REG - Rockhopper Exp plc - Final results for the year ended 31 December 2019
8 April 2020
Rockhopper Exploration plc
("Rockhopper" or the "Company")
Full-year results for the year ended 31 December 2019
Rockhopper Exploration plc (AIM: RKH), the oil and gas exploration and production company with key interests in the North Falkland Basin, is pleased to announce its audited results for the year ended 31 December 2019.
HIGHLIGHTS
Sea Lion Phase 1 development - project validated and de-risked through introduction of Navitas as joint venture partner
· Detailed Heads of Terms signed with Navitas to farm-in for a 30 per cent interest in the Sea Lion project
· Under the Heads of Terms, Rockhopper's costs for the Phase 1 development (not met by external debt) are to be funded by Premier and Navitas from 1 January 2020 to Phase 1 Project Completion (estimated to occur 9-12 months after first oil)*
· Through the FEED and optimisation processes, the project has been substantially de-risked from a technical and cost perspective
· Resources to be developed in Phase 1 increased from 220 to 250 mmbbls (gross) with associated capex to first oil estimated at approximately US$1.8 billion (gross)
· Public commitment that Sea Lion will be developed on a net zero emissions basis
Financial
· Revenue of US$10.3 million and operating costs US$4.6 million
· Cash operating costs of US$9.9 per boe - maintaining a low cost base
· Continued management of G&A costs - US$5.3 million - reduced by circa 30% in the last 3 years
· Cash resources of US$21.9 million as at 1 April 2020 (unaudited)
Corporate
· Appointment of Keith Lough as Non-Executive Chairman following the retirement of David McManus at the Company's AGM in May 2019
· Ombrina Mare arbitration - in June 2019 the Tribunal rejected Italy's request for suspension and related intra-EU jurisdictional objections
· Disposal of Rockhopper Egypt Pty Limited for US$16.0 million completed in February 2020
· Initiatives identified to further materially reduce corporate G&A costs in response to current market conditions
Outlook
· Despite the current oil price weakness, all parties remain committed to the finalisation of the Navitas farm-out agreement with completion subject to agreed consents and approvals
· In response to recent external events, cost reduction process initiated to scale-back headcount and activity at Sea Lion pending an improvement in the external macro environment
· Outcome in relation to Ombrina Mare arbitration expected in the coming months - seeking significant monetary damages
Keith Lough, Chairman of Rockhopper, commented:
"In the first quarter of 2020, equity markets and oil prices have fallen significantly due to a combination of fears over the spread of COVID-19 and the impact this will have on the global balance of supply and demand for oil coupled with the recent inability of OPEC and Russia to agree on supply cuts.
Recent initiatives by the Company, including the sale of Rockhopper Egypt Pty Limited together with the legally binding Heads of Terms signed with Premier Oil place the Company in a relatively stable financial position with cash at 1 April 2020 of approximately US$22 million and with limited exposure to future development costs at Sea Lion.
We look forward to the finalisation and ultimate completion of the farm-out to Navitas which we believe validates the world-class nature of the Sea Lion asset and enhances, once the oil price and capital markets recover, the prospects of securing the requisite senior debt to allow sanction.
With a supportive interim ruling on jurisdiction, we are positive on the prospects of recovering significant monetary damages through our international arbitration against the Republic of Italy in respect of Ombrina Mare and look forward to an outcome in the coming months."
*Excluding licence fees, taxes and project wind down costs
Enquiries:
Rockhopper Exploration plc
Sam Moody - Chief Executive
Stewart MacDonald - Chief Financial Officer
Tel. +44 (0) 20 7390 0234 (via Vigo Communications)
Canaccord Genuity Limited (NOMAD and Joint Broker)
Henry Fitzgerald-O'Connor/James Asensio
Tel. +44 (0) 20 7523 8000
Peel Hunt LLP (Joint Broker)
Richard Crichton
Tel. +44 (0) 20 7418 8900
Vigo Communications
Patrick d'Ancona/Ben Simons
Tel. +44 (0) 20 7390 0234
Note regarding Rockhopper oil and gas disclosure
This announcement has been approved by Rockhopper's geological staff which includes Lucy Williams (Geoscience Manager) who is a Chartered Geologist, a Fellow of the Geological Society of London and a Member of both the Petroleum Exploration Society of Great Britain and American Association of Petroleum Geologists, with over 25 years of experience in petroleum exploration and management and who is the qualified person as defined in the Guidance Note for Mining, Oil and Gas Companies issued by the London Stock Exchange in respect of AIM companies.
The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").
CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S REPORT
Rockhopper's strategy is to build a well-funded, full-cycle, exploration-led E&P company.
In the first quarter of 2020, equity markets and oil prices have fallen significantly due to a combination of fears over the spread of COVID-19 and the impact this will have on the global balance of supply and demand for oil coupled with the recent inability of OPEC and Russia to agree on supply cuts. Recent initiatives by the Company, including the sale of Rockhopper Egypt together with the legally binding Heads of Terms signed with Premier Oil plc ("Premier") place the Company in a relatively stable financial position to weather this current period of uncertainty.
The Company was delighted to announce the signing of a Heads of Terms with Navitas Petroleum LP ("Navitas") in January 2020 as the Board believes the introduction of Navitas into the Sea Lion joint venture validates the attractive nature of the asset, enhances the prospects of securing the requisite senior debt to allow sanction (once oil prices and capital markets recover) and, at the same time, through the revised commercial arrangements ensures that Rockhopper is fully funded for all Sea Lion development costs (excluding licence fees, taxes and project wind down costs) from 1 January 2020 to project completion (estimated 9 - 12 months after first oil).
Our interest in Abu Sennan has performed very well for us both operationally and financially. However, despite our efforts to acquire and grow a more material position in Egypt, we were unable to do so on attractive terms given the competitive market dynamics and significant buyer interest for assets. As a result, we took the opportunity to instead divest, crystallise an attractive return on investment and at the same time strengthen the Company's balance sheet.
Sea Lion Phase 1 development - project validated and de-risked through introduction of Navitas as joint venture partner
The introduction of Navitas represents an important milestone both for the Sea Lion project and Rockhopper itself. Highlights of the proposed transaction include:
· Working interests aligned across the Sea Lion licences PL032, PL004b and PL004c: Premier 40% (Operator); Rockhopper 30%; Navitas 30%
· Adds additional strength to the Sea Lion joint venture which Rockhopper believes will increase the likelihood of a successful senior debt project financing for the Sea Lion Phase 1 development once markets recover
· Brings additional sources of senior debt financing to the project
· Rockhopper's costs for the Phase 1 development (not met by external debt and save for licence fees, taxes and project wind down costs) to be met by a combination of carry and loans from Premier and Navitas from 1 January 2020 to Phase 1 Project Completion (estimated to occur 9-12 months after first oil)
· Greater alignment and simplified commercial arrangements across the joint venture
· Rockhopper maintains material share of Phase 1 project NPV, a significant 30% interest in Phase 2 Sea Lion development, and additional upside from the Isobel-Elaine area (PL004a)
· Contingent consideration payable to Rockhopper by Premier and Navitas of up to US$48 million related to future phases of development in the North Falkland Basin
Good progress has been made during the first quarter of 2020 to convert the Heads of Terms into fully documented agreements. Despite the current oil price weakness, all parties remain committed to the finalisation of the Navitas farm-out agreement with completion subject to agreed consents and approvals.
Following the FEED and optimisation processes which concluded during 2019, the resources to be developed in Phase 1 have increased from 220 to 250 mmbbls (gross) with associated capex to first oil estimated at approximately US$1.8 billion (gross). A total of 29 wells are now expected to be drilled in the Phase 1 project with 12 wells drilled pre-first oil, supporting ramp-up to plateau production rates of approximately 85,000 bopd. This optimisation and value engineering has resulted in a substantially de-risked project with robust economics, which is critical as we progress the process to secure senior debt funding for the project.
From an operational standpoint, the overall strategy to develop the North Falkland Basin remains a phased development solution, starting with Sea Lion Phase 1, which will commercialise through a conventional FPSO development scheme 250 mmbbls (gross) of oil resources in the northern part of PL032 (in which Rockhopper has a 30% working interest post farm-out to Navitas). A subsequent Phase 2 development will commercialise the remaining approximately 280 mmbbls (gross) resources in both PL032 and the satellite accumulations in the north of PL004 (in which Rockhopper has a 30% working interest post farm-out to Navitas). In addition, there is a further 200 mmbbls (gross) of low risk, near field exploration potential which could be included in either the Phase 1 or Phase 2 developments. Phase 3 will entail the development of the Isobel/Elaine fan complex in the south of PL004, subject to further appraisal drilling.
The Sea Lion financing plan comprises funding elements including senior project finance debt (likely involving a combination of export credit guarantees and loans as well as commercial debt), vendor financing from contractors and equity from the joint venture.
During 2019, the joint venture engaged with a wide range of stakeholders to obtain the support required to secure senior debt, which represents the core of the project's funding strategy. In this regard, a Preliminary Information Memorandum and comprehensive set of independent expert reports, which formed the basis of a financing application for the senior debt component of the project financing, were submitted to potential senior lenders including export credit agencies in July 2019. It is clear that the UK General Election in December 2019 and the subsequent Cabinet reshuffle in February 2020 have had the impact of delaying the decision-making process. While engagement with senior debt providers has been constructive, feedback received highlights the need for Premier to complete its announced corporate actions and extension of its credit facilities to provide certainty over its medium- to long-term funding position before financial guarantees for the project can be secured. Recovery of the oil price is clearly also critical to securing such funding.
On the vendor financing side, the project contractors have undertaken an extensive due diligence and assurance process and remain supportive of the project and its financing plan.
Rockhopper's share of the joint venture equity is to be funded through an interest free loan from Premier and Navitas.
Constructive and supportive engagement with the Falkland Islands Government ("FIG") continues on a range of environmental, fiscal and regulatory matters with a view to obtaining the consents and agreements necessary to reach a final investment decision. Formal approval of the Environmental Impact Statement ("EIS") and Field Development Plan ("FDP") are expected at sanction. As part of this engagement, the Sea Lion Discovery Area licence, which was due to expire on 15 April 2020, has been extended to 1 May 2021 with no additional licence commitments.
Greater Mediterranean - opportunistic disposal of Abu Sennan to generate attractive return on investment and strengthen the balance sheet
Our Greater Mediterranean portfolio continued to perform well in 2019 with production averaging 1.3 kboepd net to Rockhopper.
In March 2019, Rockhopper announced the commencement of a four well drilling campaign on the Abu Sennan concession with activity focused on the continued development of the Al Jahraa field as well as an exploration / appraisal well at ASH.
In July 2019, Rockhopper announced the disposal of Rockhopper Egypt Pty Limited to United Oil & Gas plc ("United") for consideration of US$16.0 million. The key asset of Rockhopper Egypt Pty Limited is a 22% working interest in the Abu Sennan concession. Having acquired the interest in Abu Sennan for US$11.9 million in August 2016 and agreeing to sell for US$16.0 million, plus benefitting from free cash flow during our period of ownership, the Board concluded that it was a suitable time to dispose.
Corporate matters
Rockhopper commenced international arbitration proceedings against the Republic of Italy in relation to the Ombrina Mare field in March 2017. The hearing took place in early February 2019 in Paris. In June 2019, the Tribunal rejected Italy's request for the suspension of the arbitration and Italy's related intra-EU jurisdictional objections. Post-hearing briefings were submitted in October and November 2019 with a final outcome anticipated in the coming months.
Rockhopper continues to believe it has strong prospects of recovering very significant monetary damages - on the basis of lost profits - as a result of the Republic of Italy's breaches of the Energy Charter Treaty. All costs associated with the arbitration are funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder.
As part of the Board's long-term succession planning, and having served on the Board for nearly nine years, the past three as Non-Executive Chairman, David McManus retired as a Director at the Company's AGM in May 2019. Keith Lough, previously Senior Independent Director, succeeded David as Non-Executive Chairman. In addition, and as previously announced, Tim Bushell will step down from the Board effective 30 April 2020. We thank David and Tim for their significant contribution and wish them every success in the future.
The Company continues to actively manage its corporate costs and has reduced G&A by circa 50% over the last 5 years. In these particularly difficult times, a further review of corporate overheads has been initiated with additional cost savings of circa 30% of G&A identified. Implementation of such cost reduction initiatives has already commenced.
Environmental, Social and Governance ("ESG")
ESG continues to be a key focus for Rockhopper and we are committed to acting as a socially responsible contributor to the global energy mix.
For the Sea Lion development, Rockhopper is committed to net zero in respect of scope 1 and 2 emissions from the project. Such a commitment is expected to be achieved through a combination of reduced emissions from the use of best-in-class technologies and investment in carbon-offsetting projects both in the Falklands and the UK.
In June 2019, FIG approved the establishment of an environment fund to receive and administer future off-setting payments from the Sea Lion joint venture and distribute those funds for activities aimed at ensuring a positive environmental legacy.
Impact on the Company of COVID-19
The immediate human and economic impact of COVID-19 has been very significant. At this point, the longer-term implications are unclear and will depend on a number of factors which will develop in the coming months.
In part related to COVID-19, the Brent oil price has fallen dramatically during Q1 2020 hitting a low of c.$25 per barrel in late March. This has resulted in a material fall in global equities (including the Company's share price) and will bring balance sheet strength, liquidity and cost reduction measures to the fore. In the upstream oil & gas sector, companies have announced very material and widespread cost reductions through deferment or eliminations of non-essential capital and operating costs. Premier, the operator of the Sea Lion project has made similar public statements. As a consequence, a process to reduce headcount levels and activity on the Sea Lion project has commenced with a smaller team continuing to progress mainly regulatory, fiscal and financial matters, pending a recovery in the external macro environment. A delay to the Final Investment Decision on the Sea Lion project is inevitable until the oil price and capital markets recover.
With the Company's modest presence in Italy already having been substantially scaled back, the Company's day to day operations remain unaffected by the spread of COVID-19 with necessary contingency measures in place.
In these unprecedented times, our priority remains the health and wellbeing of our employees and wider stakeholders. At the time of writing, we are glad to report all our employees and their families are safe and well.
Outlook
Notwithstanding the current market volatility, Sea Lion remains a world-class oil resource with the potential to be transformational for Rockhopper and the Falklands as a whole.
We look forward to the finalisation and ultimate completion of the proposed farm-out to Navitas which we believe validates the world-class nature of the asset, enhances the prospects of securing the requisite senior debt to allow sanction and at the same time, through the revised commercial arrangements, ensures that Rockhopper is fully funded for all Sea Lion development costs (excluding licence fees, taxes and project wind down costs) from 1 January 2020 to project completion (estimated 9 - 12 months after first oil).
With a supportive interim ruling on jurisdiction, we remain positive on the prospects of recovering significant monetary damages through our international arbitration against the Republic of Italy in respect of Ombrina Mare and look forward to an outcome in the coming months.
The Company continues to believe that the creation of shareholder value will be maximised through a strategy to build a well-funded, full-cycle, exploration led-E&P company. As such, we maintain ambitions to materially expand our production base thereby generating additional free cash flow to strengthen our balance sheet and invest in future exploration or other value-accretive growth opportunities both in the Falklands and elsewhere.
Keith Lough
Samuel Moody
Non-Executive Chairman
Chief Executive
FINANCIAL REVIEW
OVERVIEW
From a finance perspective, the most significant events in the year include:
· Heads of Terms signed with Navitas to farm-in for a 30 per cent interest in the Sea Lion project (signed January 2020)
· Progression of the Sea Lion project financing with the submission of a Preliminary Information Memorandum to potential senior lenders
· Disposal of Rockhopper Egypt Pty Limited to United for consideration of US$16.0 million (completed February 2020)
Following the disposal of Rockhopper Egypt Pty Limited, the Company has cash and term deposits of US$21.9 million as at 1 April 2020 (unaudited).
The revised funding arrangements ensure that Rockhopper is funded for all pre-sanction costs related to Sea Lion (other than licence fees, taxes and project wind down costs). As such, the Company believes the above events materially strengthen the Company's financial position in the short and medium term and significantly enhance the prospects for a successful project financing for the Sea Lion project once markets recover.
RESULTS SUMMARY
US$m (unless otherwise specified)
2019
2018
Working interest production (kboepd)
1.3
1.1
Realised oil price (US$/bbl)
60.8
68.4
Revenue
10.3
10.6
Cash operating costs
4.6
4.6
Recurring administrative costs ("G&A")
5.3
5.3
Loss after tax
(20.6)
(7.1)
Cash (out)/in flow from operating activities
(0.2)
5.4
Capital expenditure
23.9
15.8
Cash and term deposits
17.2
40.4
RESULTS FOR THE YEAR
For the period ended 31 December 2019, the Group reported revenues of US$10.3 million and loss after tax of US$20.6 million. The loss after tax primarily arose as a result of non-recurring non-cash impairments associated with the Group's Greater Mediterranean portfolio.
REVENUE
The Group's revenues of US$10.3 million (2018: $10.6 million) during the period relate entirely to the sale of oil and natural gas in the Greater Mediterranean (Egypt and Italy). The reduction in revenues from the comparable period reflects a decrease in realised oil and gas prices, partially offset by an increase in production.
Working interest production averaged approximately 1,284 boepd during 2019, an increase over the comparable period (2018: 1,064 boepd) primarily relating to the ASH-2 well within the Abu Sennan concession in Egypt.
During the period, the Group's gas production in Italy was sold under short-term contract with an average realised price of €0.17 per scm (2018: €0.25 per scm), equivalent to US$5.3 per mscf. Gas is sold at a price linked to the Italian "PSV" (Virtual Exchange Point) gas marker price.
In Egypt, all of the Group's oil and gas production was sold to Egypt General Petroleum Company ("EGPC"). The average realised price for oil was US$60.8 per barrel (2018: $68.4 per barrel), a small discount to the average Brent price over the same period. Gas was sold at a fixed price of US$2.65 per mmbtu.
OPERATING COSTS
Cash operating costs, excluding depreciation and impairment charges, amounted to US$4.6 million (2018: US$4.6 million). Underlying cash operating costs were flat on 2018 levels despite increased production in the period. Cash operating costs on a per barrel of oil equivalent basis improved on the comparative period and remain attractive at US$9.9 per boe.
The Group continues to manage corporate costs having achieved an approximate 30% reduction in general and administrative ("G&A") cost, excluding non-recurring expenses related to restructuring and acquisitions, over the last three years. G&A costs remained flat in 2019 amounting to US$5.3 million, compared to the corresponding period last year (2018: US$5.3 million). In light of the sharp reduction in oil prices experienced in Q1 2020, initiatives to further reduce corporate costs have been explored and are in the process of being implemented.
Following the decision in February 2016 by the Ministry of Economic Development not to award the Group a Production Concession covering the Ombrina Mare field, in March 2017 the Group commenced international arbitration proceedings against the Republic of Italy. All costs associated with the arbitration are funded on a non-recourse ("no win - no fee") basis from a specialist arbitration funder.
CASH MOVEMENTS AND CAPITAL EXPENDITURE
At 31 December 2019, the Company had cash and term deposits of US$17.2 million (31 December 2018: US$40.4 million) and no debt. Following the disposal of Rockhopper Egypt Pty Limited, the Company has cash and term deposits of US$21.9 million as at 1 April 2020 (unaudited).
Cash and term deposit movements during the period:
US$m
Opening cash balance (31 December 2018)
40.4
Revenues
10.3
Cost of sales
(4.6)
Falkland Islands
(19.3)
Greater Mediterranean
(4.6)
Admin and miscellaneous
(5.0)
Closing cash balance (31 December 2019)
17.2
Falkland Islands spend of US$19.3 million relates primarily to pre-development activities on Sea Lion. Following signature of a Heads of Terms in January 2020, Rockhopper's share of pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs) are funded by Premier and/or Navitas. During the first quarter of 2020, the Company paid US$3.9 million of Sea Lion costs related to the period prior to 1 January 2020. Whilst timing remains unclear, further such costs, estimated at up to US$10.0 million and included in the balance sheet under current liabilities, could become payable in the next 12 months.
Spend in the Greater Mediterranean largely relates to the Egyptian drilling campaign at Abu Sennan. Following completion of the disposal of Rockhopper Egypt Pty Limited, annual capital expenditure in the Greater Mediterranean is expected to be limited.
Admin and miscellaneous includes G&A, foreign exchange and movements in working capital during the period.
MERGERS, ACQUISITIONS AND DISPOSALS
On 23 July 2019, Rockhopper announced the disposal of Rockhopper Egypt Pty Limited which holds a 22% working interest in the Abu Sennan concession to United for consideration of US$16.0 million.
The consideration payable to Rockhopper under the transaction comprised:
· cash of $11.5 million; and
· the issue of 114,503,817 Consideration Shares (at an issue price of 3 pence) representing approximately 18.5% of United's enlarged ordinary share capital.
Consideration Shares held by Rockhopper in United are subject to certain lock-up and orderly market disposal provisions for a period of up to 12 months from completion.
The transaction was subject to satisfaction of customary conditions precedent including United shareholder approval, completion of the readmission of United to trading on AIM and receipt of Egyptian government approvals. The transaction completed on 28 February 2020.
Following impairments of US$2.0 million to reflect the value of consideration received, assets and liabilities associated with the transaction, as at 31 December 2019, were US$17.9 million and US$2.0 million respectively.
TAXATION
On 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with the Falkland Islands Government in relation to the tax arising from the Group's farm-out to Premier.
The Tax Settlement Deed confirms the quantum and deferment of the outstanding tax liability and is made under Extra Statutory Concession 16.
As a result of the Tax Settlement Deed, the outstanding tax liability was confirmed at £64.4 million and is payable on the earlier of: (i) the first royalty payment date on Sea Lion; (ii) the date of which Rockhopper disposes of all or a substantial part of the Group's remaining licence interests in the North Falkland Basin; or (iii) a change of control of Rockhopper Exploration plc.
During the first half of 2017, as a result of the Group receiving the full Exploration Carry from Premier during the 2015/16 drilling campaign, the Falkland Islands Commissioner of Taxation agreed to reduce the tax liability in line with the terms of the Tax Settlement Deed. As such, the tax liability has been revised downwards to £59.6 million. The outstanding tax liability is classified as non-current and is discounted to a period-end value of US$39.2 million.
Full details of the provisions and undertakings of the Tax Settlement Deed are disclosed in note 23 of these consolidated financial statements and these include "creditor protection" provisions including undertakings not to declare dividends or make distributions while the tax liability remains outstanding (in whole or in part).
LIQUIDITY, COUNTERPARTY RISK AND GOING CONCERN
The Group monitors its cash position, cash forecasts and liquidity on a regular basis and takes a conservative approach to cash management, with surplus cash held on term deposits with a number of major financial institutions.
Following the completion of the disposal of Rockhopper Egypt Pty Limited, the Group has cash resources of US$21.9 million (as at 1 April 2020, unaudited) and generates limited revenue and cash flow from the sale of oil or gas but continues to fund the Group's reduced G&A costs.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. However, following signature of a legally binding Heads of Terms in January 2020, Rockhopper's share of all Sea Lion pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs) are funded by Premier and/or Navitas.
Management's base case forecast assumes a final investment decision on the Sea Lion development during 2021, subject to securing requisite financing. With the Group's costs funded by Premier and/or Navitas during this period.
Management has also considered a downside scenario in which the project does not achieve sanction which could be due to a number of factors including funding not being achieved, or Premier deciding to withdraw from the Sea Lion Development which could also ultimately result in relinquishment of the acreage. In this scenario the Sea Lion project would need to be wound down including the decommissioning of the assets in the Falklands and the Group is liable for its share of these project wind down costs with no funding support from Premier and/or Navitas.
Under the base case forecast, the Group will have sufficient financial headroom to meet forecast cash requirements for the 12 months from the date of approval of these consolidated financial statements. However, in the downside scenario, in the absence of any mitigating actions, the Group may have insufficient funds to meet its forecast cash requirements. Potential mitigating actions, some of which are outside the Group's control, could include collection of arbitration award proceeds, deferral of expenditure or raising additional equity.
Accordingly, after making enquiries and considering the risks described above, the Directors have assessed that the cash balance held provides the Group with adequate headroom over forecasted expenditure for the following 12 months - as a result, the Directors have adopted the going concern basis of accounting in preparing these consolidated financial statements. Nonetheless, for the avoidance of doubt, in the downside scenario run and in the absence of potential mitigating actions, a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that may be necessary if the Group were not a going concern.
PRINCIPAL RISK AND UNCERTAINTIES
A detailed review of the potential risks and uncertainties which could impact the Company are outlined elsewhere in this Strategic Report. The Company identified its principal risks at the end of 2019 as being:
· sustained low oil price;
· joint venture partner alignment and funding issues, both of which could ultimately create a delay to the Sea Lion Final Investment Decision; and
· failure of the joint venture partners to secure the requisite funding to allow a Sea Lion Final Investment Decision.
During 2019, the environmental impact of oil and gas extraction (e.g. Climate Change) has been added to the risk register, reflecting the increased focus on ESG issues which could have an adverse impact on investor and lender sentiment towards the Company and the Sea Lion project.
Stewart MacDonald
Chief Financial Officer
CONSOLIDATED income statement
for the YEAR ended 31 DeCEMBER 2019
Year
ended
31 Dec 19
Year
ended
31 Dec 18
Notes
$'000
$'000
Revenue
10,328
10,580
Other cost of sales
(4,647)
(4,563)
Depreciation and impairment of oil and gas assets
(5,738)
(3,968)
Total cost of sales
4
(10,385)
(8,531)
Gross (loss)/profit
(57)
2,049
Exploration and evaluation expenses
5
(1,974)
(5,014)
Impairment of goodwill
(10,057)
-
Costs in relation to acquisition and disposals
(649)
(58)
Recurring administrative costs
(5,293)
(5,328)
Total administrative expenses
7
(5,942)
(5,386)
Charge for share based payments
10
(1,307)
(1,478)
Other income
-
943
Foreign exchange movement
11
(1,627)
1,208
Results from operating activities and other income
(20,964)
(7,678)
Finance income
12
624
825
Finance expense
12
(291)
(253)
Loss before tax
(20,631)
(7,106)
Tax
13
-
(25)
LOSS FOR THE YEAR ATTRIBUTABLE TO THE
EQUITY SHAREHOLDERS OF THE PARENT COMPANY
(20,631)
(7,131)
Loss per share: cents
Basic
14
(4.54)
(1.57)
Diluted
14
(4.54)
(1.57)
All operating income and operating gains and losses relate to continuing activities.
CONSOLIDATED statement of comprehensive income
for the YEAR ended 31 DECEMBER 2019
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Loss for the year
(20,631)
(7,131)
Exchange differences on translation of foreign operations
70
371
TOTAL COMPREHENSIVE LOSS FOR THE YEAR
(20,561)
(6,760)
The notes form an integral part of these financial statements.
CONSOLIDATED balance sheet
as at 31 DECEMBER 2019
31 Dec
31 Dec
2019
2018
Notes
$'000
$'000
NON CURRENT ASSETS
Exploration and evaluation assets
15
465,820
447,035
Property, plant and equipment
16
1,814
11,836
Right-of-use assets
1.4
1,255
-
Finance lease receivable
1.4
628
-
Goodwill
17
-
10,308
CURRENT ASSETS
Inventories
1,463
1,779
Other receivables
18
3,501
9,510
Finance lease receivable
1.4
146
-
Restricted cash
19
467
568
Term deposits
20
-
30,000
Cash and cash equivalents
17,223
10,426
Assets held for sale
21
17,925
-
TOTAL ASSETS
510,242
521,462
CURRENT LIABILITIES
Other payables
22
17,943
15,148
Lease liability
1.4
426
-
Liabilities directly associated with assets held for sale
21
2,000
-
NON-CURRENT LIABILITIES
Lease liability
1.4
1,735
Tax payable
23
39,167
37,860
Provisions
24
13,636
13,888
Deferred tax liability
25
39,221
39,223
TOTAL LIABILITIES
114,128
106,119
EQUITY
Share capital
26
7,212
7,205
Share premium
27
3,547
3,422
Share based remuneration
27
4,871
5,103
Own shares held in trust
27
(3,371)
(3,369)
Merger reserve
27
74,332
74,332
Foreign currency translation reserve
27
(9,678)
(9,748)
Special reserve
27
433,766
456,680
Retained losses
27
(114,565)
(118,282)
ATTRIBUTABLE TO THE EQUITY SHAREHOLDERS OF THE COMPANY
396,114
415,343
TOTAL LIABILITIES AND EQUITY
510,242
521,462
These financial statements were approved by the directors and authorised for issue on 8 April 2020 and are signed on their behalf by:
STEWART MACDONALD
CHIEF FINANCIAL OFFICER
The notes form an integral part of these financial statements.
CONSOLIDATED statement of changes in equity
for the YEAR ended 31 DECEMBER 2019
Own
Foreign
shares
currency
Share
Share
Share based
held
Merger
translation
Special
Retained
Total
capital
Premium
remuneration
in trust
reserve
reserve
reserve
losses
Equity
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
$'000
Balance at 31 December 2017
7,200
3,282
5,609
(3,383)
74,332
(10,119)
460,077
(116,400)
420,598
Total comprehensive loss for the year
-
-
-
-
-
371
-
(7,131)
(6,760)
Share based payments
-
-
1,478
-
-
-
-
-
1,478
Share issues in relation to SIP
5
140
-
(118)
-
-
-
-
27
Other transfers
-
-
(1,984)
132
-
-
(3,397)
5,249
-
Balance at 31 December 2018
7,205
3,422
5,103
(3,369)
74,332
(9,748)
456,680
(118,282)
415,343
Total comprehensive loss for the year
-
-
-
-
-
70
-
(20,631)
(20,561)
Share based payments (see note 10)
-
-
1,307
-
-
-
-
-
1,307
Share issues in relation to SIP
7
125
(105)
(2)
-
-
-
-
25
Other transfers
-
-
(1,434)
-
-
-
(22,914)
24,348
-
Balance at 31 December 2019
7,212
3,547
4,871
(3,371)
74,332
(9,678)
433,766
(114,565)
396,114
See note 27 for a description of each of the reserves of the Group.
CONSOLIDATED statement OF CASHFLOWS
for the YEAR ended 31 DECEMBER 2019
Year
ended
31 Dec 19
Year
ended
31 Dec 18
Notes
$'000
$'000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before tax
(20,631)
(7,106)
Adjustments to reconcile net losses to cash:
Depreciation
1.4 & 16
4,544
4,111
Share based payment charge
10
1,307
1,478
Impairment of oil and gas assets
16
1,600
-
Impairment of exploration and evaluation assets
15
350
3,884
Impairment of goodwill
17
10,057
-
Finance expense
291
253
Finance income
(624)
(825)
Foreign exchange
11
1,221
(2,256)
Operating cash flows before movements in working capital
(1,885)
(461)
Changes in:
Inventories
214
(23)
Other receivables
3,259
7029
Payables
(1,623)
(103)
Movement on other provisions
(189)
(1,012)
Cash (utilised by)/from operating activities
(224)
5,430
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalised expenditure on exploration and evaluation assets
(20,152)
(13,940)
Purchase of property, plant and equipment
(3,743)
(1,844)
Acquisition of Beach Egypt
-
(658)
Interest
1,020
750
Investing cash flows before movements in capital balances
(22,875)
(15,692)
Changes in:
Restricted cash
101
(28)
Term deposits
30,000
-
Cash flow from investing activities
7,226
(15,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Share incentive plan
25
27
Lease liability payments
(259)
-
Finance expense
(13)
(9)
Cash flow from financing activities
(247)
18
Currency translation differences relating to cash and cash equivalents
42
(31)
Net cash flow
6,755
(10,272)
Cash and cash equivalents brought forward
10,426
20,729
CASH AND CASH EQUIVALENTS CARRIED FORWARD
17,223
10,426
Notes to the CONSOLIDATED financial statements
for the Year ended 31 DECEMBER 2019
1 ACCOUNTNG POLICIES
1.1 GROUP AND ITS OPERATIONS
Rockhopper Exploration plc, the 'Company', a public limited company quoted on AIM, incorporated and domiciled in the United Kingdom ('UK'), together with its subsidiaries, collectively 'the 'Group' holds certain exploration licences for the exploration and exploitation of oil and gas in the Falkland Islands. In 2014, it diversified its portfolio into the Greater Mediterranean through the acquisition of an exploration and production company with operations principally based in Italy. During 2016 the Group augmented this through the acquisition of exploration and production assets in Egypt which were subsequently divested in 2020. The registered office of the Company is 4th Floor, 5 Welbeck Street, London, W1G 9YQ.
1.2 STATEMENT OF COMPLIANCE
The consolidated financial statements are prepared in compliance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006. The consolidated financial statements were approved for issue by the board of directors on 8 April 2020 and are subject to approval at the Annual General Meeting of shareholders which will take place in June 2020.
1.3 BASIS OF PREPARATION
The results upon which these consolidated financial statements have been based were prepared using the accounting policies set out below. These policies have been consistently applied unless otherwise stated.
These consolidated financial statements have been prepared under the historical cost convention as set out in the accounting policies below.
Items included in the results of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the "functional currency").
All values are rounded to the nearest thousand dollars ($'000) or thousand pounds (£'000), except when otherwise indicated.
1.4 CHANGE IN ACCOUNTING POLICY
Changes in accounting standards
Adoption of IFRS 16
In the current year new and revised standards, amendments and interpretations were effective and are applicable to the consolidated financial statements of the Group. Furthermore, IFRIC 23 "Uncertainty over Income Tax Treatments" was adopted on 1 January 2019. These did not affect amounts reported in these consolidated financial statements other than the adoption of IFRS16 with effect from 1 January 2019. The Group applied the modified retrospective approach to adoption, measuring right-of-use assets at an amount based on their respective lease liability on adoption, with the cumulative effect of adopting the standard recognised in the balance sheet on 1 January 2019.
Adjustments on adoption of IFRS 16
On adoption of IFRS 16, the Group recognised lease liabilities and receivables in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These leases were measured at the present value of the remaining lease payments and discounted using an incremental borrowing rate representing the rate of interest Rockhopper would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment. The incremental borrowing rate applied to the leases as of 1 January 2019 was 6%. The resulting lease liability and receivable as of 1 January 2019 was determined as follows:
1 January 2019
$'000
Operating lease commitments disclosed at 31 December 2018
855
Add: finance lease liabilities recognised at 31 December 2018
2,117
Less: effects of discounting
(522)
Lease liability recognised at 1 January 2019
2,450
The associated right-of-use assets were measured at the amount equal to the lease, therefore there was no adjustment to retained earnings on adoption.
The effect of adoption of IFRS 16 is as follows:
Right-of-use assets
Lease receivable
Lease liabilities
$'000
$'000
$'000
As at 1 January 2019
1,555
912
(2,450)
Depreciation expense
(300)
-
-
Interest income/expense
-
55
(147)
Receipts/payments
-
(193)
436
Balance as at 31 December 2019
1,255
774
(2,161)
Of which are:
Current
-
146
(426)
Non-current
1,255
628
(1,735)
1,255
774
(2,161)
Practical expedients applied
In applying IFRS 16 for the first time, the Group used the following practical expedients permitted by the standard:
· Reliance on previous assessments on whether leases are onerous;
· The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of the initial application, and;
· The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease
The Group's leasing activities and how these are accounted for
The Group lets and sub-lets various offices typically for periods of 5 years but may have extension options. Until the 2018 financial year, leases of property were classified as operating leases. Payments and receipts made under operating leases (net of any incentives received from the lessor) were charged to profit and loss on a straight-line basis over the period of the lease.
From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability and receivable at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost, while the corresponding receipt associated with the sub-lease are allocated between the receivable and finance income. The finance cost and income are charged to profit and loss over the lease period. The right-of-use asset is depreciated over the lease term on a straight-line basis.
Payment associated with short term leases and leases of low value assets are recognised on a straight-line basis as an expense in profit or loss. Short term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture.
1.5 Going concern
The Group monitors its cash position, cash forecasts and liquidity on a regular basis and takes a conservative approach to cash management, with surplus cash held on term deposits with a number of major financial institutions.
Following the completion of the disposal of Rockhopper Egypt Pty Limited, the Group has cash resources of US$21.9 million (as at 1 April 2020, unaudited) and generates limited revenue and cash flow from the sale of oil or gas but continues to fund the Group's reduced G&A costs.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. However, following signature of a legally binding Heads of Terms in January 2020, Rockhopper's share of all Sea Lion pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs) are funded by Premier and/or Navitas.
Management's base case forecast assumes a final investment decision on the Sea Lion development during 2021, subject to securing requisite financing. With the Group's costs funded by Premier and/or Navitas during this period.
Management has also considered a downside scenario in which the project does not achieve sanction which could be due to a number of factors including funding not being achieved, or Premier deciding to withdraw from the Sea Lion Development which could also ultimately result in relinquishment of the acreage. In this scenario the Sea Lion project would need to be wound down including the decommissioning of the assets in the Falklands and the Group is liable for its share of these project wind down costs with no funding support from Premier and/or Navitas.
Under the base case forecast, the Group will have sufficient financial headroom to meet forecast cash requirements for the 12 months from the date of approval of these consolidated financial statements. However, in the downside scenario, in the absence of any mitigating actions, the Group may have insufficient funds to meet its forecast cash requirements. Potential mitigating actions, some of which are outside the Group's control, could include collection of arbitration award proceeds, deferral of expenditure or raising additional equity.
Accordingly, after making enquiries and considering the risks described above, the Directors have assessed that the cash balance held provides the Group with adequate headroom over forecasted expenditure for the following 12 months - as a result, the Directors have adopted the going concern basis of accounting in preparing these consolidated financial statements. Nonetheless, for the avoidance of doubt, in the downside scenario run and in the absence of potential mitigating actions, a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that may be necessary if the Group were not a going concern.
1.6 Significant accounting policies
(a) Basis of accounting
The Group has identified the accounting policies that are most significant to its business operations and the understanding of its results. These accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to the capitalisation of exploration expenditure. The determination of this is fundamental to the financial results and position and requires management to make a complex judgment based on information and data that may change in future periods.
Since these policies involve the use of assumptions and subjective judgments as to future events and are subject to change, the use of different assumptions or data could produce materially different results. The measurement basis that has been applied in preparing the results is historical cost with the exception of financial assets, which are held at fair value.
The significant accounting policies adopted in the preparation of the results are set out below.
(b) Basis of consolidation
The consolidated financial statements include the results of Rockhopper Exploration plc and its subsidiary undertakings to the balance sheet date. Where subsidiaries follow differing accounting policies from those of the Group, those accounting policies have been adjusted to align with those of the Group. Inter-company balances and transactions between Group companies are eliminated on consolidation, though foreign exchange differences arising on inter-company balances between subsidiaries with differing functional currencies are not offset.
(c) Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker as required by IFRS8 Operating Segments. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the board of directors.
The Group's operations are made up of three segments, the oil and gas exploration and production activities in the geographical regions of the Falkland Islands and the Greater Mediterranean region as well as its corporate activities centered in the UK.
(d) Oil and Gas Assets
The Group applies the successful efforts method of accounting for exploration and evaluation ("E&E") costs, having regard to the requirements of IFRS6 - 'Exploration for and evaluation of mineral resources'.
Exploration and evaluation ("E&E") expenditure
Expensed exploration & evaluation costs
Expenditure on costs incurred prior to obtaining the legal rights to explore an area, geological and geophysical costs are expensed immediately to the income statement.
Capitalised intangible exploration and evaluation assets
All directly attributable E&E costs are initially capitalised in well, field, prospect, or other specific, cost pools as appropriate, pending determination.
Treatment of intangible E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each cost pool are carried forward until the existence, or otherwise, of commercial reserves have been determined, subject to certain limitations including review for indicators of impairment. If commercial reserves have been discovered, the carrying value, after any impairment loss, of the relevant E&E assets, are then reclassified as development and production assets within property plant and equipment. However, if commercial reserves have not been found, the capitalised costs are charged to expense.
The Group's definition of commercial reserves for such purpose is proved and probable reserves on an entitlement basis. Proved and probable reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty (see below) to be recoverable in future years from known reservoirs and which are considered commercially producible. There should be a 50% statistical probability that the actual quantity of recoverable reserves will be more than the amount estimated as proved and probable. The equivalent statistical probabilities for the proven component of proved and probable reserves are 90%.
Such reserves may be considered commercially producible if management has the intention of developing and producing them and such intention is based upon:
- a reasonable assessment of the future economics of such production;
- a reasonable expectation that there is a market for all or substantially all the expected hydrocarbon production;
- evidence that the necessary production, transmission and transportation facilities are available or can be made available; and
- the making of a final investment decision.
Furthermore:
(i) Reserves may only be considered proved and probable if producibility is supported by either actual production or a conclusive formation test. The area of reservoir considered proved includes: (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, or both; and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geophysical, geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are only included in the proved and probable classification when successful testing by a pilot project, the operation of an installed programme in the reservoir, or other reasonable evidence (such as, experience of the same techniques on similar reservoirs or reservoir simulation studies) provides support for the engineering analysis on which the project or programme was based.
Development and production assets
Development and production assets, classified within property, plant and equipment, are accumulated generally on a field-by-field basis and represent the costs of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets.
Depreciation of producing assets
The net book values of producing assets are depreciated generally on a field-by-field basis using the unit-of-production method by reference to the ratio of production in the year and the related commercial reserves of the field, taking into account the future development expenditure necessary to bring those reserves into production.
Disposals
Net cash proceeds from any disposal of an intangible E&E asset are initially credited against the previously capitalised costs. Any surplus proceeds are credited to the income statement.
Decommissioning
Provision for decommissioning is recognised in full when the related facilities are installed. The amount recognised is the present value of the estimated future expenditure. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related oil and gas property. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure is dealt with prospectively as an adjustment to the provision and the oil and gas property. The unwinding of the discount is included in finance cost.
(E) Right OF USE Assets
The Group's accounting policy for Right of Use assets is explained in note 1.4.
(F) Capital commitments
Capital commitments include all projects for which specific board approval has been obtained up to the reporting date. Projects still under investigation for which specific board approvals have not yet been obtained are excluded.
(G) Foreign currency translation
Functional and presentation currency:
Items included in the results of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates, the functional currency. The consolidated financial statements are presented in US$ as this best reflects the economic environment of the oil exploration sector in which the Group operates. The Group maintains the financial statements of the parent and subsidiary undertakings in their functional currency. Where applicable, the Group translates subsidiary financial statements into the presentation currency, US$, using the closing rate method for assets and liabilities which are translated at the rate of exchange prevailing at the balance sheet date and rates at the date of transactions for income statement accounts. Differences are taken directly to reserves.
Transactions and balances:
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are capitalised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
The year end rates of exchange actually used were:
31 Dec 2019
31 Dec 2018
£ : US$
1.32
1.28
€ : US$
1.12
1.15
(H) Revenue and income
(i) Revenue
Revenue arising from the sale of goods is recognised when a performance obligation is satisfied by transferring control over a product or service to a customer, which is typically at the point that title passes, and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, customs duties and sales taxes
(ii) Investment income
Investment income consists of interest receivable for the period. Interest income is recognised as it accrues, taking into account the effective yield on the investment.
(I) NON-DERIVATIVE Financial instruments
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument.
(i) Other receivables
Other receivables are classified as loans and receivables and are initially recognised at fair value. They are subsequently measured at their amortised cost using the effective interest method less any provision for impairment. A provision for impairment is made where there is objective evidence that amounts will not be recovered in accordance with original terms of the agreement. A provision for impairment is established when the carrying value of the receivable exceeds the present value of the future cash flow discounted using the original effective interest rate. The carrying value of the receivable is reduced through the use of an allowance account and any impairment loss is recognised in the income statement.
(ii) Term deposits
Term deposits are disclosed separately on the face of the balance sheet when their term is greater than three months and they are unbreakable.
(iii) Restricted cash
Restricted cash is disclosed separately on the face of the balance sheet and denoted as restricted when it is not under the exclusive control of the Group.
(iv) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and at bank and other short-term deposits held by the Group including breakable and unbreakable deposits with terms of less than three months and breakable term deposits of greater terms than three months where amounts can be accessed within three months without material loss. They are stated at carrying value which is deemed to be fair value.
(v) Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
(vi) Account and other payables
Account payables are initially recognised at fair value and subsequently at amortised cost using the effective interest method.
(vii) Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
(J) INCOME TAXES AND DEFERRED TAXATION
The current tax expense is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before tax and amounts charged or credited to reserves as appropriate.
Deferred taxation is recognised in respect of all taxable temporary differences that have originated but not reversed at the balance sheet date where a transaction or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the exception that deferred tax assets are recognised only to the extent that the directors consider that it is probable that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which temporary differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
(K) Share based remuneration
The Group issues equity settled share based payments to certain employees. Equity settled share based payments are measured at fair value (excluding the effect of non market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for non market based vesting conditions.
Fair value is measured by use of either Binomial or Monte-Carlo simulation. The main assumptions are disclosed in note 10.
Cash settled share based payment transactions result in a liability. Services received and liability incurred are measured initially at fair value of the liability at grant date, and the liability is remeasured each reporting period until settlement. The liability is recognised on a straight line basis over the period that services are rendered.
2 Use of estimates, assumptions and judgements
The Group makes estimates, assumptions and judgements that affect the reported amounts of assets and liabilities. Estimates, assumptions and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Carrying value of intangible exploration and evaluation assets (note 15)
The amounts for intangible exploration and evaluation assets represent active exploration and evaluation projects. These amounts will be written off to the income statement as exploration costs unless commercial reserves are established or the determination process is not completed and there are indications of impairment in accordance with the Group's accounting policy.
In addition for assets under evaluation where discoveries have been made, such as Sea Lion, their carrying value is checked by reference to the net present value of future cashflows which requires key assumptions and estimates in relation to: commodity prices that are based on forward curves for a number of years and the long-term corporate economic assumptions thereafter, discount rates that are adjusted to reflect risks specific to individual assets, the quantum of commercial reserves and the associated production and cost profiles. Future development costs are estimated taking into account the level of development required to produce the reserves by reference to operators, where applicable, and internal engineers.
Decommissioning costs (note 24)
Decommissioning costs are uncertain and cost estimates can vary in response to many factors, including changes to the relevant legal requirements, the emergence of new technology or experience at other assets. The expected timing, work scope and amount of expenditure may also change. Therefore significant estimates and assumptions are made in determining the provision for decommissioning. The estimated decommissioning costs are reviewed annually by an external expert and the results of the most recent available review used as a basis for the amounts in the Financial Statements. Provision for environmental clean-up and remediation costs is based on current legal and contractual requirements, technology and price levels.
3 REVENUE AND SEGMENTAL INFORMATION
YEAR ENDED 31 DECEMBER 2019
The Group's operations are located and managed in three geographically distinct business units; namely the Falkland Islands, the Greater Mediterranean, and Corporate (or UK). Some of the business units currently do not generate any revenue or have any material operating income. The business is only engaged in one business of upstream oil and gas exploration and production.
Falkland
Greater
Islands
Mediterranean
Corporate
Total
$'000
$'000
$'000
$'000
Revenue
-
10,328
-
10,328
Cost of sales
-
(10,385)
-
(10,385)
Gross profit
-
(57)
-
(57)
Exploration and evaluation expenses
(315)
(560)
(1,099)
(1,974)
Impairment of goodwill
-
(10,057)
-
(10,057)
Costs in relation to acquisition and group restructuring
-
(649)
-
(649)
Recurring administrative costs
-
(1,603)
(3,690)
(5,293)
Total administrative expenses
-
(2,252)
(3,690)
(5,942)
Charge for share based payments
-
-
(1,307)
(1,307)
Other income
-
-
-
-
Foreign exchange gain/(loss)
(1,307)
(142)
(178)
(1,627)
Results from operating activities and other income
(1,622)
(13,068)
(6,274)
(20,964)
Finance income
-
29
595
624
Finance expense
-
(214)
(77)
(291)
Loss before tax
(1,622)
(13,253)
(5,756)
(20,631)
Tax
-
-
-
-
Profit/(loss) for year
(1,622)
(13,253)
(5,756)
(20,631)
Reporting segments assets
464,638
27,230
18,374
510,242
Reporting segments liabilities
78,304
16,621
19,203
114,128
Depreciation
-
4,249
295
4,544
Year ended 31 December 2018
Falkland
Greater
Islands
Mediterranean
Corporate
Total
$'000
$'000
$'000
$'000
Revenue
-
10,580
-
10,580
Cost of sales
-
(8,531)
-
(8,531)
Gross profit
-
2,049
-
2,049
Exploration and evaluation expenses
(253)
(3,682)
(1,079)
(5,014)
Costs in relation to acquisition and group restructuring
-
(58)
-
(58)
Recurring administrative costs
(1,406)
(3,922)
(5,328)
Total administrative expenses
(1,464)
(3,922)
(5,386)
Charge for share based payments
-
-
(1,478)
(1,478)
Other income
-
943
-
943
Foreign exchange movement
2,197
(100)
(889)
1,208
Results from operating activities and other income
1,944
(2,254)
(7,368)
(7,678)
Finance income
-
8
817
825
Finance expense
-
(254)
1
(253)
Loss before tax
1,944
(2,500)
(6,550)
(7,106)
Tax
(25)
-
(25)
Loss for year
1,944
(2,525)
(6,550)
(7,131)
Reporting segments assets
440,314
41,992
39,156
521,462
Reporting segments liabilities
76,996
18,183
10,940
106,119
Depreciation
-
3,991
120
4,111
All of the Group's worldwide sales revenues of oil and gas $10,328 thousand (2018: $10,580 thousand) arose from contracts to customers. Total revenue relates to revenue from two customers (2018: two customers) each exceeding 10 per cent of the Group's consolidated revenue.
4 Cost of sales
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Cost of sales
4,647
4,563
Impairment of oil and gas assets (see note 16)
1,600
-
Depreciation of oil and gas assets (see note 16)
4,138
3,968
10,385
8,531
5 exploration and evaluation expenses
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Allocated from administrative expenses (see note 7)
790
891
Capitalised exploration costs impaired (see note 15)
350
3,884
Other exploration and evaluation expenses
834
239
1,974
5,014
6 IMPAIRMENT OF GOODWILL
As a result of the acquisition of Mediterranean Oil & Gas plc in 2014, goodwill of €9.0 million arose relating to the portfolio of intangible exploration and appraisal assets and the strategic premium associated with a significant presence in a new region. However, following the decision to dispose of Rockhopper Egypt Pty Limited and with Italian portfolio now deemed largely non-core, a decision was made to impair the goodwill associated with that acquisition.
7 Administrative expenses
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Directors' salaries and fees, including bonuses (see note 8)
1,563
1,727
Other employees' salaries
2,475
2,638
National insurance costs
541
637
Pension costs
148
164
Employee benefit costs
96
88
Total staff costs (including group restructuring costs)
4,823
5,254
Amounts reallocated
(1,518)
(2,105)
Total staff costs charged to administrative expenses
3,305
3,149
Auditors' remuneration (see note 9)
232
251
Other professional fees
1,444
1,058
Other
1,527
1,648
Depreciation
106
143
Amounts reallocated
(672)
(863)
5,942
5,386
The average number of staff employed during the year was 18 (31 December 2018: 20). The relative decrease between years reflects the continued restructuring of the Greater Mediterranean operation. Following the sale of Rockhopper Egypt Pty Ltd the number of staff further reduced to 16, comprising 12 in the UK and 4 in Italy.
Amounts reallocated relate to the costs of staff and associated overhead in relation to non administrative tasks. These costs are allocated to exploration and evaluation expenses or capitalised as part of the intangible exploration and evaluation assets as appropriate.
8 directors' remuneration
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Executive salaries
887
912
Executive bonuses
178
250
Company pension contributions to money purchase schemes & pension cash allowance
133
137
Benefits
27
28
Non-executive fees
338
400
1,563
1,727
The total remuneration of the highest paid director was:
Year
ended
31 Dec 19
Year
ended
31 Dec 18
£
£
Annual salary
380,400
373,000
Bonuses
76,000
93,000
Money purchase pension schemes
57,100
55,900
Benefits
11,400
11,200
524,900
533,100
Interest in outstanding share options and SARs, by director, are separately disclosed in the directors' remuneration report.
9 Auditors' remuneration
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Fees payable to the Company's auditors for the audit of the Company's annual financial statements
119
128
Fees payable to the Company's auditors and its associates for other services:
Audit of the accounts of subsidiaries
81
72
Half year review
32
38
Tax compliance services
-
13
232
251
In May 2019, after a competitive tender process, PricewaterhouseCoopers LLP was appointed as the Group's auditors, replacing KPMG LLP.
10 Share based Payments
The charge for share based payments relate to options granted to employees of the Group.
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Charge for the long term incentive plan options
1,202
1,360
Charge for shares issued under the SIP throughout the year
105
118
1,307
1,478
The models and key assumptions used to value each of the grants and hence calculate the above charges are set out below:
Long term incentive plan
During 2013 a long term incentive plan ("LTIP") was approved by shareholders. The LTIP is operated and administered by the Remuneration Committee. During the year a number of LTIP awards ('Awards'), structured as nil cost options, were granted to executive directors and senior staff.
LTIP awards will generally only vest or become exercisable subject to the satisfaction of a performance condition measured over a three year period ("Performance Period") determined by the Remuneration Committee at the time of grant. The performance conditions must contain objective conditions, which must be related to the underlying financial performance of the Company. The current performance condition used is based on Total Shareholder Return ("TSR") measured over a three-year period against the TSR of a peer group of at least 9 other oil and gas companies comprising both FTSE 250, larger AIM oil and gas companies and Falkland Islands focused companies ("Peer Group"). The Peer Group for the Awards may be amended by the Remuneration Committee at their sole discretion as appropriate.
Performance measurement for the Awards are based on the average price over the relevant 90 day dealing period measured against the 90 dealing day period three years later. Awards will typically vest on a sliding scale from 35% to 100% for performance in the top two quartiles of the Peer Group. No awards will vest for performance in the bottom two quartiles.
The Awards granted on 8 October 2013 and 10 March 2014 have an additional performance condition so that no awards will be exercisable unless the Company's share price exceeds £1.80 based on an average price over any 90 day dealing period up to 31 March 2023.
The LTIP has been valued using a Monte Carlo model the key inputs of which are summarised below
Grant date:
31 July 2019
23 April 2018
16 June 2017
22 Apr 2016
Closing share price
20.75
25.7p
21.25p
31.5p
Number granted
7,200,000
7,000,000
6,700,000
10,047,885
Weighted average volatility
50.0%
44.4%
53.3%
60.4%
Weighted average volatility of index
70.0%
64.0%
71.4%
71.2%
Weighted average risk free rate
0.35%
0.90%
0.18%
0.58%
Correlation in share price movement with comparator group
5%
13.0%
15.3%
27.5%
Exercise price
0p
0p
0p
0p
Dividend yield
0%
0%
0%
0%
The following movements occurred during the year:
At 31 December
At 31 December
Issue date
Expiry date
2018
Issued
Lapsed
2019
8 October 2013
8 October 2023
546,145
-
-
546,145
10 March 2014
10 March 2024
70,391
-
-
70,391
22 April 2016
22 April 2026
6,017,850
-
(6,017,850)
-
16 June 2017
16 June 2027
6,700,000
-
-
6,700,000
23 April 2018
23 April 2028
7,000,000
-
-
7,000,000
31 July 2019
31 July 2029
-
7,200,000
-
7,200,000
20,334,386
7,200,000
(6,017,850)
21,516,536
Share incentive plan
The Group has in place an HMRC approved Share Incentive Plan ("SIP"). The SIP allows the Group to award Free Shares to UK employees (including directors) and to award shares to match Partnership Shares purchased by employees, subject to HMRC limits.
Throughout this and the prior year the Group issued two Matching Shares for every Partnership Share purchased.
In the year the Group made a free award of £38,999 (year ended 31 December 2018 £41,997) worth of Free Shares to eligible employees.
This resulted in 173,329 (year ended 31 December 2018: 156,268) Free Shares and under the SIP scheme matching and partnership shares issued were 310,527 (year ended 31 December 2018: 223,131) in the year.
31 Dec
31 Dec
2019
2018
The average fair value of the shares awarded (pence)
21
28
Vesting
100%
100%
Dividend yield
Nil
Nil
Lapse due to withdrawals
Nil
Nil
The fair value of the shares awarded will be spread over the expected vesting period.
Share appreciation rights
A share appreciation right ("SAR") is effectively a share option that is structured from the outset to deliver, on exercise, only the net gain in the form of new ordinary shares that would have been made on the exercise of a market value share option.
No consideration is payable on the grant of a SAR. On exercise, an option price of 1 pence per ordinary share, being the nominal value of the Company's ordinary shares, is paid and the relevant awardee will be issued with ordinary shares with a market value at the date of exercise equivalent to the notional gain that the awardee would have made, being the amount by which the aggregate market value of the number of ordinary shares in respect of which the SAR is exercised, exceeds a notional exercise price, equal to the market value of the shares at the time of grant (the "base price"). The remuneration committee has discretion to settle the exercise of SARs in cash.
The following movements occurred during the year on SARs:
Exercise price
At 31 Dec
At 31 Dec
Issue date
Expiry date
(pence)
2018
Exercised
Lapsed
2019
3 July 2009
3 July 2019
30.87
103,368
-
(103,368)
-
11 January 2011
11 January 2021
372.75
175,048
-
-
175,048
14 July 2011
14 July 2021
239.75
43,587
-
-
43,587
16 August 2011
16 August 2021
237.00
17,035
-
-
17,035
13 December 2011
13 December 2021
240.75
29,594
-
-
29,594
17 January 2012
17 January 2022
303.75
244,541
-
-
244,541
30 January 2013
30 January 2023
159.00
277,162
-
-
277,162
890,335
-
(103,368)
786,967
11 FOREign Exchange
Year ended
31 Dec 19
Year ended
31 Dec 18
$'000
$'000
Foreign exchange (loss)/gain on Falkland Islands tax liability (see note 23)
(1,307)
2,197
Foreign exchange gain on term deposits, cash and restricted cash
86
59
(1,221)
2,256
Foreign exchange on operating activities
(406)
(1,048)
Total net foreign exchange (loss) /gain
(1,627)
1,208
12 FINANCE INCOME AND EXPENSE
Year ended
31 Dec 19
Year ended
31 Dec 18
$'000
$'000
Bank and other interest receivable
624
825
Total finance income
624
825
Unwinding of discount on decommissioning provisions (see note 24)
204
244
Other
87
9
Total finance expense
291
253
13 Taxation
Year ended
31 Dec 19
Year ended
31 Dec 18
$'000
$'000
Current tax:
Overseas tax
-
-
Adjustment in respect of prior years
-
-
Total current tax
-
-
Deferred tax:
Overseas tax
-
25
Total deferred tax - note 25
-
25
Tax on profit on ordinary activities
-
25
Loss on ordinary activities before tax
(20,631)
(7,106)
Loss on ordinary activities multiplied at 26% weighted average rate (31 December 2018: 26%)
(5,364)
(1,848)
Effects of:
Income and gains not subject to taxation
(1,646)
(2,528)
Impairment of goodwill
1,911
-
Expenditure not deductible for taxation
1,631
1,688
Depreciation in excess of capital allowances
1,060
1,050
IFRS2 Share based remuneration cost
313
384
Losses carried forward
1,326
1,275
Effect of tax rates in foreign jurisdictions
769
(21)
Adjustments in respect of prior years
-
25
Tax charge/(credit) for the year
-
25
On the 8 April 2015 the Group agreed binding documentation ("Tax Settlement Deed") with the Falkland Island Government ("FIG") in relation to the tax arising from the Group's farm-out to Premier Oil plc ("Premier"). As such the Group is able to defer this tax liability under Extra Statutory Concession 16. As it is deferred, the liability is classified as non-current and discounted. Additional information is given in Note 23 Tax payable.
The total carried forward losses and carried forward pre trading expenditures potentially available for relief are as follows:
Year ended
31 Dec 19
Year ended
31 Dec 18
$'000
$'000
UK
70,429
66,740
Falkland Islands
631,203
592,483
Italy
56,156
75,278
In Egypt under the terms of the PSC any taxes arising are settled by EGPC on behalf of the Group. Consequently, any carried forward losses would have no impact on the reported profits of the Group.
No deferred tax asset has been recognised in respect of temporary differences arising on losses carried forward, outstanding share options or depreciation in excess of capital allowances due to the uncertainty in the timing of profits and hence future utilisation. Losses carried forward in the Falkland Islands includes amounts held within entities where utilisation of the losses in the future may not be possible.
14 Basic and diluted loss per share
31 Dec 19
31 Dec 18
Number
Number
Shares in issue brought forward
457,495,899
457,116,500
Shares issued
- Issued under the SIP
483,856
379,399
Shares in issue carried forward
457,979,755
457,495,899
Weighted average number of Ordinary Shares for the purposes of basic earnings per share
454,659,998
457,369,112
454,659,998
457,369,112
$'000
$'000
Net loss after tax for purposes of basic and diluted earnings per share
(20,631)
(7,131)
Loss per share - cents
Basic
(4.54)
(1.57)
Diluted
(4.54)
(1.57)
The weighted average number of Ordinary Shares takes into account those shares which are treated as own shares held in trust (see note 27). As the Group is reporting a loss in the year then in accordance with IAS33 the share options are not considered dilutive because the exercise of the share options would have the effect of reducing the loss per share.
15 intangible exploration and evaluation assets
Falkland
Greater
Islands
Mediterranean
Total
$'000
$'000
$'000
As at 31 December 2017
425,971
6,176
432,147
Additions
14,595
3,364
17,959
Written off to exploration costs
(252)
(3,632)
(3,884)
Transfer to assets held for sale (see note 21)
-
834
834
Foreign exchange movement
-
(21)
(21)
As at 31 December 2018
440,314
6,721
447,035
Additions
24,325
1,745
26,070
Written off to exploration costs
-
(350)
(350)
Transfer to oil and gas assets (see note 16)
-
(3,901)
(3,901)
Transfer to assets held for sale (see note 21)
-
(3,012)
(3,012)
Foreign exchange movement
-
(22)
(22)
As at 31 December 2019
464,639
1,181
465,820
FALKLAND ISLANDS LICENCES
The additions during the year of $24.3 million relate principally to the Sea Lion development.
In assessing whether it is necessary to undertake a detailed impairment test, management consider whether there are any triggers, e.g. a significant change in the view on long term oil pricing or project cost, that would suggest such a detailed test is necessary. Management do not consider there to be any such triggers.
Nevertheless, management, as a matter of good practice, run their cashflow model regularly. At the year end, the key inputs to this model were a 2019 real terms Brent oil price of $70/bbl, a post-tax discount rate of 12.5% and utilising the operator's current estimates of capital and operating costs and production profiles. In response to current market conditions, the cash flow model now assumes a project sanction decision at the end of 2021 (with such decision dependent on securing funding) and is expected to take three and half years from sanction to first oil.
Sensitivity analysis is performed by, in turn, reducing oil price by $10/bbl, reducing production by 10%, increasing capital expenditure by 10%, increasing operating expenditure by 10% and delaying the development by one year. None of these sensitivities would have led to an impairment charge in the year.
Costs related to the remaining barrels in Sea Lion and associated near field discoveries as well as the Isobel/Elaine discoveries are carried at cost and no indication of impairment currently exists. The assets are still pending determination but are expected to be monetised in a second and third phase of development respectively.
GREATER MEDITERRANEAN LICENCES
The $1.7 million additions during the year predominantly relate to work on the Egyptian license interests. A $3.9 million transfer of costs to oil and gas assets was made following the award of a development lease concerning the oil discovery in the Abu Roash C-Reservoir (see note 16). A further $3 million reallocation was made concerning all costs associated with the disposal of the Group's interest in Egypt.
16 property, plant and equipment
Oil and gas
Other
Oil and gas
Other
assets
assets
31 Dec 19
assets
assets
31 Dec 18
$'000
$'000
$'000
$'000
$'000
$'000
Cost brought forward
37,168
878
38,046
31,043
1,134
32,177
Additions
3,757
40
3,797
1,996
25
2,021
Transfer from intangible exploration and evaluation assets
3,901
-
3,901
-
-
-
Foreign exchange
(430)
(4)
(434)
(762)
(10)
(772)
Disposals
-
-
-
-
(271)
(271)
Transfer from/(to) assets held for sale
(20,121)
-
(20,121)
4,891
-
4,891
Cost carried forward
24,275
914
25,189
37,168
878
38,046
Accumulated depreciation and impairment loss brought forward
(25,504)
(706)
(26,210)
(19,751)
(841)
(20,592)
Current year depreciation charge
(4,138)
(106)
(4,244)
(3,968)
(143)
(4,111)
Impairment
(1,600)
-
(1,600)
-
-
-
Foreign exchange
317
2
319
611
7
618
Disposals
-
-
-
-
271
271
Transfer (from)/to assets held for sale
8,360
-
8,360
(2,396)
-
(2,396)
Accumulated depreciation and impairment loss carried forward
(22,565)
(810)
(23,375)
(25,504)
(706)
(26,210)
Net book value brought forward
11,664
172
11,836
11,292
293
11,585
Net book value carried forward
1,710
104
1,814
11,664
172
11,836
All oil and gas assets relate to the Greater Mediterranean region, specifically producing assets in Italy and Egypt.
Asset additions, transfers from intangible exploration and evaluation assets and impairment relate almost entirely to the the Abu Sennan production asset in Egypt.
The value of the Abu Sennan production asset was written down in the year to the value of net consideration receivable and was subsequently transferred to asset held for sale.
17 GOODWILL
Greater
Mediterranean
$'000
As at 31 December 2018
10,308
Impairment
(10,057)
Foreign exchange movement
(251)
As at 31 December 2019
-
As a result of the acquisition of Mediterranean Oil & Gas plc in 2014, goodwill of €9.0 million arose relating to the portfolio of intangible exploration and appraisal assets and the strategic premium associated with a significant presence in a new region. However, following the decision to dispose of Rockhopper Egypt Pty Limited and with Italian portfolio now deemed largely non-core, a decision was made to impair the goodwill associated with that acquisition.
18 OTHER Receivables
31 Dec 19
31 Dec 18
$'000
$'000
Current
Receivables
1,059
3,811
Accrued interest
-
396
Other
2,442
5,303
3,501
9,510
The carrying value of receivables approximates to fair value. The decrease in receivables in the year is due to transfer of receivable balances associated with the Group's interest in Egypt and the reclaim of prior period IVA balances from the Italian tax authorities.
Other receivables predominantly relate to IVA balances due from the Italian tax authorities which are in the process of being reclaimed.
19 Restricted cash
31 Dec 19
31 Dec 18
$'000
$'000
Charged accounts
467
568
467
568
Restricted cash amounts mainly relate to sums on deposit in relation to offices leased by the group.
20 Term Deposits
31 Dec 19
31 Dec 18
$'000
$'000
Maturing after the period end:
Within three months
-
10,000
Six to nine months
-
10,000
Nine months to one year
-
10,000
-
30,000
Term deposits are disclosed separately on the face of the balance sheet when their term is greater than three months and they are unbreakable.
21 Disposal group held for sale
On 23 July 2019, the Group announced the sale of Rockhopper Egypt Pty Limited. The key asset of Rockhopper Egypt Pty Limited is a 22% working interest in the Abu Sennan concession. The transaction completed on the 28 February 2020 and accordingly the assets and associated liabilities are presented as a disposal group.
As at 31 December 2019, following impairments to intangible exploration and evaluation assets ($0.3 million) and property, plant and equipment ($1.6 million) the disposal group comprised net assets of $15.9 million, detailed as follows.
$'000
Intangible exploration and evaluation assets
3,012
Property, plant and equipment
11,764
Inventories
67
Other receivables
3,082
Other payables
(2,000)
15,925
22 Other payables and accrualS
31 Dec 19
31 Dec 18
$'000
$'000
Accounts payable
2,248
2,462
Accruals
15,272
12,246
Other creditors
423
440
17,943
15,148
Accruals have increased due to costs associated with the Sea Lion development.
All amounts are expected to be settled within twelve months of the balance sheet date and so the book values and fair values are considered to be the same.
23 Tax payable
31 Dec 19
31 Dec 18
$'000
$'000
Non current tax payable
39,167
37,860
39,167
37,860
On the 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with the Falkland Island Government ("FIG") in relation to the tax arising from the Group's farm-out to Premier Oil plc ("Premier").
The Tax Settlement Deed confirms the quantum and deferment of the outstanding tax liability and is made under Extra Statutory Concession 16.
As a result of the Tax Settlement Deed the outstanding tax liability is confirmed at £59.6 million and payable on the first royalty payment date on Sea Lion. Currently the first royalty payment date is anticipated to occur within six months of first oil production which itself is estimated to occur approximately three and a half years after project sanction. As such the tax liability has been reclassified as non-current and discounted at 15%. A foreign exchange loss of US$1.3 million (2018: US$2.2 million gain) has been recognised in the year.
24 Provisions
Decommissioning
Other
provision
provisions
31 Dec 19
31 Dec 18
$'000
$'000
$'000
$'000
Brought forward
13,815
73
13,888
5,986
Amounts utilized
(193)
(5)
(198)
(881)
Amounts arising in the year
-
8
8
10
Unwinding of discount
204
-
204
247
Transfer from liabilities associated with assets held for sale
-
-
-
8,750
Foreign exchange
(265)
(1)
(266)
(224)
Carried forward at year end
13,561
75
13,636
13,888
The decommissioning provision relates to the Group's licences in the Greater Mediterranean region. The provision covers both the plug and abandonment of wells drilled as well as any requisite site restoration. Assumptions, based on the current economic environment being an inflation rate of 2 per cent and a discount rate of 2 per cent, have been made which management believe are a reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required which will reflect market conditions at the relevant time. Furthermore, the timing of decommissioning is likely to depend on when the fields cease to produce at economically viable rates. This in turn will depend upon future oil and gas prices, which are inherently uncertain.
Other provisions include amounts due to employees for accrued holiday and leaving indemnity for staff in Italy, that will become payable when they cease employment.
25 deferred tax liability
31 Dec 19
31 Dec 18
$'000
$'000
At beginning of period
39,223
39,202
Movement in period
(2)
21
At end of period
39,221
39,223
The deferred tax liability arises due to temporary differences associated with the intangible exploration and evaluation expenditure. The majority of the balance relates to historic expenditure on licences in the Falklands, where the tax rate is 26%, being utilised to minimise the corporation tax due on the consideration received as part of the farm-out disposal during 2012.
Total carried forward losses and carried forward pre-trading expenditures available for relief on commencement of trade at 31 December 2019 are disclosed in note 13 Taxation. No deferred tax asset has been recognised in relation to these losses due to uncertainty that future suitable taxable profits will be available against which these losses can be utilised. The potential deferred tax asset at the 31 December 2019 would be $197 million (31 December 2018: $185 million).
26 Share capital
31 Dec 2019
31 Dec 2018
$'000
Number
$'000
Number
Authorised, called up, issued and fully paid: Ordinary shares of £0.01 each
7,212
457,979,755
7,205
457,495,899
For details of all movements during the year, see note 14.
27 reserves
Set out below is a description of each of the reserves of the Group:
Share premium
Amount subscribed for share capital in excess of its nominal value.
Share based remuneration
The share incentive plan reserve captures the equity related element of the expenses recognised for the issue of options, comprising the cumulative charge to the income statement for IFRS2 charges for share based payments less amounts released to retained earnings upon the exercise of options.
Own shares held in trust
Shares held in trust represent the issue value of shares held on behalf of participants in the SIP by Capita IRG Trustees Limited, the trustee of the SIP as well as shares held by the Employee Benefit Trust which have been purchased to settle future exercises of options.
Merger reserve
The difference between the nominal value and the fair value of shares issued on acquisition of subsidiaries.
Foreign currency translation reserve
Exchange differences arising on consolidating the assets and liabilities of the Group's subsidiaries are classified as equity and transferred to the Group's translation reserve.
Special reserve
The reserve is non distributable and was created following cancellation of the share premium account on 4 July 2013. It can be used to reduce the amount of losses incurred by the Parent Company or distributed or used to acquire the share capital of the Company subject to settling all contingent and actual liabilities as at 4 July 2013. Should not all of the contingent and actual liabilities be settled, prior to distribution the Parent Company must either gain permission from the actual or contingent creditors for distribution or set aside in escrow an amount equal to the unsettled actual or contingent liability.
Retained losses
Cumulative net gains and losses recognised in the financial statements.
28 CAPITAL COMMITMENTS
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is US$0.6 million (2018: US$18 million) relating to the Group's intangible exploration and evaluation assets.
29 Related Party Transactions
The remuneration of directors, who are the key management personnel of the Group, is set out below in aggregate. Further information about the remuneration of individual directors is provided in the Directors' Remuneration Report on pages 35 to 45 of the Group's financial statements.
Year
ended
31 Dec 19
Year
ended
31 Dec 18
$'000
$'000
Short term employee benefits
1,430
1,636
Pension contributions
133
137
Share based payments
679
742
2,242
2,515
30 POST BALANCE SHEET EVENTS
Impact of COVID-19
The immediate human and economic impact of COVID-19 has been very significant. At this point, the longer-term implications are unclear and will depend on a number of factors which will develop in the coming months.
In part related to COVID-19, the Brent oil price has fallen dramatically during Q1 2020 hitting a low of c.$25 per barrel in late March. This has resulted in a material fall in global equities (including Company's share price) and will bring balance sheet strength, liquidity and cost reduction measures to the fore. In the upstream oil & gas sector, companies have announced very material and widespread cost reductions through deferment or eliminations of non-essential capital and operating costs. Premier, the operator of the Sea Lion project has made similar public statements. As a consequence, headcount levels and activity on the Sea Lion project are expected to reduce in the coming months. A delay to the Final Investment Decision on the Sea Lion project is inevitable until the oil price and capital markets recover.
With the Company's modest presence in Italy already having been substantially scaled back, the Group's day to day operations remain unaffected by the spread of COVID-19 with necessary contingency measures in place.
Heads of Terms for farm-in to Sea Lion signed
On the 7 January 2020 the Group announced that itself and Premier had signed a detailed Heads of Terms with Navitas to farm-in for a 30 per cent interest in the Sea Lion project (the "Transaction"). In addition, Rockhopper and Premier agreed certain amendments to their existing commercial arrangements.
Under the Heads of Terms working interest in Sea Lion licences PL032, PL004b and PL004c to be aligned: Premier 40% (Operator); Rockhopper 30%; Navitas 30%. The joint venture will continue to pursue a senior debt project finance (or similar) to fund the Phase 1 development of Sea Lion.
Existing funding arrangements between Rockhopper and Premier are to be replaced such that Rockhopper is funded for all pre- and post-sanction costs not met by senior debt by Premier and/or Navitas through a combination of carry and loans.
Premier will carry all of Rockhopper's costs from 1 January 2020 to 1 March 2020 (being the effective date for the Transaction) and on a bridging basis pending completion of the Transaction (the "Carry").
Premier and Navitas will fund all of Rockhopper's project development costs (excluding production area licence fees, taxes and project wind down costs) from 1 March 2020 to Phase 1 Project Completion (estimated to occur 9-12 months after first oil) through an interest free loan ("Loan"). Funds drawn under the Loan will be repaid from 85% of Rockhopper's working interest share of free cash flow.
An additional standby loan ("Standby Loan") will be available from Premier to cover Rockhopper's share of production area licence fees and any Capital Gains Tax liability. This new Standby Loan will attract interest at a rate of 15% per annum and will be repaid from Rockhopper's residual share of Phase 1 free cash flow.
Existing funding arrangements between Rockhopper and Premier will be replaced such that, subject to certain conditions, Rockhopper will receive contingent payments of up to US$36 million from Premier and Navitas' share of Phase 2 cash flows, linked to the achievement of certain production and oil price milestones.
Rockhopper has granted Navitas and Premier an option to acquire working interests in PL004a (30% and 4% respectively) to align working interests across PL032 and PL004. The option must be exercised by Navitas within 8 years of completion of the Transaction, or the date of Phase 2 FID ("Financial Investment Decision"). In the event the option is exercised and subject to certain conditions, Rockhopper will receive contingent payments of up to US$12 million from Navitas' and Premier's share of Phase 3 cash flows, linked to the achievement of certain production and oil price milestones.
Good progress has been made during the first quarter of 2020 to convert the Heads of Terms into fully documented agreements. Despite the current oil price weakness, all parties remain committed to the finalisation of the Navitas farm-out agreement with completion subject to agreed consents and approvals.
Completion of disposal of Rockhopper Egypt Pty Limited
On the 28 February 2020 the Group announced that following satisfaction of the requisite conditions precedent, the disposal of Rockhopper Egypt Pty Limited to United was completed.
The US$16.0 million consideration payable to Rockhopper under the transaction comprises:
· cash of $11.5 million; and
· the issue of 114,503,817 Consideration Shares (at an issue price of 3 pence) representing approximately 18.5% of United's enlarged ordinary share capital.
·
Consideration Shares held by Rockhopper in United are subject to certain lock‐up and orderly market disposal provisions for a period of up to 12 months from completion.
31 Risk management policies
Risk review
The risks and uncertainties facing the Group are set out in the risk management report. Risks which require further quantification are set out below.
Foreign exchange risks: The Group is exposed to foreign exchange movements on monetary assets and liabilities denominated in currencies other than US$, in particular the tax liability with the Falkland Island Government which is a GB£ denominated balance. In addition a number of the Group's subsidiaries have a functional currency other than US$, where this is the case the Group has an exposure to foreign exchange differences with differences being taken to reserves.
Asset balances include cash and cash equivalents, restricted cash and term deposits of $17.7 million of which $13.0 million was held in US$ denominations. The following table summarises the split of the Group's assets and liabilities by currency:
Currency denomination of balance
$
£
€
EGP £
CAD $
$'000
$'000
$'000
$'000
$'000
Assets
31 December 2019
494,570
3,454
10,688
1,530
-
31 December 2018
491,148
2,440
27,234
640
-
Liabilities
31 December 2019
57,857
41,451
14,820
-
-
31 December 2018
51,200
38,346
16,518
-
55
The following table summarises the impact on the Group's pre-tax profit and equity of a reasonably possible change in the US$ to GB£ exchange rate and the US$ to euro exchange:
Pre tax profit
Total equity
+10% US$ rate
increase
-10% US$ rate
decrease
+10% US$ rate
increase
-10% US$ rate
decrease
$'000
$'000
$'000
$'000
US$ against GB£
31 December 2019
(3,800)
3,800
(3,800)
3,800
31 December 2018
(3,591)
3,591
(3,591)
3,591
US$ against euro
31 December 2019
(413)
413
(413)
413
31 December 2018
1,072
(1,072)
1,072
(1,072)
Capital risk management: the Group manages capital to ensure that it is able to continue as a going concern whilst maximising the return to shareholders. The capital structure consists of cash and cash equivalents and equity. The board regularly monitors the future capital requirements of the Group, particularly in respect of its ongoing development programme.
Credit risk; the Group recharges partners and third parties for the provision of services and for the sale of Oil and Gas. Should the companies holding these accounts become insolvent then these funds may be lost or delayed in their release. The amounts classified as receivables as at the 31 December 2019 were $2,168,000 (31 December 2018: $3,948,000). Credit risk relating to the Group's other financial assets which comprise principally cash and cash equivalents, term deposits and restricted cash arises from the potential default of counterparties. Investments of cash and deposits are made within credit limits assigned to each counterparty. The risk of loss through counterparty failure is therefore mitigated by the Group splitting its funds across a number of banks, two of which are part owned by the British government.
Interest rate risks; the Group has no debt and so its exposure to interest rates is limited to finance income it receives on cash and term deposits. The Group is not dependent on its finance income and given the current interest rates the risk is not considered to be material.
Liquidity risks; the Group makes limited use of term deposits where the amounts placed on deposit cannot be accessed prior to their maturity date. The amounts applicable at the 31 December 2019 were $nil (31 December 2018: $30,000,000).
(i) Maturity of financial liabilities
The table below analyses the Group's financial liabilities, which will be settled on a gross basis, into relevant maturity groups based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
At 31 December 2019
Within 1 year
2 to 5 years
More than 5 years
Total contractual cashflows
Carrying amount
$'000
$'000
$'000
$'000
$'000
Other payables
17,943
-
-
17,943
17,943
Lease liability
539
1,975
-
2,514
2,161
Tax payable
-
-
78,780
78,780
39,167
18,482
1,975
78,780
99,237
59,271
At 31 December 2018
Within 1 year
2 to 5 years
More than 5 years
Total contractual cashflows
Carrying amount
$'000
$'000
$'000
$'000
$'000
Other payables
15,148
-
-
15,148
15,148
Lease liability
458
2,149
365
2,972
2,450
Tax payable
-
-
76,150
76,150
37,860
15,606
2,149
76,515
94,270
55,458
The financial information set out above does not constitute the Group's statutory accounts for the year ended 31 December 2019, but is derived from those accounts. References within the document may refer to information in the statutory accounts and these will be sent to shareholders and published on the Company's website imminently.
Glossary:
2C
best estimate of contingent resources
2P
proven plus probable reserves
3C
a high estimate category of contingent resources
AGM
Annual General Meeting
Best
a best estimate category of Prospective Resources also used as a generic term to describe a best, or mid estimate
Board
the Board of Directors of Rockhopper Exploration plc
Boe
barrels of oil equivalent
Bopd
barrels of oil per day
boepd
barrels of oil equivalent per day
Capex
capital expenditure
Cash resources
Cash and term deposits
Company
Rockhopper Exploration plc
E&E
Exploration and evaluation
E&P
exploration and production
EGPC
Egyptian General Petroleum Company
EIS
Environmental Impact Statement
ERCE
ERC Equipoise Limited
ESG
Environmental, Social and Governance
Farm-down
to assign an interest in a licence to another party
FEED
Front End Engineering and Design
FDP
Field Development Plan
FID
Final Investment Decision
FIG
Falkland Islands Government
FOGL
Falkland Oil and Gas Limited
FPSO
Floating Production, Storage and Offtake vessel
G&A
General and administrative costs
Group
the Company and its subsidiaries
High
high estimate category of Prospective Resources also used as a generic term to describe a high or optimistic estimate
IFRS
International Financial Reporting Standard
Kboepd
thousand barrels of oil equivalent per day
Low
a low estimate category of Prospective Resources also used as a generic term to describe a low or conservative estimate
LOI
Letter of Intent
LTIP
Long term incentive plan
Mmbbls
million barrels
Mmboe
million barrels of oil equivalent
Mmbtu
million British thermal units
MMstb
million stock barrels (of oil)
Mscf
thousand standard cubic feet
Navitas
Navitas Petroleum LP
net pay
the portion of reservoir containing hydrocarbons that through the placing of cut offs for certain properties such as porosity, water saturation and volume of shale determine the productive element of the reservoir
P&A
plug and abandon
PIM
Project Information Memorandum
Premier
Premier Oil plc
PSV
virtual exchange point
SAR
Share appreciation right
Scm
standard cubic metre
SIP
Share incentive plan
STOIIP
stock-tank oil initially in place
SURF
Subsea, Umbilicals, Risers and Flowlines
TSR
Total shareholder return
Tvdss
true vertical depth subsea
United
United Oil & Gas plc
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