Serica Energy plc (TSX:SQZ)(AIM:SQZ) ("Serica" or the "Company") the oil and gas
exploration and production company, announces its results for the year ended 31
December 2011. The results and associated Management Discussion and Analysis are
included below and copies are available at www.serica-energy.com and
www.sedar.com.
The Company is upgrading its web-site to take account of its expanding
operations and the new content will be available from Monday 2 April 2012 at
www.serica-energy.com.
Operational Highlights:
UK Assets
-- Columbus field:
-- Negotiations concluded with BG for export via Lomond platform,
subject to final documentation, partner and Board approvals
-- Clears way for project sanction. DECC approval targeted for 2Q 2012
-- All engineering and design studies completed
-- Environmental Statement has been submitted and approved
-- NSAI estimate 11.2 mmboe gross reserves in Block 23/16f
-- Well to appraise Spaniards discovery scheduled for 3Q 2012.
-- Wells planned for Doyle and South Otter subject to farm out
-- Two further UK licences awarded at year end
Non-UK Assets
-- Namibia:
-- Awarded an 85% interest in central Luderitz Basin blocks, offshore
Namibia
-- Large structures identified
-- Secured farm-out with BP. BP will carry the full cost of extensive
3D seismic survey and pay Serica's past costs to earn 30%
-- Polarcus Seismic Limited contracted to begin up to 4,150 sq km
seismic acquisition in April 2012
-- Serica will remain as operator during the seismic acquisition phase
-- Ireland:
-- Six new blocks awarded in Irish Rockall Basin, Serica operator
-- Three large prospects mapped: Muckish, Midleton, West Midleton
-- Farm-out campaigns commenced for licences in the Slyne and Rockall
Basins
-- Morocco:
-- Multi salt diapir and tilted fault block prospects identified and
mapped
-- Farm-out process underway prior to drilling the first well
-- Indonesia:
-- Sale of Indonesia exploration properties to Kris Energy in October
2011
-- Kambuna gas field average daily production of 35 mmscfd of gas and
2,363 bbl/day of condensate
-- Average prices realised for gas and condensate during the year were
US$6.16 per mcf and US$115.8 per barrel respectively
Financial Highlights:
-- 2011 sales revenue of US$27.1 million
-- Gross profit before expenses of US$1.5 million
-- Loss before tax of US$11.3 million (from continuing operations)
-- Increased field allowances improve Columbus economics
-- At the year-end:
-- Cash position of US$20 million
-- No debt
-- Carry forward tax losses available of approximately US$138.7 million
Outlook:
-- Company now focused on two business units
-- UK North Sea & East Irish Sea and
-- International exploration in four Atlantic Margin basins
-- Field development expected for Columbus
-- Project sanction anticipated 1H 2012 with production expected to
commence 2014 or early 2015
-- Exploration portfolio with high impact potential
-- Major 3D seismic survey of up to 4,150 sq kms in Namibia starts in
April 2012
-- Farm-outs planned for Ireland and Morocco to bring forward drilling
-- Spaniards appraisal well to be drilled in 3Q 2012
-- Doyle and South Otter prospects await farm-in partners
Tony Craven Walker, Chairman and Interim CEO of Serica commented:
"2011 has been a tough but rewarding year for Serica. The Company has undergone
a fundamental change in strategy and has repositioned itself with a growing
portfolio in emerging areas that we believe hold great promise.
With the sale of our Indonesian exploration assets Serica is now focussed on the
UK North Sea and the Atlantic Margin where we have built up a significant
presence for a company of our size. With this in mind 2012 promises to be a busy
and exciting year for the company.
I would like to thank the team at Serica and its shareholders for their
continued support as we look forward to the year ahead."
30 March 2012
The technical information contained in the announcement has been reviewed and
approved by Peter Sadler, Business Development Director of Serica Energy plc.
Peter Sadler is a qualified Petroleum Engineer (MSc Imperial College, London,
1982) and has been a member of the Society of Petroleum Engineers since 1981.
NOTES TO EDITORS
Serica Energy was formed in 2004 and, since then, has drilled 19 wells in
locations as diverse as the UK Offshore, the Atlantic margin offshore Ireland,
offshore Indonesia (North West Sumatra, East Kalimantan and Java) and offshore
Vietnam. Seventeen of these wells were drilled by the Company as Operator,
fourteen of the wells encountered oil or gas and six of these were commercial.
The first of the commercial discoveries, the Kambuna field in North West
Sumatra, was developed by the Company. The second, the Columbus field in the UK
North Sea, is now in the pre-development stage with project sanction targeted
for first half 2012. The Company also has a residual economic interest in the
Bream oil field offshore Norway, which will be crystallised when the field is
developed, and licence interests offshore Ireland, Morocco and Namibia.
The Company is listed on both the Toronto Stock Exchange and the London AIM
under the ticker SQZ.
To receive Company news releases via email, please contact
nick.elwes@collegehill.com and specify "Serica press releases" in the subject
line.
FORWARD LOOKING STATEMENTS
This disclosure contains certain forward looking statements that involve
substantial known and unknown risks and uncertainties, some of which are beyond
Serica Energy plc's control, including: geological, geophysical and technical
risk, the impact of general economic conditions where Serica Energy plc
operates, industry conditions, changes in laws and regulations including the
adoption of new environmental laws and regulations and changes in how they are
interpreted and enforced, increased competition, the lack of availability of
qualified personnel or management, fluctuations in foreign exchange or interest
rates, stock market volatility and market valuations of companies with respect
to announced transactions and the final valuations thereof, and obtaining
required approvals of regulatory authorities. Serica Energy plc's actual
results, performance or achievement could differ materially from those expressed
in, or implied by, these forward looking statements and, accordingly, no
assurances can be given that any of the events anticipated by the forward
looking statements will transpire or occur, or if any of them do so, what
benefits, including the amount of proceeds, that Serica Energy plc will derive
therefrom.
CHAIRMAN'S REPORT
Dear Shareholder
2011 has been a year of positive change for Serica, a year during which the
Company has disposed of its Indonesian exploration assets and has repositioned
itself with a growing portfolio of properties in emerging new areas which we
believe have great potential to build a thriving and exciting business.
The Company is now focussed on two business units - our UK North Sea and East
Irish Sea business and our growing international exploration business. These two
business units have significantly different characteristics but each has
considerable unrealised value to be unlocked. Serica has the skill sets to
exploit this potential and we expect to see considerable progress to this end in
2012.
UK Assets
Our UK business is centred on the Columbus field discovered by Serica in 2006.
Bringing that field onto production has been our main UK focus but has been
frustrated over the past couple of years or so by the difficulties in reaching
agreement with adjacent infrastructure holders. As a gas/gas condensate field it
can only be produced if a transportation route for the gas can be accessed. We
and our partners in the field have been working towards reaching agreement with
BG, as operator of the adjacent Lomond platform, with the target for agreement
being the first quarter of 2012. I am very pleased to be able to say that we
have now, subject to final documentation, Board and partner approvals, concluded
negotiations with BG which will allow us to sanction the project.
Serica, as the Columbus operator, submitted the Field Development Plan to the
Department of Energy and Climate Change in June 2011 on behalf of all the
Columbus partners. The Environmental Statement has also been submitted and has
been approved. All of the basic engineering and design studies have been
completed. With the final principles on cost sharing and transportation awaiting
Board approvals and the Chancellor's recent announcement on field allowances
improving Columbus economics, there is little to stand in the way of the project
progressing and we are aiming for early sanction to enable first gas for end
2014/early 2015.
An independent review of reserves in the Columbus field has also been completed.
As in past years this was conducted by Netherland Sewell & Associates ("NSAI")
who interpret gross 2P Columbus reserves to be 16.7 million barrels of oil
equivalent. These reserves are split between blocks 23/16f operated by Serica
and 23/21 operated by BG. To be consistent with final cost sharing agreements
between the participants in the blocks, NSAI have interpreted the percentage of
reserves lying in Block 23/16f as 67% and interpret gross 2P Columbus reserves
lying in Serica's Block 23/16f to be 11.2 million barrels oil equivalent, a net
5.6 million barrels to Serica. This reduction of 0.7 million barrels from last
year's reported figures is due entirely to the adjusted split of reserves
between the blocks.
There is considerable upside growth potential in our UK business. In Block
15/21g we are committed to drill a well to explore the possibility of an
extension to the Spaniards discovery lying in the adjacent Block 15/21a (part).
This is expected to start in the third quarter. Serica will have a 21% field
interest in the event that this well is successful and the extension of
Spaniards is proven.
Two further UK wells are planned in other blocks which are both operated by
Serica. In East Irish Sea Block 113/27c, the Doyle prospect is ready to drill.
Due to the proximity of this prospect to acreage offered in the recently
announced 27th Licensing Round, we will probably wish to defer a decision on the
well at least until applications for the Round are closed but we are discussing
the possibility of farming-out part of our holding in the block with parties who
have expressed an interest in joining us. In the Northern North Sea, Block
210/20a contains several clearly defined prospects and the Company plans to
bring in a partner before drilling. We have a 100% interest in the block.
Serica received a boost at the year end with the award of two further UK
licences under the delayed 26th Licensing Round. One of these, consisting of
four part blocks surrounding the York gas field in the Southern North Sea,
contains a number of low risk gas prospects. The licence is operated by Centrica
who also operate the adjacent York field. The second licence, covering Block
110/8b in the East Irish Sea, holds a gas prospect lying just south of the
Morecambe gas field operated by Centrica. We shall be undertaking work on both
blocks in 2012.
In summary, Serica has a valuable business in the UK with reserves to be brought
on-line and well defined prospects to be drilled. Reaching a conclusion on cost
sharing and transportation allows us to develop Columbus, an important turning
point for the Company, but it will still be a couple of years before we see
production from the field. We have therefore been investigating the possibility
of acquiring UK production or to merge the Company's UK business with a business
which brings UK production. Such steps would result in making the business far
more efficient from the perspective of risk balance and help us to accelerate
our drilling programme and unlock value. We shall continue to investigate the
possibilities. In the meantime we are looking forward to developing Columbus and
finally bringing it onto production.
Non-UK Assets
We have also made great progress outside the UK during 2011. The sale in October
of our exploration properties and operating subsidiaries in Indonesia has
allowed us to reposition the Company's portfolio into new areas which we believe
hold far greater potential. These efforts culminated late in the year with
material awards being made to Serica in the Atlantic waters offshore Ireland and
Namibia. Coupled with our existing acreage in Ireland and Morocco, these awards
have given us a strong Atlantic margin presence for a company of Serica's size.
We now have the opportunity to build on this new exploration portfolio. Apart
from an indirect interest in the Bream oil field in Norway, which is awaiting a
development decision, and the direct holding that we retain in the producing
Kambuna gas field in Indonesia, the major impact of our non-UK business lies in
these potentially exciting exploration projects located in the deep water basins
of the Atlantic margins of Ireland, Morocco and Namibia. The Company is
continuing to look for more opportunities showing the same material potential
elsewhere.
The characteristics of our Atlantic margin licences are very different from the
interests that we hold in the UK. The size of the prospects in each area are of
a different order of magnitude and the size of the licence blocks is very large
(approximately 12,700 square kilometres in the case of the Morocco blocks and
appropriately 17,400 square kilometres in the case of the Namibian blocks). They
are also generally located in much deeper water. Serica's objectives in each
case, therefore, have been to high-grade the prospects through a complete and
thorough review of all seismic information and to bring in partners with the
appropriate deep water technology once there is clearly established
prospectivity.
This strategy has met with very real success in Namibia where, in December, we
were awarded an 85% interest in a large licence offshore in the central Luderitz
Basin. The Luderitz Basin displays many of the attributes required for
significant accumulations of oil and gas, including clear evidence from existing
seismic data of very large potential trapping mechanisms, but there has been
very little exploration drilling to-date. With water depths in Serica's blocks
ranging from 300 to 3,000 metres the blocks are at the early, frontier stage.
Drilling in these depths of water requires sophisticated drilling techniques and
equipment and is very costly.
We are very pleased, therefore, that BP has agreed to farm-in to our Namibian
licence to earn a 30% interest by paying a sum covering our past costs and
meeting the full cost of a large 3D survey covering 4,150 square kilometres.
Serica will remain as operator during the seismic acquisition phase and has
contracted Polarcus Seismic Limited to start the acquisition programme in April.
In the event that the seismic data substantiates the potential which we believe
exists in the blocks we will wish to drill to prove the presence of
hydrocarbons. To this end we have given BP the option to earn a further 37.5% in
the licence by meeting the cost of a well drilled to the Barremian. By entering
into this transaction we have been able to make a very early start on the
licence whilst limiting our financial exposure and retaining both early stage
operatorship and a significant interest in what could become a very valuable
licence if the drilling is successful.
Our licences offshore Morocco and in the Atlantic offshore Ireland also contain
many large prospects all of which hold the potential for material hydrocarbon
discoveries and we are now bringing forward plans for both areas. The blocks in
Morocco were awarded in 2009. Serica has undertaken a very detailed
re-interpretation since then of existing 3D seismic data and this work has
demonstrated the presence of a large number of salt diapir-related prospects and
tilted fault block plays. Given the water depths of up to 2,000 metres we are
now in the farm-out stage prior to moving forward to drilling the first well.
In Ireland we have mapped significant prospects lying close to an existing
discovery. With the award to Serica in October 2011 of the blocks containing the
Midleton and West Midleton prospects we now have two new prospects to complement
the very sizeable Muckish prospect. Serica has a 100% interest in the 12 blocks
containing these three large prospects in the Rockall Basin lying close to the
Dooish gas condensate discovery and is now reviewing opportunities to invite
partners to join in a drilling campaign.
To the south, Serica has a 50% interest as operator in three Slyne Basin blocks
and part blocks where we encountered oil in the Jurassic with our first well
drilled in 2009. Subsequent evaluation of information from this well combined
with re-interpretation of seismic data has now shown the presence of further
Jurassic oil prospects in the blocks as well as deeper Triassic gas prospects.
In summary, Serica's portfolio of Atlantic margin acreage, in four distinct
basins, exhibits the potential for significant discoveries of oil or gas and we
are optimistic about the opportunities which these prospects bring to the
Company. The exploration and development nature of our assets in the UK, coupled
with the very high-impact prospects which we hold outside the UK in new frontier
areas, places the Company in an enviable position with two businesses both of
which have material upside.
Finances and management
We have continued to manage our finances prudently during this period of change
whilst we have added materially to our exploration assets. At the year-end, our
cash position of US$20 million, with all debt repaid, was higher than our net
cash position at the start of the year when we had US$11.7 million of debt. Net
current assets at the year-end were unchanged over the year. This was achieved
despite falling revenues from the Kambuna field, which is now in decline. Whilst
our expenditure levels are expected to rise as we take on new projects the
Company continues to contain its finances as it enters 2012. The transaction
with BP in Namibia will enable the Company to accelerate its programme there
with minimum financial impact and we shall be reviewing financing options for
Columbus now that we are nearing project sanction.
2011 has been a tough but ultimately rewarding year, a year in which all of the
employees at Serica committed themselves fully to the task in hand. Without this
commitment, the Company would not have been able to achieve the successful
rebuilding that we have seen which forms a strong basis upon which we can
generate future growth. On behalf of shareholders I would like to thank the
whole Serica team.
During the period since last April I have been acting as Interim CEO and it has
been a pleasure to work with a team such as that at Serica. With the changes now
made to the Company's portfolio and direction, Columbus close to sanction and a
growing exploration programme, we are nearing the position where we can conclude
our search for a suitable successor to fill the position of CEO and take the
Company forward. 2012 promises to be an interesting and rewarding year and I and
my Board colleagues look forward to it with much anticipation.
Tony Craven Walker
Chairman and Interim CEO
29 March 2012
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis ("MD&A") of the financial and
operational results of Serica Energy plc and its subsidiaries (the "Group")
should be read in conjunction with Serica's consolidated financial statements
for the year ended 31 December 2011.
Serica's activities are based in the UK, Ireland, Namibia, Morocco and the
retained interest in the Kambuna Field in Indonesia. References to the "Company"
include Serica and its subsidiaries where relevant. All figures are reported in
US dollars ("US$") unless otherwise stated.
REVIEW OF LICENCE HOLDINGS AND OPERATIONS
Serica holds offshore licence interests in the UK North Sea, the UK East Irish
Sea, Ireland, Namibia, Morocco and Indonesia.
The following table summarises the Company's Licences as at 31 December 2011.
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Block(s) Description Role % at Location
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31/12/11
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UK
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15/21g Exploration Non-operator 21% Central North Sea
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15/21a (part) Exploration Non-operator 21% Central North Sea
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22/19c Exploration Non-operator 50% Central North Sea
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23/16f Columbus Field Operator 50% Central North Sea
Development
planned
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47/2b (split) Exploration Non-operator 37.5% Southern North Sea
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47/3g (split) Exploration Non-operator 37.5% Southern North Sea
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47/7 (split) Exploration Non-operator 37.5% Southern North Sea
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47/8d (part) Exploration Non-operator 37.5% Southern North Sea
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110/2d Exploration Operator 100% East Irish Sea
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110/8b Exploration Operator 100% East Irish Sea
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113/26b Exploration Operator 65% East Irish Sea
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113/27c Exploration Operator 65% East Irish Sea
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210/19a Exploration Operator 100% Northern North Sea
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210/20a Exploration Operator 100% Northern North Sea
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Ireland
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27/4 Exploration Operator 50% Slyne Basin
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27/5 (part) Exploration Operator 50% Slyne Basin
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27/9 Exploration Operator 50% Slyne Basin
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5/17 Exploration Operator 100% Rockall Basin
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5/18 Exploration Operator 100% Rockall Basin
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5/22 Exploration Operator 100% Rockall Basin
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5/23 Exploration Operator 100% Rockall Basin
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5/27 Exploration Operator 100% Rockall Basin
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5/28 Exploration Operator 100% Rockall Basin
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11/5 Exploration Operator 100% Rockall Basin
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11/10 Exploration Operator 100% Rockall Basin
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11/15 Exploration Operator 100% Rockall Basin
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12/1 Exploration Operator 100% Rockall Basin
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12/6 Exploration Operator 100% Rockall Basin
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12/11 (part) Exploration Operator 100% Rockall Basin
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Namibia
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2512A Exploration Operator 85% Luderitz Basin
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2513A Exploration Operator 85% Luderitz Basin
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2513B Exploration Operator 85% Luderitz Basin
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2612A (part) Exploration Operator 85% Luderitz Basin
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Morocco
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Foum Draa Exploration Non-operator 25% Tarfaya-Ifni Basin
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Sidi Moussa Exploration Non-operator 25% Tarfaya-Ifni Basin
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Indonesia
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Glagah Kambuna Kambuna Field Non-operator 25% Offshore
TAC Production North Sumatra
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The following is a summary of the status of operations on these licences and
other operational developments in the year.
United Kingdom
Central North Sea: Block 23/16f - Columbus Field
Block 23/16f covers an area of approximately 52 square kilometres in the UK
Central North Sea and contains the majority of the Columbus gas field. The gas
in Columbus is rich in condensate and therefore requires processing before it
can enter a gas transportation system. Serica has a 50% interest in Block 23/16f
and is operator for the block.
The field extends from Block 23/16f to the south into Block 23/21 which contains
the Lomond field and is operated by BG International Limited ("BG"). Serica has
been actively co-operating with BG in the front-end engineering design for a new
Bridge-Linked Platform to handle production from the Columbus field. The Bridge
Linked Platform is planned to be installed adjacent to the existing Lomond field
platform and to receive production from Columbus and other nearby fields for
processing on the Lomond platform and onward transportation to the CATS and
Forties pipeline systems. The use of the Bridge-Linked Platform forms the basis
of the Field Development Plan agreed by the Columbus field partners (Serica,
Endeavour Energy UK Limited, EOG Resources United Kingdom Limited, BG and SSE
E&P UK Limited) and submitted to DECC in June 2011.
With field engineering plans largely complete and awaiting DECC approval,
discussions have taken place with BG throughout the period to date to determine
final cost sharing arrangements and the relative interests of the 23/16f and
23/21 partners in the Columbus field. Subject to final documentation and the
approval of partners, negotiations have now been concluded to enable the project
to proceed and financing options to be put in place. Project sanction is
anticipated to be sought in the first half of 2012 and it is expected that
production will commence in late 2014 or early 2015.
Independent consultant Netherland, Sewell & Associates ("NSAI") carried out a
reserves report on the Columbus field for the end of 2011. This report estimates
that the gross Proved plus Probable Reserves of the field are 70.6 bcf of gas
and 4.9 mm bbl of liquids, a total of 16.7 mmboe. Serica holds a 50% interest in
those Columbus reserves lying in Block 23/16f. After providing for reserves
lying in the adjacent block, NSAI estimates Serica's share of proved and
probable reserves in the field to be 23.6 bcf of sales gas and 1.6 mmbbl of
liquids, a net 5.6 mmboe to Serica.
Central North Sea: Block 15/21g and 15/21a (part) - Spaniards Appraisal
Block 15/21g, in which Serica was initially awarded a 30% interest, lies
immediately west of the Scott oil field and contains a potentially significant
extension to the existing Jurassic oil discovery well 15/21-38z in Block 15/21a,
which flowed 2,660 bpd of 25 degrees API oil from a good quality Jurassic-aged
Upper Claymore sand. Interpretation of pressure data, supported by the presence
of oil saturations in down-dip well 15/21-2 indicates that the Spaniards
discovery tested by well 15/21-38z may extend across both 15/21a and 15/21g.
In June 2011, the Block 15/21g partners, announced they had agreed terms to
acquire a 70 per cent interest in part of Block 15/21a. The area in Block 15/21a
to be acquired includes the 15/21a-38z discovery. In consideration, the Block
15/21g group agreed to assign to the Block 15/21a group a 30 per cent interest
in Block 15/21g, and agreed to fund the cost of the first well to appraise the
Spaniards discovery. A subsequent appraisal well, if deemed necessary and
approved by the partnership, would be funded on promoted terms by the current
Block 15/21a partners, after which funding for any further wells would be by
equity share.
The amalgamation agreement to combine Block 15/21g and Block 15/21a was
finalised in January 2012. Serica now has a 21% interest in the amalgamated area
covering the Spaniards discovery and will be required to contribute a 30% share
of the cost of drilling the first well to appraise the discovery and a 17.14%
share of the cost of drilling a follow-up well.
Plans are in place to acquire site survey data and secure a rig to drill the
Spaniards appraisal well in Q3 2012.
Central North Sea: Block 22/19c
Block 22/19c is located approximately 20 kilometres to the west of Serica's
Columbus field. Serica holds a 50% interest in the block which is operated by
Premier.
East Irish Sea: Block 110/2d
Serica holds a 100% interest in this block. Technical work is being carried out
to assess the block's potential.
East Irish Sea: Block 110/8b
In December 2011, in the final stage of the 26th Round of UK Offshore Licensing
announced by the Department of Energy and Climate Change, the Company was
awarded a 100% interest and the operatorship of Block 110/8b in the East Irish
Sea. The work commitment comprises a 3D seismic reprocessing programme planned
to delineate a gas prospect, Darwen North, which has been identified in the
block.
The block also contains a small undeveloped oil discovery which will be
re-evaluated.
East Irish Sea: Blocks 113/26b and 113/27c - Doyle Prospect
Serica has a 65% interest in these blocks. Work during 2011 has focussed on
maturing the Doyle gas prospect lying in the north of Block 113/27c. Plans are
being brought forward for a well to be drilled in 2012 to test the Doyle
prospect although, in view of open acreage nearby being offered in the UK 27th
Licensing Round, this may be deferred at least until applications are closed.
Northern North Sea: Blocks 210/19a and 210/20a
These blocks, in which Serica has a 100% interest, are contiguous part blocks
lying immediately adjacent to the Otter oilfield. A number of oil prospects have
been provisionally identified on the blocks at Jurassic Brent Group and Home
Sand levels. Two of the Brent Group prospects are down-faulted traps, an
emerging and successful play in the northern North Sea, and the other is a
conventional Brent fault block. The fourth prospect is in a Jurassic reservoir
known as the Home Sand.
Serica is planning to drill the first well to test one of the prospects, known
as the South Otter prospects, in 2012. Before drilling, Serica is likely to seek
a partner.
Southern North Sea: Blocks 47/2b (Split), 47/3g (Split), 47/7 (Split) & 47/8d (Part)
In December 2011, Blocks 47/2b (Split), 47/3g (Split), 47/7 (Split) & 47/8d
(Part) in the Southern North Sea were offered under a single licence to a group
in which Serica has a 37.5% interest. Centrica is the operator for the group.
These blocks are contiguous part blocks immediately adjacent to the York field,
also operated by Centrica. A number of gas prospects, including a possible
extension to North York, have been provisionally identified on the blocks at
both the Leman (Permian) and Namurian (Carboniferous) levels. The work
obligation comprises a 3D seismic survey and reprocessing of existing seismic
data.
Ireland
Slyne Basin: Blocks 27/4, 27/5 (west) and 27/9 - Liffey & Boyne Prospects
These blocks cover an area of 611 square kilometres in the Slyne Basin off the
west coast of Ireland. Serica holds a 50% interest in the blocks and operates
the licence.
The shallow Jurassic oil discovery made by Serica in 2009 in the Bandon
exploration well 27/4-1 provides clear evidence of the presence of oil in this
part of the Slyne Basin although the discovery itself was not commercial. Deeper
Jurassic oil prospects of potentially commercial size are, however, evident at
the Liffey and Boyne locations in addition to the separate deeper gas prospects
at those locations. The Company has acquired site survey data in preparation for
a drilling programme to test these prospects and is currently seeking a farm-in
partner.
Rockall Basin: Blocks 5/17, 5/18, 5/22, 5/23, 5/27, and 5/28 - Muckish Prospects
Serica holds a 100% working interest in six blocks covering a total area of 993
square kilometres in the north-eastern part of the Rockall Basin off the west
coast of Ireland.
The Rockall Basin extends over 100,000 square kilometres in which only three
exploration wells have been drilled to date. The basin is therefore regarded as
very underexplored. Of these exploration wells, the 12/2-1 Dooish gas-condensate
discovery, approximately nine kilometres to the south of the licence,
encountered a 214 metre hydrocarbon column.
A large exploration prospect, Muckish, has been mapped on Serica's licence.
Further evaluation of the data has increased confidence in the potential of the
prospect, which covers an area of approximately 30 square kilometres in a water
depth of 1,450 metres and is therefore large. Serica intends to find a partner
to join in drilling a well on Muckish.
Rockall Basin: Blocks 11/5, 11/10, 11/15, 12/1, 12/6 and 12/11(part) - Midleton
Prospects
In October 2011, the Company was awarded Licensing Option 11/1 covering six
blocks in the Irish Rockall Basin under the Irish 2011 Atlantic Margin Licensing
Round. Serica now has two licences to explore some 2,220 square kilometres in
the Rockall Basin. The 2011 licence covers an extended area of proven
hydrocarbon potential in which large prospective structures have already been
identified from existing 3D seismic data.
The area covered by the licence award contains two pre-Cretaceous fault block
prospects, Midleton and West Midleton which are analogous to the proven
gas-condensate bearing Dooish discovery lying immediately to the east. These
complement and provide additional diversity to the Muckish prospect lying in
Serica's acreage just to the north east and the award will enable a
comprehensive exploration programme covering the Muckish and Midleton prospects.
Given the size of the prospects and their position in a proven gas-condensate
bearing basin, the award of the licence significantly expands the options open
to Serica to deliver an active drilling campaign in the area.
Under the terms of the licence award Serica will undertake 2D and 3D seismic
reprocessing work and other geological studies in the first two years to firm up
the prospects, following which the Company has an option to convert the licence
into a full Exploration Licence.
Namibia
Luderitz Basin: Blocks 2512A, 2513A, 2513B and 2612A (part)
In November 2011, Serica confirmed the announcement made by the Namibian
Ministry of Mines and Energy of the award to Serica Energy Namibia B.V., a
wholly owned subsidiary of Serica, of an 85% interest in a Petroleum Agreement
covering four large blocks and part blocks in the prospective Luderitz Basin,
offshore Namibia. The award to Serica, concluded in December, was in partnership
with The National Petroleum Corporation of Namibia (Pty) Limited and Indigenous
Energy (Pty) Limited. Serica is the operator of the group.
In respect of the award, Serica agreed to make the following signature payments
to NAMCOR:
-- US$1 million cash payment to NAMCOR
-- US$2 million through an allotment to NAMCOR of 6 million ordinary shares
of Serica (which represents approximately 3.28% of the enlarged issued
share capital of Serica); the actual terms being subject to variation as
described below
The issue of the shares to NAMCOR is intended to provide NAMCOR and the
Government of the Republic of Namibia with an additional return in the event of
success with the project. To the extent that the value of 6 million ordinary
shares is more than US$2 million on the day of allotment, then Serica may reduce
the number of shares allotted; alternatively, if the value is less than US$2
million, Serica may either increase the number of shares allotted or pay the
cash equivalent of the difference to NAMCOR. The US$1 million cash payment was
made to NAMCOR in January 2012 and Serica expects to allot the shares in the
second quarter 2012.
The Luderitz Basin is one of three under-explored sedimentary basins lying south
of the Walvis Ridge offshore Namibia. The licence award comprises Blocks 2512A,
2513A, 2513B and 2612A (part) in the centre of the basin and covers an area of
approximately 17,400 square kilometres. Existing 2D seismic data demonstrates
the existence of large four-way dip closed structures lying wholly in the
undrilled deep water parts of the licence area together with the potential for
sizable traps in stratigraphic pinch outs towards the shelf margin.
During the initial four-year exploration period of the licence, Serica is
required to conduct an extensive 3D seismic survey and undertake reprocessing of
existing 2D seismic data. In March the Company announced that it had agreed to
farm-out an interest in the licence to BP. Under the transaction, BP will pay to
Serica a sum covering Serica's past costs and earn a 30% interest in the licence
by meeting the full cost of an extensive 3D seismic survey. As a result of the
farm-out, Serica's interest in the licence following completion of the seismic
survey will be 55%. Contemporaneously, Serica announced that it had signed a
contract with Polarcus Seismic Limited to acquire up to 4,150 square kilometres
of 3D seismic across the licence. The survey will considerably exceed Serica's
obligations for seismic acquisition under the licence terms.
The deep water geological basins offshore Namibia, including the Luderitz Basin,
are at the early frontier stage of exploration. Although the presence of very
large structures have been shown to exist from seismic surveys, very few wells
have been drilled in the deeper water Namibian basins to date and the full
hydrocarbon potential of the area has not yet been fully tested. Water depths in
Serica's Luderitz Basin blocks range from 300 to 3,000 metres. Drilling in these
depths of water, whilst becoming more commonplace in the industry, requires
sophisticated drilling techniques and equipment and is very costly.
Serica has therefore granted an option for BP to increase its interest in the
Licence by meeting the full cost of drilling and testing an exploration well to
the Barremian level before the end of the first four year exploration period. In
the event that this option is exercised, Serica's interest in the Licence will
be 17.5% carried through the first well, which will have very considerable value
if the exploration drilling is successful. Serica will continue to be the
operator of the licence during the initial seismic period with BP taking over as
operator if it exercises its option to drill and test a well.
Morocco
Sidi Moussa and Foum Draa Petroleum Agreements
Serica holds a 25% interest in the Sidi Moussa and adjacent Foum Draa Petroleum
Agreements offshore Morocco. The blocks together cover a total area of
approximately 12,700 square kilometres in the sparsely explored Tarfaya-Ifni
Basin and extend from the Moroccan coastline into water depths reaching a
maximum of 2,000 metres. A drilling decision is required to be made at the end
of the initial phases of the Agreements.
The Tarfaya-Ifni Basin is geologically analogous to the oil producing salt
basins of West Africa. Sidi Moussa and Foum Draa are covered by over 5,200
square kilometres of modern 3D seismic data and over 7,000 kilometres of 2D
seismic data. Evaluation of this data is now largely complete and demonstrates
the presence of a large number of salt diapir related prospects and tilted fault
block plays. The analysis is now being made available to potential farm-in
partners which Serica and its partners will require before entering the drilling
phase.
Spain
The Company held a 75% interest and operatorship in the Abiego, Barbastro,
Binefar and Peraltilla Exploration Permits onshore northern Spain. Serica and
its joint venture partner gave notice to relinquish the permits in October 2011.
Indonesia
A summary of Serica's interests in Indonesia and developments during 2011 is
detailed below.
In Q4 2010 the Company announced it was undertaking a strategic review of its
operations in South East Asia. As at 30 June 2011, as a result of the decision
by the Company to dispose of its remaining Indonesian assets and a conditional
sale agreed in June to dispose of the operations, the various assets and
associated liabilities of the Company's entire Indonesian business formed part
of a disposal group and were presented as held for sale in the Group Balance
Sheet at 30 June 2011. The financial results of this Indonesian business
disposal group were disclosed as discontinued operations and separate from the
results of the retained business segments. During the third quarter, the Company
continued to review proposals to realise the value of its Indonesian properties.
In October 2011, Serica announced the sale of its Indonesian exploration
properties to Kris Energy Limited. The sale, with an effective date of 1
September 2011, comprised Serica's wholly owned subsidiary, Serica Indonesia
Holdings BV, which excluded Serica's interest in the producing Kambuna gas field
but which held Serica's Indonesian operating subsidiaries and the following
exploration properties:
-- An operated 30% interest in the Kutai PSC onshore and offshore East
Kalimantan
-- An operated 100% interest in the East Seruway PSC offshore North-West
Sumatra, and
-- Rights relating to certain Indonesian Joint Study Areas
The base consideration for the transaction with Kris Energy Limited amounted to
US$3.14 million together with a further US$0.3 million in respect of
expenditures relating to the properties since the effective date. These sums
were received on completion in October 2011 and a further contingent
consideration payment of US$1.0 million was received in December 2011, following
the award of a licence in a Joint Study Area to Kris Energy Limited. A further
contingent consideration payment of up to US$0.5 million becomes payable to
Serica in the event of a future award to Kris Energy Limited of a second licence
interest in a Joint Study Area.
Serica's sole remaining interest in Indonesia subsequent to the sale is its 25%
interest in the Glagah Kambuna Technical Assistance Contract ("TAC"). This asset
is being held by Serica for the time being and whilst the Company will continue
to benefit from the cash flow it receives from this field it does not consider
the asset to be core to its forward strategy.
Glagah Kambuna TAC - Kambuna Field, Offshore North Sumatra, Indonesia
The Glagah Kambuna Technical Assistance Contract ("TAC") covers an area of
approximately 380 square kilometres and lies offshore North Sumatra. Serica
holds an interest of 25% in the TAC which contains the producing Kambuna gas
field.
The Kambuna gas is used for power generation to supply electricity to the city
of Medan in North Sumatra and for industrial uses. The gas sales prices per
thousand standard cubic feet under the contracts with PLN and Pertiwi Nusantara
Resources ("Pertiwi") in December 2011 were approximately US$5.6 and US$7.0
respectively, escalated at 3% per annum. Kambuna gas yields significant volumes
of condensate (light oil) which is sold to the state oil company Pertamina at
the official Attaka Indonesian Crude Price less 11 cents per barrel.
Gross Kambuna field production in 2011 was 12,653 million standard cubic feet of
gas and 862,600 barrels of condensate, equivalent to gross average daily
production for the year of 35 mmscfd and 2,363 bbl/day. Average prices realised
during the year for gas and condensate sales respectively were US$6.16 per mcf
and US$115.8 per barrel. The highest price achieved during 2011 is US$126.1 per
barrel, achieved in April 2011.
Following the reserve revision at the end of 2010 the field has now commenced
its anticipated natural decline and production rates are expected to fall in
line with reservoir pressure depletion. During the fourth quarter the field
produced at an average rate of 23 mmscfd with approximately 1,489 barrels per
day of condensate. Average prices realised during the quarter for gas and
condensate sales respectively were US$6.18 per mcf and US$114.1 per barrel.
Compression facilities have been successfully installed in February 2012 to
enhance the production capacity of the field after the first quarter of 2012.
During 2011 the field operator reviewed options to drill an additional well,
Kambuna #5, to exploit the gas bearing potential of a likely northern extension
of the field. It had been intended that this well be drilled in the latter half
of 2011 but the lack of a suitable rig at an acceptable price in the timeframe
resulted in the deferral of the well. It is now considered unlikely this well
will be drilled in 2012 although discussions may reopen with Pertamina with a
view to investigating this possibility.
Serica commissioned an independent reserves audit on the Kambuna field for its
2011 annual reserves filings. This new reserves report, carried out by RPS
Energy, the same consultants as used by the operator, estimates that at 31
December 2011 the gross Proved plus Probable Reserves of the field are 17.5 bcf
of sales gas and 1.1 mm bbl of condensate, a total of 4.7 mmboe. These new
estimates include slight revisions in reserves from the figures previously
reported by Serica in 2010.
The Company has assessed the expected useful life of the future economic
benefits embodied in the asset and considers that, given the relatively short
remaining field life, the production profiles associated with proved reserves
better reflect this expected remaining useful life. Accordingly the Company has
concluded that it is appropriate to use proved reserves as a basis for the
specific depletion calculation for the Kambuna field asset with effect from 1
July 2011. RPS Energy estimates that at 31 December 2011 the gross Proved
Reserves of the field are 11.1 bcf of sales gas and 0.6 mm bbl of condensate, a
total of 2.9 mmboe.
The performance of the field will continue to be monitored throughout 2012 as
further production information becomes available.
North Sumatra: East Seruway PSC
Serica disposed of its 100% interest in the East Seruway Production Sharing
Contract ("PSC") offshore North Sumatra, to Kris Energy on 11 October 2011 and
no longer has an interest in this block. The sale took effect from 1 September
2011.
East Kalimantan: Kutai PSC
Serica was the operator of the Kutai PSC and held a 30% interest. The Company
disposed of its interest in the Kutai PSC to Kris Energy on 11 October 2011 and
no longer has an interest in this block. The sale took effect from 1 September
2011.
GLOSSARY
bbl barrel of 42 US gallons
bcf billion standard cubic feet
boe barrels of oil equivalent (barrels of oil,
condensate and LPG plus the heating equivalent of
gas converted into barrels at a rate of 4,800
standard cubic feet per barrel for Kambuna, which
has a relatively high calorific value, and 6,000
standard cubic feet per barrel for Columbus)
boepd barrels of oil equivalent per day
bopd or bpd barrels of oil or condensate per day
LNG Liquefied Natural Gas (mainly methane and ethane)
LPG Liquefied Petroleum Gas (mainly butane and propane)
mcf thousand cubic feet
mm bbl million barrels
mmboe million barrels of oil equivalent
mmBtu million British Thermal Units
mmscfd million standard cubic feet per day
PSC Production Sharing Contract
Proved Reserves Proved reserves are those Reserves that can be
estimated with a high degree of certainty to be
recoverable. It is likely that the actual remaining
quantities recovered will exceed the estimated
proved reserves.
Probable Reserves Probable reserves are those additional Reserves that
are less certain to be recovered than proved
reserves. It is equally likely that the actual
remaining quantities recovered will be greater
or less than the sum of the estimated proved +
probable reserves.
Possible Reserves Possible reserves are those additional Reserves that
are less certain to be recovered than probable
reserves. It is unlikely that the actual remaining
quantities recovered will exceed the sum of the
estimated proved + probable + possible reserves
Reserves Estimates of discovered recoverable commercial
hydrocarbon reserves calculated in accordance with
the Canadian National Instrument 51-101
Contingent Resources Estimates of discovered recoverable hydrocarbon
resources for which commercial production is not yet
assured, calculated in accordance with the Canadian
National Instrument 51-101
Prospective Resources Estimates of the potential recoverable hydrocarbon
resources attributable to undrilled prospects,
calculated in accordance with the Canadian National
Instrument 51-101
TAC Technical Assistance Contract
tcf trillion standard cubic feet
FINANCIAL REVIEW
Results of Operations
The results of Serica's operations detailed below in this MD&A, and in the
financial statements, are presented in accordance with International Financial
Reporting Standards ("IFRS").
The financial results of the Indonesian business disposal group that was sold in
October 2011 are disclosed as discontinued operations and separate from the
results of the retained business segments. The financial results of the Kambuna
field interest had been disclosed in the Q2 2011 and Q3 2011 reports to
shareholders as part of discontinued operations. The directors consider that as
at 31 December 2011, whilst still available for sale, this operation no longer
meets the IFRS 5 criteria to recognise it as an asset held for sale and
therefore include as 'discontinued'. The annual financial results of the Kambuna
field are therefore now disclosed within continuing operations together with the
results of the retained core business segments.
Restated (i)
Continuing operations 2011 2010
US$000 US$000
Sales revenue 27,111 31,302
Cost of sales (25,648) (18,758)
---------------- ----------------
Gross profit 1,463 12,544
Expenses:
Impairment of fixed assets and goodwill (2,314) (11,797)
Pre-licence costs (1,507) (1,858)
E&E asset and other write offs (355) (4,091)
Administrative expenses (6,011) (6,570)
Foreign exchange (loss)/gain (46) 60
Share-based payments (844) (1,117)
Depreciation (348) (132)
---------------- ----------------
Operating loss before net finance revenue
and tax (9,962) (12,961)
Finance revenue 15 57
Finance costs (1,394) (4,083)
---------------- ----------------
Loss before taxation (11,341) (16,987)
Taxation charge for the year (3,149) (979)
---------------- ----------------
Loss for the year from continuing
operations (14,490) (17,966)
---------------- ----------------
Discontinued operations
Loss for the year from discontinued
operations (5,880) (26,251)
---------------- ----------------
Loss for the year (20,370) (44,217)
---------------- ----------------
---------------- ----------------
Loss per ordinary share - EPS
Basic and diluted EPS on loss for the year
from continuing operations (US$) (0.08) (0.10)
Basic and diluted EPS on loss for the year
(US$) (0.12) (0.25)
(i) Restated for discontinued operations
Continuing operations
Serica generated a gross profit of US$1.5 million for the year ended 31 December
2011 (2010: US$12.5 million) from its retained 25% interest in the Kambuna
field.
Sales revenues
Serica currently generates all its sales revenue from the Kambuna field in
Indonesia. Revenue is recognised on an entitlement basis for the Company's net
working field interest. Entitlement revenues are higher in those periods where
the full capped amount of cost recovery entitlement is eligible to be claimed
out of gross revenue. In the Q2, Q3 and Q4 2011 periods, the cycle of eligible
cost recovery was such that the full capped amount of cost recovery could not be
claimed by the contractors, therefore giving lower contractor entitlement
revenues and an increased government share of gross revenue. This has reduced
Serica's reported entitlement revenues as a proportion of gross sales volumes in
Q2, Q3 and Q4 2011 compared to earlier periods. Unclaimed cost recovery amounts
are carried forward to future periods.
In 2011, gross Kambuna field gas production averaged 35 mmscf (2010: 31 mmscf)
per day together with average condensate production of 2,363 barrels per day
(2010: 2,685 bpd). Field commissioning work was completed in Q4 2010. The 2011
gas production was sold at prices averaging US$6.16 per Mscf (2010 US$5.88 per
Mscf) and generated US$15.1 million (2010 US$15.3 million) of revenue net to
Serica. Condensate production is stored and sold when lifted at a price
referenced to the Indonesia Attaka official monthly crude oil price. Liftings in
the year earned US$12.0 million (2010 US$16.0 million) of revenue net to Serica
at an average price of US$115.8 per barrel (2010 US$80.8 per barrel).
Cost of sales and depletion charges
Cost of sales for 2011 were driven by production from the Kambuna field and
totalled US$25.6 million (2010 US$18.8 million). The charge comprised direct
operating costs of US$7.7 million (2010 US$7.6 million), non cash depletion of
US$17.7 million (2010 US$11.5 million) and a decrease in condensate inventory of
US$0.2 million (2010 US$0.3 million increase). The direct operating costs are
broadly in line with field production but the depletion charges per boe
increased significantly for Q4 2010 and the first two quarters in 2011 following
the Kambuna field reserves downgrade previously announced in the 2010 Annual
Report. With effect from 1 July 2011, the Company revised its accounting
estimate of entitlement reserves for depletion purposes from 'proved and
probable' to 'proved'. The reduction in entitlement reserve base generated
further increases in the depletion charge per boe for the second half of 2011.
The Company generated a loss before tax from continuing operations of US$11.3
million for 2011 compared to a loss before tax of US$17.0 million for 2010.
The 2011 US$2.3 million (2010 US$11.8 million) pre-tax impairment related to the
Kambuna field and was recorded against oil and gas property, plant and
equipment.
Pre-licence costs included direct costs and allocated general administrative
costs incurred on oil and gas activities prior to the award of licences,
concessions or exploration rights. The expense of US$1.5 million for 2011 was
lower than the 2010 charge of US$1.9 million. Significant work was performed in
both years, in 2010 mainly on the 26th Licensing Round in the UK and in 2011 in
Namibia and Ireland. During 2011 the Company was awarded interests in Blocks
210/19a and 210/20a in the UK Northern North Sea, Block 110/8b in the East Irish
Sea, four blocks in the Southern North Sea, a further six blocks in the Rockall
Basin in Ireland, and four large blocks and part blocks in the Luderitz Basin in
Namibia.
Asset write-offs in 2011 of US$0.4 million (2010 of US$4.1 million) included
minor working capital amounts and costs from relinquished licences. The 2010
asset write off of US$4.1 million was primarily attributed to the Oates block
(US$3.5 million).
Administrative expenses of US$6.0 million for 2011 decreased from US$6.6 million
for 2010. The Company has worked to reduce overhead during 2011 and expects
these savings to give further benefit in 2012.
The impact of foreign exchange was not significant in 2011 or 2010.
Share-based payment costs of US$0.8 million reflected share options granted and
compare with US$1.1 million for 2010.
Negligible depreciation charges in all periods represent office equipment and
fixtures and fittings. The depletion and amortisation charge for Kambuna field
development costs is recorded within 'Cost of Sales'.
Finance revenue for 2011, comprising interest income of US$0.02 million,
compares with US$0.06 million for 2010. Bank deposit interest income has been
negligible in both periods.
Finance costs consist of interest payable, arrangement costs spread over the
term of the bank loan facility and other fees. The significant reduction in
expense from US$4.1 million in 2010 to US$1.4 million arose following the full
repayment of outstanding liabilities in February 2011. All facility arrangement
costs have been amortised and no interest is currently payable. The only ongoing
cost related to other minor fees.
The taxation charge of US$3.1 million (2010 US$1.0 million) arose from
Indonesian operations, and comprised a current tax charge of US$4.4 million
(2010: US$1.1 million) and a deferred tax credit of US$1.3 million (2010: US$0.1
million). Current tax is charged on the profit oil or gas element of sales
revenue rather than the cost recovery component. The significant increase in
current tax charge of 2011 compared to 2010 is due to the higher proportion of
profit gas or oil as part of recorded field revenue in this cycle of the field
life.
The net loss per share from continuing operations of US$0.08 for 2011 compares
to a net loss per share of US$0.10 for 2010.
Discontinued operations
The results of discontinued operations below are those generated from Serica's
South East Asia operations which were disposed of in October 2011.
At 30 June 2011, as a result of the Board's strategic decision to exit
Indonesia, the Group's interests in the region were classified as a disposal
group held for sale and therefore included as discontinued operations. In
October 2011, the Group completed the disposal of its operated exploration
portfolio; however the Group's 25% non-operated interest in Kambuna has not yet
been sold. The directors concluded that as at 31 December 2011, whilst still
available for sale, Serica's interest in Kambuna no longer meets the IFRS 5
criteria to be classified as an asset held for sale, because an active marketing
program is no longer in place, and therefore the results of this part of the
disposal group are disclosed within continuing operations together with the
results of the retained core business segments.
Discontinued operations 2011 2010
US$000 US$000
Sales revenue - -
Cost of sales - -
---------------- ----------------
Gross profit - -
Expenses:
Pre-licence costs (292) (66)
E&E asset and other write-offs (788) (25,395)
Administrative expenses (621) (783)
Foreign exchange loss (3) (5)
Share-based payments (203) (114)
Depreciation - (5)
---------------- ----------------
Operating loss before net finance revenue
and tax (1,907) (26,368)
Other costs (363) -
Loss recognised on remeasurement to
fair value (3,720) -
Profit on disposal 110 -
Finance revenue - 117
---------------- ----------------
Loss before taxation (5,880) (26,251)
Taxation charge for the year - -
---------------- ----------------
Loss for the year (5,880) (26,251)
---------------- ----------------
Asset write offs in 2011 and 2010 were in respect of E&E and other expenses from
the Kutai PSC in Indonesia, which was sold in October 2011. 2011 expenditure on
the asset was expensed as incurred.
In October 2011 the Company completed the disposal of its portfolio of operated
exploration interests in South East Asia to Kris Energy Limited for base
consideration of US$3.4 million and a further contingent payment of US$1.0
million received in December 2011. The transaction generated a loss of US$3.6
million (chiefly comprising a loss recognised on re-measurement to fair value of
US$3.7 million as at 30 September 2011) after deducting booked asset costs and
other transaction costs and fees.
Summary of Quarterly Results
Quarter ended: 31 Mar 30 Jun 30 Sep 31 Dec
US$000 US$000 US$000 US$000
--------------------------------------------
2011
Sales revenue 8,577 6,613 6,579 5,342
(Loss)/profit for the quarter (2,465) (11,342) (2,462) (4,101)
Basic earnings per share US$ (0.01) (0.06) (0.01) (0.02)
Diluted earnings per share US$ (0.01) (0.06) (0.01) (0.02)
--------------------------------------------
2010
Sales revenue 5,334 6,537 10,018 9,413
(Loss)/profit for the quarter (2,740) (1,646) 281 (40,112)
Basic earnings per share US$ (0.02) (0.01) 0.002 (0.22)
Diluted earnings per share US$ (0.02) (0.01) 0.002 (0.22)
--------------------------------------------
The second quarter 2011 loss includes a charge of US$8.7 million recognised on
the re-measurement to fair value of the Indonesian disposal group as at 30 June
2011.
The fourth quarter 2010 loss includes asset write offs of US$29.5 million
attributed to the Kutai and Oates E&E assets and an impairment charge of US$11.8
million against the Kambuna production asset.
Working Capital, Liquidity and Capital Resources
Current Assets and Liabilities
An extract of the balance sheet detailing current assets and liabilities is
provided below:
31 December 31 December
2011 2010
US$000 US$000
---------------- ----------------
Current assets:
Inventories 1,572 2,748
Trade and other receivables 9,338 14,669
Financial assets 647 -
Cash and cash equivalents 19,946 30,002
---------------- ----------------
Total Current assets 31,503 47,419
Less Current liabilities:
Trade and other payables (10,267) (13,574)
Income tax payable (302) (1,466)
Financial liabilities - (11,671)
---------------- ----------------
Total Current liabilities (10,569) (26,711)
---------------- ----------------
Net Current assets 20,934 20,708
---------------- ----------------
At 31 December 2011, the Company had net current assets of US$20.9 million which
comprised current assets of US$31.5 million less current liabilities of US$10.6
million, giving an overall increase in working capital of US$0.2 million in the
year.
Inventories decreased from US$2.7 million to US$1.6 million over the year,
largely due to the disposal of certain equipment.
Trade and other receivables at 31 December 2011 totalled US$9.3 million, which
included US$3.7 million of trade debtors from gas and condensate sales in
November and December. The decrease in amounts receivable from the 2010 balance
of US$14.7 million is largely caused by the disposal of balances attributed to
the Indonesian exploration operations. Other items included advance payments on
ongoing operations, recoverable amounts from partners in joint venture
operations in the UK and Indonesia, sundry UK and Indonesian working capital
balances, and prepayments.
Financial assets at 31 December 2011 represented US$0.6 million of restricted
cash deposits.
Cash and cash equivalents decreased from US$30.0 million to US$20.0 million in
the year. During 2011 the Company generated US$27.1 million of revenues from the
Kambuna field but also repaid US$11.8 million to reduce its debt liability to
US$nil. Cash outflows were incurred on Kambuna field operating costs, Kambuna
cash tax payments of US$5.7 million in respect of current and prior periods, and
outstanding liabilities from the 2010 Kutai exploration drilling programme in
Indonesia. Other costs included seismic work across the portfolio in Ireland,
Columbus Field Development Plan expense together with new venture costs, ongoing
administrative costs and corporate activity.
Trade and other payables of US$10.3 million at 31 December 2011 chiefly include
US$3.4 million of liabilities arising on the signature of the Namibian licences
in December, and trade creditors and accruals from UK & Kambuna operations.
Other items include sundry creditors and accruals from the ongoing exploration
programmes, payables for administrative expenses and other corporate costs.
The current tax creditor of US$0.3 million arises in respect of the Kambuna
field in Indonesia. First cash tax payments from Kambuna field revenues were
made in April 2011.
Financial liabilities comprised drawings under the senior debt facility and were
disclosed net of the unamortised portion of allocated issue costs. The balance
was classified as short-term as at 31 December 2010 and was fully repaid in
February 2011.
Long-Term Assets and Liabilities
An extract of the balance sheet detailing long-term assets and liabilities is
provided below:
31 December 31 December
2011 2010
US$000 US$000
---------------- ----------------
Exploration and evaluation assets 69,083 68,604
Property, plant and equipment 18,719 37,546
Financial assets 394 1,431
Long-term other receivables 3,613 4,748
Provisions (2,029) (1,706)
Deferred income tax liabilities - (1,339)
During 2011, total investments in petroleum and natural gas properties
represented by exploration and evaluation assets ("E&E assets") increased from
US$68.6 million to US$69.1 million. These amounts exclude the Kambuna
development costs which are classified as property, plant and equipment.
The net US$0.5 million increase consists of US$7.4 million of additions (US$6.3
million on continuing operations) less the US$6.9 million of asset book costs
from the East Seruway PSC which was sold in October 2011.
The US$6.3 million of additions on continuing operations were incurred on the
following assets:
In Africa, US$3.4 million was incurred upon the signature of the Luderitz basin
licence interests in Namibia and US$0.6 million was incurred on ongoing work on
the Morocco interests.
In the UK & Ireland, US$0.8 million was incurred on the Columbus FDP (including
FEED work on the BLP), US$0.8 million on a site survey and other exploration
work in Ireland and US$0.7 million on other UK exploration work and G&A.
Property, plant and equipment chiefly comprise the net book amount of the
capital expenditure on the Company's interest in the Kambuna development. During
2011, the Company's investment decreased from US$36.7 million to US$18.2
million. This US$18.5 million decrease comprised depletion charges of US$17.7
million arising from the production of gas and condensate, the Q4 2011
impairment of US$2.3 million, partially offset by US$1.5 million of capex
additions in the year. The property, plant and equipment also included balances
of US$0.5 million (2010: US$0.8 million) for office fixtures and fittings and
computer equipment.
Financial assets at 31 December 2011 represented US$0.4 million of restricted
cash deposits.
Long-term other receivables of US$3.6 million are represented by value added tax
("VAT") on Indonesian capital spend which is expected to be recovered from the
Indonesian authorities.
Provisions of US$2.0 million at 31 December 2011 are in respect of Kambuna field
decommissioning payments in Indonesia.
The deferred income tax liability as at 31 December 2010 arose in respect of the
Company's retained Kambuna asset interest in Indonesia.
Shareholders' Equity
An extract of the balance sheet detailing shareholders' equity is provided below:
31 December 31 December
2011 2010
US$000 US$000
---------------- ----------------
Total share capital 207,702 207,657
Other reserves 19,475 18,428
Accumulated deficit (116,463) (96,093)
Total share capital includes the total net proceeds, both nominal value and any
premium, on the issue of equity capital.
Other reserves mainly include amounts in respect of cumulative share-based
payment charges. The increase from US$18.4 million to US$19.5 million reflects
proportional charges in 2011 for options issued in 2011 and prior years.
Asset values and Impairment
At 31 December 2011 Serica's market capitalisation stood at US$49.8 million (GBP
32.2 million), based upon a share price of GBP 0.1825, which was exceeded by the
net asset value at that date of US$110.7 million. By 28 March 2012 the Company's
market capitalisation had increased to US$100.8 million. Management conducted a
thorough review of the carrying value of its assets and determined that no
further write-downs were required beyond those already disclosed above.
Capital Resources
Available financing resources and debt facility
Serica's prime focus has been to deliver value through exploration success.
To-date this has given rise to the Kambuna gas field development in Indonesia
and the Columbus gas field in the UK North Sea, for which development plans are
being formulated.
Typically exploration activities are equity financed whilst field development
costs are principally debt financed. In the current business environment, access
to new equity and debt remains uncertain. Consequently, the Company has given
priority to the careful management of existing financial resources.
In November 2009 the Company replaced its US$100 million debt facility with a
new three-year facility for an equal amount. The new facility, which was
arranged with J.P.Morgan plc, Bank of Scotland plc and Natixis as Mandated Lead
Arrangers, was principally to refinance the Company's outstanding borrowings on
the Kambuna field. It was also put in place to finance the appraisal and
development of the Columbus field and for general corporate purposes.
Following the debt repayments in 2010, management reduced its debt facility to
US$50 million total capacity so as to restrict ongoing facility costs. The
ability to draw under the facility for development is determined both by the
achievement of milestones on the relevant project and also by the availability
calculated under a projection model. The outstanding amount under the Company's
debt facility was fully repaid in February 2011.
At 31 December 2011, the Company held cash and cash equivalents of US$20.0
million and US$1.0 million of short and long-term restricted cash in continuing
operations. Overall, the current cash balances held, the crystallisation of
value from Indonesia either through the revenues from a retained 25% Kambuna
interest or a disposal, and the control that the Company can exert over the
timing and cost of its exploration programmes both through operatorship and
through farm-outs leave it well placed to manage its commitments.
Summary of contractual obligations
The following table summarises the Company's contractual obligations as at 31
December 2011;
Total less than 1-3 years greater than
1 year 3 years
Contractual US$000 US$000 US$000 US$000
Obligations
--------------------------------------------------------
Long term debt - - - -
Operating leases 678 538 140 -
Other long term
obligations 1,805 500 870 435
--------------------------------------------------------
Total contractual
obligations 2,483 1,038 1,010 435
All bank debt was repaid in February 2011.
Other long term obligations relate to decommissioning payments in Indonesia.
Lease commitments
At 31 December 2011, Serica had no capital lease obligations. At that date, the
Company had commitments to future minimum payments under operating leases in
respect of rental office premises and office equipment for each of the following
period/years as follows:
US$000
31 December 2012 538
31 December 2013 140
Capital expenditure commitments, obligations and plans
Following the disposal in October 2011 of the Company's interests in the Kutai
PSC and East Seruway PSC in Indonesia, the Company has no further obligations in
respect of these properties.
The Company's share of expected outstanding capital costs on the Kambuna project
were approximately a net US$1.0 million, and are in respect of a condensate
pipeline and the installation of a permanent compressor.
In addition to the above, the Company also typically has obligations to carry
out defined work programmes on its oil and gas properties, under the terms of
the award of rights to these properties.
The most significant obligations are in respect of the Company's recently
awarded Namibian licence. Under the terms of the licence the Company has a
minimum obligation expenditure on exploration work of US$15.0 million covering
the entire initial four year period of the licence, ending in December 2015.
Following the farm-out transaction with BP noted in the operations review, the
Company's work programme obligation will be carried by a third party.
Other less material minimum obligations include G&G, seismic work and ongoing
licence fees in the UK and Ireland.
Following the finalisation of the amalgamation agreement to combine the Central
North Sea Blocks 15/21g and 15/21a in January 2012, the venture partners are now
committed to drill an appraisal well which is expected to take place in 2H 2012.
Serica's estimated 30% share of costs is approximately US$7.8 million.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet transactions or arrangements.
Critical Accounting Estimates
The Company's significant accounting policies are detailed in note 2 to the
attached audited 2011 financial statements. International Financial Reporting
Standards have been adopted. The costs of exploring for and developing petroleum
and natural gas reserves are capitalised. The capitalisation and any write off
of E&E assets, or depletion of producing assets, necessarily involve certain
judgments with regard to whether the asset will ultimately prove to be
recoverable. Key sources of estimation uncertainty that impact the Company
relate to assessment of commercial reserves and the impairment of the Company's
assets. Oil and gas properties are subject to periodic review for impairment,
whilst goodwill is reviewed at least annually. Impairment considerations
necessarily involve certain judgements as to whether E&E assets will lead to
commercial discoveries and whether future field revenues will be sufficient to
cover capitalised costs. Recoverable amounts can be determined based upon risked
potential, or where relevant, discovered oil and gas reserves. In each case,
recoverable amount calculations are based upon estimations and management
assumptions about future outcomes, product prices and performance. Management is
required to assess the level of the Group's commercial reserves together with
the future expenditures to access those reserves, which are utilised in
determining the amortisation and depletion charge for the period and assessing
whether any impairment charge is required.
Financial Instruments
The Group's financial instruments comprise cash and cash equivalents, bank loans
and borrowings, accounts payable and accounts receivable. It is management's
opinion that the Group is not exposed to significant interest or credit or
currency risks arising from its financial instruments other than as discussed
below:
Serica has exposure to interest rate fluctuations on its cash deposits and its
bank loans; given the level of expenditure plans over 2012/13 this is managed in
the short-term through selecting treasury deposit periods of one to three
months. Treasury counterparty credit risks are mitigated through spreading the
placement of funds over a range of institutions each carrying acceptable
published credit ratings to minimise counterparty risk.
Where Serica operates joint ventures on behalf of partners it seeks to recover
the appropriate share of costs from these third parties. The majority of
partners in these ventures are well established oil and gas companies. In the
event of non payment, operating agreements typically provide recourse through
increased venture shares.
Serica retains certain cash holdings and other financial instruments relating to
its operations, limited to the levels necessary to support those operations. The
US$ reporting currency value of these may fluctuate from time to time causing
reported foreign exchange gains and losses. Serica maintains a broad strategy of
matching the currency of funds held on deposit with the expected expenditures in
those currencies. Management believes that this mitigates much of any actual
potential currency risk from financial instruments. Loan funding is available in
US Dollars and Pounds Sterling.
It is management's opinion that the fair value of its financial instruments
approximate to their carrying values, unless otherwise noted.
Share Options
As at 31 December 2011, the following director and employee share options were
outstanding:
Expiry Date Amount Exercise cost
Cdn$
December 2014 200,000 200,000
January 2015 600,000 600,000
June 2015 1,100,000 1,980,000
Exercise cost
GBP
August 2012 1,200,000 1,182,000
October 2013 750,000 300,000
January 2014 371,000 118,720
November 2015 298,000 289,060
January 2016 765,000 791,775
June 2016 270,000 259,200
November 2016 120,000 134,400
January 2017 393,000 400,860
May 2017 210,000 218,400
March 2018 1,020,000 765,000
March 2018 850,000 697,000
January 2020 3,486,000 2,370,480
April 2021 450,000 141,188
In January 2011, 90,000 share options were exercised by employees other than
directors at a price of GBP 0.32.
In April 2011, 200,000 share options were granted to an executive director with
an exercise cost of GBP 0.31375 and an expiry date of 4 April 2021. The exercise
of the options is subject to certain performance criteria as set out in the
Directors' Report. Also in April 2011, 250,000 share options were granted to
certain employees other than directors with an exercise cost of GBP 0.31375 and
an expiry date of 4 April 2021.
In January 2012, 859,690 share options were granted to two executive directors
and 1,285,270 share options were granted to certain employees other than
directors with an exercise cost of GBP 0.21375 and an expiry date of 10 January
2022.
Outstanding Share Capital
As at 28 March 2012, the Company had 176,660,311 ordinary shares issued and
outstanding.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
The Company's Chief Executive Officer and Chief Financial Officer have designed,
or caused to be designed under their supervision, disclosure controls and
procedures ("DC&P") to provide reasonable assurance that: (i) material
information relating to the Company is made known to the Company's Chief
Executive Officer and Chief Financial Officer by others, particularly during the
periods in which the annual and interim filings are being prepared; and (ii)
information required to be disclosed by the Company in its annual filings,
interim filings or other reports filed or submitted by it under securities
legislation is recorded, processed, summarized and reported within the time
period specified in securities legislation. All control systems by their nature
have inherent limitations and, therefore, the Company's DC&P are believed to
provide reasonable, but not absolute, assurance that the objectives of the
control systems are met.
The Company's Chief Executive Officer and Chief Financial Officer have designed,
or caused to be designed under their supervision, internal controls over
financial reporting ("ICFR") to provide reasonable assurance regarding the
reliability of the Company's financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's DC&P and ICFR as defined by National
Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim
Filings. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as at December 31, 2011, the Company's
DC&P and ICFR are effective. There were no changes in the Company's ICFR during
the period beginning on October 1, 2011 and ended December 31, 2011 that have
materially affected, or are reasonably likely to materially affect, the
Company's ICFR. It should be noted that a control system, including the
Company's disclosure and internal controls and procedures, no matter how well
conceived can provide only reasonable, but not absolute assurance that the
objectives of the control system will be met and it should not be expected that
the disclosure and internal controls and procedures will prevent all errors or
fraud.
Business Risk and Uncertainties
Serica, like all companies in the oil and gas industry, operates in an
environment subject to inherent risks and uncertainties. The Board regularly
considers the principal risks to which the company is exposed and monitors any
agreed mitigating actions. The overall strategy for the protection of
shareholder value against these risks is to retain a broad portfolio of assets
with varied risk/reward profiles, to apply prudent industry practice in all
operations, to carry insurance where available and cost effective, and to retain
adequate working capital.
The principal risks currently recognised and the mitigating actions taken by the
management are as follows:
----------------------------------------------------------------------------
Investment Returns: Management seeks to raise funds and then to generate
shareholder returns though investment in a portfolio of exploration acreage
leading to the drilling of wells and discovery of commercial reserves.
Delivery of this business model carries a number of key risks.
----------------------------------------------------------------------------
Risk Mitigation
----------------------------------------------------------------------------
Market support may be eroded - Management regularly communicates
obstructing fundraising and lowering its strategy to shareholders
the share price - Focus is placed on building an asset
portfolio capable of delivering
regular news flow and offering
continuing prospectivity
----------------------------------------------------------------------------
General market conditions may - Management aims to retain adequate
fluctuate hindering delivery of the working capital to ride out downturns
company's business plan should they arise
----------------------------------------------------------------------------
Management's decisions on capital - Rigorous analysis is conducted of
allocation may not deliver the all investment proposals
expected successful outcomes - Operations are spread over a range
of areas and risk profiles
----------------------------------------------------------------------------
Each asset carries its own risk - Management aims to avoid over-
profile and no outcome can be certain exposure to individual assets and to
identify the associated risks
objectively
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations: Operations may not go according to plan leading to damage,
pollution, cost overruns and poor outcomes.
----------------------------------------------------------------------------
Risk Mitigation
----------------------------------------------------------------------------
Individual wells may not deliver - Thorough pre-drill evaluations are
recoverable oil and gas reserves conducted to identify the risk/reward
balance
- Exposure is selectively mitigated
through farm-out
----------------------------------------------------------------------------
Wells may blow out or equipment may - The Group retains fully trained and
fail causing environmental damage and experienced personnel
delays - The planning process involves risk
identification and establishment of
mitigation measures
- Emphasis is placed on engaging
experienced contractors
- Appropriate insurances are retained
----------------------------------------------------------------------------
Production may be interrupted - Serica's only producing field,
generating significant revenue loss Kambuna, is in the later stages of
production and insurance is not
considered cost-effective
----------------------------------------------------------------------------
Operations may take far longer or cost - Management applies rigorous budget
more than expected control
- Adequate working capital is
retained to cover reasonable
eventualities
----------------------------------------------------------------------------
Resource estimates may be misleading - The Group deploys qualified
curtailing actual production and personnel
reducing reserves estimates - Ongoing performance is monitored
- Regular third-party reports are
commissioned
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Personnel: The company relies upon a pool of experienced and motivated
personnel to identify and execute successful investment strategies
----------------------------------------------------------------------------
Risks Mitigation
----------------------------------------------------------------------------
Key personnel may be lost to other - The Remuneration Committee regularly
companies evaluates incentivisation schemes to
ensure they remain competitive
----------------------------------------------------------------------------
Personal safety may be at risk in - A culture of safety is encouraged
demanding operating environments, throughout the organisation
typically offshore - Responsible personnel are designated
at all appropriate levels
- The Group maintains up-to-date
emergency response resources and
procedures
- Insurance cover is carried in
accordance with industry best practice
----------------------------------------------------------------------------
Staff and representatives may find - Company policies and procedures are
themselves exposed to bribery and communicated to personnel regularly
corrupt practices - Management reviews all significant
contracts and relationships with
agents and governments
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commercial environment: World and regional markets continue to be volatile
with fluctuations and access issues that might hinder the company's business
success
----------------------------------------------------------------------------
Risk Mitigation
----------------------------------------------------------------------------
Volatile commodity prices mean that - Kambuna gas is sold under long-term
the company cannot be certain of the contracts and similar arrangements
future sales value of its products will be considered for Columbus
production
- Such contracts can be supplemented
by price hedging although none is
currently in place for Kambuna
condensate
- Budget planning considers a range of
commodity pricing
----------------------------------------------------------------------------
The company may not be able to get A range of different off-take options
access, at reasonable cost, to have been considered for Columbus and
infrastructure and product markets field partners are currently in
when required advanced negotiation
----------------------------------------------------------------------------
Credit to support field development - Serica's existing facility was
programmes may not be available at designed to fund part of Columbus
reasonable cost capital costs
- Funding requirements for Kambuna
were significantly mitigated through
part disposal
----------------------------------------------------------------------------
Fiscal regimes may vary, increasing - Operations are currently spread over
effective tax rates and reducing the a range of different fiscal regimes in
expected value of reserves Indonesia, Western Europe and Africa
- Before committing to a significant
investment the likelihood of fiscal
term changes is considered when
evaluating the risk/reward balance
----------------------------------------------------------------------------
In addition to the principal risks and uncertainties described herein, the
Company is subject to a number of other risk factors generally, a description of
which is set out in our latest Annual Information Form available on
www.sedar.com.
Key Performance Indicators ("KPIs")
The Company's main business is the acquisition of interests in prospective
exploration acreage, the discovery of hydrocarbons in commercial quantities and
the crystallisation of value whether through production or disposal of reserves.
The Company tracks its non-financial performance through the accumulation of
licence interests in proven and prospective hydrocarbon producing regions, the
level of success in encountering hydrocarbons and the development of production
facilities. In parallel, the Company tracks its financial performance through
management of expenditures within resources available, the cost-effective
exploitation of reserves and the crystallisation of value at the optimum point.
Nature and Continuance of Operations
The principal activity of the Company is to identify, acquire and subsequently
exploit oil and gas reserves. Its activities are located in the UK, Ireland,
Namibia and Morocco, together with a currently retained interest in the Kambuna
Field in Indonesia.
The Company's financial statements have been prepared with the assumption that
the Company will be able to realise its assets and discharge its liabilities in
the normal course of business rather than through a process of forced
liquidation. During the year ended 31 December 2011 the Company generated a loss
of US$14.5 million from continuing operations. At 31 December 2011 the Company
had US$20.0 million of net cash.
The Company intends to utilise its existing cash balances and future operating
cash inflows to fund the immediate needs of its investment programme and ongoing
operations. Further details of the Company's financial resources and debt
facility are given above in the Financial Review in this MD&A.
Additional Information
Additional information relating to Serica, including the Company's annual
information form, can be found on the Company's website at www.serica-energy.com
and on SEDAR at www.sedar.com
Approved on Behalf of the Board
Antony Craven Walker Christopher Hearne
Chief Executive Officer Finance Director
29 March 2012
Forward-Looking Statements
This disclosure contains certain forward looking statements that involve
substantial known and unknown risks and uncertainties, some of which are beyond
Serica Energy plc's control, including: the impact of general economic
conditions where Serica Energy plc operates, industry conditions, changes in
laws and regulations including the adoption of new environmental laws and
regulations and changes in how they are interpreted and enforced, increased
competition, the lack of availability of qualified personnel or management,
fluctuations in foreign exchange or interest rates, stock market volatility and
market valuations of companies with respect to announced transactions and the
final valuations thereof, and obtaining required approvals of regulatory
authorities. Serica Energy plc's actual results, performance or achievement
could differ materially from those expressed in, or implied by, these forward
looking statements and, accordingly, no assurances can be given that any of the
events anticipated by the forward looking statements will transpire or occur, or
if any of them do so, what benefits, including the amount of proceeds, that
Serica Energy plc will derive therefrom.
Serica Energy plc
Group Income Statement
for the year ended 31 December
Restated (i)
2011 2010
Notes US$000 US$000
Continuing operations
Sales revenue 4 27,111 31,302
Cost of sales 5 (25,648) (18,758)
----------------------------
Gross profit 1,463 12,544
Impairment of fixed assets and goodwill 16,17 (2,314) (11,797)
Pre-licence costs (1,507) (1,858)
E&E and other asset write-offs (355) (4,091)
Administrative expenses (6,011) (6,570)
Foreign exchange (loss)/gain (46) 60
Share-based payments 29 (844) (1,117)
Depreciation 8 (348) (132)
----------------------------
Operating loss before net finance
revenue and tax (9,962) (12,961)
Finance revenue 11 15 57
Finance costs 12 (1,394) (4,083)
----------------------------
Loss before taxation (11,341) (16,987)
Taxation charge for the year 13 a) (3,149) (979)
----------------------------
Loss for the year from continuing
operations (14,490) (17,966)
----------------------------
----------------------------
Discontinued operations
Loss for the year from discontinued
operations 7 (5,880) (26,251)
----------------------------
Loss for the year (20,370) (44,217)
----------------------------
----------------------------
Loss per ordinary share - EPS
Basic and diluted EPS on continuing
operations (US$) 14 (0.08) (0.10)
Basic and diluted EPS on loss for the
year (US$) 14 (0.12) (0.25)
(i) Restated for discontinued operations - see note 7
Group Statement of Comprehensive Income
There are no other comprehensive income items other than those passing through
the income statement.
Serica Energy plc
Balance Sheet
As at 31 December
Group Company
2011 2010 2011 2010
Notes US$000 US$000 US$000 US$000
Non-current assets
Exploration &
evaluation assets 15 69,083 68,604 - -
Property, plant and
equipment 16 18,719 37,546 - -
Goodwill 17 - - - -
Investments in
subsidiaries 18 - - 11,830 11,830
Financial assets 19 394 1,431 394 1,431
Other receivables 19 3,613 4,748 - -
------------------------------------------------
91,809 112,329 12,224 13,261
------------------------------------------------
Current assets
Inventories 20 1,572 2,748 - -
Trade and other
receivables 21 9,338 14,669 115,312 123,302
Financial assets 21 647 - 647 -
Cash and cash
equivalents 22 19,946 30,002 19,142 26,696
------------------------------------------------
31,503 47,419 135,101 149,998
------------------------------------------------
TOTAL ASSETS 123,312 159,748 147,325 163,259
------------------------------------------------
Current liabilities
Trade and other
payables 23 (10,267) (13,574) (633) (939)
Income taxation
payable (302) (1,466) - -
Financial
liabilities 24 - (11,671) - (11,671)
Non-current
liabilities
Provisions 25 (2,029) (1,706) - -
Deferred income tax
liabilities 13d) - (1,339) - -
------------------------------------------------
TOTAL LIABILITIES (12,598) (29,756) (633) (12,610)
------------------------------------------------
NET ASSETS 110,714 129,992 146,692 150,649
------------------------------------------------
------------------------------------------------
Share capital 27 207,702 207,657 172,430 172,385
Merger reserve 18 - - 4,322 4,322
Other reserves 19,475 18,428 19,475 18,428
Accumulated deficit (116,463) (96,093) (49,535) (44,486)
------------------------------------------------
TOTAL EQUITY 110,714 129,992 146,692 150,649
------------------------------------------------
------------------------------------------------
Approved by the Board on 29 March 2012
Antony Craven Walker Christopher Hearne
Chief Executive Officer Finance Director
Serica Energy plc
Statement of Changes in Equity
For the year ended 31 December 2011
Group Share Other Accum'd
capital reserves deficit Total
US$000 US$000 US$000 US$000
At 1 January 2010 207,633 17,197 (51,876) 172,954
Loss for the year - - (44,217) (44,217)
--------------------------------------------------
Total comprehensive income - - (44,217) (44,217)
Share-based payments - 1,231 - 1,231
Proceeds on exercise of
options 24 - - 24
--------------------------------------------------
At 31 December 2010 207,657 18,428 (96,093) 129,992
Loss for the year - - (20,370) (20,370)
--------------------------------------------------
Total comprehensive income - - (20,370) (20,370)
Share-based payments - 1,047 - 1,047
Proceeds on exercise of 45
options 45 - -
--------------------------------------------------
At 31 December 2011 207,702 19,475 (116,463) 110,714
--------------------------------------------------
--------------------------------------------------
Company Share Merger Other Accum'd
capital reserve reserve deficit Total
US$000 US$000 US$000 US$000 US$000
At 1 January 2010 172,361 112,174 17,197 (18,349) 283,383
Loss for the year - - - (133,989) (133,989)
----------------------------------------------------------
Total
comprehensive
income - - - (133,989) (133,989)
Share-based
payments - - 1,231 - 1,231
Proceeds on
exercise of
options 24 - - - 24
Transfers - (107,852) - 107,852 -
----------------------------------------------------------
At 31 December
2010 172,385 4,322 18,428 (44,486) 150,649
Loss for the year - - - (5,049) (5,049)
----------------------------------------------------------
Total
comprehensive
income - - - (5,049) (5,049)
Proceeds on
exercise of
options 45 - - - 45
Share-based
payments - - 1,047 - 1,047
----------------------------------------------------------
At 31 December
2011 172,430 4,322 19,475 (49,535) 146,692
----------------------------------------------------------
----------------------------------------------------------
Serica Energy plc
Cash Flow Statement
For the year ended 31 December
Group Company
2011 2010 2011 2010
US$000 US$000 US$000 US$000
Operating activities:
Loss for the year (20,370) (44,217) (5,049) (133,989)
Adjustments to reconcile
loss for the year to net
cash flow from operating
activities:
Taxation 3,149 979 - -
Net finance costs 1,379 3,909 1,339 3,488
Loss on re-measurement to
fair value 3,720 - - -
Profit on disposal (110) - - -
Depreciation 348 137 - -
Depletion and amortisation 17,716 11,479 - -
Asset write-offs - 29,486 - -
Impairment 2,314 11,797 - 126,193
Share-based payments 1,047 1,231 1,047 1,231
Decrease/(increase) in trade
and other receivables 5,377 (9,152) 386 104
Decrease in inventories 745 177 - -
(Decrease)/increase in trade
and other payables (2,171) 4,343 (306) (546)
------------------------------------------------
Cash generated from
operations 13,144 10,169 (2,583) (3,519)
Taxation paid (5,653) - - -
------------------------------------------------
Net cash in/(out)flow from
operations 7,491 10,169 (2,583) (3,519)
------------------------------------------------
Investing activities:
Interest received 15 765 15 58
Purchase of property, plant
and equipment (1,268) (5,241) - -
Purchase of E&E assets (7,400) (30,569) - -
Cash inflow from disposals
(note 7) 3,672 99,532 - -
Funding provided to Group
subsidiaries - - - (23,263)
Funds from Group
subsidiaries - - 7,578 99,532
------------------------------------------------
Net cash flow from investing
activities (4,981) 64,487 7,593 76,327
------------------------------------------------
Financing activities:
Finance costs paid (805) (2,313) (805) (2,313)
Proceeds on exercise of
options 45 24 45 24
Repayments of loans and
borrowings (11,800) (60,700) (11,800) (60,700)
------------------------------------------------
Net cash flow from financing
activities (12,560) (62,989) (12,560) (62,989)
------------------------------------------------
Net (decrease)/increase in
cash and cash equivalents (10,050) 11,667 (7,550) 9,819
Effect of exchange rates on
cash and cash equivalents (6) (77) (4) (45)
Cash and cash equivalents at
1 January 30,002 18,412 26,696 16,922
------------------------------------------------
Cash and cash equivalents at
31 December 19,946 30,002 19,142 26,696
------------------------------------------------
------------------------------------------------
Serica Energy plc
Notes to the Financial Statements
1. Authorisation of the Financial Statements and Statement of Compliance with IFRS
These are not the statutory accounts of the Company prepared in accordance with
the Companies Act. The Group's and Company's financial statements for the year
ended 31 December 2011 were authorised for issue by the Board of Directors on 29
March 2012 and the balance sheets were signed on the Board's behalf by Antony
Craven Walker and Chris Hearne. Serica Energy plc is a public limited company
incorporated and domiciled in England & Wales. The principal activity of the
Company and the Group is to identify, acquire and subsequently exploit oil and
gas reserves. Its current activities are located in the United Kingdom, Ireland,
Namibia, Morocco and a retained interest in the Kambuna Field in Indonesia. The
Company's ordinary shares are traded on AIM and the TSX.
The Group's financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted by the EU as
they apply to the financial statements of the Group for the year ended 31
December 2011. The Company's financial statements have been prepared in
accordance with IFRS as adopted by the EU as they apply to the financial
statements of the Company for the year ended 31 December 2011 and as applied in
accordance with the provisions of the Companies Act 2006. The Group's financial
statements are also prepared in accordance with IFRS as issued by the IASB. The
principal accounting policies adopted by the Group and by the Company are set
out in note 2.
The Company has taken advantage of the exemption provided under section 408 of
the Companies Act 2006 not to publish its individual income statement and
related notes. The deficit dealt with in the financial statements of the parent
Company was US$5,049,000 (2010: US$133,989,000).
On 1 September 2005, the Company completed a reorganisation (the
"Reorganisation"), whereby the common shares of Serica Energy Corporation were
automatically exchanged on a one-for-one basis for ordinary shares of Serica
Energy plc, a newly formed company incorporated under the laws of the United
Kingdom. In addition, each shareholder of the Corporation received beneficial
ownership of part of the 'A' share of Serica Energy plc issued to meet the
requirements of public companies under the United Kingdom jurisdiction. Under
IFRS this reorganisation was considered to be a reverse takeover by Serica
Energy Corporation and as such the financial statements of the Group represent a
continuation of Serica Energy Corporation.
2. Accounting Policies
Basis of Preparation
The accounting policies which follow set out those policies which apply in
preparing the financial statements for the year ended 31 December 2011.
The Group and Company financial statements are presented in US dollars and all
values are rounded to the nearest thousand dollars (US$000) except when
otherwise indicated.
Going Concern
The financial position of the Group, its cash flows and available debt
facilities are described in the Financial Review above. As at 31 December 2011
the Group had US$19.9 million of net cash.
The Directors are required to consider the availability of resources to meet the
Group and Company's liabilities for the forseeable future. As described in the
MD&A, the current business environment is challenging and access to new equity
and debt remains uncertain. However, the management considers that it will not
require recourse to either to cover its existing commitments.
This is based upon the following factors: operating cash inflows are being
generated from the Kambuna field; gas sales contracts for Kambuna are in place
at fixed prices and any fluctuations in condensate prices will be largely offset
by variations in cost recovery entitlement, and the Company has a record of
prudent financial management, including the raising of capital through farm down
and asset disposals. The option of further asset sales and farm outs is also
open to the Company.
After making enquiries and having taken into consideration the above factors,
the Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future.
Accordingly they continue to adopt the going concern basis in preparing the
annual financial statements.
Use of judgement and estimates and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as well as the disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts of revenues and
expenses during the reporting period. Estimates and judgments are continuously
evaluated and are based on management's experience and other factors, including
expectations of future events that are believed to be reasonable under the
circumstances. Actual outcomes could differ from these estimates.
The key sources of estimation uncertainty that have a significant risk of
causing material adjustment to the amounts recognised in the financial
statements are: the assessment of commercial reserves, the impairment of the
Group and Company's assets (including oil & gas development assets and
Exploration and Evaluation "E&E" assets), decommissioning provisions,
share-based payment costs and the assessment of the disclosure of the Group's
disposed Indonesian operations.
Assessment of commercial reserves
Management is required to assess the level of the Group's commercial reserves
together with the future expenditures to access those reserves, which are
utilised in determining the amortisation and depletion charge for the period and
assessing whether any impairment charge is required. The Group employs
independent reserves specialists who periodically assess the Group's level of
commercial reserves by reference to data sets including geological, geophysical
and engineering data together with reports, presentation and financial
information pertaining to the contractual and fiscal terms applicable to the
Group's assets. In addition the Group undertakes its own assessment of
commercial reserves and related future capital expenditure by reference to the
same datasets using its own internal expertise.
Impairment
The Group monitors internal and external indicators of impairment relating to
its intangible and tangible assets, which may indicate that the carrying value
of the assets may not be recoverable. The assessment of the existence of
indicators of impairment in E&E assets involves judgement, which includes
whether management expects to fund significant further expenditure in respect of
a licence and whether the recoverable amount may not cover the carrying value of
the assets. For development and production assets judgement is involved when
determining whether there have been any significant changes in the Group's oil
and gas reserves.
The Group determines whether E&E assets are impaired at an asset level and in
regional cash generating units ('CGUs') when facts and circumstances suggest
that the carrying amount of a regional CGU may exceed its recoverable amount. As
recoverable amounts are determined based upon risked potential, or where
relevant, discovered oil and gas reserves, this involves estimations and the
selection of a suitable pre-tax discount rate relevant to the asset in question.
The calculation of the recoverable amount of oil and gas development properties
involves estimating the net present value of cash flows expected to be generated
from the asset in question. Future cash flows are based on assumptions on
matters such as estimated oil and gas reserve quantities and commodity prices.
The discount rate applied is a pre-tax rate which reflects the specific risks of
the country in which the asset is located.
Management is required to assess the carrying value of investments in
subsidiaries in the parent company balance sheet for impairment by reference to
the recoverable amount. This requires an estimate of amounts recoverable from
oil and gas assets within the underlying subsidiaries (see note 18).
Decommissioning provisions
Management has determined that, based on their understanding of the contractual
agreements they are party to in Indonesia, the Company has a constructive
obligation to incur future decommissioning costs as at 31 December 2011. However
these assumptions involve judgement, which may be subject to change, and
therefore the position will be reviewed on an ongoing basis. A change in
circumstances may result in a change to the liability being recorded in future
periods (see note 25).
Share-based payment costs
The estimation of share-based payment costs requires the selection of an
appropriate valuation model, consideration as to the inputs necessary for the
valuation model chosen and the estimation of the number of awards that will
ultimately vest, inputs for which arise from judgments relating to the
continuing participation of employees (see note 29).
Disclosure of discontinued operations
At 30 June 2011, as a result of the Board's strategic decision to exit
Indonesia, the Group's interests in the region were classified as a disposal
group held for sale and therefore included as discontinued operations. The
proposed disposal was noted as a core shift in strategy for the Serica Group,
effected to re-allocate resources into new areas of Group focus. In October 2011
the Company disposed of its operated exploration portfolio in Indonesia to
KrisEnergy Limited and closed its local office. The non-operated interest in the
Kambuna TAC has not yet been disposed of. The Company considers its intention to
exit operations in Indonesia to represent a single coordinated plan to dispose
of a geographic area of business. Accordingly it is considered appropriate to
classify the results of the disposed sector as discontinued (see note 7) since
it is part of the single plan. The Company's interest in the Kambuna TAC is
still considered as available for sale however it does not meet the definition
of an asset held for sale, or a discontinued operation in accordance with IFRS 5
at the reporting date.
Basis of Consolidation
The consolidated financial statements include the accounts of Serica Energy plc
(the "Company") and its wholly owned subsidiaries Serica Energy Corporation,
Serica Energy Holdings B.V., Asia Petroleum Development Limited, Petroleum
Development Associates (Asia) Limited, Serica Energia Iberica S.L., Serica
Holdings UK Limited, Serica Energy (UK) Limited, PDA Lematang Limited, APD
(Asahan) Limited, APD (Biliton) Limited, Serica Glagah Kambuna B.V., Serica Sidi
Moussa B.V. and Serica Foum Draa B.V. and Serica Namibia B.V. Together these
comprise the "Group".
All inter-company balances and transactions have been eliminated upon consolidation.
Foreign Currency Translation
The functional and presentational currency of Serica Energy plc and all its
subsidiaries is US dollars.
Transactions in foreign currencies are initially recorded at the functional
currency rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are retranslated at the foreign
currency rate of exchange ruling at the balance sheet date and differences are
taken to the income statement. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rate as
at the date of initial transaction. Non-monetary items measured at fair value in
a foreign currency are translated using the exchange rate at the date when the
fair value was determined. Exchange gains and losses arising from translation
are charged to the income statement as an operating item.
Business Combinations and Goodwill
Business combinations from 1 January 2010
Business combinations are accounted for using the acquisition method. The cost
of an acquisition is measured as the aggregate of consideration transferred,
measured at acquisition date fair value and the amount of any non-controlling
interest in the acquiree. Acquisition costs incurred are expensed and included
in administrative expenses.
Business combinations prior to 1 January 2010
Business combinations are accounted for using the purchase method of accounting.
The purchase price of an acquisition is measured as the cash paid plus the fair
value of other assets given, equity instruments issued and liabilities incurred
or assumed at the date of exchange.
Goodwill on acquisition is initially measured at cost being the excess of
purchase price over the fair market value of identifiable assets, liabilities
and contingent liabilities acquired. Following initial acquisition it is
measured at cost less any accumulated impairment losses. Goodwill is not
amortised but is subject to an impairment test at least annually and more
frequently if events or changes in circumstances indicate that the carrying
value may be impaired.
At the acquisition date, any goodwill acquired is allocated to each of the
cash-generating units, or groups of cash generating units expected to benefit
from the combination's synergies. Impairment is determined by assessing the
recoverable amount of the cash-generating unit, or groups of cash generating
units to which the goodwill relates. Where the recoverable amount of the
cash-generating unit is less than the carrying amount, an impairment loss is
recognised.
Joint Venture Activities
The Group conducts petroleum and natural gas exploration and production
activities jointly with other venturers who each have direct ownership in and
jointly control the assets of the ventures. These are classified as jointly
controlled assets and the financial statements reflect the Group's share of
assets and liabilities in such activities.
Full details of Serica's working interests in those petroleum and natural gas
exploration and production activities classified as jointly controlled assets
are included in the Review of Operations.
Exploration and Evaluation Assets
As allowed under IFRS 6 and in accordance with clarification issued by the
International Financial Reporting Interpretations Committee, the Group has
continued to apply its existing accounting policy to exploration and evaluation
activity, subject to the specific requirements of IFRS 6. The Group will
continue to monitor the application of these policies in light of expected
future guidance on accounting for oil and gas activities.
Pre-licence Award Costs
Costs incurred prior to the award of oil and gas licences, concessions and other
exploration rights are expensed in the income statement.
Exploration and Evaluation (E&E)
The costs of exploring for and evaluating oil and gas properties, including the
costs of acquiring rights to explore, geological and geophysical studies,
exploratory drilling and directly related overheads, are capitalised and
classified as intangible E&E assets. These costs are directly attributed to
regional CGUs for the purposes of impairment testing; UK & Ireland and Africa.
E&E assets are not amortised prior to the conclusion of appraisal activities but
are assessed for impairment at an asset level and in regional CGUs when facts
and circumstances suggest that the carrying amount of a regional cost centre may
exceed its recoverable amount. Recoverable amounts are determined based upon
risked potential, and where relevant, discovered oil and gas reserves. When an
impairment test indicates an excess of carrying value compared to the
recoverable amount, the carrying value of the regional CGU is written down to
the recoverable amount in accordance with IAS 36. Such excess is expensed in the
income statement.
Costs of licences and associated E&E expenditure are expensed in the income
statement if licences are relinquished, or if management do not expect to fund
significant future expenditure in relation to the licence.
The E&E phase is completed when either the technical feasibility and commercial
viability of extracting a mineral resource are demonstrable or no further
prospectivity is recognised. At that point, if commercial reserves have been
discovered, the carrying value of the relevant assets, net of any impairment
write-down, is classified as an oil and gas property within property, plant and
equipment, and tested for impairment. If commercial reserves have not been
discovered then the costs of such assets will be written off.
Asset Purchases and Disposals
When a commercial transaction involves the exchange of E&E assets of similar
size and characteristics, no fair value calculation is performed. The
capitalised costs of the asset being sold are transferred to the asset being
acquired. Proceeds from a part disposal of an E&E asset, including back-cost
contributions are credited against the capitalised cost of the asset.
Farm-ins
In accordance with industry practice, the Group does not record its share of
costs that are 'carried' by third parties in relation to its farm-in agreements
in the E&E phase. Similarly, while the Group has agreed to carry the costs of
another party to a Joint Operating Agreement ("JOA") in order to earn additional
equity, it records its paying interest that incorporates the additional
contribution over its equity share.
Property, Plant and Equipment - Oil and gas properties
Capitalisation
Oil and gas properties are stated at cost, less any accumulated depreciation and
accumulated impairment losses. Oil and gas properties are accumulated into
single field cost centres and represent the cost of developing the commercial
reserves and bringing them into production together with the E&E expenditures
incurred in finding commercial reserves previously transferred from E&E assets
as outlined in the policy above. The cost will include, for qualifying assets,
borrowing costs.
Depletion
Oil and gas properties are not depleted until production commences. Costs
relating to each single field cost centre are depleted on a unit of production
method based on the commercial proved and probable reserves for that cost
centre. The depletion calculation takes account of the estimated future costs of
development of recognised proved and probable reserves. Changes in reserve
quantities and cost estimates are recognised prospectively from the last
reporting date.
The Kambuna field was depleted using proved and probable entitlement reserves
until 30 June 2011.
The Company has assessed the expected useful life of the future economic
benefits embodied in the asset and considers that given the relatively short
remaining field life, the production profiles associated with proved reserves
better reflect this expected pattern of consumption. Accordingly the Company has
concluded that it is appropriate to use proved reserves as a basis for the
specific depletion calculation for the Kambuna field asset with effect from 1
July 2011.
The impact of this change in accounting estimate in the 2011 financial
statements is an increased depletion charge in the second half 2011 period of
US$2,320,000. The impact of the change in estimate on future periods is not
considered practical to disclose.
Impairment
A review is performed for any indication that the value of the Group's
development and production assets may be impaired.
For oil and gas properties when there are such indications, an impairment test
is carried out on the cash generating unit. Each cash generating unit is
identified in accordance with IAS 36. Serica's cash generating units are those
assets which generate largely independent cash flows and are normally, but not
always, single development or production areas. If necessary, impairment is
charged through the income statement if the capitalised costs of the cash
generating unit exceed the recoverable amount of the related commercial oil and
gas reserves.
Asset Disposals
Proceeds from the entire disposal of a development and production asset, or any
part thereof, are taken to the income statement together with the requisite
proportional net book value of the asset, or part thereof, being sold.
Decommissioning
Liabilities for decommissioning costs are recognised when the Group has an
obligation to dismantle and remove a production, transportation or processing
facility and to restore the site on which it is located. Liabilities may arise
upon construction of such facilities, upon acquisition or through a subsequent
change in legislation or regulations. The amount recognised is the estimated
present value of future expenditure determined in accordance with local
conditions and requirements. A corresponding tangible item of property, plant
and equipment equivalent to the provision is also created.
Any changes in the present value of the estimated expenditure is added to or
deducted from the cost of the assets to which it relates. The adjusted
depreciable amount of the asset is then depreciated prospectively over its
remaining useful life. The unwinding of the discount on the decommissioning
provision is included as a finance cost.
Property, Plant and Equipment - Other
Computer equipment and fixtures, fittings and equipment are recorded at cost as
tangible assets. The straight-line method of depreciation is used to depreciate
the cost of these assets over their estimated useful lives. Computer equipment
is depreciated over three years and fixtures, fittings and equipment over four
years.
Inventories
Inventories are valued at the lower of cost and net realisable value. Cost is
determined by the first-in first-out method and comprises direct purchase costs
and transportation expenses.
Investments
In its separate financial statements the Company recognises its investments in
subsidiaries at cost less any provision for impairment.
Financial Instruments
Financial instruments comprise financial assets, cash and cash equivalents,
financial liabilities and equity instruments.
Financial assets
Financial assets within the scope of IAS 39 are classified as either financial
assets at fair value through profit or loss, or loans and receivables, as
appropriate. When financial assets are recognised initially, they are measured
at fair value. Transaction costs that are directly attributable to the
acquisition or issue of the financial asset are capitalised unless they relate
to a financial asset classified at fair value through profit and loss in which
case transaction costs are expensed in the income statement.
The Group determines the classification of its financial assets at initial
recognition and, where allowed and appropriate, re-evaluates this designation at
each financial year end.
Financial assets at fair value through profit or loss include financial assets
held for trading and derivatives. Financial assets are classified as held for
trading if they are acquired for the purpose of selling in the near term.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. After initial
measurement loans and receivables are subsequently carried at amortised cost,
using the effective interest rate method, less any allowance for impairment.
Amortised cost is calculated by taking into account any discount or premium on
acquisition over the period to maturity. Gains and losses are recognised in the
income statement when the loans and receivables are de-recognised or impaired,
as well as through the amortisation process.
Cash and cash equivalents
Cash and cash equivalents include balances with banks and short-term investments
with original maturities of three months or less at the date acquired.
Financial liabilities
Financial liabilities include interest bearing loans and borrowings, and trade
and other payables.
Obligations for loans and borrowings are recognised when the Group becomes party
to the related contracts and are measured initially at the fair value of
consideration received less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortised cost using the effective interest method.
Gains and losses are recognised in the income statement when the liabilities are
derecognised as well as through the amortisation process.
Equity
Equity instruments issued by the Company are recorded in equity at the proceeds
received, net of direct issue costs.
Revenue Recognition
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Group and the revenue can be reliably measured.
Revenue from oil and natural gas production is recognised on an entitlement
basis for the Group's net working interest.
Finance Revenue
Finance revenue chiefly comprises interest income from cash deposits on the
basis of the effective interest rate method and is disclosed separately on the
face of the income statement.
Finance Costs
Finance costs of debt are allocated to periods over the term of the related debt
using the effective interest method. Arrangement fees and issue costs are
amortised and charged to the income statement as finance costs over the term of
the debt.
Borrowing costs
Borrowing costs directly relating to the acquisition, construction or production
of a qualifying capital project under construction are capitalised and added to
the project cost during construction until such time the assets are
substantially ready for their intended use i.e when they are capable of
commercial production. Where funds are borrowed specifically to finance a
project, the amounts capitalised represent the actual borrowing costs incurred.
All other borrowing costs are recognised in the income statement in the period
in which they are incurred.
Share-Based Payment Transactions
Employees (including directors) of the Group receive remuneration in the form of
share-based payment transactions, whereby employees render services in exchange
for shares or rights over shares ('equity-settled transactions').
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference
to the fair value at the date on which they are granted. In valuing
equity-settled transactions, no account is taken of any service or performance
conditions, other than conditions linked to the price of the shares of Serica
Energy plc ('market conditions'), if applicable.
The cost of equity-settled transactions is recognised, together with a
corresponding increase in equity, over the period in which the relevant
employees become fully entitled to the award (the 'vesting period'). The
cumulative expense recognised for equity-settled transactions at each reporting
date until the vesting date reflects the extent to which the vesting period has
expired and the Group's best estimate of the number of equity instruments that
will ultimately vest. The income statement charge or credit for a period
represents the movement in cumulative expense recognised as at the beginning and
end of that period.
No expense is recognised for awards that do not ultimately vest, except for
awards where vesting is conditional upon a market or non-vesting condition,
which are treated as vesting irrespective of whether or not the market or
non-vesting condition is satisfied, provided that all other performance
conditions are satisfied. Equity awards cancelled are treated as vesting
immediately on the date of cancellation, and any expense not recognised for the
award at that date is recognised in the income statement. Estimated associated
national insurance charges are expensed in the income statement on an accruals
basis.
Where the terms of an equity-settled award are modified or a new award is
designated as replacing a cancelled or settled award, the cost based on the
original award terms continues to be recognised over the original vesting
period. In addition, an expense is recognised over the remainder of the new
vesting period for the incremental fair value of any modification, based on the
difference between the fair value of the original award and the fair value of
the modified award, both as measured on the date of the modification. No
reduction is recognised if this difference is negative.
Income Taxes
Current tax, including UK corporation tax and overseas corporation tax, is
provided at amounts expected to be paid using the tax rates and laws that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided using the liability method and tax rates and laws that
have been enacted or substantively enacted at the balance sheet date. Provision
is made for temporary differences at the balance sheet date between the tax
bases of the assets and liabilities and their carrying amounts for financial
reporting purposes. Deferred tax is provided on all temporary differences except
for:
-- temporary differences associated with investments in subsidiaries, where
the timing of the reversal of the temporary differences can be
controlled by the Group and it is probable that the temporary
differences will not reverse in the foreseeable future; and
-- temporary differences arising from the initial recognition of an asset
or liability in a transaction that is not a business combination and, at
the time of the transaction, affects neither the income statement nor
taxable profit or loss.
Deferred tax assets are recognised for all deductible temporary differences, to
the extent that it is probable that taxable profits will be available against
which the deductible temporary differences can be utilised. Deferred tax assets
and liabilities are presented net only if there is a legally enforceable right
to set off current tax assets against current tax liabilities and if the
deferred tax assets and liabilities relate to income taxes levied by the same
taxation authority.
Earnings Per Share
Earnings per share is calculated using the weighted average number of ordinary
shares outstanding during the period. Diluted earnings per share is calculated
based on the weighted average number of ordinary shares outstanding during the
period plus the weighted average number of shares that would be issued on the
conversion of all relevant potentially dilutive shares to ordinary shares. It is
assumed that any proceeds obtained on the exercise of any options and warrants
would be used to purchase ordinary shares at the average price during the
period. Where the impact of converted shares would be anti-dilutive, these are
excluded from the calculation of diluted earnings.
New and amended standards and interpretations
The accounting policies adopted are consistent with those of the previous
financial year, except for the following new and amended IFRS and IFRIC
interpretations effective as of 1 January 2011. The adoption of the standards or
interpretations is described below:
i) IAS 24 Related Party Transactions (Amendment)
The IASB issued an amendment to IAS 24 that clarifies the definitions of a
related party. The new definitions emphasise a symmetrical view of related party
relationships and clarifies the circumstances in which persons and key
management personnel affect related party relationships of an entity. In
addition, the amendment introduces an exemption from the general related party
disclosure requirements for transactions with government and entities that are
controlled, jointly controlled or significantly influenced by the same
government as the reporting entity. The adoption of the amendment did not have
any impact on the financial position or performance of the Group.
ii) IAS 32 Financial Instruments: Presentation (Amendment)
The IASB issued an amendment that alters the definition of a financial liability
in IAS 32 to enable entities to classify rights issues and certain options or
warrants as equity instruments. The amendment is applicable if the rights are
given pro rata to all of the existing owners of the same class of an entity's
non-derivative equity instruments, to acquire a fixed number of the entity's own
equity instruments for a fixed amount in any currency. The amendment has had no
effect on the financial position or performance of the Group because the Group
does not have these type of instruments.
iii) Improvements to IFRSs
In May 2010, the IASB issued its third omnibus of amendments to its standards,
primarily with a view to removing inconsistencies and clarifying wording. There
are separate transitional provisions for each standard. The adoption of any
amendments did not have any impact on the financial position or performance of
the Group.
Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the Group's
financial statements are listed below. This listing of standards and
interpretations issued are those that the Group reasonably expects to have an
impact on disclosures, financial position or performance when applied at a
future date. The Group intends to adopt these standards when they become
effective.
IAS 1 Financial Statement presentation - Presentation of items of Other
Comprehensive Income
The amendments to IAS 1 change the grouping of items presented in Other
Comprehensive Income. Items that could be classified to profit or loss at a
future point in time would be presented separately from items that will never be
reclassified. The amendment affects presentation only and has no impact on the
Group's financial position or performance. The amendment becomes effective for
annual periods beginning on or after 1 July 2012.
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 9 as issued reflects the first phase of the IASBs work on the replacement
of IAS 39 and applies to the classification and measurement of financial assets
and financial liabilities as defined in IAS 39. The standard is effective for
annual periods beginning on or after 1 January 2015.
IFRS 10 Consolidated Financial Statements
IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial
Statements that addresses the accounting for consolidated financial statements.
The standard becomes effective for annual periods beginning on or after 1
January 2013.
IFRS 11 Joint Arrangements
IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13
Jointly-controlled Entities - Non-monetary Contributions by Venturers. IFRS 11
removes the option to account for jointly controlled entities (JCEs) using
proportionate consolidation. Instead JCEs that meet the definition of a joint
venture must be accounted for using the equity method. The standard becomes
effective for annual periods beginning on or after 1 January 2013.
IFRS 12 Disclosure of Involvement with Other Entities
IFRS 12 includes all of the disclosures that were previously in IAS 27 related
to consolidated financial statements, as well as all of the disclosures that
were previously included in IAS 31 and IAS 28. These disclosures relate to an
entity's interests in subsidiaries, joint arrangements, associates and
structured entities. A number of new disclosures are also required. The standard
becomes effective for annual periods beginning on or after 1 January 2013.
IFRS 13 Fair Value Measurement
IFRS 13 establishes a single source of guidance under IFRS for all fair value
measurements. The standard becomes effective for annual periods beginning on or
after 1 January 2013.
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