REG - Sound Energy PLC - Half-year Report
07/09/2022 07:00
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RNS Number : 5127Y Sound Energy PLC 07 September 2022
7 September 2022
SOUND ENERGY PLC
("Sound Energy" the ''Company'' and together with its subsidiaries the
"Group")
HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2022
Sound Energy, the transition energy company, announces its unaudited half-year
report for the six months ended 30 June 2022.
HIGHLIGHTS
Development of the Tendrara Production Concession (the ''Concession'')
· Phase 1 Micro LNG project (''Phase 1'')
o Signing of the Notice to Proceed in February 2022
o Initial drawdown of the Loan Note subscription with Afriquia Gaz in
February 2022
o Site preparation activities at the Tendrara TE-5 Horst commenced in March
2022
o Phase 1 first LNG delivery expected year end 2023
· Phase 2 (pipeline) development (''Phase 2'')
o Announced Gazudoc-Mahgreb Europe (''GME'') pipeline interconnection
agreement with ONHYM in March 2022
o Appointed Attijariwafa Bank, Morocco's largest bank, as exclusive lead
arranger for the senior debt financing in June 2022
Post period end
· In August 2022, the Company launched a farm-out process in both
the Concession and in the underexplored but prospective surrounding
exploration permits in the Tendrara basin
· The purpose of the farm-out process is to secure an ambitious
strategic partner for the Concession, and further exploration and appraisal of
the Company's exploration permits in the Tendrara basin
· Identification and high grading 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
· Company considering its options following rejection by Moroccan
tribunal of Sound Energy Morocco East Ltd's request for approximately $2.55m
tax claim to be dropped
Graham Lyon, Executive Chairman said:
"I am extremely proud of what we have achieved in the first half of 2022, with
limited resources: making significant progress on Phase 1 which is targeting
first LNG delivery year end 2023 and advancing debt financing for Phase 2,
which is planned to fund the majority of the Phase 2 development costs. The
Company continues to be ever prudent with our G&A as we also evaluate a
range of new business development opportunities in order to grow and diversify
the Company both in Morocco and further afield. Post period end, we commenced
a farm-out process to secure participation of a strategic partner in both the
development of the Concession and exploration and appraisal of the Company's
exploration permits in Eastern Morocco. The committed Sound Energy team is
diligently pursuing its ongoing development activities targeting production
and revenue in 2023 and will continue to be focused on creating shareholder
value whilst taking bold decisions to enable us to respond to the challenges
(and opportunities) which continue to impact the wider global economy as world
events unfold.''
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 Tel:44 7789 865 095
Richard Hail
STATEMENT FROM THE EXECUTIVE CHAIRMAN
Delivering on Strategy
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.
Phase 1 Micro LNG Project
In February, the Group achieved an important milestone in the development of
Phase 1 with the signing of the Notice to Proceed together with Italfluid
Geology S.r.l. This triggered an initial drawdown of the Loan Note
subscription with Afriquia Gaz S.A (entered into during 2021) and meant that
the project contract for the provision of a gas processing and liquification
facility was now fully in effect and the associated works could commence.
In March, the Group commenced site preparation activities at the Tendrara TE-5
field location, with excavation works promptly completed. The evaporation unit
pit was completed, and the geomembrane installed in preparation for further
construction works.
There has been significant progress with the required access road upgrades
allowing the project to progress. Technical work also progressed with the
computer-based reservoir model optimisation and the well flowline flow
assurance studies completed.
Going forward, project activities to be advanced include wellhead inspection
and servicing tool fabrication, flowlines concept selection, engineering and
owners engineering support.
Phase 2 Tendrara TE-5 Development
Strong progress on the Group's Tendrara Phase 2 Central Processing Facility
(CPF) and pipeline development was made in the first half of 2022. 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. This fulfilled one of the
key remaining conditions 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 exclusive lead arranger of a senior debt
financing of up to approximately $250 million for the pipeline development.
The bank is now undertaking detailed due diligence and the parties expect to
enter into a binding term sheet in H2 2022.
Corporate
In June, the Company raised £4 million (before expenses) to progress a number
of key value creating projects including pre-development activities on the
proposed Tendrara Phase 2 development necessary to enable a final investment
decision, corporate new ventures activities and corporate G&A.
Post period end, in July, the Company announced that a Moroccan tribunal had
rejected its claim to overturn the previous decision of a Moroccan local tax
committee to seek a tax payment of approximately $2.55 million from Sound
Energy Morocco East relating to a purported historical sale of an exploration
permit. Based upon previous specialist tax and legal advice, the Company
continues to vehemently refute the tax claim and is, among other measures,
awaiting the written court judgment and working alongside its specialist
advisors in order to determine the next steps that it will take to defend its
position.
Graham Lyon
Chairman (Executive)
OPERATIONS REVIEW
Tendrara Development: Micro LNG
Sound Energy is pursuing the Field Development Plan underpinning the
Concession centred around the TE-5 Horst gas discovery. The development is
progressing in two phases. Phase 1 is intended to prioritise early first cash
flows from the Concession via a micro LNG (''mLNG'') production scheme. This
is planned to commence production a year ahead of the Phase 2 full field
development that is centred around the installation of a 120km gas export
pipeline to help fully unlock the gas potential of this region and lower the
bar of commerciality for future discoveries. Both phases address different
markets in Morocco; the industrial energy user and the state power producer,
both of which have strong and growing demand, and Tendrara gas playing an
important role in supporting Morocco's strategy to lower carbon emissions.
Progress of the Phase 1 Development Project
This first phase focuses on the existing TE-6 and TE-7 wells of the TE-5
Horst. First gas will be achieved by tying the currently suspended TE-6 and
TE-7 gas wells with flowlines connected to the inlet of a skid mounted,
combined gas processing and mLNG plant. The environmental impact assessment
for the mLNG facility has been approved under the existing full field
development plan.
The Company signed a letter of exclusivity with Italfluid Geoenergy S.r.l.
("Italfluid") in December 2020 to negotiate and enter a binding project
contract, and in February 2022 the Company issued Italfluid the notice to
proceed under the agreed project contract. The project contract includes the
necessary design, construction, commissioning, operation, and maintenance of
the mLNG facilities under a lease to purchase arrangement. The mLNG
facilities, which will also treat, and process raw gas produced from the wells
prior to liquefaction, is the principal part of the surface facilities
required to be built and operated as part of this first phase of development.
LNG will be delivered to on-site storage from the outlet of the mLNG
facilities whereupon Afriquia Gaz will lift LNG for transportation,
distribution and sale to the Moroccan industrial market.
Groundworks for the construction of the mLNG facility commenced in March 2022
following completion of surveying and remediation works to the access road for
the facility. Excavation works for the LNG storage tank, evaporation and flare
pits have been completed with geomembrane installed where necessary.
Preparation for the compressor package foundations has also been completed.
Facilities engineering will continue to progress throughout the year with
major vendors and Italfuild has placed purchase orders for the gas processing
and liquefaction packages together with the LNG storage tank.
The Company has also completed selection of the owner engineering contract,
awarded to Kellogg Brown and Root Ltd alongside contractor selection for flow
assurance and flowline preliminary engineering. The Company awarded scheduled
inspection and routine maintenance of the wellhead Christmas tree assemblies
on TE-6 and TE-7, to Petroleum Equipment Supply Engineering Company Ltd with
planning now underway for inspection and maintenance to take place later in
the year.
The next key steps to progress the project include execution of TE-6 and TE-7
wellhead inspection and servicing and flowline and associated equipment
procurement. Additionally, Italfluid will complete the preliminary engineering
and progress detailed design, place its remaining purchase orders for
equipment packages and bulks, and complete site preparation and commence
civils foundation works.
Completion of the Phase 1 Development Project remains on schedule for Q4 2023,
with first LNG delivery expected by year end 2023.
Progress of the Phase 2 Development Project
In November 2021, the Company announced that the Tendrara JV partners' had
entered into a binding gas sale and purchase agreement (the "GSA") in respect
of the Phase 2 development of the Concession with Morocco's state-owned power
Company ONEE for the sale of natural gas from the Concession in Eastern
Morocco over a 10-year period. ONEE will utilise the gas to fuel its gas-fired
power stations that are connected to the regional GME pipeline.
Under the GSA, the Tendrara JV Partners have conditionally committed to
delivering gas from the Concession to the GME pipeline (point of sale) for an
annual contractual volume up to 350 million cubic meters of natural gas per
year for a period of 10 years, with an annual take or pay volume of 300
million cubic meters.
The GSA includes a fixed unitary price for the annual volume of 0.3 bcm per
annum (approximately 29.0 MMscf/d or a minimum amount of energy of
approximatively 10.5 million MMBtu per annum to be delivered at the point of
sale).
The GSA is conditional upon: all necessary authorisations and permits having
been granted for the construction of the Phase 2 gas installations; the final
investment decision, when taken, by the Tendrara JV Partners, being approved
by the relevant Moroccan government ministries; and finally, the entry by the
Tendrara JV Partners into an interconnection agreement with the operator of
the GME pipeline, together with the commencement of works, for the connection
of the Concession to the GME pipeline.
The conditions to the GSA are required to be satisfied within 90 days of
signature, however an extension is allowable with the consent of all parties.
On the 9 March 2022 the Company announced an extension of a further 90 days.
Whilst the conditions precedent have not yet been concluded ONEE and the
Company are in close discussion regarding an extension.
On 14 March 2022, the Company announced the entry of a pipeline tie-in
agreement to the GME pipeline with ONHYM (GME owner and operator) in respect
of the Phase 2 development of the Concession, and satisfying one of the above
referenced GSA conditions. Pursuant to the pipeline tie-in agreement, ONHYM
has now approved the connection of the Concession via a gas export spur
pipeline to the GME pipeline.
On 23 June 2022, the Company announced that it had entered into an arrangement
and mandate letter with Attijariwafa Bank of Morocco in relation to senior
debt financing for the development of Sound Energy's Concession. The senior
debt facility is intended to have a term of up to 12 years with a facility
size of up to 2.250 billion Moroccan dirhams (approximately US$250 million)
for the partial financing of the currently estimated 3.000 billion Moroccan
dirhams (approximately US$330 million) Phase 2 development cost.
Eastern Morocco
Exploration
Our Eastern Morocco Licences comprising the Concession together with the
Anoual and Greater Tendrara exploration permits are positioned in a region
containing a potential extension of the established petroleum plays of
Algerian Triassic Province and Saharan Hercynian Platform. The presence of the
key geological elements of the Algerian Trias Argilo-Gréseux Inférieur or
'TAGI' gas play are already proven within the licence areas with the
underlying Palaeozoic, representing a significant upside opportunity to be
explored.
These licences cover a surface area of over 23,000 square kilometres, but so
far only thirteen wells have been drilled, of which six are either located
within or local to the Concession. Exploration drilling beyond the region of
the Concession has been limited and the Group maintains a portfolio of
features identified from previous operators' studies, plus new targets
identified by Sound Energy from the recent geophysical data acquisition,
subsequent processing and ongoing interpretation studies. These features are
internally classified as either prospects, leads or concepts based upon their
level of technical maturity and represent potential future exploration
drilling targets.
Whilst the Company has strategically prioritised its gas monetisation strategy
through the phased development of the TE-5 Horst (Tendrara Production
Concession), the Company has also re-evaluated its extensive exploration
portfolio within the Greater Tendrara and Anoual exploration permits
surrounding the Concession. By integrating the acquired data and learnings
from previous drilling campaigns with acquired and reprocessed seismic
datasets, the Company has high graded several potential near term subsalt
drilling opportunities within the TAGI gas reservoir, the proven reservoir of
the TE-5 Horst gas accumulation.
In August 2022, the Company launched a farm-out process in the underexplored
but highly prospective Tendrara Basin in Eastern Morocco. This opportunity
provides access to high impact, short term exploration opportunities, in a
stable country with very attractive fiscal terms. The Company has high graded
three potential near term sub-salt drilling opportunities where, importantly,
future discoveries have the potential to be commercialised through the planned
infrastructure of Phase 2. The Company's intention is to seek to secure an
ambitious strategic partner for both the ongoing and planned development of
the Concession together with exploration and appraisal of the Eastern Morocco
exploration permits.
Near term drillable targets include the exploration prospect 'M5' located on
the Anoual permits, together with the potential of the structures previously
drilled on the Greater Tendrara permits, SBK-1 and TE-4. Both SBK-1 and TE-4,
drilled in 2000 and 2006 respectively, encountered gas shows in the TAGI
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 mechanical
stimulation. TE-4 was tested in 2006 but did not flow gas to the surface.
Mechanical 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 Company looks forward to providing further updates on these near-term
drilling opportunities as further evaluation and planning progresses.
TENDRARA CONCESSION
- 25 years from September 2018
75% interest Operated Production permit 133.5 km(2) acreage, 4 wells drilled
Eastern Morocco licences
GREATER TENDRARA
- 8 years from September 2018
75% interest Operated Exploration permit 14,411 km(2) acreage, 8 wells drilled
ANOUAL
- 9 years and 4 months from September 2017
75% interest Operated Exploration permit 8,873 km(2), 1 well drilled
Southern Morocco licence
SIDI MOKTAR ONSHORE
- 8 years remaining
- Effective date 9/04/2018
75% interest Operated Exploration permit 4,712 km(2)
Southern Morocco Exploration
The Sidi Moktar licence is located in the Essaouira Basin, in Southern
Morocco. The licence covers a combined area of 4,712 km(2). The Group views
the Sidi Moktar licence as an exciting opportunity to explore high impact
prospectivity within the sub-salt Triassic and Palaeozoic plays in the
underexplored Essaouira Basin in the West of Morocco. In June 2018,
Ministerial approval was received for a new 8-year Sidi Moktar Onshore
Petroleum Agreement, consisting of a two years and six months initial period,
a first extension period of three years, and a second extension period of two
years and six months. Due to disruption caused by the impact of the Covid-19
pandemic, during which the Group undertook regular dialogue with the
regulatory authorities, ONHYM approved a 24-month extension to the initial
period of the Sidi Moktar Petroleum Agreement in order for the Group to
complete the committed work programme. The work programme commitments for the
initial period remain unchanged. The lengths of the first and second
complimentary periods, which would commence upon the successful completion of
the initial period, also remain unchanged.
The Sidi Moktar permit hosts a variety of proven plays. The licence hosts 44
vintage wells drilled between the 1950s and the present. Previous exploration
has been predominantly focused on the shallower post-salt plays. The licence
is adjacent to the ONHYM operated Meskala gas and condensate field. The main
reservoirs in the field are Triassic aged sands, directly analogous to the
deeper exploration plays in the Sidi Moktar licence. The Meskala field and its
associated gas processing facility is linked via a pipeline to a state-owned
phosphate plant, which produces fertiliser both for domestic and export
markets. This pipeline passes across the Sidi Moktar licence. The discovery of
the Meskala field proved the existence of a deeper petroleum system in the
basin. Specifically, Meskala provides evidence that Triassic clastic
reservoirs are effective, proves the existence of the overlying salt seal and
provides support for evidence of charge from deep Palaeozoic source rocks.
Based on work undertaken by Sound Energy, the main focus of future exploration
activity in the licence is expected to be within this deeper play fairway. The
Company believes that the deeper, sub-salt Triassic and Palaeozoic plays may
contain significant prospective resources, in excess of any discovered volumes
in the shallower stratigraphy.
The Company's evaluation of the exploration potential of Sidi Moktar,
following an independent technical review, includes a mapped portfolio of
sub-salt, Triassic and Palaeozoic leads in a variety of hydrocarbon trap
types. Sound Energy is developing a work programme to mature the licence with
specific focus on the deeper, sub-salt plays.
Preparations for this seismic acquisition campaign have commenced with the
completion and approval of an EIA in late 2019. This approval, which concerns
25 territorial communes of the province of Essaouira and 11 territorial
communes of the province of Chichaoua, is an important step in the local
permitting process and enables the Group to continue its preparations for the
seismic acquisition campaign.
The Group continues to seek to progress a farm out process for this permit,
offering an opportunity to a technically competent partner to acquire a
material position in this large tract of prospective acreage.
Condensed Interim Consolidated Income Statement
Notes Six months ended Six months ended Year ended
30 June 2022 30 June 2021 31 Dec 2021
Unaudited £'000s Unaudited Audited
£'000s
£'000s
Other income 3 41 221 223
Reversal of impairment/(impairment loss) on development assets and exploration 5,407 (3,684) 4,024
costs
Gross profit/(loss) 5,448 (3,463) 4,247
Administrative expenses (2,018) (1,028) (1,695)
Group operating profit/(loss) from continuing operations 3,430 (4,491) 2,552
Finance revenue 2 1 4
Foreign exchange gain 5,896 416 2,210
Finance expense (720) (1,712) (2,306)
Profit/(loss) for period before taxation 8,608 (5,786) 2,460
Tax expense 4 (7) (42) (42)
Profit/(loss) for period after taxation 8,601 (5,828) 2,418
Other comprehensive income/(loss)
Items that may subsequently be reclassified
to profit and loss account:
Foreign currency translation gain/(loss) 13,136 (1,472) 1,179
Total comprehensive income/(loss) for 21,737 (7,300) 3,597
the period attributable to equity holders
of the parent
Pence Pence Pence
Basic and diluted profit/(loss) per share for the period attributable to 5 0.52 (0.42) 0.16
equity holders of the parent
Condensed Interim Consolidated Balance Sheet
Notes 30 June 30 June 31 Dec
2022
2021 2021
Unaudited
Unaudited Audited
£'000s
£'000s £'000s
Non-current assets
Property, plant and equipment 6 161,631 128,175 139,666
Intangible assets 7 35,434 30,589 31,598
Interest in Badile land 619 730 663
Prepayments 8 3,087 - -
200,771 159,494 171,927
Current assets
Inventories 969 851 871
Other receivables 2,345 1,586 852
Prepayments 233 105 31
Cash and short term deposits 10,513 2,261 2,913
14,060 4,803 4,667
Total assets 214,831 164,297 176,594
Current liabilities
Trade and other payables 6,184 2,068 1,500
6,184 2,068 1,500
Non-current liabilities
Loans and borrowings 9 27,271 20,098 20,039
27,271 20,098 20,039
Total liabilities 33,455 22,166 21,539
Net assets 181,376 142,131 155,055
Capital and reserves
Share capital and share premium 38,621 32,558 34,573
Shares to be issued 404 - -
Warrant reserve 1,607 1,534 1,534
Foreign currency reserve 8,212 (7,575) (4,924)
Accumulated surplus 132,532 115,614 123,872
Total equity 181,376 142,131 155,055
Condensed Interim Consolidated Statement of Changes in Equity
Share Share Accumulated Warrant Foreign currency Total
capital premium Shares to be issued surplus reserve reserves equity
£'000s £'000s £'000s £'000s £'000s £'000s £'000s
At 1 January 2022 16,292 18,281 - 123,872 1,534 (4,924) 155,055
Total profit for the period - - - 8,601 - - 8,601
Other comprehensive income - - - - 13,136 13,136
Total comprehensive income for the period - - 8,601 - 13,136 21,737
-
Issue of share capital 2,195 2,246 - - - - 4,441
Share issue costs - (393) - - - - (393)
Fair value of warrants issued during the period - - - 73 - 73
-
Vested nil options bonus awards - - 404 - - - 404
Share based payments - - - 59 - - 59
At 30 June 2022 (unaudited) 18,487 20,134 404 132,532 1,607 8,212 181,376
Share Share Accumulated Warrant Foreign currency Total
capital premium Shares to be issued surplus reserve reserves equity
£'000s £'000s £'000s £'000s £'000s £'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 for the period - - 2,418 - 1,179 3,597
-
Issue of share capital 3,030 2,004 - - - - 5,034
Share issue costs - (1) - - - - (1)
Fair value of warrants issued during the period - - - 1,534 - 1,534
-
Reclassification on expiry of warrants - - - 4,090 (4,090) - -
Share based payments - - - 30 - - 30
At 31 December 2021 (audited) 16,292 18,281 - 123,872 1,534 (4,924) 155,055
Share Share Accumulated Warrant Foreign currency Total
capital premium Shares to be issued surplus reserve reserves equity
£'000s £'000s £'000s £'000s £'000s £'000s £'000s
At 1 January 2021 13,262 16,278 - 117,334 4,090 (6,103) 144,861
Total loss for the period - - - (5,828) - - (5,828)
Other comprehensive income/(loss) - - - - - (1,472) (1,472)
Total comprehensive loss for the period - - - (5,828) - (1,472) (7,300)
Issue of share capital 1,423 1,595 - - - - 3,018
Fair value of warrants issued during the period - - - 1,534 - 1,534
-
Reclassification on expiry of warrants - - - 4,090 (4,090) - -
Share based payments - - - 18 - - 18
At 30 June 2021 (unaudited) 14,685 17,873 - 115,614 1,534 (7,575) 142,131
Condensed Interim Consolidated Statement of Cash Flows
Six months Six months Year
ended ended ended
30 June 30 June 31 Dec
2022 Unaudited £'000s 2021 Unaudited £'000s 2021
Audited
£'000s
Cash flow from operating activities
Cash flow from operations (1,080) (1,079) (1,513)
Interest received 2 1 4
Tax paid (7) (42) (42)
Net cash flow from operating activities (1,085) (1,120) (1,551)
Cash flow from investing activities
Capital expenditure (770) (290) (959)
Exploration expenditure (311) (246) (454)
Receipt from interest in Badile land - - 218
Net cash flow from investing activities (1,081) (536) (1,195)
Cash flow from financing activities
Net proceeds from equity issue 3,680 - 2,000
Loan drawdown 5,532 - -
Interest payments (214) (587) (878)
Lease payments - (15) (31)
Net cash flow from financing activities 8,998 (602) 1,091
Net increase/(decrease) in cash and cash equivalents 6,832 (2,258) (1,655)
Net foreign exchange difference 768 51 100
Cash and cash equivalents at the beginning of the period 2,913 4,468 4,468
Cash and cash equivalents at the end of the period 10,513 2,261 2,913
Notes to Statement of Cash Flows
Six months Six months Year
ended ended ended
30 June 30 June 31 Dec
2022 Unaudited £'000s 2021 Unaudited £'000s 2021
Audited
£'000s
Cash flow from operations reconciliation
Profit/(loss) for the period before tax 8,608 (5,786) 2,460
Finance revenue (2) (1) (4)
(Increase)/decrease in drilling inventories (98) 61 41
(Increase)/decrease in short term receivables and prepayments (666) (297) 511
Increase/(decrease) in accruals and short term payables 702 (155) (841)
(Reversal of Impairment)/impairment loss on development assets and exploration (5,407) 3,684 (4,024)
costs
Impairment of interest in Badile land 60 - 50
Depreciation 30 101 168
Share based payments charge and bonuses payable in shares 869 18 30
Finance costs and exchange adjustments (5,176) 1,296 96
Cash flow from operations (1,080) (1,079) (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 (note 10).
The Group has provided collateral of $1.75 million (December 2021: $1.75
million) to the Moroccan Ministry of Petroleum to guarantee the Group's
minimum work programme obligations. The cash is held in a bank account under
the control of the Company and as the Group expects the funds to be released
as soon as the commitment is fulfilled on this basis the amount remains
included within cash and cash equivalents.
Notes to the Condensed interim Consolidated Financial Statements for the six
months ended 30 June 2022
1. Basis of preparation
The condensed interim consolidated financial statements do not represent
statutory accounts within the meaning of section 435 of the Companies Act
2006. The financial information for the year ended 31 December 2021 is based
on the statutory accounts for the year ended 31 December 2021. Those accounts,
upon which the auditors issued an unqualified opinion, have been delivered to
the Registrar of Companies and did not contain statements under section 498(2)
or (3) of the Companies Act 2006.
The condensed interim financial information is unaudited and has been prepared
on the basis of the accounting policies set out in the Group's 2021 statutory
accounts and in accordance with IAS 34 Interim Financial Reporting.
The seasonality or cyclicality of operations does not impact on the interim
financial statements.
Going concern
As at 31 August 2022, the Group's unaudited cash balance was £5.5 million
(including approximately £1.5 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 September 2023. The Company
commenced its Phase 1 of the Concession upon taking FID on the mLNG project.
The Company is progressing Phase 2, pipeline led development of the Concession
and is in the process of arranging financing after which FID is expected to be
taken. The Company's forecasts and projections indicate that to fulfil its
other obligations the Company will be required to seek additional funding.
The COVID-19 pandemic has not had a material impact on the Company's
operations. Following the sanctioning of the mLNG project the Company will
continue to monitor the situation as deterioration could impact the supply
chain and affect the project schedule and therefore could impact the Company's
liquidity.
These conditions indicate the existence of a material uncertainty which may
cast significant doubt about the Company's ability to continue as a going
concern. These Interim condensed consolidated 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. Furthermore, based upon the
Company's proven track record 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 Interim condensed consolidated financial statements.
2. Segment information
The Group categorises its operations into three business segments based on
Corporate, Exploration and Appraisal and Development and Production. The
Group's Exploration and Appraisal activities are carried out in Morocco. The
Group's reportable segments are based on internal reports about the components
of the Group which are regularly reviewed by the Board of Directors, being the
Chief Operating Decision Maker (''CODM''), for strategic decision making and
resources allocation to the segment and to assess its performance. The segment
results for the period ended 30 June 2022 are as follows:
Segment results for the period ended 30 June 2022
Corporate £'000s Development & Production £'000s Exploration & Appraisal £'000s Total
£'000s
Other income - - 41 41
Reversal of impairment of development assets and exploration costs - 5,407 - 5,407
Administration expenses (2,018) - - (2,018)
Operating profit segment result (2,018) 5,407 41 3,430
Interest receivable 2 - - 2
Finance costs and exchange adjustments 5,176 - - 5,176
Profit for the period before taxation 3,160 5,407 41 8,608
The segments assets and liabilities at 30 June 2022 are as follows:
Corporate £'000s Development & Production £'000s Exploration & Appraisal £'000s Total
£'000s
Non-current assets 632 164,705 35,434 200,771
Current assets 4,383 6,625 3,052 14,060
Liabilities attributable to continuing operations (17,629) (10,446) (5,380) (33,455)
The geographical split of non-current assets at 30 June 2022 is as follows:
Europe Morocco
£'000s £'000s
Development and production assets - 161,618
Interest in Badile land 619 -
Fixtures, fittings and office equipment 5 8
Prepayment - 3,087
Exploration and evaluation assets - 35,434
Total 624 200,147
Segment results for the period ended 30 June 2021
Corporate £'000s Development & Production £'000s Exploration & Appraisal £'000s Total
£'000s
Other income - - 221 221
Impairment of development assets and exploration costs - (3,684) - (3,684)
Administration expenses (1,028) - - (1,028)
Operating loss segment result (1,028) (3,684) 221 (4,491)
Interest receivable 1 - - 1
Finance costs and exchange adjustments (1,296) - - (1,296)
Loss for the period before taxation (2,323) (3,684) 221 (5,786)
The segments assets and liabilities at 30 June 2021 were as follows:
Corporate Development & Production £'000s Exploration & Appraisal £'000s Total
£'000s £'000s
Non-current assets 804 128,101 30,589 159,494
Current assets 2,573 941 1,289 4,803
Liabilities attributable to continuing operations (21,147) (65) (954) (22,166)
The geographical split of non-current assets at 30 June 2021was as follows:
Europe Morocco
£'000s £'000s
Development and production assets - 128,101
Interest in Badile land 730 -
Fixtures, fittings and office equipment 5 67
Right-of-use assets 2 -
Exploration and evaluation assets - 30,562
Software - 27
Total 737 158,757
Segment results for the year ended 31 December 2021
Corporate £'000s Development and production £'000s Exploration and appraisal £'000s Total
£'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 £'000s Development and production £'000s Exploration and appraisal £'000s Total
£'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 at 31 December 2021 was 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
30 June 30 June 31 Dec
2022 2021 2021
Unaudited Unaudited Audited
£'000s £'000s £'000s
Research and development expenditure credit 41 221 223
During the period 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
30 June 30 June 31 Dec
2022 2021 2021
Unaudited Unaudited Audited
£'000s £'000s £'000s
Tax expense (7) (42) (42)
The tax expense, at a rate of 19%, was paid on receipt of the research and
development expenditure credit (note 3).
In May 2021, the Group received from the tax authority an information request
and a notification of its intention to assess Sound Energy Morocco SARL AU
(''SARL AU''), a wholly owned subsidiary of Sound Energy Morocco East Limited
(''SEME''). The information request levied penalties (approximately $0.3
million) claiming late remittance of withholding taxes and the notification
intended to assess additional VAT and withholding taxes of approximately $19.7
million. The Group believes that the assessment arises from a misunderstanding
of the historical licence relinquishment and intercompany funding arrangements
and appealed to the LTC which has up to 12 months to make a decision.
In September 2021, SEME filed to the Moroccan Court its challenge to the Local
tax committee (''LTC'') finding that upheld the tax authority's claim of tax
liabilities of approx. $2.5 million (excluding penalties and interests that
may be levied) 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 Greater Tendrara.
In July 2022, the Company was informed that a public pronouncement had been
made by the Court indicating that SEME's demand for the annulment of the LTC
finding was rejected. Once the reasons for the decision are received, the
Company, together with its advisors, will decide what further steps it will
take including but not limited to lodging an appeal. The Company has 30 days
from the date of receiving the reasons for the decision to make an appeal.
No liability has been recognised in the interim condensed consolidated
financial statements, but the assessments are considered to be a contingent
liability.
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 period. The calculation of diluted profit/(loss) per share
is based on the profit/(loss) after tax on the weighted average number of
ordinary shares in issue plus weighted average number of shares that would be
issued if dilutive options, restricted stock units and warrants were converted
into shares. Basic and diluted profit/(loss) per share is calculated as
follows:
30 June 30 June 31 December
2022 2021 2021
£'000 £'000 £'000
Profit/(loss) after tax from continuing operations 8,601 (5,828) 2,418
million million million
Weighted average shares in issue 1,650 1,382 1,494
Dilutive potential ordinary shares 9 - 1
Diluted weighted average number of shares 1,659 1,382 1,495
Pence Pence Pence
Basic profit/(loss) per share from continuing operations 0.52 (0.42) 0.16
Diluted profit/(loss) per share from continuing operations 0.52 (0.42) 0.16
6. Property, plant and equipment
30 June 30 June 31 December
2022 2021 2021
£'000s £'000s £'000s
Cost
At start of period 145,361 143,375 143,375
Additions 795 313 997
Disposal (3) - (305)
Exchange adjustments 16,119 (1,762) 1,294
At end of period 162,272 141,926 145,361
Depreciation
At start of period 5,695 9,988 9,988
Charge/(reversal) for period (5,377) 3,753 (3,916)
Disposal (2) - (305)
Exchange adjustments 325 10 (72)
At end of period 641 13,751 5,695
Net book amount 161,631 128,175 139,666
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 the period and accordingly revised
the discount rate from 10% to 14.3% as at 30 June 2022. 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 period, the Company concluded that a forecast gas price
referenced to the Title Transfer Facility (''TTF'') in the Netherlands is more
representative of the current conditions in the gas market instead of
indexation to the Brent price. After taking account of the changes to the
discount rate and referenced forecast gas price to TTF, an impairment reversal
of approximately £5.4 million has been recognised.
7. Intangibles
30 June 30 June 31 December
2022 2021 2021
Unaudited £'000s Unaudited Audited
£'000s £'000s
Cost
At start of period 42,556 41,552 41,552
Additions 401 363 698
Exchange adjustments 3,466 (402) 306
At end of period 46,423 41,513 42,556
Impairment and Depreciation
At start of period 10,958 10,895 10,895
Charge for period - 32 60
Exchange adjustments 31 (3) 3
At end of period 10,989 10,924 10,958
Net book amount 35,434 30,589 31,598
8. Prepayments
Non-current prepayment of £3.1 million relates to activities of the Company's
Phase 1 mLNG Project in the Concession.
9. Loans and borrowings
30 June 30 June 31 December
2022 2021 2021
Unaudited Unaudited Audited
£'000s £'000s £'000s
Non-current liability
Secured bonds 20,941 20,098 20,039
Loan note- Afriquia 6,330 - -
27,271 20,098 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 settled, at a rate of 5% every six months, commencing on 21 December
2023. The Bonds bear until maturity 2% cash interest paid per annum and 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 period, the Company made a drawdown of $7.5 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 instalments commencing December 2028. The loan is secured on the issued
share capital of Sound Energy Meridja Limited. The effective interest on the
drawdown amount is approximately 6.2%.
10. Shares in issue and share based payments
As at 30 June 2022, the Company had 1,848,702,674 ordinary shares in issue.
Share issues during the
period
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 Tendrara Development and for
establishing the commercial framework for monetisation of Phase 2 of the
Tendrara
development.
In May 2022, the Company issued 1,057,211 shares following vesting of
historically awarded Restricted Stock Units (RSU) awards to members of staff
and former
employees.
In May 2022, the Company issued 1,617,621 to third parties as part settlement
for services provided.
In June 2022, the Company issued 200,000,000 shares at 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.
LTIP
During the period, 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 which 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 10 year
period. Awards granted under the LTIP will generally be subject to a 3 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 exercisable at 2.4 pence per share. The LTIP options expire 10
years after the grant.
Nil-cost
options
In May 2022, the Company granted 20,236,628 nil-cost options to employees in
settlement of bonus awards. The nil-cost options vested immediately and expire
5 years from the date of grant.
Warrants
In June 2022 as part of the equity raise, the Company issued broker warrants
over a total of 7,056,875 ordinary shares exercisable at 2.75 pence per share
for a period of 3
years.
Expired options and
RSU
During the period to 30 June 2022, 5.0 million share options and 0.1 million
RSU awards expired.
11. Post Balance Sheet events
In July 2022, the Company was informed that a public pronouncement had been
made by the Court indicating that SEME's demand for the annulment of the LTC
finding was rejected (see Note 4).
In August 2022, the Company provided an update on progress being made in
securing financing for the Company's Phase 2 development of the Concession.
Progress was being made by the Company's mandated bank to secure debt
financing and to finance the balance of the Phase 2 development costs not
covered by debt, the Company announced that it had initiated a formal farm-out
process of the Concession and the surrounding Greater Tendrara and Anoual
exploration permits and had appointed an advisor to manage the
process.
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