Final Results

RNS Number : 0665Z

Sound Energy PLC

24 May 2016

 

24 May 2016

SOUND ENERGY PLC

("Sound Energy" or the "Company")

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2015

Sound Energy, the Mediterranean focused upstream oil and gas company, announces its audited final results for the year ended 31 December 2015.

2015 Highlights

·      Acquisition of an operated 55% position in the Tendrara licence, onshore Morocco, offering large scale gas discovery and multiple Tcf exploration potential

·      Introduction of Schlumberger as a strategic partner for existing and new assets across Europe and Africa

·      Entry into Field Management Agreement with Schlumberger for Tendrara, de-risking the asset technically and funding the majority of the first three wells

·      Secured the approval of the Environmental Impact Assessment for the significant Badile prospect, onshore Italy 

·      Cash balance of £15.2 million at 31 December 2015

Post period end

·      Currently drilling some 50 metres away from the reservoir at the first well at Tendrara

·      Broadening of the Moroccan portfolio with the acquisition of an interest in the Sidi Moktar licence and subsequent entry into Heads of Terms to farmout

·      Acquisition of an option to acquire Meridja Area, neighbouring Tendrara

·      Receipt of the final Badile drilling permission from the Italian Ministry of Economic Development (UNMIG)

James Parsons, Chief Executive Officer of Sound Energy, commented:

"Despite the challenging sector backdrop and a disappointing result so far at Nervesa, Sound Energy's high quality partnerships, significant cash balance and strong management team position us well for continued counter-cyclical growth.  We move into a very busy 2016 in a very robust position, looking to generate value through the drill bit and pursuing selective opportunities to complement our portfolio. We are now just a few weeks away from the result at our first strategic play."

For further information please contact:

Vigo Communications - PR Adviser Patrick d'Ancona Chris McMahon Alexandra Roper	Tel: [phone]
Sound Energy James Parsons, Chief Executive Officer	[e-mail]
Smith & Williamson - Nominated Adviser Azhic Basirov David Jones Ben Jeynes	Tel: [phone]
Cantor Fitzgerald Europe - Broker Sarah Wharry David Porter	Tel: [phone]

Statement from the Chairman and Chief Executive Officer

Sound Energy is a European/Mediterranean focused upstream gas company, listed on AIM, with a strategic partnership with Schlumberger (one of the largest companies in our sector), a cornerstone investor and an active and potentially transformational drill programme.  

Sound Energy's portfolio includes a blend of high upside exploration assets, low risk appraisal/development assets and production, which is diversified across Italy and Morocco.  

2015 was a turbulent year for the energy sector, with continued low oil prices and increasing global carbon consciousness.

In response to the challenging environment faced by the industry at large, Sound Energy has been steadfastly pursuing an onshore regional gas strategy, underpinned by solid European gas fundamentals and a trend of global transition to gas, as a cleaner alternative to coal and oil.

Whilst acknowledging the recent disappointments of the Nervesa discovery, the Company with its high quality partnerships, strong cash position and strong management team is positioned well for continued counter-cyclical growth whilst sector valuations are low and competition is limited.

The key highlights of 2015 include:

•      The acquisition of an operated 55% position in the Tendrara licence, onshore Morocco. Morocco is a stable, growing, gas-hungry country with strong gas prices and competitive fiscal terms. Tendrara benefits from a compelling risk/reward balance with both a large scale gas discovery and multiple Tcf exploration potential.

•      Introduction of Schlumberger as a strategic partner for existing and new assets across Europe and Africa.

•      Entry of a Field Management Agreement with Schlumberger in respect of the Tendrara licence with a view to de-risking the asset technically and funding the majority of the first three wells.

•      Securing of the approval of the Environmental Impact Assessment for the significant Badile prospect, onshore Italy, which enabled the Company to secure the final permission to drill in May 2016.

Following the period end, Sound Energy entered into binding agreements to acquire a 75% operated position in the Sidi Moktar licences, onshore Morocco, where the Kechoula discovery represents an opportunity for material near term production. The wider Sidi Moktar licence area also provides significant exploration potential.

As announced by the Company on 10 March 2016, the Company has entered into heads of terms in respect of a farmout of the Sidi Moktar licences which, if completed, would provide a carry on all future capital whilst only reducing the Company's position to a 25% operated interest. As a result of this progress, Sound Energy's current immediate focus is now on three strategic plays across Morocco and Italy:

•      Tendrara, onshore Morocco

•      Sidi Moktar, onshore Morocco

•      Badile, onshore Italy

The outcome of the first well on the Company's strategic Tendrara play, which is currently drilling, is expected to be known shortly.

The Company is in a strong financial position as it enters 2016 and a period of high activity, with a cash balance of £15.2 million at 31 December 2015.  We continue to operate with a low cost but high quality philosophy, keeping costs under control and leveraging partners' balance sheets.

The significant progress achieved by Sound Energy during 2015 would not have been possible without the efforts of Sound Energy's executive team and supportive shareholders. We would like to take this opportunity to thank all of them as we continue to develop into a large scale regional upstream company.

Simon Davies                                            James Parsons

Chairman                                                  CEO

Operational and Financial Review

Strategic Play - Tendrara

Permit Area

The Tendrara permit is located in the Figuig Province, North-East Morocco, 120 km from the GME pipeline, connecting Algeria and Morocco to the Spanish/Portuguese gas grids. The permit area, which is sub-divided into eight blocks, covers a combined area of 14,500 km².

Geology

The Tendrara structure represents a continuity of the Algerian Triassic Province and Saharan Hercynian platform with the same basin shows as the tectono-sedimentary evolution in the Algeria Basins.

Activity History

AGIP first explored the Tendrara structure in 1966/67 drilling two wells, both proved gas bearing but were not fully tested. In 1983 the Moroccan National Oil Company (NOC), ONHYM (Office National de HydroCarbures et des Mines) further appraised the structure drilling a third gas bearing well. In 2000, MPE drilled SBK-1 in the adjacent Sidi Belkacem structure to further assess the Trias Argilo-Gréseux Inférieur ("TAGI") reservoir, which proved to be gas bearing and tested successfully.

In total seven wells have been drilled in the permit, five have been gas bearing and two have tested successfully. Of the two successful test wells SBK-1 had a peak rate of 5.5 MMscf/d and TE-5 had flow rates of 1.5 MMscf/d.

Sound Energy farmed in to the Tendrara licence in June 2015, taking a 55% working interest in the licence, partnering ONHYM (25% interest) and Oil & Gas Investment Fund ("OGIF") (20% interest) and assuming the Operatorship. Sound's 55% working interest will be secured in two tranches, with tranche one (37.5%) awarded on completion of the transaction and the second tranche (17.5%) secured once Sound Energy commits to the second exploration phase (which would include a second well). Under the terms of the farm-in to the licence Sound will pay 100% of the cost of three wells, of which only the first well would be a firm commitment.

In December 2015, Sound entered into a Field Management Agreement (FMA) with Schlumberger. Under the terms of the FMA Schlumberger agreed to fund a significant portion of the capital expenditure on the first three Tendrara wells and provide technical services, equipment and personnel to Sound as Operator in exchange for an upside linked to production performance.

The first well is to appraise the larger of two existing discoveries in the Tendrara licence with a view to addressing the residual reservoir uncertainties (well deliverability and areal continuity) and proving up sufficient reserves to properly size the design of the infrastructure required to commercialise the gas.

The licence already has 4,400 km of 2D seismic and 500 km² of 3D seismic.

Preliminary internal estimates of existing discovery volumes suggest significant volumes in place with potential recoverable resources of multiple Tcf across multiple prospects/leads.

Meridja

Permit Area

Sound has secured an option to acquire a 55% interest in the Meridja permit, located next to its Tendrara licence.  

The Meridja reconnaissance permit is currently held 75% by OGIF and 25% by ONHYM.

Both Meridja and Tendrara have a pericratonic position and are located between three geologic domains: the inverted High Atlas, the Folded Hercynian Basement and the Non Deformed Saraha Platform.

In Meridja, two main targets have been identified: the Paleozoic formations, which belong to the Hercynian Saharan Platform, and the Triassic Sandstones (TAGI) which belong to the Triassic province. Currently, 15 leads have been identified with reserves potentially similar in scale to those in Tendrara.

Strategic Play - Sidi Moktar

Permit Area

The Sidi Moktar permit is located in the Essaouira Basin in central Morocco (Western sea border) and is sub-divided into three blocks (North, South and West) with a combined area of 4,500 km². Adjacent to and surrounding the permit is the Meskala Field, a gas/condensate discovery, which has been producing since the late 1980s and represents one of the most significant discoveries in Morocco to date. The Sidi Moktar permit itself hosts some 40 wells, a pipeline and production facilities for gas and condensate.

The Geology

There are four petroleum systems (PS) within the Sidi Moktar permit:

·     PS1 Argovian (sandy dolomite) which has given rise to five discoveries (Jeer, Kechoula, Sidi Rhalem, Toukimt and N'Dark);

·     PS2 Low Liasssic (sandstone) which has given rise to two discoveries (Zelten and Kechoula);

·     PS3 Triassic (TAGI equivalent) which has given rise to one discovery (Meskala); and

·     PS4 Paleozoic Devonian carbonates which remains frontier exploration. 

Activity History

Historically, 84 wells have been drilled in the Essaouira basin with PS2 and PS3 having the highest discovery ratio. Exploration in the basin began in the 1950s resulting in in the discovery of two small gas fields (Kechoula in 1957 and Jeer in 1958) and one oil field (Sidi Rhalem in 1961). By 1970, 35 onshore wells and one offshore well had been drilled, of which 12 were classed as appraisal/development. From 1974 to 1980, a further 13 wells were drilled with the aid of multi-fold 2D seismic resulting in three further discoveries at Toukimt (1976), at N'Dark (1976) and at Meskala (1977).

The development of the Meskala Field gave rise to the discovery of gas-condensate in Triassic clastics at 3,500m and a DST yielded a flow rate of 12 MMscf/d. Between 1980 and 1987 a further 28 wells were drilled including nine development wells at Meskala, two of which were the deepest stratigraphic tests in the basin (4.3km), proving the possibility of Ordovician sands as a second potential Palaeozoic target.

Additionally, 7,000 km of seismic have been acquired since the late 1950s.

In 2009, Magreb Petroleum Exploration (MPE) signed a Petroleum Agreement with ONHYM to secure a 75% interest in the Sidi Moktar North, South and West licences, the remaining 25% being held by ONHYM. MPE subsequently farmed out a 50% working interest operated position to Petromaroc (formerly Longreach) in exchange for a full carry to first commercial gas. During the course of 2013 and 2014, Petromaroc drilled two wells which both had gas shows but which were never completed and tested.

In January 2016, Sound secured a 75% interest in the licences through two transactions. The Company is now working on finalising a farmout of the asset.

Strategic Play - Badile

Permit Area

The Badile Permit is situated in the Piedmont Lombard Basin in northern Italy where the principal play is oil, gas and condensate in deep Triassic dolomites and limestones. The permit is adjacent to ENI's Gaggiano oil field and a short distance from the giant Villafortuna-Trecate and Malossa oil fields with total proven recoverable reserves of over 400 MMboe.

The permit area was initially held by ENI in the exclusive zone until 2004. A total of 460-line km 2D and 238 km² 3D seismic was acquired between 1974 and 1990. Two dry wells were drilled within the permit area between 1978 and 1982.

Activity History

Sound Energy filed an application in January 2006 and the permit was awarded in March 2010. To date G&G data studies, drilling application (Moirago-1 dir. well) and Environmental Impact Assessment have been completed on this permit.

ERC Equipoise Limited completed a full independent Competent Person's Report of this prospect in 2013, confirming a Best Case estimate of gross prospective resources of 178bscf equivalent (106 Bscf of gas plus 12 MMbbl of condensate) with a High Case estimate of 673bscfe (397 Bscf of gas plus 46 MMbbl of condensate) and a Low Case estimate of 46bscfe (28 Bscf of gas plus 3 MMbbl of condensate). The study confirmed a 22% geological chance of success for the prospect. 

In October 2014, Sound Energy purchased a 59,140 m² plot of industrial land in the Lombardy region of Italy, which will host the drill site for the initial Badile exploration well and for all other production wells required to exploit the discovery. The approval of the Environment Impact Assessment ("EIA") for the Badile exploration well was received from the Lombardy regional government in March 2015. Since then, the Company has been advised by UNMIG (the Italian Ministry of Economic Development) that the Badile permit will be extended until the earlier of 31 December 2016 or 12 months from the date of the award of the final authorisation to drill the forthcoming well. This marks an important step in the local permitting process and enables Sound to continue preparations for the forthcoming exploration well. Final authorisation was achieved in May 2016.

In January 2016 Sound Energy, with independent external support, completed the acquisition of additional well stratigraphic information from the area. As a result of the work, Sound updated its assessment of the prospect resulting in an increase in the estimated chance of success to 34%.

Producing Assets

Rapagnano Gas Field

The concession is located in Fermo Province, Marche Region. Geologically the area is within the Ancona-Pescara Basin associated with the Central Apennine foredeep. First gas was delivered from the onshore Rapagnano field to the local gas distributor on 15 May 2013. The asset successfully produced 125.6 MMscf in 2015 at a rate of 0.34 MMscf/d. During the period, Sound also entered into a 12-month gas sales agreement with Steca Energia Srl, until September 2016 based on a variable market price.

Nervesa Gas Discovery

The permit is located in northeast Italy, within the Alpine foredeep province. The Nervesa structure was first drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa-1dir. A) and proved gas-bearing in at least 13 sand intervals within the Tortonian. Sound drilled its first well in July 2013 encountering 46 metres of net pay across 13 zones. A second well, Cascina Daga-1 was drilled on the southern structure during 2015, which did not encounter commercial hydrocarbons. Sound received a Production Concession for the first well (the concession is named Casa Tonetto), in late 2015, achieved first gas in February 2016 and has a GSA with Royal Dutch Shell.

Casa Tiberi Gas Discovery

The permit is located in Ancona, Marche in central Italy, within the foredeep trough of the Central Apennines. First gas was delivered from the onshore Casa Tiberi field, to the local gas distributor on 28 July 2014, with initial production from the Lower Pliocene Cellino formation. Sound Energy signed a gas sales agreement with Prometeo Spa in summer 2014.

Selected Exploration and Appraisal Prospects

Zibido Prospect (Sound Oil 100%) - Exploration

The Zibido prospect is adjacent to the Badile prospect in the Po Valley. It is a downthrown fault terrace play in the Mesozoic with a total depth of 5,600 metres.

Laura Discovery (Sound Oil 100%) - Appraisal

Laura (DR74-AP) is located in the Ionian Sea Zone D within the Sibari Basin, Gulf of Taranto, 4 km offshore, where the average water is 200 m deep. In 1980, commercial gas was discovered in two sand intervals in Laura-1. The Company was awarded the permit in June 2014 and intends to drill the discovery from an onshore location with a long reach deviated well.

Dora/Dalla (Sound Oil 100%) - Appraisal

The Dora gas discovery, which lies 21 km offshore in the Adriatic Sea, was previously drilled in 1972 and achieved flow rates of 200 MMScf/d. The play is a faulted anticline, gas-condensate in the Scaglia Formation (1,400 m depth). The Dalla project, held within the Dora permit, provides additional exploration potential.

Income Statement

In 2015, production continued from the Rapagnano and Casa Tiberi fields, generating revenues of £0.9 million consistent with 2014, which was the first full year of Rapagnano production.

The loss after finance costs and tax from continuing operations increased in 2015 to £18.3 million from £4.9 million, due to a write-off of exploration costs associated with the Cascina Daga-1 well of £5.6 million, impairment of Casa Tonetto £6.3 million and an increase in foreign exchange losses primarily related to intra-group loans denominated in euros. Administrative costs increased by £0.4 million to £3.2 million (2014: £2.8 million) reflecting the increased corporate activity and expansion into a second country.

Cash Flow/Financing

During 2015, £13.9 million of net cash proceeds were raised from financing activities (2014: £19.1 million), primarily from a private placement arranged by Continental Investment Partners in April 2015, and a subsequent Open Offer in June 2015. These placements demonstrate Continental's continued confidence, and the wider shareholder base's confidence, in the Company's strategy against a difficult market backdrop. In 2014, financing activities were split between the issue of debt (£11.4 million gross) and the issue of equity (£8.2 million gross).

The Group spent £7.7 million on investing activities during 2015, which largely consisted of the Cascina Daga exploration well as well as the facilities additions to the Casa Tonetto site in preparation for commercial production.

Balance Sheet

In the year, non-current assets decreased by £7.0 million due to exchange adjustments and impairments offset by capital additions. The functional currency of the Group's Italian subsidiary, which holds most of the Group's assets as at 31 December 2015, is the euro, which weakened significantly against sterling during the year to 31 December 2015 causing the exchange adjustments.

The Group's closing cash balance remained strong at £15.2 million as at 31 December 2015 (2014: £12.6 million). The net proceeds of the successful equity raising more than offsetting the capital expenditure incurred on the work programme for the year. Debt marginally reduced to £12.9 million (2014: £13.4 million).

Accounting Standards

The Group has reported its 2015 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union.

Going Concern

The Directors have reviewed the forward cash flow projections for the Group for the foreseeable future, being at least the next 12 months from the date of this report, which show that the Group has sufficient financial resources to undertake its committed work programme, and thus the Directors have concluded that the Group is a going concern.

Abbreviations:

Bscf: Billion standard cubic feet of gas.

Tcf: Trillion standard cubic feet of gas.

MMbo: Million barrels of oil.

MMboe: Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil).

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2015

		2015 £'000s	2014 £'000s
Revenue		859	983
Operating costs		(538)	(658)
Impairment of producing assets		(6,347)	(723)
Exploration costs		(5,838)	(74)
Gross profit		(11,864)	(472)
Administrative expenses		(3,181)	(2,773)
Group operating loss from continuing operations		(15,045)	(3,245)
Finance revenue		52	7
Foreign exchange loss		(1,389)	(661)
External interest costs		(1,905)	(1,022)
Loss for the year before taxation		(18,287)	(4,921)
Tax expense		-	-
Loss for the year after taxation		(18,287)	(4,921)
Foreign currency translation		(320)	127
Total comprehensive loss for the year		(18,607)	(4,794)
Loss for the year attributable to:
Owners of the company		(18,607)	(4,794)
Non-controlling interests		-	-

		2015 £'000s	2014 £'000s
Loss per share and diluted for the year		(3.90)	(1.40)
Attributable to the equity shareholders of the parent (pence)		(3.90)	(1.40)

 

Consolidated Balance Sheet

as at 31 December 2015

	Notes	2015 £'000s	2014 £'000s
Non-current assets
Property, plant and equipment	6	5,558	13,200
Intangible assets	7	9,564	8,888
Land and buildings		1,327	1,433
		16,449	23,521
Current assets
Other receivables		2,506	2,173
Prepayments		99	157
Cash and short term deposits		15,240	12,608
		17,845	14,938
Total assets		34,294	38,459
Current liabilities
Trade and other payables		2,097	2,194
Loans repayable in under one year		5,751	131
		7,848	2,325
Non-current liabilities
Deferred tax liabilities		1,992	2,099
Loans due in over one year		7,157	13,437
Provisions		1,138	1,164
		10,287	16,700
Total liabilities		18,135	19,025
Net assets		16,159	19,434
Capital and reserves
Equity share capital		86,315	71,298
Warrant reserve		369	369
Foreign currency reserve		1,068	1,388
Accumulated deficit		(71,593)	(53,621)
Total equity		16,159	19,434

Consolidated Statement of Changes in Equity

for the year ended 31 December 2015

		Share capital £'000s	Share premium £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2015		4,153	67,145	(53,621)	369	1,388	19,434
Total loss for the year		-	-	(18,287)	-	-	(18,287)
Other comprehensive income		-	-	-	-	(320)	(320)
Total comprehensive loss		-	-	(18,287)	-	(320)	(18,607)
Issue of share capital		886	15,342	-	-	-	16,228
Transaction costs		-	(1,211)	-	-	-	(1,211)
Share based payments		-	-	315	-	-	315
At 31 December 2015		5,039	81,276	(71,593)	369	1,068	16,159

		Share capital £'000s	Share premium £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2014		2,876	60,209	(49,029)	-	1,261	15,317
Total loss for the period		-	-	(4,921)	-	-	(4,921)
Other comprehensive income		-	-	-	-	127	127
Total comprehensive income/(loss)		-	-	(4,921)	-	127	(4,794)
Issue of share capital		1,277	7,442	-	-	-	8,719
Transaction costs		-	(506)	-	-	-	(506)
Fair value of warrants		-	-	-	369	-	369
Share based payments		-	-	329	-	-	329
At 31 December 2014		4,153	67,145	(53,621)	369	1,388	19,434

Consolidated Cash Flow Statement

for the year ended 31 December 2015

	Notes	2015 £'000s	2014 £'000s
Cash flow from operating activities
Cash flow from operations		(3,487)	(3,327)
Interest received		52	7
Net cash flow from operating activities		(3,435)	(3,320)
Cash flow from investing activities
Capital expenditure and disposals		(1,156)	(2,258)
Exploration and development expenditure		(6,545)	(1,089)
Net cash flow from investing activities		(7,701)	(3,347)
CSTI funding contract		(117)	(242)
Net proceeds from debt		-	11,398
Net proceeds from equity issue		15,017	8,213
Interest payments		(1,051)	(280)
Net cash flow from financing activities		13,849	19,089
Net increase in cash and cash equivalents		2,713	12,420
Net foreign exchange difference		(81)	(355)
Cash and cash equivalents at the beginning of the year		12,608	543
Cash and cash equivalents at the end of the year		15,240	12,608

Notes to the Financial Statements

1 Accounting policies

Sound Energy plc is a public limited company registered and domiciled in England and Wales under the Companies Act 2006.

(a)      Basis of preparation

The financial statements of the Group and its parent have been prepared in accordance with:

1.   International Financial Reporting Standards (IFRS) as adopted by the European Union (IFRSs, as adopted by the European Union), IFRIC Interpretations; and

2.   those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements have been prepared under the historical cost convention, except to the extent that the following policies require fair value adjustments.

The Group and its parent company's financial statements are presented in sterling (£) and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

The principal accounting policies set out below have been consistently applied to all financial reporting periods presented in these consolidated financial statements and by all Group entities, unless otherwise stated. All amounts classified as current are expected to be settled/recovered in less than 12 months unless otherwise stated in the notes to these financial statements.

The Group and its parent company's financial statements for the year ended 31 December 2015 were authorised for issue by the Board of Directors on 23 May 2016.

The financial position of the Group, its cash flows and available debt facilities are described in the Financial Review above. As at 31 December 2015 the Group had £15.2 million of available cash. Based on the current management plan, management believes that the Group will remain a going concern for the next 12 months from the date of the authorisation of the financial statements on the basis that the Group has sufficient funding options for the forecast expenditure (12 months through 23 May 2017) using both the available cash resources and funding from partners in the main strategic licences.

b) Use of estimates and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual outcomes could differ from those estimates.

The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the impairment of intangible exploration and evaluation (E&E), investments and goodwill and the estimation of share based payment costs.

The Group determines whether E&E assets are impaired in cost pools when facts and circumstances suggest that the carrying amount of a cost pool may exceed its recoverable amount. As recoverable amounts are determined based upon risked potential, or where relevant, discovered oil and gas reserves, this involves estimations and the selection of a suitable discount rate. The capitalisation and any write-off of E&E assets necessarily involve certain judgements with regard to whether the asset will ultimately prove to be recoverable.

In determining the treatment of E&E assets and investments the Directors are required to make estimates and assumptions as to future events and circumstances. There are uncertainties inherent in making such assumptions, especially with regard to oil and gas reserves and the life of, and title to, an asset; recovery rates; production costs; commodity prices; and exchange rates. Assumptions that are valid at the time of estimation may change significantly as new information becomes available and changes in these assumptions may alter the economic status of an E&E asset and result in resources or reserves being restated. The estimation of recoverable amounts, based on risked potential and the application of value in use calculations, are dependent upon finance being available to fund the development of the E&E assets.

Goodwill is tested annually and at other times when impairment indications exist. When value in use calculations are undertaken, management estimates the expected future cash flows from the asset and chooses a suitable discount rate in order to calculate the present value of those cash flows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in the treatment of E&E assets above.

The estimation of share based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the continuing participation of key employees.

The Group considers the latest available information on the performance of producing licences compared to expected targets and where there are indications that the production is below expectations, the Group's reservoir engineers conduct an evaluation to identify the technical reasons and where necessary seek opinion from external engineers. The Group has reviewed the carrying value of the Casa Tonetto licence in view of the reservoir performance being below expectations upon commencement of production at the beginning of 2016 and recognised that an impairment charge of £6.3 million (note 6) was required. The carrying value of Casa Tonetto after impairment was £4.8 million and for every 5% adjustment in the reservoir size the impairment charge would vary by approximately £0.3 million.

2 Operating Loss

	2015 £'000s	2014 £'000s
Operating loss is stated after charging:
Auditor's remuneration	76	75
Depreciation	136	225
Employee costs	2,557	2,192
Impairment charges and exploration costs	12,185	723

3 Auditor's Remuneration

	2015 £'000s	2014 £'000s
Fees payable to Company's Auditor for the audit of Company's annual accounts	65	65
Fees payable to the Company's Auditor and its associates for other services:
The audit of the Company's subsidiaries pursuant to legislation	7	6
Tax services	4	4
	76	75

4 Employee Costs

	2015 £'000s	2014 £'000s
Staff costs, including Executive Directors
Share based payments	315	329
Wages and salaries	1,885	1,507
Social security costs	308	347
Employee benefits	49	9
Total	2,557	2,192

	2015 Number	2014 Number
Number of employees (including Executive Directors) at the end of the year
Technical and operations	8	5
Management and administration	14	11
Total	22	16

5 Profit/(loss) per share

The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. Basic profit/(loss) per share is calculated as follows:

	2015 £'000s	2014 £'000s
Loss after tax from continuing operations	(18,287)	(4,921)

	2015 million	2014 million
Weighted average shares in issue	467	360

	2015 pence	2014 pence
Loss per share (basic) from continuing operations	(3.90)	(1.40)

6 Property, plant and equipment

	2015 £'000s	2014 £'000s
Development and production assets
Cost
At start of the year	15,566	2,947
Exchange adjustments	(957)	(548)
Additions	234	1,612
Reversal of capitalised interest	(546)	-
Transfers	-	11,555
At end of the year	14,297	15,566
Depreciation
At start of the year	2,454	1,559
Impairment of assets	6,347	712
At end of the year	8,906	2,454
Net book amount	5,391	13,112
Fixtures, fittings and office equipment
Cost
At start of the year	273	231
Exchange adjustments	(10)	(4)
Additions	120	46
Disposal	(6)	-
At end of the year	377	273
Depreciation
At start of the year	185	143
Exchange adjustments	(4)	-
Charge for the year	31	42
Disposals	(2)	-
At end of the year	210	185
Net book amount	167	88
Total net book amount	5,558	13,200

In 2015, the impairment costs related to Casa Tonetto due to latest revisions on the remaining life of production from the field. The Group has reviewed the carrying value of the Casa Tonetto licence in view of the reservoir performance being below expectations upon commencement of production at the beginning of 2016 and recognised an impairment charge of £6.3 million as at 31 December 2015. In 2014, San Lorenzo was impaired due to revisions on the remaining life of production from the field (see note 1 for further details).

	2015 £'000s	2014 £'000s
Italy	6,347	712
Total	6,347	712

7 Intangibles

	Goodwill £'000s	Software £'000s	Exploration & Evaluation Assets  £'000s	2015 £'000s
Cost
At 1 January 2015	2,099	91	11,758	13,948
Additions	-	15	6,545	6,560
Transfers	-	-	-	-
Exchange adjustments	(107)	-	(203)	(310)
At 31 December 2015	1,992	106	18,100	20,198
Impairment
At start of the year	-	-	5,060	5,060
Charge for the year	-	6	5,568	5,574
At end of the year	-	6	10,628	10,634
Net book amount at 31 December 2015	1,992	100	7,472	9,564

	Goodwill £'000s	Software £'000s	Exploration  & Evaluation Assets  £'000s	2014 £'000s
Cost
At 1 January 2014	2,167	-	22,393	24,560
Additions	-	91	998	1,089
Transfers	-	-	(11,555)	(11,555)
Exchange adjustments	(68)	-	(78)	(146)
At 31 December 2014	2,099	91	11,758	13,948
Impairment
At start of period	-	-	5,060	5,060
Exchange adjustments	-	-	-	-
Charge for period	-	-	-	-
At end of period	-	-	5,060	5,060
Net book amount at 31 December 2014	2,099	91	6,698	8,888

Goodwill

Goodwill arises on acquisitions accounted for at fair value and consists largely of the synergies expected from combining acquired operations with those of the Group. In accordance with IFRS, goodwill is assessed annually for impairment. The carrying value of the goodwill is linked to the exploration and evaluation assets, on the basis that there is significant headroom (see below) no impairment is considered necessary. The impairment charge is included within exploration costs in the consolidated statement of comprehensive income.

Exploration and Evaluation Assets

Intangible assets are allocated to the cash generating unit ("CGU") identified according to business segment.

In assessing whether impairment indications exist in relation to intangible assets, the Directors have regard to the results of the Group's exploration and evaluation programme and to the most recent review and valuation of the Group's assets prepared independently by its geoscience advisers in competent persons' reports ("CPRs").

A CPR for covering most of Group's assets was released in April 2015. A CPR for Santa Maria Goretti was performed in July 2014. A Badile CPR was executed in October 2013 which gave a Best estimate NPV10 of €486 million, an increase of 60% on the previous CPR. During the year the Group wrote off £5.8 million as exploration costs primarily relating to the Carita licence as commercial quantities of hydrocarbons were not discovered at the conclusion of drilling. After taking account of the CPR and current work programme the Directors do not therefore consider that any impairment indications exist in relation to the remaining Italian CGU.

The valuation calculations included in the CPRs are entirely dependent on the availability of finance to fund capital expenditure on the development of exploration and evaluation assets. Should finance not be available the carrying amounts of the Group's exploration and evaluation assets are likely to be impaired to their market value in a distressed sale.

The methodology to arrive at the values attributed to the Group's assets in the CPRs was as follows:

·     Net present value ("NPV") calculations were prepared for proven contingent resources, including all the Italian licences.

Estimates of the NPV of any project are always subject to many factors and wide margins of error. NPV calculations have been prepared over the period of the expected production profile and duration of sales contracts. The principal assumptions on which the NPV calculations are based are as follows:

·     The 2015 Italian CPR was produced with five different pricing scenarios with base gas prices of between 23 euro cents and
31 euro cents for 2015. Gas prices, in all cases, were then escalated at 2% per annum from 2016. The oil price scenarios were priced from 38.64 euros per barrel to 57.96 euros per barrel with future years being escalated according to a Brent futures curve until 2022 and from then on at 2% per annum.

·     A discount rate of 10% was used which the Directors believe to be standard industry practice and approximate to the Group's weighted average cost of capital.

·     The NPV calculations are most sensitive to the assumptions for production and operating expenditure.

During the year, the Group had capitalised interest costs of approximately £525,000 (2014: £799,000); primarily to Carita licence but these were subsequently written off on impairment of the Carita licence.

8 Post Balance Sheet Events

On 14 January 2016, the Company entered into an agreement with Maghreb Petroleum Exploration S.A (''MPE'') for the purchase of three onshore gas permits located in Morocco (together the 'Sidi Moktar Licences'). In consideration for the acquisition, the Company issued MPE 21,764,706 ordinary shares and granted MPE a 1.6% net profit interest in any future cash flows from the Kechoula discovery.

On 8 February 2016, the Company announced that it had signed a binding agreement with Oil & Gas Investment Fund S.A.S ('OGIF') whereby OGIF granted the Company an option to acquire a 55% interest in the Meridja permit, onshore Morocco. As consideration for the option, the Company was required to pay OGIF US$100,000 as well as funding commitment of up to US$200,000 and on exercise of option pay a further US$150,000 to OGIF and a carry of costs up to the end of a first Meridja exploration well.

On 10 March 2016, the Company announced a further 50% acquisition of an operated interest in three onshore gas licences in Morocco (together the 'Sidi Moktar Licences') from PetroMaroc Corporation Plc ('PetroMaroc'). The Company also entered into a transaction with Culebra Petroleum Limited for Culebra to acquire 50% interest in Sidi Moktar. The effect of the transaction was that the Company ended with an effective 25% working interest in Sidi Moktar with a carry to US$18 million and an additional US$6 million receivable by the Company.

On 21 April 2016 the Company announced the commencement of drilling of the first well at Tendrara, onshore Morocco.

On 10 May 2016, the Company announced the signing of heads of terms with Greenberry plc for Greenberry and other investors to subscribe for bonds to be issued by the Company to provide additional funding for the Company's growth strategy and simplify the Company's corporate debt. The bonds are expected to be five year non-amortising bonds with aggregate par value of at least €28.8 million and a 5% coupon. The bonds will be issued at a 32% discount to par and will attract a total cash fee of €1.1 million. The Company also intends to issue Greenberry 70,312,500 warrants to subscribe for new shares in the Company at an exercise price of 30p per share and with an exercise period of five years from the date of issue.

On 11 May 2016, the Company announced the receipt of the final Badile Drilling Approval.

On 16 May 2016, the Company provided an update on Nervesa and noted that there had been reduction in the reservoir pressure and that it was planning for a remedial re-perforation and evaluating the possibility of a sidetrack well.

 

END

 

 

FR EANSDASAKEFF