SOUND OIL PLC

("Sound Oil" or "the Company"")

 

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2010

 

Sound Oil, the upstream oil and gas company with assets in Indonesia and Italy, is pleased to announce its audited final results for the year ended 31 December 2010.

 

 

Key highlights:

 

-    Successful Acquisition of Italian business

o 13 Discoveries

o 16 Exploration prospects

o Mainly operated

 

-    8 Planned Wells 2011/12

-     Italy

o 1 Production well

o 2 Exploration/appraisal wells

 

-     Indonesia

o 5 Exploration wells

 

-    £11 Million Funds Raised

 

-    Funding Commitments Reduced

 

 

 

Chairman's Statement

 

This year has been the most successful since the Company was formed.

At the start of 2011 we acquired Consul Oil & Gas Ltd, a private UK company with a number of exciting assets in Italy. We now own 98% of the Consul shares through the issue of 275 million new Sound shares and a cash payment of £1.40 million - representing a total cost of £4.64 million at the time. The Italian assets have given the Company a second geographic area of focus and access to 17 permits containing a variety of promising opportunities. Since we took over in early January we have already commissioned a drilling rig to undertake the development at Marciano where an existing gas well needs to be completed as a producer. During the remainder of the year we shall be working up a number of exploration and appraisal prospects with a view to operating up to three wells over the next 12 to 18 months. The Company also considers that Italy offers further opportunities for expansion which we are actively pursuing.

In Indonesia, three substantial new exploration prospects have been identified on the Citarum permit where we have a 20% interest. These are the result of the extensive seismic programme which was finally completed after a two year effort. The terrain and environmental conditions made the work very difficult for the operator but the last of the 865km was finally acquired in the middle of 2010. The operator has scheduled the drilling of the three wells in the latter part of 2011 and these will fulfil the remaining work obligations on this Production Sharing Contract (PSC).

In Kalimantan, our PSC at Bangkanai (Sound 5%, carried) has seen a change of operator and it is their intention to drill two previously identified exploration prospects, again in the second half of this year. The new operator is also actively progressing the development of the Kerendan Gas accumulation on the same PSC and expects to bring this on stream within three years.

In the last five months, Sound has made a series of fundraising transactions and now has approximately £13 million in cash and no debt. In January 2011, as part of the Consul acquisition, 311 million new shares were issued at a price of 1.2p to raise £3.7 million and a further £3.2 million was raised by issuing 230 million new shares at a price of 1.4p. In late 2010 we entered into a £10 million standby equity distribution facility with Yorkville Advisors LLC whereby we can issue shares to them during the next three years in return for cash. In January 2011 the Company received shareholder authority to issue up to 100 million shares for this purpose. In March, 39 million shares were placed with Yorkville at an average price of 2.58p raising £1 million and in April a further 54 million shares at a price of 5.15p raising 2.8 million.

Sound now has a small staff of proven capability in Rome who have shown already that they can weld together an impressive portfolio of assets in short order. In Jakarta, over the last several years our colleagues have worked hard to progress our interests and I expect this year to be the most active for the Company in Indonesia. I wish to thank all of them and also the UK staff and my Board colleagues for their continuous efforts on behalf of the Company. Finally I wish to thank our shareholders for their support.

 

I believe Sound has plenty of exciting activity coming up in the next year or so. Altogether we expect around seven wells to be drilled and we shall also be investigating other ways of giving shareholders greater value.

 

 

For further information please contact:

 

Sound Oil Gerald Orbell, Chief Executive Tony Heath, Finance Director	Tel: 44 (0)1372 371010 Tel: 44 (0)1372 371010
Buchanan Communications Tim Thompson Ben Romney	Tel: 44 (0)207 466 5000
finnCap Sarah Wharry Henrik Persson	Tel:  44 (0)207 600 1658

 

Financial Review

 

Accounting standards

 

The Group has prepared its 2010 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union.

 

Income statement

 

Prior to the write down of the Bangkanai asset following its partial farm-down, the Group incurred a loss after tax of £1,758,000 which was £889,000 lower than in the previous year. The write down was £14,210,000 giving a total loss after tax for 2010 of £15,968,000 (2009: £2,620,000).

 

Trading loss at £1,932,000 was almost the same as in 2009. This included higher exploration costs of £430,000 (2009: £334,000) but administration costs were lower at £1,502,000 (2009: £1,596,000).

 

Due to the weakness of sterling, there was a foreign exchange gain of £211,000 compared with a loss of £786,000 in 2009.

 

Cash flow/financing

 

Net cash outflow before foreign exchange movements was £6,242,000 (2009: £3,086,000). Of this, exploration expenditure was £1,165,000 (2009: £953,000). However, there was a foreign exchange gain of £104,000 (2009: loss £917,000) due to the fall in sterling increasing the sterling value of the US$ cash deposits, as a result of which the Group's cash balance was £6,138,000 lower at £4,484,000 (2009: £10,622,000).

 

The Group continues to have no borrowings.

 

Going concern

 

Forward cash flow calculations show that the Group would have sufficient financial resources for the foreseeable future. The Group's financial statements have been prepared on the assumption that the Group will be able to realise its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. The Group currently has no operating revenues and during the year ended 31 December 2010 generated a Group trading loss of £1.9 million from continuing operations. At 31 December 2010 the Group held cash and cash equivalents of £4.5 million. The directors have considered the Group's cash flow forecasts for the period to the end of June 2012. Forward cash flow projections show that forecast expenditure (12 months through 30 June 2012) will be less than the funds available as at 31 December 2010; together with the £10.7 million raised in January, March and April 2011 from share placings and the £6 million undrawn element of the Yorkville facility. As a result, the Group has sufficient cash resources to undertake its work program in the next 12 months.

 

Balance sheet

 

Exploration and evaluation expenditure in 2010 was £1,165,000 (2009: £953,000) mainly on seismic work on the Citarum licence in Indonesia. Currency movement increased the balance in sterling terms by £745,000. However the write down of the Bangkanai asset by £14,210,000 left the year end balance at £9,954,000 (2009: £22,185,000).

The deferred tax liability and the matching goodwill balance arising from the tax provision were both reduced by £3,662,000 due to the Bangkanai farm down. After allowing for exchange adjustments of £390,000, this left the end 2010 balance at £1,525,000 (2009: £4,797,000).

 

Other debtors of £2,861,000 at end 2010 included £2,413,000 of cash held in escrow relating to the acquisition of Consul Oil & Gas Ltd which was paid to the vendors on 4 January 2011.

 

Impairment

 

Under IFRS 6, the cost carried in the balance sheet may be carried forward if exploration activities have not reached a stage to allow reasonable assessment of economically recoverable reserves. As this remains the situation with all of the Group's licences, with only one exploration well having been drilled and extensive prospective areas remaining to be explored, no impairment charge has been recorded and accordingly an update of the estimated monetary value shows that the value exceeds the carrying value of our intangible evaluation and exploration assets and goodwill.

 

Post balance sheet event

 

The provisional effect of the Company's acquisition on 4 January 2011 of Consul Oil & Gas Ltd is shown in note 12. This shows that the total cost of £4.7 million was funded as to £3.3 million by the issue of 275 million ordinary shares in Sound at 1.2p and £1.4 million by cash. Exploration and evaluation assets are increased by £5.9 million and Deferred Tax and Goodwill by £1.6 million.

 

 

Technical Review

 

Note: The commentary in this Technical Review reflects the acquisition on 4 January 2011 of Consul Oil & Gas Ltd.

 

Licence Interests

 

The Group holds licence interests in two countries, Italy and Indonesia.  In Italy, Sound Oil has acquired 98% of Consul Oil & Gas Ltd which, through its wholly-owned Italian subsidiary company Apennine Energy srl, gave Sound participating interests in sixteen new licences, mostly as operator: one concession, eight permits and seven assigned permits. In addition Apennine has two exclusive applications for pending awards lodged with the Italian Ministry of Industry.

 

The Apennine portfolio offers multiple opportunities for production, appraisal and development of existing oil and gas discoveries and exploration drilling. It is Sound's intention over the coming 12-18 months to complete one production well and to drill three new wells targeting several of the exploration and appraisal opportunities in our portfolio. Where necessary the Company will achieve these objectives by selective farm-out of high equity positions. The projects for implementation are currently being discussed with our various partners and will be selected from the assets described below.

 

In Indonesia, the Group participates in two Production Sharing Contract (PSC) areas in Java and Kalimantan through its subsidiary company Mitra Energia Limited. Our working interests are 20% in the Citarum PSC and 5% carried in the Bangkanai PSC.

 

Production

 

Fonte San Damiano Concession (Apennine 99%, Operator). The Concession is located in Basilicata in southern Italy (Figure 1). It contains the Marciano-01ST gas discovery which was drilled by Apennine in 2007. The well encountered two thin gas bearing sand intervals, MAR-4 at 1283-1288m and MAR-5 at 1325-1331m which have been cased-off ready for production.

 

Consolidated Income Statement

for the year ended 31 December 2010

	Notes		2009 £'000's		2010 £'000's
Exploration costs			(334)		(430)
Gross loss			(334)		(430)
Administrative Expenses			(1,596)		(1,502)
Group trading loss			(1,930)		(1,932)
Other income /(loss)			50		(58)
Group operating loss from continuing operations	2		(1,880)		(1,990)
Finance revenue	5		19		21
Foreign exchange gain/(loss)			(786)		211
Loss on disposal of farmout interest	9		-		(14,210)
Loss before income tax			(2,647)		(15,968)
Income tax credit			27		-
Loss for the period attributable to the equity holders of the parent			(2,620)		(15,968)
Other comprehensive loss:
Foreign exchange translation (loss)/gain			(2,258)		711
Total comprehensive loss for the period attributable to the equity holders of the parent			(4,878)		(15,257)
Loss per share basic and diluted for the period attributable to the equity holders of the parent	6		(0.38)		(2.31)

 

 

 

Consolidated Balance Sheet

as at 31 December 2010

	Notes	2009 £'000's
			2010  £'000's
Non-current assets
Property, plant and equipment		32	12
Intangible assets	7	4,797	1,525
Exploration and evaluation assets	8	22,185	9,954
Other debtors		792	621
		27,806	12,112
Current assets
Other debtors		192	2,940
Prepayments		108	65
Current tax receivable		27	26
Cash and short term deposits		10,622	4,484
		10,949	7,515
Total assets		38,755	19,627
Current liabilities
Trade and other payables		897	284
Current tax payable		-	-
		897	284
Non-current liabilities
Deferred tax liabilities		4,797	1,525
Provisions		105	103
		4,902	1,628
Total liabilities		5,799	1,912
Net assets		32,956	17,715
Capital and reserves attributable to equity holders of the Company
Equity share capital	10	36,456	36,456
Foreign currency reserve	11	3,030	3,741
Accumulated deficit	11	(6,530)	(22,482)
Total equity		32,956	17,715

 

 

Consolidated Statement of Changes in Equity

for the year ended 31 December 2010

 

	Share capital £'000s	Share premium £'000	Accumulated deficit £'000s	Foreign currency reserve £'000s	Total equity £'000s
At 1 January 2010	692	35,764	(6,530)	3,030	32,956
Total loss for the year	-	-	(15,968)	-	(15,968)
Total comprehensive gain	-	-	-	711	711
Total comprehensive income/(loss)	-	-	(15,968)	711	(15,257)
Share based payments	-	-	16	-	16
At 31 December 2010	692	35,764	(22,482)	3,741	17,715
At 1 January 2009	692	35,764	(3,927)	5,289	37,818
Total loss for the year	-	-	(2,620)	-	(2,620)
Total comprehensive loss	-	-	-	(2,259)	(2,259)
Total comprehensive income/(loss)	-	-	(2,620)	(2,259)	(4,879)
Share based payments	-	-	17	-	17
At 31 December 2009	692	35,764	(6,530)	3,030	32,956

 

 

 

 

Consolidated Cash Flow Statement

for the year ended 31 December 2010

	2009  £'000's
		2010  £'000's
Cash flow from operating activities
Cash flow from operations	(2,145)	(2,683)
Interest received	19	21
Net cash flow from operating activities	(2,126)	(2,662)
Cash flow from investing activities
Capital expenditure and disposals	(7)	(2)
Exploration expenditure	(953)	(1,165)
Payment in escrow - acquisition of subsidiaries	-	(2,413)
Net cash flow from investing activities	(960)	(3,580)
Net cash flow from financing activities	-	-
Net decrease in cash and cash equivalents	(3,086)	(6,242)
Net foreign exchange difference	(917)	104
Cash and cash equivalents at the beginning of the year	14,625	10,622
Cash and cash equivalents at the end of December	10,622	4,484
Notes to cash flow
	2009	2010
	£'000's	£'000's
Cash flow from operations reconciliation
Profit/(loss) after tax	(2,620)	(15,968)
Finance revenue	(19)	(21)
Foreign exchange (gain)/loss	786	(211)
Loss on disposal of farmout interest	-	14,210
Exploration expenditure written off	(63)	3
Income tax charge (credit)	(27)	-
Increase/(decrease) in accruals and short term creditors	(210)	(630)
Depreciation	36	15
Share based payments charge	17	16
(Decrease)/increase in long term provisions	11	(5)
(Increase)/decrease in long term debtors	(204)	194
(Increase)/decrease in short term debtors	148	(286)
Cash flow from operations	(2,145)	(2,683)

 

Notes to the financial information

 

1          Accounting policies

 

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

 

The principal accounting policies adopted in the preparation of the financial information in this announcement are set out in the Company's full financial statements for the year ended 31 December 2010 and are consistent with those adopted in the financial statements for the year ended 31 December 2009.

 

(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) adopted by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) as endorsed by the European Commission (EC) for use in the European Union (EU); and

 

(2)         those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

 

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 financial position of the Group, its cash flows and available debt facilities are described in the Financial Review above. As at 31 December 2010 the Group had £4.484 million of available cash. After the balance sheet date but before the date of approval of these financial statements, the Group raised a further £10.7 million from equity fundraisings. The Directors are required to consider the availability of resources to meet the Group and Company's liabilities for the foreseeable future. As described above, the current business environment is challenging and access to new equity and debt remains uncertain. Based on current management plan, management believe 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 of forecast expenditure (12 months through 30 June 2012) will be less than the funds available as at 31 December 2010 together with the £10.7 million raised in January, March and April 2011 from share placings and the £6 million undrawn element of the Yorkville facility. Management will also continue to pursue farm-out and financing strategies to reduce/fund Sound's future obligations.

 

2          Operating loss

 

Operating loss is stated after charging/(crediting):	2009 £'000's
		2010  £'000's
Auditors' remuneration	119	89
Depreciation	36	15
Employee costs	952	1,009
Impairment charge/(write back)	(63)	3
3        Auditors' remuneration
	2009	2010
	£'000's	£'000's
Audit of financial statements	114	84
Other services relating to taxation	5	5
All other services	-	-
Charged to income statement	119	89

 

4          Employee costs   Notes	2009 £'000's
		2010 £'000's
Staff costs, including executive directors
Share based payments	18	16
Wages and salaries	824	883
Social security costs	110	110
Total	952	1,009
Number of employees (including executive directors) at the end of the year
Technical and operations	5	4
Management and administration	11	10
Total	16	14

 

 

5        Finance revenue

	2009	2010
	£'000's	£'000's
Interest on cash at bank and short-term deposits	19	21
Total	19	21

 

6          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:

 

	2009	2010
(Loss)/profit after tax (£'000's)	(2,620)	(15,968)
Weighted average shares in issue (million shares)	692	692
(Loss)/profit per share (basic) (pence)	(0.38)	(2.31)

 

 

 

Diluted loss per share has not been disclosed as inclusion of unexercised options would be anti-dilutive.

 

After the balance sheet date, the Company has issued additional shares which will impact on the weighted average number of shares in issue in future periods.

 

7          Intangible assets

 

Goodwill	2009 £'000's
		2010 £'000's
Cost At 1 January Exchange adjustments Acquisitions Disposals	5,277 (480) - -	4,797 390 - (3,662)
At 31 December	4,797	1,525
Impairment losses At 1 January Impairment in the year	- -	- -
At 31 December	-	-
Net book amount at 31 December	4,797	1,525

 

Group

The goodwill balance that had arisen on the acquisition of the Mitra group in July 2006 has been allocated to the cash generating unit ('CGU') identified according to business segment. In assessing whether goodwill has been impaired, the carrying amount of the CGU, including goodwill, is compared with the recoverable amount of the CGU.

 

The recoverable amount of each CGU is based on value in use calculations. The methodology to arrive at the value in use calculation was based on Net Present Value (NPV) for proven contingent resources, in this case the Kerendan Field, and Estimated Monetary Value (EMV) for prospective resources on Bangkanai PSC and Citarum PSC. In addition, EMV includes an assessment of risk for the geological uncertainties of undrilled prospects as indicated in the Competent Person's Report in respect of Sound's assets in December 2009.

 

The calculation of value in use is most sensitive to the assumptions for production and operating expenditure and is entirely reliant on the availability of finance to fund capital expenditure on the development of E&E assets.

 

These assumptions are based on the assumptions as defined in the Plan of Development for the Kerendan gas field.

 

The 2007 fair value less costs to sell calculations are based on a gas price of $2.98/MMBtu which was obtained from the Heads of Agreement (HOA) of the sales contract between Elnusa and PT Medco Power. A final sales agreement has not yet been signed. The 2010 calculations are based on a significantly higher expected gas price of $4.75 per MMBtu, which is based on current negotiations between the Bangkanai Partners and PLN, the Indonesian state electricity utility, and corresponding Capex revisions. However, even if the 2010 calculations were sensitised to a gas price of $2.98/MMBtu, no impairment would be required.

 

Estimates of the NPV of any project, and particularly of projects like the Group's interests in the Bangkanai PSC and the Citarum PSC, are always subject to many factors and wide margins of error. The directors believe that the estimates and calculations supporting their conclusions have been carefully considered and are a fair representation of the projected financial performance of the projects.

 

The NPV calculations have been prepared over the period of the PSC and the duration of the sales contract. A discount rate of 10% has been used (2009: 10%), which the directors believe to be standard industry practice and approximates to the Company's weighted average cost of capital.

 

The EMV for unappraised and undiscovered resources is a risked estimate of the value of prospective resources at $0.25 per mcf for gas.

 

 

8          Exploration and evaluation assets	2009 £'000's
		2010 £'000's
Cost
At 1 January	26,248	25,123
Additions	953	1,165
Disposals	-	(14,051)
Exchange adjustments	(2,078)	745
At 31 December	25,123	12,982
Impairment
At 1 January	2,941	2,938
Additions (write back)	(63)	3
Exchange adjustments	60	87
At 31 December	2,938	3,028
Net book amount at 31 December	22,185	9,954

 

The recoverable amount is the value in use of the asset. A discount factor of 10% has been used in the current estimate of value in use.

 

Considerations in relation to potential impairment of E&E assets are similar to those in relation to potential impairment of goodwill described above.

 

 

9.         Farm out disposal

 

On 25 May 2010, the company entered into an agreement under which it assigned part of its interest in the Bankanai PSC to Elnusa Bangkanai Energy Limited, the operator of the PSC.

 

Under the agreement, the Group's existing 34.99% interest was reduced to 5% on a carry basis such that the Group is carried through the costs of two forthcoming obligatory exploration wells and also through the costs of developing the Kerendan gas field up to the point of the first production of gas.

 

The book value of the Company's 34.99% interest in the Bangkanai PSC was £16.5 million as at 25 May 2010. Since the Group will not receive any cash consideration pursuant to the farm out agreement (other than its share of future net revenues receivable under the retained 5% carry) the carrying value of the Company's interest in the Bangkanai PSC has been written down accordingly in these accounts by £14.2 million.

 

The amounts written down were:

 

	£'000
Non current assets Property, plant and equipment Intangible assets Exploration and evaluation assets Other debtors	7 3,661 14,051 304
Current assets Other debtors Prepayments	43 14
Current liabilities Trade and other payables	(209)
Non-current liabilities Deferred tax liabilities	(3,661)
Net written down	14,210

 

 

 

10        Share capital

 

Company
	Number of	2009	Number of	2010
	shares	£'000s	shares	£'000s
Ordinary shares - 0.1p
Issued	692,427,348	692	692,427,348	692

 

Share option schemes

Options to subscribe for the Company's shares were granted to certain executives in 2006, 2007 and 2010. No options were granted in 2008 and 2009.

 

 

11        Reserves

 

Group

	Foreign currency reserve £'000's	Share capital £'000's	Share premium £'000's	Accumulated retained earnings/(deficit) £'000's	Total £'000's
At 1 January 2010	3,030	692	35,764	(6,530)	32,956
(Loss) for the year	-	-	-	(15,968)	(15,968)
Foreign currency translation	711	-	-	-	711
Share based payments	-	-	-	16	16
At 31 December 2010	3,741	692	35,764	(22,482)	17,715
At 1 January 2009	5,289 --	692	35,764	(3,927)	37,818
(Loss) for the year	-	-	-	(2,620)	(2,620)
Foreign currency translation	(2,259)	-	-	-	(2,259)
Share based payments	-	-	-	17	17
At 31 December 2009	3,030	692	35,764	(6,530)	32,956

 

The foreign currency reserve represents accumulated exchange differences relating to the translation of net assets of the Group's foreign operations from their functional currency to the Group's presentational currency which are recognised directly in other comprehensive income and accumulated in the foreign currency reserve.

 

 

12        Post balance sheet events

 

Acquisition

On 4 January 2011, the Company completed the acquisition of 96% of the issued share capital of Consul Oil & Gas Ltd ("Consul"), an unquoted company with interests in Italy, for a total consideration of £4.64 million and made an offer to acquire the remaining 4%.

 

The consideration was satisfied by the payment in cash of approximately US$2.19 million (£1.39 million) and the issue of 269,127,983 ordinary shares to the vendors. In addition the Company purchased an existing loan from RAB to Consul of €1 .5 million.

 

On 29 January 2011 the Company acquired a further 2% of the issued share capital of Consul, satisfied by the payment in cash of US$46,667 and the issue of 5,555,555 new ordinary shares. A further 5,555,555 ordinary shares will be issued and payment of US$46,667 in cash if the remaining 2% of Consul is acquired.

 

The provisional fair value of 100% of the assets of Consul is as follows:

	Book value IFRS £'000's	Adjustments and/or revaluation £'000's	Fair value to the Company £'000's
Intangible exploration & evaluation costs	3,446	2,220	5,666
Tangible fixed assets	10	-	10
Current debtors	254	-	254
Non-current debtors	29	-	29
Cash	45	-	45
Current creditors	(278)	-	(278)
Non-current creditors	(926)	-	(926)
Deferred tax liabilities	-	(688)	(688)
Net assets	2,580	1,532	4,112

 

The directors consider that goodwill of approximately £690,000 will arise on the acquisition, consisting largely of the synergies expected from combining the operations of the Group and Consul.

 

13        Other matters

 

The financial information for the year ended 31 December 2010 set out in this announcement does not constitute statutory financial statements, as defined in Section 434 of the Companies Act 2006, but is based on the statutory financial statements for the year then ended.

 

Those financial statements, upon which the auditors have issued an unqualified opinion, will be delivered to the Registrar of Companies.

 

The directors do not propose a dividend in respect of the year ended 31 December 2010 (2009: nil).

 

Copies of the annual report will be sent to shareholders in due course and will be available on the Company's website www.soundoil.co.uk

 

This announcement was approved by the Board on 24 May 2011.