30 May 2013

 

SOUND OIL PLC

("Sound Oil" or the "Company")

 

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

 

Sound Oil, the independent upstream oil and gas company quoted on the AIM market of the London Stock Exchange, is pleased to announce its audited final results for the year ended 31 December 2012.

Highlights

 

1.         Exciting exploration upside confirmed at Badile prospect (US$ 400M NPV10; Sound Oil operated with 100% working interest; 175Bscf (P50))

 

2.         Three other game changing projects spanning 2013 to 2015:

 

·      Nervesa (100%) - US$57m NPV10

·      Laura (100%) - US$86m NPV10

·      Zibido (100%) - US$265m NPV10

 

3.         Strong recent operational progress:

 

·    First production and revenue from Rapagnano achieved on 15 May 2013

·    Nervesa rig arrived on site in anticipation of appraisal drilling

·    Reorganised Board and Executive Team with a clear European and Mediterranean strategy focused on operated and accretive growth

 

 

4.         High upside Italian portfolio (18 licences with one pending application):

 

·    17.5 MMboe (P 50) discoveries with NPV10 of US$300m

·    96 MMboe (P50) exploration portfolio

 

5.         US$17.5m potential upside exposure from Indonesia retained

 

6.         Strong current funding position with cash balances as at 31 December 2012 of £6.9m

 

7.         Costs heavily reduced and now tightly managed

 

 

 

For further information please contact:

 

Sound Oil James Parsons, Chief Executive Officer	j.parsons@soundoil.co.uk
Smith & Williamson - Nominated Adviser Azhic Basirov David Jones	Tel: 44 (0)20 7131 4000
Peel Hunt - Broker Richard Crichton Charles Batten	Tel: 44 (0)20 7418 8900

 

The information contained in this announcement has been reviewed by Sound Oil's Chief Operating Officer, Dr M. J. Cope BSc PhD CGeol FGS, a qualified petroleum geologist. "MMboe" means million barrels of oil equivalent; "P50" refers to a 50% chance of finding a given volume and is consistent with SPE (The Society of Petroleum Engineers) guidelines; "NPV10" means estimated net present value using a discount rate of 10%.

 

 

Chairman's Statement

 

It is a pleasure and a privilege to be writing this introduction to the Sound Oil plc 2012 annual report as your new Chairman following the retirement of Dr Gerry Orbell as Chairman and Chief Executive last October. On behalf of the Board and shareholders, I would like to thank Gerry for his contribution to Sound Oil and wish him well for the future.

 

Last year Sound Oil embarked upon an exciting journey, which commenced with the divestment of our non-operated Indonesian assets. This has resulted in the re-focusing of the Company's strategy toward the European and Mediterranean region and has recently seen first gas from Rapagnano, giving Sound Oil its first revenue since its IPO in 2005.

 

On the organisational side, the year has also been one of significant positive change for the Company with renewed focus on its cost structure, its portfolio of assets and the search for other opportunities in its chosen geography. From a corporate point of view I am very pleased to report that the new Executive Team under CEO James Parsons is driving the business of the Company forward with energy and is focused on meeting our immediate goals and implementing our plan for growth.

 

In all of our activities our prime concern is the health and safety of our employees, contractors and stakeholders and the protection of the environment in which we operate. This approach has resulted in all our 2011 and 2012 activities having been executed without a lost time incident.

 

2012

 

The sale of the Company's Indonesian portfolio for a mixture of cash and deferred consideration has been transformational in reducing our cost exposure. This major strategic move was initiated when it became clear that the operator of the Citarum Production Sharing Contract ("Citarum PSC") was experiencing serious difficulties in drilling two commitment wells, making substantial unpredictable cost overruns likely, which would have put unacceptable pressure on the Company's cash resources without delivering positive subsurface results. The divestment was achieved in two phases. On the 18th October, the Company announced the sale of its 20% working interest in the Citarum PSC to the operator Pan Orient Energy (Citarum) PTE Limited in return for the waiving of $2.4m (£1.5m) of the Company's immediate cash obligation and a possible further consideration of $5m (£3.1m) and $16m (£10m) in cash, contingent on revenues from the first two discoveries on the PSC. The second transaction followed on 12th December when the Company sold its subsidiary Mitra Energia Bangkanai Ltd ("MEB") to Salamander Energy Plc. MEB's only asset was a 5% carried interest in the Bangkanai Production Sharing Contract ("Bangkanai PSC") containing the Kerendan gas field. The total consideration of up to $7.1m (£4.4m) was structured as $4.5m (£2.8m) cash payable immediately, $1.1m (£0.7m) cash payable on the later of first gas from Kerendan or the signature of a new gas sales agreement for the currently unsold Kerendan gas and up to $1.5m (£0.9m) cash payable as a royalty from revenues on any future discovery on the Bangkanai PSC. Our cost exposure was further reduced through the closure of our Indonesian office.

 

In the middle of the year, with a view to funding the ongoing cash requirements on the Indonesian assets, the Company announced a private placement with Manxdale Holdings Limited in combination with an open offer to existing shareholders. The placement, which involved the Company issuing 774,341,464 new ordinary shares, raised a gross consideration of £5.63m in instalments over seven months to February 2013 at an average Volume Weighted Average Price of 8.073p per share (adjusted for the January 2013 share consolidation). At the end of the drawdown period the open offer was made in the first quarter of 2013, raising a further approximately £50,000.

 

Later in 2012, two asset- specific funding arrangements were put in place to support the maturing of our Italian portfolio. The first of these, in August, involved the Milan-based engineering company CSTI Srl ("CSTI") funding part of the development cost of the Rapagnano gas field. The second, in October 2012, also involved CSTI, this time in funding part of the Nervesa appraisal well cost. These arrangements have significantly reduced the Company's cash exposure whilst leaving us in full operational control and owning the major proportion of the value of the assets.

 

In addition, on 4th January 2013, the Company executed a ten for one share consolidation. The consolidation is expected to assist in reducing the volatility in our share price and to enable a more consistent valuation of the Company.

 

 

2013

 

As a result of these transactions the Company is now focused firmly on growth firstly through developing its exciting Italian assets, including the Nervesa and Laura discoveries and the Badile and Zibido exploration prospects, and secondly by seeking to grow both the size and diversity of the portfolio, and thus our value per share, by acquiring companies and assets in the Mediterranean region that meet our strict criteria for operated and accretive growth. To support the Chief Executive, we are actively seeking to expand the Executive Team with the addition of an experienced Business Development Officer and a Chief Financial Officer. Under the excellent leadership of Luca Madeddu, our Managing Director in Italy, we have relocated our Italian office to Milan to improve our access to the Italian market for skilled oil and gas industry professionals and oilfield services. Luca has already succeeded in putting a local core team in place all of whom have first-hand experience of operating in the Italian oil and gas industry.

 

In short, the Company is now well positioned with a clear growth strategy, strong financial and operational discipline, some £6.9m cash in the bank and an attractive Italian portfolio with game-changing potential across which we control our own destiny.

 

As I write, 2013 already promises to be a significant year for the Company, having reached the strategic milestone of delivering first gas at the Rapagnano Field so earning the Company's first revenue since our listing in 2005. The Company is about to begin drilling our first appraisal well on the Nervesa gas discovery. Assuming a successful appraisal well, we will prepare for a second appraisal well and commence development planning to move this flagship project into production as soon as possible. We are also pressing ahead with plans to appraise Laura, a significant offshore discovery, and with our exciting onshore exploration prospects Badile and Zibido, we are preparing for an ambitious drilling programme in 2014.

 

In closing, I would like to thank the Board and all the Company's staff for their hard work, commitment and enthusiasm throughout 2012 and to thank our shareholders for their continued support.

 

Andrew Hockey

Chairman

 

 

Financial Review

 

Accounting Standards

The Group has prepared its 2012 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union.

 

Income Statement

Following the disposal of the Group's interests in Indonesia, impairments of £1,453,000 in Italy resulted in a loss before tax of continuing operations of £4,804,000 compared with £5,551,000 in 2011.

 

The significant impairment related primarily to the Montemarciano well which was tested and found to have smaller than originally envisaged commercial quantities of gas.

 

Administrative expenses incurred as part of continuing operations during the year were £ 3,176,000, an increase from £2,259,000 in 2011. In the year, Sound Oil incurred significant one-off expenditures relating to the exit from Indonesia and the departure of Gerry Orbell. 2013 administrative expenditures are expected to reduce to close to 2011 levels.

 

The loss for the period from discontinued operations of £ 8,934,000 consisted primarily of write-downs relating to the disposal of the Group's interest in the Citarum PSC in Indonesia, partially offset by the recognition of foreign exchange gains on Sound Oil's Indonesian investments which had previously been carried in the foreign exchange reserve.

 

The loss on disposal on discontinued operations arose primarily as no value has been recognised in the financial statements in respect of contingent cash consideration of up to $18,600,000 in aggregate which may be receivable by the Group in the event of first gas from the Kerendan field and/or future discoveries.

 

Cash flow/financing

During 2012, £6,804,000 net cash proceeds were raised from new equity and £3,913,000 was spent on exploration and development costs.

 

This resulted in a net cash inflow before foreign exchange movements of £1,010,000 (2011: inflow £2,638,000).

 

The Group's year end cash balance was £6,909,000 (2011: £6,286,000). At 22 April 2013, Sound Oil had a cash balance of £6,900,000.

 

The Group continues to have no long term borrowings.

 

Going concern - Forward cash flow calculations show that the Group has 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.

 

The Group currently has revenues from the Rapagnano gas field, onshore Italy, which part funds the cost of the Italian office. The directors have considered the Group's cash flow forecasts for the period to the end of June 2014. Forward cash flow projections show that forecast commitments will be less than the funds available as at 31 December 2012.

 

As a result, the Group has sufficient cash resources to undertake its work programme over the next twelve months.

 

Balance Sheet

Exploration and evaluation expenditure in 2012 was £4,247,000 of which £1,289,000 was in Italy with the balance being incurred in Indonesia prior to the disposal of the Company's interests in Citarum.

 

Gross disposals of £15,970,000 were incurred during the year as the Group disposed of its interests in the Citarum and Bangkanai PSCs in Indonesia. Of this, £3,055,000 had been impaired in previous years.

 

The carrying value of the Rapagnano and Montemarciano developments were reviewed for transfer to development assets in 2012. The review resulted in a write-down of £1,453,000. Abandonment provisions against both these licences and also Marciano were also reviewed with an increase of £341,000 being booked against the three licences.

 

In 2011, £1,246,000 of Bangkanai expenditure was transferred to development expenditure from exploration and evaluation. This balance was written off in 2012 following the disposal of the Group's interest in the Bangkanai PSC.

 

Goodwill of £1,525,000 and related deferred tax liabilities were also written off during the year following the Indonesian disposals.

 

Shareholders' equity was reduced by the loss for the year, offset by an increase reflecting the new equity issued during 2012, resulting in a decrease to £ 21,514,000 (2011: £29,866,000).

 

Technical Review

 

Sound Oil currently has interests in 18 licences in Italy:

 

2 production concessions, 8 permits and 8 exclusive permit applications. In addition one concession application is pending on an existing permit. The Company's interests are held through its wholly-owned Italian subsidiary companies Apennine Energy SpA and Apennine Oil & Gas SpA.

 

Production

 

Rapagnano Concession (Sound Oil - 100%)

The concession, located in Marche Region, central Italy, was awarded in July 2011 as part of a marginal fields development programme subject to Environmental Impact Assessment. It contains the Rapagnano-1 gas discovery made by ENI in 1952 and its associated production facilities. The re -development plan included re-establishing production from a lower shut-in reservoir zone and the re-vamping of surface facilities. In May 2012 the Company submitted a field re-development programme to UNMIG and an associated EIA to the Marche regional authorities. The concession was finally awarded in November 2012 and a gas sales agreement was signed with the local provider STECA.

 

In January 2013 the Company successfully re-entered the well using coiled tubing, isolated the upper perforated interval (1,418-1,430 m, A2 reservoir) and re-opened the lower perforated interval (1,652.5-1,658.5 m, Sabbie reservoir). The Sabbie reservoir was tested for two three-hour drawdown periods. The first period on 1/8" choke established a commercial stabilized rate of 9,500 Scmd (0.34 MMscfd) with a flowing well head pressure of 79.2 Bar (1148 psi). No water was produced during the test. The second period on 3/16" choke confirmed an increased stabilized rate of 13,600 Scmd (0.48 MMscfd) with a flowing well head pressure of 44.5 Bar (645 psi). The gas was also confirmed as dry, with no trace of water from the reservoir. All the rate and pressure data obtained from the flow periods were consistent with the Company's reservoir model for production of 1.3 Bscf from the field over thirteen years.

 

In June 2012 Sound Oil entered into a contract with local oilfield services company CSTI for part-funding of approximately 50% of the project capital expenditure to include the facilities re-vamping, construction and production commissioning. Work on the surface engineering was started immediately after conclusion of the well operations and first gas was delivered on 15 May 2013.

 

San Lorenzo Concession (Montemarciano Permit, Sound Oil - 100%)

The permit is located in Marche Region, central Italy. Sound Oil farmed-in to the permit in June 2011 by committing to drill the Casa Tiberi-1 exploration well to earn a 75% working interest in the licence.

 

The well was drilled in November 2011 to a target depth ('TD") of 715 m in the Lower Pliocene Cellino sand objective. It encountered 14.9 m gross (3.9 m net) hydrocarbon pay. Partner SARP withdrew from the operation after logging and opted not to participate in its completion, and so going forward Apennine holds a 100% interest in the discovery. The well was completed with the perforation of a single zone 571-581 m measured depth ('MD"). During clean-up flow the well tested dry gas at rates of ~26,000 Scmd (~0.92 MMscfd). The well was subsequently re-entered in January 2012 and a flow test delivered a final rate of 37,850 Scmd (~1.3 MMscfd) on 5/16" choke. A further re-entry of the well was undertaken in March 2012 in order to conduct a commercial rate test. The well flowed as planned at a stabilized rate of 8,000 Scmd (0.28 MMscfd) on 8/64" choke with a flowing tubing head pressure of 54 bar.

 

Following this successful test program an application for a production concession was submitted in May 2012 to UNMIG together with an associated EIA to the Marche regional authorities. Final approvals are expected in 2Q 2013. The development is a candidate for possible re-use of redundant Marciano production facilities.

 

Appraisal and Development

 

Nervesa Field, Carita Permit (Sound Oil - 100%)

The permit is located in Veneto Region, northeast Italy. The permit contains the Nervesa gas discovery that was drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa-1dir A) proven gas-bearing in several Miocene sand intervals. One interval, designated Level 9a, was tested in the Nervesa-1dir A well over the interval 1,822-1,827 mMD and flowed after acidification at a rate of 97,100 Scmd (~3.3 MMscfd) on 1/4" choke. This reservoir zone was put into production and produced 18.2 MMscm (~0.6 Bscf) during 1989-1990. Remaining P50 contingent resources for the field have been estimated by Fugro-Robertson to be 20.7 Bscf.

 

In May 2012 the Company submitted an application to drill an appraisal well on the field to UNMIG and in July 2012 submitted an EIA to the Treviso provincial authorities, revised for the use of a new generation hydraulic rig with reduced environmental footprint. The EIA was approved in November 2012. Subsequently final approvals from the Veneto regional authorities and UNMIG were received in March 2013. The well, designated Sant'Andrea-1 is expected to spud in early June 2013.

 

Sant'Andrea-1 will target the crest of the structure in a location approximately 1km north of the original discovery wells. In this position the well will also encounter additional higher reservoir objectives which are prospective for P50 resources of 9.5 Bscf. Dependent on results the Company will plan to drill additional appraisal wells and/ or file an application for a production concession.

 

D150 DR-CS (Sound Oil - 100%)

The permit is located in the Gulf of Taranto, offshore southern Italy. It contains the Laura gas discovery, with P50 contingent resources estimated by Fugro Robertson of 30 Bscf. The field was discovered in 1980 by ENI/Agip and is located in 197m water depth approximately 4 km from the shore. The permit award for this project is pending and expected in 2013.

 

Sound Oil's strategy is to drill an appraisal well on the discovery. In order to reduce potential drilling, development and operational costs the Company intends to drill the discovery from an onshore location with a long reach deviated well similar to the Wytch Farm oil field development in the English Channel, UK. The company has commenced feasibility studies for this strategy and intends to apply to drill the well immediately on award of the permit, expected in 2Q 2013, in order to drill in 2014.

 

Other Projects

An application to drill an appraisal well on the Strombone oil discovery (Torrente Alvo Permit) was submitted to UNMIG and the Basilicata regional authorities in June 2012.

 

Exploration

 

Badile Permit (Sound Oil - 100%)

The Badile permit is situated in Lombardy Region, northern Italy. The principal play is gas, condensate and oil, in deep Triassic dolomites and limestones. The permit is adjacent to the Gaggiano oil field, 30 km southeast from the Villafortuna-Trecate oil and gas fields (estimated reserves 275 MMboe) and 40 km southwest of the Malossa gas field (cumulative production 177 Bscf with associated light condensate).

 

Two large prospects have been identified in the permit area, Badile and Zibido. Badile, structurally similar to Malossa, has P50 prospective resources estimated by ERC-Equipoise to be 175 Bscf in the main Upper Triassic reservoir. In 2011 Apennine purchased and interpreted legacy 3D seismic data over the Badile prospect to define an optimum drilling location. It is the Company's intention to submit an application to drill a first well on the prospect in 2Q 2013 with a target to drill the well in 2014. Zibido, structurally similar to Gaggiano, has P50 prospective resources estimated by Fugro Robertson to be 130 Bscf (or 16 MMbo oil case) in the deeper Middle Triassic reservoir. Additional 3D seismic data will be purchased over the Zibido prospect with the aim to define a suitable drilling location and submit a further drilling application by year-end.

 

Notes:

 

1   UNMIG (Ufficio Nazionale Minerario per gli Idrocarburi e le Georisorse) the responsible body for petroleum exploration and production activities in Italy, a division of the Ministry of Economic Development Department of Energy.

 

2   Contingent and prospective resources, consistent with SPE (The Society of Petroleum Engineers) guidelines, are quantified in terms of the statistical probability to describe a given recoverable hydrocarbon (oil or gas) volume in a subsurface structure considering all the geological variables involved. The P50 figure indicates a 50% chance of finding a given volume and is generally considered as the best or most-likely estimate. Contingent resources refer to already discovered, but not produced, hydrocarbons and prospective resources refer to hydrocarbons yet to be discovered.

 

3   Fugro-Robertson Limited is an independent petroleum consultancy company providing resource and reserve assessments. The figures quoted here are taken from their Competent Person's Reports of July 2010 and October 2011.

 

4   ERC-Equipoise Limited is an independent petroleum consultancy company providing resource and reserve assessments. The figures quoted here are taken from their interpretation report of December 2011.

 

Abbreviations:

 

Bopd:	Barrels of oil per day.
Bscf:	Billion standard cubic feet of gas.
MMbo:	Million barrels of oil.
MMboe:	Million barrels of oil equivalent (6,000 standard cubic feet of gas = 1 barrel of oil).
MMscfd:	Million standard cubic feet of gas per day.
MMscm:	Million standard cubic meters of gas.
Mscf:	Thousand standard cubic feet of gas.
Scfd:	Standard cubic feet of gas per day.
Scmd:	Standard cubic meters of gas per day.

 

 

Consolidated Income Statement

for the year ended 31 December 2012

 

 

	2012 £'000's	2011 £'000's restated
Exploration and development costs	(1,455)	(2,381)
Gross loss Administrative expenses	(1,455) (3,176)	(2,381) (2,259)
Group trading loss from continuing operations	(4,631)	(4,640)
Finance revenue Foreign exchange (loss)/gain Expense incurred in acquiring subsidiaries External interest costs	11 (174) -   (10)	44 (439) (516)   -
Loss before income tax	(4,804)	(5,551)
Income tax Loss for the period attributable to continuing operations Loss on disposal from discontinued operations	- (4,804)   ( 8,934)	- (5,551)   (713)
Loss for the period attributable to owners of the parent	(13,738)	(6,264)
Other comprehensive income: Foreign currency translation gain	427	27
Total comprehensive income for the year	( 13,311)	(6,237)
Attributable to: Owners of the company	( 13,311)	(6,237)
	2012	2011
	Pence	Pence

 

Loss per share (basic) from continuing operations	(0.20)	(0.35)
Loss per share (basic) from discontinued operations	(0.37)	(0.04)

 

 

 

 

 

 

Consolidated Balance Sheet

as at 31 December 2012

 

Group	2012 £'000's	2011 £'000's
Non-current assets
Property, plant and equipment	853	1,278
Intangible assets	14,546	26,302
Other debtors	-	668
	15,399	28,248
Current assets
Other debtors	2,774	1,388
Prepayments	38	119
Cash and short term deposits	6,909	6,286
	9,721	7,793
Total assets	25,120	36,041
Current liabilities
Trade and other payables	719	2,233
Loans repayable in under one year	82	-
	801	2,233
Non-current liabilities
Deferred tax liabilities	2,125	3,576
Provisions	680	366
	2,805	3,942
Total liabilities	3,606	6,175
Net assets	21,514	29,866
Capital and reserves attributable to equity holders of the company
Issued equity share capital and share premium	63,083	54,704
Accumulated deficit	(42,273)	(28,606)
Foreign currency reserve	704	3,768
Total equity	21,514	29,866

 

 

Consolidated Statement of Changes in Equity

for the year ended 31 December 2012

 

Group	Share capital £'000's	Share premium £'000's	Accumulated deficit             £'000's	Foreign currency reserve £'000's	Total equity £'000's
At 1 January 2012	1,833	52,871	(28,606)	3,768	29,866
Total loss for the period excluding exchange gain recycled to the income statement	-	-	(17,229)	-	(17,229)
Transfer from foreign currency reserve on disposal	-	3,491	(3,491)	-	-
Other comprehensive gain/(loss)	-	-	-	427	427
Total comprehensive income/(loss)	-	-	(13,738)	(3,064)	(16,802)
Issue of share capital	1,037	8,589	-	-	9,626
Transaction costs	-	(1,247)	-	-	(1,247)
Share based payments	-	-	71	-	71
At 31 December 2012	2,870	60,213	(42,273)	704	21,514

 

	Share capital	Share premium	Accumulated deficit	Foreign currency reserve	Non controlling interest	Total equity
	£'000's	£'000's	£'000's	£'000's	£'000's	£'000's
At 1 January 2011	692	35,764	(22,482)	3,741	-	17,715
Total loss for the year	-	-	(6,259)	-	(5)	(6,264)
Other comprehensive gain/(loss)	-	-	-	27	-	27
Total comprehensive income/(loss)	-	-	(6,259)	27	(5)	(6,237)
Issue of share capital	1,141	18,104	-	-	-	19,245
Share issue costs	-	(997)	-	-	-	(997)
Share based payments	-	-	260	-	-	260
Acquisition of non-controlling interests with a change in control	-	-	-	-	94	94
Acquisitions of non-controlling interests without a change in control	-	-	(125)	-	(89)	(214)
At 31 December 2011	1,833	52,871	(28,606)	3,768	-	29,866

 

Consolidated Cash Flow Statement

for the year ended 31 December 2012

 

	2012 £'000's	2011 £'000's
Cash flow from operating activities
Cash flow from operations	(4,327)	(3,009)
Interest received	11	44
Net cash flow used in operating activities	(4,316)	(2,965)
Cash flow from investing activities
Capital expenditure and disposals	(80)	(31)
Exploration expenditure	(3,913)	(3,809)
Payment in escrow - acquisition of subsidiaries	-	2,413
Expense in acquiring subsidiaries	-	(366)
Acquisition of subsidiaries	-	(4,712)
Net cash inflow on disposal of subsidiary	2,515	-
Net cash flow used in investing activities	(1,478)	(6,505)
Net proceeds from equity issues	6,804	12,108
Net cash flow from financing activities	6,804	12,108
Net increase/(decrease) in cash and cash equivalents	1,010	2,638
Net foreign exchange difference	(387)	(836)
Cash and cash equivalents at 1 January	6,286	4,484
Cash and cash equivalents at 31 December	6,909	6,286

 

 

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.

 

(a) Basis of preparation

 

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

 

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

 

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

 

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

 

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

 

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

 

The Group and its parent company's financial statements for the year ended 31 December 201 2 were authorised for issue by the board of directors on 29 May 2013.

 

The financial position of the Group, its cash flows and available debt facilities are described in the Financial Review above. As at 31 December 201 2 the Group had £6.9 million of available cash. Based on the 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 that forecast expenditure (12 months through 30 May 201 4) will be less than the funds available as at 31 December 2012. 

 

(b)        Use of estimates and key sources of estimation uncertainty

 

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

 

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

 

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

 

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

 

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

 

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

 

2.  Operating loss

 

Operating loss is stated after charging:
	2012	2011
	£'000s	£'000s
Auditor's remuneration	98	95
Depreciation	24	15
Employee costs	2,357	2,137
Impairment charge	1,453	1,101

 

3.  Auditors' remuneration

	2012 £'000s	2011 £'000s
Fees payable to the company's auditor for the audit of the company's annual accounts	73	74
Fees payable to the company's auditor and its associates for other services:
- The audit of the company's subsidiaries pursuant to legislation	6	8
- Tax services	19	13
	98	95

 

4.  Employee costs

	2012 £'000s	2011 £'000s
Staff costs, including executive directors
Share based payments	71	260
Wages and salaries	2,015	1,696
Social security costs	265	181
Employee benefits	6	-
Total	2,357	2,137
	2012	2011
Number of employees (including executive directors) at the end of the year
Technical and operations	4	6
Management and administration	12	10
Total	16		16

 

All members of the Group Board and the Group Executive team are included as part of "Management and Administration".

 

5. Discontinued activities

 

On 18 October 2012 the Company announced the sale of its 20% working interest in the Citarum PSC to Pan Orient Energy (Citarum) PTE for cash consideration of $16 million, contingent on revenues from the fi rst two discoveries on the PSC. On 12 December 2012 the Company sold its subsidiary, Mitra Energia Bangkanai Ltd ('MEB') to Salamander Energy Plc, subject to final regulatory approval, for cash consideration of $4.5 million payable immediately but subject to deduction of local taxes and further cash consideration of up to $2.6 million contingent on first gas from the Kerenden gas field and/or future discoveries. The only asset of MEB was a 5% carried interest in the Bangkanai PSC containing the Kerendan gas field. As a consequence of the disposals the office in Indonesia was closed.

 

Both of the above transactions have been classified and accounted for as disposals in the year and presented as discontinued activities in the financial statements. The comparative income statement has been re-presented to include those operations classified as discontinued in the current year as follows:

 

	2012 £'000s	2011 £'000s
Exploration and development costs	-	24
Administration expenses	671	689
Gain on disposal of subsidiary	(329)	-
Loss on disposal of intangible assets	12,083	-
Cumulative exchange gain reclassified from foreign currency reserve to income statement	(3,491)	-
Loss from discontinued operations	8,934	713

 

 

6.  Finance revenue

	2012	2011
	£'000s	£'000s
Interest on cash at bank and short-term deposits	11	44
Total	11	44

 

7.  Earnings 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:

 

	2012	2011
	£'000s	£'000s
Loss after tax from continuing operations	(4,804)	(5,551)
	2012	2011
	million	million
Weighted average shares in issue	2,424	1,600
	2012	2011
	Pence	Pence
Loss per share (basic) from continuing operations	(0.20)	(0.35)
	2012	2011
	£'000s	£'000s
Loss after tax from discontinued operations	( 8,934)	(713)
	2012	2011
	Pence	Pence
Loss per share (basic) from discontinued operations	( 0.37)	(0.04)

 

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

 

In accordance with IAS 33, calculations of earnings per share have been adjusted retrospectively to reflect the Share Consolidation approved in general meeting on 4 January 2013.

 

8.  Property, Plant and Equipment

 

Group

	Development and production assets £'000s	Fixtures, fittings and office equipment £'000s	Total £'000s
Cost
At 1 January 2012	1,246	204	1,450
Exchange adjustments	-	(5)	(5)
Additions	-	80	80
Decommissioning provisions	341	-	341
Transfers (1)	1,877	-	1,877
Disposals	(1,246)	(88)	(1,334)
As at 31 December 2012	2,218	191	2,409
Depreciation
At 1 January 2012	-	172	172
Exchange adjustments	-	(5)	(5)
Transfers (1)	1,453	-	1,453
Charge for the year	-	24	24
Disposals	-	(88)	(88)
As at 31 December 2012	1,453	103	1,556
Net book amount at 31 December 2012	765	88	853
Cost
At 1 January 2011	-	139	139
Exchange adjustments	-	(1)	(1)
Acquisitions	-	35	35
Additions	-	31	31
Transfers (1)	1,246	-	1,246
Disposals	-	-	-
At 31 December 2011	1,246	204	1,450
Depreciation
At 1 January 2011	-	127	127
Exchange adjustments	-	(1)	(1)
Acquisitions	-	31	31
Charge for the year	-	15	15
Disposals	-	-	-
At 31 December 2011	-	172	172
Net book amount at 31 December 2011	1,246	32	1,278

 

 

(1) Transfers represent the reclassification of assets from intangible assets (note 9)

 

During the 2011 period the accumulated cost of the Group's investment in the Kerendan field of £1,246,000 was reclassified from exploration and evaluation assets to development and production assets following the signature of a gas sales agreement for the field. This investment was disposed of in 2012 .

 

During 2012, the Group's net investment in the Rampagnano license was reclassified from exploration and evaluation to production assets.

 

 

9.  Intangible Assets

	Goodwill £'000s	Exploration and evaluation assets £'000s	Total £'000s
Cost
At 1 January 2012	3,577	26,856	30,433
Exchange adjustments	7 4	240	31 4
Additions	-	4,247	4,247
Transfers(1)	-	(1,87 9)	(1,87 9)
Disposals	(1,525)	( 15,970)	( 17,495)
At 31 December 2012	2,126	13,494	15,620
Impairment
At 1 January 2012	-	(4,131)	(4,131)
Additions	-	(1,45 5)	( 1,45 5)
Transfers	-	1,45 5	1,45 5
Disposals	-	3,055	3,055
At 31 December 2012	-	(1,076)	(1,076)
Net book amount at 31 December 2012	2,126	12,420	14,546
		Exploration and evaluation
	Goodwill	assets	Total
	£'000s	£'000s	£'000s
Cost
At 1 January 2011	1,525	12,982	14,507
Exchange adjustments	1	(50)	(49)
Acquisitions	2,051	11,361	13,412
Additions	-	3,809	3,809
Transfers (1)	-	(1,246)	(1,246)
At 31 December 2011	3,577	26,856	30,433
Impairment
At 1 January 2011	-	3,028	3,028
Exchange adjustments	-	3	3
Additions	-	1,100	1,100
At 31 December 2011	-	4,131	4,131
Net book amount at 31 December 2011	3,577	22,725	26,302

⁽¹⁾ Transfers represent the reclassification of assets to PP&E (note 8)

 

Goodwill arises on acquisitions accounted for at fair value and consists largely of the synergies expected from combining acquired operations with those of the Group.

 

 

Exploration and Evaluation Assets

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

 

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

 

CPRs were last prepared for Italy in October 2011. The values attributed to the Group's assets in the most recent CPRs are very significantly in excess of the carrying amounts of the Italian CGU, including goodwill. The Board of Directors believe the data held in the CPRs is still relevant and up to date and remains valid for use in the annual impairment review. Consequently, the directors do not therefore consider that any impairment indications exist in relation to the remaining Italian CGU.

 

In the year, the Group disposed of its Indonesian interests in the Citarum and Bangkanai PSCs. This resulted in a disposal of £1.5m of goodwill on the acquisition of its Indonesian interests and a write-down of their respective carrying values.

 

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

 

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

 

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

 

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

 

•           The Italian CPR is based on an oil price of $109/bbl as per 2012 with the Brent forward curve for five years then $80/bbl real, whilst the gas price forecast assumes 80% of the Brent price on an energy equivalent basis.

 

•           A discount rate of 10% (2011: 10%) has been used which the directors believe to be standard industry practice and approximate to the Groups' weighted average cost of capital.

 

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

 

In 2012, the impairment costs related to the costs of drilling on wells now considered to have smaller than originally envisaged commercial quantities of gas.

 

	2012	2011
	£'000s	£'000s
Indonesia	-	24
Italy	1,453	1,076
Total	1,453	1,100

 

10.  Post balance sheet events

 

Share consolidation

On 12 December 2012, the Group announced its intention to execute a ten for one share consolidation subject to shareholder approval with the main aim being the reduction of share volatility inherent in penny stocks.

 

Shareholder approval was obtained at a General Meeting on 4 January 2013. Consequently, 287,012,882 new consolidated ordinary shares were admitted to trading on the AIM market.

 

Open Offer

The redemption of the private placement was completed in February 2013 at which time the Group announced an Open Offer to existing shareholders.

 

Up to 12,386,968 new ordinary shares were offered at a price of 8.073p per share. The offer was not underwritten.

 

A company Circular was issued on 6 March 2013 defining the terms of the announcement. The Company announced the results on 22 March 2013 which confirmed 605,662 Open Offer Share acceptances had been received. Following the issue of the these shares, the Company has 287,618,544 Ordinary Shares in issue.

 

Subsidiary Sale

On 16 February 2013, the Group executed the sale of its 100% subsidiary, Mitra Energia Ltd, to Ilham Habibie, a former non-Executive Director of the Group, for $1.

 

Mitra Energia Limited is the holding company of Mitra Energia Bangkanai Ltd which was sold to Salamander Energy in 2012. Mitra Energia Limited had no assets on disposal.

 

11.  Other matters

 

The financial information for the year ended 31 December 2012 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 2012 (2011: 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 29 May 2013.