SOUND ENERGY PLC

Interim / Quarterly Report • Sep 14, 2017

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RNS Number : 6909Q

Sound Energy PLC

14 September 2017

14 September 2017

SOUND ENERGY PLC

("Sound Energy" or the "Company")

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2017

Sound Energy, the African and European focused upstream gas company, announces its unaudited half year report for the six months ended 30 June 2017.

Half- year highlights

Morocco

̶  Farm out of Anoual to Schlumberger for US$27.5 million carried exploration programme

̶  TE-8 well opening Palaeozoic play

̶  Ongoing 2D Seismic acquisition and aerial gradiometry

Corporate

̶  Cash balance as at 30 June 2017of US$50.1 million

̶  Strong safety record following the safe drilling of 3 complex wells

For further information please contact:

Vigo Communications - PR Advisor Patrick d'Ancona Chris McMahon Alexandra Roper	Tel: +44 (0)20 7830 9700
Sound Energy James Parsons, Chief Executive Officer JJ Traynor, Chief Financial Officer	j.parsons@soundenergyplc.com       jj.traynor@soundenergyplc.com
Smith & Williamson - Nominated Adviser Azhic Basirov David Jones Ben Jeynes	Tel: +44 (0)20 7131 4000
RBC - Broker Matthew Coakes Martin Copeland Laura White	Tel: +44 (0)20 7653 4000

Statement from the Chairman and Chief Executive Officer

"Having long shifted the axis of our activities to play-opening work in Eastern Morocco, Sound continues to rapidly build a Moroccan exploration-focused onshore gas business hinged on strong European gas fundamentals, a strategic partnership with Schlumberger and our multi Tcf opportunity set."

Our journey so far, including the first half of 2017, has been a busy and exciting one, encompassing all the usual highs and lows of the exploration business. Crucially, and behind the scenes, we continue to grow our core Net Asset Value in Morocco and remain hugely excited about the company's prospects over the next year or two.

Following the disappointing result at Badile the board is currently reviewing the Company's Italian portfolio. It is important to put this into context; having long shifted the axis of our activities to play-opening work in Eastern Morocco, Sound continues to rapidly build a Moroccan exploration-focused onshore gas business hinged on strong European gas fundamentals, a strategic partnership with Schlumberger and our multi Tcf opportunity set. We are clear in our goals strategically, strong financially, and on the path to firming up the very significant upside on our acreage.

So far in 2017 we have drilled three complex wells safely, re-entered Sidi Moktar with gas flared to surface to fulfil the licence commitment, secured a further US$27.5 million farm out of select Eastern Morocco licences to Schlumberger, established the deeper Paleozoic play in Eastern Morocco and, finally, secured the acquisition of Oil and Gas Investment Fund's ("OGIF")  interests in Morocco.

As we look forward, the further exploration and development of our Eastern Morocco portfolio (Tendrara, Anoual and Matarka) remains the Company's absolute priority. Here the exploration potential is being de-risked by a combination of aerial gradiometry, reprocessed seismic and 2,644 Km of new 2D seismic which are all underway and fully carried by Schlumberger. It is anticipated that the Company should be ready for further hi-impact exploration drilling shortly underpinned by the recently completed OGIF transaction. Meanwhile the field development planning for the already proven volumes continues apace, most recently with the receipt of an indicative offer from AFG to fund the main pipeline. Final Investment Decision is now expected early 2018. These will be important catalysts as we continue to move the company forward and build value.

We continue steadfast in our belief that the Eastern Morocco TAGI and Paleozoic is a completely new play for our industry and one which will over the next year or two prove both the making of our company and the making of the Moroccan Oil and Gas sector.

James Parsons

Chief Executive Officer

Stephen Whyte

Non-Executive Chairman

CONDENSED INTERIM CONSOLIDATED INCOME STATEMENT

	Notes	Six months ended 30 June 2017 Unaudited £'000s	Six months ended  30 June  2016 Unaudited  £'000s	Year ended  31 Dec 2016 Audited £'000s
Revenue		378	529	833
Other income		-	715	715
Operating costs		(169)	(801)	(1,110)
Impairment of producing assets		-	-	(5,455)
Impairment of goodwill		-	-	(1,704)
Exploration costs	4	(15,124)	(28)	(2,334)
Gross profit/(loss)		(14,915)	415	(9,055)
Administrative expenses		(5,161)	(2,346)	(6,241)
Group operating loss from continuing operations		(20,076)	(1,931)	(15,296)
Finance revenue	5	37	2,717	1,364
Foreign exchange gain		759	807	1,935
Other gains and (losses)
- derivative financial instruments		182	-	583
External interest costs		(116)	(1,183)	(3,769)
Profit/(loss) for period before taxation		(19,214)	410	(15,183)
Tax credit/(expense)		-	-	1,744
Profit/(loss) for period after taxation		(19,214)	410	(13,439)
Other comprehensive (loss)/income
Foreign currency translation income/(loss)		(167)	631	375
Total comprehensive profit/(loss) for the period		(19,381)	1,041	(13,064)
Profit/(loss) for the period attributable to:
Equity holders of the parent		(19,381)	1,041	(13,064)
Basic and diluted profit/(loss) per share for the period attributable to the equity holders of the parent (pence)	3	(2.73)	0.08	(2.52)

CONDENSED INTERIM CONSOLIDATED BALANCE SHEET

As at 30 June 2017

	Notes	30 June 2017 Unaudited £'000s	30 June  2016 Unaudited £'000s	31 Dec 2016 Audited  £'000s
Non-current assets
Property, plant and equipment		1,811	6,952	1,729
Intangible assets	4	31,828	14,204	28,060
Land and buildings		1,581	1,493	1,535
		35,220	22,649	31,324
Current assets
Inventories		705	327	331
Other receivables		6,087	14,147	8,777
Derivative financial instruments		2,135	-	2,545
Prepayments		201	116	320
Cash and short term deposits		38,532	14,466	46,809
		47,660	29,056	58,782
Total assets		82,880	51,705	90,106
Current liabilities
Trade and other payables		10,649	10,028	12,604
Loans repayable in under one year	5	-	7,704	986
Provisions	4	1,406	-	-
		12,055	17,732	13,590
Non-current liabilities
Deferred tax liabilities		433	2,160	433
Loans due in over one year	5	17,632	9,152	16,455
Provisions		1,876	1,780	2,049
		19,941	13,092	18,937
Total liabilities		31,996	30,824	32,527
Net assets		50,884	20,881	57,579
Capital and reserves
Share capital and share premium		147,371	86,868	135,667
Shares to be issued		-	-	223
Warrant reserve		4,090	3,209	4,459
Foreign currency reserve		1,276	1,699	1,443
Accumulated deficit		(101,853)	(70,895)	(84,213)
Total equity		50,884	20,881	57,579

The financial statements were approved by the Board and authorised for issue on 13 September 2017 and were signed on its behalf by:

J Parsons

Director

S Whyte

Director

CONDENSED INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Share capital £'000s	Share premium £'000s	Shares  to be  issued  £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2017	6,651	129,016	223	(84,213)	4,459	1,443	57,579
Total loss for the period	-	-	-	(19,214)	-	-	(19,214)
Other comprehensive income	-	-	-	-	-	(167)	(167)
Total comprehensive income for the period	-	-	-	(19,214)	-	(167)	(19,381)
Reclassification on debt settlement	-	-	-	369	(369)	-	-
Reclassification on share issue	18	205	(223)	-	-	-	-
Issue of share capital	646	10,835	-	-	-	-	11,481
Share based payments	-	-	-	1,205	-	-	1,205
At 30 June 2017 (unaudited)	7,315	140,056	-	(101,853)	4,090	1,276	50,884

	Share capital £'000s	Share premium £'000s	Shares  to be issued  £'000s	Accumulated deficit  £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2016	5,039	81,276	-	(71,593)	369	1,068	16,159
Total loss for the period	-	-	-	(13,439)	-	-	(13,439)
Other comprehensive income	-	-	-	-	-	375	375
Total comprehensive income/(loss)	-	-	-	(13,439)	-	375	(13,064)
Issue of share capital	1,612	50,425	-	-	-	-	52,037
Share issue costs	-	(2,685)	-	-	-	-	(2,685)
Shares to be issued	-	-	223	-	-	-	223
Fair value of warrants issued with bonds	-	-	-	-	4,090	-	4,090
Share based payments	-	-	-	819	-	-	819
At 31 December 2016	6,651	129,016	223	(84,213)	4,459	1,443	57,579

	Share capital £'000s	Share premium £'000s	Accumulated deficit £'000s	Warrant reserve £'000s	Foreign currency reserves £'000s	Total equity £'000s
At 1 January 2016	5,039	81,276	(71,593)	369	1,068	16,159
Total profit for the period	-	-	410	-	-	410
Other comprehensive income	-	-	-	-	631	631
Total comprehensive income for the period	-	-	410	-	631	1,041
Fair value of warrants issued with bonds	-	-	-	2,840	-	2,840
Issue of share capital	53	500	-	-	-	553
Share based payments	-	-	288	-	-	288
At 30 June 2016 (unaudited)	5,092	81,776	(70,895)	3,209	1,699	20,881

CONDENSED INTERIM CONSOLIDATED CASH FLOW STATEMENT

	Six months ended 30 June 2017 Unaudited £'000s	Six months ended 30 June 2016 Unaudited £'000s	Year ended 31 Dec 2016 Audited £'000s
Cash flow from operating activities
Cash flow from operations	(3,308)	(704)	(2,826)
Interest received	37	51	96
Net cash flow from operating activities	(3,271)	(653)	(2,730)
Cash flow from investing activities
Capital expenditure and disposals	(370)	(470)	(945)
Exploration and development expenditure	(14,345)	(3,173)	(10,882)
Net cash flow from investing activities	(14,715)	(3,643)	(11,827)
CSTI funding contract	-	(13)	(14)
Net proceeds from debt	-	5,292	10,248
Repayment of borrowings	-	(2,724)	(5,435)
Net proceeds from equity issue	9,813	553	40,247
Interest payments	(645)	(461)	(1,108)
Net cash flow from financing activities	9,168	2,647	43,938
Net (decrease)/increase in cash and cash equivalents	(8,818)	(1,649)	29,381
Net foreign exchange difference	541	875	2,188
Cash and cash equivalents at the beginning of the period	46,809	15,240	15,240
Cash and cash equivalents at the end of the period	38,532	14,466	46,809

	Six months ended 30 June  2017 Unaudited £'000s	Six months  ended 30 June 2016 Unaudited £'000s	Year ended  31 Dec  2016 Audited £'000s
Cash flow from operations reconciliation
Profit/(loss) before tax	(19,214)	410	(15,183)
Finance revenue	(37)	(2,717)	(1,364)
Impairment of goodwill	-	-	1,704
Exploration expenditure written off and impairment of assets	15,124	-	7,789
(Decrease)/increase in accruals and short term payables	(2,327)	7,104	9,035
Depreciation	331	181	272
Share based payments charge	1,205	288	819
Increase in drilling inventories	(374)	(327)	(331)
Gain on derivative financial instruments	(182)	-	(583)
Finance costs and exchange differences	(643)	376	1,508
Decrease/(Increase) in short term receivables	2,809	(6,019)	(6,492)
Cash flow from operations	(3,308)	(704)	(2,826)

The primary non-cash transactions during the period related to the exercise of 9.6 million of 10.4p warrants in settlement of £1.0 million debt and issue of 830,565 shares as part settlement of the drilling services at the Badile licence, onshore Italy.

NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of preparation

The condensed interim consolidated financial statements do not represent statutory accounts within the meaning of section 435 of the Companies Act 2016. The financial information for the year ended 31 December 2016 is based on the statutory accounts for the year ended 31 December 2016. Those accounts, upon which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The condensed interim financial information is unaudited and has been prepared on the basis of the accounting policies set out in the Group's 2016 statutory accounts and in accordance with IAS 34 Interim Financial Reporting.

The seasonality or cyclicality of operations does not impact on the interim financial statements.

2. Segment information

The Group categorises its operations into three business segments based on Corporate, exploration and appraisal and development and production. The Group's exploration and appraisal activities are carried out in Morocco and Italy. The Group's reportable segments are based on internal reports about the components of the Group which are regularly reviewed by the Board of Directors, being the Chief Operating Decision Maker (''COMD''), for strategic decision making and resources allocation to the segment and to assess its performance. Sales during the period arose from producing licences in Italy. The segment results for the period ended 30 June 2017 are as follows:

Segment results for the period ended 30 June 2017

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total  £'000s
Sales and other operating revenues	-	378	-	378
Operating costs	-	(169)	-	(169)
Exploration costs	-	-	(15,124)	(15,124)
Administration expenses	(5,161)	-	-	(5,161)
Operating loss segment result	(5,161)	209	(15,124)	(20,076)
Finance revenue	37	-	-	37
Gain on derivative financial instruments	182	-	-	182
Finance costs and exchange gains	643	-	-	643
Profit/(loss) for the period before taxation	(4,299)	209	(15,124)	(19,214)

The segments assets and liabilities at 30 June 2017 are as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Capital expenditure	609	1,202	33,409	35,220
Other assets	41,343	30	6,287	47,660
Total liabilities	(18,980)	(1,780)	(11,236)	(31,996)

The geographical split of non-current assets is as follows:

	UK £'000s	Italy £'000s	Morocco £'000s
Development and production assets	-	1,202	-
Land and buildings	-	1,581	-
Fixtures, fittings and office equipment	192	185	232
Goodwill	-	433	-
Exploration and evaluation assets	-	4,539	26,622
Software	88	5	141
Total	280	7,945	26,995

Segment results for the period ended 30 June 2016

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total  £'000s
Sales and other operating revenues	-	529	-	529
Other income	715	-	-	715
Operating costs	-	(801)	-	(801)
Exploration costs	-	-	(28)	(28)
Administration expenses	(2,346)	-	-	(2,346)
Operating loss segment result	(1,631)	(272)	(28)	(1,931)
Finance revenue	2,717	-	-	2,717
Finance costs and exchange gains	(376)	-	-	(376)
Profit/(loss) for the period before taxation	710	(272)	(28)	410

The segments assets and liabilities at 30 June 2016 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Capital expenditure	274	6,678	15,697	22,649
Other assets	22,802	62	6,192	29,056
Total liabilities	(11,546)	(1,938)	(17,340)	(30,824)

The geographical split of non-current assets is as follows:

	UK £'000s	Italy £'000s	Morocco £'000s
Development and production assets	-	6,678	-
Land and buildings	-	1,493	-
Fixtures, fittings and office equipment	38	170	66
Goodwill	-	2,160	-
Exploration and evaluation assets	-	7,809	4,122
Software	103	8	2
Total	141	18,318	4,190

Segment results for the year ended 31 December 2016

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Sales and other operating revenues	-	833	-	833
Other income	-	715	-	715
Operating costs	-	(1,110)	-	(1,110)
Exploration costs	-	-	(2,334)	(2,334)
Impairment of producing assets	-	(5,455)	-	(5,455)
Goodwill impairment	-	(524)	(1,180)	(1,704)
Administration expenses	(6,241)	-	-	(6,241)
Operating loss segment result	(6,241)	(5,541)	(3,514)	(15,296)
Interest receivable	1,364	-	-	1,364
Gain on derivative financial instruments	583	-	-	583
Finance costs and exchange gains	(1,834)	-	-	(1,834)
Loss for the period before taxation	(6,128)	(5,541)	(3,514)	(15,183)

The segments assets and liabilities at 31 December 2016 were as follows:

	Corporate £'000s	Development & Production £'000s	Exploration & Appraisal £'000s	Total £'000s
Non-current assets	513	1,216	29,595	31,324
Current assets	52,526	22	6,234	58,782
Total liabilities	(3,161)	(2,049)	(27,317)	(32,527)

The geographical split of non-current assets is as follows:

	UK £'000s	Italy £'000s	Morocco £'000
Development and production assets	-	1,216	-
Land and buildings	-	1,535	-
Fixtures, fittings and office equipment	194	171	148
Goodwill	-	433	-
Exploration and evaluation assets	-	8,511	18,876
Software	89	6	145
Total	283	11,872	19,169

3. Profit/(loss) per share

The calculation of basic profit/(loss) per Ordinary Share is based on the profit/(loss) after tax and on the weighted average number of Ordinary Shares in issue during the period. The calculation of diluted profit/(loss) per share is based on the profit/(loss) after tax on the weighted average number of ordinary shares in issue plus weighted average number of shares that would be issued if dilutive options and warrants were converted into shares. Basic and diluted profit/(loss) per share is calculated as follows:

	Profit/(loss) after tax from continuing operations			Weighted average shares in issue			Profit/(loss) per share (basic) from continuing operations
	June 2017 £'000s	June 2016 £'000s	December 2016 £'000s	June 2017 million	June 2016 million	December 2016 million	June 2017 pence	June 2016 pence	December 2016 pence
Basic	(19,214)	410	(13,439)	703	506	534	(2.73)	0.08	(2.52)

	Profit/(loss) after tax from continuing operations			Weighted average shares in issue and dilutive potential ordinary shares			Profit/(loss) per share (diluted) from continuing operations
	June 2017 £'000s	June 2016 £'000s	December 2016 £'000s	June 2017 million	June 2016 million	December 2016 million	June 2017 pence	June 2016 pence	December 2016 pence
Diluted	(19,214)	410	(13,439)	703	538	534	(2.73)	0.08	(2.52)

4. Intangibles

	Six months ended 30 June  2017 Unaudited  £'000s	Six months ended 30 June 2016 Unaudited  £'000s	Year ended  31 Dec 2016  Audited £'000s
Cost
At start of period	42,386	20,198	20,198
Additions	18,186	4,000	21,352
Exchange adjustments	(284)	657	836
At end of period	60,288	24,855	42,386
Impairment and Depreciation
At start of period	14,326	10,634	10,634
Charge for period	13,761	17	3,559
Exchange adjustments	373	-	133
At end of period	28,460	10,651	14,326
Net book amount	31,828	14,204	28,060

During the period there was an impairment charge of approximately £13.7 million in respect of the Badile licence, Italy, following sub-commercial well results and in addition, approximately £1.4 million for the well abandonment costs was provided for.

5. Loans and Borrowings

	Six months ended 30 June  2017 Unaudited  £'000s	Six months ended 30 June 2016 Unaudited  £'000s	Year  ended  31 Dec 2016 Audited £'000s
Current liability
Other loans	-	7,704	986
Non-current liability
5-year secured bonds	17,632	8,125	16,455
Other loans	-	1,027	-
	17,632	9,152	16,455

On 21 June 2016, the Company announced that Greenberry S.A (''Greenberry'') had subscribed for 5-year non-amortising secured bonds with an aggregate value of the issue of €28.8 million (the ''bonds''). Alongside the bonds, the Company was to issue 70,312,500 warrants to subscribe for new ordinary shares in the Company at an exercise price of 30 pence per ordinary share and an exercise period of approximately five years, concurrent with the term of the bonds, to Greenberry ( the ''warrants''). The bonds are secured over the share capital of Sound Energy Holdings Italy Limited. The bonds have a 5% coupon and were issued at a 32% discount to par value. A total cash fee of €1.1 million was payable by the Company.

The warrants were recorded within equity at their fair value on the date of issuance and the proceeds of the notes net of issue costs were recorded as non-current liability. Part of the proceeds of the bonds was used to settle an existing Reserve Based Lending facility from Greenberry of €7.0 million at a discount of 50% reported within finance revenue. The Company also settled £7.0 million debt that had been issued to Continental Investment Partners in 2014. The coupon rate of 5% for the bonds ensures that the Company's on-going cash out-flow on interest payments is low and which conserves the Company's cash resources. The effective interest rate is approximately 16.3%. The 5-year secured bonds are due in June 2021.

During the period to 30 June 2017, the Company settled £1.0 million debt that had been issued to Simon Davies in 2014 and had an annual coupon of 10%. The debt was settled through the exercise of 9.6 million warrants at 10.4p per share.

	30 June     2017 £'000s	30 June 2016 £'000s	31 December 2016 £'000s
Liability component at 1 January	986	7,118	7,118
Interest and amortised issue costs	44	620	1,413
Interest paid	(30)	(306)	(545)
Debt paid	(1,000)	-	(7,000)
	-	7,432	986

6. Shares in issue and share based payments

As at 30 June 2017, the Company had 731,514,432 ordinary shares in issue. In the period to 30 June 2016, a total of 54.2 million warrants were exercised for total proceeds of £9.8 million and 9.6 million warrants were exercised in settlement of a debt (note 5).

During the period to 30 June 2017, the Company granted 11.1 million share options to staff under its long term incentive plan. Approximately 3.8 million share options expired during the period.

7. Post Balance Sheet events

On 21 July 2017, the Company announced that it was progressing well with its acquisition of various licences in Eastern Morocco from OGIF (the "Acquisition") and is expecting completion of the Acquisition at the end of Q3 2017. On completion of the Acquisition OGIF will be issued with 272 million new ordinary shares in the Company which was approved by the Company's shareholders on 15 March 2017. The Company has entered into petroleum agreements with Morocco's Office National des Hydrocarbures des Mines ("ONHYM") for Anoual and Matarka licences, on shore Morocco. These agreements will come into force at the same time as completion of the Acquisition.  A bank guarantee of US$2.95 million had been lodged by the Company and its partners to cover a proportion of the work commitments under the licences.  

On 5 July 2017, the Company announced that the re-entry of the Koba-1 well at Sidi Moktar licence, onshore Morocco had been successfully complete and flared gas at surface. The Company expected to undertake a rigless extended well test.

On 1 August 2017, the Company announced that it had received written confirmation, from a local authority in Eastern Morocco, that preliminary approval had been provided for the proposed route of the gas export pipeline that will be necessary to transit gas from Sound Energy's Eastern Moroccan interests to the Gazoduc Maghreb Europe (GME) pipeline.

On 3 August 2017, the Company announced that it had received final approval for the Matarka Licence, which has been granted with an effective date of 27 July 2017.  The Company expected to receive the remaining approvals in relation to the Anoual and Tendrara licence areas by the end of Q3 2017.

On 4 September 2017, the Company announced that it had received an indicative non-binding commercial proposal (the "Indicative Proposal") from Advisory & Finance Group Investment Bank ("AFG").  AFG is a Moroccan based financial institution which acts as fund manager to OGIF, the Company's partner in Morocco.  The Indicative Proposal, subject to agreement of terms and contract, is for the provision of funding for the construction of the Tendrara Gas Export Pipeline ("TGEP") connecting Tendrara to the GME pipeline of between US$60 million and US$100 million.  The Company currently estimates the gross capital cost of the TGEP pipeline to be approximately US$60 million for a 12 inch pipeline and US$100 million for a 20 inch pipeline.

On 12 September 2017, the Company announced the completion of the acquisition of various licenses in Eastern Morocco from OGIF (the "Acquisition") outline above. As a result, the Company now holds
a net 47.5% position in the Tendara and Anoual petroleum agreements and Matarka reconnaissance exploration license, in exchange for 272 million new ordinary shares to OGIF.

This announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

This information is provided by RNS

The company news service from the London Stock Exchange

END

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