REG - Sound Energy PLC - Final Results
04/05/2023 07:00
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RNS Number : 3488Y Sound Energy PLC 04 May 2023
4 May 2023
SOUND ENERGY PLC
("Sound Energy", "Sound" or the "Company")
FINAL RESULTS
Sound Energy, the transition energy company, announces its audited final
results for the year ended 31 December 2022.
HIGHLIGHTS
Development of the Moroccan Tendrara Production Concession
· Phase 1 Micro LNG project
o Signing of the Notice to Proceed in February 2022
o Drawdown of the Loan Note subscription with Afriquia Gaz commenced in
February 2022
o Site preparation activities at the Tendrara TE-5 Horst commenced in March
2022
o Main civil work (LNG tank foundations) done and checked in early 2023
o Despite the disruptive events occurred in 2022 which delayed the
activities, engineering and manufacturing are both progressing
o Phase 1 LNG delivery scheduled to commence in 2024
· Phase 2 Gas (pipeline) development
o Announced Gazudoc-Mahgreb Europe (''GME'') pipeline interconnection
agreement with ONHYM in March 2022
Project financing
· Appointed Attijariwafa Bank, Morocco's largest bank, as exclusive
lead arranger for the senior debt financing, in June 2022
· The Company launched a process to seek a funding partner in both
the Tendrara Production Concession and in the underexplored but prospective
surrounding exploration permits in the Tendrara basin.
· Indications of interest from several parties were received by
year end and the Company is continuing negotiations.
Exploration
· Extension of Sidi Moktar and Anoual exploration permits by a
further year (subject to ministerial approval)
· Entry into the first complementary period on the Grand Tendrara
exploration permits (subject to ministerial approval)
· Identification and high grading of three potential near term
subsalt drilling opportunities where, importantly, any future discoveries have
the potential to be commercialised through the planned infrastructure of Phase
2
Corporate
· Successful equity raise of £4 million (before expenses) in June
2022
· Post period end, the Company has entered into a full and final
settlement of its tax disputes with the Moroccan tax authorities, subject to
the Court agreeing that all cases be withdrawn
Graham Lyon, Executive Chairman said:
"2022 was a year of real tangible progress for Sound Energy, with the
micro-LNG development at Tendrara contracted to deliver maiden revenues in
early 2024. I am pleased that, as we move further into construction
activities, the Company continues to uphold all our ESG values and deliver our
work in a manner commensurate with our principles. We are pleased to have
settled our outstanding tax matters such that we can optimise our resources on
field development. We have enjoyed a supportive working relationship with
ONHYM, the Ministry and our various contractors in Morocco, and, most
importantly, we continue to benefit from the hard work and dedication of our
own staff. We will continue to work diligently to deliver value and progress
for all our stakeholders during 2023 and beyond as we target to deliver
material developments.''
For further information, visit www.soundenergyplc.com
(http://www.soundenergyplc.com) or follow us on twitter @soundenergyplc
This announcement contains inside information.
Enquiries:
Vigo Consulting - PR Adviser Tel: 44 (0)20 7390 0230
Patrick d'Ancona
Finlay Thomson
Sound Energy Chairman@soundenergyplc.com
Graham Lyon, Executive Chairman
Cenkos Securities - Nominated Adviser Tel: 44 (0)20 7397 8900
Ben Jeynes
Peter Lynch
SP Angel Corporate Finance LLP- Broker Tel:44 (Tel:44) (0) 7789 865 095
Richard Hail
Gneiss Energy Limited- Financial Adviser Tel:44 (Tel:44) (0)20 3983 9263
Jon Fitzpatrick / Paul Weidman
Tel:44 (Tel:44) (0) 7789 865 095
Gneiss Energy Limited- Financial Adviser
Jon Fitzpatrick / Paul Weidman
Tel:44 (Tel:44) (0)20 3983 9263
STATEMENT OF THE EXECUTIVE CHAIRMAN
Introduction
2022 was a ground breaking year for the Company both literally and
figuratively as Sound Energy continued the transition from being a pure
exploration company to a development and production company. In March,
groundworks began on Phase 1, our micro-LNG project at the Tendrara production
concession in Morocco. We also made material progress on Phase 2, the further
development of the concession via a pipeline, primarily on the financing side.
Despite a challenging and rapidly-changing global political and economic
backdrop, the Company was able to successfully deliver a number of milestones
in moving towards becoming a revenue generating company. All exploration
licences were either extended or advanced into the first Complementary Period.
The ongoing dispute with the Moroccan authorities over tax continued to be an
unhelpful drain on the Company's time and resources; and, post period end, the
Company entered into a settlement agreement with Morocco tax authority on a
phased payment schedule of approximately US$2.5 million as a full and final
settlement against a claim of approximately US$23.95 million.
2023 will be an important year, which I hope will see further progress.
Irrespective of the challenges we may face, the team remains fully dedicated
to delivering its project activities and growing the Company as we seek to
create material value for the Company's shareholders.
In February 2022, the Notice to Proceed for our Phase 1 project was issued,
and work commenced. Material progress at site has been made and there is a
more detailed commentary in the operational review. We are pleased that the
Company is moving forward to becoming a revenue generating company.
Progress on the Group's Phase 2 Tendrara Concession development planning
comprising of a Central Processing Facility (CPF), a pipeline and several
development wells, has been made throughout the year. In March, the Company
announced the pipeline interconnection agreement with ONHYM (Office National
des Hydrocarbures et des Mines) to enable the tie-in of the future gas export
pipeline to the GME gas pipeline, a key remaining condition of the binding,
but conditional, gas sale and purchase agreement with ONEE (Office National de
l'Electricite et de l'Eau potable). Additionally, in June, the Company
announced the appointment of Attijariwafa Bank, Morocco's largest bank, as the
exclusive lead arranger of a senior debt financing of up to approximately $250
million for Phase 2. The bank is now undertaking detailed due diligence and we
expect the parties will enter into a Conditioned Financing Offer term sheet in
the near future. Both ONEE and Attijariwafa work hand in hand with Sound to
ensure the prime target of delivering local gas to local power stations
becomes a reality. As such, all have agreed to work to conclude documentation
by mid-2023.
In December, we were pleased to report that ONHYM had extended a number of our
Moroccan licences, all subject to Ministry approval First, the Grand Tendrara
Exploration Permits are continued by two years to 1 October 2024 and will
involve the drilling of one exploration well with a Triassic objective, this
being entry into the First Complementary Period. The Anoual exploration
permits has been extended by 12 months and will also involve the drilling of
one exploration well with a Triassic objective. Finally, the Sidi Moktar
exploration permit has been granted a 12-month extension to 9 October 2023. We
are delighted that the Moroccan authorities remain so supportive of our work
programmes and await Ministerial formal approval.
As part of our wider efforts to bring funding into our plans for Phase 2, we
announced, in August, that we had initiated a formal process to identify a
partner for the Tendrara Production Concession and the surrounding Grand
Tendrara and Anoual exploration permits.
The objective of the area-wide approach is to seek a co-investing partner in
each licence, to both fund the expected balance of Phase 2 development costs
to first gas of c.US$60 million net to the Company's working interest in the
Tendrara Production Concession and to progress an exploration and appraisal
drilling programme in the Grand Tendrara and Anoual exploration permit areas.
Following strong levels of interest in this process, from a wide range of
credible and well-funded parties, the Company received quantified non-binding
indications of interest from several parties and, following review, the
Company is progressing negotiations. Whilst there is no guarantee that a
partner will be selected, it is hoped that such a transaction can be concluded
alongside the debt funding for Phase 2 development.
Corporate
Early in 2022 the Company reviewed the opportunity to create an enlarged group
with Angus Energy to focus on high margin, onshore gas in stable fiscal
environments. On detailed evaluation the opportunity did not meet the criteria
required for Sound Energy and the opportunity was not further pursued.
In June, we successfully raised £4 million through an equity issue, which was
priced at 2 pence per share, with the funds earmarked for pre-development work
on the Tendrara Phase 2 pipeline to FID, new ventures activities and corporate
G&A.
The Company performed its first stakeholder review, setting a benchmark in
early 2022 with a follow up undertaken at year end 2022. The Company strategy
is well recognised amongst Stakeholders, and stakeholder feedback that the
team are considered to be performing well whilst facing technical, commercial,
and resourcing challenges.
Stakeholder meetings and Investor sessions were held; it was a pleasure to
meet so many knowledgeable and passionate shareholders face to face and engage
in meaningful dialogue.
ESG sits at the heart of our business and, as Operations commenced, we have
monitored and taken immediate action at any slight safety issue. Our
environmental releases are recorded and monitored. Corporate Governance is
maintained at all levels. Finally, we engage with our local communities and
have taken steps to not only employ but keep all stakeholders in Morocco well
informed regarding our activities.
The Company continues to manage its financial resources prudently whilst
undertaking several substantial activities. The bridge to fund the company
until first revenues is always under review and the mix of various cash
sources explored, such as debt/equity funding for projects and potential
partnering.
Moroccan tax dispute
In July, a Moroccan tribunal rejected Sound Energy Morocco East's (SEME) claim
to overturn the previous decision of a Moroccan local tax committee to seek a
tax payment of approximately US$ 2.55 million relating to a purported
historical sale of an exploration permit. The Company received the written
judgement late in the year and submitted an appeal within the allotted
timeframe. The Company continues to believe the tax authority has
mis-interpreted licensing law in Morocco.
In a separate case, Sound Energy Morocco SARL AU (SARL AU) received notice
that the Local Taxation Committee supported the Tax Authorities' assumption of
a sale of assets, although the Committee did not present a full calculation of
the amounts it purports to be due on the taxable base amounts it has now
upheld. However, Sound Energy estimated that taxes on those taxable bases
would amount to, approximately, US$ 21.4 million (previously reported as
US$19.7 million for half-year reporting but was unaudited. Following the
year-end audit, the estimate was revised to US$21.4 million). As previously
announced, the Company remains of the strong opinion that the assessments
levied against SARL AU, that certain purported historical intra Group
transactions between SARL AU and SEME have taxable bases, have been wrongly
interpreted by the Moroccan Tax Administration.
Post period end, the Company entered into a settlement agreement with Morocco
tax authority on a phased payment schedule back ended over 6 years of
approximately US$2.5 million as a full and final settlement against a claim of
approximately US$23.95 million.
Board
During 2022, the Board continued to meet regularly and contribute to strategy
and problem solving for the company. A review of the Board's effectiveness was
conducted, the first in several years. Learnings and improvements were
identified and will be included in the Board's 2023 activities.
Graham Lyon
Executive Chairman
Portfolio Review
A blended portfolio of gas assets
Eastern Morocco
Tendrara Production Concession
Permit Area
Located proximate to Gazoduc Maghreb Europe ("GME") pipeline, approximately
120 kilometres to the North. The 522 kilometre-long Moroccan section is owned
by the Moroccan State and operated by ONHYM. The pipeline connects Morocco to
Spanish/Portuguese gas grids as well as Moroccan gas-fired power stations.
Geology
The gas is trapped within the Triassic TAGI(1) reservoir within the structural
fault block, termed the TE-5 Horst, and sealed by the overlying Triassic salt.
Reservoir characteristics are significantly enhanced by application of proven
hydraulic stimulation techniques to increase gas flow rates.
Ongoing and Planned Developments
Potential capacity to address local gas demand in a phased manner with Phase I
being the implementation of a micro-LNG development scheme (currently
underway) and Phase II being the development of a larger scale central
processing facility ("CPF") and gas export pipeline to GME.
Phase 1
Supply of LNG displacing higher carbon energy (such as heavy fuel, petcoke or
imported LPG)
Phase 1 Micro LNG Development - Funding arranged to meet Sound Energy's share
of sanctioned pre first gas development costs
Deployment of field gas treatment, processing, liquefaction and storage
facilities to deliver mobile LNG to buyer at site. The LNG buyer will
distribute and sell on to its growing Moroccan industrial consumers within the
domestic gas market.
Supplies of LNG are to be an annual contractual quantity equivalent to
approximately 100 million standard cubic metres of gas (approximately 3.5
billion standard cubic feet of gas per year) over a ten-year period.
Binding gas sales agreement and associated funding are in place with Afriquia
Gaz, one of the largest LPG distributors in Morocco. A ten-year commitment
from first gas to sell annual contractual quantity of 100 million standard
cubic metres per annum with take or pay agreement priced at $6-$8.346 per
mmBTU ex plant.
Development utilises the existing wells TE-6 and TE-7, with the drilling of
one new well, as required, to maintain the ten-year period of production at
the plateau.
LNG Central Processing Facility is under construction by Italfluid
Micro LNG Plant to be designed, constructed, commissioned, operated and
maintained by Italfluid with guarantees for plant operability
and delivery.
Lease structure (with option to buy):
• Minimal LNG tank construction capital payments at FID, and
following successful completion of Micro LNG Plant commissioning (including
production build-up)
• Leasing solution substantially lowers capital investment
requirements of Phase 1 development
• Daily rental payment paid to Italfluid on guaranteed daily volume
only
• Performance guarantees on plant availability
Phase 2
Gas as a transition fuel flowing to the GME pipeline
Phase 2 Tendrara TE-5 Development
20 inch, 120km Tendrara Gas Export Pipeline ("TGEP"):
• Tie-in to existing GME pipeline (Station M04), approved by the new
operator ONHYM, which took over the GME operatorship at the end of Q4 2021.
• Pipeline EIA permit approved and pipeline corridor fully secured.
Lease agreements signed with the landowners and the first lease payments are
scheduled for first half of 2023.
• CPF EIA permit approved
• EPC Consortium selection process launched in 2022 and ongoing
discussion with bidders
• Gas Sales Agreement ("GSA") with ONEE (Office National de
l'Electricite et de l'Eau potable) signed November 2021 for domestic power
plants for gas-to-power generation (transit via GME line), minimum volume of
0.3 bcm/year (approximately 10.5 billion standard cubic feet of gas per year)
at a fixed sale price over a ten-year term.
• Up to six horizontal wells planned to achieve First Gas (Phase 2)
• Exclusive partnership with Attijariwafabank (which is one of the
top banks in Morocco and in Africa and which is part of the King's holding
MADA) acting as Lead Debt Arranger in order to fund a substantial part of
Phase 2 project. Technical and Legal Due Diligence ongoing.
• Different options to close out equity raise are currently
discussed with financial investors and Vendors.
Exploration
Greater Tendrara - two Triassic TAGI(1) discoveries
Licence Details
Area 14,411 km(2)
Status Petroleum Agreement: Exploration
Effective date 1 October 2018
Term 8 years
Resource Potential Exploration potential in the Triassic TAGI reservoir of 7.52 Tcf gross/5.64
Tcf net (arithmetical sum of mid-case un-risked GIIP) identified in sub-salt
concepts, leads and prospects.
Permit Area
Surrounds the Tendrara Production Concession.
Located for access to Gazoduc Maghreb Europe ("GME") pipeline approximately
120 kilometres to the north. The 522 kilometres long Moroccan section is owned
and operated by the Moroccan State. The pipeline connects Morocco to the
Spanish/Portuguese gas grids as well as the Moroccan gas-fired-power stations.
Geology
Only eight wells drilled across the entire area, all encountered evidence of a
petroleum system. The primary reservoir is the Triassic TAGI(1) charged from
Palaeozoic petroleum source rocks and sealed by the overlying Triassic salt,
which is present across much of the basin. This petroleum play is regionally
extensive and extends into Morocco from Algeria.
Two Triassic TAGI(1) gas discoveries exist within the permit area:
• SBK-1 tested by the previous licence holder at a peak rate of 4.41
mmscf/d in July 2000
• TE-10 flowed gas at non-commercial rates in May 2019
Exploration potential in the Triassic TAGI(1) reservoir of 7.52 Tcf gross/5.64
Tcf net (mid-case unrisked GIIP) identified in sub-salt concepts, leads and
prospects.
Future Developments
A number of targets are available for near-term drilling with two features,
the SBK structure and the TE-4 Horst, high-graded for drilling. Both these
structures were drilled by SBK-1 and TE-4, in 2000 and 2006, respectively, and
both encountered gas shows in the TAGI(1) reservoir. SBK-1 flowed gas to
surface during testing in 2000 at a peak rate of 4.41 mmscf/d post
acidification but was not tested with hydraulic stimulation. TE-4 was tested
in 2006 but did not flow gas to the surface. Hydraulic stimulation has proven
to be a key technology to commercially unlock the potential of the TAGI gas
reservoir in the TE-5 Horst gas accumulation and, accordingly, the Company
believes this offers potential to unlock commerciality elsewhere in the basin.
The gross exploration potential of these high-graded structures, expressed as
GIIP, are as follows:
Target name Unrisked Volume Potential Gas Initially in Place (Bcf) Chance of Success
Gros
s
(100
%)
basi
s
Low Best High Mean
TE-4 Horst Structure 153 260 408 273 36%
SBK-1 Structure 71 130 225 140 50%
A discovery in either structure would have the potential to be commercialised
through the proposed development infrastructure centred on the TE-5 Horst,
with sufficient capacity in the planned Tendrara Export Pipeline or as
standalone mLNG projects.
Subject to approval by the Ministry of Energy and Ministry of Finance, the
Company has elected to enter the voluntary first Complementary period, which
commenced mid-October 2022 with one well commitment to be drilled before
October 2024. A well drilled on either the SBK structure or the TE-4 Horst
would satisfy this commitment.
Anoual
Licence Details
Area 8,873 km(2)
Status Petroleum Agreement: Exploration
Effective date 8 September 2017
Term 10 years
Resource Potential Exploration potential in the Triassic TAGI reservoir of 11.51 Tcf gross/8.63
Tcf net (mid-case un-risked GIIP(2)) identified in sub-salt concepts, leads
and prospects
Permit Area
Located for access to Gazoduc Maghreb Europe ("GME") pipeline approximately
120 kilometres to the North. The 522 kilometre-long Moroccan section is owned
and operated by the Moroccan State. The pipeline connects Morocco to the
Spanish/Portuguese gas grids as well as the Moroccan gas-fired power stations.
Geology
Only one well drilled across the entire area. The primary reservoir is the
Triassic TAGI(1) charged from Palaeozoic petroleum source rocks and sealed by
the overlying Triassic salt, which is present across much of the basin. This
petroleum play is regionally extensive and extends into Morocco from Algeria.
Committed geophysical surveying completed with a single well commitment
remaining.
Exploration potential in the Triassic TAGI(1) reservoir of 11.51 Tcf
gross/8.63 Tcf net (mid-case un-risked GIIP(2)) identified in sub-salt
concepts, leads and prospects.
Future Developments
"M5" prospect high graded for drilling a TAGI(1) target, operational planning
is progressing. The Company's estimation of the gross exploration potential of
the M5 exploration prospect, a possible candidate for the exploration well,
expressed in GIIP, is as follows:
Target name Unrisked Volume Potential Chance of Success
Gas Initially In Place (Bcf)
Gros
s
(100
%)
basi
s
Low Best High Mean
M5 Exploration 332 800 1728 943 21%
(1) Trias Argilo-Gréseux Inférieur ("TAGI") are sandstones deposited in a
fluvial-alluvial environment and are significant oil and gas reservoirs across
Algeria, extending into Morocco
(2) Internal exploration potential estimates, arithmetical sum of mid-case
unrisked Gas Initially In Place ("GIIP")
Sidi Mokhtar
Licence Details
Area 4,712 km(2)
Status Petroleum Agreement: Exploration
Effective date April 2018
Term 10 years
Resource Potential Unrisked exploration potential of 8.9 Tcf mid-case unrisked GIIP following
interpretation of the historical 2D seismic
Permit Area
The permit is in which Sound Energy has a 75% interest is located onshore on
the Atlantic seaboard of Morocco, approximately 100 kilometres to the west of
Marrakech.
In July 2017, the Company reported the results of the re-entry, completion,
perforation and flow testing of the existing Koba-1 well, with a focus on
previously producing relatively shallow gas reservoir.
Strategically, the Company has shifted its focus on the Sidi Mokhtar area
towards what it believes to be the potentially more significant opportunity of
the deeper Triassic TAGI(2) and Palaeozoic gas plays in the region already
demonstrated by the gas and condensate producing adjacent Meskala Field
operated by our partner ONHYM. In June 2018, the Company was awarded a new
eight-year Petroleum Agreement and is now actively seeking a partner to
participate in a geophysical survey programme focused on these deeper
objectives.
In December 2020, the Company announced a further one-year extension to the
initial period of the Sidi Mokhtar licence and that the work programme for the
initial period of the Sidi Mokhtar permit remained unchanged.
Geology
Un-risked exploration potential of up to 8.9 Tcf(1) gross gas initially in
place following interpretation of the historical 2D seismic. The Company
believes the pre-salt plays have been overlooked in the region with limited
drilling to specifically target these deeper successions.
The sub-salt plays are underexplored with more than 60 historical exploration
wells focused on shallower objectives in the Jurassic post-salt carbonate
successions. The few historical sub-salt tests were drilled on poor sub-salt
seismic imaging. Recent improvements in seismic acquisition and processing
technologies are expected to provide enhanced imaging of the sub-salt
structure and geology.
Future Developments
Our next step is to mature the identified leads to drillable prospects with
improved seismic imaging. We aim to acquire new, high-quality 2D seismic data,
focused on improving the sub-salt imaging. This work is hoped to lead to an
exploration well targeting a high-impact gas prospect.
(1) Internal exploration potential estimates, arithmetical sum of mid-case
unrisked Gas Initially In Place (gross)
(2) Trias Argilo-Gréseux Inférieur ("TAGI") are sandstones deposited in a
fluvial-alluvial environment and are significant oil and gas reservoirs across
Algeria, extending into Morocco
LNG Project Review
Sound Energy is a pioneer in Morocco in establishing an onshore small scale
LNG solution to provide LNG to a local market in Africa and to assist the
Moroccan industry in reducing usage of more polluting fuels and reducing CO(2)
emissions.
The mLNG project is a complex project that involves three main parties:
• Afriquia Gaz, which is the LNG offtaker and is in charge of LNG
logistics from the Tendrara gas field to all its customers located in Morocco
(mainly in the western part of Morocco, whereas the Tendrara field is in
Eastern Morocco)
• Italfluid GeoEnergy (Italfluid), which is Sound Energy's partner
in charge of the construction and maintenance of the gas processing and
liquefaction plant through a lease arrangement;
• Sound Energy and its Concession partners including ONHYM, which
are in charge of financing the delivery of the raw gas gathering system, the
upgrade of the current wells ready to produce (TE6 and TE7), and the drilling
of a new well T-112 to be done post first gas production
All the main agreements were signed in 2021 and are in place to enable the
project to be implemented. On behalf of the Concession partners, Sound Energy
released the Notice to Proceed to Italfluid on 15th February 2022.
Progress in 2022
Italfluid mobilised its staff to start the civil work on site and levelled up
the land on which the plant will be located. In the meantime, they started the
engineering specifics, and the work on the main equipment packages required to
be manufactured by its subcontractors.
Despite some challenges encountered since the issue of the Notice to Proceed,
including market volatility due to the war in Ukraine, which has been
disruptive in achieving a reliable schedule and firm costs from the supply
chain subcontractors, Sound Energy and both of its partners, successfully,
managed to progress project activities on site and to start the manufacturing
of several elements. The foundations of the LNG tank, which is the most
complicated part of the civil work on site, are now complete, and have been
checked by the subcontractor in charge of the erection of the LNG tank, which
is another key part of the mLNG plant construction project. Project schedule
is reviewed constantly and remains challenging. Delivery of a commissioned
plant by Italfluid is contracted for Q1 2024.
The first pieces of equipment were delivered on site and are being assembled.
The main elements of the firefighting system have been put in place in the
field. The detailed engineering is still progressing to allow Italfluid to
continue procuring remaining different packages required for commissioning the
plant. Some delays have, nevertheless, been noted on the date for first gas
production but Italfluid, Sound Energy and Afriquia Gaz are working together,
cooperatively, to supply LNG to the local industry in 2024 in an efficient
manner without neglecting safety issues.
Sound Energy have deployed an HSSE supervisor on site to closely monitor the
work to ensure it is done in compliance with the best safe practice.
Sound Energy started the detailed engineering work related to the gas
gathering system and the upgrade operation on wells TE6 and TE7. The work to
upgrade the access road and to bring an alternate source of power supply from
the grid, using the construction of the self-powered generation solution using
raw gas production, are ongoing.
2023 is a key year when all the equipment packages are to be completed and
tested in the workshops and later be brought from workshops located around the
world (USA, Asia, etc.), delivered on site through the main ports in Morocco
(Casablanca, Tanger or Nador) and assembled on site before being all tested.
Sound Energy expects to face some challenges of different nature ( for
example, administrative approval of equipment testing by local authorities
given that this project is the 1(st) LNG project in Morocco, delays in the
supply chain due to the disruptive events which occurred in 2022, cost
increase which can impact our main contractor and its subcontractors and risk
of delay on the offtake side), which are usual for projects in which an
international chain of suppliers is involved, but remain confident that the
three partners Afriquia Gaz, SoundEnergy and Italfluid should make significant
progress in 2023.
Consequently, provided that no new disruptive events slow down progress, and
the final industrial users are ready to make their process switch from their
current fuel to natural gas, LNG plant commissioning and the full solution
commissioning including the well and gas gathering system and Afriquia Gaz
logistic solution, are both expected to be started in 2024.
Financial review
Income Statement
The profit for the year before tax from continuing operations was £6.6
million (2021: £2.4 million). Reversal of impairment of development assets of
£5.7 million (2021: £4.0 million impairment reversal), related to the TE-5
Horst production concession, arose following the results of an impairment
test, which indicated that previously recognised impairment charge should be
reversed. The discount rate and forecast gas price are significant estimated
inputs used by the Company to determine the recoverable amount when
undertaking impairment testing of the Company's TE-5 Horst concession. The
Company has taken account of changes in the wider financial markets during
2022 and has, accordingly, revised the discount rate from 10% at the end of
2021 to 12.5% as at 31 December 2022. The Company previously used forecast gas
price indexed to the Brent price for pricing the forecasted uncontracted gas
sales volumes for impairment testing. Following significant changes in market
conditions during the year, the Company concluded that an average of forecast
gas price referenced to the Title Transfer Facility (''TTF'') in the
Netherlands and the UK National Balancing Point (''NBP'') price is more
representative of the conditions in the gas market than an indexation to the
Brent price.
Accordingly, the Company used an average of TTF and NBP forecast gas price for
its impairment testing as at 31 December 2022.
Administrative costs at £3.1 million were higher than 2021 administration
costs (£1.7 million). During 2022, there were awards of nil cost options of
approximately £0.5 million in settlement of 2020 and 2021 staff bonuses, and
the issue of shares of approximately £0.3 million in settlement of a one-time
bonus to a member of staff. Due to the Company being in a largely continuous
closed period during 2020 and 2021, the issue of shares and awards of the nil
cost options could not be done during that period. During 2022, the Company
adopted a new Long-term Incentive Plan (LTIP) designed to reward, incentivise
and retain the Company's executives and senior management to deliver
sustainable growth for shareholders. Approximately £0.2 million of the
administrative costs related to the LTIP expense incurred during 2022. The
remainder of the increase in administrative costs reflects increased
operational activities, including the taking of FID on Phase 1 Micro-LNG in
February 2022 and pre-FID activities on the Phase 2 gas project.
Foreign exchange gains primarily related to intra-Group loans, which were
partially offset by exchange losses in US dollar and Euro-denominated
borrowings. Foreign exchange gains and losses arising from intercompany loans
that originated on acquisition of Moroccan licences are recognised in the
other comprehensive income section of the statement of comprehensive income.
Cash Flow/Financing
During 2022, an equity issuance raised approximately £3.7 million (2021:
£2.0 million) net of issue costs. Drawdowns from the Company's loan note
facility with Afriquia Gaz amounted to $9.5 million (£7.2 million).
Financing costs were £1.4 million (2021: £2.3 million), primarily due to the
amortised costs of the Euro denominated loan notes and the US dollar Afriquia
loan note facility drawdowns, net of interest capitalised to the development
and exploration licences of £0.1 million (2021: £0.1 million). The decline
in finance costs arose due to full-year impact of the 2021 restructuring of
the Company's Eurobond, which inter alia extended the maturity of the loan
notes to 21 December 2027 and amended the coupon structure from a 5% cash
coupon per annum to a 2% cash coupon per annum together with a deferred 3% per
annum coupon, payable at maturity.
The Group spent £6.2 million (2021: £1.2 million) on investing activities
during 2022. The primary spend related to approximately £4.3 million paid in
advance in respect of the Group's Micro-LNG project. The balance of spend
consisted of expenditure on the Group's Morocco licences and capitalised
general and administrative expenses.
Balance Sheet
As at 31 December 2022, the carrying amount of property, plant and equipment
was £163.4 million (2021: £139.7 million), primarily related to the
development and production assets in Morocco with a carried value of £163.1
million (2021: £139.6 million) after taking account of impairment reversal,
additions and foreign exchange movement.
Intangible assets, with a carrying amount of £36.0 million (2021: £31.6
million), primarily relates to the Group's investment in its exploration
licences in Morocco. Additions of £0.8 million intangible assets primarily
consisted of capitalised general and administrative expenses and £3.6 million
foreign exchange movement recognised.
As part of the 2018 Italy divestment agreement, the Company is entitled to
receive the proceeds, upon the sale, of land associated with the former Badile
onshore exploration permit (''Badile land''). The Company has a carrying
amount of, approximately, £0.6 million (2021: £0.7 million) as interest in
Badile land. The Company expects the sale of the remaining area of Badile land
to be completed during 2023 for gross proceeds of €350,000 and the Company's
obligation for the Badile land remediation, with a carrying amount of £0.4
million (2021: £0.4 million) will terminate upon the sale as it will be taken
over by the buyer of the Badile land.
Non-current prepayments of £4.3 million relate to the Group's Phase 1 mLNG
project.
Other receivables, amounting to £2.8 million (2021: £0.9 million), primarily
related to receivables from our partners in Morocco licences and recoverable
VAT in Morocco.
Trade and other payables amounting to £1.9 million (2021: £1.5 million),
primarily related to payables and accruals for the operations in the Group's
licences in Morocco, where the Group, as operator, recognises 100% of the
liability and receives funds from partners to pay the partners' share.
During 2022, the Company issued 219,518,767 shares of which 200,00,000 were
issued for cash and 19,518,767 were non-cash share issues. The primary
non-cash share issue related to 13,419,891 shares issued as one-time bonus to
the Chief Operating Officer following the delivery of all elements required to
take FID for Phase 1 of the Concession and for establishing the commercial
framework for monetisation of Phase 2 of the Concession.
Post period end in May 2023, the Company entered into a phase payment schedule
with Morocco tax authority for full and
final settlement of the tax cases for approximately £1.6 million (£0.1m
current liability and £1.5m non current liability).
Going Concern
As detailed in note 1 to the financial statements, the Company's cash flow
forecasts, for the next twelve-month period to May 2024, indicate that
additional funding will be required to enable the Company to continue to meet
its obligations. This condition indicates the existence of a material
uncertainty on the Company's ability to continue as a going concern.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2022
Notes 2022 2021
£'000s £'000s
Continuing operations
Revenue - -
Other income 3 43 223
Reversal of impairment on development assets and exploration costs 5,678 4,024
Gross profit 5,721 4,247
Administrative expenses (3,175) (1,695)
Group operating profit from continuing operations 2,546 2,552
Finance revenue 13 4
Foreign exchange gain 5,462 2,210
Finance expense 11 (1,446) (2,306)
Profit for the year before taxation 6,575 2,460
Tax expense 4 (1,602) (42)
Profit for the year after taxation 4,973 2,418
Other comprehensive income
Items that may subsequently be reclassified to the profit and loss account
Foreign currency translation gain 13,373 1,179
Total comprehensive profit for the year 18,346 3,597
Profit for the year attributable to:
Owners of the Company 18,346 3,597
Notes 2022 2021
Pence Pence
Basic and diluted profit per share for the year attributable to the equity 5 0.28 0.16
shareholders of the parent (pence)
Consolidated Balance Sheet
as at 31 December 2022
Notes 2022 2021
£'000s £'000s
Non-current assets
Property, plant and equipment 6 163,362 139,666
Intangible assets 7 36,007 31,598
Prepayments 8 4,272 -
Interest in Badile land 637 663
204,278 171,927
Current assets
Inventories 963 871
Other receivables 2,815 852
Prepayments 139 31
Cash and short-term deposits 3,861 2,913
7,778 4,667
Total assets 212,056 176,594
Current liabilities
Trade and other payables 1,868 1,500
Tax liabilities 4 126 -
Lease liabilities 162 -
Loans and borrowings 11 1,121 -
3,277 1,500
Non-current liabilities
Lease liabilities 121 -
Tax liabilities 4 1,505 -
Loans and borrowings 11 29,068 20,039
30,694 20,039
Total liabilities 33,971 21,539
Net assets 178,085 155,055
Capital and reserves
Share capital and share premium 38,621 34,573
Shares to be issued 404 -
Accumulated surplus 129,004 123,872
Warrant reserve 1,607 1,534
Foreign currency reserve 8,449 (4,924)
Total equity 178,085 155,055
Group Statements of Changes in Equity
for the year ended 31 December 2022
Notes Share Share premium £'000s Shares to be issued Accumulated surplus Warrant reserve £'000s Foreign currency reserves £'000s Total
capital £'000s £'000s equity
£'000s £'000s
At 1 January 2022 16,292 18,281 - 123,872 1,534 (4,924) 155,055
Total profit for the year - - - 4,973 - - 4,973
Other comprehensive income - - - - - 13,373 13,373
Total comprehensive income - - - 4,973 - 13,373 18,346
Issue of share capital 9 2,195 2,246 - - - - 4,441
Share issue costs - (393) - - - - (393)
Fair value of warrants issued during the year - - - - 73 - 73
Vested nil options bonus awards - - 404 - - - 404
Share-based payments 10 - - - 159 - - 159
At 31 December 2022 18,487 20,134 404 129,004 1,607 8,449 178,085
Notes Share Share premium £'000s Accumulated surplus Warrant reserve Foreign currency reserves £'000s Total
capital £'000s £'000s equity
£'000s £'000s
At 1 January 2021 13,262 16,278 117,334 4,090 (6,103) 144,861
Total profit for the year - - 2,418 - - 2,418
Other comprehensive income - - - - 1,179 1,179
Total comprehensive income - - 2,418 - 1,179 3,597
Issue of share capital 9 3,030 2,004 - - - 5,034
Share issue costs - (1) - - - (1)
Fair value of warrants issued during the year 11 - - - 1,534 - 1,534
Reclassification on expiry of warrants - - 4,090 (4,090) - -
Share-based payments 10 - - 30 - - 30
At 31 December 2021 16,292 18,281 123,872 1,534 (4,924) 155,055
Group Statement of Cash Flows
for the year ended 31 December 2022
Notes 2022 2021
£'000s £'000s
Cash flow from operating activities
Cash flow from operations (3,928) (1,513)
Interest received 13 4
Tax paid (7) (42)
Net cash flow from operating activities (3,922) (1,551)
Cash flow from investing activities
Capital expenditure (1,519) (959)
Exploration expenditure (399) (454)
Prepayment for Phase 1 the mLNG project (4,272) -
Receipt from interest in Badile land - 218
Net cash flow from investing activities (6,190) (1,195)
Cash flow from financing activities
Net proceeds from equity issue 3,680 2,000
Loan drawdown 11 7,233 -
Interest payments 11 (431) (878)
Lease payments (58) (31)
Net cash flow from financing activities 10,424 1,091
Net increase/(decrease) in cash and cash equivalents 312 (1,655)
Net foreign exchange difference 636 100
Cash and cash equivalents at the beginning of the year 2,913 4,468
Cash and cash equivalents at the end of the year 3,861 2,913
Note to Statement of Cash Flows
for the year ended 31 December 2022
2022 2021
£'000s
£'000s
Cash flow from operations reconciliation
Profit for the year before tax 6,575 2,460
Finance revenue (13) (4)
(increase)/decrease in drilling inventories (92) 41
(Increase)/decrease in receivables and prepayments (2,071) 511
Increase/(decrease) in accruals and short-term payables 190 (841)
Reversal of impairment on development assets and exploration costs (5,678) (4,024)
Impairment of interest in Badile land 107 50
Depreciation 101 168
Share-based payments charge and remuneration paid in shares 969 30
Finance costs and exchange adjustments (4,016) 96
Cash flow from operations (3,928) (1,513)
Non-cash transactions during the period included the issue of 17,901,146
ordinary shares, to members of staff and former employees of the Company in
settlement of vested Restricted Stock Units (RSU) awards, a one-time bonus to
one member of staff, and vested nil cost options. 1,617,621 ordinary shares
were issued to third parties in settlement of £25,000 due for services
provided.
The Group has provided collateral of $2.5 million (2021: $1.75 million) to the
Moroccan Ministry of Petroleum to guarantee the Group's minimum work programme
obligations for the Anoual, Greater Tendrara and Sidi Mokhtar licences. The
cash is held in a bank account under the control of the Company and, as the
Group expects the funds to be released as soon as the commitment is fulfilled,
on this basis, the amount remains included within cash and cash equivalents.
Notes to the Financial Statements
for the year ended 31 December 2022
1 Accounting Policies
Sound Energy plc is a public limited Company registered and domiciled in
England and Wales under the Companies Act 2006. The Company's registered
office is 20 St Dunstan's Hill, London EC3R 8HL.
The consolidated financial information contained within this announcement does
not constitute statutory accounts for the year ended 31 December 2021 within
the meaning of Section 434 of the Companies Act 2006 but is derived from those
audited accounts. The auditors reported on those accounts and their report was
unqualified and did not contain any statement under section 498(2) or section
498(3) of the Companies Act 2006. The statutory accounts for the year ended 31
December 2022 will be delivered to the Registrar of Companies in due course.
The annual report and statutory accounts will be sent to shareholders and will
be made available to the public on the Company's website:
www.soundenergyplc.com or, upon request, copies may be obtained from the
Company Secretary at the registered office of Sound Energy plc 20 St Dunstan's
Hill, London, EC3R 8HL.
(a) Basis of preparation
The financial statements of the Group and its parent Company have been
prepared in accordance with UK-adopted International Accounting Standards.
The consolidated financial statements have been prepared under the historical
cost convention, except to the extent that the following policies require fair
value adjustments. The Group and its parent Company's financial statements are
presented in sterling (£) and all values are rounded to the nearest thousand
(£'000) except when otherwise indicated.
The principal accounting policies set out below have been consistently applied
to all financial reporting periods presented in these consolidated financial
statements and by all Group entities, unless otherwise stated. All amounts
classified as current are expected to be settled/recovered in less than 12
months unless otherwise stated in the notes to these financial statements.
The Group and its parent Company's financial statements for the year ended 31
December 2022 were authorised for issue by the Board of Directors on 3 May
2023.
Going concern
As at 31 March 2023, the Group's cash balance was £2.6 million (including
approximately £2.0 million held as collateral for a bank guarantee against
licence commitments). The Directors have reviewed the Company's cash flow
forecasts for the next 12-month period to May 2024. The Company's forecasts
and projections indicate that, to fulfil its other obligations, the Company
will require additional funding. The Company commenced its Phase 1 of the
Concession upon taking FID on the micro-LNG project, and has continued to
actively monitor the project schedule, costs and financing. The Company is
progressing Phase 2, pipeline led development of the Concession, and is in the
process of arranging financing and other elements necessary to enable the
taking of Phase 2 FID. The Company continues to engage with its partner,
ONHYM, for payment of approximately £2.1 million for ONHYM's share of
expenditure on the Tendrara Production Concession as at 31 December 2022.
The need for additional financing indicates the existence of a material
uncertainty, which may cast significant doubt about the Group and Company's
ability to continue as a going concern. These financial statements do not
include adjustments that would be required if the Company was unable to
continue as a going concern. The Company continues to exercise rigorous cost
control to conserve cash resources, and the Directors believe that there are
several corporate funding options available to the Company, including a
farm-down on some of the Company's licences, various debt funding options
together with settlement of the outstanding Tendrara Production Concession
receivable balance from ONHYM. Furthermore, based upon the Company's proven
success in raising capital in the London equity market, and based on feedback
from ongoing financing discussions, the Directors have a reasonable
expectation that the Company and the Group will be able to secure the funding
required to continue in operational existence for the foreseeable future, and
have made a judgement that the Group will continue to realise its assets and
discharge its liabilities in the normal course of business. Accordingly, the
Directors have adopted the going concern basis in preparing the consolidated
financial statements.
Use of estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, as well as the disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. The Group based its assumptions and
estimates on parameters available when the consolidated financial statements
were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or circumstances
arising that are beyond the control of the Group. Such changes are reflected
in the assumptions when they occur.
Estimation and assumptions
The key sources of estimation uncertainty, that have a significant risk of
causing material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are the impairment of intangible exploration
and evaluation ("E&E") assets, impairment of development and production
assets, investments, warrants, taxation and the estimation of share-based
payment costs.
E&E, development and production assets
When considering whether E&E assets are impaired, the Group first
considers the IFRS 6 indicators set out in note 11. The making of this
assessment involves judgement concerning the Group's future plans and current
technical and legal assessments. In considering whether development and
production assets are impaired, the Group considers various impairment
indicators and whether any of these indicates existence of an impairment. If
those indicators are met, a full impairment test is performed.
lmpairment test
When value in use calculations are undertaken, management estimates the
expected future cash flows from the asset and chooses a suitable discount rate
to calculate the present value of those cash flows. In undertaking these value
in use calculations, management is required to make use of estimates and
assumptions similar to those described in the treatment of E&E assets
above. Further details are given in note 7.
At 31 December 2022, the Company's market capitalisation was £16.2 million,
which is below the Group and Company's net asset value of £179.8 million and
£168.4 million, respectively. Management considers this to be a possible
indication of impairment of the Group and Company's assets. A significant
portion of the Group's net assets is the carrying value of the development and
producing assets and disclosures relating to management's assessment of
impairment for these assets and the investment in subsidiaries are included in
note 6, on the basis that the recoverability of the investment in subsidiaries
in the Company balance sheet is linked to the value of the development and
producing assets as, ultimately, the cash flows these generate will determine
the subsidiaries' ability to pay returns to the Company.
Impairment exists when the carrying value of an asset or cash generating unit
exceeds its recoverable amount, which is the higher of its fair value less
costs of disposal and its value in use. The fair value less costs of disposal
calculation is based on available data from binding sales transactions,
conducted at arm's length, for similar assets or observable market prices less
incremental costs of disposing of the asset. The value in use calculation is
based on a discounted cash flow model (''DCF model''). The cash flows are
derived from the latest budgets, expenditure and price data in signed gas
sales agreements (for contracted gas sales volumes), market based price data
(for uncontracted gas sales volumes), project contract or agreed heads of
terms, and the latest management plans on project phasing. The recoverable
amount is sensitive to the discount rate and gas price assumption as well as
the Brent price assumption that impacts condensate sales pricing in the DCF
model. The carrying amount of the development and production assets and parent
Company investment in subsidiaries increased by approximately £5.1 million
following a reversal of impairment during the year. The key assumptions used
to determine the recoverable amount of the development and production assets
are disclosed in note 6.
Share-based payments
The estimation of share-based payment costs requires the selection of an
appropriate valuation model, consideration as to the inputs necessary for the
valuation model chosen, and the estimation of the number of awards that will
ultimately vest, inputs for which arise from judgements relating to the
continuing participation of key employees (note 10).
Fair value of warrants
Significant judgement and estimation is also required in the determination of
the fair value of warrants.
Taxation
The Group seeks professional tax and legal advice to make a judgement on
application of tax rules on underlying transactions within the Group or with
third parties. Tax treatment adopted by the Group may be challenged by tax
authorities. In 2020, the Morocco tax authority informed the Group that it
intended to claim taxes on historical acquisition of licences in Eastern
Morocco by the Group. The Group continues to believe that the Morocco tax
authority has misunderstood or misinterpreted the underlying transactions and
appealed against the assessment. The matter is in Court. In May 2021, the
Group received notification from the Morocco tax authority of its intention to
assess additional VAT and withholding taxes on historical transactions of the
Company's subsidiary entity, Sound Energy Morocco SARL AU. The Group appealed
the assessment. [Subsequent to period end, a settlement on the tax cases was
agreed upon as disclosed in note 4.]
Intercompany loans
The Company has funded its subsidiaries through non-interest bearing loans
payable on demand. Given that the Company has no intention to call in the
loans in the foreseeable future, the loans are classified as non-current
investments. Other source of estimate concern IFRS 9 on intercompany loans at
parent Company level but is not considered likely subject to material change
in the coming 12 months.
(b) Investments in subsidiaries
Subsidiaries are all entities over which the Group has the power to govern the
financial and operating policies, is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity. Such power, generally but not
exclusively, accompanies a shareholding of more than one-half of the
voting rights. The Group uses the purchase method of accounting for the
acquisition of subsidiaries. The cost of an acquisition is measured as the
fair value of the assets given, equity instruments issued and liabilities
incurred or assumed at the date of exchange. Costs of acquisition are expensed
during the period they are incurred.
(c) Foreign currency translation
The functional currency of the Company is GBP sterling. The Group also has
subsidiaries whose functional currencies are US dollar.
Transactions in foreign currencies are initially recorded in the functional
currency by applying the spot exchange rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies
are retranslated at the functional currency rate of exchange ruling at the
balance sheet date. All differences are taken to the income statement.
On consolidation, the assets and liabilities of foreign operations are
translated into sterling at the rate of exchange ruling at the balance sheet
date. Income and expenses are translated at weighted average exchange rates
for the year, unless this is not a reasonable approximation of the rates on
the transaction dates. The resulting exchange differences are recognised in
other comprehensive income and held in a separate component of equity. On
disposal of a foreign entity, the deferred cumulative amount recognised in
equity relating to that foreign operation is recognised in the income
statement.
2 Segment Information
The Group categorises its operations into three business segments based on
corporate, exploration and appraisal, and development and production.
In the year ended 31 December 2022, the Group's development, exploration and
appraisal activities were primarily carried out in Morocco.
The Group's reportable segments are based on internal reports about components
of the Group, which are regularly reviewed and used by the Board of Directors,
being the Chief Operating Decision Maker ("CODM"), for strategic decision
making and resource allocation, in order to allocate resources to the segment
and to assess its performance.
Details regarding each of the operations of each reportable segments are
included in the following tables.
Segment results for the year ended 31 December 2022:
Corporate £'000s Development and production £'000s Exploration Total
and appraisal
£'000s
£'000s
Other income - - 43 43
Reversal of impairment of development assets and exploration costs - 5,678 - 5,678
Administration expenses (3,175) - - (3,175)
Operating profit/(loss) segment result (3,175) 5,678 43 2,546
Interest receivable 13 - - 13
Finance costs and exchange adjustments 4,016 - - 4,016
Profit/(loss) for the period before taxation from continuing operations 854 5,678 43 6,575
The segments assets and liabilities at 31 December 2022 is as follows:
Corporate £'000s Development and production £'000s Exploration Total
and appraisal £'000s
£'000s
Non-current assets 944 167,346 35,988 204,278
Current assets 4,224 2,141 1,413 7,778
Liabilities attributable to continuing operations (23,024) (8,301) (2,646) (33,971)
The geographical split of non-current assets is as follows:
Europe Morocco
£'000s £'000s
Development and production assets - 163,074
Interest in Badile land 637 -
Fixtures, fittings and office equipment 5 9
Right of use assets 274 -
Software - 19
Prepayments - 4,272
Exploration and evaluation assets - 35,988
Total 916 203,362
Segment results for the year ended 31 December 2021 were as follows:
Corporate Development Exploration Total
and production
and appraisal
£'000s
£'000s
£'000s £'000s
Other income - - 223 223
Reversal of impairment of development assets and exploration costs - 4,024 - 4,024
Administration expenses (1,695) - - (1,695)
Operating profit/(loss) segment result (1,695) 4,024 223 2,552
Interest receivable 4 - - 4
Finance costs and exchange adjustments (96) - - (96)
Profit/(loss) for the period before taxation from continuing operations (1,787) 4,024 223 2,460
The segments assets and liabilities at 31 December 2021 were as follows:
Corporate Development Exploration Total
and production
and appraisal
£'000s
£'000s
£'000s £'000s
Non-current assets 701 139,628 31,598 171,927
Current assets 3,097 244 1,326 4,667
Liabilities attributable to continuing operations (20,669) (94) (776) (21,539)
The geographical split of non-current assets were as follows:
Europe Morocco
£'000s £'000s
Development and production assets - 139,628
Interest in Badile land 663 -
Fixtures, fittings and office equipment 5 33
Exploration and evaluation assets - 31,598
Total 668 171,259
3 Other Income
2022 2021
£'000s £'000s
Research and development expenditure credit 43 223
During the year, the Company's subsidiaries received credit under the HMRC's
Research and Development Expenditure Credit (RDEC) scheme for qualifying
activities undertaken in prior years.
4 Taxation
(a) Analysis of the tax charge for the year:
2022 2021
£'000s
£'000s
Current tax
UK corporation tax - -
Adjustment to tax expense in respect of prior years (7) (42)
Tax cases settlement (overseas tax) (1,595) -
Total current tax (charge)/credit (1,602) (42)
Deferred tax credit arising in the current year - -
Total tax (charge)/credit (1,602) (42)
(b) Reconciliation of tax charge
2022 2021
£'000s
£'000s
Profit before tax 6,575 2,460
Tax (charge)/credit charged at UK corporation tax rate of 19% (2021: 19%) (1,249) (467)
Tax effect of:
Expenses not deductible for tax purposes (49) (38)
Settlement of tax cases (1,595) -
Temporary differences not recognised 1,276 451
Differences in overseas tax rates 15 12
Total tax (charge)/credit (1,602) (42)
Deferred tax assets have not been recognised in respect of tax losses
available due to the uncertainty of the utilisation of those assets.
Unrecognised tax losses as at 31 December 2022 were estimated to be
approximately £8.8 million (2021: £6.1 million).
In September 2022, Sound Energy Morocco SARL AU (''SARL AU'') a wholly owned
subsidiary of Sound Energy Morocco East Limited (''SEME'') received findings
of the Local Tax Committee (''LTC'') that upheld the tax authority's intended
assessment of approximately $21.4 million (excluding penalties and interest
that may be levied) relating to the fiscal years 2016 and 2017. The Group,
having taken legal and tax advice, continues to believe that the assessment
arises from a misunderstanding of the historical licence relinquishment and
intercompany funding arrangements and has appealed to the Court where the case
is progressing.
On a separate tax case, in December 2022, SEME was notified of the judgement
by the Court indicating that SEME's demand for the annulment of the LTC
finding was rejected. The LTC had upheld the tax authority's claim of tax
liabilities of approximately $2.5 million (excluding penalties and interests
that may be levied), relating to the fiscal years 2016 to 2018, alleging that
there was a disposal of assets by SEME to its partner, Schlumberger, on entry
to a brand-new petroleum agreement for exploration at Grand Tendrara. In
January 2023, SEME appealed against the judgement and the case is progressing
in Court.
Post period end, in May 2023, the Company entered into a phased payment
schedule with Morocco tax authority for full and final settlement of the tax
cases for undiscounted amount of approximately $2.45m (£2.0m). The discounted
amount is approximately $1.97 (£1.63m) with a current liability of
approximately $152k (£126k) and non current liability of approximately $1.82m
(£1.5m). The tax settlement is subject to the Court agreeing that the cases
can be withdrawn.
5 Profit/(loss) per Share
The calculation of basic profit/(loss) per ordinary share is based on the
profit/(loss) after tax and on the weighted average number of ordinary shares
in issue during the year. The calculation of diluted profit/(loss) per share
is based on profit/(loss) after tax on the weighted average number of ordinary
shares in issue, plus the weighted average number of shares that would be
issued if dilutive options, RSUs and warrants were converted into shares.
Basic and diluted profit/(loss) per share is calculated as follows:
2022 2021
£'000s £'000s
Profit for the year after taxation 4,973 2,418
2022 2021
Million Million
Basic weighted average shares in issue 1,752 1,494
Dilutive potential ordinary shares 7 1
Diluted weighted average number of shares 1,759 1,495
2022 2021
Pence Pence
Basic profit per share 0.28 0.16
Diluted profit per share 0.28 0.16
Dilutive potential ordinary shares included in the calculation of diluted
weighted average number of shares relates to nil options granted during the
year. LTIP options awards and warrants totalling 138.8 million (2021: 105
million) were all anti-dilutive and were not included in the calculation of
diluted weighted average number of shares.
6 Property, Plant and Equipment
Development and production assets Fixtures, fittings and office equipment Right-of-use assets 2022
£'000s £'000s £'000s £'000s
Cost
At 1 January 2022 144,735 626 - 145,361
Additions 1,597 4 331 1,932
Disposal - (3) - (3)
Exchange adjustments 16,742 29 - 16,771
At 31 December 2022 163,074 656 331 164,061
Impairment and depreciation
At 1 January 2022 5,107 588 - 5,695
(Reversal)/charge for period (5,678) 30 57 (5,591)
Disposal - (2) - (2)
Exchange adjustments 571 26 - 597
At 31 December 2022 - 642 57 699
Net book amount 163,074 14 274 163,362
Development and production assets Fixtures, fittings and office equipment Right-of-use assets 2021
£'000s £'000s £'000s £'000s
Cost
At 1 January 2021 142,447 778 150 143,375
Additions 997 - - 997
Disposal - (155) (150) (305)
Exchange adjustments 1,291 3 - 1,294
At 31 December 2021 144,735 626 - 145,361
Impairment and depreciation
At 1 January 2021 9,204 665 119 9,988
(Reversal)/charge for period (4,024) 77 31 (3,916)
Disposal - (155) (150) (305)
Exchange adjustments (73) 1 - (72)
At 31 December 2021 5,107 588 - 5,695
Net book amount 139,628 38 - 139,666
Change in estimate
The discount rate and forecast gas price are significant estimates used by the
Company to determine the recoverable amount when undertaking impairment
testing of the Company's TE-5 Horst concession. The Company has taken account
of changes in the market conditions during 2022 and has, accordingly, revised
the discount rate to 12.5% as at 31 December 2022 (2021: 10%). The Company
previously used forecast gas price indexed to the Brent price for pricing the
forecast uncontracted gas sales volumes. Following significant changes in
market conditions during the year, the Company concluded that an average
forecast gas price referenced to the Title Transfer Facility (''TTF'') in the
Netherlands and the UK National Balancing Point (''NBP'') is more
representative of the conditions in the gas market instead of indexation to
the Brent price. Accordingly, the Company used an average of TTF and NBP
forecast gas price for its impairment testing as at 31 December 2022.
The Company's market capitalisation was £16.2 million as at 31 December 2022,
which is below the Group's net assets of
£179.7 million and the Company's net assets of £168.4 million. An impairment
indicator therefore exists. The Company is pursuing a micro-LNG development
(phase 1) followed by full field development (phase 2) of its TE-5 Horst
concession at the Group's Tendrara licence and an impairment test was
undertaken on the carrying amount of the TE-5 Horst concession. The Company
used a DCF model (''Model'') to calculate the recoverable amount for the
Company's share of the TE-5 Horst concession. The Model has an NPV of $207.9
million (£171.8 million) which when compared to the carrying amount of the
development expenditure of £163.1 million indicated that no impairment was
required and as a result a reversal of previously recognised impairment of
approximately £5.7 million was made.
The Model covers the period 2023 to 2049. The input to the Model included a
discount rate of 12.5% and phase 1 gas price of $8.0 per mmbtu rising to the
phase 1 gas price ceiling of $8.346 per mmbtu, indexed using a combination of
the TTF and United States Henry Hub benchmark indexes. Phase 2 gas price used
is a fixed price for the first 10 years for annual volume of 0.3 bcm and the
price for uncontracted volumes referenced to an average forecast price of TTF
and NBP with price range of $37.05 per mmBTU in 2023 and $17.41 per mmBTU in
2033, increasing at 2% per annum thereafter, consistent with published
sources. The base gas prices used are consistent with LNG GSA for the Phase 1
development and Phase 2 gas price is based on GSA signed with ONEE for the
first ten years. The production volumes data was based on the 2018 CPR for
TE-5 Horst.
The well cost assumptions used were based on management's past experience;
mLNG plant leasing costs were based on contract with the micro-LNG plant
contractor; and pipeline related costs were based on Head of Terms entered
into with a consortium of partners that had offered to provide a build, own,
operate and transfer (''BOOT'') solution for the Phase 2 of the development.
The Company's latest forecast covered the period to 2027, but the model
extends to 2049, as that is the period required to produce the gas resources
at TE-5 Horst concession and the economic cut-off. A change in the discount
rate by 1% has a $22.4 million (£18.5 million) impact on the NPV and change
in average TTF and NBP forecast gas price by $1/bbl has a $9.4 million (£7.8
million) impact on the NPV.
7 Intangibles
Software £'000s Exploration 2022
& Evaluation Assets
£'000s
£'000s
Cost
At 1 January 2022 352 42,204 42,556
Additions 23 813 836
Exchange adjustments - 3,577 3,577
At 31 December 2022 375 46,594 46,969
Impairment and depreciation
At the start of the year 352 10,606 10,958
Charge for the year 14 - 14
Exchange adjustments (10) - (10)
At 31 December 2022 356 10,606 10,962
Net book amount 19 35,988 36,007
Software £'000s Exploration 2021
& Evaluation Assets
£'000s
£'000s
Cost
At 1 January 2021 349 41,203 41,552
Additions - 698 698
Exchange adjustments 3 303 306
At 31 December 2021 352 42,204 42,556
Impairment and depreciation
At the start of the year 289 10,606 10,895
Charge for the year 60 - 60
Exchange adjustments 3 - 3
At 31 December 2021 352 10,606 10,958
Net book amount - 31,598 31,598
Exploration and evaluation assets
Details regarding the geography of the Group's E&E assets is contained in
note 2. The Directors assess for impairment when facts and circumstances
suggest that the carrying amount of an E&E asset may exceed its
recoverable amount. In making this assessment, the Directors have regard to
the facts and circumstances noted in IFRS 6 paragraph 20. In performing their
assessment of each of these factors, at 31 December 2022, the Directors have:
a. reviewed the time period that the Group has the right to explore the
area and noted no instances of expiration, or licences that are expected to
expire in the near future and not be renewed;
b. determined that further E&E expenditure is either budgeted or
planned for all licences;
c. not decided to discontinue exploration activity due to there being a
lack of quantifiable mineral resource; and
d. not identified any instances where sufficient data exists to indicate
that there are licences where the E&E spend is unlikely to be recovered
from successful development or sale.
On the basis of the above assessment, the Directors are not aware of any facts
or circumstances that would suggest the carrying amount of the E&E asset
may exceed its recoverable amount. During the year, the Group had capitalised
interest costs of approximately £0.1 million (2021: £0.1 million).
8 Prepayments
Non-current prepayment of £4.3 million relates to activities of the Company's
Phase 1 mLNG Project in the Concession.
9 Capital and Reserves
2022 £'000s 2021 £'000s
Number Number
of shares of shares
Ordinary shares - 1p 1,848,702,674 18,487 1,629,183,907 16,292
2022 2021
Number Number
of shares
of shares
At 1 January 1,629,183,907 1,326,244,389
Issued during the year for cash 200,000,000 159,731,651
Non-cash share issue 19,518,767 143,207,867
At 31 December 1,848,702,674 1,629,183,907
Non-cash transactions during the period included the issue of 17,901,146
ordinary shares to members of staff and former employees of the Company in
settlement of vested Restricted Stock Units (RSU) awards, a one-time bonus to
one member of staff, and vested nil cost options. 1,617,621 ordinary shares
were issued to third parties in settlement of £25,000 due for services
provided.
Share issues
In May 2022, the Company issued 13,419,891 shares as one-time bonus to the
Company's Chief Operating Officer following the delivery of all elements
required to take FID for Phase 1 of the Concession and for establishing the
commercial framework for monetisation of Phase 2 of the Concession.
In May 2022, the Company issued 1,057,211 shares following vesting of
historically awarded RSUs to members of staff and former employees of the
Company.
In May 2022, the Company issued 1,617,621 shares to third parties in
settlement of £25,000 for services provided to the Company.
In June 2022, the Company issued 200,000,000 shares at a price of 2 pence per
share following an equity raise.
In June 2022, the Company issued 3,424,044 shares following the exercise of
nil cost options by members of staff.
Reserves
In 2018, the Company sought, and was granted, a court order approving a
capital reduction following the cancellation of the share premium account.
This resulted in the transfer of £277.7 million to distributable reserves.
10 Share-Based Payments
2022 2021
£'000s £'000s
Expense arising from equity-settled LTIP and RSU awards 159 30
Bonuses paid in shares and nil cost options 810 -
969 30
LTIP Awards
During the year, the Company adopted a new long term incentive plan (the
''LTIP''), designed to reward, incentivise and retain the Company's Executives
and senior management to deliver sustainable growth for shareholders.
The maximum number of awards that may be issued under the LTIP from time to
time will be limited to 3% of the Company's issued share capital on the date
of grant of awards, and, together, with all other options issued by the
Company under any employee share scheme from time to time, will not exceed an
aggregate of 15% of the Company's issued ordinary share capital in a rolling
ten year period. Awards granted under the LTIP will, generally, be subject to
a three-year vesting period from the date of grant, the number of awards,
ultimately, vesting dependent on the grantee's continued service and on
additional performance conditions set by the Remuneration Committee.
The Company issued 48,875,515 options to subscribe for new ordinary shares
under the LTIP, out of which 31,769,085 options were allocated to qualifying
Executives and senior management and the balance of 17,106,430 was retained
for future allocations. The LTIP awards are exercisable at 2.4 pence per share
and expire ten years after the grant.
The fair value of LTIP awards granted was estimated at the date of grant using
a Black-Scholes model, taking account of the terms and conditions upon which
the awards were granted.
The expected life of the LTIP award is based on the maximum award period and
is not necessarily indicative of exercise patterns that may occur. Expected
volatility was determined by reference to the historical volatility of the
Company's share price over a five-year period. The expected volatility
reflects the assumption that the historical volatility is indicative of future
trends, which may not necessarily be the actual outcome. The valuation assumed
an expected life of ten years and used the following additional assumptions
for the LTIP awards granted during the year:
(i) Share price on grant date: 2.53 pence
(ii) Average risk free interest rate: 1.79%
(iii) Expected volatility: 99.11%
(iv) Assumed forfeitures: 0%
(v) Expected dividends: nil
No other features of the LTIP awards were incorporated into the measurement of
fair value. The fair value of the LTIP award granted was 2.26 pence. The
remaining contractual life of the LTIP awards outstanding at 31 December 2022
is 9.3 years. If all the 31,769,085 LTIP awards were exercisable immediately,
new ordinary shares equal to approximately 1.7% of the shares currently in
issue, would be created.
One time bonus and nil-cost options
In May 2022, the Company issued 13,419,891 shares as one-time bonus to a staff
member and also granted 20,236,628 nil-cost options to employees in settlement
of bonus awards. The nil-cost options vested immediately and expire five years
from the date of grant. The nil-cost options were recognised at fair value on
grant date by reference to the closing share price of the Company's shares on
the trading day prior to the grant of the options.
Share options
All previously outstanding share options expired during the year.
2022 Weighted average exercise price 2021 Weighted average
exercise price
Number Pence Number
Pence
Share options outstanding at the start of the year 5,450,000 66.47 8,950,000 44.93
Share options granted - - - -
Share options expired (5,450,000) 66.47 (3,500,000) 22.29
Share options exercised - - - -
Share options outstanding at the end of the year - - 5,450,000 66.47
RSU awards
All RSU awards vested or expired during the year.
2022 2021
Number Number
RSU awards outstanding at the start of the year 1,165,400 1,487,765
Granted during the year - -
Expired during the year (108,189) -
Vested during the year (1,057,211) (322,365)
RSU awards outstanding at the end of the year - 1,165,400
The weighted average share price at the date of vesting of the RSU awards was
2.5 pence (2021: 1.9 pence).
Warrants
As at 31 December 2022, the Company had the following outstanding warrants to
subscribe to the Company's ordinary shares.
2022 Exercise price Expiry date Number Granted/ Expired Number at
(exercised)
31 December
Pence at 1 January
2022 Warrants 2.75 13 June 2025 - 7,056,875 - 7,056,875
2021 Warrants 2.75 21 December 2027 99,999,936 - - 99,999,936
99,999,936 7,056,875 - 107,056,811
2021 Exercise price Expiry date Number Granted/ Expired Number at
(exercised)
31 December
Pence at 1 January
2016 Warrants 30.00 21 June 2021 52,411,273 - (52,411,273) -
2021 Warrants 2.75 21 December 2027 99,999,936 - - 99,999,936
152,411,209 - (52,411,273) 99,999,936
11 Loans and Borrowings
Secured Loan note- Afriquia Total 2021
bonds £'000s 2022 £'000s
£'000s £'000s
Current liabilities
At 1 January - - - 24,709
Amount converted into ordinary shares of the Company - - - (3,000)
Fair value of warrants issued - - - (1,534)
Amortised finance charges - - - 1,564
Interest payments - - - (389)
Exchange adjustments - - - (919)
Reclassification from/(to) non-current liability 1,121 - 1,121 (20,431)
At 31 December 1,121 - 1,121 -
Non-current liabilities
At 1 January 20,039 - 20,039 -
Drawdown during the year - 7,233 7,233 -
Amortised finance charges 1,245 324 1,569 810
Interest payments (431) - (431) (489)
Exchange adjustments 1,123 656 1,779 (713)
Reclassification (to)/from current liabilities (1,121) - (1,121) 20,431
At 31 December 20,855 8,213 29,068 20,039
The Company has €25.32 million secured bonds (the "Bonds"). The Bonds mature
on 21 December 2027. The outstanding principal amount of the Bonds will be
partially repaid, at a rate of 5% every six months, commencing on 21 December
2023. Until maturity, the Bonds bear 2% cash interest paid per annum and a 3%
deferred interest per annum to be paid at redemption. The Company has the
right, at any time until 21 December 2024, to redeem the Bonds in full for 70%
of the principal value then outstanding together with any unpaid interest at
the date of redemption. The Company issued to the Bondholders 99,999,936
warrants to subscribe for new ordinary shares in the Company at an exercise
price of 2.75 pence per share. The warrants expire on 21 December 2027. The
Bonds are secured on the issued share capital of Sound Energy Morocco South
Limited. After taking account of the terms of the Bonds, the effective
interest is approximately
6.2%.
During the year, the Company made drawdowns totaling $9.5 million from the
Company's $18.0 million 6% secured loan note facility with Afriquia Gaz
maturing in December 2033 (the ''Loan''). The drawn down principal bears 6%
interest per annum payable quarterly, but deferred and capitalised
semi-annually, until the second anniversary of entry of the Loan agreement.
Thereafter, principal and deferred interest will be repayable, annually, in
equal installments commencing December 2028. The Loan is secured on the issued
share capital of Sound Energy Meridja Limited. The weighted effective interest
of the drawdowns made during the year is, approximately, 6.2%.
Reconciliation of liabilities arising from financing activities
Non-cash changes
2022 1 January 2022 Cash flows £'000s Amortised finance charges £'000s Exchange adjustments £'000s Office lease 31 December 2022
entry
£'000s £'000s
Long-term borrowings 20,039 6,802 1,569 1,779 - 30,189
Leases - (58) 10 - 331 283
Total liabilities from financing activities 20,039 6,744 1,579 1,779 331 30,472
Non-cash changes
2021 1 January 2021 Cash flows £'000s Amortised finance charges £'000s Exchange adjustments £'000s Issue of equity and fair value of warrants 31 December 2021
£'000s £'000s
Long-term borrowings 24,709 (878) 2,374 (1,632) (4,534) 20,039
Leases 30 (31) 1 - - -
Total liabilities from financing activities 24,739 (909) 2,375 (1,632) (4,534) 20,039
Reconciliation of finance expense
2022 2021
£'000s £'000s
Amortised finance charges 1,569 2,375
Unwinding of discount on lease 10 -
Less capitalised interest (133) (69)
Total external interest for the year 1,446 2,306
12 Post Balance Sheet Events
In March 2023, the Company provided an update on progress being made in
securing financing for the Company's Phase 2 development of the Concession.
Significant progress had been made by the Company's mandated lead finance
arranger, who had completed legal and technical due diligence in respect of
the proposed financing. Whilst other aspects of pre-financing were continuing,
the parties were progressing to detailed financial structuring and had entered
a further amendment to the mandate and extended the deadline by which the
parties would seek to negotiate binding terms for the proposed financing to 28
April 2023. In April 2023, the Company announced that the lead finance
arranger's credit committee consideration had been delayed and was not
expected to be held prior to 28 April 2023. With the lead arranger's credit
committee consideration of the financing re-scheduled, the parties continue to
work in good faith in advancing the financing.
Post period end, in May 2023, the Company entered into a phased payment
schedule with Morocco tax authority for full and final settlement of the tax
cases for undiscounted amount of approximately $2.45m (£2.0m). The discounted
amount is approximately $1.97 (£1.63m) with a current liability of
approximately $152k (£126k) and non current liability of approximately $1.82m
(£1.5m) (note 4). The tax settlement is subject to the Court agreeing that
the cases can be withdrawn.
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