REG - Rockhopper Exp plc - Final results for the year ended 31 December 2020
19 May 2021
Rockhopper Exploration plc
("Rockhopper", the "Group" or the "Company")
Full-year results for the year ended 31 December 2020
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 2020.
HIGHLIGHTS
Sea Lion
· Detailed transaction terms agreed with Navitas Petroleum LP to farm-in for a 30% interest in the Sea Lion project
· Recently completed merger of Premier Oil plc with Chrysaor to create Harbour Energy plc, resulting in a materially larger and financially stronger operator of the Sea Lion project
· Extension of the Company's North Falkland Basin Petroleum Licences, including the Sea Lion Discovery Area, to 1 November 2022
Corporate and financial
· Ombrina Mare arbitration Tribunal confirms "deliberations and the drafting process have both advanced very considerably"
· Disposal of Rockhopper Egypt Pty Limited to United Oil & Gas plc completed in February 2020
o Subsequent sale of the Group's entire shareholding in United Oil & Gas plc in August 2020 raised proceeds of US$4.0 million
· Initiatives implemented to further materially reduce corporate costs
· US$222.6 million one-off non-cash impairment, based on a decision, in line with the Sea Lion operator, to write off the historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project
· Cash resources of US$11.7 million as at 31 December 2020
Outlook
· Targeting completion of the Navitas farm-in
· Outcome in relation to Ombrina Mare arbitration expected in July 2021 - seeking significant monetary damages
Keith Lough, Chairman of Rockhopper, commented:
"The Company will continue to work closely with all stakeholders to maximise the chance of securing the Navitas farm out and project sanction of Sea Lion. The Board believes that the opportunity to invest in a world-scale fully appraised and engineered project with material additional upside at this point in the cycle presents a compelling opportunity, and one which would lead us towards unlocking the value within the project long-awaited by all stakeholders."
Enquiries:
Rockhopper Exploration plc
Sam Moody - Chief Executive
Stewart MacDonald - Chief Financial Officer
Tel. +44 (0) 20 7390 0234 (via Vigo Consulting)
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 Consulting
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 and member of the Council of the Geological Society of London, 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
INTRODUCTION
2020 has been a year of unprecedented uncertainty, volatility and challenge, both from a human and economic perspective. The COVID-19 pandemic caused a sharp economic slowdown with a resultant collapse in oil prices during the first half of the year. Through a combination of OPEC+ supply cuts, relaxation of restrictions related to COVID-19 and positive news related to vaccines, oil prices recovered strongly through the second half of the year and into 2021. With the global balance of oil supply and demand now converging, the outlook is more positive.
Notwithstanding increasing concerns over climate change and the energy transition, absent material advances in technology or radical changes in lifestyle, most external forecasters predict significant oil demand continuing for decades. It is highly unlikely existing oil fields will be able to satisfy such demand and therefore new oil and gas developments, such as Sea Lion, will be required. Against that backdrop, it is our belief that new projects will need to demonstrate not only superior economic and financial returns but also outline how they support the energy transition and support their stakeholders' commitments to achieve net zero.
It is in this context that Environmental, Social and Governance ("ESG") continues to be a key focus for Rockhopper which is committed to developing Sea Lion on an environmentally sensitive basis. Such a commitment is expected to be achieved through a combination of reduced emissions from the use of best-in-class technologies and the offsetting of emissions through investment in nature-based carbon-offsetting projects both in the Falklands and elsewhere.
SEA LION PHASE 1 DEVELOPMENT
Rockhopper has been operating offshore the Falkland Islands since 2004. We are a long-term partner of the Falklands and our aim has always been to support the rights of the Falkland Islanders to develop their natural resources for their own economic benefit.
Having completed the technical definition of the Sea Lion project, at the outset of 2020 the priorities for the year ahead included securing senior debt financing for the project, completing the farm down to Navitas Petroleum LP ("Navitas") and submitting a Field Development Plan for the Sea Lion project to the Falkland Islands Government ("FIG").
However, in response to the unprecedented fall in the oil price experienced in March 2020, a decision was made in early April 2020 to reduce costs and scale-back headcount and activity on the project. Through the rest of the year, a reduced team continued to progress a number of regulatory and commercial workstreams, including the development of Sea Lion's net zero emissions plan and finalising the terms of the Navitas farm-in.
The recently completed merger of Premier Oil plc ("Premier") and Chrysaor Holdings Limited ("Chrysaor") to create Harbour Energy plc ("Harbour") results in a materially larger and financially stronger operator of the Sea Lion project. Navitas has confirmed that it remains committed to the proposed farm-in. However, in order to enable the new management of Harbour to make a firm decision on the Sea Lion project, Rockhopper, Premier and Navitas agreed to extend the exclusivity period for the farm-in to 30 September 2021. While there can be no guarantee around Harbour's future intentions for Sea Lion, Harbour has publicly stated a desire to pursue international growth with a preference for material operated positions and with capital allocated to those projects which best fit its investment strategy.
Rockhopper's Board remain confident the Sea Lion project benefits from robust economics (at $65/bbl Brent - NPV10@FID ~$1.8bn; break-even ~$42/bbl; life of project free cash flow ~$4.2bn with material upside at higher oil prices) and that it compares favourably to other investment opportunities which may be available in the current environment.
In March 2021, the Company was pleased to announce that, following discussions between the joint venture partners, Harbour and FIG, FIG has agreed to extend each of the Group's North Falkland Basin Petroleum Licences, including the Sea Lion Discovery Area, until 1 November 2022, with no additional licence commitments.
OMBRINA MARE ARBITRATION
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. The Tribunal confirmed in May 2021 that it anticipates being in a position to render its award in the course of July 2021.
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.
CORPORATE MATTERS
The Group continues to actively manage its corporate costs and has reduced G&A by circa 50% over the last five years. In light of the sharp reduction in oil prices experienced in the first half of 2020, initiatives to further reduce corporate costs commenced in May 2020 with a target to reduce costs by a further 30%. These measures include, but are not limited to: permanent reduction to executive director base remuneration; employee headcount reductions including certain roles transitioning to part-time; reductions to adviser and contractor costs; and a decrease in head office costs through the relocation to premises outside of London.
The disposal of our Egyptian business, including the subsequent sale of our shareholding in United Oil & Gas plc ("United"), generated a healthy return on investment with sale proceeds of US$15.5 million and free cash flow during our period of ownership of circa US$4.0 million, against an original investment of US$11.9 million in 2016.
ESG
As outlined above, ESG, and Corporate Responsibility more generally, continues to be a key focus for Rockhopper.
As an oil and gas exploration and production business our role is to produce hydrocarbons in an environmentally responsible manner.
As part of this strategy, FIG has recently established an independent environment trust to receive and administer future off-setting payments from the Sea Lion project and distribute those funds for activities aimed at ensuring a positive environmental legacy in the Islands.
Once FID on Sea Lion has been achieved, the Company commits to define measures, report transparently, and mitigate our own emissions as far as practicable.
In addition, the Company will in 2021 be undertaking a review of its broader ESG framework to ensure it remains appropriate to its business and increasing stakeholder interest in this area.
COVID-19
The human and economic impact of COVID-19 has been very significant. The health and wellbeing of our staff remains a priority. We have adapted our working practices to ensure business continuity. We thank our staff and wider stakeholders for their continued support.
OUTLOOK
At 530 million barrels of 2C recoverable resources, Sea Lion is a world-class oil field with the scale and potential to create huge value for Rockhopper, its partners and the Falkland Islands as a whole.
The merger of Premier and Chrysaor to create Harbour results in a financially stronger operator of the project. This, combined with the proposed entry of Navitas to the Sea Lion joint venture, creates a solid operational and financial foundation giving the project the strongest possible chance of progressing.
Based on recent guidance from the Tribunal, an outcome in relation to the Ombrina Mare arbitration is now expected in July 2021. The Company remains of the view it has strong prospects of recovering very significant monetary damages.
Finally, we thank the Falkland Islands Government for its continuing support and will continue to work closely with all stakeholders to maximise the chance of securing the Navitas farm out and project sanction of Sea Lion. The Board believes that the opportunity to invest in a world-scale fully appraised and engineered project with material additional upside at this point in the cycle presents a compelling opportunity, and one which would lead us towards unlocking the value within the project long-awaited by all stakeholders.
Keith Lough
Chairman
Sam Moody
CEO
FINANCIAL REVIEW
OVERVIEW
From a finance perspective, the most significant events in the year include:
· Detailed transaction terms agreed with Premier/Harbour and Navitas in relation to the Sea Lion project
· Disposal of Rockhopper Egypt Pty Limited to United - completed in February 2020 - and subsequent sale of the Group's entire shareholding in United - completed in August 2020
· In response to the COVID-19 pandemic, and the dramatic fall in oil and gas prices experienced through 2020, significant cost reduction programmes implemented both at the Sea Lion project level and corporately at Rockhopper
The revised funding arrangements with Premier/Harbour 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 Sea Lion once markets recover.
RESULTS FOR THE YEAR
For the year ended 31 December 2020, the Group reported revenues of US$2.8 million and loss after tax of US$236.5 million. The loss after tax primarily arose as a result of non-recurring non-cash impairments associated with previously incurred exploration costs in the North Falkland Basin. The decision was made, in line with the operator, to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project.
REVENUE
The Group's revenues of US$2.8 million (2019: US$10.3 million) during the year relate entirely to the sale of oil and natural gas in the Greater Mediterranean (Egypt and Italy) region. The reduction in revenues from the comparable period reflects the completion of the disposal of the Group's Egypt portfolio in February 2020 as well as a decline in production and gas prices in Italy.
Working interest production averaged approximately 316 boepd during 2020, a reduction over the comparable period (2019: 1,284 boepd), again related to the disposal of the Group's Egyptian portfolio during the period.
During the period, the Group's gas production in Italy was sold under short-term contract with an average realised price of €0.10 per scm (2019: €0.17 per scm). Gas was 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").
OPERATING COSTS
Cash operating costs, excluding depreciation and impairment charges, amounted to US$2.1 million (2019: US$4.6 million). Again, the reduction in operating costs reflects the disposal of the Group's Egypt portfolio during the period.
The Group continues to manage corporate costs, having achieved an approximate 50% reduction in general and administrative ("G&A") cost, excluding non-recurring expenses related to restructuring and acquisitions, over the last five years. In light of the sharp reduction in oil prices experienced in the first half of 2020, initiatives to further reduce corporate costs commenced in May 2020 with a target to reduce costs by a further 30%. G&A costs decreased to US$4.0 million in 2020 (2019: US$5.3 million), excluding non-recurring expenses related to restructuring and acquisitions and divestments. During the year approximately $2.0 million of recurring annual corporate costs were identified and removed permanently from the business. The full impact of such cost reduction initiatives is expected in 2021.
Following the decision in February 2016 by the Italian 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 2020, the Group had cash and term deposits of US$11.7 million (31 December 2019: US$17.2 million).
Cash and term deposit movements during the period:
US$m
Opening cash balance (31 December 2019)
17.2
Revenues
2.8
Cost of sales
(2.1)
Falkland Islands - (relating to current year)
(1.5)
- (relating to pre 1 January 2020)
(12.9)
Greater Mediterranean
(0.2)
Egyptian disposal proceeds
14.8
Administrative expenses
(4.0)
Miscellaneous
(2.4)
Closing cash balance (31 December 2020)
11.7
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/Harbour and/or Navitas. During 2020, the Group paid US$12.9 million of Sea Lion costs related to the period prior to 1 January 2020. Post period end, the Company received and subsequently paid a significantly larger than expected tax liability of US$1.4 million associated with the 2015/16 Falklands drilling campaign. The amount was fully accrued for as at the year-end and, going forward, limited further costs related to the period prior to 1 January 2020 are expected.
Miscellaneous includes non-recurring restructuring costs, foreign exchange and movements in working capital during the period.
Impairment of oil and gas assets
Rockhopper has tested the carrying value of its assets for impairment. Carrying values are compared to the value in use of the assets based on discounted cash flow models. Future cash flows were estimated using a long-term Brent oil price assumption of US$62.5/bbl (in "real" terms) (2019: US$70/bbl real). A post-tax nominal discount rate of 10% and 12.5% was used for the Group's Greater Mediterranean and Falkland Islands assets respectively.
Despite the reduction in the long-term oil price assumption, no impairment arose on the Sea Lion Phase 1 project. A range of sensitivities have been considered as part of the impairment testing process. In the event of a US$2.5/bbl reduction in the Group's long‐term oil price assumption, an impairment of $5 million on Sea Lion Phase 1 arises. No impairment would arise if the Group assumed project sanction was delayed by a further year.
A decision was made, in line with the operator, to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project. This impairment has no impact on the Group's long-term strategy for multiple phases of development in the North Falkland Basin but instead reflects the limited capital which will be invested outside of the Phase 1 project in the near-term. A reversal of the impairment is expected once the Phase 1 project has been sanctioned and investment resumes on the Phase 2 project.
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.
The consideration payable to Rockhopper under the transaction comprised:
· cash of US$11.5 million; and
· the issue of 114,503,817 Consideration Shares representing approximately 18.5% of United's enlarged ordinary share capital.
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.
In August 2020, the Group disposed of its entire shareholding in United, realising a further US$4.0 million of cash proceeds.
TAXATION
On 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with FIG 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$40.7 million.
Full details of the provisions and undertakings of the Tax Settlement Deed are disclosed in note 20 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.
At 31 December 2020, the Group had cash resources of US$11.7 million and $10.0 million as at the end of Q1 2021 (unaudited). Following the sale of Rockhopper Egypt Pty Limited in 2020, the Group generates limited revenue and cash flow from the sale of oil or gas.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. However, following signature of Heads of Terms in January 2020, Premier/Harbour and/or Navitas have a legally binding obligation to fund Rockhopper's share of all Sea Lion pre-sanction costs from 1 January 2020 (other than licence fees, taxes and project wind down costs).
With the recently completed acquisition of Premier (operator of the Sea Lion project) by Chrysaor to create Harbour, management's base case forecast assumes a final investment decision on the Sea Lion development during 2022, with the Group's costs funded by Premier/Harbour and/or Navitas during this period.
Management has also considered a number of downside scenarios including (1) the farm-out to Navitas does not proceed and the Heads of Terms lapses; (2) the Sea Lion project does not achieve sanction (which could be due to a number of factors including funding not being achieved or; (3) Premier deciding to withdraw from the Sea Lion Development) which could ultimately result in relinquishment of the acreage. In this scenario the Sea Lion project would need to be wound down including the decommissioning of assets in the Falklands and the Group would be 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 scenarios, 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, these conditions indicate the existence of a material uncertainty which may cast significant doubt on the Group's and Company's ability to continue as a going concern. The financial statements do not include the adjustments that would be required if the Group and Company were unable to continue as 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 key risks at the end of 2020 as being:
· oil price volatility;
· access to capital;
· joint venture partner alignment; and
· failure of joint venture partners to secure the requisite funding to allow a Sea Lion Final Investment Decision.
In 2020, the environmental impact of oil and gas extraction (e.g. climate change) was 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 2020
Year
ended
31 Dec 20
Year
ended
31 Dec 19
Notes
$'000
$'000
Revenue
3
2,754
10,328
Other cost of sales
(2,109)
(4,647)
Depreciation and impairment of oil and gas assets
(2,692)
(5,738)
Total cost of sales
4
(4,801)
(10,385)
Gross loss
(2,047)
(57)
Other exploration and evaluation expenses
(2,431)
(1,624)
Impairment of exploration and evaluation assets
(223,280)
(350)
Total exploration and evaluation expenses
5
(225,711)
(1,974)
Impairment of goodwill
6
-
(10,057)
Costs in relation to acquisition and disposals
-
(649)
Non recurring restructuring costs
(614)
-
Recurring administrative costs
(4,010)
(5,293)
Total administrative expenses
7
(4,624)
(5,942)
Charge for share based payments
10
(1,840)
(1,307)
Foreign exchange movement
11
(1,438)
(1,627)
Results from operating activities and other income
(235,660)
(20,964)
Finance income
12
44
624
Finance expense
12
(819)
(291)
Loss before tax
(236,435)
(20,631)
Tax
13
(69)
-
LOSS FOR THE YEAR ATTRIBUTABLE TO THE
EQUITY SHAREHOLDERS OF THE PARENT COMPANY
(236,504)
(20,631)
Loss per share: cents
Basic
14
(51.73)
(4.54)
Diluted
14
(51.73)
(4.54)
All operating income and operating gains and losses relate to continuing activities.
CONSOLIDATED statement of comprehensive income
for the YEAR ended 31 DECEMBER 2020
Year
ended
31 Dec 20
Year
ended
31 Dec 19
$'000
$'000
Loss for the year
(236,504)
(20,631)
Items that may be reclassified to profit or loss
Exchange differences on translation of foreign operations
(893)
70
TOTAL COMPREHENSIVE LOSS FOR THE YEAR
(237,397)
(20,561)
The notes on pages 55 to 72 form an integral part of these consolidated financial statements.
CONSOLIDATED balance sheet
as at 31 DECEMBER 2020
31 Dec
31 Dec
2020
2019
Notes
$'000
$'000
NON CURRENT ASSETS
Exploration and evaluation assets
15
244,349
465,820
Property, plant and equipment
16
1,420
3,069
Finance lease receivable
462
628
CURRENT ASSETS
Inventories
310
1,463
Other receivables
17
2,464
3,501
Finance lease receivable
187
146
Restricted cash
486
467
Cash and cash equivalents
11,680
17,223
Assets held for sale
18
-
17,925
TOTAL ASSETS
261,358
510,242
CURRENT LIABILITIES
Other payables
19
3,790
17,943
Lease liability
567
426
Liabilities directly associated with assets held for sale
18
-
2,000
NON-CURRENT LIABILITIES
Lease liability
1,273
1,735
Tax payable
20
40,703
39,167
Provisions
21
15,158
13,636
Deferred tax liability
22
39,300
39,221
TOTAL LIABILITIES
100,791
114,128
EQUITY
Share capital
23
7,218
7,212
Share premium
24
3,622
3,547
Share based remuneration
24
5,973
4,871
Own shares held in trust
24
(3,342)
(3,371)
Merger reserve
24
74,332
74,332
Foreign currency translation reserve
24
(10,571)
(9,678)
Special reserve
24
188,028
433,766
Retained losses
24
(104,693)
(114,565)
ATTRIBUTABLE TO THE EQUITY SHAREHOLDERS OF THE COMPANY
160,567
396,114
TOTAL LIABILITIES AND EQUITY
261,358
510,242
These financial statements on pages 51 to 72 were approved by the directors and authorised for issue on 19 May 2021 and are signed on their behalf by:
STEWART MACDONALD
CHIEF FINANCIAL OFFICER
Rockhopper Exploration plc Registered Company number: 05250250
The notes on pages 55 to 72 form an integral part of these consolidated financial statements.
CONSOLIDATED statement of changes in equity
for the YEAR ended 31 DECEMBER 2020
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 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
Total comprehensive loss for the year
-
-
-
-
-
(893)
-
(236,504)
(237,397)
Share based payments (see note 10)
-
-
1,840
-
-
-
-
-
1,840
Share issues in relation to SIP
6
75
-
(71)
-
-
-
-
10
Other transfers
-
-
(738)
100
-
-
(245,738)
246,376
-
Balance at 31 December 2020
7,218
3,622
5,973
(3,342)
74,332
(10,571)
188,028
(104,693)
160,567
See note 24 for a description of each of the reserves of the Group.
CONSOLIDATED STATEMENT OF CASHFLOWS
for the YEAR ended 31 DECEMBER 2020
Year
ended
31 Dec 20
Year
ended
31 Dec 19
Notes
$'000
$'000
CASH FLOWS FROM OPERATING ACTIVITIES
Loss before tax
(236,435)
(20,631)
Adjustments to reconcile net losses to cash:
Depreciation
16
808
4,544
Share based payment charge
10
1,840
1,307
Impairment of oil and gas assets
16
1,114
1,600
Impairment of exploration and evaluation assets
15
223,280
350
Impairment of goodwill
-
10,057
Loss on disposal of property, plant and equipment
4
-
Finance expense
816
291
Finance income
-
(624)
Foreign exchange
1,315
1,221
Operating cash flows before movements in working capital
(7,258)
(1,885)
Changes in:
Inventories
1,289
214
Other receivables
1,904
3,259
Payables
(1,320)
(1,623)
Movement on other provisions
(54)
(189)
Cash utilised by operating activities
(5,439)
(224)
CASH FLOWS FROM INVESTING ACTIVITIES
Capitalised expenditure on exploration and evaluation assets
(14,570)
(20,152)
Purchase of property, plant and equipment
(85)
(3,743)
Net proceeds from disposal of assets held for sale
14,763
-
Interest
-
1,020
Investing cash flows before movements in capital balances
108
(22,875)
Changes in:
Restricted cash
-
101
Term deposits
-
30,000
Cash flow from investing activities
108
7,226
CASH FLOWS FROM FINANCING ACTIVITIES
Share incentive plan
10
25
Lease liability payments
(382)
(259)
Finance expense
(19)
(13)
Cash flow from financing activities
(391)
(247)
Currency translation differences relating to cash and cash equivalents
179
42
Net cash flow
(5,722)
6,755
Cash and cash equivalents brought forward
17,223
10,426
CASH AND CASH EQUIVALENTS CARRIED FORWARD
11,680
17,223
Notes to the CONSOLIDATED financial statements
for the Year ended 31 DECEMBER 2020
1 Accounting 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 addition it has operations in the Greater Mediterranean based in Italy and Egypt. During 2020 the Group divested its exploration and production assets in Egypt. The registered office of the Company is Warner House, 123 Castle Street, Salisbury, Wiltshire, SP1 3TB.
1.2 Statement of compliance
The consolidated financial statements are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The consolidated financial statements were approved for issue by the board of directors on 19 May 2021 and are subject to approval at the Annual General Meeting of shareholders on 29 June 2021.
1.3 Basis of preparation
The results upon which these 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, except for assets held for sale, which are held at fair value, 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"). The consolidated financial statements are presented in US Dollars ($), which is Rockhopper Exploration plc's presentation 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
In the current year the following new and revised Standards and Interpretations have been adopted. None of these have a material impact on the Group's annual results.
• Amendments to IFRS 3: Definition of a Business;
• Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform;
• Amendments to IAS 1 and IAS 8 Definition of Material; and
• Revised Conceptual Framework for Financial Reporting.
No Standards and Interpretations have been adopted early.
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.
At 31 December 2020, the Group had cash resources of US$11.7 million. Following the sale of Rockhopper Egypt Pty Limited in 2020, the Group generates limited revenue and cash flow from the sale of oil or gas.
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/Harbour and/or Navitas.
With the recently completed acquisition of Premier (operator of the Sea Lion project) by Chrysaor to create Harbour, management's base case forecast assumes a final investment decision on the Sea Lion development during 2022, with the Group's costs funded by Premier/Harbour and/or Navitas during this period.
Management has also considered a number of downside scenarios including (1) the farm-out to Navitas does not proceed and the Heads of Terms lapses; (2) the Sea Lion project does not achieve sanction (which could be due to a number of factors including funding not being achieved or; (3) Premier deciding to withdraw from the Sea Lion Development) which could ultimately result in relinquishment of the acreage. In this scenario the Sea Lion project would need to be wound down including the decommissioning of assets in the Falklands and the Group would be 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 scenarios, 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, these conditions indicate the existence of a material uncertainty which may cast significant doubt on the Group's and Company's ability to continue as a going concern. The financial statements do not include the adjustments that would be required if the Group and Company were unable to continue as a going concern.
(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 assets held for sale, 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.
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
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.
(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$, using the closing rate method for assets and liabilities which are translated at the rate of exchange prevailing at the balance sheet date and rates at the date of transactions for income statement accounts. Differences are taken directly to reserves.
Transactions and balances:
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are capitalised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
The year end rates of exchange actually used were:
31 Dec 2020
31 Dec 2019
£ : US$
1.36
1.32
€ : US$
1.23
1.12
(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 are recognised initially at the amount of consideration that is unconditional, unless they contain significant financing components when they are recognised at fair value. They are subsequently measured at amortised cost using the effective interest method, less loss allowance. 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 The Group recognises an allowance for expected credit losses for all debt instruments not held at fair value through profit or loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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. Sensitivity analysis is disclosed in the related note as required.
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 21)
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 and the results of the most recent available review used as a basis for the amounts in the Consolidated 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
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.
YEAR ENDED 31 DECEMBER 2020
Falkland
Greater
Islands
Mediterranean
Corporate
Total
$'000
$'000
$'000
$'000
Revenue
-
2,754
-
2,754
Cost of sales
-
(4,801)
-
(4,801)
Gross loss
-
(2,047)
-
(2,047)
Exploration and evaluation expenses
(222,593)
(2,312)
(806)
(225,711)
Restructuring costs
-
-
(614)
(614)
Recurring administrative costs
-
(1,096)
(2,914)
(4,010)
Total administrative expenses
-
(1,096)
(3,528)
(4,624)
Charge for share based payments
-
-
(1,840)
(1,840)
Foreign exchange (loss)/gain
(1,537)
78
21
(1,438)
Results from operating activities and other income
(224,130)
(5,377)
(6,153)
(235,660)
Finance income
-
6
38
44
Finance expense
-
(305)
(514)
(819)
Loss before tax
(224,130)
(5,676)
(6,629)
(236,435)
Tax
-
(69)
-
(69)
Loss for year
(224,130)
(5,745)
(6,629)
(236,504)
Reporting segments assets
243,647
4,643
13,068
261,358
Reporting segments liabilities
79,840
16,301
4,650
100,791
Depreciation and impairments
222,584
1,429
493
224,506
YEAR ENDED 31 DECEMBER 2019
Falkland
Greater
Islands
Mediterranean
Corporate
Total
$'000
$'000
$'000
$'000
Revenue
-
10,328
-
10,328
Cost of sales
-
(10,385)
-
(10,385)
Gross loss
-
(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)
Foreign exchange 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
-
-
-
-
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
All of the Group's worldwide sales revenues of oil and gas $2,754 thousand (2019: $10,328 thousand) arose from contracts to customers. Total revenue relates to revenue from two customers (2019: two customers) each exceeding 10 per cent of the Group's consolidated revenue.
4 Cost of sales
Year
ended
31 Dec 20
Year
ended
31 Dec 19
$'000
$'000
Cost of sales
2,109
4,647
Impairment of oil and gas assets (see note 16)
1,114
1,600
Depreciation of oil and gas assets (see note 16)
232
4,138
Depreciation and impairment on assets held for sale
1,346
-
4,801
10,385
5 exploration and evaluation expenses
Year
ended
31 Dec 20
Year
ended
31 Dec 19
$'000
$'000
Allocated from administrative expenses (see note 7)
799
790
Capitalised exploration costs impaired (see note 15)
223,280
350
Impairment on assets held for sale
314
-
Other exploration and evaluation expenses
1,318
834
225,711
1,974
6 IMPAIRMENT OF GOODWILL
As a result of the acquisition of Mediterranean Oil & Gas plc in 2014, goodwill of €9 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 in the prior year to impair the goodwill associated with that acquisition.
7 Administrative expenses
Year
ended
31 Dec 20
Year
ended
31 Dec 19
$'000
$'000
Directors' salaries and fees, including bonuses (see note 8)
1,090
1,563
Other employees' salaries
1,806
2,475
National insurance costs
483
541
Pension costs
325
148
Employee benefit costs
82
96
Total staff costs (including group restructuring costs)
3,786
4,823
Amounts reallocated
(937)
(1,518)
Total staff costs charged to administrative expenses
2,849
3,305
Auditors' remuneration (see note 9)
244
232
Other professional fees
588
1,444
Other
1,222
1,527
Depreciation
162
106
Amounts reallocated
(441)
(672)
4,624
5,942
The average number of full time equivalent staff employed during the year was 13 (2019: 18). As at the year end the Group employed 12 staff, mainly part time, 8 of which were 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 20
Year
ended
31 Dec 19
$'000
$'000
Executive salaries
812
887
Executive bonuses
-
178
Company pension contributions to money purchase schemes & pension cash allowance
120
133
Benefits
21
27
Non-executive fees
278
338
1,231
1,563
The total remuneration of the highest paid director was:
Year
ended
31 Dec 20
Year
ended
31 Dec 19
£
£
Annual salary
341,000
380,400
Bonuses
-
76,000
Money purchase pension schemes
51,100
57,100
Benefits
7,200
11,400
399,300
524,900
Interest in outstanding share options and SARs, by director, are separately disclosed in the directors' remuneration report.
9 Auditors' remuneration
Year
ended
31 Dec 20
Year
ended
31 Dec 19*
$'000
$'000
Fees payable to the Company's auditors for the audit of the Company's annual financial statements
135
119
Fees payable to the Company's auditors and its associates for other services:
Audit of the accounts of subsidiaries
58
99
Half year review
33
32
226
250
After the completion of the 2019 consolidated financial statements additional audit fees for subsidiaries amounting to $18,000 were incurred. These additional fees are included in the 2019 fee analysis above.
10 Share based Payments
The charge for share based payments relate to options granted to employees of the Group.
Year
ended
31 Dec 20
Year
ended
31 Dec 19
$'000
$'000
Charge for option scheme
530
-
Charge for the long term incentive plan options
1,112
1,202
Charge for shares issued under the SIP
198
105
1,840
1,307
The models and key assumptions used to value each of the grants and hence calculate the above charges are set out below:
Option scheme
A one-off equity option package has been implemented during the year (the "Option Scheme") to replace the existing long term incentive plan. In place of the LTIP scheme, executive directors and senior staff received options to subscribe for Ordinary Shares, exercisable at a price of 6.25 pence per new Ordinary Share (the "Market Price Options). The Market Price Options will vest in equal tranches after three, four and five years' further continuous employment.
Executive directors and staff in lieu of their contractual notice periods also received options to subscribe for an aggregate new ordinary shares in the capital of the Company ("Ordinary Shares"), exercisable at a price of 1 pence per new Ordinary Share (the "1p Options"). These options will vest after continuous employment equivalent to their notice period being six months or one year as applicable.
The options have been valued using a binomial model the key inputs of which are summarised below
Grant date:
18 May 2020
18 May 2020
18 May 2020
18 May 2020
18 May 2020
Vesting date
19 Nov 2020
19 May 2021
19 May 2023
19 May 2024
19 May 2025
Closing share price (pence)
6.25
6.25
6.25
6.25
6.25
Number granted
1,986,972
6,357,616
7,949,997
7,950,000
7,950,003
Weighted average volatility
50.0%
50.0%
50.0%
50.0%
50.0%
Weighted average risk free rate
0.08%
0.07%
0.10%
0.12%
0.14%
Exercise price (pence)
1.00
1.00
6.25
6.25
6.25
Dividend yield
0%
0%
0%
0%
0%
The following movements occurred during the year:
At 31 December
Issue date
Vesting date
Expiry date
Issued
Lapsed
2020
18 May 2020
19 Nov 2020
18 Nov 2030
1,986,972
-
1,986,972
18 May 2020
19 May 2021
18 Nov 2030
6,357,616
-
6,357,616
18 May 2020
19 May 2023
18 Nov 2030
7,949,997
-
7,949,997
18 May 2020
19 May 2024
18 Nov 2030
7,950,000
-
7,950,000
18 May 2020
19 May 2025
18 Nov 2030
7,950,003
-
7,950,003
32,194,588
-
32,194,588
Long term incentive plan
LTIP awards 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 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 vest on a sliding scale from 35% to 100% for performance in the top two quartiles of the Peer Group. No awards 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
2019
Issued
Lapsed
2020
8 October 2013
8 October 2023
546,145
-
-
546,145
10 March 2014
10 March 2024
70,391
-
-
70,391
16 June 2017
16 June 2027
6,700,000
-
(3,484,000)
3,216,000
23 April 2018*
23 April 2028
7,000,000
-
-
7,000,000
31 July 2019*
31 July 2029
7,200,000
-
-
7,200,000
21,516,536
18,032,536
* Denotes LTIPs that had not completed the Performance Period and as such were unvested at the year end
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 £35,999 (year ended 31 December 2019 £38,999) worth of Free Shares to eligible employees.
This resulted in the issue of 195,756 (year ended 31 December 2019: 173,329) Free Shares and 306,606 (year ended 31 December 2019: 310,527) SIP scheme matching and partnership shares in the year.
31 Dec
31 Dec
2020
2019
The average fair value of the shares awarded (pence)
12
21
Vesting
100%
100%
Dividend yield
Nil
Nil
Lapse due to withdrawals
Nil
Nil
The scheme was closed during the year and the fair value of the shares awarded recognised in full.
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.
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"). All SARs have vested and the remuneration committee has discretion to settle the exercise of SARs in cash.
All SARs have vested and the following movements occurred during the year:
Exercise price
At 31 Dec
At 31 Dec
Issue date
Expiry date
(pence)
2019
Exercised
Lapsed
2020
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
786,967
-
-
786,967
11 FOREign Exchange
Year ended
31 Dec 20
Year ended
31 Dec 19
$'000
$'000
Foreign exchange loss on Falkland Islands tax liability (see note 20)
(1,537)
(1,307)
Other foreign exchange movements
99
(320)
Total net foreign exchange loss
(1,438)
(1,627)
12 FINANCE INCOME AND EXPENSE
Year ended
31 Dec 20
Year ended
31 Dec 19
$'000
$'000
Bank and other interest receivable
44
624
Total finance income
44
624
Unwinding of discount on decommissioning provisions (see note 21)
296
204
Other
523
87
Total finance expense
819
291
13 Taxation
Year ended
31 Dec 20
Year ended
31 Dec 19
$'000
$'000
Current tax:
Overseas tax
-
-
Adjustment in respect of prior years
(10)
-
Total current tax
(10)
-
Deferred tax:
Overseas tax
79
-
Total deferred tax - note 22
79
-
Tax on profit on ordinary activities
69
-
Loss on ordinary activities before tax
(236,435)
(20,631)
Loss on ordinary activities multiplied at 26% weighted average rate (31 December 2019: 26%)
(61,473)
(5,364)
Effects of:
Income and gains not subject to taxation
-
(1,646)
Impairment of goodwill
-
1,911
Expenditure not deductible for taxation
58,812
1,631
Depreciation in excess of capital allowances
9
1,060
IFRS2 Share based remuneration cost
478
313
Losses carried forward
2,349
1,326
Effect of tax rates in foreign jurisdictions
(156)
769
Other
(19)
Adjustments in respect of prior years
(10)
-
Tax credit for the year
(10)
-
On the 8 April 2015 the Group agreed binding documentation ("Tax Settlement Deed") with the Falkland Islands Government ("FIG") in relation to the tax arising from the Group's farm out to 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 20 Tax payable.
The total carried forward losses and carried forward pre trading expenditures potentially available for relief are as follows:
Year ended
31 Dec 20
Year ended
31 Dec 19
$'000
$'000
UK
74,762
70,429
Falkland Islands
618,444
631,203
Italy
64,086
56,156
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 20
31 Dec 19
Number
Number
Shares in issue brought forward
457,979,755
457,495,899
Shares issued
- Issued under the SIP
502,362
483,856
Shares in issue carried forward
458,482,117
457,979,755
Weighted average number of Ordinary Shares for the purposes of basic earnings per share
458,289,239
454,659,988
$'000
$'000
Net loss after tax for purposes of basic and diluted earnings per share
(236,504)
(20,631)
Loss per share - cents
Basic
(51.73)
(4.54)
Diluted
(51.73)
(4.54)
The weighted average number of Ordinary Shares takes into account those shares which are treated as own shares held in trust (see note 24). 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
At 1 January 2019
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 18)
-
(3,012)
(3,012)
Foreign exchange movement
-
(22)
(22)
At 31 December 2019
464,639
1,181
465,820
Additions
1,592
147
1,739
Written off to exploration costs
(222,584)
(696)
(223,280)
Foreign exchange movement
-
70
70
At 31 December 2020
243,647
702
244,349
FALKLAND ISLANDS LICENCES
The additions during the year of $1.6 million relate principally to the Sea Lion development. Management made a judgement as to whether there were any indicators of impairment during the year and concluded that for Phase 1 of the Sea Lion development there were none.
Management, as a matter of good practice, run their cashflow model for Sea Lion phase 1 regularly. At the year end, the key inputs to this model were a real terms Brent oil price of $62.5/bbl (2019: $70/bbl), a post-tax discount rate of 12.5% (2019: 12.5%) and utilising the operator's current estimates of capital and operating costs and production profiles. The project is targeting project sanction decision during 2022 (with such decision dependent on securing funding) and it is expected to take three and half years from sanction to first oil.
Despite the reduction in the long‐term oil price assumption, no impairment arose on the Sea Lion Phase 1 project. A range of sensitivities have been considered as part of the impairment testing process. In the event of a US$2.5/bbl reduction in the Group's long‐term oil price assumption, an impairment of $5 million on Sea Lion Phase 1 arises. No impairment would arise if the Group assumed project sanction was delayed by a further year.
Management made the judgement that the limited near term capital being invested outside of the Phase 1 project was an indicator of impairment in the subsequent phases of the project. Accordingly a decision was made, in line with the operator, to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project. This impairment has no impact on the Group's long‐term strategy for multiple phases of development in the North Falkland Basin. A reversal of the impairment is expected once the Phase 1 project has been sanctioned and investment resumes on the Phase 2 project.
16 property, plant and equipment
Oil and gas
Right of use
Other
assets
assets
assets
Total
$'000
$'000
$'000
$'000
Cost
At 1 January 2019
37,168
1,555
878
39,601
Additions
3,757
-
40
3,797
Transfer from intangible exploration and evaluation assets
3,901
-
-
3,901
Foreign exchange
(430)
-
(4)
(434)
Transfer to assets held for sale
(20,121)
-
-
(20,121)
At 31 January 2019
24,275
1,555
914
26,744
Additions
-
138
84
222
Foreign exchange
2,006
-
14
2,020
Disposals
-
-
(99)
(99)
At 31 December 2020
26,281
1,693
913
28,887
Depreciation and impairment
At 1 January 2019
25,504
-
706
26,210
Charge for the year
4,138
300
106
4,544
Impairment
1,600
-
-
1,600
Foreign exchange
(317)
-
(2)
(319)
Transfer to assets held for sale
(8,360)
-
-
(8,360)
At 31 December 2019
22,565
300
810
23,675
Charge for the year
232
528
48
808
Impairment
1,114
-
-
1,114
Foreign exchange
1,960
-
5
1,965
Disposals
-
-
(95)
(95)
At 31 December 2020
25,871
828
768
27,467
Net book value at 31 December 2019
1,710
1,255
104
3,069
Net book value at 31 December 2020
410
865
145
1,420
All oil and gas assets relate to the Greater Mediterranean region, specifically producing assets in Italy.
17 OTHER Receivables
31 Dec 20
31 Dec 19
$'000
$'000
Current
Receivables
619
1,059
Other
1,844
2,442
2,464
3,501
The carrying value of receivables approximates to fair value.
18 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. Accordingly the assets and associated liabilities are presented as a disposal group and the transaction completed on the 28 February 2020.
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.
31 Dec 19
$'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
19 Other payables and accrualS
31 Dec 20
31 Dec 19
$'000
$'000
Accounts payable
1,021
2,248
Accruals
2,553
15,272
Other creditors
216
423
3,790
17,943
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.
20 Tax payable
31 Dec 20
31 Dec 19
$'000
$'000
Non current tax payable
40,703
39,167
40,703
39,167
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.
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$1.5 million (2019: US$1.3 million loss) has been recognised in the year.
21 Provisions
Decommissioning
Other
provision
provisions
31 Dec 20
31 Dec 19
$'000
$'000
$'000
$'000
Brought forward
13,561
75
13,636
13,888
Amounts utilized
(54)
-
(54)
(198)
Amounts arising in the year
-
7
7
8
Unwinding of discount
296
-
296
204
Foreign exchange
1,264
9
1,273
(266)
Carried forward at year end
15,067
91
15,158
13,636
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 (2019: 2 per cent) and a discount rate of 2 per cent (2019: 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. Of these estimates the costs associated with the decommissioning works are those that are likely to have a material impact on the provision and as such a 10 per cent change in these estimates would have a corresponding 10 per cent impact on the provision.
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.
22 deferred tax liability
31 Dec 20
31 Dec 19
$'000
$'000
At beginning of period
39,221
39,223
Movement in period
79
(2)
At end of period
39,300
39,221
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 2020 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 2020 would be $163 million (31 December 2019: $197 million).
23 Share capital
31 December 2020
31 December 2019
$'000
Number
$'000
Number
Authorised, called up, issued and fully paid: Ordinary shares of £0.01 each
7,218
458,482,117
7,212
457,979,755
For details of all movements during the year, see note 14.
24 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.
25 CAPITAL COMMITMENTS
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is US$0.4 million (2019: US$0.6 million) relating to the Group's intangible exploration and evaluation assets.
26 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 31 to 41.
31 Dec 20
31 Dec 19
$'000
$'000
Short term employee benefits
1,111
1,430
Pension contributions
120
133
Share based payments
873
679
2,104
2,242
Directors purchased the following ordinary shares of £0.01 each in the Company as follows
Date
Number
Price (pence)
Sam Moody
15 January 2020
125,000
19.45
Keith Lough
15 January 2020
80,000
19.24
8 June 2020
148,515
8.08
Stewart MacDonald
15 January 2020
80,000
19.24
Alison Baker
8 June 2020
70,000
8.85
John Summers
8 June 2020
74,229
8.08
27 Risk management policies
Risk review
The risks and uncertainties facing the Group are set out in the risk management report. Risks which require further quantification are set out below.
Foreign exchange risks: The Group is exposed to foreign exchange movements on monetary assets and liabilities denominated in currencies other than US$, 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 and restricted cash of US$12.2 million of which US$7.6 million was held in US$ denominations. The following table summarises the split of the Group's assets and liabilities by currency:
Currency denomination of balance
$
£
€
EGP £
$'000
$'000
$'000
$'000
Assets
31 December 2020
253,577
3,115
4,666
-
31 December 2019
494,570
3,454
10,688
1,530
Liabilities
31 December 2020
41,338
43,152
16,301
-
31 December 2019
57,857
41,451
14,820
-
The following table summarises the impact on the Group's pre-tax profit and equity of a reasonably possible change in the US$ 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 2020
(4,004)
4,004
(4,004)
4,004
31 December 2019
(3,800)
3,800
(3,800)
3,800
US$ against euro
31 December 2020
(1,164)
1,164
(1,164)
1,164
31 December 2019
(413)
413
(413)
413
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 2020 were $2,079,000 (31 December 2019: $2,168,000). 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;
(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 2020
Within 1 year
2 to 5 years
More than 5 years
Total contractual cashflows
Carrying amount
$'000
$'000
$'000
$'000
$'000
Other payables
3,790
-
-
3,790
3,790
Lease liability
608
1,473
-
2,081
1,840
Tax payable
-
-
81,867
81,867
40,703
4,398
1,473
81,867
87,738
46,333
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
The financial information set out above does not constitute the Group's statutory accounts for the year ended 31 December 2020, 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.
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