VOLTAIC STRATEGIC RESOURCES LTD — Annual Report 2014

Feb 26, 2015

==> picture [472 x 104] intentionally omitted <==

A.B.N. 66 138 145 114

Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

RESULTS FOR ANNOUNCEMENT TO THE MARKET

	%’age Change	US$	US$
		2014	2013
Revenue from ordinary activities	41%	$6,466,932	$10,939,590
Profit/(Loss) from ordinary
activities after tax attributable to	106%	$669,037	($11,469,595)
members
Net profit after tax for the period attributable to members	106%	$669,037	($11,469,595)
Earnings per share	106%	0.42 cents	(7.35) cents
Diluted earnings per share	106%	0.42 cents	(7.35) cents
Net tangible assets per share	3%	9.0 cents	8.7 cents

Directors have not proposed a dividend and no dividend has been paid since incorporation

This report is based on accounts which have not yet been audited or reviewed. Oilfield asset values in the financial statements are subject to review by external competent persons and could result in impairment if the estimates are below net book value.

The functional and presentation currency of Incremental Oil and Gas Ltd is United States dollars (US$). Any reference to dollars or currency in this report will be a reference to US$ unless stated otherwise.

P a g e | 1

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

COMMENTARY ON RESULTS

This consolidated financial report of Incremental Oil and Gas Limited (“Incremental” or “the Company”) covers the twelve months of operations for the year ended 31 December 2014.

Incremental has improved its net profit after tax for the financial year ending 31 December 2014 (Profit - $426,000) compared to the prior year (Loss - $6.326M). Cash flow from operations remained strong despite a decrease in production from natural decline. A summary of operating profit is as follows:

	2014	2013
	US$M	US$M
Volume of oil/gas sold	74,643 boe	114,677 boe
Revenue from oil and gas sales (US$ million) Royalty Payments Production Expenses	$6.467 ($1.108) ($1.118)	$10.940 ($1.958) ($1.912)
Operating Profit Gross Profit margin Other income Overhead Expenses	$4.241 66% $0.008 ($1.998)	$7.070 65% $0.003 ($3.140)
EBITDAX Loss on sale of assets Interest income/expense (net) & Finance costs Depreciation/Amortisation Tax (expense)/benefit Impairment Other non-operatingincome/(expenses)	$2,251 ($0.008) ($0.378) ($0.874) ($0.327) $ - $0.005	$3.927 ($0.385) ($0.397) ($1.839) $3.182 ($15.925) ($0.042)
Net Profit/(Loss) After Tax	$0.669	($11.470)

Production declined during the year in line with expectations as a result of decreased reservoir energy. The table below indicates the production of oil from each of the Company’s fields.

Field	2014 (Bbls)	2013 (Bbls)
Sheep Springs (oil only) Round Mountain Florence	24,167 18,559 30,418	33,665 24,884 54,065
TOTAL	73,144	112,614

P a g e | 2

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Revenue was impacted by a lower average oil price. During the first three quarters of 2014, WTI oil prices were relatively strong but there was a severe decrease in pricing during Q4-14 (Refer WTI Oil Price chart below). The average oil price received for 2014 was US$88/bbl (2013 – US$97/bbl). Incremental was fully exposed to the market price of oil with no hedging in place.

==> picture [453 x 31] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 31] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 32] intentionally omitted <==

==> picture [453 x 31] intentionally omitted <==

The net proceeds after royalties, production taxes and lease operating expenses (netback) for the company was $58/bbl (2013 - $63/bbl). Lease operating costs were reduced during 2014 with the biggest saving from the Round Mountain Field where there was a $350k cost reduction from improvements in water disposal management.

The company increased its cash reserves by around $830,000 in 2014 ending the year with a cash position of $1,361,814 (2013 - $541,110). Debt was reduced by $512,000 during the year.

OPERATING REVIEW

SHEEP SPRINGS :

The Sheep Springs Oilfield, bought by Incremental in January 2010, continued to perform well during 2014, with only minimal production decline, mainly due to the gradual depletion of reservoir pressure in the field. Some minor remedial workovers were performed during 2014 and production in December 2014 was higher than any month during the year.

P a g e | 3

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

==> picture [432 x 33] intentionally omitted <==

==> picture [432 x 32] intentionally omitted <==

==> picture [432 x 33] intentionally omitted <==

==> picture [432 x 33] intentionally omitted <==

==> picture [432 x 33] intentionally omitted <==

==> picture [432 x 33] intentionally omitted <==

==> picture [432 x 33] intentionally omitted <==

Sheep Springs oil production 2011 – 14

Technical analysis was undertaken in relation to the potential for the recovery of undeveloped reserves in the Sheep Spring Oilfield. It was determined that these reserves could be accessed and there were nearby analogues to demonstrate this.

ROUND MOUNTAIN :

No new wells have been drilled in the Round Mountain Field during 2014. Disposal of increasing water production from the Smoot #7 and #8 wells was addressed through workovers.

The decline rate of the field has been variable but the low cost operation continues to be profitable.

==> picture [429 x 33] intentionally omitted <==

==> picture [429 x 34] intentionally omitted <==

==> picture [429 x 34] intentionally omitted <==

==> picture [429 x 33] intentionally omitted <==

==> picture [429 x 34] intentionally omitted <==

==> picture [429 x 34] intentionally omitted <==

==> picture [429 x 33] intentionally omitted <==

==> picture [429 x 33] intentionally omitted <==

P a g e | 4

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

FLORENCE :

Since the acquisition of the Florence Oilfield in the southern part of the DJ Basin in May 2012 and the unsuccessful drilling campaign of two wells commenced in Q1 2013, no further development has taken place in the field in 2014. We believe that the Niobrara is still sub-economic due to the proportion of gas and limited infrastructure.

The rate of decline in production at Florence has continued to slow substantially throughout 2014 as was expected from the Pierre Shale production (see Figure 1 below) and is now similar to the decline rate in conventional oilfields.

==> picture [440 x 33] intentionally omitted <==

==> picture [440 x 33] intentionally omitted <==

==> picture [440 x 34] intentionally omitted <==

==> picture [440 x 33] intentionally omitted <==

==> picture [440 x 33] intentionally omitted <==

==> picture [440 x 33] intentionally omitted <==

==> picture [440 x 33] intentionally omitted <==

Florence oil production 2013-14

OTHER PROJECTS :

Incremental has invested considerable resources over the last year in reviewing a number of producing assets in the USA. The company has submitted offers on a number of projects but has been outbid by competitors. The substantial drop in oil price in Q4-14 is expected to result in a realignment of oil asset values which is likely to create acquisition opportunities for the Company within its value range.

CORPORATE :

Incremental had a number of Board changes in 2014. Founding Directors, Mr Chris Cronin and Mr John (Sandy) Macdonald, retired from the Board. Matt McCann was appointed as a non-executive director in May. Mr McCann has extensive public company experience in the energy sector and brings a US perspective to the Board. During the year, Mr Gerry McGann moved from the role of Managing Director to a nonexecutive Technical Director role. The Managing Director role was taken up by John Whilser who had been the President of the US entities. Mr Whisler comes to the role of CEO with a highly credentialed track record and extensive experience in management and operations in the energy sector in the US.

During 2014, Incremental refinanced the debt that it held from RMB Resources with a loan facility from ANB Bank (based in the USA). ANB Bank provided the company with a US$3M term loan that is repayable over a four year term plus a line of credit facility that can be used for acquisitions and working capital requirements as they are required.

P a g e | 5

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

SUMMARY :

Incremental has weathered a difficult year with its main achievements being:

• Refinancing of its debt facility at a lower cost and with improved covenants;

• Investigation of a considerable number of new business opportunities under a rigorous set of criteria which has created extensive market knowledge and a good understanding of a range of territories where other opportunities can be reviewed with a higher degree of certainty;

• Lowering of operating and overhead costs;

• Optimisation of existing well production in all fields.

Incremental is in a sound position to commit to new opportunities as it is restructuring its capital position to provide additional capital to invest in new projects. Its focus will continue to be producing oilfields in North America that have a range of opportunities to add value through behind pipe workovers and drilling of new wells to increase production.

P a g e | 6

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Consolidated statement of profit and loss and other comprehensive income (for the year ended 31 December)

Oil and gas sales 2a Direct cost of sales Royalty costs Production and exploration expenses Amortisation and depreciation 2b Restoration Gross profit from operations Other revenue 2a Compliance costs Operating lease costs Salaries, directors’ fees and employee benefits Interest and finance costs 2d Other costs Foreign exchange (losses) / gains Depreciation 2b Gain/(loss) on sale of assets 2c Impairment of assets 2e Profit / (Loss) before income tax Income tax (expense) / benefit Profit / (Loss) after tax Profit / (Loss) for the period attributable to members of the entity Other comprehensive income: Items that will not be reclassified to profit and loss Items that may be reclassified to profit or loss Other comprehensive income / (loss) for the period , net of tax Total comprehensive income / (loss) for the period attributable to members of the entity Basic earnings per share attributable to ordinary equity holders of the entity (cents) 3 Diluted earnings per share attributable to ordinary equity holders of the entity (cents) 3	2014 US$ 6,466,932 (1,107,780) (1,118,047) (848,128) 9,866 3,402,843 8,292 (356,283) (140,521) (1,199,515) (378,475) (301,396) (8,623) (25,963) (4,184) - 966,175 (327,138) 669,037 669,037 - - - 669,037 0.42 0.42	2013 US$
		10,939,590 (1,957,700) (1,911,785) (1,819,933) (32,799)
		5,217,373 3,047 (411,394) (254,575) (1,885,393) (396,827) (588,231) (5,966) (18,989) (384,966) (15,925,208)
		(14,651,129) 3,181,534
		(11,469,595)
		(11,469,595)
		- -
		-
		(11,469,595)
		(7.35) (7.35)

P a g e | 7

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Consolidated statement of financial position (as at 31 December)

Note Current assets Cash and cash equivalents 4 Trade and other receivables 5 Inventories 6 Total current assets Non-current assets Trade and other receivables 5 Other financial assets Oil properties 7 Exploration assets Plant and equipment 8 Deferred tax asset Total non-current assets Total assets Current liabilities Trade and other payables 9 Borrowings 10 Provisions 11 Taxes payable Total current liabilities Non-current liabilities Trade and other payables 9 Borrowings 10 Provisions 11 Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital 12 Share reserve for employee share plan 12 Reserves 14 Accumulated profit/(loss) Total equity	2014 US$ 1,361,814 298,013 364,528 2,024,355 27,707 10,626 15,168,734 - 1,522,770 41,791 16,771,628 18,795,983 515,687 750,000 45,852 126,273 1,437,812 134,410 1,737,534 1,104,749 - 2,976,693 4,414,505 14,381,478 22,620,836 (156,512) 349,661 (8,432,507) 14,381,478	2013 US$
		541,110 766,243 390,675
		1,698,028
		- 10,626 15,733,764 - 1,614,587 307,023
		17,666,000
		19,364,028
		1,379,593 2,785,057 84,962 64,358
		4,313,970
		318,590 - 1,133,159 -
		1,451,749
		5,765,719
		13,598,309
		22,430,823 (65,636) 334,666 (9,101,544)
		13,598,309

P a g e | 8

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Consolidated statement of cash flows (for the year ended 31 December)

Note Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid State tax paid Net cash provided by operating activities Cash flows from investing activities Proceeds from sale and farm-down of oil properties Oil property development expenditure Refunds/(payments) for performance bonds Payments for purchases of property, plant and equipment Payments for lease renewals Net cash used in investing activities Cash flows from financing activities Proceeds from issues of equity securities Cost of share issue Proceeds/ (repayment) of borrowings Net cash provided by financing activities Cash and cash equivalents at the start of the year/period Net increase/(decrease) in cash and cash equivalents Exchange differences on cash balances held Cash and cash equivalents at the end of the year/period	2014 US$ 6,960,797 (4,284,768) 436 (134,517) (958,337) 1,583,611 - (104,466) - (135,504) - (239,970) - - (512,438) (512,438) 541,110 831,203 (10,499) 1,361,814	2013 US$
		11,319,761 (6,913,276) 3,047 (295,194) (104,713)
		4,009,625
		165,000 (3,394,834) 184,374 (127,631) (1,367,281)
		(4,540,372)
		112,003 - (3,000,000)
		(2,887,997)
		3,970,247 (3,418,744) (10,393)
		541,110

P a g e | 9

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Consolidated statement of changes in equity (for the year ended 31 December)

(for	the year ended 31 December)
At 31 December 2013 Profit attributable to members of the entity Total income/expense for the year Issue of employee shares Issue of options Placement of shares Cost of issue of share capital At 31 December 2014 At 31 December 2012 Profit attributable to members of the entity Total income/expense for the year Issue of employee shares Issue of options Placement of shares Cost of issue of share capital At 31 December 2013	Issued capital Shares reserved for employee share plan Accumulated profits/ (losses) Share option reserve Total equity US$ US$ US$ US$ US$
	22,430,823 (65,636) (9,101,544) 334,666 13,598,309 - - 669,037 - 669,037
	- - 669,037 - 669,037 - (90,876) - - (90,876) - - - 14,995 14,995 190,013 - - - 190,013 - - - - -
	22,620,836 (156,512) (8,432,507) 349,661 14,381,478
	Issued capital Shares reserved for employee share plan Accumulated profits/ (losses) Share option reserve Total equity US$ US$ US$ US$ US$
	22,318,820 - 2,368,051 35,769 24,722,640 - - (11,469,595) - (11,469,595)
	- - (11,469,595) - (11,469,595) - (65,636) - - (65,636) - - - 298,897 298,897 112,003 - - - 112,003 - - - - -
	22,430,823 (65,636) (9,101,544) 334,666 13,598,309

P a g e | 10

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

Condensed notes to the financial statements

1. Summary of significant accounting policies

a. Basis of preparation

The report is based on accounts that are in the process of being audited.

The report does not include all of the notes normally included in an annual financial report. Accordingly this report is to be read in conjunction with the financial report for the year ended 31 December 2013 and any public announcements made by Incremental during the reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

The financial report is presented in United States dollars (US$) unless otherwise stated .

b. Statement of Compliance

The financial report complies with Australian Accounting Standards, which include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards (IFRS).

The Company has adopted all new and revised Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board (AASB) which are mandatory to apply to the current year.

c. Principals of consolidation

• The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Incremental Oil and Gas Ltd (“Incremental”) as at 31 December 2014 and the results of all subsidiaries for the year then ended. Incremental and its subsidiaries together are referred to as the Group. Subsidiaries are all those entities (including special purpose entities) over which the Group has power to govern the financial and operating policies, so as to obtain benefits from its activities, generally accompanying a shareholding of more than one-half of the voting rights. The existence and potential effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Entity, using consistent accounting policies. Accounting policies of subsidiaries have been changed when necessary to ensure consistency with the policies adopted by the Group.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. There are deconsolidated from the date that control ceases. Intercompany transactions and balances, income and expenses and profit and losses between Group companies, are eliminated.

P a g e | 11

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

2. Revenue, other income and expenses a) Sales revenue Oil and gas Royalties Oil and gas sales Other revenue Interest Income Other revenue Total other revenue b) Depreciation and amortisation included in the statement of comprehensive income Amortisation – oil and gas properties Depreciation – oil and gas properties Depreciation – other plant & equipment c) Net gain/(loss) on sale of oil properties and exploration assets West Mountain -sold Equipment sale d) Finance costs Interest on bank loans Other Interest Charges Financing charges e) Impairment of assets Impairment of oil and gas properties -Florence – uncommercial new wells -Florence – Niobrara Formation downgrade -Sheep Springs and Round Mountain Impairment of exploration and evaluation assets	2014 US$ 6,404,490 62,442 6,466,932 436 7,856 8,292 (650,953) (197,175) (848,128) (25,963) (874,091) - (4,184) (4,184) (133,679) (838) (243,958) (378,475) - - - - -	2013 US$ 10,805,052 134,538
		10,939,590
		3,047 -
		3,047
		(1,616,931) (203,002)
		(1,819,933) (18,989)
		(1,838,922)
		(367,019) (17,947)
		(384,966)
		(293,368) (1,826) (101,633)
		(396,827)
		(2,734,124) (9,045,777) (3,474,823) (670,484)
		(15,925,208)

P a g e | 12

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

3. Earnings per share Earnings used in calculating basic earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilutive securities: Share Options Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 4. Cash and cash equivalents Cash at bank and on hand 5. Trade and other receivables Current - Oil and gas sales debtors Other receivables Non-current - Other receivables 6. Inventories Oil and gas inventory at cost of production Field inventory 7. Oil properties Cost of acquisition and enhancements Impairment Accumulated amortisation 8. Fixed assets Cost Depreciation	2014 US$ 669,037 Number of Shares 158,306,505 - 158,306,505 2014 US$ 1,361,814 271,131 26,882 298,013 27,707 87,275 277,253 364,528 24,436,849 (3,474,823) (5,793,292) 15,168,734 2,290,461 (767,691) 1,522,770	2013 US$ (11,469,595)
		Number of Shares 156,023,790 -
		156,023,790
		2013 US$ 541,110
		735,029 31,234
		766,243
		- 111,804 278,871
		390,675
		24,350,927 (3,474,823
		(5,142,340)
		15,733,764
		2,174,675 (560,088)
		1,614,587

P a g e | 13

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

9. Trade and other payables CURRENT - Trade payables and accruals NON CURRENT - Trade payables and accruals 10. Borrowings CURRENT - Bank Loan (Secured) NON-CURRENT - Bank Loan (Secured)	2014 US$ 515,687 134,410 750,000 1,737,534	2013 US$ 1,379,593
		318,590
		2,785,057
		-

The secured bank loan is provided by ANB Bank as a US Dollar denominated term loan facility which was provided in May 2014 for the purpose of repaying a loan facility from RMB Australia Holdings Ltd. The RMB Australia Holdings loan was advanced to the Company in 2012 for the purpose of acquiring the Florence Oilfield. The loan balance shown at the end of 2013 was payable to RMB Australia Holdings. Details of the term loan to ANB are as follows:

• Security - mortgages over the Company’s producing oilfields in California and Colorado

• Interest - paid monthly at a rate of 0.50% above the Prime Rate (2014 – 3.75%)

• Term – four years from May 2014

• Principal repayments – monthly equal instalments ($62,500)

• Initial face value of loan - $3.0 million

• Financial covenants – Modified Current Ratio shall not be less than 1:1 (Modified Current Ration means, as of the end of any Fiscal Quarter ending after the Closing Date, the ratio of: (a) the sum of Borrower's current assets (including as a current asset any and all unused availability under the Revolving Loan, but excluding assets resulting from any mark-to-market of unliquidated hedge contracts); to (b) the sum of Borrower's current liabilities (excluding the current portion of long term Debt with the exception of principal that is due within ninety (90) days and liabilities resulting from any mark-to-market of unliquidated hedge contracts), all determined on a consolidated basis pursuant to the most recent financial statements delivered by Borrower to Lender. Oil in inventory, not reported on the most recent financial statement, will be added to the current assets at market price.)

In addition to the Term Loan, ANB Bank approved a line of credit (Revolving Loan) for an amount of $5.0 million which could be used for the purpose of funding of capital expenditures relating to oil and gas properties, drilling and well development and general working capital. At the financial year-end, the amount drawn down from this Revolving Loan facility was $Nil. Following a redetermination of the facility limit for the Revolver Loan by ANB, the limit of this facility has been reduced to $3,642,694. This limit will be redetermined again in March 2015

11. Provisions CURRENT - Employee leave provision NON CURRENT - Asset retirement obligation	45,852 1,104,749	84,962
		1,133,159

P a g e | 14

Incremental Oil and Gas Ltd Preliminary Final Report (Appendix 4E) for the year ended 31 December 2014

12. Issued capital At 1 January New shares issued - placement New shares issued- employee shares Exercise of options At 31 December At 1 January New shares issued – placement (net of capital raising costs) New shares issued – employee shares At 31 December Shares reserved for employee share plan 13. Options 92,500,000 options exercisable at 20 cents per option on or before 1 November 2014 expired during 2014 The company has on issue 5,000,000 options exercisable at A$0.1485 per option on or before 27 July 2018 The company has on issue 400,000 options exercisable at A$0.07 per option on or before 26 May 2017 14. Reserves Share option reserve	2014 US$ Number of shares 156,242,680 - 4,094,000 - 160,336,680 US$ 22,430,823 - 190,013 22,620,836 (156,512) 349,661	2013 US$ Number of shares 155,743,680 - 499,000 -
		156,242,680
		US$ 22,318,820 - 112,003
		22,430,823
		(65,636)
		334,666

P a g e | 15