated Financial Statements are for the year ended 30 September 2018 and have been prepared under
the historical cost convention and in accordance with International Financial Reporting Standards as adopted by
the EU ("adopted IFRS"). These Consolidated Financial Statements (the "Financial Statements") have been
prepared and approved by the Directors on 14 March 2019 and signed on their behalf by Stephen Sanderson and
Kiran Morzaria.
The accounting policies have been applied consistently throughout the preparation of these Financial
Statements, and the financial report is presented in Pound Sterling (£) and all values are rounded to the nearest
thousand pounds (£‘000) unless otherwise stated.
New standards, amendments and interpretations adopted by the Company
No new and/or revised Standards and Interpretations have been required to be adopted, and/or are applicable
in the current year by/to the Group and/or Company, as standards, amendments and interpretations which are
effective for the financial year beginning on 1 October 2017 are not material to the Company.
New standards, amendments and interpretations not yet adopted
At the date of authorisation of these financial statements, the following IFRSs, IASs and Interpretations were in
issue but not yet effective. Their adoption is not expected to have a material effect on the financial statements
unless otherwise indicated:
•
•
•
•
IFRS 9 Financial Instruments (effective date 1 January 2018);
IFRS 15 Revenue from Contracts with Customers (effective date 1 January 2018);
IFRS 16 Leases (effective date 1 January 2019);
IFRS 17 Insurance Contracts (effective date 1 January 2021).
Principles of consolidation and equity accounting
(i) Subsidiaries
Subsidiaries are all entities (including structured entities) over which the group has control. The group controls
an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity
and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are
fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the
date that control ceases.
The acquisition method of accounting is used to account for business combinations by the group.
Intercompany transactions, balances and unrealised gains on transactions between group companies are
eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of
the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure
consistency with the policies adopted by the group. Non-controlling interests in the results and equity of
subsidiaries are shown separately in the consolidated statement of profit or loss, statement of comprehensive
income, statement of changes in equity and balance sheet respectively.
(ii) Associates
Associates are all entities over which the group has significant influence but not control or joint control. This is
generally the case where the group holds between 20% and 50% of the voting rights. Investments in associates
are accounted for using the equity method of accounting (see (iii) below), after initially being recognised at cost.
Company Registration No: 05299925
41
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(iii) Equity method
Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter
to recognise the group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the
group’s share of movements in other comprehensive income of the investee in other comprehensive income.
Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying
amount of the investment.
When the group’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity,
including any other unsecured long-term receivables, the group does not recognise further losses, unless it has
incurred obligations or made payments on behalf of the other entity.
Unrealised gains on transactions between the group and its associates and joint ventures are eliminated to the
extent of the group’s interest in these entities. Unrealised losses are also eliminated unless the transaction
provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees
have been changed where necessary to ensure consistency with the policies adopted by the group.
The carrying amount of equity-accounted investments is tested for impairment at each reporting date.
(iv) Business combinations
The acquisition method of accounting is used to account for all business combinations, regardless of whether
equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary
comprises the:
•
•
•
•
•
fair values of the assets transferred
liabilities incurred to the former owners of the acquired business
equity interests issued by the group
fair value of any asset or liability resulting from a contingent consideration arrangement, and
fair value of any pre-existing equity interest in the subsidiary.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with
limited exceptions, measured initially at their fair values at the acquisition date. The group recognises any non-
controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-
controlling interest’s proportionate share of the acquired entity’s net identifiable assets.
Acquisition-related costs are expensed as incurred.
The excess of the:
•
•
•
consideration transferred,
amount of any non-controlling interest in the acquired entity, and
acquisition-date fair value of any previous equity interest in the acquired entity over the fair value of
the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value
of the net identifiable assets of the business acquired, the difference is recognised directly in profit or
loss as a bargain purchase.
Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted
to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing
rate, being the rate at which a similar borrowing could be obtained from an independent financier under
comparable terms and conditions.
Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial
liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.
If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously
held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising
from such remeasurement are recognised in profit or loss.
Company Registration No: 05299925
42
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Revenue
Revenue is measured by reference to the fair value of consideration received or receivable by the Group for
services provided, excluding VAT and trade discounts. Revenue is credited to the Income Statement in the period
it is deemed to be earned.
Revenue from the sale of oil and petroleum products is recognised when the significant risks and rewards of
ownership have been transferred, which is considered to occur when title passes to the customer. This generally
occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism.
Revenue from the production of oil, in which the Group has an interest with other producers, is recognised based
on the Group’s working interest and the terms of the relevant production sharing contracts. Differences between
oil lifted and sold and the Group’s share of production are not significant.
Finance Income and Costs
Finance income and costs are reported on an accruals basis.
Oil & Gas properties (“OGP”), Exploration & Evaluation assets
Oil and natural gas exploration, evaluation and development expenditure is accounted for using the successful
efforts method of accounting.
(i) Pre-licence costs
Pre-licence costs are expensed in the period in which they are incurred.
(ii) Licence and property acquisition costs
Exploration licence and leasehold property acquisition costs are capitalised in intangible assets. Licence costs
paid in connection with a right to explore in an existing exploration area are capitalised and amortised over the
term of the permit.
Licence and property acquisition costs are reviewed at each reporting date to confirm that there is no indication
that the carrying amount exceeds the recoverable amount. This review includes confirming that exploration
drilling is still under way or firmly planned, or that it has been determined, or work is under way to determine
that the discovery is economically viable based on a range of technical and commercial considerations and that
sufficient progress is being made on establishing development plans and timing.
If no future activity is planned or the licence has been relinquished or has expired, the carrying value of the
licence and property acquisition costs are written off through the statement of profit or loss and other
comprehensive income. Upon recognition of proved reserves and internal approval for development, the
relevant expenditure is transferred to oil and gas properties.
(iii) Exploration and evaluation costs
Exploration and evaluation activity involves the search for hydrocarbon resources, the determination of technical
feasibility and the assessment of commercial viability of an identified resource.
Once the legal right to explore has been acquired, costs directly associated with an exploration well are
capitalised as exploration and evaluation intangible assets until the drilling of the well is complete and the results
have been evaluated. These costs include directly attributable employee remuneration, materials and fuel used,
rig costs and payments made to contractors.
If no potentially commercial hydrocarbons are discovered, the exploration asset is written off through the
statement of profit or loss and other comprehensive income as a dry hole. If extractable hydrocarbons are found
and, subject to further appraisal activity (e.g., the drilling of additional wells), it is probable that they can be
commercially developed, the costs continue to be carried as an intangible asset while sufficient/continued
progress is made in assessing the commerciality of the hydrocarbons.
Company Registration No: 05299925
43
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Costs directly associated with appraisal activity undertaken to determine the size, characteristics and commercial
potential of a reservoir following the
initial discovery of hydrocarbons, including the costs of appraisal wells where hydrocarbons were not found, are
initially capitalised as an intangible asset.
All such capitalised costs are subject to technical, commercial and management review, as well as review for
indicators of impairment at least once a year. This is to confirm the continued intent to develop or otherwise
extract value from the discovery. When this is no longer the case, the costs are written off through the statement
of profit or loss and other comprehensive income.
When proved reserves of oil and natural gas are identified and development is sanctioned by management, the
relevant capitalised expenditure is first assessed for impairment and (if required) any impairment loss is
recognised, then the remaining balance is transferred to oil and gas properties. Other than licence costs, no
amortisation is charged during the exploration and evaluation phase.
(iv) Development costs
Expenditure on the construction, installation or completion of infrastructure facilities such as platforms, pipelines
and the drilling of development wells, including unsuccessful development or delineation wells, is capitalised
within oil and gas properties.
Oil and gas properties and other property, plant and equipment
(i) Initial recognition
Oil and gas properties and other property, plant and equipment are stated at cost, less accumulated depreciation
and accumulated impairment losses.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to
bringing the asset into operation, the initial estimate of the decommissioning obligation and, for qualifying assets
(where relevant), borrowing costs. The purchase price or construction cost is the aggregate amount paid and the
fair value of any other consideration given to acquire the asset. The capitalised value of a finance lease is also
included within property, plant and equipment.
When a development project moves
the capitalisation of certain
construction/development costs ceases, and costs are either regarded as part of the cost of inventory or
expensed, except for costs which qualify for capitalisation relating to oil and gas property asset additions,
improvements or new developments.
the production stage,
into
(ii) Depreciation/amortisation
Oil and gas properties are depreciated/amortised on a unit-of-production basis over the total proved developed
and undeveloped reserves of the field concerned, except in the case of assets whose useful life is shorter than
the lifetime of the field, in which case the straight-line method is applied. Rights and concessions are depleted
on the unit-of-production basis over the total proved developed and undeveloped reserves of the relevant area.
The unit-of-production rate calculation for the depreciation/amortisation of field development costs takes into
account expenditures incurred to date, together with sanctioned future development expenditure.
Other property, plant and equipment are generally depreciated on a straight-line basis over their estimated
useful lives, which is between 2 and 10 years depending on the type of asset, and major inspection costs are
amortised over three to five years, which represents the estimated period before the next planned major
inspection. Property, plant and equipment held under finance leases are depreciated over the shorter of lease
term and estimated useful life. An item of property, plant and equipment and any significant part initially
recognised is derecognised upon disposal or when no future economic benefits are expected from its use or
disposal.
Company Registration No: 05299925
44
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal
proceeds and the carrying amount of the asset) is included in the statement of profit or loss and other
comprehensive income when the asset is derecognised. The asset’s residual values, useful lives and methods of
depreciation/amortisation are reviewed at each reporting period and adjusted prospectively, if appropriate.
(iii) Major maintenance, inspection and repairs
Expenditure on major maintenance refits, inspections or repairs comprises the cost of replacement assets or
parts of assets, inspection costs and overhaul costs. Where an asset, or part of an asset that was separately
depreciated and is now written off is replaced and it is probable that future economic benefits associated with
the item will flow to the Group, the expenditure is capitalised.
Where part of the asset replaced was not separately considered as a component and therefore not depreciated
separately, the replacement value is used to estimate the carrying amount of the replaced asset(s) and is
immediately written off. Inspection costs associated with major maintenance programmes are capitalised and
amortised over the period to the next inspection. All other day-to-day repairs and maintenance costs are
expensed as incurred.
Provision for rehabilitation / Decommissioning Liability
The Group recognises a decommissioning liability where it has a present legal or constructive obligation as a
result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and
a reliable estimate of the amount of obligation can be made.
The obligation generally arises when the asset is installed, or the ground/environment is disturbed at the field
location. When the liability is initially recognised, the present value of the estimated costs is capitalised by
increasing the carrying amount of the related oil and gas assets to the extent that it was incurred by the
development/construction of the field. Any decommissioning obligations that arise through the production of
inventory are expensed when the inventory item is recognised in cost of goods sold.
Changes in the estimated timing or cost of decommissioning are dealt with prospectively by recording an
adjustment to the provision and a corresponding adjustment to oil and gas assets.
Any reduction in the decommissioning liability and, therefore, any deduction from the asset to which it relates,
may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken
immediately to the statement of profit or loss and other comprehensive income.
If the change in estimate results in an increase in the decommissioning liability and, therefore, an addition to the
carrying value of the asset, the Group considers whether this is an indication of impairment of the asset as a
whole, and if so, tests for impairment. If, for mature fields, the estimate for the revised value of oil and gas assets
net of decommissioning provisions exceeds the recoverable value, that portion of the increase is charged directly
to expense. Over time, the discounted liability is increased for the change in present value based on the discount
rate that reflects current market assessments and the risks specific to the liability.
The periodic unwinding of the discount is recognised in the statement of profit or loss and other comprehensive
income as a finance cost. The Company recognises neither the deferred tax asset in respect of the temporary
difference on the decommissioning liability nor the corresponding deferred tax liability in respect of the
temporary difference on a decommissioning asset.
Taxation
Current tax is the tax currently payable based on taxable profit for the year.
Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is
generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases.
However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an
asset or liability unless the related transaction is a business combination or affects tax or accounting profit.
Company Registration No: 05299925
45
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided
if reversal of these temporary differences can be controlled by the Company and it is probable that reversal will
not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income
tax credits to the Company are assessed for recognition as deferred tax assets.
Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent
that it is probable that the underlying deductible temporary differences will be able to be offset against future
taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to
apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance
sheet date.
Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income
statement, except where they relate to items that are charged or credited directly to equity in which case the
related deferred tax is also charged or credited directly to equity.
Financial Assets
Financial assets are divided into the following categories: loans and receivables and available-for-sale financial
assets. Financial assets are assigned to the different categories by management on initial recognition, depending
on the purpose for which they were acquired, and are recognised when the Group becomes party to contractual
arrangements. Both loans and receivables and available for sale financial assets are initially recorded at fair
value.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. Trade, most other receivables and cash and cash equivalents fall into this category
of financial assets. Loans and receivables are measured subsequent to initial recognition at amortised cost using
the effective interest method, less provision for impairment. Any change in their value through impairment or
reversal of impairment is recognised in the income statement.
Provision against trade receivables is made when there is objective evidence that the Group will not be able to
collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write-
down is determined as the difference between the asset's carrying amount and the present value of estimated
future cash flows.
A financial asset is derecognised only where the contractual rights to the cash flows from the asset expire or the
financial asset is transferred, and that transfer qualifies for derecognition. A financial asset is transferred if the
contractual rights to receive the cash flows of the asset have been transferred or the Group retains the
contractual rights to receive the cash flows of the asset but assumes a contractual obligation to pay the cash
flows to one or more recipients.
A financial asset that is transferred qualifies for derecognition if the Group transfers substantially all the risks and
rewards of ownership of the asset, or if the Group neither retains nor transfers substantially all the risks and
rewards of ownership but does transfer control of that asset.
Derivative instruments are recorded at cost and adjust for their market value as applicable. They are assessed
for any equity and debt component which is subsequently accounted for in accordance with IFRS’s.
Financial Liabilities
Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group
becomes a party to the contractual provisions of the instrument.
All financial liabilities initially recognised at fair value less transaction costs and thereafter carried at amortised
cost using the effective interest method, with interest-related charges recognised as an expense in finance cost
in the income statement. A financial liability is derecognised only when the obligation is extinguished, that is,
when the obligation is discharged or cancelled or expires.
Company Registration No: 05299925
46
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Impairment of assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested
annually for impairment, or more frequently if events or changes in circumstances indicate that they might be
impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For
the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets
(cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for
possible reversal of the impairment at the end of each reporting period.
Goodwill
Goodwill is measured as described in Business Combinations. Goodwill on acquisitions of subsidiaries is included
in intangible assets. Goodwill is not amortised but it is tested for impairment annually, or more frequently if
events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated
impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating
to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to
those cash-generating units or groups of cash-generating units that are expected to benefit from the business
combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which
goodwill is monitored for internal management purposes, being the operating segments (note 2).
Inventories
Inventories are stated at the lower of cost and net realisable value. The cost of materials is the purchase cost,
determined on first-in, first-out basis. The cost of crude oil and refined products is the purchase cost, the cost of
refining, including the appropriate proportion of depreciation, depletion and amortisation and overheads based
on normal operating capacity, determined on a weighted average basis. The net realisable value of crude oil and
refined products is based on the estimated selling price in the ordinary course of business, less the estimated
costs of completion and the estimated costs necessary to make the sale.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly
liquid investments that are readily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value.
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 (options) of the Company. The fair
value of the employee services received in exchange for the grant of the 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;
Excluding the impact of any service and non-market performance vesting conditions (for example,
profitability or sales growth targets, or 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 vesting 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.
Company Registration No: 05299925
47
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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 period and grant date.
At the end of each reporting period, the entity 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 profit or loss, with a corresponding adjustment to equity.
When the 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.
Equity
Equity comprises the following:
•
•
•
•
"Share capital" representing the nominal value of equity shares.
"Share premium" representing the excess over nominal value of the fair value of consideration received
for equity shares, net of expenses of the share issue.
“Share based payment reserve” represents the value of equity benefits provided to employees and
directors as part of their remuneration and provided to consultants and advisors hired by the Group
from time to time as part of the consideration paid.
"Retained earnings" represents retained profits and (losses).
Foreign Currencies
Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction.
Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance
sheet date. Non-monetary items that are measured at historical cost in a foreign currency are translated at the
exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.
Any exchange differences arising on the settlement of monetary items or on translating monetary items at rates
different from those at which they were initially recorded are recognised in the profit or loss in the period in
which they arise. Exchange differences on non-monetary items are recognised in other comprehensive income
to the extent that they relate to a gain or loss on that non-monetary item taken to other comprehensive income,
otherwise such gains and losses are recognised in the income statement.
The Group and Company's functional currency and presentational currency is Sterling.
Significant accounting judgements, estimates and assumptions
The preparation of the Group’s consolidated financial statements requires management to make judgements,
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and
the accompanying disclosures, and the disclosure of contingent liabilities at the date of the consolidated financial
statements.
Estimates and assumptions are continuously evaluated and are based on management’s experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment
to the carrying amount of assets or liabilities affected in future periods.
In particular, the Group has identified the following areas where significant judgements, estimates and
assumptions are required. Further information on each of these areas and how they impact the various
accounting policies are described below and also in the relevant notes to the financial statements.
Changes in estimates are accounted for prospectively.
(i) Judgements
In the process of applying the Group’s accounting policies, management has made the following judgements,
which have the most significant effect on the amounts recognised in the consolidated financial statements.
Company Registration No: 05299925
48
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(i.a) Contingencies
Contingent liabilities may arise from the ordinary course of business in relation to claims against the Group,
including legal, contractor, land access and other claims. By their nature, contingencies will be resolved only
when one or more uncertain future events occur or fail to occur. The assessment of the existence, and potential
quantum, of contingencies inherently involves the exercise of significant judgement and the use of estimates
regarding the outcome of future events.
(i.b) Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date
that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within
the next financial year, are described below. The Group based its assumptions and estimates on parameters
available when the consolidated financial statements were prepared. Existing circumstances and assumptions
about future developments, however, may change due to market change or circumstances arising beyond the
control of the Group. Such changes are reflected in the assumptions when they occur.
(i.c) Hydrocarbon reserve and resource estimates
Hydrocarbon reserves are estimates of the amount of hydrocarbons that can be economically and legally
extracted from the Group’s oil and gas properties. The Group estimates its reserves and resources based on
information compiled by appropriately qualified persons relating to the geological and technical data on the size,
depth, shape and grade of the hydrocarbon body and suitable production techniques and recovery rates.
Commercial reserves are determined using estimates of oil and gas in place, recovery factors and future
commodity prices, the latter having an impact on the total amount of recoverable reserves and the proportion
of the gross reserves which are attributable to the host government under the terms of the Production-Sharing
Agreements.
Future development costs are estimated using assumptions as to the number of wells required to produce the
commercial reserves, the cost of such wells and associated production facilities, and other capital costs. The
current long-term Brent oil price assumption used in the estimation of reserves is US$70/bbl. The carrying
amount of oil and gas development and production assets at 30 September 2018 is shown in Note 9.
The Group estimates and reports hydrocarbon reserves in line with the principles contained in the SPE Petroleum
Resources Management Reporting System (PRMS) framework. As the economic assumptions used may change
and as additional geological information is obtained during the operation of a field, estimates of recoverable
reserves may change. Such changes may impact the Group’s reported financial position and results, which
include:
•
The carrying value of exploration and evaluation assets; oil and gas properties; property, plant and
equipment; and goodwill may be affected due to changes in estimated future cash flows
•
• Depreciation and amortisation charges in the statement of profit or loss and other comprehensive
income may change where such charges are determined using the Units of Production (UOP) method,
or where the useful life of the related assets change
Provisions for decommissioning may require revision — where changes to the reserve estimates affect
expectations about when such activities will occur and the associated cost of these activities
The recognition and carrying value of deferred tax assets may change due to changes in the judgements
regarding the existence of such assets and in estimates of the likely recovery of such assets
•
(i.d) Exploration and evaluation expenditures
The application of the Group’s accounting policy for exploration and evaluation expenditure requires judgement
to determine whether future economic benefits are likely, from future either exploitation or sale, or whether
activities have not reached a stage which permits a reasonable assessment of the existence of reserves.
The determination of reserves and resources is itself an estimation process that involves varying degrees of
uncertainty depending on how the resources are classified. These estimates directly impact when the Group
defers exploration and evaluation expenditure. The deferral policy requires management to make certain
estimates and assumptions about future events and circumstances, in particular, whether an economically viable
extraction operation can be established.
Company Registration No: 05299925
49
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Any such estimates and assumptions may change as new information becomes available. If, after expenditure is
capitalised, information becomes available suggesting that the recovery of the expenditure is unlikely, the
relevant capitalised amount is written off in the statement of profit or loss and other comprehensive income in
the period when the new information becomes available.
(i.e) Units of production (UOP) depreciation of oil and gas assets
Oil and gas properties are depreciated using the UOP method over total proved developed and undeveloped
hydrocarbon reserves. This results in a depreciation/amortisation charge proportional to the depletion of the
anticipated remaining production from the field.
(i.f) Units of production (UOP) depreciation of oil and gas assets
The life of each item, which is assessed at least annually, has regard to both its physical life limitations and present
assessments of economically recoverable reserves of the field at which the asset is located. These calculations
require the use of estimates and assumptions, including the amount of recoverable reserves and estimates of
future capital expenditure.
The calculation of the UOP rate of depreciation/amortisation will be impacted to the extent that actual
production in the future is different from current forecast production based on total proved reserves, or future
capital expenditure estimates change. Changes to proven reserves could arise due to changes in the factors or
assumptions used in estimating reserves, including:
•
The effect on proven reserves of differences between actual commodity prices and commodity price
assumptions
• Unforeseen operational issues
(i.g) Recoverability of oil and gas assets
The Group assesses each asset or cash generating unit (CGU) (excluding goodwill, which is assessed annually
regardless of indicators) each reporting period to determine whether any indication of impairment exists. Where
an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to
be the higher of the fair value less costs of disposal (FVLCD) and value in use (VIU).
The assessments require the use of estimates and assumptions such as long-term oil prices (considering current
and historical prices, price trends and related factors), discount rates, operating costs, future capital
requirements, decommissioning costs, exploration potential, reserves (see (a) Hydrocarbon reserves and
resource estimates above) and operating performance (which includes production and sales volumes). These
estimates and assumptions are subject to risk and uncertainty. Therefore, there is a possibility that changes in
circumstances will impact these projections, which may impact the recoverable amount of assets and/or CGUs.
Information on how fair value is determined by the Group follows.
(i.h) Decommissioning costs
Decommissioning costs will be incurred by the Group at the end of the operating life of some of the Group’s
facilities and properties. The Group assesses its decommissioning provision at each reporting date. The ultimate
decommissioning costs are uncertain and cost estimates can vary in response to many factors, including changes
to relevant legal requirements, the emergence of new restoration techniques or experience at other production
sites.
The expected timing, extent and amount of expenditure may also change — for example, in response to changes
in reserves or changes in laws and regulations or their interpretation.
Therefore, significant estimates and assumptions are made in determining the provision for decommissioning.
As a result, there could be significant adjustments to the provisions established which would affect future
financial results.
Company Registration No: 05299925
50
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
External valuers may be used to assist with the assessment of future decommissioning costs. The involvement of
external valuers is determined on a case by case basis, taking into account factors such as the expected gross
cost or timing of abandonment, and is approved by the Company’s Audit Committee. Selection criteria include
market knowledge, reputation, independence and whether professional standards are maintained. The provision
at reporting date represents management’s best estimate of the present value of the future decommissioning
costs required.
(i.i) Fair value measurement
The Group measures financial instruments, such as derivatives, at fair value at each balance sheet date. From
time to time, the fair values of non-financial assets and liabilities are required to be determined, e.g., when the
entity acquires a business, or where an entity measures the recoverable amount of an asset or cash-generating
unit (CGU) at FVLCD.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
The fair value of an asset or a liability is measured using the assumptions that market participants would use
when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate
economic benefits by using the asset in its highest and best use or by selling it to another market participant that
would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are
available to measure fair value, maximising the use of relevant observable inputs and minimising the use of
unobservable inputs. From time to time external valuers are used to assess FVLCD of the groups non-financial
assets. Involvement of external valuers is decided upon by the Valuation Committee after discussion with and
approval by the Company’s Audit Committee.
Selection criteria include market knowledge, reputation, independence and whether professional standards are
maintained. Valuers are normally rotated every three years. The valuation committee decides, after discussions
with the Group’s external valuers, which valuation techniques and inputs to use for each case.
Changes in estimates and assumptions about these inputs could affect the reported fair value.
2. Going Concern
The Directors noted the losses that the Group has made for the Year Ended 30 September 2018. The Directors
have prepared cash flow forecasts for the period ending 31 March 2020 that take account of the current cost
and operational structure of the Group.
The cost structure of the Group comprises a high proportion of discretionary spend and therefore in the event
that cash flows become constrained, costs can be quickly reduced to enable the Group to operate within its
available funding.
These forecasts demonstrate that the Group has sufficient cash funds available to allow it to continue in business
for a period of at least twelve months from the date of approval of these financial statements. Accordingly, the
financial statements have been prepared on a going concern basis.
It is the prime responsibility of the Board to ensure the Group remains a going concern. At 30 September 2018
the Company had cash and cash equivalents of £12,427,000 and borrowings of £3,533,000. The Company has
minimal contractual expenditure commitments and the Board considers the present funds sufficient to maintain
the working capital of the Company for a period of at least 12 months from the date of signing the Annual Report
and Financial Statements. For these reasons the Directors adopt the going concern basis in the preparation of
the Financial Statements.
Company Registration No: 05299925
51
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. Business Combinations
Acquisition of Horse Hill Developments Ltd (“HHDL”)
On 25 September 2018 through UK Oil & Gas PLC, the Group announced the completion of the acquisition of a
further 22% shareholding interest in HHDL, for a total consideration of £6,600,000, comprising £6,175,000 in the
form of 328,858,149 UKOG ordinary shares and £425,000 in cash.
Prior to the completion of the additional interest above, the Group held a 49.9% interest in HHDL, and equity
accounted as an associate investment accordingly. The additional interest therefore took the Group to a 71.9%
total shareholding interest and accordingly a change in status of the investment in HHDL from an associate to a
subsidiary. The resultant business combination has been calculated as below.
The assets and liabilities arising on the day of the business combination are as follows:
Horse Hill
Developments
Limited
Fair Value
Non-controlling
interest
Adjustments
Total Fair Value
£’000
£’000
£’000
Intangible Assets: Exploration Costs
Trade & other receivables
Cash
Current Liabilities
Borrowings
Net identifiable assets acquired at fair value
Total consideration / acquisition cost
Goodwill on acquisition
13,523
460
3,100
(2,166)
(12,601)
(3,800)
(129)
(871)
609
3,540
Total purchase consideration / acquisition cost is made up as
follows;
Cash paid
Shares issued
Associate losses accounted for
Loans novated to UKOG on acquisitions
Total consideration / acquisition cost (see below)
Total cash flow on the additional acquisition the current year is as follows:
Cash paid
Net cash acquired with the subsidiaries
Net consolidated cash inflow for the year ended 30 September
2018
9,723
331
2,229
(1,557)
(9,061)
1,665
7,955
6,290
3,893
8,446
(672)
(3,712)
7,955
(425)
3,100
2,675
The total consideration / acquisition costs includes all the equity shares the group has acquired in HHDL over the
previous 4 years, whilst building up its equity interest therein. As part of the equity acquisitions, UKOG also
acquired the loan balances owed from HHDL to the equity shareholder at the time of each acquisition, for
nominal costs.
Company Registration No: 05299925
52
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. Segment Reporting
All of the Group’s assets and operations are located in the United Kingdom. For management purposes, the
Group is organised into business units based on the main types of activities and has three reportable segments,
as follows:
• Oil exploration and production segment: includes producing business activities
• Oil exploration and evaluation: includes non-producing activities.
• Head Office, corporate and administrative, including parent company activities.
The Board of Directors monitors the operating results of its business units separately for the purpose of making
decisions about resource allocation and performance assessment. Segment performance is evaluated based on
operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial
statements. However, the Group’s financing (including finance costs and finance income) and income taxes are
managed on a group basis and are not allocated to operating segments.
The accounting policies used by the Group in reporting segments internally are the same as those used in the
financial statements.
Subject to further acquisitions and/or disposals, the Group expects to further review its segmental information
during the forthcoming financial year, as it begins to see the full impact of its acquisitions and/or disposals.
Group
Year ended 30 September 2018
Revenue
External Customers
Total revenue
Results
Depreciation, Depletion &
Amortisation
Exploration Write offs &
Impairment
Share of associates loss
Profit/(loss) before & after
taxation
Oil production
& exploration
£’000
Oil exploration
& evaluation
£’000
Corporate &
Administrative
£’000
Consolidated
£’000
225
225
(15)
-
-
-
-
(48)
(11,560)
(419)
-
-
-
225
225
(63)
(222)
-
(11,782)
(419)
112
(13,657)
(3,202)
(16,747)
Segment assets
1,776
33,321
9,555
44,652
Segment liabilities
-
(882)
(6,982)
(7,864)
Other disclosures:
Goodwill on acquisition
Capital expenditure (1)
-
174
6,290
19,616
-
-
6,290
19,790
(1) Capital expenditure consists of capitalised exploration expenditure, development expenditure, additions to
oil & gas properties and to other intangible assets including expenditure on assets from the acquisition of
subsidiaries.
Company Registration No: 05299925
53
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. Segment Reporting (continued)
Group
Year ended 30 September 2017
Revenue
External Customers
Total revenue
Results
Depletion & impairment
Share of associates loss
(Loss) before & after taxation
Segment assets
Segment liabilities
Other disclosures:
Investment in associate
Capital expenditure (1)
Oil production
& exploration
£’000
Oil exploration
& evaluation
£’000
Corporate &
Administrative
£’000
Consolidated
£’000
207
207
(74)
-
(66)
2,162
(306)
-
2
-
-
-
(77)
(209)
21,193
(3,415)
323
8,723
-
-
-
-
(1,993)
4,395
(363)
-
-
207
207
(74)
(77)
(2,268)
27,750
(4,084)
323
8,725
(1) Capital expenditure consists of capitalised exploration expenditure, development expenditure, additions to
oil & gas properties and to other intangible assets including expenditure on assets from the acquisition of
subsidiaries.
5. Operating Loss
Group
Operating (loss) is stated after charging:
– Directors remuneration – fees & salaries
– Employee Benefit Trust charge
– Auditors’ remuneration
Audit-related assurance services
Other compliance services
Tax compliance
– Depletion of oil & gas properties
2018
£'000
2017
£'000
435
6
42
35
-
63
428
5
32
-
-
74
Company Registration No: 05299925
54
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. Directors and Employees
The Company employed the services of an average of 6 Employees in the year (2017: 5), of which an average of
3 (2017: 3) were executive and non-executive Directors. Remuneration in respect of these employees was:
Group
Employment costs, including Directors, during the year:
Wages and salaries
Social security costs
Employee pension costs
Consultancy fees
Share based payments
Average number of persons, including executive Directors employed
Administration
Operations
2018
£'000
496
56
2
313
309
1,176
No.
4
2
6
£'000
744
2018
£'000
-
584
108
43
9
744
2017
£'000
249
23
-
393
217
882
No.
4
1
5
£'000
645
2017
£'000
65
339
179
62
-
645
Total
£’000
584
108
43
9
744
Total
£’000
339
179
62
65
645
Fees and salaries
£’000
275
108
43
9
435
Fees and salaries
£’000
240
100
23
65
428
Share based
payments (****)
£’000
309
-
-
-
309
Share based
payments (****)
£’000
99
79
39
-
217
Directors’ remuneration
Emoluments
Jason Berry (*)
Stephen Sanderson
Kiran Morzaria
Allen Howard (**)
Nicholas Mardon Taylor (***)
Total Directors Emoluments
2018
S Sanderson
K Morzaria
A Howard (**)
N Mardon Taylor (***)
2017
S Sanderson
K Morzaria
A Howard (**)
J Berry (*)
* Resigned 16 November 2016, ** Appointed 1 March 2017, ***Appointed 1 August 2018, **** Share based payments are
non-cash remuneration by way of the issue of share options in the company. No pension contributions were made on
behalf of Directors during the year.
Company Registration No: 05299925
55
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. Income Tax
There is no tax credit on the loss for the current or prior year. The tax assessed for the year differs from the
standard rate of corporation tax in the UK as follows:
Loss for the year before tax
Tax rate
Expected tax credit
Differences between capital allowances and
depreciation
Expenses not deductible for tax purposes
Future income tax benefit not brought to account
Actual tax expense
8. Loss per Share
2018
£'000
(16,747)
19%
(3,182)
-
213
2,969
-
2018
£'000
(2,268)
19/20%
(442)
-
107
335
-
The calculation of the basic loss per share is calculated by dividing the consolidated loss attributable to the equity
holders of the Company by the weighted average number of ordinary shares in issue during the year.
Group
(Loss) attributable to ordinary shareholders
Weighted average number of ordinary shares for
calculating basic loss per share
Basic and diluted loss per share
2018
£’000
(16,747)
2017
£’000
(2,268)
Number
Number
4,116,039,727
2,905,392,699
Pence
(0.41)
Pence
(0.08)
As inclusion of the potential ordinary shares would result in a decrease in the earnings per share they are
considered to be anti-dilutive, as such, a diluted earnings per share is not included.
Company Registration No: 05299925
56
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. Intangible assets
Group
Exploration &
evaluation
costs
£’000
Decommissioning
Asset
£’000
Company
Exploration
&
evaluation
costs
£’000
Goodwill
£’000
Total
£’000
Cost & Net Book Value
As at 1 October 2016
Reclassifications
Additions
As at 30 September 2017
Acquired through Business
Combinations (Note 2)
Additions
Exploration Write offs
Impairment
6,187
200
8,723
15,110
13,523
5,793
(11,560)
(222)
As at 30 September 2018
22,644
-
-
-
-
362
-
-
362
-
-
-
-
6,187
200
8,723
15,110
6,290
-
-
-
19,813
6,155
(11,560)
(222)
742
-
576
1,318
-
2,016
(1,205)
(729)
6,290
29,296
1,400
Directors have assessed the fair value of the exploration & evaluation assets as at 30 September 2018 and have
concluded the carrying value of the following assets require write off:
Exploration and evaluation activity involves the search for hydrocarbon resources, the determination of technical
feasibility and the assessment of commercial viability of an identified resource. The additions during the year
reflect the associated exploration and evaluation activities.
At this point the Company is still assessing the potential of the remaining assets and will continue to develop and
evaluate these assets in the coming year. Since their acquisition dates there has been no further material changes
to the Licence areas. The directors therefore consider that no further impairment is required at 30 September
2018, other than detailed above.
The group tests whether goodwill has suffered any impairment on an annual basis at each reporting date. For
the 2018 reporting period, the recoverable amount of the cash generating units (CGUs) was determined based
on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections
based on financial budgets approved by management covering a 25-year period.
Cash flows beyond the 25-year period are extrapolated using the estimated growth rates stated below. These
growth rates are consistent with forecasts included in industry reports specific to the industry in which each CGU
operates.
Company Registration No: 05299925
57
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. Oil & gas properties
Group
Cost
As at 1 October
Reclassifications
Additions
As at 30 September
Depletion & impairment
As at 1 October
Depletion charge
As at 30 September
Carrying value
As at 30 September
Oil & gas
properties
2018
£’000
Property,
plant &
equipment
2018
£’000
1,662
-
36
1,698
(234)
(15)
(249)
170
-
138
308
-
(48)
(48)
Oil & gas
Properties
Total
2017
£’000
2,030
(200)
2
1,832
(160)
(74)
(234)
Total
2018
£’000
1,832
-
174
2,006
(234)
(63)
(297)
1,449
260
1,709
1,598
Impairment review
The Directors have carried out an impairment review as at 30 September 2018 and determined that an
impairment charge is not currently required in relation to Oil & Gas properties and related property plant &
equipment. The Directors based this assessment ongoing production from Horndean and in the case of Avington
the operational optimisation that is ongoing to improve operational efficiencies.
Company Registration No: 05299925
58
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11. Investment in Subsidiaries
Company
Cost and net book amount
At 1 October
Additions in the year
Impairment
At 30 September
2018
£’000
5,019
7,955
(189)
12,785
2017
£’000
5,019
-
-
5,019
At 30 September 2018, the Directors have assessed the carrying value of investments in the Company’s
subsidiaries with the result that the investments in UKOG Solent Limited and UKOG Weald Limited have been
written down to zero, with an impairment charge of £189,000. The two subsidiaries both relinquished licences
during the year, and as a result the Directors have impaired accordingly.
The Company holds more than 50 per cent of the share capital of the following companies as at 30 September
2018:
Company
UKOG (GB) Limited
UKOG Solent Limited
UKOG Weald Limited
UKOG (234) Limited – previously
“Kimmeridge Oil & Gas Limited”
(KOGL) Ltd – previously
Horse Hill Developments Ltd
UKOG
“Kimmeridge Energy Limited”
UK Oil & Gas Investments Limited –
previously “UK Oil & Gas Limited”
Country of
Registration
Proportion
held
Functional
Currency
Nature of business
UK
UK
UK
UK
UK
UK
UK
100%
100%
100%
100%
71.9%
100%
100%
GB£
GB£
GB£
GB£
GB£
GB£
GB£
Oil production
Oil exploration
Oil exploration
Oil exploration
Oil exploration
Dormant
Dormant
All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary
undertaking held directly by the parent company do not differ from the proportion of the ordinary shares held.
The following companies are taking an exception from the audit of the financial statements as per S479A of the
Companies Act; UKOG (GB) Ltd (04050227), UKOG Solent Ltd (05000092), UKOG Weald Ltd (04991234), UKOG
(234) Ltd (07055133), Horse Hill Developments Ltd (08808553).
12. Investment in Associate
Group and Company
Carrying Value as at 1 October
Net equity additions at cost
Share of associates loss for the year
Transferred to investment in subsidiaries
Carrying Value as at 30 September
2018
£’000
5,003
3,371
(419)
(7,955)
-
2017
£’000
4,757
323
(77)
-
5,003
On 25 September 2018, the Company completed the acquisition of a further 22% interest in Horse Hill
Developments Ltd (“Horse Hill”) for a total consideration of £6,600,000 (cash £425,000 and UKOG share issues
£6,175,000) and net loan acquisitions of £3,229,000. This increase resulted in increasing the Company’s holding
to 71.9% and has thus been reclassified as a subsidiary. See Note 2 – Business Combinations for further details.
Company Registration No: 05299925
59
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
13. Available for Sale Investments
Group & Company
Investment in unlisted securities
Valuation at 1 October
Additions at cost
Disposals
Valuation at 30 September
2018
£’000
-
-
-
-
2017
£’000
368
-
(368)
-
Angus Energy Plc completed a listing on the AIM Market on 14 November 2016. The Company disposed of its
entire shareholding in Angus Energy Plc for £572,000 in early 2017 resulting in a gain on disposal of £204,000.
14. Inventory
Group
Inventories - Crude Oil
Total
15. Trade and Other Receivables
Trade debtors
Other debtors
Loans to related parties (see Note 24)
Loans to subsidiary companies
Prepayments and accrued income
Total
2018
£’000
2017
£’000
5
5
4
4
Group
Company
2018
£’000
38
660
-
-
517
1,215
2017
£’000
164
1,488
2,117
-
16
3,785
2018
£’000
13
252
-
23,076
271
23,612
2017
£’000
145
418
2,117
7,055
-
9,735
During the year the parent company UKOG wrote-off loans to subsidiary companies, UKOG (Solent) Ltd and UKOG
(Weald) Ltd totalling £319,000 as a result of the impairment decisions made by the Directors as noted in Note 8.
The directors consider that the carrying amount of trade and other receivables approximates to their fair value.
16. Cash and Cash Equivalents
Cash at bank and in hand
Total
Company Registration No: 05299925
Group
Company
2018
£’000
12,427
12,427
2017
£’000
1,748
1,748
2018
£’000
9,160
9,160
2017
£’000
1,714
1,714
60
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
17. Trade and Other Payables
Current trade and other payables
Trade creditors
Other creditors
Accruals and deferred income
Total
Group
Company
2018
£’000
1,699
276
1,015
2,990
2017
£’000
2,656
-
1,069
3,725
2018
£’000
226
276
161
663
2017
£’000
283
-
81
364
The directors consider that the carrying amount of trade and other payables approximates to their fair value.
18. Borrowings
Current trade and other payables
Loans payable to Non Controlling Interests
Total
Group
Company
2018
£’000
3,533
3,533
2017
£’000
-
-
2018
£’000
-
-
2017
£’000
-
-
Loans payable to non-controlling interests are payable on demand with an interest rate of 10% above Bank of
England base Rate. The Group acquired these loans as part of the business combination acquisition of HHDL,
and represent loans made to HHDL by the other shareholders thereof.
Convertible Loan Financing
In November 2017, the Company entered into a £10 million loan agreement ("Loan") with Cuart Investments PCC
Ltd and YA II PN Ltd ("Investors"), an investment consortium arranged by Riverfort Global Capital Ltd. A first
tranche of £7,500,000 was drawn down immediately by the Company, with the second tranche of £2,500,000
drawn down in December 2017. The first and second tranches were repayable on 13 November 2019 and 31
December 2019, respectively. The draw downs of the loans attracted total fees of £510,000 in accordance with
the terms thereof.
The Loan attracted 0% interest and may, at the sole discretion of the Investors, be converted into new ordinary
shares in the Company. The conversion price was the lower of either a share price of 8 pence, or 90% of the
Company's lowest daily volume weighted average price ("VWAP") during the five days prior to the conversion
date. The Loan was convertible in tranches of not less than £250,000, with a limit of £3,000,000 per quarter,
unless otherwise agreed by the Company.
The Loan included a provision that, for as long as any portion of the Loan is outstanding, neither the Investors
nor any of their affiliates shall hold any net short position with respect to the equity of UKOG.
UKOG could repay the principal amount of the Loan at any time for cash, provided that the 5-day VWAP of the
Company's equity is less than 8 pence and a prepayment fee equal to 10 per cent of the principal amount of the
Loan then outstanding was paid by the Company to the Investors.
The full amount of the loan was repaid during the year by way of equity conversions throughout the period from
November 2017 to July 2018, in accordance with the terms above. A total of 684,626,188 shares were issued
during the period of loan notice conversions. No further liabilities existed at the 30 September 2018.
Company Registration No: 05299925
61
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
19. Provisions - Decommissioning
Group
As at 1 October
Additions
Release
As at 30 September
2018
£’000
359
1,059
(77)
1,341
2017
£’000
359
-
-
359
The amount provided at 30 September 2018 represents the Group’s share of decommissioning liabilities in
respect of the producing Horndean and Avington fields, and the Broadford Bridge, Horse Hill and Markwells
Wood drilling sites.
The Company makes full provision for the future cost of decommissioning oil production facilities and pipelines
on a discounted basis on the installation of those facilities. The decommissioning provision represents the
present value of decommissioning costs relating to oil and gas properties.
These provisions have been created based on the Company’s internal estimates. Assumptions based on the
current economic environment have been made, which management believes are a reasonable basis upon which
to estimate the future liability. These estimates are reviewed regularly to take into account any material changes
to the assumptions.
However, actual decommissioning costs will ultimately depend upon future market prices for the necessary
decommissioning works required that will reflect market conditions at the relevant time. Furthermore, the timing
of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This, in
turn, will depend upon future oil and gas prices, which are inherently uncertain.
Company Registration No: 05299925
62
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
20. Share Capital
Ordinary Shares
Number of
ordinary
shares
Nominal
Value
Issued at 30 September 2016
On 08 December 16, for options exercised at 0.4p per share
On 24 May 17, placing for cash at 0.8p per share
On 16 June 17, for warrants exercised at 0.4p per share
On 19 July 17, for options/warrants exercised at 0.4p/2.25p per
share
On 28 July 17, for warrants exercised at 0.8p per share
On 24 August 17, for acquisition at 1.55p per share
On 04 September 17, for options exercised at 0.4p per share
Issued at 30 September 2017
2,577,634,099
20,000,000
812,500,000
15,000,000
55,000,001
40,625,000
17,361,862
2,000,000
3,540,120,962
For conversion of loan notes (At prices from 4.1p to 0.9p)
684,626,188
On 08 November 2017, for options exercised at 1.15p per share
On 08 December 2017, for acquisition at 8p per share
On 13 April 2018, for options exercised at 0.4p per share
On 14 June 2018, placing for cash at 0.9p per share
On 28 June 2018, for options exercised at 1.15p per share
On 02 July 2018, placing for cash at 2p per share
On 04 July 2018, placing for cash at 2p per share
On 13 August 2018, for warrants exercised at 0.9p per share
On 06 September 2018, for warrants exercised at 0.9p per share
On 25 September, for acquisition at 1.76p per share
On 25 September 2018, for acquisition at 1.77p per share
On 25 September 2018, for acquisition at 1.92p per share
Issued at 30 September 2018
8,000,000
9,382,271
1,000,000
611,111,105
3,000,000
250,000,000
100,000,000
14,000,000
16,555,555
31,171,898
63,644,030
234,042,221
5,566,654,230
£
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
0.0001
Total
Value
£’000
258
2
81
1
6
4
2
-
354
68
1
1
-
62
-
25
10
1
2
3
6
24
557
Deferred shares
The Company has in existence at 30 September 2018 and at 30 September 2017, 1,158,385,229 deferred shares
of 0.001p. These deferred shares do not carry voting rights.
Total Ordinary and Deferred Shares
The issued share capital as at 30 September 2018 is as follows:
Number
of shares
Nominal Value
£
Total Value
£’000
Ordinary shares
Deferred shares
5,566,654,230
1,158,385,352,229
0.0001
0.00001
Company Registration No: 05299925
557
11,584
12,141
63
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
20. Share Capital (continued)
Share Options
During the year 52.5 million options were granted (2017: 120 million).
As at 30 September 2018 the options in issue were:
Exercise price
0.4p
1.15p
1.6p
1.82p
Expiry date
Options in issue
30 September 2018
31 December 2019
24 May 2022
12 April 2023
26 September 2019
35,000,000
117,000,000
17,500,000
45,000,000
214,500,000
12,000,000 options were exercised, and no options were cancelled during the year (2017: 78,500,000 exercised).
35,000,000 options lapsed during the year (2017: 20,000,000).
Warrants
As of 30 September 2018, no warrants were in issue (2017: nil).
30,555,000 warrants were issued during the year (2017: 40,625,000). No warrants lapsed during the year (2017:
nil). 30,555,000 warrants were exercised during the year (2017: 54,125,001 exercised).
Employee Benefit Trust
The Company established on 29 September 2014, an employee benefit trust called the UK Oil & Gas Employee
Benefit Trust ("EBT") to implement the use of the Company's existing share incentive plan over 10% of the
Company's issued share capital from time to time in as efficient a manner as possible for the beneficiaries of that
plan. The EBT is a discretionary trust for the benefit of directors, employees and consultants of the Company.
Accordingly, on establishment, the trustees of the EBT subscribed for 129,000,000 new ordinary shares of 0.01p
each in the Company, at par value per share at an aggregate cost to the Company of £12,900, such shares
representing 9.07% of the existing issued share capital of the Company (at that date). The shares held in the EBT
are intended to be used to satisfy future awards made by the Company's Remuneration Committee under the
share incentive scheme. During the financial year ending 30 September 2015, 80,000,000 new ordinary shares.
million were awarded to employees and consultants, none of whom are related parties. The current balance of
the EBT is 49,000,000 new ordinary shares.
No further issue of ordinary shares was made to the EBT during the years ended 30 September 2018 & 30
September 2017.
Company Registration No: 05299925
64
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
21. Share-Based Payments
Details of share options and warrants granted during the year to Directors, consultants & employees over the
ordinary shares are as follows:
At 1
October
2017
No.
million
Issued
during
the year
No.
million
lapsed /
exercised
during the
year
No.
million
At 30
September
2018
No.
million
Exercise
price
£
Date from
which
exercisable
Expiry date
10
8
20
25
35
-
25
123
11
10
65
-
-
209
-
-
-
-
-
25
-
25
-
-
-
10
17.5
52.5
-
(8)
-
10
-
0.0115
0.0115
25/05/2017
22/08/2014
24/05/2022
22/08/2019
20
0.0115
25/05/2017
24/05/2022
(25)
-
0.0040
21/01/2015
31/12/2017
-
-
-
(33)
(11)
-
(3)
-
-
(47)
35
0.0182
28/09/2016
28/09/2019
25
0.0040
13/04/2018
31/12/2019
25
115
-
10
62
10
17.5
214.5
0.0115
25/05/2017
24/05/2022
0.0040
0.0182
0.0115
0.0040
21/01/2015
28/09/2016
25/05/2017
13/04/2018
31/12/2017
28/09/2019
24/05/2022
31/12/2019
0.0160
13/04/2018
12/04/2023
Share options
Allen Howard
Jason Berry
Kiran
Morzaria
Stephen
Sanderson
Stephen
Sanderson
Stephen
Sanderson
Stephen
Sanderson
Consultants
Consultants
Consultants
Consultants
Consultants &
employees
The share price range during the year was £0.01125 to £0.07375 (2017 - £0.0103 to £0.0898).
The disclosure of Weighted Average Exercise Prices, and Weighted Average Contractual Life analysis is not
viewed as informative because of the minimal variation of options currently in issue, and therefore has
accordingly not been disclosed.
For those options granted where IFRS 2 "Share-Based Payment" is applicable, the fair values were calculated
using the Black-Scholes model. The inputs into the model were as follows:
13 April 2018 (0.4p)
13 April 2018 (1.6p)
Risk free rate
0.8%
0.9%
Share price
volatility
128.9%
128.9%
Expected life
1.72 years
5 years
Share price at
date of grant
£0.015
£0.015
Expected volatility was determined by calculating the historical volatility of the Company's share price for 12
months prior to the date of grant. The expected life used in the model has been adjusted, based on
management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural
considerations.
The Company recognised total expenses of £655,000 (2017: £474,000) relating to equity-settled share-based
payment transactions during the year, and £237,000 (2017: £526,000) was transferred via equity to retained
earnings on the exercising or lapse of options during the year.
Company Registration No: 05299925
65
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
22. Financial Instruments and Risk Analysis
Financial Assets by Category
The categories of financial asset, all included at fair value in the balance sheet and the headings in which they
are included are as follows:
Current assets - Group
Inventory
Trade and other receivables
Cash and cash equivalents
2018
£’000
5
1,215
12,427
13,647
2017
£’000
4
3,787
1,748
5,539
Financial Liabilities by Category
The categories of financial liability all included at fair value in the balance sheet and the headings in which they
are included are as follows:
Current liabilities – Group
Trade and other payables
Borrowings
2,990
3,553
6,523
3,725
-
3,725
The group is exposed to market risk through its use of financial instruments and specifically to credit risk, and
liquidity risk which result from both its operating and investing activities. The group's risk management is
coordinated at its head office, in close co-operation with the board of Directors, and focuses on actively securing
the group's short to medium term cash flows by minimising the exposure to financial markets.
Long term financial investments are managed to generate lasting returns. The group does not actively engage
in the trading of financial assets for speculative purposes nor does it write options. The most significant financial
risks to which the group is exposed to are described below.
Interest Rate Sensitivity
The group is not substantially exposed to interest rate sensitivity, other than in relation to interest bearing bank
accounts. The Group only has borrowings at a fixed coupon rate of 10%+BOE and therefore minimal interest
rate risk, as this is deemed its only material exposure thereto.
Credit Risk Analysis
The group's exposure to credit risk is limited to the carrying amount of trade receivables and cash at bank. The
group continuously monitors defaults of customers and other counterparties, identified either individually or by
Company, and incorporates this information into its credit risk controls. Where available at reasonable cost,
external credit ratings and/or reports on customers and other counterparties are obtained and used.
The group's policy is to deal only with creditworthy counterparties. Group management considers that trade
receivables that are not impaired for each of the reporting dates under review are of good credit quality,
including those that are past due. None of the group's financial assets are secured by collateral or other credit
enhancements. The credit risk for liquid funds and other short-term financial assets is considered negligible since
the counterparties are reputable banks with high quality external credit ratings.
Liquidity risk analysis
All of the Group’s liabilities are contractually due within one year.
The group’s continued future operations depend on the ability to raise sufficient working capital through the
issue of equity share capital. The Directors are confident that adequate funding will be forthcoming with which
to finance operations. Controls over expenditure are carefully managed.
Company Registration No: 05299925
66
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
23. Financial Instruments and Risk Analysis (continued)
Capital Management Policies
The group's capital management objectives are to:
•
•
•
Ensure the group's ability to continue as a going concern; and
Provide a return to shareholders
To provide capital for the purpose of strengthening the Group's risk management capability.
The Group actively and regularly reviews and manages its capital structure, to ensure an optimal capital
structure, and equity holder returns, taking into consideration the future capital requirements of the Group and
capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital
expenditures and projected strategic investment opportunities. Management regards total equity as capital and
reserves, for capital management purposes.
Commodity price risk
The Group is exposed to the risk of fluctuations in prevailing market commodity prices on the mix of oil and gas
products it produces. The Group’s policy is to manage these risks through the use of contract-based prices with
customers.
Commodity price sensitivity
The table below summarises the impact on profit before tax for changes in commodity prices. The analysis is
based on the assumption that the crude oil price moves 10% resulting in a change of US$ 6.68/bbl (2017: US$
5.43/bbl), with all other variables held constant. Reasonably possible movements in commodity prices were
determined based on a review of the last two years’ historical prices and economic forecasters’ expectations.
Increase/decrease in crude oil prices
Increase US$ 6.68/bbl (2017: US$ 5.43/bbl)
Decrease US$ 6.68/bbl (2017: US$ 5.43/bbl)
Effect on profit before
tax for the year ended
30 September 2018
Increase/(Decrease)
Effect on profit before
tax for the year ended
30 September 2017
Increase/(Decrease)
£’000
23
(23)
£’000
25
(25)
Currency risk
The Group has no significant monetary assets or liabilities that are denominated in a foreign currency. The
Group’s exposed to currency risk, with the price of Brent Crude Oil being denominated in US$. The current
exposure is not seen as material, with the current level of revenue being generated therefrom. The Board will
continue to monitor this risk as the operations and/or revenues increase.
24. Commitments & Contingent Liabilities
As at 30 September 2018, the Group had the following material commitments;
Ongoing exploration expenditure is required to maintain title to the Group’s exploration permits. No provision
has been made in the financial statements for these amounts as the expenditure is expected to be fulfilled in the
normal course of the operations of the Group.
There were no contingent liabilities at 30 September 2018.
Company Registration No: 05299925
67
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
25. Events after the Reporting Date
On 21 January 2019, the Company completed its purchase of a 30% interest in the PEDL331 onshore Isle of Wight
licence for a total consideration of £350,000. The total consideration was satisfied through the issuance of
17,989,326 new ordinary shares and £90,450 in cash. At the date of signing the annual report, the Company
holds an operated 95% direct interest in the Licence.
On 20 February 2019, the Company announced the completion of the purchase of a further 6% interest in Horse
Hill Developments td for a consideration of £2,100,000 settled by the issue of 129,629,630 new ordinary shares.
The Group’s total shareholding in Horse Hill Developments Ltd after this further acquisition is 77.9%.
26. Related Party Transactions
The company had the following amounts outstanding from its investee companies at 30 September:
Horse Hill Developments Ltd (“Horse Hill”)
2018
£’000
-
-
2017
£’000
2,117
2,117
The above loans outstanding are included within trade and other receivables, Note 15. The loan to HHDL has
been made in accordance with the terms of the investment agreement whereby it accrues interest daily at the
Bank of England base rate and is repayable out of future cashflows. As detailed in Note 3, HHDL became a group
subsidiary company during the year, and the balance due therefrom is now included within loans to subsidiaries
at 30 September 2018.
Transactions with related parties
During the year, consultancy fees of £217,000 (2017 - £189,000) were charged to the Company by Matt
Cartwright Consulting Limited, a company of which Mr Matt Cartwright, UKOG’s Chief Operating Officer is the
sole director. £30,000 was outstanding at the year-end (2017: £38,000).
In addition, consultancy fees of £96,000 (2017 - £204,000) were charged to the Company by BuntyBay Limited,
a company of which Mr Stephen Sanderson, UKOG’s Chief Executive is a director. £nil was outstanding at the
year-end (2017: £32,000).
Remuneration of Key Management Personnel
The remuneration of the directors, and other key management personnel of the Company, is set out below in
aggregate for each of the categories specified in IAS24 Related Party Disclosures
Short-term employee benefits
Consultancy fees
Share-based payments
27. Ultimate Controlling Party
In the opinion of the directors there is no controlling party.
2018
£’000
496
313
496
1,305
2017
£’000
249
393
474
1,116
Company Registration No: 05299925
68
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
28. Profit and loss account of the parent company
As permitted by section 408 of the Companies Act 2006, the profit and loss account of the parent company has
not been separately presented in these accounts. The parent company loss for the year was £5,849,000 (2017:
loss £2,070,000).
Company Registration No: 05299925
69
COMPANY INFORMATION
Company registration number
05299925
Registered office
Directors
Secretary
Auditors
Nominated Adviser
Solicitors
Registrars
The Broadgate Tower 8th Floor
20 Primrose Street
London
EC2A 2EW
Allen Howard
Stephen Sanderson
Kiran Morzaria
Nicholas Mardon Taylor
Kiran Morzaria
Chapman Davis LLP
Chartered Accountants
Registered Auditor
2 Chapel Court
London, SE1 1HH
WH Ireland Limited
24 Martin Lane
London, EC4R 0DR
Hill Dickinson
The Broadgate Tower 8th Floor
20 Primrose Street
London, EC2A 2EW
Share Registrars Limited
The Courtyard,
17 West Street
Farnham,
Surrey, GU9 7DR
Company Registration No: 05299925
70