Final Results

RNS Number : 5058T

Sound Energy PLC

21 March 2019

 

21 March 2019

SOUND ENERGY PLC

("Sound Energy" or the "Company")

Final Results

Sound Energy, the Moroccan focused upstream oil and gas company, announces its audited final results for the year ended 31 December 2018.

HIGHLIGHTS

Morocco

·      Completion of 2,850 line kilometres fully carried seismic programme

·      Recent second TAGI discovery at TE-10 at Tendrara with testing underway

·      De-risking of existing TE-5 discovery; including production concession awarded and GSA approaching

·      Heads signed for Infrastructure BOOT with Enagas, Elecnor and Fomento

Corporate

·      Cash balance as at 31 December 2018 of £20.5 million

·      Completion of disposal of Italian interests to centre strategic focus on high impact Moroccan assets

For further information please contact:

Vigo Communications - PR Adviser Patrick d'Ancona Chris McMahon	Tel: [phone]
Sound Energy James Parsons, Chief Executive Officer  JJ Traynor, Chief Financial Officer	[e-mail]
Cenkos Securities - Nominated Adviser Azhic Basirov David Jones Ben Jeynes	Tel: [phone]
RBC - Joint Broker Matthew Coakes Martin Copeland	Tel: [phone]
Macquarie Capital (Europe) Limited - Joint Broker Alex Reynolds Nick Stamp	Tel: [phone]

The information communicated within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Chairman's statement

2018 was a very active year for Sound Energy delivering on our priorities to de-risk and advance our existing discovery and unlock our significant exploration potential.

During the year, Sound Energy focused on safely delivering its Moroccan growth strategy which culminated in the recommencement of exploration drilling operations on the Tendrara licences in Eastern Morocco. During the year, in addition to the exploration drilling programme, the Company was awarded a 25-year exploitation (production) concession for the TE-5 discovery at Tendrara (less than two years from discovery), entered into a Heads of Terms with a Spanish consortium embracing the development infrastructure, completed its fully Schlumberger-carried Eastern Morocco 2D seismic programme, commenced the process to introduce Schlumberger directly onto the Eastern Morocco licences and was awarded new eight-year Petroleum Agreements for Sidi Moktar, Tendrara and Anoual. The Company is now well advanced in the execution of its Moroccan strategy which includes early options for monetisation.

Strengthening the Moroccan Portfolio

The Company continues to believe that the TAGI and Palaeozoic plays across Tendrara and Anoual have the potential to become a material hydrocarbon province, transforming both the Company and the Moroccan gas industry. In 2018, the Company strengthened its licence position by securing a new eight-year licence combining Tendrara and Matarka. In addition, the Company's Moroccan strategic partner, Schlumberger, underlined its commitment to its partnership with Sound Energy and to the Tendrara licences by issuing notice to convert its synthetic commercial interest in the licences to a full participating licence interest.

Sound Energy continued to deepen its knowledge of the Eastern Morocco basin through, in part, the completion in August 2018 of the US$27.2 million seismic programme which was fully funded by Schlumberger. This work has supported our new Eastern Morocco basin model and was critical to minimising the risk of the 2018/19 exploration drill programme.

Exploration Drilling Programme

In October, following an extensive pre-drill exploration work programme and detailed well planning, the Company embarked upon drilling the first well in a three-well exploration campaign in Eastern Morocco. The first well, TE-9, targeting the A1 structure at Tendrara, was safely drilled ahead of schedule and under budget. The well encountered approximately 60m gross section in the primary TAGI objective, consisting of dolomitized silty sandstones.  In the secondary Palaeozoic objective consisted of an approximately 630m of a Westphalian aged succession of fine sandstones, siltstones and mudstones. The wireline logs did not indicate the presence of producible gas in either the primary or secondary objectives. Subsequent petrophysical analysis indicated that the intervals are of low porosity and therefore poor reservoir quality. Despite the poor reservoir quality, subsequent laboratory analysis of the drill gas samples from the well confirmed the presence of thermogenic hydrocarbons supporting the Company's basin model and the significant remaining exploration potential in the area.

In December, the Company commenced the second well (TE-10) in the exploration programme, targeting a TAGI structural-stratigraphic play. TE-10 was also safely drilled ahead of schedule and under budget, underlining the Company's operational capabilities. The well logs indicated a potential gross reservoir interval between a measured depth (''MD'')1,899 metres and 2,009 metres MD. The gas shows encountered during drilling and the petrophysical analysis both indicate that net pay extends below the seismically mapped structural closure.   These observations suggest that the gas accumulation most likely extends up-dip into the larger North East Lakbir structural-stratigraphic trap. The well also encountered additional thin-bedded net pay and following the first successful modular formation dynamic testing ("MDT") in the TAGI sands at Tendrara, the Company successfully recovered a gas sample to surface.

Following completion of TE-10 drilling, the Company commenced the planning process for an unstimulated and stimulated well test over the reservoir interval in early 2019.

Tendrara TE-5 Development

The Company made considerable progress in advancing the development of the Tendrara TE-5 discovery. An independent Competent Person's Report ("CPR") in relation to the discovery was completed in January 2018 - the report certified mid-case resources of 651 Bcf unrisked gas originally in place (GOIP) with an upside case of 873 Bcf and a downside case of 349 Bcf.

In June, following a competitive market enquiry process, a Heads of Terms for front end engineering design ("FEED") for a 20-inch (240mmsc/d capacity) gas export pipeline and central processing facilities ("CPF") was signed with a consortium of Enagas, Elecnor and Fomento who bring strong industry expertise and capabilities.

An innovative 'build-own-operate-transfer' ("BOOT") structure was agreed with the consortium which further underpins the financial attractiveness of the development by leveraging vendor financing. FEED for the pipeline was completed in November, with FEED for the CPF scheduled to be completed in early 2019. Since June, and in parallel with the technical work, the Company has made progress to further develop the structuring and commercial framework relating to the proposed BOOT transaction.

Positive discussions have continued to progress the gas sales agreement ("GSA") for offtake which forms a key building block to support project sanction. The Company expects to sign binding GSA terms shortly.

The Company continues to maintain a strong focus on health, safety, environment and the community, with the Company working in partnership with a local charity on the renovation of the Matarka healthcare centre.

Sidi Moktar

The Company views its Sidi Moktar licences as an exciting opportunity to explore for high-impact prospectivity within the pre-salt Triassic and Palaeozoic plays in the underexplored Essaouira Basin in Southern Morocco. In June, the Company was delighted to receive Ministerial approval of a new eight-year Sidi Moktar Onshore Petroleum Agreement. An Environmental Impact Assessment for the proposed seismic programme is underway and the Company continues to assess a potential farm down of the asset, while retaining operatorship of the permits, ahead of potential exploration operations in 2019.

Italy Disposal

Following the agreement entered into in 2017 with Saffron Energy PLC (now Coro Energy plc) to divest the Company's Italian portfolio, the sale was successfully completed in April 2018. This divestment allowed the Company to centre its strategic focus and investments on its high-impact Moroccan portfolio whilst providing Sound Energy shareholders with direct shareholdings in Coro Energy plc. Work continues with Coro Energy plc on the restoration of the Badile land, to which the Company retains its economic rights to receive the proceeds of a future sale.

Corporate

The Company remains in a strong financial position for 2019 with cash balances remaining at 31 December 2018 of US$26 million. In June, the Company successfully completed an equity placing of US$15 million before expenses. The Company has significantly strengthened the Board during 2018 with Richard Liddell being appointed as Non-executive Chairman, David Clarkson joining as a Non-executive Director and JJ Traynor, the Company's Chief Financial Officer, joining the Board.

Richard Liddell | Chairman (Non-executive)

OPERATIONAL REVIEW

Asset Overview

Eastern Morocco

Asset	Interest	Status	Area
Greater Tendrara	47.5% interest operated	Exploration Permit	14,599km2 acreage, 10 wells drilled
Anoual	47.5%* interest operated	Exploration Permit	8,873km2
Tendrara Production Concession	47.5%* interest operated	Concession	133.5km2

* upon Schlumberger converting their synthetic interest into an interest on the licence

Southern Morocco

Asset	Interest	Status	Area
Sidi Moktar	75% interest operated	Exploration Permit	4,711km2 acreage

 

Operationally, 2018 was a busy year for Sound Energy in Morocco.

 

Exploration Programme

Two challenging exploration wells were safely delivered in the year, TE-9 and TE-10 both within the Greater Tendrara permit in Morocco. TE-9 proved unsuccessful due to a lack of effective reservoir in both the targeted TAGI and Westphalian sequences. The second well TE-10 completed drilling in December 2018 and established a new gas discovery within the TAGI sequence with a potential gross reservoir interval of 110m MD. A gas sample was successfully recovered, the first successful MDT gas test from the TAGI sandstone in the Tendrara licence. These two wells have fulfilled the work programme commitment for the initial three-year phase of the new Greater Tendrara licence awarded in August 2018, combining the previous Tendrara Lakbir and Matarka licences into a single licence.

Geophysical and Geological Programme

2018 saw Sound Energy complete its geophysical programme in Eastern Morocco with an extensive programme of 2D seismic acquisition and processing. This seismic programme augmented the coverage of 22,800 square kilometres of the licences with flown Gravity Gradiometry, Magnetics and LiDAR data and detailed satellite imagery completed in 2017. The seismic programme totalled approximately 2,850 line kilometres commenced in October 2017 and all phases were completed in August 2018. In total, approximately 2,252 line kilometres were acquired in 2018. In addition to this operational programme, the Company has completed reprocessing approximately 2,431 line kilometres of historical 2D seismic data across both the Greater Tendrara and Anoual licences, including advanced quantitative interpretation techniques. The Company further progressed an integrated programme of geological studies including commissioning new petrographic, surface geochemical, chemostratigraphic and biostratigraphic analyses of the historical well data. Both geological and geophysical programmes provided the datasets to build a 3D basin model in order to quantify hydrocarbon charge, migration timing and migration pathways on a regional basis.

HSE

The Company's HSE record met KPIs of zero LTIs Company-wide for >1 million exposure hours and >2.5 million kilometres driven on both Seismic and Drilling Operations.

Development of Existing Discovery

Continued good progress has been made on the development project, including the resource certification issued in January 2018. Key forward steps including the contracting, engineering and financing, are progressing well. Following a competitive process and negotiation, a consortium comprising Enagas, Elecnor and Fomento has been awarded the front-end engineering and design ("FEED") and exclusivity to finalise the funding, construction and operation for both a 20-inch pipeline and the central processing facility under a 'build-own-operate-transfer' ("BOOT") structure. Off-take and other related commercial agreements under the Gas Sales Agreement are in advanced negotiations.

In September, Sound Energy and its partners were awarded the production concession. The production concession covers an area of 133.5 square kilometres and follows the application made in June 2018. The partnership expects to be in a position to take a final investment decision on the Tendrara development once key development milestones have been secured, including a Gas Sales Agreement, FEED development capital funding and local regulatory administrative formalities.

Commercial Relationships

A new Greater Tendrara licence was awarded in August 2018, combining the previous Tendrara-Lakbir and Matarka licences into a single licence with Schlumberger converting through its affiliate Schlumberger Silk Route Services Limited the previous 27.5% synthetic interests held by an affiliate of Schlumberger Oilfield Holdings Limited in the Tendrara Lakbir licences into a participating interest. Schlumberger also decided to convert their 27.5% synthetic into 27.5% participating interest in the Anoual licences and the Tendrara Production Concession. Sound Energy retained operatorship of this Eastern Morocco Portfolio.

Eastern Morocco

2018 Highlights

̶   TE-10 vertical well drilled and proved evidence of another gas discovery in the TAGI play on the Greater Tendrara licence

̶   Achievement of the Reserves Certification on the first field (TE-5 Horst structure)

̶   Completion of renegotiation of the exploration licences combining Tendrara Lakbir and Matarka into a single licence, Greater Tendrara with a new 8 year term

̶   Fulfilling the initial three-year period work programme commitment on Greater Tendrara with the drilling of TE-9 and TE-10

̶   Completion of the biggest 2D seismic acquisition and processing ever done onshore Morocco to provide a better image of the drilled structures and to support an improved assessment of potential prospects

̶   Award of a 25 year exploitation (production) concession for the TE-5 gas discovery at Tendrara and entered into a Heads of Terms with the Enagas-led consortium embracing the associated development infrastructure

Permit Area

̶   Figuig Province, North-East Morocco

̶   120 kilometres from Gazoduc Maghreb Europe ("GME") pipeline (connecting Algeria and Morocco to the Spanish/Portuguese gas grids)

̶   Greater Tendrara and Anoual licences are sub-divided into thirteen blocks

Geology

Greater Tendrara is contiguous with the Algerian Triassic Province and Saharan Hercynian platform. Comparable tectono-sedimentary as the evolution in the Algeria Basins.

Partnerships

̶   Sound Energy farmed in to the Tendrara licence in June 2015, taking a 55% working interest in the licence, partnering L'office National des Hydrocarbures et des Mines ("ONHYM") (25% interest) and OGIF - (20% interest) and assuming Operatorship.

̶   In December 2015, Sound Energy entered into a Field Management Agreement ("FMA") with Schlumberger. 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 Energy as Operator in exchange for an upside linked to production performance.

̶   In February 2017, Sound Energy entered into binding agreements with OGIF for the conditional acquisition by the Company of a further 20% interest in the Company's Tendrara-Lakbir permits and a 75% position in Matarka (relinquished area of the Tendrara exploration area) and in Anoual permits (ex Meridja reconnaissance licence converted in permits). These agreements were approved by Sound Energy shareholders at a general meeting in March 2017.

̶   In June 2017, Sound Energy and Schlumberger expanded their partnership to Matarka reconnaissance licence and Anoual permits.

̶   In September 2017, after the completion of all the conditions precedent-related to February 2017's binding agreements, OGIF became a substantial shareholder of the Company.

̶   In August 2018, the Tendrara-Lakbir and Matarka licences are combined into a single licence, Greater Tendrara, and Schlumberger convert their synthetic interests into participating interests.

Historical Well Results

̶   First well (TE-6):
28m net pay, 17 mmscf/d achieved post-stimulation

̶   Second well (TE-7):
32 mmscf/d after clean up: Successful extended well test

Main Results in 2018

̶   TE-10 proved another gas accumulation, 19 kilometres to the Northeast of the Tendrara production concession, in the TAGI sequence, commencing at a measured depth of 1,899 metres. It penetrated a potential gross interval of 110 metres with gas shows greater than background levels observed from 1,908 metres to approximately 2,030 metres MD. The TAGI encountered by TE-10 was also interpreted to be at a different reservoir pressure to the previous wells on the TE-5 Horst (TE-5, TE-6, TE-7 and TE-8).

̶   Preliminary interpretation of the intermediate wireline log data from TE-10 indicates thinly bedded gas bearing intervals within the gross section, with initial estimates of net pay of up to 10.5 metres and an average porosity of 8%. FMI logs have potentially identified the presence of additional thin bedded net pay within the gross reservoir interval. An MDT gas sample (comprising C1 to C5 hydrocarbons) was successfully recovered from one of these pay intervals at approximately 1,937 metres MD.

̶   The gas shows observed extend below the currently mapped structural closure suggesting the gas accumulation may extend up dip into the larger stratigraphic trap. The North East Lakbir stratigraphic trap, the most material of TE-10's two targets, had pre-drill mid case potential on a gross (100%) basis of 2.7 Tcf gas originally in place ("GOIP") (4.5 Tcf GOIP upside case and a 1.5 Tcf GOIP low case).

̶   Sound Energy completed the 2D seismic and magneto-telluric acquisition in Eastern Morocco, the largest onshore survey ever in Morocco.

Future Focus

̶   Sound Energy will conduct a rigless stimulated well test over the TE-10 reservoir interval. The testing programme will conduct a series of flow tests on multiple intervals between 1,899 metres MD and 2,070 metres MD to establish the presence of deepest moveable gas and then mechanically stimulate the most prospective reservoir zones in a series of production flow tests. This is expected to occur in early 2019.

̶   A third well, TE-11, targeting the Palaeozoic in the northern area of the Greater Tendrara licence, is expected to be drilled in 2019. Groundworks for TE-11 are expected to commence after the TE-10 well test subject to partners' approvals.

Eastern Morocco - Commercialisation

BOOT and FEED

The Company continued to make good progress commercialising its Eastern Morocco licence position. In June, the Company was pleased to enter into a binding Heads of Terms with a Spanish Consortium led by the Spanish midstream gas company, Enagas, for the provision of build own operate transfer ("BOOT") services for the key infrastructure (processing and treatment facilities and gas export pipeline) associated with its proposed development of the TE-5 discovery.

The agreement sets out the terms upon which the consortium will undertake and finance front end engineering design ("FEED") and the conditional terms upon which the development and financing of the facilities will be undertaken by the consortium. FEED is now under way and is expected to complete in early 2019 prior to entering into a definitive BOOT Agreement ahead of the Company taking a Final Investment Decision (FID) on the project.

Approval of Production Concession

The Company submitted its field development plan for the proposed TE-5 development to the Moroccan State in June and was pleased to have been awarded a 25-year exploitation (production) concession in September - a significant milestone in progressing Sound Energy's Eastern Morocco commercialisation strategy. Award of the concession was followed by other pre-FID activities including progression of the environmental impact assessment, pipeline route survey and continuation of FEED activities.

Gas Sales Agreement

The Company continues to make good progress in negotiating long-term gas offtake arrangements in support of the proposed development. This is a critical component in the proposed development and in the overall value creation in Eastern Morocco, and the Company anticipates signing binding gas sales terms in 2019.

Southern Morocco

The Sidi Moktar permit is located in the Essaouira Basin in central-southern Morocco and is sub-divided into three sub-blocks (North, South and West) with a combined area of 4,711 km². Sound Energy originally farmed into the Sidi Moktar licences in 2015 and took over operatorship in 2016. Following the successful completion of the work programme on the old licences, the permit was re-awarded to Sound Energy in April 2018 with an extended footprint. Sound Energy holds a 75% interest in the licence, with ONHYM holding the remaining 25%. The licence has an overall eight-year period (expiring in April 2026) divided into three phases: an initial period of two years and six months, followed by a first extension period of three years and second extension period of a further two years and six months.

The Sidi Moktar permit area hosts some 40 vintage wells drilled between the 1950s and the present. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoir in the field are Triassic aged sands, directly analogous to the deeper exploration plays in the Sidi Moktar licences. The Meskala field and its associated gas processing facility is linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for the domestic and export markets. This pipeline passes across the Sidi Moktar licence.

Two main play types are present in the Sidi Moktar licence. These are broadly divided into the Sidi Shallow and Sidi Deep play types. The main focus of activity in the basin and licence area historically has been the shallow plays. Indeed a number of discoveries were made from the 1950s to the present in Jurassic aged carbonates and clastics. With the discovery of the Meskala field in the 1980s, focus switched to the deeper play types. The discovery of the Meskala field proved the existence of a deep petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt super seal and provides evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within the deeper play fairways.

Sidi Shallow (approx. 1,000 metres to 3,000 metres depth below surface)

̶   Mainly Jurassic aged carbonate and clastic reservoirs.

̶   Gas discovery (Kechoula) in Argovian and Lower Liassic aged reservoirs. The Argovian aged reservoir was successfully tested in the Kechoula discovery by Sound Energy, by re-enerting the Koba-1 well.

Sidi Deep (approx. 3,000 metres to 4,500 metres depth below surface)

̶   Mainly Triassic and older clastic and carbonate reservoirs, sealed by Triassic salt.

̶   A potential of up to 9 Tcf mid case, gross, unrisked, gas initially in place.

Future development

The forward plans for Sidi Moktar, following the initial tests of the remaining potential of the Kechoula discovery, are focused on exploring the deep potential of the Triassic TAGI and Palaeozoic plays. An exploration 2D seismic programme is planned to start in the second half of 2019. The 2D seismic programme will be focused on improving the imaging in the pre-salt section.

Italy

Disposal of Italian Portfolio

On 22 January 2018, the Company announced entry into a binding conditional sale and purchase agreement with Saffron Energy Plc under which Saffron acquired the Company's portfolio of Italian interests and permits through the acquisition by Saffron of the entire issued share capital of the Company's wholly owned subsidiary, Sound Energy Holdings Italy Limited. On completion Saffron was renamed Coro Energy plc. The divestment successfully completed on 9 April 2018.

The consideration for the disposal was the issue of 183,907,500 new ordinary shares in Saffron directly to Sound Energy plc shareholders. The consideration value was approximately £8.0 million using the completion date share price of 4.3 pence per share.

FINANCIAL REVIEW

We invested £12.4 million during 2018, primarily on the TE-9 and TE-10 wells. Approximately £8.0 million worth of Coro Energy plc shares were distributed to shareholders, as payment for Sound's exit from Italy. Sound's cash position at the end of the year was £20.5 million, positioning us well for 2019.

Income Statement

The loss for the year before tax from continuing operations was £11.7 million (2017: £12.3 million). Exploration costs of £4.1 million (2017: nil) related to the impairment charge of TE-9 well costs as the well didn't encounter producible gas. Administrative costs at £8.9 million were slightly higher than 2017 administration costs of £8.5 million.

Foreign exchange gains and losses primarily related to intra-Group loans and Euro denominated borrowings.

As part of the acquisition of the Sidi Moktar licences, onshore Morocco, an agreement was entered into with PetroMaroc and provided that, if the shares of the Company which were issued as part of the consideration for the acquisition were sold, the realised proceeds for any share price achieved above 50 pence would be shared equally between the Company and PetroMaroc. The derivative financial instruments arose from this agreement. During the year, PetroMaroc sold all the outstanding shares at prices below 50 pence. The carrying value of the derivative, £80 thousand, at the time of the sale was expensed. In 2017, a £1.9 million loss arose from the change in the share price during the year.

The disposal of the Group's operations in Italy completed in April 2018. The profit from discontinued operations increased to £5.0 million (2017: £21.8 million loss), primarily from the transfer of £1.5 million cumulative translation gains to the income statement on the Italy divestment and recognition of interest in Badile land and VAT refund receivable in line with the divestment agreement. The loss in 2017 was primarily due to an impairment charge of approximately £19.0 million attributable to the Badile licence following sub-commercial well results.

Cash Flow/Financing

During 2018, an equity raise, warrants and share option exercises raised approximately £12.2 million (2017: £11.6 million). Net proceeds from the July 2018 equity raise was £10.8 million.

The financing costs were £2.4 million (2017: £1.1 million) primarily due to amortised costs of the bonds, net of interest capitalised to the exploration licences of £0.6 million (2017: £1.6 million). The capitalised interest was lower in 2018 compared to 2017 due to a lower capital expenditure on the licences during 2018.

The Group spent £12.4 million (2017: £24.0 million) on investing activities during 2018, which largely consisted of spend on the greater Tendrara licence TE-9 and TE-10 exploration wells in Morocco and capitalised general and administrative expenses. £2.7 million of cash disposed with Italian operations is included in the cash flow from investing activities.

 

Balance Sheet

Following the award to the Group of a production concession in September 2018, covering the Tendrara's TE-5 Horst area, approximately £146.2 million of capital expenditure was transferred from intangible assets to development and production assets. As at 31 December 2018, the carrying amount of the development and production assets was £150.6 million after taking account of additions and foreign exchange movement.

Additions to the intangible assets largely consisted of expenditure on the greater Tendrara licence TE-9 and TE-10 exploration wells in Morocco and capitalised general and administrative expenses. During the year we completed a $27.2 million (£21.4 million) carried seismic programme and commenced a three-well drilling programme. The TE-9 and TE-10 exploration wells were drilled ahead of schedule and under budget with TE-10 well completing in January 2019.

As part of the Italy divestment agreement, the Company is entitled to receive the proceeds, upon the sale, of Badile land. The Company has therefore recognised £1.6 million (2017: nil) being the carrying value of Badile land at the time of disposal.

Other receivables amounting to £3.4 million (2017: £3.5 million) primarily related to receivables from our partners in Morocco licences and £0.8 million VAT refund receivable as part of the Italy divestment agreement.

2017 assets of the disposal group held for sale related to the Italian operations and primarily included intangible assets, Badile land and VAT receivables.

Trade and other payables amounting to £10.1 million (2017: £6.6 million) primarily related to payables and accruals for the operations in the Group's licences in Morocco, where the Group, as operator, recognises 100% of the liability and receives funds from partners to pay the partners' share. The Company recognised £0.7 million as obligation for the Badile land remediation in line with the Italy divestment agreement.

2017 liabilities of the disposal group held for sale related to the Italian operations and primarily included trade and other payables and provision for decommissioning of licences.

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.

Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018

	Notes	2018 £'000s	2017 £'000s
Continuing operations
Revenue		-	-
Exploration costs		(4,058)	-
Gross loss		(4,058)	-
Administrative expenses		(8,857)	(8,458)
Group operating loss from continuing operations		(12,915)	(8,458)
Finance revenue		233	23
Foreign exchange gain/(loss)		3,387	(914)
Other gains and (losses)
- derivative financial instruments		(80)	(1,873)
External interest costs	7	(2,374)	(1,117)
Loss for the year from continuing operations before taxation		(11,749)	(12,339)
Tax credit/(expense)		-	-
Loss for the year from continuing operations		(11,749)	(12,339)
Discontinued operations
Profit/(loss) for the year from discontinued operations	8	4,953	(21,811)
Total loss for the year		(6,796)	(34,150)
Other comprehensive income/(loss)
Items that may subsequently be reclassified to the profit and loss account
Foreign currency translation gain/(loss)		7,614	(5,361)
Total comprehensive profit/(loss) for the year		818	(39,511)
Profit/(loss) for the year attributable to:
Owners of the company		818	(39,511)
Non-controlling interests		-	-

	Notes	2018 Pence	2017 Pence
Basic and diluted loss per share for the year from continuing and discontinued operations	3	(0.66)	(4.28)
Attributable to the equity shareholders of the parent (pence)	3	(0.66)	(4.28)
Basic and diluted loss per share for the year from continuing operations	3	(1.14)	(1.54)
Attributable to the equity shareholders of the parent (pence)	3	(1.14)	(1.54)

Consolidated Balance Sheet
As at 31 December 2018

	Notes	2018 £'000s	2017 £'000s
Non-current assets
Property, plant and equipment	4	151,005	372
Intangible assets	5	32,008	163,939
Interest in Badile land	8	1,618	-
		184,631	164,311
Current assets
Inventories		929	628
Other receivables		3,365	3,526
Derivative financial instruments		-	80
Prepayments		178	117
Cash and short term deposits		20,536	21,198
		25,008	25,549
Assets of disposal group held for sale	8	-	12,292
Total assets		209,639	202,152
Current liabilities
Trade and other payables		10,068	6,601
		10,068	6,601
Liabilities of disposal group held for sale	8	-	4,492
Non-current liabilities
Loans due in over one year	7	20,476	18,566
		20,476	18,566
Total liabilities		30,544	29,659
Net assets		179,095	172,493
Capital and reserves
Share capital and share premium		22,600	287,829
Warrant reserve		4,090	4,090
Foreign currency reserve		2,163	(3,918)
Accumulated surplus/(deficit)		150,242	(115,508)
Total equity		179,095	172,493

Group Statements of Changes in Equity
for the year ended 31 December 2018

	Notes	Share capital £'000s	Share premium £'000s	Accumulated surplus/(deficit) £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2018		10,159	277,670	(115,508)	4,090	(3,918)	172,493
Total loss for the year		-	-	(6,796)	-	-	(6,796)
Other comprehensive income		-	-	-	-	7,614	7,614
Total comprehensive loss		-	-	(6,796)	-	7,614	818
Issue of share capital	6	392	12,687	-	-	-	13,079
Share issue costs		-	(570)	-	-	-	(570)
Reclassification to profit and loss account on Italy divestment	8	-	-	-	-	(1,533)	(1,533)
Reclassification on share premium account cancellation	6	-	(277,738)	277,738	-	-	-
Distribution to shareholders on Italy divestment		-	-	(7,994)	-	-	(7,994)
Share based payments		-	-	2,802	-	-	2,802
At 31 December 2018		10,551	12,049	150,242	4,090	2,163	179,095

 

	Notes	Share capital £'000s	Share premium £'000s	Shares to be  issued £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2017		6,651	129,016	223	(84,213)	4,459	1,443	57,579
Total loss for the year		-	-	-	(34,150)	-	-	(34,150)
Other comprehensive loss		-	-	-	-	-	(5,361)	(5,361)
Total comprehensive loss		-	-	-	(34,150)	-	(5,361)	(39,511)
Issue of share capital		3,490	148,449	-	-	-	-	151,939
Reclassification on share issue		18	205	(223)	-	-	-	-
Reclassification on debt settlement		-	-	-	369	(369)	-	-
Share based payments		-	-	-	2,486	-	-	2,486
At 31 December 2017		10,159	277,670	-	(115,508)	4,090	(3,918)	172,493

 

Consolidated Cash Flow Statement
for the year ended 31 December 2018

	Notes	2018 £'000s	2017 £'000s
Cash flow from operating activities
Cash flow from operations		(281)	(11,849)
Interest received		259	102
Net cash flow from operating activities		(22)	(11,747)
Cash flow from investing activities
Capital expenditure and disposals		(937)	(478)
Exploration expenditure		(8,855)	(23,482)
Disposal of Italian operations	8	(2,655)	-
Net cash flow from investing activities		(12,447)	(23,960)
Proceeds from derivative financial instruments		-	592
Net proceeds from equity issue		12,218	11,550
Interest payments	7	(1,274)	(1,293)
Net cash flow from financing activities		10,944	10,849
Net decrease in cash and cash equivalents		(1,525)	(24,858)
Net foreign exchange difference		50	60
Cash and cash equivalents at the beginning of the year		22,011	46,809
Cash and cash equivalents at the end of the year		20,536	22,011

Notes to Cash Flow Statement
for the year ended 31 December 2018

	Notes	2018 £'000s	2017 £'000s
Cash flow from operations reconciliation
Loss before tax from continuing operations		(11,749)	(12,339)
Profit/(loss) before tax from discontinued operations		4,953	(21,866)
Total loss for the year before tax		(6,796)	(34,205)
Finance revenue		(259)	(102)
Impairment of goodwill		-	55
Exploration expenditure written off and impairment of producing assets		4,058	19,833
Increase/(decrease) in accruals and short term payables		1,078	(5,783)
Depreciation		164	406
Share based payments charge and bonuses paid in shares		3,094	2,486
Increase in drilling inventories		(299)	(430)
Loss on derivative financial instruments		80	1,873
Gain on disposal of Italy operations	8	(3,684)	-
Foreign currency translation gain reclassified from other comprehensive income	8	(1,533)	-
Finance costs and exchange adjustments		(1,013)	2,158
Decrease in receivables and prepayments		4,829	1,860
Cash flow from operations		(281)	(11,849)

Non-cash transactions during the year included the issue of 688,146 shares in lieu of cash bonuses at an issue price of approximately 40.08 pence per share and issue of 88,740 shares at 17.80 pence per share to a third party in settlement of services provided. In 2017, non-cash transactions included the issue of shares worth £138.8 million as the consideration for the acquisition of OGIF's interests in Morocco licences and issue of shares worth £0.7 million as part settlement of the drilling services at the Badile licence, onshore Italy. 9.6 million warrants of 10.4p per warrant were exercised in settlement of £1.0 million debt.

During the year the Group provided $0.75 million (2017: $2.95 million) to the Moroccan Ministry of Petroleum to guarantee the Group's minimum work programme obligations. The cash is held in a bank account under the control of the Company and as the Group expects the funds to be released as soon as the commitment is fulfilled on this basis the amount remains included within cash equivalent and cash equivalents. In 2017, a guarantee of €0.7 million was provided for expenditure relating to Badile licence and was included in cash and cash equivalents as it was expected to be released as soon as the commitment was fulfilled.

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. The Company's registered office is 1st Floor, 4 Pembroke Road, Sevenoaks, Kent, TN13 1XR.

The consolidated financial information contained within this announcement does not constitute statutory accounts for the year ended 31 December 2018 within the meaning of Section 434 of the Companies Act 2006, but is derived from those audited accounts. The auditors reported on those accounts and their report was unqualified and did not contain any statement under section 498(2) or section 498(3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2018 will be delivered to the Registrar of Companies in due course. The annual report and statutory accounts will be sent to shareholders and will be made available to the public on the Company's website: www.soundenergyplc.com or, upon request, copies may be obtained from the Company Secretary at the registered office of Sound Energy plc 1st Floor, 4 Pembroke Road, Sevenoaks, TN13 1XR.

(a) Basis of preparation

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

1.     International Financial Reporting Standards (IFRS) 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 2018 were authorised for issue by the Board of Directors on 20 March 2019.

As at 31 December 2018 the Group had £20.5 million of available cash. Based on the current management plan, management believes that the Group will remain a going concern for at least 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 21 March 2020) using both the available cash resources and funding from partners in the main strategic licences.

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.

When considering whether E&E assets are impaired the Group first considers the IFRS 6 indicators set out in note 5. The making of this assessment involves judgement concerning the Group's future plans and current technical and legal assessments.

If those indicators are met a full impairment test is performed. During the year TE-9 well drilled at the Group's Tendrara licence, onshore Morocco was plugged and abandoned as no producible gas was encountered. An impairment charge of £4.1 million was recognised.

Following the award of a production concession in Morocco, judgement was required in determining the the date of and quantum of the E&E expenditure transferred to development. In making assessment for impairment prior to transfer of the E&E expenditure to development (see note 5), the inputs used in the valuation model included expected gas price, production volume, discount rate and tax rate which are not considered likely to be subject to material change in the coming 12 months

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. Further details are given in note 5.

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.

Significant judgement and estimation is also required in the determination of the fair value of warrants and bonds. The proceeds from the issue of the Company's bonds were used to settle existing liabilities and therefore an element of judgement was required in determining the portion of issues costs to be allocated to the old and new debt.

Other sources of estimate concern IFRS 9 on intercompany loans at parent Company level and share based payments but are not considered likely subject to material change in the coming 12 months.

Investments in subsidiaries, joint ventures and associates are recorded at cost, subject to impairment testing in the Group's financial statements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, until the date that control ceases.

(b) Investments in subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, 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 over the entity. Such power, generally but not exclusively, accompanies a shareholding of more than one-half of the voting rights.

The Group uses the purchase method of accounting for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Costs of acquisition are expensed during the period they are incurred.

(c) Foreign currency translation

Transactions in foreign currencies are initially recorded in the functional currency by applying the spot exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the income statement.

The assets and liabilities of foreign operations are translated into sterling at the rate of exchange ruling at the balance sheet date. Income and expenses are translated at weighted average exchange rates for the year, unless this is not a reasonable approximation of the rates on the transaction dates. The resulting exchange differences are recognised in other comprehensive income and held in a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that foreign operation is recognised in the income statement.

 (d) Discontinued operations

The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense.

The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification.

Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately in the balance sheet.

A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:

·     Represents a separate major line of business or geographical area of operations

·     Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of comprehensive income. All other notes to the financial statements include amounts for continuing operations, unless otherwise mentioned.

2 Segment Information

The Group categorises its operations into three business segments based on corporate, exploration and appraisal, and development and production.

In the year ended 31 December 2018 the Group's exploration and appraisal activities were primarily carried out in Morocco.

The Group's reportable segments are based on internal reports about components of the Group which are regularly reviewed and used by the Board of Directors, being the Chief Operating Decision Maker ("CODM"), for strategic decision making and resource allocation, in order to allocate resources to the segment and to assess its performance.

Details regarding each of the operations of each reportable segment is included in the following tables.

Segment results for the year ended 31 December 2018:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Exploration costs	-	-	(4,058)	(4,058)
Administration expenses	(8,857)	-	-	(8,857)
Operating loss segment result	(8,857)	-	(4,058)	(12,915)
Interest receivable	233	-	-	233
Loss on derivative financial instruments	(80)	-	-	(80)
Finance costs and exchange adjustments	1,013	-	-	1,013
Loss for the period before taxation from continuing operations	(7,691)	-	(4,058)	(11,749)

The segments assets and liabilities at 31 December 2018 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Non-current assets	405	150,600	33,626	184,631
Current assets	22,056	-	2,952	25,008
Liabilities attributable to continuing operations	(22,377)	(320)	(7,847)	(30,544)

The geographical split of non-current assets is as follows:

	UK £'000s	Morocco £'000s
Development and production assets	-	150,600
Interest in Badile land	1,618	-
Fixtures, fittings and office equipment	113	292
Exploration and evaluation assets	-	31,799
Software	24	185
Total	1,755	182,876

Segment results for the year ended 31 December 2017 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Administration expenses	(8,458)	-	-	(8,458)
Operating loss segment result	(8,458)	-	-	(8,458)
Interest receivable	23	-	-	23
Loss on derivative financial instruments	(1,873)	-	-	(1,873)
Finance costs and exchange adjustments	(2,031)	-	-	(2,031)
Loss for the period before taxation from continuing operations	(12,339)	-	-	(12,339)

The segments assets and liabilities at 31 December 2017 are as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Non-current assets	372	-	163,939	164,311
Current assets	21,701	-	3,848	25,549
Liabilities attributable to continuing operations	(20,165)	-	(5,002)	(25,167)

The geographical split of non-current assets is as follows:

	UK £'000s	Morocco £'000s
Fixtures, fittings and office equipment	177	195
Exploration and evaluation assets	-	163,737
Software	66	136
Total	243	164,068

 

3 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 year. The calculation of diluted profit/(loss) per share is based on profit/(loss) after tax on the weighted average number of ordinary shares in issue plus weighted average number of shares that would be issued if dilutive options and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated as follows:

	2018 £'000s	2017 £'000s
Loss after tax from continuing operations	(11,749)	(12,339)
Profit/(loss) after tax from discontinued operations	4,953	(21,811)
Total loss for the year	(6,796)	(34,150)

	2018 Million	2017 Million
Weighted average shares in issue	1,035	799
Dilutive potential ordinary shares	18	-
	1,053	799

Basic profit/(loss) per share	2018 Pence	2017 Pence
Basic loss per share from continuing operations	(1.14)	(1.54)
Basic profit/(loss) per share from discontinued operations	0.48	(2.74)
Basic loss per share from continuing and discontinued operations	(0.66)	(4.28)

Diluted profit/(loss) per share	2018 Pence	2017 Pence
Diluted loss per share from continuing operations	(1.14)	(1.54)
Diluted profit/(loss) per share from discontinued operations	0.47	(2.74)
Diluted loss per share from continuing and discontinued operations	(0.66)	(4.28)

The effect of the potential dilutive shares noted above on the earnings per share from continuing operations would be anti-dilutive and therefore are not included in the above calculation of diluted earnings per share from continuing operations.

4 Property, Plant and Equipment

	2018 £'000s	2017 £'000s
Development and production assets
Cost
At start of the year	-	15,968
Transfer from intangible assets (note 5)	146,245	-
Additions	755	-
Exchange adjustments	3,600	51
Reclassification to assets of disposal group held for sale (note 8)	-	(16,019)
At end of the year	150,600	-
Depreciation
At start of the year	-	14,752
Exchange adjustments	-	-
Impairment of assets	-	27
Charge for the year	-	97
Reclassified to assets of disposal group held for sale (note 8)	-	(14,876)
At end of the year	-	-
Net book amount	150,600	-
Fixtures, fittings and office equipment
Cost
At start of the year	646	815
Exchange adjustments	25	7
Additions	127	386
Disposal	(4)	-
Reclassified to assets of disposal group held for sale (note 8)	-	(562)
At end of the year	794	646
Depreciation
At start of the year	274	302
Exchange adjustments	21	5
Charge for the year	96	309
Disposal	(2)	-
Reclassified to assets of disposal group held for sale (note 8)	-	(342)
At end of the year	389	274
Net book amount	405	372
Total net book amount	151,005	372

 

 

5 Intangibles

	Goodwill £'000s	Software £'000s	Exploration & Evaluation Assets £'000s	2018 £'000s
Cost
At 1 January 2018	-	281	163,737	164,018
Additions	-	55	11,392	11,447
Transfer to development and production assets (note 4)	-	-	(146,245)	(146,245)
Exchange adjustments	-	24	7,168	7,192
At 31 December 2018	-	360	36,052	36,412
Impairment
At start of the year	-	79	-	79
Charge for the year	-	68	4,058	4,126
Exchange adjustments	-	4	195	199
At end of the year	-	151	4,253	4,404
Net book amount at 31 December 2018	-	209	31,799	32,008

	Goodwill £'000s	Software £'000s	Exploration & Evaluation Assets £'000s	2017 £'000s
Cost
At 1 January 2017	2,202	282	39,902	42,386
Additions	-	92	165,670	165,762
Exchange adjustments	64	(7)	(6,043)	(5,986)
Reclassified to assets of disposal group held for sale (note 8)	(2,266)	(86)	(35,792)	(38,144)
At 31 December 2017	-	281	163,737	164,018
Impairment
At start of the year	1,769	42	12,515	14,326
Charge for the year	55	117	19,018	19,190
Exchange adjustments	64	3	(152)	(85)
Reclassified to assets of disposal group held for sale (note 8)	(1,888)	(83)	(31,381)	(33,352)
At end of the year	-	79	-	79
Net book amount at 31 December 2017	-	202	163,737	163,939

 

 

Transfer to Development and production assets

In September 2018, the Group was granted a production concession award by the Moroccan Ministry of Energy, covering an area of approximately 133.5 km² in the Tendrara licence. The Group considers the discoveries included in the production concession award area to be commercial and following the award of the concession, the exploration and evaluation expenditure of £146.2 million was transferred to development after an assessment for impairment which indicated that there was no impairment. The key assumptions used in the impairment assessment valuation model included; Company's share of the reserves estimated to be 169.5 bscf, a discount rate of 10% and an implicit oil price of 65 US$/bbl.

During the year, the Group had capitalised interest costs of approximately £0.6 million (2017: £1.6 million).

Exploration and evaluation assets

Details regarding the geography of the Groups E&E assets is contained in note 2.

The Directors assess for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. In making this assessment the Directors have regard to the facts and circumstances noted in IFRS 6 paragraph 20. In performing their assessment of each of these factors at 31 December 2018 the Directors have:

1.     reviewed the time period that the Group has the right to explore the area and noted no instances of expiration, or licences that are expected to expire in the near future;

2.     determined that further E&E expenditure is either budgeted or planned for all licences;

3.     not decided to discontinue exploration activity due to there being a lack of quantifiable mineral resource; and

4.     not identified any instances where sufficient data exists to indicate that there are licences where the E&E spend is unlikely to be recovered from successful development or sale.

On the basis of the above assessment, the Directors are not aware of any facts or circumstances that would suggest the carrying amount of the E&E asset may exceed its recoverable amount.

6 Capital and Reserves

 

	2018 Number of shares	£'000s	2017 Number of shares	£'000s
Ordinary shares - 1p	1,055,107,172	10,551	1,015,869,699	10,159

	2018 Number of shares	2017 Number of shares
At January	1,015,869,699	665,069,037
Issued during the year for cash	38,460,587	66,550,042
Non-cash share issue	776,886	284,250,620
At 31 December	1,055,107,172	1,015,869,699

Non-cash transactions during the year included the issue of 688,146 shares in lieu of cash bonuses at an issue price of approximately 40.08 pence per share and the issue of 88,740 shares at 17.85 pence per share to a third party in settlement of services provided. 


As part of the Italy divestment process, the Company sought and was granted a court order on 13 March 2018 approving a capital reduction following the cancellation of the share premium account. This resulted in the transfer of £277.7 million to distributable reserves.

Share option schemes and RSU Awards

The Company's share options scheme was replaced by an RSU Award scheme from 2018. The first RSU award was granted in 2018 and is expected to be settled in 2021.

Share issues

During the year ended 31 December 2018, the Company issued 2,681,279 shares following warrant exercises at exercise prices in the range of 24p to 30p per share.

On 26 April 2018, the Company announced the issue of 688,146 shares in respect of performance bonuses for 2017 financial year. The issue price was approximately 40.08p per share.

On 2 July 2018, the Company announced that it would issue 30,829,308 shares following a placing at 37p per share.

On 26 September 2018, the Company announced the issue of 1,250,000 shares following the exercise of share options by a Director of the Company at a price of 14.25p per share. The gain on exercise is disclosed in the statement of Directors remuneration.

On 23 November 2018, the Company announced that it would issue 88,740 shares at a price of 17.85p per share in settlement of fees for services provided by a third party.

During the year ended 31 December 2018, the Company issued 3,700,000 shares as a result of share options exercised by non-board members of the Company. The shares were issued at prices in the range of 14.25p to 17.13p per share.

7 Loans and Borrowings

 

	2018 £'000s	2017 £'000s
Non-current liabilities
5-year secured bonds
At 1 January/on recognition	18,566	16,455
Amortised finance charges	2,927	2,706
Interest payments	(1,274)	(1,263)
Exchange adjustments	257	668
	20,476	18,566

The Company has a 5-year non-amortising secured bonds with an aggregate issue value of €28.8 million (the "bonds"). The bonds are secured over the share capital of Sound Energy Morocco South Limited, have a 5% coupon and were issued at a 32% discount to par value. Alongside the bonds, the Company issued 70,312,500 warrants to subscribe for new ordinary shares in the Company at an exercise price of 30 pence per ordinary share and an exercise period of approximately five years, concurrent with the term of the bonds.

The Warrants were recorded within equity at fair value on the date of issuance and the proceeds of the notes net of issue costs were recorded as non-current liability. The effective interest rate is approximately 16.3%. The 5-year secured bonds are due in June 2021.

 

Reconciliation of liabilities arising from financing activities

		Non-cash changes
2018	1 January 2018 £'000	Cash flows  £'000	Amortised finance charges £'000	Exchange adjustments £'000	31 December 2018 £'000
Long-term borrowings	18,566	(1,274)	2,927	257	20,476
Total liabilities from financing activities	18,566	(1,274)	2,927	257	20,476

		Non-cash changes
2017	1 January 2017 £'000	Cash  flows  £'000	Loan repayment in shares £'000	Amortised finance charges  £'000	Exchange adjustments £'000	31 December 2017 £'000
Long-term borrowings	16,455	(1,263)	-	2,706	668	18,566
Short-term borrowings	986	(30)	(1,000)	44	-	-
Total liabilities from financing activities	17,441	(1,293)	(1,000)	2,750	668	18,566

Reconciliation of external interest costs

	2018 £'000s	2017 £'000s
Amortised finance charges - long-term borrowings	2,927	2,706
Amortised finance charges - short-term borrowings	-	44
	2,927	2,750
Less capitalised interest	(561)	(1,618)
Exchange adjustments	8	(15)
Total external interest for the year	2,374	1,117

 

 

8 Discontinued Operations

On 5 October 2017, the Company announced that it had entered into non-binding conditional heads of terms with Saffron Energy plc ("Saffron") and Po Valley Energy Limited under which it was proposed that Company disposes of its portfolio of Italian interests and permits through the sale of Sound Energy Holdings Italy and Apennine Energy SpA (the "disposal") for the consideration of 185,907,500 new ordinary shares in Saffron (subsequently renamed Coro Energy plc) issued directly to the Company's shareholders. On 23 January 2018, the Company announced that it had entered into a binding agreement with Saffron for the disposal and the transaction completed on 9 April 2018. The value of the 185,907,500 Coro Energy plc shares distributed to the Company's shareholders was £8.0 million using the completion date share price of Coro Energy plc of 4.3 pence per share. The Company was also entitled to receive proceeds of VAT refund due from the Badile well operations and retained economic interest in Badile land. The Company was also obligated to fund the Badile land restoration for a fixed amount.

The results of the Italian operations for the year are presented below:

	2018* £'000s	2017 £'000s
Revenue	140	708
Operating costs	(170)	(697)
Impairment of goodwill	-	(55)
Impairment of intangible assets	-	(19,018)
Exploration costs	(25)	(761)
Gross loss	(55)	(19,823)
Administrative expenses	(235)	(1,995)
Operating loss from discontinued operations	(290)	(21,818)
Finance revenue	26	79
Foreign exchange gain	-	4
Finance costs	-	(131)
Foreign currency translation gain reclassified from other comprehensive income	1,533	-
Gain on disposal of Italian operations	3,684	-
Profit/(loss) for the year before taxation from discontinued operations	4,953	(21,866)
Deferred tax credit	-	55
Profit/(loss) for the year after taxation from discontinued operations	4,953	(21,811)

* Represent the results for the period to divestment on 9 April 2018.

The net cash flows of the Italian operations were as follows:

	2018 £'000s	2017 £'000s
Net cash flow from operating activities	1,897	(2,513)
Net cash flow from investing activities	(2,655)	(13,962)
Net cash flow from financing activities	-	-
Net cash outflow	(758)	(16,475)

The calculation of gain on disposal of Italian operation is shown below:

	2018           £'000s	2017 £'000s
Consideration
Fair value of shares distributed to shareholders	7,994	-
Total disposal consideration	7,994	-
Carrying amount of net assets sold	(7,415)	-
Assets less liabilities payable by the Company	3,969	-
Impairments and other expenses on disposal	(864)	-
Gain on disposal of Italian operations	3,684	-

The major classes of assets and liabilities of the Italian operations classified as held for sale as at 31 December 2017 were as follows:

	2017 £'000s
Assets
Property, plant and equipment	1,363
Intangible assets	4,792
Land and buildings	1,598
Inventories	133
Other receivables	3,527
Prepayments	66
Cash and short term deposits	813
Assets of disposal group held for sale	12,292
Liabilities
Trade and other payables	1,644
Deferred tax liabilities	378
Provisions	2,470
Liabilities of disposal group held for sale	4,492
Net assets	7,800

 

 

9 Post Balance Sheet Events

On 7 January 2019, the Company provided further update on the Company's TE-10 exploration well, confirmed the achievement of total depth, the potential identification of additional thin bedded net pay and the successful recovering of a gas sample to surface.

On 28 January 2019, the Company provided further update on the operations in Eastern Morocco and confirmed that the rig at TE-10 had been demobilised and that design, planning and procurement for the TE-10 testing programme was nearing completion.

On 18 February 2019, the Company announced an increase in net pay estimate on TE-10 well from up to 10.5m to up to 15.3m. The well testing and stimulation equipment has been mobilised from Libya and Tunisia and extra equipment mobilised from the USA. The Company is expecting the equipment to arrive on location, and be rigged up and be ready to commence the test programme within four weeks.

On 7 March 2019, the Company confirmed that it was in continued positive discussions with Morocco's Office National de l'Electricité et de l'Eau Potable ("ONEE") and the Moroccan Minister of Energy in relation to a gas sales agreement ("GSA"), pursuant to which the Minister of Energy had confirmed his intention that the GSA covers all of the gas to be produced from the recently awarded Tendrara Production Concession, onshore Morocco.

 

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FR EAXDEALENEFF