Final Results

RNS Number : 6173H

Sound Oil PLC

21 May 2014

 



Sound Oil PLC

21 May 2014

SOUND OIL PLC

("Sound Oil" or the "Company")

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2013

Sound Oil, the Mediterranean focused upstream oil and gas company, is pleased to announce its audited final results for the year ended 31 December 2013.

Highlights

·      Introduction of cornerstone institutional investor following the year-end at a significant premium to market with transaction completion expected in June 2014.

·      Strong Italian business fundamentals, including:

o  High upside asset portfolio: 18 MMboe (P50) discoveries with NPV10 of €227M and 96MMboe (P50) exploration

o  High energy and ambitious team

o  Strong funding outlook

·      Successful Nervesa discovery with agreed Heads of Terms for a 3.6 to 1 farm out.  This farm out fully funds the next well addressing the southern part of the structure and enables achievement of first gas without significant further capital.

·      Continued preparation for the drilling of the world class Badile prospect end in late 2014 / early 2015.  A competitive farm out process is underway.

·      Strong production from Rapagnano, which has been in production since May 2013, resulting in maiden revenues for the Company during 2013.

·      Italian cost base to be covered by production from Rapagnano and Casa Tiberi (first gas expected by end H1-2014).

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

"We are continuing our strategy of building a mid cap Mediterranean focused upstream oil and gas company.  In Italy this involves continuing to drill, at a minimum, two material wells every year whilst focusing our financial and human resources on game-changing assets such as Badile.

"The combination of the introduction of an institutional investor and the farm-in on Nervesa, both of which we expect to close during June, positions our Company to fully exploit the potential of our assets."

For further information please contact:

Sound Oil James Parsons, Chief Executive Officer Stuart Joyner, Chief Financial Officer	[e-mail] [e-mail]
Smith & Williamson - Nominated Adviser Azhic Basirov David Jones Ben Jeynes	Tel: [phone]
Peel Hunt - Broker Richard Crichton Charles Batten	Tel: [phone]

Chairman's Statement

2013 was a year in which Sound Oil made strong progress and built upon the foundations laid by the significant re-structuring carried out in 2012.

I am delighted to report that the Company announced its maiden revenues in 2013 with the Rapagnano gas field supplying its first volumes on 15 May 2013. Total Rapagnano production from this date to 31 December 2013 was 79.45 MMscf, yielding revenue of approximately £0.5 million. Although Rapagnano is one of the Company's smaller assets, delivering first gas was a vital milestone for Sound Oil as it demonstrated the Company's ability to take projects through development and on to production and revenue generation.

Our production capacity will be further enhanced with the development of the Casa Tiberi discovery. First gas production is expected in the summer of 2014. Combined with revenues from Rapagnano, the cash flows generated from our producing assets are expected to more than cover the running costs of our highly experienced Milan-based Italian technical team. I am satisfied to note that all operational activity during the period to 20 May 2014 has been executed without a single Lost Time Incident.

Another highlight of 2013 was the successful drilling of the first well on the northern limb of the Nervesa discovery on the Carita permit. The well was spudded on 7 June 2013 and reached total depth on 15 July 2013. On test, the well achieved a stabilised total gas flow rate of 2.7 MMscfd using a dual string completion. Based on test and other data, the Company announced that our internal P50 estimate of recoverable resources for the Nervesa discovery had increased to 24 Bscf from the previously announced 21 Bscf. The Company now plans to develop the field and we have applied for a production concession with a view to achieving first gas in mid-2015. As recently announced, we intend to drill a second well to address the southern part of the Nervesa structure. We expect that this second well will be fully funded by a farm-in partner, with whom Heads of Terms were signed, and announced, on 28 April 2014.

The Company also made tangible progress in developing its other core assets, most particularly the Badile exploration prospect. We are currently marketing Badile to potential farm-in partners, having already received, but not accepted, an earlier offer from a large Italian oil company. In October 2013, the Company announced that a new Competent Person's Report ("CPR") had confirmed a new best estimate NPV10 of €486 million for the Badile licence, which represented a 60% increase on the previous CPR. We expect to receive the Environmental Impact Assessment approval in respect of Badile in the second half of 2014 and drilling is scheduled to commence late 2014/early 2015.

On 14 January 2014, Sound Oil announced a new discounted underwritten open offer to eligible shareholders to raise approximately £1.6 million before expenses. The open offer was made of 38,349,139 shares at 4.2 pence per share. We were pleased to announce on 3 February 2014 that the open offer was significantly over-subscribed.

The Company also announced on 14 January 2014 that it had secured an asset-backed eighteen month loan facility of up to £1.5 million.

In February 2014 I was delighted to welcome both Simon Davies and Gerry Orbell to the Board following the retirement of two long serving Non-Executive Directors, Michael Nobbs, who stepped down from the Board last December and Tony Heath, who has signified his intention to retire after the forthcoming AGM. Michael and Tony joined the Board at the inception of the Company nine years ago and we wish them both well after their long and distinguished service.

Simon Davies and Gerry Orbell bring extensive experience and knowledge, which will strengthen Sound Oil as we progress towards commercialising the Nervesa discovery and as we prepare to drill the first-class exploration opportunity at Badile.

In the summer of 2013 we were pleased to announce the recruitment of Leonardo Spicci, formerly ENI's District Manager for Northern Italy to lead a specific Badile project team and the appointment of Stuart Joyner as our Chief Financial Officer. Stuart was formerly Head of Oil and Gas at Investec Bank plc and brings twenty years' experience in fundraising and mergers and acquisitions to the Executive Team.

In April 2014, we were also pleased to announce a proposed £14 million funding injection via a combination of debt and equity from Swiss institutional investor Continental Investment Partners SA.

As referred to above, we have also agreed Heads of Terms for a 3.6 to 1 farm out on Sound Oil's flagship asset, Nervesa. This farm-in will fully fund the next well addressing the southern part of the structure and enables Sound Oil to achieve first gas on Nervesa without significant further capital and whilst maintaining control of the asset.

2014 and Beyond

Looking to the future, the Company's focus is to monetise the value of our significant licence position in Italy. Our strategy remains consistent with the focus remaining on the Nervesa and Laura discoveries and Badile and Zibido exploration prospects. To this exciting portfolio, we have now added the Santa Maria Goretti discovery following the completion of further technical studies. This low risk opportunity has a preliminary internal best estimate NPV10 of €39 million with estimated P50 resources of 18 Bscf and we are looking to accelerate potential cash flows from this asset.

Our immediate operational priority is to drill the second well at Nervesa to address the southern part of the structure. We have already signed a letter of intent for the rig and expect to complete the drilling in Q3 2014. In parallel we will proceed to develop the field and we expect first gas production in mid-2015. This will represent a step change in the revenue generation of the Group and will provide crucial cash flow to develop further projects.

Following success at Nervesa we will then proceed with our planned drilling programme, including Badile and Laura.

In summary, 2014 and 2015 should be the busiest and most exciting time in the history of Sound Oil to date. We can expect to be well under way with development work on both the Nervesa wells with first revenues following shortly after. This will be a landmark in the Company's history as for the first time we will be able to use free cash flow to grow the business. Success at the Laura discovery and at the game-changing Badile exploration well should also propel Sound Oil, under the leadership of our Chief Executive Officer James Parsons, towards our continued aim of becoming a fully funded mid-cap company. I am enthused by the variety and quality of prospects in our portfolio and look forward to unlocking their value with the highly skilled and professional team we have built. I would like to take this opportunity to thank our shareholders for their support over the past year and to wish you well.

Andrew Hockey

Chairman

20 May 2014

Financial Review

Accounting Standards

The Group has prepared its 2013 full year accounts under International Financial Reporting Standards (IFRS), as adopted by the European Union.

Income Statement

In 2013, the Group recorded its first revenues from the Rapagnano field following first production on 15 May.

The loss before finance costs and tax from continuing operations in 2013 was £6,437,000 an increase from £4,631,000 in 2012. This was as a result of increased impairments. As the Group has shifted its focus toward large gas plays, such as Badile, Laura and Zibido, the Group decided to de-prioritise developments such as Strombone. We also further reviewed the inherent risk of Strombone, and consequently we have lowered its carrying value and the quantity of estimated hydrocarbons.

Administrative expenses fell significantly in 2013 to £2,616,000 (2012: £3,176,000). This reduction is the result of efforts to pro-actively minimise administrative costs in addition to the one-off costs incurred in 2012 as a result of the Group re-structuring.

Cash Flow/Financing

During 2013, £3,240,000 net cash proceeds from financing were raised. Of this £1,664,000 was provided by our Italian partner CSTI to develop the Rapagnano field and drill the first appraisal well at Nervesa.

A further £1,576,000 was raised on completion of a placement entered into in 2012. The open offer of March 2013 also provided funding.

The funding arrangements with CSTI for both Rapagnano and Nervesa have been accounted for as loans with repayments made as a fixed proportion of net revenue until the arrangements are repaid. As the amounts due will not be repaid in their entirety in 201 4, the Group's balance sheet now shows long term borrowings of £1,947,000 (2012: £Nil).

In January 2014, the Group raised a further £1.6m (before expenses) as part of a new Open Offer and also agreed a £1.5m asset-backed loan arrangement with Simon Davies, a non-Executive Director.

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 is obtaining strong revenues from the Rapagnano gas field and shortly hopes to commence commercial production from the Casa Tiberi field. It is expected that net revenues from these fields will more than cover the cost of the Italian office. The directors have considered the Group's cash flow forecasts for the period to end of June 2015. Forward cash flow projections show that funds available to the Group will exceed forecast commitments.

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

Balance Sheet

In the year, exploration and evaluation increased by £8,719,000 which was related primarily to the drilling of the Nervesa appraisal well including its subsequent decommissioning provision and to expenditure incurred in beginning work on the Badile project.

In the year impairments relating to exploration and evaluation totalled £3,984,000. The costs related primarily to the Strombone development and Monteluro, a permit that the Group has decided to relinquish.

£706,000 was incurred on development and production assets primarily being necessary work to put Rapagnano into production.

Non-current provisions increased to £1,226,000 (2012: £680,000) due to the recognition of decommissioning provisions following the drilling of the Nervesa appraisal well.

Technical Review

Sound Oil currently has interests in 18 licences in Italy: 3 production concessions, 7 permits and 8 exclusive permit applications. 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 is located in Fermo Province, Marche Region, central Italy. Geologically the area is within the Ancona-Pescara Basin associated with the Central Apennine foredeep. First gas was delivered from the onshore Rapagnano field to the local gas distributor on 15 May 2013. The initial production rate was 10,000 Scmd (0.4 MMscfd). Under the gas sales agreement with Steca Energia Srl, gas was priced initially at €0.316 per Scm (US$11.2/Mscf), varying quarterly based on a basket of commodity prices (diesel, Brent and fuel oil as published in Platts) with an average 2013 price of €0.320 per Scm. On 30 September 2013, this GSA expired and Sound Oil now receives a monthly fixed price of €0.29 per Scm from Steca. Total 2013 production for the period May to December was 2.25 MMscm (79.45 MMscf) with an average production rate of 9,770 Scmd (0.34 MMscfd). This yielded revenue of €567,000 for 2013 gas deliveries. On an annualised basis, the Company expects the field to yield circa €480,000 of cash flow after operating costs per annum. The Company plans to produce a further 1.2 Bscf over a twelve year period.

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

The permit is located in Ancona, Marche in central Italy, within the foredeep trough of the Central Apennines. The principal hydrocarbon plays are for biogenic gas in sand bodies in the shallow Pleistocene-Pliocene section and thermogenic gas in the deeper Miocene and older carbonates. Following Board approval to develop the Casa Tiberi gas field, an Engineering, Procurement, Construction and Lease contract has been awarded to TESI Srl, a local company with proven experience in onshore processing plants in Italy. The contract is for a total of €300,000 and involves the three month construction and subsequent lease of a production skid in anticipation of first gas from the field at the end of H1 2014.

The plant will be based on modular skids with nitrogen used for both gas dehydration and as "service gas" providing an effective and extremely environmental friendly solution to deliver the gas to the local low pressure network.

Appraisal and Development

Nervesa Field, Carita Permit ( Sound Oil 100%)

The permit is located in northeast Italy, within the Alpine foredeep province. The Nervesa structure was drilled by ENI in 1985 with two wells (Nervesa-1 and Nervesa-1dir A) and proved gas-bearing in at least 13 sand intervals within the Tortonian (5, 6a-d, 7a-e, 8, 9a-b). Of these intervals only one (9a) was completed in Nervesa-1 and put in production between 1989 and 1991. The permit was acquired by Celtique Energie in 2010 and subsequently operated by Sound Oil. Sound Oil acquired Celtique's 50% interest in November 2011. The Nervesa field has the potential of five further completions on the remaining 12 sand intervals at 1,829m to 1,964m depth. Gross P50 contingent resources have been independently estimated to be 20.7 Bscf. The first well was drilled in July 2013 with 46 metres of net pay across 13 zones. The well test achieved a stabilised total gas flow rate of 2.7 MMscfd from multiple sandstone intervals in the Upper Miocene San Dona Formation using a dual string completion. Following these successful results, Sound Oil has applied for a Production Concession with a view to achieving first gas sales at Nervesa in 2015. This is the first well in a 2 or 3 well development plan with the second well, in the Southern part of the structure, planned for Q2-Q3 2014. There are preliminary signs of potential for an additional exploration prospect on the same licence.

Laura Discovery (Sound Oil 100%)

D150 DR-CS is located in the Ionian Sea Zone D within the Sibari Basin in offshore (ENI) Calabria. Average water depth is 200m. The permit area was formerly held by Agip as permit D.R50.AG between 1976 and 1984. In 1980 commercial gas was discovered in two sand intervals in Laura-1. Gross P50 contingent resources for the Laura discovery have been independently estimated to be 30 Bscf. The permit is expected to be awarded shortly and the strategy is to drill an appraisal well on the discovery. In order to reduce potential drilling and development 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 project and intends to submit a drilling application on award of the permit to enable drilling in 2015.

Santa Maria Goretti Permit (Sound Oil 100%)

In December 2013, Sound was pleased to announce the award of the Santa Maria Goretti Permit ("SMG Permit") from the Italian Ministry of Economic Development. The onshore SMG Permit sits in the Marche Region in Italy, covers an area of 101km2 and is owned 100% by Sound Oil. The SMG Permit area contains the southern extension of two significant producing gas fields, which are operated by ENI in the adjacent permit. Sound Oil's internal seismic evaluation and reservoir studies are very encouraging and the Company plans to submit a drilling application to appraise the reservoir.

Exploration Assets

Badile Prospect (Sound Oil 100%)

The permit containing the Badile Prospect was awarded in March 2010. An independent Competent Person's Report (CPR) has confirmed a Best estimate NPV10 of €486m, an increase of 60% on the previous CPR (which was €302m). The CPR has also estimated a High Case NPV10 of €1.7bn and a Low Case NPV10 of €101m.

Underpinning these estimates are gross prospective resources of 178Bscf equivalent (106 Bscf of gas plus 12 MMbbl of condensate) with a High Case estimate of 673Bscfe (397 Bscf of gas plus 46 MMbbl of condensate) and a Low Case estimate of 46Bscfe (28 Bscf of gas plus 3 MMbbl of condensate). The study has also confirmed a 22% geological chance of success for the prospect. In December 2013 Sound Oil applied to drill the exploratory well Moirago-1 submitting both the well plan and the relevant EIA documentation.

Abbreviations:

Bopd:	Barrels of oil per day.
Bscf:	Billion standard cubic feet of gas.
Bscfe	Billion standard cubic feet of oil equivalent.
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.
NPV10	Net present value at a discount rate of 10%.
Scfd:	Standard cubic feet of gas per day.
Scmd:	Standard cubic meters of gas per day.

The resource estimates contained in this announcement in respect of Sound Oil's internal best estimates in respect of the SMG Permit have been prepared in accordance with definitions and guidelines set out in the 2007 Petroleum Resources Management System approved by the Society of Petroleum Engineers and these estimates, together with the other information contained in this announcement, have been reviewed  by Sound Oil's Italian Managing Director, Luca Madeddu, a qualified petroleum geologist.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2013

	2013 £'000s	2012 £'000s
Revenue Operating costs Exploration and development costs	482 (265) (4,038)	- - (1,455)
Gross loss Administrative expenses	(3,821) (2,616)	(1,455) (3,176)
Group trading loss from continuing operations	(6,437)	(4,631)
Finance revenue Foreign exchange (loss)/gain External interest costs	9 (304) (132)	11 (174) (10)
Loss before income tax	(6,864)	(4,804)
Income tax Loss for the period attributable to continuing operations Loss on disposal from discontinued operations	- (6,864) -	- (4,804) (8,934)
Loss for the period attributable to owners of the parent	(6,864)	(13,738)
Other comprehensive income: Foreign currency translation gain	557	427
Total comprehensive income for the year	(6,307)	(13,311)
Attributable to: Equity holders of the parent	(6,307)	(13,311)
	2013 Pence	2012 Pence
Loss per share (basic) from continuing operations	(2.40)	(2.00)
Loss per share (basic) from discontinued operations	-	(3.70)

Consolidated Balance Sheet

as at 31 December 2013

Group	2013 £'000s	2012 £'000s
Non-current assets
Property, plant and equipment	1,476	853
Intangible assets	19,500	14,546
	20,976	15,399
Current assets
Other debtors	1,978	2,774
Prepayments	184	38
Cash and short term deposits	543	6,909
	2,705	9,721
Total assets	23,681	25,120
Current liabilities
Trade and other payables	2,797	719
Loans repayable in under one year	229	82
	3,026	801
Non-current liabilities
Deferred tax liabilities	2,165	2,125
Provisions	1,226	680
Loans due in over one year	1,947
	5,338	2,805
Total liabilities	8,364	3,606
Net assets	15,317	21,514
Capital and reserves attributable to equity holders of the company
Issued equity share capital and share premium	63,085	63,083
Accumulated deficit	(49,029)	(42,273)
Foreign currency reserve	1,261	704
Total equity	15,317	21,514

Consolidated Statement of Changes in Equity

for the year ended 31 December 2013

Group	Share capital £'000s	Share premium £'000s	Accumulated deficit £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2013	2,870	60,213	(42,273)	704	21,514
Total loss for the period	-	-	(6,864)	-	(6,864)
Other comprehensive gain/(loss)	-	-	-	557	557
Total comprehensive income/(loss)	-	-	(6,861)	557	(6,307)
Issue of share capital	6	43	-	-	49
Transaction costs	-	(47)	-	-	(47)
Share based payments	-	-	108	-	108
At 31 December 2013	2,876	60,209	(49,029)	1,261	15,317
				Foreign
	Share	Share	Accumulated	currency	Total
	capital	premium	deficit	reserves	equity
	£'000s	£'000s	£'000s	£'000s	£'000s
At 1 January 2012	1,833	52,871	(28,606)	3,768	29,866
Total loss for the year 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

Consolidated Cash Flow Statement

for the year ended 31 December 2013

	2013 £'000s	2012 £'000s
Cashflow from operating activities
Cashflow from operations	(2,645)	(4,327)
Interest received	9	11
Net cash flow used in operating activities	(2,636)	(4,316)
Cash flow from investing activities
Capital expenditure and disposals	(706)	(80)
Exploration expenditure	(6,482)	(3,913)
Net cash inflow on disposal of subsidiary	-	2,515
Net cash flow used in investing activities	(7,188)	(1,478)
Proceeds from CSTI funding contract	1,664	-
Net proceeds from equity issues	1,576	6,804
Net cash flow from financing activities	3,240	6,804
Net increase/(decrease) in cash and cash equivalents	(6,584)	1,010
Net foreign exchange difference	218	(387)
Cash and cash equivalents at 1 January	6,909	6,286
Cash and cash equivalents at 31 December	543	6,909

Notes to the Financial Statements

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 financial position of the Group, its cash flows and available debt facilities are described in the Financial Review above. As at 31 December 2013 the Group had £0.6m 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 2015) will be less than the funds available as at 31 December 2013.

(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) assets, provisions made for decommissioning, 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.

The recognition and measurement of decommissioning provisions involves the use of estimates and assumptions. These include the existence of a legal or constructive obligation to decommission, based on current legislation, contractual or regulatory requirements or best practice; the risk-free discount rate used to determine the net present value of the liability; the estimated cost of decommissioning based on internal and external engineering estimates and reports; and the payment dates of expected decommissioning costs which are uncertain and are based on economic assumptions surrounding the useful economic lives of the fields concerned. Actual costs could differ from estimated costs due to changes in legislation, regulations, technology, price levels and the expected date of decommissioning.

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

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

2  Operating loss

Operating loss is stated after charging:
	2013	2012
	£'000s	£'000s
Auditors' remuneration	82	98
Depreciation and amortisation	146	24
Employee costs	2,045	2,357
Impairment charge	3,984	1,455

3  Auditors' remuneration

	2013 £'000s	2012 £'000s
Fees payable to the company's auditor for the audit of the company's annual accounts	67	73
Fees payable to the company's auditor and its associates for other services:
- The audit of the company's subsidiaries pursuant to legislation	7	6
- Tax services	8	19
	82	98

4 Employee costs

	2013	2012
	£'000s	£'000s
Staff costs, including executive directors
Share based payments	108	71
Wages and salaries	1,616	2,015
Social security costs	311	265
Employee benefits	10	6
Total	2,045	2,357

Total directors' remuneration in the year was £490,000 (2012: £679,000). The highest paid director received remuneration of £294,000 (2012: £496,000)

	2013	2012
Number of employees (including executive directors) at the end of the year
Technical and operations	5	4
Management and administration	11	12
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

In 2012 the Company announced the sale of its 20% working interest in the Citarum PSC to Pan Orient Energy (Citarum) PTE . On 12 December 2012 the Company sold its subsidiary, Mitra Energia Bangkanai Ltd ('MEB') to Salamander Energy Plc.

Both of the above transactions were classified and accounted for as disposals in 2012 and presented as discontinued activities in the financial statements.

	2013	2012
	£'000s	£'000s
Administration expenses	-	671
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

In arriving at the net loss on disposal of the Citarum and Bangkanai assets in 2012 no value was attributed to contingent cash consideration of up to £12.2m ($18.6m) receivable by the Group in the event of revenues from future discoveries in the Citarum and Bangkanai PSC's and first gas from Kerendan. Despite positive newsflow from the Bangkanai PSC, the Board feels the likelihood of realisation of economic benefit from the contingent consideration is not sufficiently proximate to recognise the amounts as assets in the financial statements.

6 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:

	2013	2012
	£'000s	£'000s
Loss after tax from continuing operations	(6,864)	(4, 804)

	2013	2012
	million	million
Weighted average shares in issue	288	242

	2013	2012
	Pence	Pence
Loss per share (basic) from continuing operations	(2.40)	(2.00)

	2013	2012
	£'000s	£'000s
Loss after tax from discontinued operations	-	(8,934)

	2013	2012
	Pence	Pence
Loss per share (basic) from discontinued operations	-	(3.70)

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

In accordance with IA S33, calculations of earnings per share have been adjusted retrospectively to reflect the Share Consolidation approved in general meeting on 4 January 2013.

7 Property, Plant and Equipment

	Development and production assets	Fixtures, fittings and office equipment	Total
Group	£'000s	£'000s	£'000s
Cost
At 1 January 2013	2,218	191	2,409
Exchange adjustments	21	3	24
Additions	706	37	743
Decommissioning provisions	2	-	2
As at 31 December 2013	2,947	231	3,178
Depreciation
At 1 January 2013	1,453	103	1,556
Charge for the year	106	40	146
As at 31 December 2013	1,559	143	1,702
Net book amount at 31 December 2013	1,388	88	1,476
Cost
At 1 January 2012	1,246	204	1,450
Exchange adjustments	-	(5)	(5)
Acquisitions	-	80	80
Additions	341	-	341
Transfers(1)	1,877	-	1,877
Disposals	(1,246)	(88)	(1,334)
At 31 December 2012	2,218	191	2,409
Depreciation
At 1 January 2012	-	172	172
Exchange adjustments	-	(5)	(5)
Transfers	1,453	-	1,453
Charge for the year	-	24	24
Disposals	-	(88)	(88)
At 31 December 2012	1,453	103	1,556
Net book amount at 31 December 2012	765	88	853

 (1) Transfers represent the reclassification of assets from intangible assets (note 11)

8  Intangible Assets

	Goodwill £'000s	Exploration and evaluation assets £'000s	Total £'000s
Cost
At 1 January 2013	2,126	13,494	15,620
Exchange adjustments	41	180	221
Additions		8,719	8,719
At 31 December 2013	2,167	22,393	24,560
Impairment
At 1 January 2013	-	1,076	1,076
Additions	-	3,984	3,984
At 31 December 2013	-	5,060	5,060
Net book amount at 31 December 2013	2,167	17,333	19,500
		Exploration and
	Goodwill	evaluation assets	Total
	£'000s	£'000s	£'000s
At 1 January 2012	3,577	26,856	30 ,433
Exchange adjustments	74	240	314
Additions	-	4,247	4,247
Transfers (1)	-	(1,879)	(1,879)
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	-	(1,455)	(1,455)
Transfers	-	1,455	1,455
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

(1) Transfers represent the reclassification of assets to PP&E (note 10)

Group

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.

The Company has no goodwill.

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").

A CPR for Badile was performed in October 2013 which gave a Best estimate NPV10 of €486m, an increase of 60% on the previous CPR. CPRs for the other Italian assets were last prepared 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.

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% (2012: 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 2013, the impairment costs related primarily to the decision to relinquish the Sambucheto and Monteluro licences whilst reducing the carrying value of the Strombone license.

	2013 £'000s	2012 £'000s
Italy	4,038	1,453
Total	4,038	1,453

9  Post balance sheet events

On 14 January 2014, the Company announced that both Simon Davies and Gerry Orbell would be appointed to the Board as non-executive directors following completion of the Open Offer announced on the same day. Consequently, they were both formally appointed on 3 February 2014.

On 14 January 2014, the Company announced a new Open Offer to eligible shareholders in order to raise approximately £1.6m (before expenses). The Offer was made for 38,349,139 new shares at 4.2p per share and represented a 32.8% discount to the closing market price of the Company's shares on 13 January 2014.

The Open Offer was fully underwritten by Peel Hunt and Simon Davies. The Company was pleased to announce on 3 February that it had received applications for shares significantly in excess of shares available as part of the issue. Consequently, 38,349,139 were admitted for trading on the AIM market on 4 February 2014.

On 14 January 2014, the Company also confirmed placement of a new asset backed loan of £1m provided by Simon Davies, which may be increased at the Company's discretion to £1.5m. The loan carries a 10% coupon and 17.5% fee.

On 25 April 2014, the Company announced that it had signed Heads of Terms with a new Institutional Investor, Continental Investment Partners SA ("Continental").

Continental agreed, subject to due diligence and contract, to inject a total of £14 million into the Company at an average price, post warrant exercise, of approximately 9 pence per share (a 69% premium to the closing share price on 24 April 2014).

Continental has agreed to subscribe for 100,000,000 new ordinary shares at a price of 8 pence per share to raise £8,000,000 before expenses. On Completion, the Investor will therefore own 23.41% of the Company's issued ordinary share capital. The Investor has agreed to an 18 month lock-in period for half of the shares to be subscribed for and a 12 months lock-in period for the other half.

As a sign of its commitment to the transaction, Continental immediately subscribed for a £1.5 million 3 year loan at a 10% coupon and was, on issue of this initial loan, granted 14,423,076 warrants to subscribe for new ordinary shares in the Company exercisable at a price of 10.4 pence per share. The exercise price of 10.4 pence per share represented a 98% premium to the closing share price on 24 April 2014 and a 79% premium to the three month VWAP. Coupon payments are made quarterly in arrears in cash.

Following approval by the Company's shareholders of the ordinary share issue at the Annual General Meeting, the Investor is expected to provide Sound Oil with an additional £4.5 million by way of a further loan on the same terms as the initial £1.5 million loan described above (10% coupon and the issue of 43,269,230 warrants, exercisable at 10.4 pence per share). Coupon payments will also be made quarterly in arrears in cash. A fee of 5% of the total proceeds of the £14 million fundraising will be payable to the Investor by the Company.

The warrants are both detachable and transferable and can be exercised at any point during the term of the loan. Should any of the warrants be exercised, the Company would be entitled, but not obliged, to apply the proceeds received to the repayment of the loan at the time of exercise. Continental will only be able to exercise the warrants up to the point where its ownership does not exceed 29.9% of the issued share capital of the Company. Any balance of the loan not repaid after three years will be repayable at that point in cash by the Company.

It is intended that on the issue of the second tranche of the loan note, the existing £1 million loan from Simon Davies, a director of the Company, will convert into a new loan on identical terms to the Investor loan (including the issue of warrants) but without fees.

Upon successful completion of the ordinary share issue and issue of the loan notes and warrants, it is intended that the Investor will have the right to nominate two Non-Executive Directors for appointment to the Board of the Company.

On 28 April 2014, the Company announced it had signed non-binding heads of terms with Niche Group plc ("Niche") for a farm down of the Company's onshore Carita licence in the Po Valley, Northern Italy (the "Heads of Terms"). The Carita licence area includes the Nervesa discovery.

Under the Heads of Terms, Niche will acquire, subject to completion of due diligence, a 27.5% interest in the Carita licence in exchange for paying 100% of the costs of a second well to address the southern part of the structure, planned for Q2/Q3 2014. Following the farm out, the Company will continue to hold a 72.5% interest in the Carita licence. The second well, to be funded by Niche, is estimated to cost Euro 6 million, including testing, completion and applicable taxes. The Heads of Terms include a binding and mutual break fee and a binding agreement is expected to be entered into during Q2 2014.

10.  Other matters

The financial information for the year ended 31 December 2013 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 2013 (2012: 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 20 May 2014.

 

END

 

 

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