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Sound Energy PLC (SOU)

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Thursday 23 April, 2020

Sound Energy PLC

Final Results

RNS Number : 5680K
Sound Energy PLC
23 April 2020
 

 

23 April 2020

 

SOUND ENERGY PLC

("Sound Energy" or the "Company")

 

FINAL RESULTS

 

 

Sound Energy, the Moroccan focused upstream oil and gas company, announces its audited final results for the year ended 31 December 2019.

 

HIGHLIGHTS

 

Morocco

· Completion of interpretation of seismic data for Eastern Moroccan licences

· Environmental Impact Assessment ("EIA") approvals for 120-kilometre 20-inch pipeline and gas treatment plant/compression station received in January 2020 and March 2020 respectively

· EIA approval for Sidi Moktar 2D seismic acquisition programme received in November 2019

· Marketing process for Eastern Moroccan licences undertaken

 

Corporate

· Structural reduction in administrative expenses in 2019 with further material reductions post period end

· Cash balance as at 31 December 2019 of £4.6 million

· Equity placing to raise gross proceeds of £2.4 million at 10 pence per ordinary share completed in June 2019

· Equity placing to raise gross proceeds of £1.5 million at 2 pence per ordinary share announced in December 2019 and completed in January 2020

Enquiries:

   

Vigo Communications - PR Adviser

Patrick d'Ancona

Chris McMahon 

 

Tel: 44 (0)20 7390 0230

Sound Energy
Graham Lyon, Executive Chairman
[email protected]
 

Cenkos Securities - Nominated Adviser

Ben Jeynes 

Russell Cook

 

Tel: 44 (0)20 7397 8900

Turner Pope Investments (TPI) Ltd  - Broker

Zoe Alexander

Andy Thacker

Tel: (0)20 3657 0050

 

Statement from the Executive Chairman

The year ending 31 December 2019 has been a challenging one for the Company and saw us refine our strategy to deliver value from our Moroccan assets. The Board took a decision following our exploration campaign in late 2018 and early 2019 to explore options on monetising our Tendrara Production Concession, the Greater Tendrara Petroleum Agreements and the Anoual Permits (the "Eastern Morocco Portfolio"). Following an extensive marketing process, the Company announced that it had entered into a period of exclusivity with a UK-based energy asset developer for a partial sale of the Company's Eastern Morocco Portfolio. Post period end, the Company announced that the period of exclusivity with the counterparty had ended and that whilst discussions with the counterparty are ongoing, there is no certainty that the previously proposed transaction will proceed or indeed successfully conclude. While the marketing process has inevitably drawn much interest and attention from within and outside of the Company, we must not forget the significant progress that has been made on the ground at our Tendrara Production Concession. In parallel with ongoing discussions in respect of the proposed partial divestment and progress towards the Full Field Development, the Company has been developing plans for a micro-LNG production plant which targets cashflow generation from our natural gas discoveries.

Partial sale of Eastern Morocco Portfolio  

Towards the end of H1 2019, Sound began the process of marketing its interests in the Eastern Morocco Portfolio, in order to explore monetisation of the assets. This process saw the Company enter into non-disclosure agreements with 23 companies, a number of which submitted non-binding offers for our Eastern Morocco Portfolio.

On 6 November 2019, we announced that the Company had entered into a non-binding heads of terms and provided a period of exclusivity to a private UK-registered company specialising in energy asset development and investment. On 14 February 2020, the Company announced that whilst the proposed counterparty had advised that it had satisfactorily concluded its technical and commercial due diligence processes, the counterparty had not yet demonstrated to the Company satisfactory proof of funds.  The period of exclusivity with the proposed purchaser has now ended, and Sound continues to discuss the proposed transaction with the counterparty, however, these discussions are no longer  being conducted on an exclusive basis and there is no certainty that the proposed transaction will proceed or will successfully conclude.

In the meantime, and concurrent to the monetisation that a partial divestment would bring, the Company has been actively progressing the development of the TE-5 Horst project throughout the year and since the period end.

In this regard we are pleased to have received approval from the Moroccan Ministry of Energy, Mines and Environment for our Environmental Impact Assessment ("EIA") to build and operate a 120-kilometre 20-inch Tendrara Gas Export pipeline connecting the proposed gas treatment plant and compression station at Tendrara, for which EIA approval has also been received, to the Gazoduc Maghreb Europe pipeline. Following the announcement in October 2019 of the entry into a binding Memorandum of Understanding (MOU) with the Moroccan State power company, Office National de l'Electricite et de l'Eau Potable for the sale of natural gas to be produced from the Tendrara Concession, the Company continues to progress discussions to enter into a binding gas sales agreement and we remain optimistic of a near-term definitive conclusion. Additionally, having received formal land access approvals for 99.9% of the land required for a 50-metre wide corridor along the entire length of the Tendrara Gas Export pipeline, negotiations with the Ministry in respect of the tariff for the land access also continue to progress to plan. The Company continues to work on a Build-Own-Operate-Transfer (BOOT) funding solution for full pipeline led field development.

On 17 February 2020, following expiry of exclusivity on the partial divestment of the Eastern Morocco Portfolio, the Company announced its intention to pursue a micro Liquified Natural Gas ("LNG") first phase production plan for the TE-5 Horst having identified micro-LNG development as an attractive route to cash flows from the Tendrara Production Concession. Additionally, the Board believes that the micro-LNG project provides a relatively low-capital cost route to gas sales from the TE-5 Horst with the first LNG delivery possible during 2021. The proposed micro-LNG production plan, which is subject to approval by our JV partners in the Tendrara Production Concession, will advance alongside all workstreams relating to the full Field Development Plan underpinning the Concession.

Eastern Morocco Exploration Portfolio

The TE-10 exploration well, which was safely drilled in December 2018 and extensively tested throughout H1 2019, returned a disappointing result. Despite encouraging initial indications provided by the mud and well logs, which identified the presence of a potential gross reservoir interval across a 110-metre measured depth section, unstimulated and stimulated testing of the well ultimately did not deliver a commercial gas flow rate. This prompted a board decision to conclude the well test following the installation of a downhole pressure gauge and to suspend all exploration drilling activity across the Company's portfolio until after the result of the Eastern Morocco Portfolio marketing process.

Two main lessons were learnt from the last drilling campaign:

1.  We still retain confidence in the potential of the TAGI across the Eastern Morocco Portfolio acreage

2.  The main exploration risk is the pre-drill identification of effective TAGI reservoir which has not, despite considerable technical assessment conducted by our exploration team and specialist consultants, been reliably determined from seismic data alone (2D or 3D) to date

Nevertheless, there remain numerous (56) concepts, leads, and prospects that lie across both Anoual and Greater Tendrara. Some are ready to be drilled and others need to be further matured before being drilled, but in aggregate these concepts, leads and prospects (which will ultimately have varying chances of success) have total unrisked gross exploration potential of 19.4 Tcf of original gas in place.

The Company believes that significant upside remains to be realised from exploring the basin with a view to unlocking new fields within our Eastern Morocco acreage. However, timing will be managed within our fiscal constraints.

Sidi Moktar

Sidi Moktar remains a largely under explored, yet exciting exploration opportunity within the Essaouira Basin. Having recently been granted Environmental Impact Assessment approval for a 2D seismic acquisition programme, our exploration team has been busy preparing for a seismic acquisition campaign which will provide greater understanding on the likely prospectivity for hydrocarbons within the pre-salt Triassic and Palaeozoic plays drawing on our knowledge and experience in these plays.

Corporate

The Company had a cash balance of £4.6 million as at 31 December 2019. In January 2020, the Company received £1.3 million net proceeds from an equity raise announced in December 2019, which strengthened the Company's cash position as it continued to progress a strategy for the partial monetisation of its Eastern Morocco Portfolio. A cost reduction process was implemented in 2019 which resulted in a reduction in General and Administrative costs.

As part of a structural cost reduction process, the Company also saw a restructuring of the Board of Directors which included JJ Traynor (former CFO), Brian Mitchener (former Exploration Director), Simon Davies (former Non-Executive Chairman) and James Parsons (former CEO) step down from the Board.

Since the period end, I am pleased to say that we have welcomed Mohammed Seghiri to the Board as acting CEO. Mohammed has worked at Sound Energy since 2017 as the Company's in-country Managing Director in Morocco and has over 18 years' experience in a range of complex sectors, including upstream and midstream oil and gas, power production and telecoms. Furthermore, his vast experience and in-country connections will undoubtedly prove valuable in his capacity as acting CEO for the near-term. Since 25 February 2020, I have taken on the role of Executive Chairman and whilst it is acknowledged that the separation of Chairman and CEO is best practice for governance I will retain this position until such time that the Board consider it appropriate that I move to Non-Executive Director.

Clearly an exploration focused company can only be sustainable with sufficient funding to fully test its portfolio. My priority is to rebalance the Company's capital, both human and financial, to self-generate sufficient funding such that the higher risk exploration drilling can be undertaken from free cash. The partial monetisation of our assets through trade sales, in parallel to undertaking the micro-LNG development project, therefore remains a short-term focus.

We have a challenging year ahead, but our team is up for the challenge and remain committed to delivering shareholder value.

At the time of issuing the Annual Report and Accounts there are unprecedented societal and market conditions following COVID-19 virus outbreak which increases the risk that there could be delay in the Company's micro-LNG strategy implementation which could impact the Company's liquidity. The Directors continue to explore ways to mitigate the impact including assessing the measures announced by the UK Chancellor to support businesses during COVID-19 outbreak.

Graham Lyon

Executive Chairman

 

Operational Review

Asset Overview

 

Eastern Morocco

 

Asset

Interest

Status

Area

Greater
Tendrara

47.5% interest operated

Exploration Permit

14,599km2 acreage,
8 wells drilled

Anoual

47.5% interest operated

Exploration Permit

8,873km2,
1 well drilled

Tendrara Production Concession

47.5% interest operated

Concession

133.5km2,
4 wells drilled

 

 

Southern Morocco

 

Asset

Interest

Status

Area

Sidi Moktar

75% interest operated

Exploration Permit

4,711km2 acreage,
44 wells drilled

 

Eastern Morocco

Operational Review

Our Eastern Morocco Licences are positioned in a region containing a continuity of the established petroleum plays of Algerian Triassic Province and Saharan Hercynian Platform. The presence of the key geological elements of the Algerian TAGI gas play are already proven within the licence areas with the underlying Palaeozoic representing a significant upside opportunity to be explored.

Last year we continued our programme of geological and geophysical studies required to mature a set of established leads into drillable prospects. In late 2018/early 2019 we drilled two high-impact exploration wells TE-9 and TE-10 to test two independent elements of the TAGI gas play outward of the TE-5 Horst discovery. Both wells were completed with zero lost time incidents.

TE-9 targeted a well-defined structural trap, the A1 Structure, similar in many respects to the TE-5 Horst. The TE-9 well was drilled to a total measured depth of 2,925m and penetrated both the TAGI primary target and the Palaeozoic secondary target. The TAGI succession consisted of 60m of dolomitised silty sandstone to microconglomerates.

The petrophysical analysis of the wireline data indicated the interval had no appreciable porosity and therefore lacked effective reservoir, the key pre-drill risk. The well also encountered approximately 630m of a Westphalian aged succession of fine sandstones, siltstones and mudstones. The petrophysical analysis of the wireline data indicated the interval is of low porosity and therefore poor reservoir quality. The well was plugged and abandoned. However, subsequent analysis of the sampled drill gas in both the TAGI and Palaeozoic intervals provided evidence of the working petroleum system supporting the Basin Model.

TE-10 targeted the TAGI in a combined structural- stratigraphic trap, North East Lakbir. The well was drilled to a total measured depth of 2,218m and encountering a 110m gross interval of the TAGI succession. Gas shows greater than background levels were observed, and an MDT gas sample was successfully recovered. Petrophysical analysis identified the potential for up to 15.4m of net pay distributed throughout the gross interval.

From March to May 2019, the TE-10 gas discovery was tested by unstimulated and mechanical stimulation over the uppermost primary zone (1,932 to 1,938 mMD) by Schlumberger deploying Hi-Way technology, the first use of this technique in Morocco. After the initial clean up this zone was flowed and recovered a mixture of gas and liquid, largely comprising the fluid used in the stimulation. Two nitrogen lift operations were subsequently performed in an attempt to increase the gas flow rate, followed by nitrogen injection into the fracture network.

Despite the nitrogen lifts and injection, the gas flow rates achieved were below the threshold required for development previously advised by the Company. In total, approximately 64,500 scf of gas and approximately 2,300 bbls of liquid were recovered over an 11-day period. The secondary lower three zones did not flow gas unstimulated, and a sample of liquid subsequently interpreted as formation water, was recovered from the third zone (1,965 to 1,977mMD). The subsequent analysis of this water supported the petrophysical interpretation of high gas saturations in the uppermost primary zone.

The Company deployed a downhole gauge to monitor the pressure in the well and has demobilised the test equipment and crew from the TE-10 well site. The test was completed with zero lost time incidents.

Further operations were placed on hold, to allow the Company to explore the monetisation options available in respect of its Eastern Moroccan portfolio.

 

Eastern Morocco - Commercialisation

During 2019 the Company continued to make progress in advancing the development of the Tendrara TE-5 discovery, including the progression of Front-End Engineering & Design (FEED) by the Enagas-led consortium together with the progression of the Moroccan environmental permitting process.

The Company also progressed discussions with Office National de l'Electricité et de l'Eau Potable ("ONEE"), the Moroccan state electricity producer, in relation to a gas sales agreement ("GSA") for offtake from the Tendrara Production Concession. In October, the Company entered into a Memorandum of Understanding ("MOU") with ONEE to set out the key terms through which it would sell an agreed quantity of gas from the Tendrara Production Concession. The GSA is a critical element required to support project sanction. Both parties continue to negotiate with a view to entering into a binding gas sales agreement in early 2020 which will incorporate the key terms of the MOU.

Southern Morocco

The Sidi Moktar licence is located in the Essaouira Basin, in Southern Morocco. The licence covers a combined area of 4,712km2.

The Company views our Sidi Moktar licences as an exciting opportunity to explore high impact prospectivity within the pre-salt Triassic and Palaeozoic plays in the underexplored Essaouira Basin in the West of Morocco. In June 2018 we were delighted to receive Ministerial approval of a new 8-year Sidi Moktar Onshore Petroleum Agreement.

The Sidi Moktar permit hosts a variety of proven plays. The licences host 44 vintage wells drilled between the 1950s and the present. Previous exploration has been dominantly focused on the shallower post salt plays. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoirs in the field are Triassic aged sands, directly analogous to the deeper exploration plays in the Sidi Moktar licences. The Meskala field and its associated gas processing facility is linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for the domestic and export markets. This pipeline passes across the Sidi Moktar licence. The discovery of the Meskala field proved the existence of a deeper petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt super seal and provides support for evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within this deeper play fairway. We believe that the deeper, pre-salt Triassic and Palaeozoic plays may contain significant prospective resources, in excess of any discovered volumes in the shallower stratigraphy.

Our evaluation of the exploration potential of Sidi Moktar, following an independent technical review, includes a mapped portfolio of 27 Jurassic, Triassic and Palaeozoic leads in a variety of hydrocarbon trap types. In addition, the Sidi Moktar licence also contains discovered resource in Jurassic reservoirs in the Kechoula gas field, which is located close to existing infrastructure and gas demand, including the large-scale Moroccan state owned OCP phosphate plant.

Sound Energy is developing a work programme to mature the licence with specific focus on the deeper, pre-salt plays. We aim to acquire new, high quality 2D seismic data in 2020, focused on improving trap imaging. Preparations for this seismic acquisition campaign have commenced with the completion and approval of an EIA. This approval, which concerns 25 territorial communes of the province of Essaouira and 11 territorial communes of the province of Chichaoua, is an important step in the local permitting process and enables the Company to continue its preparations for the seismic acquisition campaign. The Company has also undertaken a market enquiry receiving responses from multiple seismic acquisition providers.

This work is planned to culminate in an exploration well, targeting a deep prospect towards the end of 2021. The Company continues to progress a farm out process for this permit, offering an opportunity to a technically competent partner to acquire a material position in this large tract of prospective acreage.

Financial Review

Approximately £5.7 million (net of Badile VAT refund £0.8 million) was invested during 2019, primarily on the drilling and testing of TE-10 well within schedule and budget, although the well did not achieve a commercial gas flow rate.

Income Statement

The loss for the year before tax from continuing operations was £16.4 million (2018: £11.7 million). Exploration costs of £6.6 million (2018: £4.1 million) related to the impairment charge of TE-10 drilling and well test costs as the well did not achieve a commercial gas flow rate. 2018 exploration costs related to the TE-9 well that was plugged and abandoned. Administrative costs at £6.1 million were lower than 2018 administration costs of £8.9 million due to a structural cost reduction initiative taken during the year which included a reduction in staff numbers.

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

Foreign exchange gains and losses arising from intercompany loans that originated on acquisition of Moroccan licences are recognised in the statement of other comprehensive income.

Discontinued operations in 2018 related to the disposal of the Group's operations in Italy which completed in April 2018.

Cash Flow/Financing

During 2019, an equity raise, warrants and share option exercises raised approximately £2.2 million (2018: £12.2 million).

Financing costs were £2.8 million (2018: £2.4 million) primarily due to amortised costs of the bonds, net of interest capitalised to the exploration licences of £0.5 million (2018: 0.6 million).

The Group spent £5.7 million (2018: £12.4 million) on investing activities during 2019, which largely consisted of spend on the Greater Tendrara licence in Morocco, primarily in relation to the TE-10 exploration well drilling completion and testing and capitalised general and administrative expenses. A 0.8 million VAT refund from the disposed Italian operations was received during the year.

Balance Sheet

As at 31 December 2019, the carrying amount of property, plant and equipment was £147.3 million (2018: £151.0 million) primarily related to the development and production assets in Morocco with a carried value of £146.9 million (2018: £150.6 million) after taking account of additions and foreign exchange movement.

Following the adoption of IFRS 16 in 2019, the liabilities relating to the Group's office leases in UK and Morocco were measured at the present value of the remaining lease payments and recognised in the balance sheet as lease liabilities and the associated right-of-use assets was included within property, plant and equity. The carrying amount of the right-of-use assets was £0.2 million (2018: nil). The lease liabilities as at 31 December 2019 had a carrying amount of £0.2 million, primarily current liabilities.

Additions of £6.0 million to intangible assets largely consisted of TE-10 exploration well drilling completion and testing and capitalised general and administrative expenses. The drilling was within schedule and budget, although the well did not achieve a commercial gas flow rate.

As part of the Italy divestment agreement, the Company is entitled to receive the proceeds, upon the sale, of Badile land. The Company therefore has a carrying amount of £0.9 million (2018: £1.6 million) as interest in Badile land. During 2019, the Company recognised £0.6 million impairment charge in respect of the interest in Badile land due to decline in expected sale price.

Other receivables amounting to £1.5 million (2018: £3.4 million) primarily related to receivables from our partners in Morocco licences and recoverable VAT in Morocco.

Trade and other payables amounting to £2.4 million (2018: £10.1 million) primarily related to payables and accruals for the operations in the Group's licences in Morocco, where the Group, as operator, recognises 100% of the liability and receives funds from partners to pay the partners' share. The Company has a carrying amount of £0.6 million (2018: £0.7 million) relating to the obligation for the Badile land remediation in line with the Italy divestment agreement.

Going Concern

As at 31 December 2019, the Group's cash balance was £4.6 million (including approximately £2.5 million held as guarantee for minimum work commitments on the Company's licences). The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and settlement of liabilities and commitments in the normal course of operations. The Company is pursuing a micro-LNG early production plan for the Tendrara Production Concession ahead of the full development plan whilst continuing discussions with third parties for a partial sale of its Eastern Morocco Portfolio. The Company initiated a structural cost reduction programme in early 2019 to conserve cash resources and meet its ongoing obligations including settlement of coupon interest on the Company's €28.8 million bond. In January 2020, the Company received £1.3 million net proceeds from an equity raise. The Company's cashflow forecast for the twelve-month period to April 2021 indicates that additional funding will be required to enable the Company to meet its obligations. The Company's €28.8 million bond is due for settlement on 21 June 2021 and a refinancing or funding will be required before the due date to enable the Company to settle the debt.

The COVID-19 pandemic has not had a significant, immediate impact on the company's operations but the Directors are aware that if the current situation becomes prolonged then this may change, in particular it could delay the Company's micro-LNG strategy implementation and the ability of the Company to raise additional funds through an equity raise, both would impact the Company's liquidity.

These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern. These financial statements do not include adjustments that would be required if the Company was unable to continue as a going concern. The Directors have formed a judgement based on the Company's proven success in raising capital and a review of the strategic options available to the Company, that the going concern basis should be adopted in preparing the consolidated financial statements.

 

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2019

 

Notes

2019

£'000s

2018

£'000s

Continuing operations

 

 

 

Revenue

 

-

-

Exploration costs

 

(6,570)

(4,058)

Gross loss

 

(6,570)

(4,058)

Administrative expenses

 

(6,064)

(8,857)

Group operating loss from continuing operations

 

(12,634)

(12,915)

Finance revenue

 

102

233

Foreign exchange (loss)/gain

 

(1,101)

3,387

Other losses

 

 

 

- derivative financial instruments

 

-

(80)

External interest costs

8

(2,787)

(2,374)

Loss for the year from continuing operations before taxation

 

(16,420)

(11,749)

Tax credit/(expense)

 

-

-

Loss for the year from continuing operations

 

(16,420)

(11,749)

 

 

 

 

Discontinued operations

 

 

 

Profit for the year from discontinued operations

 

-

4,953

Total loss for the year

 

(16,420)

(6,796)

 

 

 

 

Other comprehensive (loss)/income

 

 

 

Items that may subsequently be reclassified to the profit and loss account

 

 

 

Foreign currency translation (loss)/gain

 

(4,256)

7,614

Total comprehensive (loss)/profit for the year

 

(20,676)

818

(Loss)/profit for the year attributable to:

 

 

 

Owners of the company

 

(20,676)

818

Non-controlling interests

 

-

-

 

 

Notes

2019

Pence

2018

Pence

Basic and diluted loss per share for the year from continuing and discontinued operations

3

(1.54)

(0.66)

Attributable to the equity shareholders of the parent (pence)

3

(1.54)

(0.66)

 

 

 

 

Basic and diluted loss per share for the year from continuing operations

3

(1.54)

(1.14)

Attributable to the equity shareholders of the parent (pence)

3

(1.54)

(1.14)

 

Consolidated Balance Sheet

as at 31 December 2019

 

Notes

2019

£'000s

2018

£'000s

Non-current assets

 

 

 

Property, plant and equipment

4

147,342

151,005

Intangible assets

5

30,784

32,008

Interest in Badile land

 

936

1,618

 

 

179,062

184,631

Current assets

 

 

 

Inventories

 

1,014

929

Other receivables

 

1,492

3,365

Prepayments

 

41

178

Cash and short-term deposits

 

4,608

20,536

 

 

7,155

25,008

Total assets

 

186,217

209,639

Current liabilities

 

 

 

Trade and other payables

 

2,444

10,068

Lease liabilities

6

183

-

 

 

2,627

10,068

Non-current liabilities

 

 

 

Lease liabilities

6

42

-

Loans due in over one year

8

21,235

20,476

 

 

21,277

20,476

Total liabilities

 

23,904

30,544

Net assets

 

162,313

179,095

Capital and reserves

 

 

 

Share capital and share premium

 

24,835

22,600

Accumulated surplus

 

135,481

150,242

Warrant reserve

 

4,090

4,090

Foreign currency reserve

 

(2,093)

2,163

Total equity

 

162,313

179,095

 

Group Statements of Changes in Equity

for the year ended 31 December 2019

 

 

Notes

Share capital £'000s

Share premium £'000s

Accumulated surplus

£'000s

Warrant reserve

 '000s

Foreign currency reserves £'000s

Total

equity

£'000s

At 1 January 2019

 

10,551

12,049

150,242

4,090

2,163

179,095

Total loss for the year

 

-

-

(16,420)

-

-

(16,420)

Other comprehensive income

 

-

-

-

-

(4,256)

(4,256)

Total comprehensive loss

 

-

-

(16,420)

-

(4,256)

(20,676)

Issue of share capital

7

245

2,228

-

-

-

2,473

Share issue costs

 

-

(238)

-

-

-

(238)

Share based payments

 

-

-

1,659

-

-

1,659

At 31 December 2019

 

10,796

14,039

135,481

4,090

(2,093)

162,313

 

 

 

 

Notes

Share

Capital

 '000s

Share

premium

£'000s

Accumulated surplus/(deficit)

£'000s

Warrant reserve

 '000s

Foreign currency reserves £'000s

Total

Equity

 '000s

At 1 January 2018

 

10,159

277,670

(115,508)

4,090

(3,918)

172,493

Total loss for the year

 

-

-

(6,796)

-

-

(6,796)

Other comprehensive income

 

-

-

-

-

7,614

7,614

Total comprehensive loss

 

-

-

(6,796)

-

7,614

818

Issue of share capital

 

392

12,687

-

-

-

13,079

Share issue costs

 

-

(570)

-

-

-

(570)

Reclassification to profit and loss
account on Italy divestment

 

-

-

-

-

(1,533)

(1,533)

Reclassification on share premium
account cancellation

7

-

(277,738)

277,738

-

-

-

Distribution to shareholders on
Italy divestment

 

-

-

(7,994)

-

-

(7,994)

Share based payments

 

-

-

2,802

-

-

2,802

At 31 December 2018

 

10,551

12,049

150,242

4,090

2,163

179,095

 

 

 

Consolidated Cash Flow Statement

for the year ended 31 December 2019

 

Notes

2019

£'000s

2018

£'000s

Cash flow from operating activities

 

 

 

Cash flow from operations

 

(10,909)

(281)

Interest received

 

102

259

Net cash flow from operating activities

 

(10,807)

(22)

Cash flow from investing activities

 

 

 

Capital expenditure and disposals

 

(1,011)

(937)

Exploration expenditure

 

(5,401)

(8,855)

Disposal of Italian operations

 

761

(2,655)

Net cash flow from investing activities

 

(5,651)

(12,447)

Cash flow from financing activities

 

 

 

Net proceeds from equity issue

 

2,235

12,218

Interest payments

8

(1,266)

(1,274)

Lease payments

 

(195)

-

Net cash flow from financing activities

 

774

10,944

Net decrease in cash and cash equivalents

 

(15,684)

(1,525)

Net foreign exchange difference

 

(244)

50

Cash and cash equivalents at the beginning of the year

 

20,536

22,011

Cash and cash equivalents at the end of the year

 

4,608

20,536

 

Notes to Cash Flow Statement

for the year ended 31 December 2019

 

 

2019

£'000s

2018

£'000s

Cash flow from operations reconciliation

 

 

 

Loss before tax from continuing operations

 

(16,420)

(11,749)

Profit before tax from discontinued operations

 

-

4,953

Total loss for the year before tax

 

(16,420)

(6,796)

Finance revenue

 

(102)

(259)

Exploration expenditure written off and impairment of intangible assets

 

6,570

4,058

Impairment of interest in Badile land

 

616

-

Increase/(decrease) in accruals and short-term payables

 

(7,773)

1,078

Depreciation

 

425

164

Share based payments charge and bonuses paid in shares

 

1,659

3,094

Increase in drilling inventories

 

(85)

(299)

Loss on derivative financial instruments

 

-

80

Gain on disposal of Italy operations

 

-

(3,684)

Foreign currency translation gain reclassified from other comprehensive income

 

-

(1,533)

Finance costs and exchange adjustments

 

3,888

(1,013)

Decrease in receivables and prepayments

 

313

4,829

Cash flow from operations

 

(10,909)

(281)

 

Non-cash transactions during the year included the issue of 40,915 ordinary shares to a former employee under the Company's RSU plan. In 2018, non-cash transactions included the issue of 688,146 shares in lieu of cash bonuses at an issue price of approximately 40.08 pence per share and the issue of 88,740 shares at 17.85 pence per share to a third party in settlement of services provided.

The Group has provided $3.35 million (2018: $3.35 million) to the Moroccan Ministry of Petroleum to guarantee the Group's minimum work programme obligations. The cash is held in a bank account under the control of the Company and as the Group expects the funds to be released as soon as the commitment is fulfilled on this basis the amount remains included within cash and cash equivalents.

 

NOTES TO THE FINANCIAL STATEMENTS

 

1 Accounting policies

Sound Energy plc is a public limited Company registered and domiciled in England and Wales under the Companies Act 2006. The Company's registered office is 1st Floor, 4 Pembroke Road, Sevenoaks, Kent, TN13 1XR.

The consolidated financial information contained within this announcement does not constitute statutory accounts for the year ended 31 December 2019 within the meaning of Section 434 of the Companies Act 2006 but is derived from those audited accounts. The auditors reported on those accounts and their report was unqualified and did not contain any statement under section 498(2) or section 498(3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar of Companies in due course. The annual report and statutory accounts will be sent to shareholders and will be made available to the public on the Company's website: www.soundenergyplc.com or, upon request, copies may be obtained from the Company Secretary at the registered office of Sound Energy plc 1st Floor, 4 Pembroke Road, Sevenoaks, TN13 1XR.

 

(a) Basis of preparation

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

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

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

The consolidated financial statements have been prepared under the historical cost convention, except to the extent that the following policies require fair value adjustments. The Group and its parent Company's financial statements are presented in sterling (£) and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

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

The Group and its parent company's financial statements for the year ended 31 December 2019 were authorised for issue by the Board of Directors on 22 April 2020.

Going concern

As at 31 December 2019, the Group's cash balance was £4.6 million (including approximately £2.5 million held as guarantee for minimum work commitments on the Company's licences). The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and settlement of liabilities and commitments in the normal course of operations. The Company is pursuing a micro-LNG early production plan for its Tendrara Production Concession ahead of the full development plan whilst continuing discussions with third parties for a partial sale of its Eastern Morocco Portfolio. The Company initiated a structural cost reduction programme in early 2019 to conserve cash resources and meet its ongoing obligations including settlement of coupon interest on the Company's €28.8 million bond. In January 2020, the Company received £1.3 million net proceeds from an equity raise. The Company's cashflow forecast for the twelve-month period to April 2021 indicates that additional funding will be required to enable the Company to meet its obligations. The Company's €28.8 million bond is due for settlement on 21 June 2021 and a refinancing or funding will be required before the due date to enable the Company to settle the debt.

The COVID-19 pandemic has not had a significant, immediate impact on the company's operations but the Directors are aware that if the current situation becomes prolonged then this may change, in particular it could delay the Company's micro-LNG strategy implementation and the ability of the Company to raise additional funds through an equity raise, both would impact the Company's liquidity.

These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern. These financial statements do not include adjustments that would be required if the Company was unable to continue as a going concern. The Directors have formed a judgement based on the Company's proven success in raising capital and a review of the strategic options available to the Company, that the going concern basis should be adopted in preparing the consolidated financial statements.

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 the estimation of share based payment costs.

When considering whether E&E assets are impaired the Group first considers the IFRS 6 indicators set out in note 5. The making of this assessment involves judgement concerning the Group's future plans and current technical and legal assessments. In considering whether development and production assets are impaired the Group considers significant declines in the market capitalisation of the Company and whether this indicates existence of an impairment.

If those indicators are met a full impairment test is performed. During the year the TE-10 well drilled at the Group's Tendrara licence, onshore Morocco was suspended as no commercial gas flow rate was achieved during the well test. An impairment charge of £6.7 million was recognised.

When value in use calculations are undertaken, management estimates the expected future cash flows from the asset and chooses a suitable discount rate in order to calculate the present value of those cash flows. In undertaking these value in use calculations, management is required to make use of estimates and assumptions similar to those described in the treatment of E&E assets above. Further details are given in note 5.

At 31 December 2019, the Company's market capitalisation was £22.1m, which is below the Group and Company's net asset value of £162.3m and £152.6m respectively. Management consider there is a possible indication of impairment of the Group's and Company's assets. Included above is management's consideration of impairment of the E&E assets. A significant portion of the Group's net assets is the carrying value of the development and producing assets and disclosures relating to management's assessment regarding potential impairment are included in note 4 on the basis that the recoverability of the investment in subsidiaries in the Company balance sheet is linked to the value of the development and producing assets as ultimately the cashflows these generate will determine the subsidiaries ability to pay returns to the Company. As detailed in note 4, following management's assessment, no impairment is required.

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

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

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

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

 (b) Investments in subsidiaries

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Such power, generally but not exclusively, accompanies a shareholding of more than one-half of the voting rights.

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

(c) Foreign currency translation

The functional currency of the Company is pound sterling. The Group also has subsidiaries whose functional currencies are US dollar.

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

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

(d) Standards, interpretations and amendments to published standards

New standard adopted

The Group adopted IFRS 16 which became effective on 1 January 2019. As allowed by IFRS 16, the Group used the modified retrospective method and therefore the comparatives were not restated and the reclassifications and adjustments arising from the adoption of IFRS 16 were recognised in the opening balance sheet on 1 January 2019. The Group's leases are in respect of the UK and Morocco office premises. On adoption of IFRS 16, the Group recognised £0.4 million as lease liability and right of use assets of the same amount, adjusted for prepaid amounts relating to the lease.

These liabilities were measured at the present value of the remaining lease payments, discounted using the individual entities incremental borrowing rates. The weighted average incremental borrowing rate was 5.6%.

The Group elected to recognise as an expense on a straight-line basis for short-term leases (lease term of 12 months or less) and leases of low value assets. During the year, depreciation of right-of-use assets recorded in the income statement was £0.2 million. The finance charge on unwind of lease liabilities was not material. Further information on the leases is provided in note 6.

Amendments to published standards

A number of amendments to standards and interpretations have been issued but had no material impact on the Group.

New accounting policies adopted by the Group

Set out below are the new accounting policies of the Group upon adoption of IFRS 16:

I. Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.

II. Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term or a change in the assessment to purchase the underlying asset.

III. Short-term leases and leases of low value assets

The Group applies the short-term lease recognition exemption to its short-term leases of vehicles and rented staff housing (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value (i.e., below £5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.

2 Segment Information

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

In the year ended 31 December 2019, the Group's exploration and appraisal activities were primarily carried out in Morocco.

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

Details regarding each of the operations of each reportable segments are included in the following tables.

Segment results for the year ended 31 December 2019:

 

Corporate £'000s

Development & Production £'000s

Exploration & Appraisal £'000s

Total

£'000s

Exploration costs

-

-

(6,570)

(6,570)

Administration expenses

(6,064)

-

-

(6,064)

Operating loss segment result

(6,064)

-

(6,570)

(12,634)

Interest receivable

102

-

-

102

Finance costs and exchange adjustments

(3,888)

-

-

(3,888)

Loss for the period before taxation from continuing operations

(9,850)

-

(6,570)

(16,420)

The segments assets and liabilities at 31 December 2019 were as follows:

 

Corporate £'000s

Development & Production £'000s

Exploration & Appraisal £'000s

Total

£'000s

Non-current assets

1,530

146,876

30,656

179,062

Current assets

4,795

-

2,360

7,155

Liabilities attributable to continuing operations

(22,636)

(9)

(1,259)

(23,904)

 

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

 

UK

£'000s

Morocco £'000s

Development and production assets

-

146,876

Interest in Badile land

936

-

Fixtures, fittings and office equipment

46

195

Right-of-use assets

90

135

Exploration and evaluation assets

-

30,656

Software

2

126

Total

1,074

177,988

 

Segment results for the year ended 31 December 2018 were as follows:

 

Corporate £'000s

Development & Production £'000s

Exploration & Appraisal £'000s

Total

£'000s

Exploration costs

-

-

(4,058)

(4,058)

Administration expenses

(8,857)

-

-

(8,857)

Operating loss segment result

(8,857)

-

(4,058)

(12,915)

Interest receivable

233

-

-

233

Loss on derivative financial instruments

(80)

-

-

(80)

Finance costs and exchange adjustments

1,013

-

-

1,013

Loss for the period before taxation from continuing operations

(7,691)

-

(4,058)

(11,749)

 

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

 

Corporate £'000s

Development & Production £'000s

Exploration & Appraisal £'000s

Total

£'000s

Non-current assets

405

150,600

33,626

184,631

Current assets

22,056

-

2,952

25,008

Liabilities attributable to continuing operations

(22,377)

(320)

(7,847)

(30,544)

 

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

 

UK

£'000s

Morocco £'000s

Development and production assets

-

150,600

Interest in Badile land

1,618

-

Fixtures, fittings and office equipment

113

292

Exploration and evaluation assets

-

31,799

Software

24

185

Total

1,755

182,876

 

3 Loss per Share

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

 

2019

£'000s

2018

£'000s

Loss after tax from continuing operations

(16,420)

(11,749)

Profit/(loss) after tax from discontinued operations

-

4,953

Total loss for the year

(16,420)

(6,796)

 

 

2019

Million

2018

Million

Weighted average shares in issue

1,068

1,035

Dilutive potential ordinary shares

-

18

 

1,068

1,053

 

Basic profit/(loss) per share 

2019

Pence

2018

Pence

Basic loss per share from continuing operations

(1.54)

(1.14)

Basic profit/(loss) per share from discontinued operations

-

0.48

Basic loss per share from continuing and discontinued operations

(1.54)

(0.66)

 

Diluted profit/(loss) per share 

2019

Pence

2018

Pence

Diluted loss per share from continuing operations

(1.54)

(1.14)

Diluted profit/(loss) per share from discontinued operations

-

0.47

Diluted loss per share from continuing and discontinued operations

(1.54)

(0.66)

 

In 2018, the effect of the potential dilutive shares noted above on the earnings per share from continuing operations would have been anti-dilutive and therefore were not included in the above calculation of diluted earnings per share from continuing operations.

 

4 Property, Plant and Equipment

 

Development and production assets

£'000s

Fixtures, fittings and office equipment

£'000s

Right-of- use assets

£'000s

2019

£'000s

 

 

 

 

 

Cost

 

 

 

 

At 1 January 2019

 150,600

 794

-

 151,394

Additions

 1,079

 -

414

 1,493

Exchange adjustments

(4,803)

(7)

(4)

(4,814)

Disposal

 

(2)

 -

(2)

At 31 December 2019

 146,876

 785

 410

148,071

Depreciation

 

 

 

 

At 1 January 2019

 -

 389

 -

 389

Exchange adjustments

 -

1

 -

1

Charge for period

 -

155

185

 340

Disposal

 -

(1)

-

(1)

At 31 December 2019

 -

 544

 185

 729

Net book amount

 146,876

 241

 225

147,342

 

 

Development and production assets

£'000s

Fixtures, fittings and office equipment

£'000s

Right-of- use assets

£'000s

2018

£'000s

 

 

 

 

 

Cost

 

 

 

 

At 1 January 2018

 -

646

-

 646

Transfer from intangible assets

146,245

-

-

146,245

Additions

755

127

-

 882

Exchange adjustments

 3,600

25

-

 3,625

Disposal

 -

(4)

 -

(4)

At 31 December 2018

 150,600

 794

 -

151,394

Depreciation

 

 

 

 

At 1 January 2018

 -

274

 -

 274

Exchange adjustments

 -

21

 -

 21

Charge for period

 -

96

-

 96

Disposal

 -

(2)

-

(2)

At 31 December 2018

 -

 389

 -

 389

Net book amount

 150,600

 405

 -

151,005

 

Right-of-use assets were recognised following the adoption of IFRS 16 leases, during the year. Further information is provided in note 6.

The Company's market capitalisation was £22.1 million as at 31 December 2019. The Company received an offer to sell approximately 24.4% of its interest in Eastern Morocco licences to a third party, for $112.8 million (NPV: $104.8 million). The Company's internal model for TE-5 Horst show that the Company's share of the remaining 23.3% of its interest in Eastern Morocco has an NPV of $148.9 million. Therefore, the total NPV is $253.7 million (£192.4 million) which provides significant headroom over the carrying value of the development of £146.9 million as at 31 December 2019. Therefore, no impairment exists.

5 Intangibles

 

 Software £'000s

 Exploration & Evaluation Assets £'000s

 2019
£'000s

Cost

 

 

 

At 1 January 2019

360

36,052

36,412

Additions

9

5,965

5,974

Exchange adjustments

(10)

(745)

(755)

At 31 December 2019

359

41,272

41,631

Impairment

 

 

 

At start of the year

151

4,253

4,404

Charge for the year

85

6,570

6,655

Exchange adjustments

(5)

(207)

(212)

At end of the year

231

10,616

10,847

Net book amount at 31 December 2019

128

30,656

30,784

 

 

 Software £'000s

 Exploration & Evaluation Assets £'000s

 2018
£'000s

Cost

 

 

 

At 1 January 2018

281

163,737

164,018

Additions

55

11,392

11,447

Transfer to development and production assets

-

(146,245)

(146,245)

Exchange adjustments

24

7,168

7,192

At 31 December 2018

360

36,052

36,412

Impairment

 

 

 

At start of the year

79

-

79

Charge for the year

68

4,058

4,126

Exchange adjustments

4

195

199

At end of the year

151

4,253

4,404

Net book amount at 31 December 2018

209

31,799

32,008

 

Exploration and evaluation assets

Details regarding the geography of the Group's E&E assets is contained in note 2.

The Directors assess for impairment when facts and circumstances suggest that the carrying amount of an E&E asset may exceed its recoverable amount. In making this assessment the Directors have regard to the facts and circumstances noted in IFRS 6 paragraph 20. In performing their assessment of each of these factors at 31 December 2019 the Directors have:

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

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

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

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

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

Transfer to development and production assets

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

During the year, the Group had capitalised interest costs of approximately £0.5 million (2018: £0.6 million).

 

6 Lease Liabilities

 

2019

£'000s

2018

£'000s

Amounts due within one year

183

-

Amounts due after more than one year

42

-

 

225

-

The movement during the year is as below

 

 

As at 1 January

400

-

Interest accretion

25

-

Payments

(195)

-

Exchange adjustments

(5)

-

As at 31 December 2019

225

-

 

The Group adopted IFRS 16 Leases, using the modified retrospective method with the date of initial application of 1 January 2019. As allowed by IFRS 16, the comparatives were not restated and the reclassifications and the adjustments arising from the new leasing rules were recognised in the opening balance sheet on 1 January 2019. The Group's leases are in respect of the UK and Morocco office premises.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to the office leases which were previously classified as operating leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the individual entities incremental borrowing rates. The weighted average incremental borrowing rate was 5.6%.

The associated right-of-use assets for the office leases were measured at an amount equal to the lease liability but adjusted for prepaid amounts relating to the lease recognised in the balance sheet as at 31 December 2018.

The effect of adoption of IFRS 16 as at 1 January 2019 is as follows:

Assets 

1 January

2019

£'000s

Right-of-use assets

400

Prepayments

14

Total Assets

414

Liabilities

 

Lease liabilities

400

Total Liabilities

400

 

The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows:

 

1 January

2019

£'000s

Operating lease commitments as at 31 December 2018

632

Weighted average incremental borrowing rate as at 1 January 2019

5.6%

Discounted operating lease commitments as at 1 January 2019

585

Less:

 

Commitments relating to short-term leases

(185)

Lease liabilities as at 1 January 2019

400

 

The right-of-use assets are reported within property, plant and equipment (note 4). During the year ended 31 December 2019, the amount recognised as short-term lease expenses was not material.

 

7 Capital and Reserves

 

 

2019

Number

of shares

£'000s

2018

Number

of shares

£'000s

Ordinary shares - 1p

1,079,612,264

10,796

1,055,107,172

10,551

 

 

2019

Number
of shares

2018

Number
of shares

At 1 January

1,055,107,172

1,015,869,699

Issued during the year for cash

24,464,177

38,460,587

Non-cash share issue

40,915

776,886

At 31 December

1,079,612,264

1,055,107,172

 

Non-cash transactions during the year included the issue of 40,915 shares following vesting of RSU previously awarded to a former employee of the Company.

Share issues

During the year ended 31 December 2019, the Company issued 8,849 shares following warrant exercises at an exercise price of 24p per share.

On 16 June 2019, the Company announced that it would issue 23,830,328 shares following a placing at 10p per share.

On 16 July 2019, the Company announced the issue of 40,915 shares following vesting of RSU previously awarded to a former employee of the Company.

During the year ended 31 December 2019, the Company issued 625,000 shares as a result of share options exercised by a former employee of the Company. The shares were issued at an exercise price of 14.07p per share.

Subsequent to the year-end the Company issued 75 million shares at a price of 2 pence per share following a placing announced in December 2019. The net proceeds received from the placing was £1.3 million. 1,425,000 shares were issued to a third party to settle fees relating to the placing.

In 2018 the Company sought and was granted a court order approving a capital reduction following the cancellation of the share premium account. This resulted in the transfer of £277.7 million to distributable reserves.

 

8 Loans and Borrowings

 

 

2019

£'000s

2018

£'000s

Non-current liabilities

 

 

5-year secured bonds

 

 

At 1 January

20,476

18,566

Amortised finance charges

3,249

2,927

Interest payments

(1,266)

(1,274)

Exchange adjustments

(1,224)

257

At 31 December

21,235

20,476

 

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

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

Reconciliation of liabilities arising from financing activities

 

 

Non-cash changes

 

2019

 1 January 2019

£'000s

Cash flows £'000s

Amortised finance charges £'000s

Exchange adjustments £'000s

31 December 2019

£'000s

Long-term borrowings

20,476

(1,266)

3,249

(1,224)

21,235

Leases

400

(195)

25

(5)

225

Total liabilities from financing activities

20,876

(1,461)

3,274

(1,229)

21,460

 

 

 

Non-cash changes

 

2018

 1 January 2018

£'000s

Cash flows £'000s

Amortised finance charges £'000s

Exchange adjustments £'000s

31 December 2018

£'000s

Long-term borrowings

18,566

(1,274)

2,927

257

20,476

Total liabilities from financing activities

18,566

(1,274)

2,927

257

20,476

 

Reconciliation of external interest costs

 

2019

£'000s

2018

£'000s

Amortised finance charges

3,274

2,927

Less capitalised interest

(492)

(561)

Exchange adjustments

5

8

Total external interest for the year

2,787

2,374

 

9 Post Balance Sheet Events

On 13 January 2020, the Company confirmed the signing of an amendment to the binding memorandum of understanding with Morocco's Office National de l'Electricité et de l'Eau Potable ("ONEE") in order to extend the period for negotiations of the final gas sales agreement ("GSA"), to 31 March 2020. On 1 April 2020, the Company confirmed that GSA negotiations were continuing and that it is was in the process of agreeing a further amendment to the MOU with ONEE in order to extend the period for negotiations of the final GSA to 30 June 2020 (the "Amendment"). Whilst the Amendment had been agreed in principle, COVID-19 related travel restrictions have meant that it has not yet been possible for the parties to enter into the Amendment and, as a result, the parties intend to enter into the Amendment as soon as is practicable.

On 27 January 2020, the Company announced the issue of 5,805,555 ordinary shares to the Company's Exploration Director in connection with the termination of his employment contract. The shares were issued at an effective issue price of 1.86 pence per share.

On 17 February 2020, the Company announced that it was continuing non-exclusive discussions with a private company for partial sale of its Eastern Morocco portfolio and in parallel, the Company planned to pursue a micro-LNG production plan for its concession ahead of the full field development plan.


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