30 May 2023
Rockhopper Exploration plc
("Rockhopper", the "Group" or the "Company")
Full-Year Results for the Year Ended 31 December 2022
Rockhopper Exploration plc (AIM: RKH), the oil and gas exploration and production company with key interests in the North Falkland Basin, is pleased to announce its audited results for the year ended 31 December 2022.
2022 HIGHLIGHTS
SEA LION AND NORTH FALKLAND BASIN
· Completion of transaction to bring Navitas Petroleum LP ("Navitas") into the North Falkland Basin licences (the "Transaction")
· Licence interests fully aligned
o Navitas 65% and Operator
o Rockhopper 35%
· Rockhopper benefits from two loans from Navitas
o Pre-Final Investment Decision ("FID") loan: covers all Rockhopper's Phase 1 Sea Lion project costs pre-FID via 8% loan
o Post FID loan: covers two-thirds of Rockhopper's Phase 1 Sea Lion project costs from FID to the earlier of 12 months post-first oil or project completion (for any costs not met by third party debt financing) via 0% loan
o Loans repaid from 85% of Rockhopper's working interest share of Sea Lion Phase 1 project cash flows
· Sea Lion project re-defined
o Total barrels developed: 269mmbbls
o Phased drilling
§ First campaign: 18 wells (11 pre first oil)
§ Further campaign: 5 wells
o Production plateau: 80,000 bbls/d
o Redeployed FPSO
o Gross JV NPV10 US$4.3 billion
o Pre first oil capex US$1.3billion
OMBRINA MARE
· Successful arbitration outcome announced in August 2022
· Awarded compensation c.€190 million plus interest (the "Award")
· Rockhopper sent letter to Italy in September 2022 requesting payment of €247 million
· Italy seeking to annul; Rockhopper contesting annulment; confident in merits of legal case
· Interest accruing at c.€1.25 million per month
· Rockhopper and Italy directed to find an outcome that allows Rockhopper to enforce whilst protecting Italy from risk of non-recoupment should it succeed in annulment
CORPORATE AND FINANCIAL
· Capital raise of US$10.4 million pre-expenses in placing and open offer which completed in July 2022
· Warrants outstanding at 9p per share
· Administrative expenses remain low
Keith Lough, Chairman of Rockhopper, commented:
"As John Summers and I approach our final AGM, we are pleased for shareholders that the Company is in such a strong position. The combination of a new, committed and capable partner in Navitas, a reworked hugely attractive Sea Lion development and the outcome of the Ombrina Mare arbitration sets our company up for what we believe is an exciting moment in our development. We are delighted with the hugely significant progress achieved in the last year and are convinced that we are closer than ever to unlocking the value of Sea Lion for all stakeholders."
Enquiries:
Rockhopper Exploration plc
Sam Moody - Chief Executive Officer
Tel. +44 (0) 20 7390 0234 (via Vigo Consulting)
Canaccord Genuity Limited (NOMAD and Joint Broker)
Henry Fitzgerald-O'Connor/James Asensio/Gordon Hamilton
Tel. +44 (0) 20 7523 8000
Peel Hunt LLP (Joint Broker)
Richard Crichton/Georgia Langoulant
Tel. +44 (0) 20 7418 8900
Vigo Consulting
Patrick d'Ancona/Ben Simons/Fiona Hetherington
Tel. +44 (0) 20 7390 0234
Note regarding financial information disclosure
The financial information set out below does not constitute the Group's statutory accounts for the year ended 31 December 2022, but is derived from those accounts. References within the document may refer to information in the statutory accounts and these will be sent to shareholders and published on the Company's website imminently.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S REVIEW
INTRODUCTION
2022 and the first months of 2023 saw the most material and positive developments at Rockhopper for some time. A combination of conflict in Europe with the terrible events in Ukraine, structural long-term underinvestment in global oil and gas projects, and a post-pandemic recovery in demand saw oil prices remain above US$70 for the year. Against this background, we made real progress, completing the Navitas transaction, extending our licences by two years, strengthening our balance sheet and benefiting from a unanimous Award in our favour from the ICSID Tribunal with compensation of approximately €190 million plus interest. Taken together, these developments put us in our strongest position for many years.
We continue to believe that oil and gas, responsibly produced, will play a hugely important role in the security of global energy supply for many decades to come as the energy transition continues. Indeed, the IEA forecasts global oil demand will grow to over 104 million barrels per day by 2026. Countries such as the United Kingdom continue to import energy from parts of the world with lower environmental standards than are applied in the Falklands, meaning that switching the source of that supply to Sea Lion would result in a reduction in that country's overall greenhouse gas emissions.
Sea Lion has the potential to play an important role not only in securing the financial future and thereby political independence of the Falklands against continued Argentine economic aggression, but also providing the UK with a secure and responsibly produced source of energy.
NAVITAS TRANSACTION COMPLETES; LICENCES EXTENDED
Having announced the exit of Harbour Energy ("Harbour") exit and the formation of the new Rockhopper-Navitas JV in April 2022, we completed what was a complex transaction with numerous moving parts in September of that year. We are delighted to welcome Navitas to the North Falkland Basin.
The transaction sees full alignment of all our North Falkland Basin (NFB) acreage with Navitas taking a 65% interest and becoming Operator of licences PL003, PL004, PL005, PL032, and PL033, which we consider to be the most prospective areas in the basin. Importantly, this removes the risk of future unitisation negotiations within the partnership as the Sea Lion development straddles a block boundary.
As a result of the transaction, Rockhopper benefits from two attractive loans from Navitas. The first loan, which we are currently drawing on, covers all of our net Sea Lion Phase 1 working interest costs (other than licence fees and taxes) at an interest rate of 8% and is available from transaction completion to FID. The second 0% interest loan covers two-thirds of our net working interest Sea Lion Phase 1 costs (other than licence fees and taxes) for project costs not covered by third party debt financing. Both loans are repaid from 85% of Rockhopper's net Sea Lion Phase 1 cash flows.
As part of closing the transaction, the new JV agreed to buy out the remaining unsatisfied exploration well commitment on licences PL032 and PL033 for US$1.8 million, with Rockhopper paying its 35% net working interest amount directly, due to it being effectively a licence fee-related cost. We also extended our South Falkland Basin ("SFB") licences by two years, which we hold 100% as Operator, where all exploration commitments have already been satisfied. Whilst our focus is very much on getting Sea Lion up and running, we continue to work up prospectivity in the SFB where we have what we believe to be a direct analogue feature to the large Darwin discovery held by Borders & Southern Petroleum in adjacent acreage. Between what has been discovered and appraised and what can be inferred, the Company believes the Falkland basins represent a long-term, world-class resource, and the key to unlocking it is getting to FID on Sea Lion.
SEA LION PROJECT RE-DEFINED
In March 2023, only six months after the transaction completed, R announced a material and hugely impressive improvement in the project costs and economics.
Building on previous work carried out by both Rockhopper and Premier Oil ("Premier"), the development team at Navitas re-defined the Sea Lion project such that, when compared to the previous project, production rates are maintained, total oil produced increases, pre-first-oil costs are down by some half a billion dollars and life-of-field cash costs have been reduced to less than US$30 per barrel. All of this has been achieved in an industry environment of rising costs. We are, perhaps not surprisingly, hugely impressed and absolutely delighted at these developments which materially improve the economics and therefore the ability to finance the project.
The new project develops 269 million barrels of oil via a leased, re-deployed FPSO with 23 wells in total spread over two separate drilling campaigns. The first campaign has 18 wells, of which 11 are drilled pre-first-oil with a second campaign of a further five wells to be drilled around 42 months post-first oil.
Navitas continues to refine these development plans and work on the financing with a view to reaching FID during 2024.
Navitas appointed Netherland Sewell & Associates ("NSAI") to review the quantities of oil and gas in the basin and produce a net present value calculation based on the new development plan. Whilst Rockhopper is not an addressee of the report, we endorse its conclusions. That report, which is available in Navitas' annual report which can be found on its web site, contains the following estimates of contingent resources in the Rockhopper Navitas JV acreage1:
| | 1C (mmbbls) | 2C (mmbbls) | 3C (mmbbls) |
| Development pending | 204 | 269 | 368 |
| Development unclarified | 247 | 443 | 761 |
| Total | 451 | 712 | 1,129 |
The NSAI report contains net to Navitas economics. Using the outputs from the report, we have calculated the NPV10 at Brent US$77 flat (the oil price used in the report) gross to the JV on a post-Falkland Island Government ("FIG") royalty, pre-tax basis, to be US$4.3 billion for the first 269 million barrels development alone (2C).
[1]The last independent resource report commissioned directly by Rockhopper was the ERCE 2016 Report which had an estimated 2C value of 517 MMbbls. The Navitas commissioned NSAI Independent Report used an updated approach and assumptions to the ERCE 2016 report.
Rockhopper is not an addressee and has not been party to the production of the NSAI Independent Report. The NSAI Independent Report has been produced to PRMS standards. Rockhopper's technical team which includes Lucy Williams (BSc Geology, MSc Petroleum Geology, Chartered Geologist) had limited opportunity to review the NSAI Independent Report before its publication but endorses the work conducted and conclusions drawn.
OMBRINA MARE
Having started our Arbitration against the Republic of Italy in 2017 we were delighted when, in August 2022, we received a unanimous decision in our favour from the ICSID Tribunal. The Tribunal awarded us compensation of approximately €190 million plus interest at EURIBOR + 4% backdated to January 2016 with a four month pause in that interest from the date of the Award.
In September 2022, having made the appropriate interest calculations, we wrote to Italy requesting payment of €247 million. Italy has not yet responded to that letter.
On 28 October 2022, Italy submitted an application to the ICSID seeking to annul the Award under Article 52 of the ICSID Convention. Italy also requested a provisional stay of the enforcement of the Award pursuant to Article 52(5) of the ICSID Convention. A hearing on whether or not to continue the stay took place on 6 March 2023 and on 24 March 2023 the Committee issued orders with regard to the provisional stay. Those orders were, as follows:
1: that Italy and Rockhopper shall confer - in good faith and using their best efforts to cooperate and find an effective arrangement - for the mitigation of the risk of non-recoupment using a first-class international bank outside the European Union (or as Italy and Rockhopper otherwise agree) to be put into place in anticipation of the termination of the provisional stay of enforcement of the Award. This is to mitigate the perceived risk that, in the event the Award is annulled, Italy may not be able to recover Italian assets seized or frozen by Rockhopper (before the ad hoc Committee issues its decision on annulment) in court enforcement proceedings.
2: that Rockhopper shall, within 30 days of the date of the decision, apprise the Committee of arrangements agreed with Italy for the mitigation of the risk of non-recoupment or that negotiations have failed and, in the latter event, propose concrete arrangements in accordance with the decision for the mitigation of the risk of non-recoupment. Italy may then briefly comment on Rockhopper's proposal within 10 days, constructively highlighting any areas of disagreement between the Parties.
Italy has refused to comply with the Panels instructions. Rockhopper intends to continue to work in good faith to resolve the issues raised regarding non-recoupment and has submitted to the Panel its proposal to mitigate this risk. The provisional stay remains in force during this time, pending further orders from the Committee.
The decision to lift the provisional stay of enforcement is unrelated to the merits of Italy's annulment request. A final hearing in relation to Italy's request to annul the Award is scheduled to take place in Q1 2024. Guidance given by Rockhopper in the Company's 31 October 2022 announcement that the entire annulment process is likely to take 18-24 months from that date remains in place. Rockhopper is currently paying its own legal costs as the previous funding budget put in place to cover the original Arbitration has been discharged.
Whilst proceedings at ICSID are confidential between the parties, ICSID does publish the grounds on which it is possible to seek annulment and statistics on the success of such applications.
The funding budget covering the costs of the Arbitration was fully discharged at the point that we received the Award and that agreement does not cover any costs past that point in time. Rockhopper has paid all legal fees (approximately US$500,000) associated with contesting the provisional stay and is investigating options for covering the balance of costs required to contest the annulment application itself and pursue any potential enforcement actions. Remaining costs to contest annulment are likely to be in the region of £1m to £1.5m. Costs to undertake enforcement are more difficult to quantify given the potential requirement to enforce simultaneously in multiple legal jurisdictions. Previous guidance on timing given at the time Italy made their annulment application remains unchanged.
Whilst there can be no guarantees, given the published statistics on annulment and the strength of our legal case, we remain confident in the likelihood of prevailing and recovering material compensation from Italy in the fullness of time.
CORPORATE MATTERS
Having significantly cut costs, moved offices, and reduced our headcount in 2020 we maintain a keen focus on keeping our General and Administrative ("G&A") costs lean. Whilst managing costs, we have also proactively sought to retain our small team of people who understand the assets in great detail, and who have preserved material exposure to development success for our shareholders, through often very challenging circumstances.
That said, with no material production revenue coming into the business, we undertook our first capital raise for over a decade in 2022. By combining a placing with an open offer we were able to offer all our shareholders the chance to participate in the raise on the same terms as larger institutional investors. By issuing 121,834,936 shares at 7pence per share we raised approximately US$10.4 million before expenses, also issuing one warrant for every two shares taken up with those warrants giving holders the right to buy shares at 9pence. Should the bulk of those warrants be taken up this would provide important additional working capital for the Company.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
ESG and Corporate Responsibility more generally continue to be a focus for Rockhopper. As an oil and gas exploration and production business our role is to ensure that we carry out our operations in a responsible manner. We have visited the Falklands twice during 2023 and pride ourselves on being a long-term partner to the people of the Islands. Once FID on Sea Lion has been achieved, we commit to defining measures to report transparently and mitigate our emissions as far as is practicable.
In recent years, we have retained a small and stable board to support the CEO and his team as we progressed important initiatives such as the ICSID tribunal and transaction with Navitas. Now is therefore an appropriate time for change as we move into a new phase for the Company, having passed through important milestones on both those fronts.
In light of this we plan to phase in a new board led by a new chair. Their focus will be on recovering our tribunal Award and working with the Falkland Islands and UK governments, as well as Navitas, to move towards approval of the Sea Lion development. Work to identify a new chair is underway and we hope to have made the appointment by Q4 of this year. In addition Non-Executive Director, John Summers will also be standing down by Q4 2023 and a replacement is also being sought.
We would like to thank the whole team for their continuing efforts during challenging times. Given our recent progress, we are absolutely convinced that an exciting period lies ahead of the Company.
FINANCIAL REVIEW
OVERVIEW
From a finance perspective, the most significant events in 2022 were:
· Detailed transaction terms agreed with Harbour and Navitas in relation to the Sea Lion project and the Transaction completed in September 2022
· Successful fundraising through Placing and Subscription raising net proceeds of US$6.3 million in June 2022
· Additional US$2.8 million net proceeds raised through Open Offer in July 2022
· Successful ICSID arbitration awardin respect of Ombrina Mare.
o Compensation of €190 million plus interest at EURIBOR + 4%, compounded annually from 29 January 2016 until time of payment
o The Republic of Italy applied to have the Award annulled in October 2022
With the Transaction completing the arrangements with Navitas ensure that Rockhopper is funded going forward for all pre-sanction costs related to the Sea Lion Phase 1 development (other than licence fees and taxes). This, combined with the fundraising, materially strengthens the Group's financial position in the short and medium term and significantly enhances the prospects for a successful project financing for Sea Lion.
The Award was made in September 2022 and Italy applied to have the Award annulled in October 2022. The Arbitration itself is discussed in detail in the Chairman and Chief Executive Officer's Review, but from a financial perspective has no impact on the results for the period to 31 December 2022 as the Award is still considered a contingent asset and as such not recognised in the financial statements. Assuming full recovery of the Award, after payments due to the arbitration funder and success fees due to the Group's legal representation, the Group expects to retain approximately 80% pre-tax. Further analysis has begun to establish the tax treatment on any payments received.
RESULTS FOR THE YEAR
For the year ended 31 December 2022, the Group reported revenues of US$0.7 million (2021: US$0.8 million) and profit after tax of US$35.5 million (2021: loss after tax US$7.8 million). The significant profit after tax was driven by a current year tax income of US$38.8 million (2021: US$0.2 million) This is discussed in more detail below.
REVENUE AND COST OF SALES
The Group's revenues of US$0.7 million (2021: US$0.8 million) during the year relate entirely to the sale of natural gas in the Greater Mediterranean (specifically Italy) region. The reduction in revenues from the comparable period reflects the reduction in production offset by increased realised gas prices. Gas was sold at a price linked to the Italian "PSV" (Virtual Exchange Point) gas marker price.
Cash operating costs, excluding movements on provisions and depreciation charges, amounted to US$0.9 million (2021: US$1.1 million). The reduction in operating costs reflects the reduced production during the year.
Following cessation of production in Italy no revenues are expected going forward.
OPERATING COSTS
Exploration and evaluation expenses are not material in the year. The impairment in the current year mainly due to the write off of costs relating to areas of the North Falkland Basin which will not be developed as part of the Sea Lion Phase 1 project. The reversal of impairment in the prior year relates to impairments against amounts over accrued in 2020.
The Group continues to manage corporate costs and has achieved significant reductions in recurring G&A costs over the last five years. In light of the sharp reduction in oil prices experienced in the first half of 2020, initiatives to further reduce corporate costs commenced in May 2020.
Administrative expenses have increased during the year to US$3.6 million (2021: US$3.3million). It should be noted that these costs include initial legal fees in relation to contesting the Annulment of the Award. Having anticipated Italy might attempt to annul the Award, Rockhopper had a non-binding offer in place to fund both fighting the annulment and enforcing the Award. The Group has instead chosen to use existing resources to fund all legal costs arising from contesting the request by Italy for annulment whilst it explores all acceptable funding possibilities.
The foreign exchange gain in the year is US$6.6 million (2021: US$0.8 million). As with last year, this is mainly movements in relation to the tax arising from the Group's farm-out to Premier in 2012, a GBP denominated balance. Finance expense in the year of US$4.2 million (2021: US$3.5million) also mainly relate to adjustments in relation to this tax balance. This balance is discussed further below.
CASH MOVEMENTS AND CAPITAL EXPENDITURE
At 31 December 2022, the Group had cash and term deposits of US$9.8 million (31 December 2021: US$4.8 million).
Cash and term deposit movements during the period:
| | US$m |
| Opening cash balance (31 December 2021) | 4.8 |
| Revenues | 0.7 |
| Cost of sales | (0.9) |
| Falkland Islands | (1.8) |
| Administrative expenses | (3.4) |
| Net proceeds of fundraising | 9.1 |
| Miscellaneous | 1.3 |
| Closing cash balance (31 December 2022) | 9.8 |
Miscellaneous includes foreign exchange and movements in working capital during the period.
The additions to intangible exploration and evaluation assets during the year of $2.7 million relate principally to the Sea Lion development. Management considered whether there were any indicators of impairment to the carrying value of the intangible and concluded there were none. This is discussed in more detail in note 14 to the financial statements.
FUNDRAISING
During the year Rockhopper raised US$9.1 million, post expenses, by way of a Placing and Subscription in June 2022 and an Open Offer in July 2022. In each case at an issue price of 7 pence per Unit (the "Issue Price"). Each Unit offered comprises one New Ordinary Share and, for every two New Ordinary Shares subscribed for, one Warrant.
Each Warrant gives the holder the right to subscribe for one new Ordinary Share at a price of 9 pence per Ordinary Share (the "Strike Price") at any time from the issue of the Warrants up to (and including) 5.00 p.m. on 31 December 2023 (the "Warrant Exercise Period").
The Placing utilised a cashbox structure and therefore the premium on the ordinary shares and associated costs have in accordance with section 621 of the Companies Act 2006 been recognised within the merger reserve.
The functional currency of Rockhopper is US$. Given the warrant exercise price is determined in GBP, a foreign currency, the Warrants issued under the Subscription do not meet the fixed amount of cash criteria to be treated as equity and therefore have been treated as a derivative financial liability. These were initially valued at US$1.3 million on grant and subsequently revalued to US$1.7 million as at the year end, with the difference being treated as a finance expense.
Accounting standards allows warrants to be treated as equity instruments where the Company offers them pro rata to all of its existing owners equally. Therefore, warrants issued as part of the Open Offer have been treated as equity.
The Placing and Subscription raised net US$6.3 million after associated costs of US$0.8 million. The Open Offer raised net US$2.8 million after associated costs of US$0.4 million.
MERGERS, ACQUISITIONS AND DISPOSALS
The Sea Lion development remains central to the Group's plans and we are excited at the prospect of bringing in a new industry partner, Navitas, especially given their experience in financing projects of a similar scale to Sea Lion.
From a financial perspective Navitas will provide loan funding to the Group to cover the majority of its share of Sea Lion phase one related costs from Transaction completion up to FID through a loan from Navitas with interest charged at 8% per annum (the "Pre-FID Loan"). Subject to a positive FID, Navitas will provide an interest free loan to fund two-thirds of the Group's share of Sea Lion phase one development costs (for any costs not met by third party debt financing).
Certain costs, such as licence costs, are excluded in both instances. Funds drawn under the loans will be repaid from 85% of Rockhopper's working interest share of free cash flow
TAXATION
On the 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with the FIG in relation to the tax arising from the Group's farm out to Premier.
The Tax Settlement Deed confirms the quantum and deferment of the outstanding tax liability and is made under Extra Statutory Concession 16.
The Tax Settlement Deed also states that the Group is entitled to make adjustments to the outstanding tax liability if and to the extent that the Commissioner is satisfied that any part of the Development Carry becomes irrecoverable. Under the Transaction the balance of Development Carry has become irrecoverable and in the Group's judgment no further amounts are due on the Group's 2012 farm-out to Premier.
Given the highly material nature of this judgment professional advice has been sought to confirm that it is probable that if challenged it would be concluded that the Group is entitled to adjust the outstanding tax liability for the irrecoverable Development Carry. As such the Group has derecognised the tax liability to measure it at the most likely amount that the liability will be settled for of US$nil. We are currently engaged with FIG formalising the tax implications of the termination of the 2012 Premier Oil farm down which resulted in irrecoverable carry of approximately US$ 670 million.
Should it be proven that there is no entitlement to adjustment under the Tax Settlement Deed then the outstanding tax liability would be £59.6 million and still payable on the earlier of: (i) the first royalty payment date on Sea Lion; (ii) the date of which Rockhopper disposes of all or a substantial part of the Group's remaining licence interests in the North Falkland Basin; or (iii) a change of control of Rockhopper Exploration plc.
In this unlikely instance Management believes the most likely timing of payment is in line with the first royalty payment. Based on previous correspondence with FIG, Management does not believe that the Transactions completion constitutes a substantial disposal and therefore would not have accelerated the liability should it be shown to be still payable.
The derecognition of the tax liability has led to a tax income of US$38.8 million.
LIQUIDITY, COUNTERPARTY RISK AND GOING CONCERN
The Group monitors its cash position, cash forecasts and liquidity on a regular basis and takes a conservative approach to cash management. At 31 December 2022, the Group had cash and cash equivalents and term deposits of US$9.8 million and $7.3 million as at 30 April 2023.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. Following completion of Navitas coming into the North Falkland Basin (the "Transaction") the Group benefits from loan funding for its share of all Sea Lion pre-sanction costs (other than licence fees and taxes).
Normal working capital requirements and projected recurring expenditure is expected to be around US$4.0 million per year and in addition there are costs associated with maintaining the various licence and concessions in the Group's Italian portfolio.
In addition to the above requirements the third-party funding agreement in place to cover costs in relation to its ICSID arbitration with the Republic of Italy does not cover any costs arising past the date of the Award (23 August 2022). A separate success fee of approximately £3 million is due to the Company's legal representatives on establishing liability and an award requiring Italy to pay at least €25 million in damages. This amount is also not covered by the funding agreement.
Having anticipated Italy might attempt to annul the Award, Rockhopper had a non-binding offer in place to fund both fighting the annulment and enforcing the Award. The Group has instead chosen to use existing resources to fund all legal costs arising from contesting the request by Italy for annulment whilst it explores all funding possibilities.
At the year end the Group had 56.5 million unexercised 9 pence warrants in issue with an expiry date of 31 December 2023. Assuming the share price is in excess of 9 pence, which it is at time of writing, the Group expects the majority of these warrants to be exercised providing additional funds of up to £5million.
However, in the downside circumstances where these outstanding warrants are not fully exercised the Group would have to raise additional funds to meet both legal costs in relation to the arbitration and normal working capital requirements as we work towards project sanction of Sea Lion.
Under the base case forecast, the Group will have sufficient financial headroom to meet forecast cash requirements for the 12 months from the date of approval of these consolidated financial statements. However, in the downside scenarios, in the absence of any mitigating actions, the Group may have insufficient funds to meet its forecast cash requirements. Potential mitigating actions, some of which are outside the Group's control, could include collection/monetisation of arbitration award proceeds, deferral of expenditure or raising additional equity.
Accordingly, after making enquiries and considering the risks described above, the Directors have reviewed the Group's overall position and are of the opinion that the Group is able to operate as a going concern for at least the next twelve months from the date of approval of these financial statements and believe the use of the going concern basis is appropriate.
Nonetheless, for the avoidance of doubt, in the downside scenarios in which the remaining warrants are not exercised and additional funding is not raised and in the absence of potential mitigating actions indicates the existence of a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern and the Group may therefore be unable to realise its assets and discharge its liabilities in the ordinary course of business. The Consolidated and Parent Company financial statements do not include adjustments that would result if the Group was unable to continue as a going concern.
PRINCIPAL RISK AND UNCERTAINTIES
A detailed review of the potential risks and uncertainties which could impact the Group are outlined elsewhere in this Strategic Report. The Group identified its key risks at the end of 2022 as being:
1 oil price volatility;
2 access to capital;
3 joint venture partner alignment; and
4 failure of joint venture partners to secure the requisite funding to allow a Sea Lion Final Investment Decision.
| CONSOLIDATED INCOME STATEMENT | |||
| for the year ended 31 December 2022 | |||
| |
Notes | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
|
Revenue |
3 |
652 |
839 |
| Other cost of sales | | (1,965) | (1,141) |
| Depreciation and impairment of oil and gas assets | | - | (667) |
| Total cost of sales | 4 | (1,965) | (1,808) |
| Gross loss | | (1,313) | (969) |
| Other exploration and evaluation expenses | | (24) | (398) |
| Write off/write back of exploration costs | | (307) | 273 |
| Total exploration and evaluation expenses | 5 | (331) | (125) |
| Administrative expenses | 6 | (3,625) | (3,263) |
| Charge for share based payments | 9 | (393) | (824) |
| Foreign exchange movement | 10 | 6,596 | 789 |
| Results from operating activities | | 934 | (4,392) |
| Finance income | 11 | 23 | 4 |
| Finance expense | 11 | (4,175) | (3,522) |
| Loss before tax | | (3,218) | (7,910) |
| Tax income | 12 | 38,763 | 151 |
| Profit/(loss) for the year attributable to the equity shareholders of the parent company | | 35,545 | (7,759) |
| Profit/(loss) per share attributable to the equity shareholders of the parent company: cents | | | |
| Basic | 13 | 6.77 | (1.70) |
| Diluted | 13 | 6.68 | (1.70) |
| All operating income and operating gains and losses relate to continuing activities. | | | |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| ||
| for the year ended 31 December 2022 |
| |
| | Year ended 31 December | Year ended 31 December |
| 2022 | 2021 | |
| $'000 | $'000 | |
| Profit/(loss) for the year | 35,545 | (7,759) |
| Items that may be reclassified to profit or loss Exchange differences on translation of foreign operations |
1,683 |
889 |
| Total comprehensive profit/(loss) for the year | 37,228 | (6,870) |
| The notes on pages 51 to 71 form an integral part of these consolidated financial statements. | | |
| CONSOLIDATED BALANCE SHEET | | ||
| as at 31 December 2022 | |||
| |
Notes |
31 December 2022 $'000 |
31 December 2021 $'000 |
| Non current assets | | | |
| Exploration and evaluation assets | 14 | 251,970 | 249,583 |
| Property, plant and equipment | 15 | 68 | 201 |
| Finance lease receivable | | 444 | 730 |
| Current assets | | | |
| Other receivables | 16 | 1,406 | 2,074 |
| Finance lease receivable | | 259 | 288 |
| Restricted cash | | 519 | 579 |
| Term deposits | 17 | 8,736 | - |
| Cash and cash equivalents | | 1,059 | 4,822 |
| Total assets | | 264,461 | 258,277 |
| Current liabilities | | | |
| Other payables | 18 | 3,383 | 2,000 |
| Derivative financial liabilities | 19 | 1,744 | - |
| Lease liability | | 209 | 286 |
| Non-current liabilities | | | |
| Lease liability | | 344 | 842 |
| Tax payable | 20 | - | 43,204 |
| Provisions | 21 | 19,177 | 18,287 |
| Deferred tax liability | 22 | 39,137 | 39,137 |
| Total liabilities | | 63,994 | 103,756 |
| Equity | | | |
| Share capital | 23 | 8,771 | 7,218 |
| Share premium | 24 | 6,518 | 3,622 |
| Share based remuneration | 24 | 1,492 | 4,327 |
| Own shares held in trust | 24 | (1,494) | (3,342) |
| Merger reserve | 24 | 78,208 | 74,332 |
| Foreign currency translation reserve | 24 | (7,999) | (9,682) |
| Special reserve | 24 | 175,281 | 175,281 |
| Retained losses | 24 | (60,310) | (97,235) |
| Attributable to the equity shareholders of the company | | 200,467 | 154,521 |
| Total liabilities and equity | | 264,461 | 258,277 |
These financial statements on pages 47 to 71 were approved by the directors and authorised for issue on 26 May 2023 and are signed on their behalf by:
Samuel Moody
Chief Executive Officer
Rockhopper Exploration plc Registered Company Number: 05250250
The notes on pages 51 to 71 form an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2022
| |
Share capital |
Share premium |
Share based remuneration |
Shares held in trust |
Merger reserve | Foreign currency translation reserve |
Special reserve |
Retained losses |
Total equity |
| $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | $'000 | |
| Balance at 31 December 2020 | 7,218 | 3,622 | 5,973 | (3,342) | 74,332 | (10,571) | 188,028 | (104,693) | 160,567 |
| Loss for the year | - | - | - | - | - | - | - | (7,759) | ( 7,759) |
| Other comprehensive profit for the year | - | - | - | - | - | 889 | - | - | 889 |
| Total comprehensive loss for the year | - | - | - | - | - | 889 | - | (7,759) | (6,870) |
| Share based payments (see note 9) | - | - | 824 | - | - | - | - | - | 824 |
| Other transfers | - | - | (2,470) | - | - | - | (12,747) | 15,217 | - |
| Balance at 31 December 2021 | 7,218 | 3,622 | 4,327 | (3,342) | 74,332 | (9,682) | 175,281 | (97,235) | 154,521 |
| Profit for the year | - | - | - | - | - | - | - | 35,545 | 35,545 |
| Other comprehensive profit for the year | - | - | - | - | - | 1,683 | - | - | 1,683 |
| Total comprehensive profit for the year | - | - | - | - | - | 1,683 | - | 35,545 | 37,228 |
| Share based payments (see note 9) | - | - | 393 | - | - | - | - | - | 393 |
| Share issues (net of expenses) | 1,553 | 2,896 | - | - | 3,876 | - | - | - | 8,325 |
| Other transfers | - | - | (3,228) | 1,848 | - | - | - | 1,380 | - |
| Balance at 31 December 2022 | 8,771 | 6,518 | 1,492 | (1,494) | 78,208 | (7,999) | 175,281 | (60,310) | 200,467 |
See note 24 for a description of each of the reserves of the Group
Other transfers relate to amounts transferred from the Share based remuneration reserve to either Retained losses for options that have either not vested or expired or Shares held in trust where they have been used to satisfy exercised options.
| CONSOLIDATED STATEMENT OF CASH FLOWS | |||
| for the year ended 31 December 2022 | | ||
| |
Notes |
Year ended 31 December 2022 $'000 |
Year ended 31 December 2021 $'000 |
| Cash flows from operating activities | | | |
| Loss before tax | | (3,218) | (7,910) |
| Adjustments to reconcile net losses to cash: | | | |
| Depreciation | 15 | 122 | 1,082 |
| Share based payment charge | 9 | 393 | 824 |
| Written off/(back) exploration costs | 14 | 307 | (273) |
| Profit/(loss) on disposal of property, plant and equipment | | 8 | (156) |
| Finance expense | | 4,167 | 3,601 |
| Foreign exchange | | (7,764) | (640) |
| Operating cash flows before movements in working capital | | (5,985) | (3,472) |
| Changes in: | | | |
| Inventories | | - | 287 |
| Other receivables | | 1,564 | 176 |
| Payables | | 837 | 420 |
| Movement on provisions | | 1,030 | 6 |
| Cash utilised by operating activities | | (2,554) | (2,583) |
| Cash flows from investing activities | | | |
| Capitalised expenditure on exploration and evaluation assets | | (1,797) | (3,248) |
| Purchase of property, plant and equipment | | - | (228) |
| Disposal of assets held for sale | | - | - |
| Investing cash flows before movements in capital balances | | (1,797) | (3,476) |
| Changes in: | | | |
| Restricted cash | | - | (100) |
| Term deposits | | (8,697) | - |
| Cash flow from investing activities | | (10,494) | (3,576) |
| Cash flows from financing activities | | | |
| Issue of ordinary shares | | 9,038 | - |
| Expenses associated with issue of ordinary shares | | (1,194) | - |
| Issue of warrants classified as derivative financial liabilities | | 1,250 | - |
| Exercise of warrants and share options | | 481 | - |
| Lease liability payments | | (257) | (587) |
| Cash flow from financing activities | | 9,318 | (587) |
| Currency translation differences relating to cash and cash equivalents | | (33) | (112) |
| Net cash flow | | (3,730) | (6,746) |
| Cash and cash equivalents brought forward | | 4,822 | 11,680 |
| Cash and cash equivalents carried forward | | 1,059 | 4,822 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2022
1. Accounting policies
1.1 Group and its operations
Rockhopper Exploration plc, the 'Company', a public limited company quoted on AIM, incorporated and domiciled in the United Kingdom ('UK'), together with its subsidiaries, collectively 'the 'Group' holds certain exploration licences for the exploration and exploitation of oil and gas in the Falkland Islands. In addition, it has operations in the Greater Mediterranean based in Italy. The registered office of the Company is Warner House, 123 Castle Street, Salisbury, Wiltshire, SP1 3TB.
1.2 Statement of compliance
The consolidated financial statements of the Group have been prepared on a going concern basis in accordance with UK adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006. The consolidated financial statements were approved for issue by the board of directors on 26 May 2023 and are subject to approval at the Annual General Meeting of shareholders on 29 June 2023.
1.3 Basis of preparation
The results upon which these financial statements have been based were prepared using the accounting policies set out below. These policies have been consistently applied unless otherwise stated.
These consolidated financial statements have been prepared under the historical cost convention with the exception of Share Based Payments which are at fair value.
Items included in the results of each of the Group's entities are measured in the currency of the primary economic environment in which that entity operates (the "functional currency"). The consolidated financial statements are presented in US Dollars ($), which is Rockhopper Exploration plc's functional currency.
All values are rounded to the nearest thousand dollars ($'000) or thousand pounds (£'000), except when otherwise indicated.
1.4 Change in accounting policy
Changes in accounting standards
In the current year the following new and revised Standards and Interpretations have been adopted. None of these have a material impact on the Group's annual results.
Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37); Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16); Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and References to Conceptual Framework (Amendments to IFRS 3).
New accounting pronouncements
At 31 December 2022, the following Standards, Amendments and Interpretations were in issue but not yet effective:
The following amendments are effective for the period beginning 1 January 2023:
· Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2);
· Definition of Accounting Estimates (Amendments to IAS 8); and
· Deferred Tax Related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12).
The following amendments are effective for the period beginning 1 January 2024:
· IFRS 16 Leases (Amendment - Liability in a Sale and Leaseback)
· IAS 1 Presentation of Financial Statements (Amendment - Classification of Liabilities as Current or Non-current)
· IAS 1 Presentation of Financial Statements (Amendment - Non-current Liabilities with Covenants)
The Directors do not expect that the adoption of the above Standards, Amendments and Interpretations will have a material impact on the Financial Statements of the Group in future periods.
1.5 Going concern
The Group monitors its cash position, cash forecasts and liquidity on a regular basis and takes a conservative approach to cash management. At 31 December 2022, the Group had cash and cash equivalents and term deposits of US$9.8 million.
Historically, the Group's largest annual expenditure has related to pre-sanction costs associated with the Sea Lion development. Following completion of Navitas coming into the North Falkland Basin (the "Transaction") the Group benefits from loan funding for its share of all Sea Lion pre-sanction costs (other than licence fees and taxes).
Normal working capital requirements and projected recurring expenditure is expected to be around US$4.0 million per year and in addition there are costs associated with maintaining the various licence and concessions in the Group's Italian portfolio.
In addition to the above requirements the third-party funding agreement in place to cover costs in relation to its ICSID arbitration with the Republic of Italy does not cover any costs arising past the date of the Award (23 August 2022). A separate success fee of approximately £3 million is due to the Company's legal representatives on establishing liability and an award requiring Italy to pay at least €25 million in damages. This amount is also not covered by the funding agreement.
Having anticipated Italy might attempt to annul the Award, Rockhopper had a non-binding offer in place to fund both fighting the annulment and enforcing the Award. The Group has instead chosen to use existing resources to fund all legal costs arising from contesting the request by Italy for annulment whilst it explores all funding possibilities.
At the year end the Group had 56.5 million unexercised 9 pence warrants in issue with an expiry date of 31 December 2023. Assuming the share price is in excess of 9 pence, which it is at time of writing, the Group expects the majority of these warrants to be exercised providing additional funds of up to £5million.
However, in the downside circumstances where these outstanding warrants are not fully exercised the Group would have to raise additional funds to meet both legal costs in relation to the arbitration and normal working capital requirements as we work towards project sanction of Sea Lion.
Under the base case forecast, the Group will have sufficient financial headroom to meet forecast cash requirements for the 12 months from the date of approval of these consolidated financial statements. However, in the downside scenarios, in the absence of any mitigating actions, the Group may have insufficient funds to meet its forecast cash requirements. Potential mitigating actions, some of which are outside the Group's control, could include collection/monetisation of arbitration award proceeds, deferral of expenditure or raising additional equity.
Accordingly, after making enquiries and considering the risks described above, the Directors have reviewed the Group's overall position and are of the opinion that the Group is able to operate as a going concern for at least the next twelve months from the date of approval of these financial statements and believe the use of the going concern basis is appropriate.
Nonetheless, for the avoidance of doubt, in the downside scenarios in which the remaining warrants are not exercised and additional funding is not raised and in the absence of potential mitigating actions indicates the existence of a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern and the Group may therefore be unable to realise its assets and discharge its liabilities in the ordinary course of business. The Consolidated and Parent Company financial statements do not include adjustments that would result if the Group was unable to continue as a going concern.
1.6 Significant accounting policies
(A) Basis of accounting
The Group has identified the accounting policies that are most significant to its business operations and the understanding of its results. These accounting policies are those which involve the most complex or subjective decisions or assessments, and relate to the capitalisation of exploration expenditure. The determination of this is fundamental to the financial results and position and requires management to make
a complex judgement based on information and data that may change in future periods.
Since these policies involve the use of assumptions and subjective judgements as to future events and are subject to change, the use of different assumptions or data could produce materially different results. The measurement basis that has been applied in preparing the results is historical cost.
The significant accounting policies adopted in the preparation of the results are set out below.
(B) Basis of consolidation
The Group financial statements consolidate the financial statements of the Company and its subsidiary undertakings drawn up to 31 December 2022. Subsidiaries are those entities over which the Group has control. Control is achieved where the Group has the power over the subsidiary, is exposed, or has rights to variable returns from the subsidiary and has the ability to use its power to affect its returns. All subsidiaries are
100 per cent owned by the Group and there are no non-controlling interests.
The results of subsidiaries acquired or disposed of during the year are included in the income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries acquired to bring the accounting policies used into line with those used by other members of the Group.
All intercompany balances have been eliminated on consolidation.
(C) Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker as required by IFRS8 Operating Segments. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the board of directors.
The Group's operations are made up of three segments, the oil and gas exploration and production activities in the geographical regions of the Falkland Islands and the Greater Mediterranean region as well as its corporate activities centered in the UK.
(D) Oil and gas assets
The Group applies the successful efforts method of accounting for exploration and evaluation ("E&E") costs, having regard to the requirements of IFRS6 - 'Exploration for and evaluation of mineral resources'.
Exploration and evaluation ("E&E") expenditure Expensed exploration & evaluation costs
Expenditure on costs incurred prior to obtaining the legal rights to explore an area, geological and geophysical costs are expensed immediately to the income statement.
Capitalised intangible exploration and evaluation assets
All directly attributable E&E costs are initially capitalised in well, field, prospect, or other specific, cost pools as appropriate, pending determination.
Treatment of intangible E&E assets at conclusion of appraisal activities
Intangible E&E assets related to each cost pool are carried forward until the existence, or otherwise, of commercial reserves have been determined, subject to certain limitations including review for indicators of impairment. If commercial reserves have been discovered, the carrying value, after any impairment loss, of the relevant E&E assets, are then reclassified as development and production assets within property plant and equipment. However, if commercial reserves have not been found, the capitalised costs are charged to expense.
Development and production assets
Development and production assets, classified within property, plant and equipment, are accumulated generally on a field-by-field basis and represent the costs of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets.
Depreciation of producing assets
The net book values of producing assets are depreciated generally on a field-by-field basis using the unit-of-production method by reference to the ratio of production in the year and the related commercial reserves of the field, taking into account the future development expenditure necessary to bring those reserves into production.
Disposals
Net cash proceeds from any disposal of an intangible E&E asset are initially credited against the previously capitalised costs. Any surplus proceeds are credited to the income statement.
Decommissioning
Provision for decommissioning is recognised in full when the related facilities are installed. The amount recognised is the present value of the estimated future expenditure. A corresponding amount equivalent to the provision is also recognised as part of the cost of the related oil and gas property. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in the present value of the estimated expenditure is dealt with prospectively as an adjustment to the provision and the oil and gas property. The unwinding of the discount is included in finance cost.
(E) Leases
The Group as lessee
The Group assesses whether a contract is, or contains, a lease, at inception of the contract. The Group recognises a right-of-use asset and
a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases and leases of low value assets.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. Lease payments included in the measurement of the lease liability comprise fixed lease payments. The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.
The Group has not had to remeasure the lease liability (and makes a corresponding adjustment to the related right-of-use asset).
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the right-of-use asset. The depreciation starts at the commencement date of the lease. The right-of-use assets are presented as a separate line in the notes to the financial statements.
Payment associated with short term leases and leases of low value assets are recognised on a straight-line basis as an expense in profit or loss. Short term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture.
The Group as lessor
The Group enters into lease agreements as a lessor with respect to some sublets on its rented offices. Leases for which the Group is a lessor are classified as a finance lease as the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's net investment outstanding in respect of the leases.
(F) Capital commitments
Capital commitments include all projects for which specific board approval has been obtained up to the reporting date. Projects still under investigation for which specific board approvals have not yet been obtained are excluded.
(G) Foreign currency translation
Functional and presentation currency:
Items included in the results of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates, the functional currency. The consolidated financial statements are presented in US$ as this best reflects the economic environment of the oil exploration sector in which the Group operates. The Group maintains the financial statements of the parent and subsidiary undertakings in their functional currency. Where applicable, the Group translates subsidiary financial statements into the presentation currency, US$, using the closing rate method for assets and liabilities which are translated at the rate of exchange prevailing at the balance sheet date and rates at the date of transactions for income statement accounts. Differences are taken through the Statement of Comprehensive Income to reserves.
Transactions and balances:
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are expensed in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
The year end rates of exchange were:
|
| 31 December 2022 | 31 December 2021 |
| £ : US$ | 1.21 | 1.35 |
| € : US | 1.07 | 1.13 |
(H) Revenue and income
(i) Revenue from contracts with customers
Revenue arising from the sale of goods is recognised when a performance obligation is satisfied by transferring control over a product or service to a customer, which is typically at the point that title passes, and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided in the normal course of business, net of discounts, customs duties and sales taxes.
(ii) Investment income
Investment income consists of interest receivable for the period. Interest income is recognised as it accrues, taking into account the effective yield on the investment.
(I) Non-derivative financial instruments
Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument.
(i) Other receivables
Other receivables are initially measured at fair value. They are subsequently measured at amortised cost using the effective interest method, less loss allowance. A provision for impairment is made where there is objective evidence that amounts will not be recovered in accordance with original terms of the agreement. The Group recognises an allowance for expected credit losses for all debt instruments not held at fair value through profit or loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate.
(ii) Restricted cash
Restricted cash is disclosed separately on the face of the balance sheet and denoted as restricted when it is not under the exclusive control of the Group. All amounts relate to balances held as security in relation to property leases.
(iii) Term deposits
Term deposits are disclosed separately on the face of the balance sheet when their term is equal or greater than one month and they are unbreakable.
(iv) Cash and cash equivalents
They are stated at carrying value which is deemed to be fair value. Cash and cash equivalents comprise instant access bank balances as well as a small amount of cash in hand.
(v) Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
(vi) Account and other payables
Account payables are initially recognised at fair value and subsequently at amortised cost using the effective interest method.
(vii) Derivative financial liabilities
Derivative financial liabilities are initially recognised and carried at fair value with changes in fair value recognised in the consolidated statement of comprehensive income.
(viii) Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
(J) Income taxes and deferred taxation
The current tax amount is based on the taxable profits or losses of the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before tax and amounts charged or credited to reserves as appropriate.
Deferred taxation is recognised in respect of all taxable temporary differences that have originated but not reversed at the balance sheet date where a transaction or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the exception that deferred tax assets are recognised only to the extent that the directors consider that it is probable that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which temporary differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
(K) Share based remuneration
The Group issues equity settled share based payments to certain employees. Equity settled share based payments are measured at fair value (excluding the effect of non market based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for non market based vesting conditions.
Fair value is measured by use of either Binomial or Monte-Carlo simulation. The main assumptions are disclosed in note 9.
Cash settled share based payment transactions result in a liability. Services received and liability incurred are measured initially at fair value of the liability at grant date, and the liability is remeasured each reporting period until settlement. The liability is recognised on a straight line basis over the period that services are rendered.
2. Use of estimates, assumptions and judgements
The Group makes estimates, assumptions and judgements that affect the reported amounts of assets and liabilities. Estimates, assumptions and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed in the relevant note as is sensitivity analysis as required. The key areas identified and the relevant note are as follows:
· Going concern (note 1.5) - judgements
· Carrying value of intangible exploration and evaluation assets (note 14) - judgements
· Tax payable (note 20) - judgements
· Decommissioning costs (note 21) - judgements and estimates
3. Revenue and segmental information
The Group's operations are located and managed in three geographically distinct business units; namely the Falkland Islands, the Greater Mediterranean, and Corporate (or UK). Some of the business units currently do not generate any revenue or have any material operating income. The business is only engaged in one business of upstream oil and gas exploration and production.
|
| Falkland Islands | Greater Mediterranean | Corporate | Total |
| Year ended 31 December 2022 | $'000 | $'000 | $'000 | $'000 |
| Revenue | - | 652 | - | 652 |
| Cost of sales | - | (1,965) | - | (1,965) |
| Gross profit | - | (1,313) | - | (1,313) |
| Exploration and evaluation reverse/(expense) | (307) | (1) | (23) | (331) |
| Administrative expenses | - | (1,109) | (2,516) | (3,625) |
| Charge for share based payments | - | - | (393) | (393) |
| Foreign exchange gain | 7,756 | - | (1,160) | 6,596 |
| Results from operating activities and other income | 7,449 | (2,423) | (4,092) | 934 |
| Finance income | - | - | 23 | 23 |
| Finance expense | (3,394) | (272) | (509) | (4,175) |
| Loss before tax | 4,055 | (2,695) | (4,578) | (3,218) |
| Tax | 38,763 | - | - | 38,763 |
| Loss for year | 42,818 | (2,695) | (4,578) | 35,545 |
| Reporting segments assets | 251,589 | 1,785 | 11,087 | 264,461 |
| Reporting segments liabilities | 43,995 | 16,287 | 3,712 | 63,994 |
| Depreciation and impairments | 307 | 50 | 72 | 429 |
|
| Falkland Islands | Greater Mediterranean | Corporate | Total | |||
| Year ended 31 December 2021 | $'000 | $'000 | $'000 | $'000 | |||
| Revenue | - | 839 | - | 839 | |||
| Cost of sales | - | (1,808) | - | (1,808) | |||
| Gross profit | - | (969) | - | (969) | |||
| Exploration and evaluation reverse/(expense) | 608 | (589) | (144) | (125) | |||
| Restructuring costs | - | - | - | - | |||
| Recurring administrative costs | - | (823) | (2,440) | (3,263) | |||
| Total administrative expenses | - | (823) | (2,440) | (3,263) | |||
| Charge for share based payments | - | - | (824) | (824) | |||
| Foreign exchange gain | 680 | - | 109 | 789 | |||
| Results from operating activities and other income | 1,288 | (2,381) | (3,299) | (4,392) | |||
| Finance income | - | 1 | 3 | 4 | |||
| Finance expense | (3,180) | (285) | (57) | (3,522) | |||
| Loss before tax | (1,892) | (2,665) | (3,353) | (7,910) | |||
| Tax | - | 151 | - | 151 | |||
| Loss for year | (1,892) | (2,514) | (3,353) | (7,759) | |||
| Reporting segments assets | 249,211 | 2,440 | 6,626 | 258,277 | |||
| Reporting segments liabilities | 86,341 | 15,337 | 2,078 | 103,756 | |||
| Depreciation and impairments | (608) | 1,117 | 300 | 809 | |||
All of the Group's worldwide sales revenues of oil and gas US$652 thousand (2021: US$839 thousand) arose from contracts to customers. Total revenue relates to revenue from one customer (2021: one customer).
| 4. Cost of sales |
Year ended |
Year ended |
| | 31 December | 31 December |
| | 2022 | 2021 |
| | $'000 | $'000 |
| Other cost of sales | 927 | 1,141 |
| Increase in decommissioning provisions (see note 21) | 1,038 | - |
| Depreciation of oil and gas assets (see note 15) | - | 667 |
| | 1,965 | 1,808 |
|
5. Exploration and evaluation expenses |
Year ended |
Year ended |
| | 31 December | 31 December |
| | 2022 | 2021 |
| | $'000 | $'000 |
| Allocated from administrative expenses (see note 6) | 22 | 143 |
| Exploration costs written off/(back) (see note 14) | 307 | (273) |
| Other exploration and evaluation expenses | 2 | 255 |
| | 331 | 125 |
| 6. Administrative expenses | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Directors' remuneration excluding benefits (see note 7) | 1,066 | 1,114 |
| Other employees' salaries | 1,175 | 930 |
| National insurance costs | 383 | 453 |
| Pension costs | 91 | 89 |
| Employee benefit costs | 53 | 45 |
| Total staff costs | 2,768 | 2,631 |
| Amounts reallocated | (648) | (751) |
| Total staff costs charged to administrative expenses | 2,120 | 1,880 |
| Auditors' remuneration (see note 8) | 156 | 161 |
| Other professional fees | 674 | 554 |
| Other | 857 | 867 |
| Depreciation | 117 | 149 |
| Amounts reallocated | (299) | (348) |
| | 3,625 | 3,263 |
The average number of full time equivalent staff employed during the year was 8 (2021: 9). As at the year end the Group employed (including part time) 11 staff, 7 of which were in the UK and 4 in Italy.
Amounts reallocated relate to the costs of staff and associated overhead in relation to non administrative tasks. These costs are allocated to exploration and evaluation expenses or capitalised as part of the intangible exploration and evaluation assets as appropriate.
| 7. Directors' remuneration | | |
|
| Year ended | Year ended |
|
| 31 December | 31 December |
|
| 2022 | 2021 |
|
| $'000 | $'000 |
| Executive salaries 1 | 746 | 725 |
| Company pension contributions to money purchase schemes & pension cash allowance | 62 | 117 |
| Benefits | 7 | 8 |
| Non-executive fees | 258 | 272 |
|
| 1,073 | 1,122 |
|
The total remuneration of the highest paid director in GBP was: | | |
|
| Year ended | Year ended |
|
| 31 December | 31 December |
|
| 2022 | 2021 |
|
| £'000 | £'000 |
| Annual salary 1 | 513 | 283 |
| Money purchase pension schemes | 47 | 47 |
| Benefits | 4 | 4 |
|
| 564 | 334 |
|
1: In prior years directors agreed to the deferment of salary and bonuses contingent on the outcome of certain future events. These events occurred during the year and so these amounts have been included in the current year. Full details are provided in the directors' remuneration report.
Interest in outstanding share options, LTIPs and SARs, by director, are also separately disclosed in the directors' remuneration report.
| ||
| 8. Auditors' remuneration | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Fees payable to the Company's auditors for the audit of the Company's annual financial statements | 130 | 135 |
| Fees payable to the Company's auditors and its associates for other services: | | |
| Audit of the accounts of subsidiaries | 26 | 26 |
| Assurance related non-audit services | 8 | 8 |
| | 164 | 169 |
9. Share based payments
The charge for share based payments relate to options granted to employees of the Group.
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Charge for option scheme | 156 | 257 |
| Charge for the long term incentive plan options | 237 | 567 |
| | 393 | 824 |
The models and key assumptions used to value each of the grants and hence calculate the above charges are set out below:
Option scheme
A one-off equity option package was implemented during the prior year (the "Option Scheme") to replace the existing long term incentive plan. In place of the LTIP scheme, executive directors and senior staff received options to subscribe for Ordinary Shares, exercisable at a price of 6.25 pence per new Ordinary Share (the "Market Price Options). The Market Price Options will vest in equal tranches after three, four and five years' further continuous employment.
Executive directors and staff in lieu of their contractual notice periods also received options to subscribe for an aggregate new ordinary shares in the capital of the Company ("Ordinary Shares"), exercisable at a price of 1 pence per new Ordinary Share (the "1p Options").
The options have been valued using a binomial model the key inputs of which are summarised below:
| Grant date: | | 19 May 2020 | 19 May 2020 | 19 May 2020 | 19 May 2020 |
| Vesting date | | 19 May 2021 | 19 May 2023 | 19 May 2024 | 19 May 2025 |
| Closing share price (pence) | | 6.25 | 6.25 | 6.25 | 6.25 |
| Number granted | | 6,357,616 | 7,949,997 | 7,950,000 | 7,950,003 |
| Weighted average volatility | | 50.0% | 50.0% | 50.0% | 50.0% |
| Weighted average risk free rate | | 0.07% | 0.10% | 0.12% | 0.14% |
| Exercise price (pence) | | 1.00 | 6.25 | 6.25 | 6.25 |
| Dividend yield | | 0% | 0% | 0% | 0% |
Weighted average volatility has been selected with reference to historic volatility but taking into account exceptionally high volatility in the year preceding the grant of the options.
The following movements occurred during the year:
|
Issue date |
Vesting date |
Expiry date | At 31 December 2021 |
Lapsed | At 31 December 2022 |
| 19 May 2020 | 19 Nov 2020 | 18 Nov 2030 | 1,986,972 | - | 1,986,972 |
| 19 May 2020 | 19 May 2021 | 18 Nov 2030 | 6,357,616 | - | 6,357,616 |
| 19 May 2020 | 19 May 2023 | 18 Nov 2030 | 7,949,997 | (2,833,333) | 5,116,664 |
| 19 May 2020 | 19 May 2024 | 18 Nov 2030 | 7,950,000 | (2,833,333) | 5,116,667 |
| 19 May 2020 | 19 May 2025 | 18 Nov 2030 | 7,950,003 | (2,833,334) | 5,116,669 |
| | | | 32,194,588 | (8,500,000) | 23,694,588 |
Long term incentive plan
LTIP awards vest or become exercisable subject to the satisfaction of a performance condition measured over a three year period ("Performance Period") determined by the Remuneration Committee at the time of grant. The performance condition used is based on Total Shareholder Return ("TSR") measured over a three-year period against the TSR of a peer group of at least 9 other oil and gas companies comprising both FTSE 250, larger AIM oil and gas companies and Falkland Islands focused companies ("Peer Group"). The Peer Group for the Awards may be amended by the Remuneration Committee at their sole discretion as appropriate.
Performance measurement for the Awards are based on the average price over the relevant 90 day dealing period measured against the 90 dealing day period three years later. Awards vest on a sliding scale from 35% to 100% for performance in the top two quartiles of the Peer Group. No awards vest for performance in the bottom two quartiles.
The Awards granted on 8 October 2013 and 10 March 2014 have an additional performance condition so that no awards will be exercisable unless the Company's share price exceeds £1.80 based on an average price over any 90 day dealing period up to 31 March 2023.
The LTIP has been valued using a Monte Carlo model the key inputs of which are summarised below:
| Grant date: | | | 31 July 2019 | 23 April 2018 |
| Closing share price | | | 20.75 | 25.7p |
| Number granted | | | 7,200,000 | 7,000,000 |
| Weighted average volatility | | | 50.0% | 44.4% |
| Weighted average volatility of index | | | 70.0% | 64.0% |
| Weighted average risk free rate | | | 0.35% | 0.90% |
| Correlation in share price movement with comparator group | | | 5% | 13.0% |
| Exercise price | | | 0p | 0p |
| Dividend yield | | | 0% | 0% |
| The following movements occurred during the year: | | | | |
|
Issue date Expiry date | At 31 December 2021 | |
Expired/Exercised | At 31 December 2022 |
| 8 October 2013 8 October 2023 | 546,145 | | - | 546,145 |
| 10 March 2014 10 March 2024 | 70,391 | | - | 70,391 |
| 16 June 2017 16 June 2027 | 3,216,000 | | - | 3,216,000 |
| 31 July 2019 31 July 2029 | 7,200,000 | | (3,899,999) | 3,300,001 |
| | 11,032,536 | | (3,899,999) | 7,132,537 |
Share appreciation rights
A share appreciation right ("SAR") is effectively a share option that is structured from the outset to deliver, on exercise, only the net gain in the form of new ordinary shares that would have been made on the exercise of a market value share option. All SARs lapsed post year end.
| The following movements occurred during the year: | | ||||
| | | Exercise price | At 31 December | | At 31 December |
| Issue date | Expiry date | (pence) | 2021 | Expired | 2022 |
| 30 January 2013 | 30 January 2023 | 159.00 | 277,162 | - | 277,162 |
| | | | 277,162 | - | 277,162 |
| | | | | | |
| 10. Foreign exchange | | | |
Year ended |
Year ended |
| | | | | 31 December | 31 December |
| | | | | 2022 | 2021 |
| | | | | $'000 | $'000 |
| Foreign exchange gain on Falkland Islands tax liability (see note 20) | | 7,756 | 679 | ||
| Other foreign exchange movements | | (1,160) | 110 | ||
| Total net foreign exchange gain | | 6,596 | 789 | ||
|
11. Finance income and expense | |
Year ended |
Year ended |
| | | 31 December | 31 December |
| | | 2022 | 2021 |
| | | $'000 | $'000 |
| Bank and other interest receivable | | 23 | 4 |
| Total finance income | | 23 | 4 |
| | | | |
| Warrants (see note 19) | | 494 | - |
| Unwinding of discount on Falkland Islands Tax Liability (see note 20) | | 3,354 | 3,180 |
| Unwinding of discount on decommissioning provisions (see note 21) | | 304 | 274 |
| Other | | 23 | 68 |
| Total finance expense | | 4,175 | 3,522 |
| 12. Taxation |
| |
|
| Year ended | Year ended |
|
| 31 December | 31 December |
|
| 2022 | 2021 |
|
| $'000 | $'000 |
| Current tax: |
| |
| Overseas tax | - | - |
| Adjustment in respect of prior years (see Note 20) | 38,763 | - |
| Total current tax | 38,763 | - |
| Deferred tax: |
| |
| Overseas tax | - | (151) |
| Total deferred tax credit - note 22 | - | (151) |
| Tax on profit on ordinary activities | 38,763 | (151) |
| Loss on ordinary activities before tax | (3,218) | (7,910) |
| Loss on ordinary activities multiplied at 26% weighted average rate (31 December 2021: 26%) | (837) | (2,057) |
| Effects of: |
| |
| Income and gains not subject to taxation | (2,017) | (248) |
| Expenditure not deductible for taxation | 872 | 827 |
| Depreciation in excess of capital allowances | 32 | 281 |
| IFRS2 Share based remuneration cost | 102 | 214 |
| Losses carried forward | 1,848 | 983 |
| Adjustments in respect of prior years (see Note 20) | 38,763 | - |
| Current tax credit for the year | 38,763 | - |
|
The total carried forward losses and carried forward pre trading expenditures potentially available for relief are as follows: | | |
|
| Year ended | Year ended |
|
| 31 December | 31 December |
|
| 2022 | 2021 |
|
| $'000 | $'000 |
| UK | 81,124 | 77,393 |
| Falkland Islands | 621,765 | 619,400 |
| Italy | 66,808 | 65,202 |
No deferred tax asset has been recognised in respect of temporary differences arising on losses carried forward, outstanding share options or depreciation in excess of capital allowances due to the uncertainty in the timing of profits and hence future utilisation. Losses carried forward in the Falkland Islands includes amounts held within entities where utilisation of the losses in the future may not be possible.
| 13. Basic and diluted loss per share | | |
| | 31 December | 31 December |
| | 2022 Number | 2021 Number |
| Weighted average number of Ordinary Shares | 527,767,197 | 458,482,117 |
| Weighted average of shares held in Employee Benefit Trust | (2,539,227) | (3,131,000) |
| Weighted average number of Ordinary Shares for the purposes of basic earnings per share | 525,227,970 | 455,351,117 |
| Effects of |
| |
| Share options and warrants | 8,731,904 | - |
| Weighted average number of Ordinary Shares for the purposes of diluted earnings per share | 531,968,624 | 455,351,117 |
| | $'000 | $'000 |
| Net profit/(loss) after tax for purposes of basic and diluted earnings per share | 35,545 | (7,759) |
| Profit/(loss) per share - cents |
| |
| Basic | 6.77 | (1.70) |
| Diluted | 6.68 | (1.70) |
The weighted average number of Ordinary Shares takes into account those shares which are treated as own shares held in trust. As at the year end the Group had 1,304,500 Ordinary shares held in an Employee Benefit Trust (2021: 3,131,000) which have been purchased to settle future exercises of options. As the Group is reporteda loss in the prior year then in accordance with IAS33 the share options are not considered dilutive because the exercise of the share options would have the effect of reducing the loss per share.
| 14. Intangible exploration and evaluation assets | | ||
| | Falkland Islands | Greater Mediterranean |
Total |
| | $'000 | $'000 | $'000 |
| At 31 December 2020 | 243,647 | 702 | 244,349 |
| Additions | 4,956 | 54 | 5,010 |
| Written back/(off) exploration costs | 608 | (335) | 273 |
| Foreign exchange movement | - | (49) | (49) |
| At 31 December 2021 | 249,211 | 372 | 249,583 |
| Additions | 2,685 | 31 | 2,716 |
| Written off exploration costs | (307) | - | (307) |
| Foreign exchange movement | - | (22) | (22) |
| At 31 December 2022 | 251,589 | 381 | 251,970 |
Falkland Islands Licences
The amounts for intangible exploration and evaluation assets represent active exploration and evaluation projects. The additions during the year of US$2.7 million relate principally to the Sea Lion development.
Given the quantum of intangible exploration and evaluation assets potential impairment could have a material impact on the financial statements. As such whether there are indicators of impairment is a key judgement. Management looked at a number of factors in making a judgement as to whether there are any indicators of impairment during the year. In particular with regard to the carrying value of the Falkland Islands assets, which relates to the Sea Lion Phase one development these include, but are not limited to;
· The Transaction, which completed in September 2022, brought on board a new partner with a track record of funding large offshore developments
· A two year license extension was granted
· Rockhopper and Navitas have used the extensive engineering work already carried out to create a lower cost development with the target to reach FID early 2024.
· Current market conditions, including oil price and security of supply, provide stronger prospects for ultimate sanction of Sea Lion
Management concluded that for these reasons, currently for Phase 1 of the Sea Lion development, there were no indicators of impairment.
Management made the judgement that the limited near term capital being invested outside of the Phase 1 project is still an indicator of impairment in the subsequent phases of the project. Accordingly the decision continues to be to write off historic exploration costs associated with the resources which will not be developed as part of the Sea Lion Phase 1 project. This impairment has no impact on the Group's long‐term strategy for multiple phases of development in the North Falkland Basin. This will be re-evaluated when the Phase 1 project has been sanctioned, currently anticipated in 2024, and investment resumes on the Phase 2 project.
| 15. Property, plant and equipment | | |||
| | Oil and gas assets | Right of use assets | Other assets |
Total |
| | $'000 | $'000 | $'000 | $'000 |
| Cost | | | | |
| At 31 December 2020 | 26,281 | 1,693 | 913 | 28,887 |
| Additions | 228 | - | - | 228 |
| Foreign exchange | (2,006) | (22) | (11) | (2,039) |
| Disposals | - | - | (497) | (497) |
| Derecognition | - | (1,264) | - | (1,264) |
| At 31 December 2021 | 24,503 | 407 | 405 | 25,315 |
| Foreign exchange | (1,441) | (14) | (4) | (1,459) |
| Disposals | - | - | (244) | (244) |
| At 31 December 2022 | 23,062 | 393 | 157 | 23,612 |
| Depreciation and impairment | | | | |
| At 31 December 2020 | 25,871 | 828 | 768 | 27,467 |
| Charge for the year | 667 | 353 | 62 | 1,082 |
| Foreign exchange | (2,035) | (15) | (4) | (2,054) |
| Disposals | - | - | (501) | (501) |
| At 31 December 2021 | 24,503 | 286 | 325 | 25,114 |
| Charge for the year | - | 96 | 26 | 122 |
| Foreign exchange | (1,441) | (16) | (3) | (1,460) |
| Disposals | - | - | (232) | (232) |
| At 31 December 2022 | 23,062 | 366 | 116 | 23,544 |
| Net book value at 31 December 2021 | - | 121 | 80 | 201 |
| Net book value at 31 December 2022 | - | 27 | 41 | 68 |
All oil and gas assets relate to the Greater Mediterranean region, specifically former producing assets in Italy. Right of use assets relate to rented offices.
| 16. Other receivables | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Current | | |
| Receivables | 294 | 478 |
| Other | 1,112 | 1,596 |
| | 1,406 | 2,074 |
The carrying value of receivables approximates to fair value.
| 17. Term deposits | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Maturing after the period end | | |
| Within three months | 6,324 | - |
| Six to nine months | 1,206 | - |
| Nine months to one year | 1,206 | - |
| | 8,736 | - |
Term deposits relate to amounts placed on fixed term deposit with various A rated deposit banks.
| 18. Other payables and accruals | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Accounts payable | 1,428 | 608 |
| Accruals | 1,692 | 1,129 |
| Other creditors | 263 | 263 |
| | 3,383 | 2,000 |
All amounts are expected to be settled within twelve months of the balance sheet date and so the book values and fair values are considered to be the same.
| 19. Derivative financial liabilities | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Warrant liabilities - initial value on grant | 1,250 | - |
| Changes in fair value taken to finance expense (see note 11) | 494 | - |
| | 1,744 | - |
Warrants issued as part of the Placing and Subscription were treated as derivative financial liabilities and as such carried at fair value on the balance sheet with changes in fair value recognised in finance expenses in the income statement. They are not designated as hedging instruments.
Fair value has been determined using a black scholes model the key inputs of which on recognition and as at year end are summarised below.
| | | | Grant | 31 December 2022 |
| Time to maturity | | | 1.5 year | 1.0 year |
| Closing share price (pence) | | | 8.00 | 9.00 |
| Number | | | 41,091,388 | 41,091,388 |
| Weighted average volatility | | | 80.0% | 98.4% |
| Weighted average risk free rate | | | 1.90% | 3.22% |
| Exercise price (pence) | | | 9.00 | 9.00 |
| 20. Tax payable | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| Non current tax payable | - | 43,204 |
| | - | 43,204 |
On the 8 April 2015, the Group agreed binding documentation ("Tax Settlement Deed") with the Falkland Island Government ("FIG") in relation to the tax arising from the Group's farm out to Premier.
The Tax Settlement Deed confirms the quantum and deferment of the outstanding tax liability and is made under Extra Statutory Concession 16.
The Tax Settlement Deed also states that the Group is entitled to make adjustment to the outstanding tax liability if and to the extent that the Commissioner is satisfied that any part of the Development Carry becomes irrecoverable. Under the Transaction the balance of Development Carry has become irrecoverable and in the Group's judgment no further amounts are due on the Group's 2012 farm-out to Premier.
Given the highly material nature of this judgment professional advice has been sought to confirm that it is probable that if challenged it would be concluded that the Group is entitled to adjust the outstanding tax liability for the Development Carry that has become irrecoverable. As such the Group has derecognised the tax liability to measure it at the most likely amount that the liability will be settled for of US$nil. We are currently engaged with FIG in relation to formalising the tax implications of the termination of the 2012 Premier Oil farm down which resulted in an irrecoverable carry amount of approximately US$670 million.
Should it be proven that there is no entitlement to adjustment under the Tax Settlement Deed then the outstanding tax liability would be £59.6 million and still payable on the earlier of: (i) the first royalty payment date on Sea Lion; (ii) the date of which Rockhopper disposes of all or a substantial part of the Group's remaining licence interests in the North Falkland Basin; or (iii) a change of control of Rockhopper Exploration plc.
In this unlikely instance Management believes the most likely timing of payment is in line with the first royalty payment. Based on previous correspondence with FIG, Management does not believe that the Transactions completion constitutes a substantial disposal and therefore would not have accelerated the liability should it be shown to be still payable.
The derecognition of the tax liability has led to a tax income of US$38.8 million. The tax liability had been treated as long term and hence discounted. The unwinding of discounts on the previously recognised liability, prior to derecognition, was US$3.4 million (2021: US$3.2 million) and treated as a finance expense. This was offset by a foreign exchange gain of US$7.8 million (2021: US$0.7 million gain) in the year.
| 21. Provisions | | |||
| |
Decommissioning |
Other | Year ended 31 December | Year ended 31 December |
| | provision $'000 | provisions $'000 | 2022 $'000 | 2021 $'000 |
| Brought forward | 18,197 | 90 | 18,287 | 15,158 |
| Amounts utilized | - | (17) | (17) | - |
| Amounts arising in the year | 1,358 | 9 | 1,367 | 4,006 |
| Unwinding of discount | 304 | - | 304 | 274 |
| Foreign exchange | (760) | (4) | (764) | (1,151) |
| Carried forward at year end | 19,099 | 78 | 19,177 | 18,287 |
The decommissioning provision relates to the Group's licences in the Greater Mediterranean region as well as facilities in the Falkland Islands. The provision covers both the plug and abandonment of wells drilled as well as removal of facilities and any requisite site restoration. Of amounts arising in the year $320 thousand (2021: $4,000 thousand) has been capitalised in intangible exploration and evaluation assets and $1,038 thousand (2021: $nil) taken to cost of sales.
Judgements are made based on the long term economic environment around appropriate inflation and discount rates to be applied as well as the timing of any future decommissioning. In the Falkland Islands costs are most likely to be in $US or GB£ so management consider the UK economic environment when informing these judgements. In the Greater Mediterranean all assets are in Italy and so costs are likely to be in Euros and as such management consider the Italian as well as the broader Eurozone region to inform these judgements.
Whilst recognising short term inflationary pressures, the Group believe it appropriate to use an inflation rate of 2.5 per cent (2021: 2 per cent) and a discount rate of 2.5 per cent (2021: 2 per cent).
Decommissioning costs are uncertain and management's cost estimates can vary in response to many factors, including changes to the relevant legal requirements, the emergence of new technology or experience at other assets. The expected timing, work scope and amount of expenditure may also change. Therefore, significant estimates and assumptions are made in determining the costs associated with the provision for decommissioning. The estimated decommissioning costs are reviewed annually, and the results of the most recent available review used as a basis for the amounts in the Consolidated Financial Statements. Provision for environmental clean-up and remediation costs is based on current legal and contractual requirements, technology and price levels. However, actual decommissioning costs will ultimately depend upon future market prices for the necessary decommissioning works required which will reflect market conditions at the relevant time.
The estimated costs associated with the decommissioning works are those that are likely to have a material impact on the provision. A 10 per cent increase in these estimates would increase both the provision and the loss in the year by US$1,470 thousand. Similarly, a 10 per cent reduction in these estimated costs would decrease both the provision and the loss in the year by US$1,470 thousand.
Other provisions include amounts due to employees for accrued holiday and leaving indemnity for staff in Italy, that will become payable when they cease employment.
| 22. Deferred tax liability | | |
| | Year ended 31 December 2022 $'000 | Year ended 31 December 2021 $'000 |
| At beginning of period | 39,137 | 39,300 |
| Foreign exchange | - | (12) |
| Movement in period | - | (151) |
| At end of period | 39,137 | 39,137 |
The deferred tax liability arises due to temporary differences associated with the intangible exploration and evaluation expenditure. The majority of the balance relates to historic expenditure on licences in the Falklands, where the tax rate is 26%, being utilised to minimise the corporation tax due on the consideration received as part of the farm out disposal during 2012.
Total carried forward losses and carried forward pre-trading expenditures available for relief on commencement of trade at 31 December 2022 are disclosed in note 12 Taxation. No deferred tax asset has been recognised in relation to these losses due to uncertainty that future suitable taxable profits will be available against which these losses can be utilised.
23. Share capital
|
| Year ended 31 December 2022 | Year ended 31 December 2021 | ||
|
| $'000 | Number | $'000 | Number |
| Authorised, called up, issued and fully paid: Ordinary shares of £0.01 each | 8,771 | 586,485,319 | 7,218 | 458,482,117 |
| | 31 December | 31 December |
| | 2022 Number | 2021 Number |
| Shares in issue brought forward | 458,482,117 | 458,482,117 |
| Shares issued | | |
| - Issued as part of Placing and Subscription | 82,182,776 | - |
| - Issued as part of Open offer | 39,652,160 | - |
| - Issued on exercise of warrants and share options | 6,168,266 | - |
| Shares in issue carried forward | 586,485,319 | 458,482,117 |
During the year Rockhopper raised funds by way of a Placing and Subscription, in each case at an issue price of 7 pence per Unit (the "Issue Price"). Each Unit offered comprises one New Ordinary Share and, for every two New Ordinary Shares subscribed for, one Warrant. Each Warrant gives the holder the right to subscribe for one new Ordinary Share at a price of 9 pence per Ordinary Share (the "Strike Price") at any time from the issue of the Warrants up to (and including) 5.00 p.m. on 31 December 2023 (the "Warrant Exercise Period").
In accordance with IAS 32:16(b)(ii), for a derivative over own equity to qualify as equity, the instrument may only be settled by exchanging a fixed amount of cash (or another financial instrument) for a fixed number of its own equity instruments. The functional currency of Rockhopper is US$. Given the warrant exercise price is determined in GBP, a foreign currency, the Warrants do not meet the fixed amount of cash criteria as it will depend on the exchange rate at time of exercise. The Warrants therefore have been treated as a derivative financial liability as disclosed in note 19 with the balance of proceeds treated as Equity.
The Placing utilised a cashbox structure and therefore the premium on the ordinary shares and associated costs have in accordance with section 621 of the Companies Act 2006 been recognised within the merger reserve. The Placing and Subscription raised net $6,252 thousand with $1,250 thousand classified as a derivative financial liability and $5,002 thousand classified as Equity after associated costs of $784 thousand.
Rockhopper raised additional funds through an Open Offer (together with the Placing and Subscription, the "Capital Raising") pursuant to which Units were offered to all existing Shareholders at the Issue Price. IAS32:16 (b)(ii) states "For this purpose, rights, options or warrants to acquire a fixed number of the entity's own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments.". Therefore warrants issued as part of the Open Offer have been treated as equity. The Open Offer raised net $2,842 thousand after associated costs of $410 thousand.
24. Reserves
Set out below is a description of each of the reserves of the Group:
| Share premium | Amount subscribed for share capital in excess of its nominal value. |
| Share based remuneration | The share incentive plan reserve captures the equity related element of the expenses recognised for the issue of options, comprising the cumulative charge to the income statement for IFRS2 charges for share based payments less amounts released to retained earnings upon the exercise of options. |
| Own shares held in trust | Shares held in trust by the Employee Benefit Trust which have been purchased to settle future exercises of options. |
| Merger reserve | The difference between the nominal value and the fair value of shares issued on acquisition of subsidiaries. |
| Foreign currency translation reserve | Exchange differences arising on consolidating the assets and liabilities of the Group's subsidiaries are classified as equity and transferred to the Group's translation reserve. |
| Special reserve | The reserve is non distributable and was created following cancellation of the share premium account on 4 July 2013. It can be used to reduce the amount of losses incurred by the Parent Company or distributed or used to acquire the share capital of the Company subject to settling all contingent and actual liabilities as at 4 July 2013. Should not all of the contingent and actual liabilities be settled, prior to distribution the Parent Company must either gain permission from the actual or contingent creditors for distribution or set aside in escrow an amount equal to the unsettled actual or contingent liability. |
| Retained losses | Cumulative net gains and losses recognised in the financial statements. |
25. Capital commitments
Significant capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is US$0.7million (2021: US$0.4 million) relating to the Group's intangible exploration and evaluation assets.
26. Contingent assets
In August 2022, pursuant to an ICSID arbitration which commenced in 2017, Rockhopper was awarded approximately €190 million plus interest and costs following a unanimous decision by the ICSID appointed arbitral Tribunal that Italy had breached its obligations under the Energy Charter Treaty (the "Award").
Rockhopper submitted a letter to the Italian Republic in September 2022 formally requesting payment of €247 million, representing the Award amount plus accrued interest from 29 January 2016 to 23 August 2022 and costs. Interest was paused for four months following the date of the Award (being 23 August 2022) and is now accruing at EURIBOR + 4% which Rockhopper estimates at between €1.25 million and €1.5 million per calendar month. Interest compounds annually.
As announced, Italy requested that this Award be annulled in October 2022. When Italy applied for the Award to be annulled, a provisional Stay of Enforcement was automatically put in place by ICSID pursuant to the ICSID Convention and Arbitration Rules.
Following Italy's request to seek annulment of the Award, an ad hoc Committee was constituted to hear relevant arguments and make a ruling on Italy's application for a continuation of the provisional Stay of Enforcement pending the determination of Italy's request to annul the Award. A hearing on whether the ad hoc Committee will continue or lift the provisional Stay of Enforcement was held on 6 March 2023. On the 24 April 2023 the Committee issued the following orders,
1: that Italy and Rockhopper shall confer - in good faith and using their best efforts to cooperate and find an effective arrangement - for the mitigation of the risk of non-recoupment using a first-class international bank outside the European Union (or as Italy and Rockhopper otherwise agree) to be put into place in anticipation of the termination of the provisional stay of enforcement of the Award. This is to mitigate the perceived risk that, in the event the Award is annulled, Italy may not be able to recover Italian assets seized or frozen by Rockhopper (before the ad hoc Committee issues its decision on annulment) in court enforcement proceedings.
2: that Rockhopper shall, within 30 days of the date of the decision, apprise the Committee of arrangements agreed with Italy for the mitigation of the risk of non-recoupment or that negotiations have failed and, in the latter event, propose concrete arrangements in accordance with the decision for the mitigation of the risk of non-recoupment. Italy may then briefly comment on Rockhopper's proposal within 10 days, constructively highlighting any areas of disagreement between the Parties.
Italy has refused to comply with the Panels instructions. Rockhopper intends to continue to work in good faith to resolve the issues raised regarding non-recoupment and has submitted to the Panel its proposal to mitigate this risk.
The decision on whether to continue or lift the provisional Stay of Enforcement is unrelated to the merits of Italy's annulment request. A final hearing in relation to Italy's request to annul the Award is scheduled to take place in Q1 2024. Guidance given by Rockhopper in the Company's 31 October 2022 announcement that the entire annulment process is likely to take 18-24 months from that date remains in place.
Rockhopper is extremely confident in the strength of its case, as was reflected in the unanimous decision underpinning the Award in August. Given the annulment request the virtual certainty required by IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" which would allow recognition of an asset on the Balance Sheet has not been met. The receivable under the Award therefore remains classified as a contingent asset at this time.
27. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed. Subsidiaries are listed in notes of the Company financial statements.
The remuneration of directors, who are the key management personnel of the Group, is set out below in aggregate. Further information about the remuneration of individual directors, including deferred salary and bonus amounts, is provided in the Directors' Remuneration Report on
pages 28 to 37.
| | Year ended 31 December | Year ended 31 December |
| | 2022 | 2021 |
| | $'000 | $'000 |
| Short term employee benefits | 1,076 | 1,005 |
| Pension contributions | - | 117 |
| Share based payments | 235 | 447 |
| | 1,311 | 1,569 |
| During the year the Company announced a successful Placing and Subscription. This involved the Placing of, and Subscription for 82,182,776 Units in each case at the Issue Price of 7 pence per Unit. Each Unit comprises one New Ordinary Share and, for every two New Ordinary Shares subscribed for, one Warrant.
Pursuant to the Subscription, the following Directors agreed to subscribe for the following Units comprising Subscription Shares and Warrants.
| |||
| | | Number of subscription shares | Number of subscription Warrants) |
| Sam Moody | | 1,428,570 | 714,285 |
| Keith Lough | | 428,570 | 214,285 |
| Alison Baker | | 142,856 | 71,428 |
| John Summers | | 142,856 | 71,428 |
28. Risk management policies
Risk review
The risks and uncertainties facing the Group are set out in the risk management report. Risks which require further quantification are set out below.
Foreign exchange risks: The Group is exposed to foreign exchange movements on monetary assets and liabilities denominated in currencies other than US$, in particular the tax liability with the Falkland Island Government which is a GB£ denominated balance. In addition a number of the Group's subsidiaries have a functional currency other than US$, where this is the case the Group has an exposure to foreign exchange differences with differences being taken to reserves.
The Group has cash and cash equivalents, term deposits and restricted cash of US$10.3 million of which US$1.7 million was held in US$ denominations. The Group has expenditure in GB£ and Euro and accepts that to the extent current cash balances in those currencies are not sufficient to meet those expenditures they will need to acquire them. The following table summarises the split of the Group's assets and liabilities by currency:
|
Currency denomination of balance | $ $'000 | £ $'000 | €a $'000 |
| Assets | | | |
| 31 December 2022 | 253,415 | 8,482 | 1,787 |
| 31 December 2021 | 253,975 | 1,859 | 2,443 |
| Liabilities | | | |
| 31 December 2022 | 43,452 | 3,475 | 15,220 |
| 31 December 2021 | 43,352 | 45,067 | 15,337 |
The following table summarises the impact on the Group's pre-tax profit and equity of a reasonably possible change in the US$ to GB£ exchange rate and the US$ to euro exchange:
| | Pre tax profit | | Total equity | |
| +10% US$ rate increase $'000 | -10% US$ rate decrease $'000 | +10% US$ rate increase $'000 | -10% US$ rate decrease $'000 | |
| US$ against GB£ | | | | |
| 31 December 2022 | 501 | (501) | 501 | (501) |
| 31 December 2021 | (4,321) | 4,321 | (4,321) | 4,321 |
| US$ against euro | | | | |
| 31 December 2022 | (1,450) | 1,450 | (1,450) | 1,450 |
| 31 December 2021 | (1,289) | 1,289 | (1,289) | 1,289 |
Capital risk management: the Group manages capital to ensure that it is able to continue as a going concern whilst maximising the return to shareholders. The capital structure consists of cash and cash equivalents and equity. The board regularly monitors the future capital requirements of the Group, particularly in respect of its ongoing development programme. Further information can be found in the going concern assessment contained in Note 1.5.
Credit risk: the Group recharges partners and third parties for the provision of services and for the sale of Oil and Gas. Should the companies holding these accounts become insolvent then these funds may be lost or delayed in their release. The amounts classified as receivables as at the 31 December 2022 were $2,109,000 (31 December 2021: $2,306,000). Credit risk relating to the Group's other financial assets which comprise principally cash and cash equivalents, term deposits and restricted cash arises from the potential default of counterparties. Investments of cash and
deposits are made within credit limits assigned to each counterparty. The risk of loss through counterparty failure is therefore mitigated by the Group splitting its funds across a number of banks.
Interest rate risks: the Group has no debt and so its exposure to interest rates is limited to finance income it receives on cash and term deposits. The Group is not dependent on its finance income and given the current interest rates the risk is not considered to be material.
Liquidity risks:
The Group monitors the liquidity position by preparing cash flow forecasts to ensure sufficient funds are available. Further information can be found in the going concern assessment contained in Note 1.5.
Maturity of financial liabilities
The table below analyses the Group's financial liabilities, which will be settled on a gross basis, into relevant maturity groups based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
| |
Within 1 year |
2 to 5 years | More than 5 years | Total contractual cashflows |
Carrying amount |
| At 31 December 2022 | $'000 | $'000 | $'000 | $'000 | $'000 |
| Other payables | 3,383 | - | - | 3,383 | 3,383 |
| Lease liability | 574 | 286 | - | 860 | 553 |
| Tax payable | - | - | - | - | - |
| | 3,957 | 286 | - | 4,243 | 3,936 |
| |
Within 1 year |
2 to 5 years |
More than 5 years |
Total contractual cashflows |
Carrying amount |
| At 31 December 2021 | $'000 | $'000 | $'000 | $'000 | $'000 |
| Other payables | 2,000 | - | - | 2,000 | 2,000 |
| Lease liability | 574 | 860 | - | 1,434 | 1,128 |
| Tax payable | - | - | 79,413 | 79,413 | 43,204 |
| | 2,574 | 860 | 79,413 | 82,847 | 46,332 |
Tax payable amounts in the current and prior year relate to amounts as disclosed in note 20.
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