and Accounts 2014 Annual Report Ophir Energy plc Annual Report and Accounts 2014 Ophir Energy creates value by finding resources and then monetising them at the appropriate time. The Group has an extensive and diverse Read more at portfolio of assets in Africa and Asia and is listed ophir-energy.com on the London Stock Exchange (FTSE 250). Ophir diversifies funding model through acquisition of Salamander Energy During 2014 Ophir agreed to acquire Salamander Energy. This acquisition provides Ophir with an Asian operating platform, with a cash generative production base that is resilient at low oil prices and will part fund the resource finding business. Review of operations page 22 Contents Strategic report 2 Financial statements 95 Overview Independent Auditor’s report 95 Financial and operational highlights in 2014 2 Consolidated income statement and Market overview 4 statement of comprehensive income 98 Business model 6 Consolidated statement of financial position 99 Chairman’s statement 8 Consolidated statement of changes in equity 100 Consolidated statement of cash flows 101 Strategy Notes to the financial statements 102 Chief Executive’s review 10 Statement of Directors’ responsibilities Strategy and key performance indicators 12 in relation to the Company financial statements 132 Principal risks and uncertainties 18 Company statement of financial position 133 Performance Company statement of changes in equity 134 Review of operations 22 Company statement of cash flows 135 Financial review 34 Notes to the financial statements 136 Corporate responsibility 38 Governance report 46 Supplementary information 155 Corporate Governance introduction 46 Shareholder information 155 Board of Directors 48 Glossary 158 Corporate Governance report 50 Report of the Audit Committee 56 Report of the Corporate Responsibility Committee 61 Report of the Nomination Committee 64 Directors’ Report 66 Directors’ remuneration report Chairman’s Annual Statement on Remuneration 69 Directors’ Remuneration Policy 71 Annual Report on Remuneration 80 Responsibility statement of the Directors in respect of the Annual Report and Accounts 94 Statement of Directors’ responsibilities in relation to the Group financial statements and Annual Report 94 Strategy for growth Business at a glance Page 12 Page 22 Annual Report and Accounts 2014 1 Financial and operational highlights in 2014 Ophir delivered another successful year operationally, ending 2014 with net contingent resources of 1,031 mmboe. The Company demonstrated the value it has created to date with the partial monetisation of its interests in Tanzania for $1.288 billion*. The reported net profit for the year was $54.8 million, reflecting asset impairments and exploration write-offs. $1.288 billion Completed the sale of a 20% interest in Tanzania Blocks 1, 3 and 4 to Pavilion Energy for $1.288 billion* 11 * includes a $38 million amount that is payable at FID. 11 exploration and appraisal wells drilled in 2014, six of which were successful 1,031 mmboe Net contingent resource at year end 2014 180 mscfd Fortuna-2 drill stem test exceeded expectations with gas flowing at an implied unconstrained rate of 180 mscfd * includes a $38 million amount that is payable at FID. 2 Ophir Energy plc Governance Financial Supplementary Strategic report report statements information Overview Strategy Performance $1.17 billion Cash and cash investments as at year end 2014* * includes $295 million of short-term investments. 0.7 LTIF rate of 0.7 per million man hours worked $1.34 per boe Three-year average finding costs $54.8 million Post-tax profit of $54.8 million Annual Report and Accounts 2014 3 Market overview Oil prices fell significantly towards the end of 2014. This has resulted in downward pressure on the service sector which is reducing Ophir’s cost of doing business. Ophir is always focused on ensuring that any exploration success is commercial and can be monetised in the prevailing oil price environment. M&A activity across the sector is expected to increase as more Service sector companies are forecast to have balance sheets that come under pressure. We are seeing companies prioritise capex restraint and Upstream oil and gas companies have generally responded to the cost reduction over new business activities. This has led to a marked decline in the oil price by reducing capital expenditure, especially on fall in the competition for new licences. exploration and appraisal activity. We have already seen this feed through to a reduction in service costs as rig utilisation and demand Commodity prices for seismic vessels contracts. In West Africa for example, deepwater rig utilisation rates have fallen from 89% to 84%. Generally rig utilisation Following a three year period where Brent crude oil prices have been is expected to fall further in 2015 as 40% of floating rig fleets will come relatively stable, the end of 2014 saw the Brent price fall from $97 off contract between Q4 2015 and Q2 2016. Floating rig rates have fallen per barrel at the end of September to $57 per barrel at the end of the by around 30% already and are expected to come under further pressure. year. This trend continued into early 2015 with Brent prices closing at Seismic costs have already dropped dramatically. Ophir has experienced a low of $49 per barrel on 13 January before recovering somewhat this in Myanmar where we were able to contract a vessel for an offshore to $54 per barrel on 17 March. 3D survey in 1Q 2015 for 70% less than the rate we were quoted during The forward futures curve highlights market expectations that the Brent our scoping work in early 2014. With a limited number of companies price will recover in the coming years with current expectations being pursuing new offshore exploration acreage, we estimate prices staying for a Brent price of $58 per bbl in 2015 rising to $68 per bbl in 2017. at this level for the immediate future. LNG contract pricing, especially in Asian markets, is still predominantly linked to oil prices and this is expected to continue. However, with the increase in US shale gas other benchmarks such as Henry Hub are more frequently being used to determine LNG pricing going forwards. Asian and European spot LNG prices are now at similar levels. Deepwater rig rates 500 Local markets Asia is an important demand centre for Ophir as the most likely 400 destination for sales of LNG/FLNG from Africa and also, post the acquisition of Salamander Energy, the region where we will be selling 300 our produced barrels. South East Asian GDP growth remains strong and is forecast to grow by 5.6%1 in 2015. A global recovery is expected to boost exports from the region, keeping interest rates low which will US$/day 200 provide a further boost to demand. This in turn will lead to Asian energy demand continuing to grow strongly. 100 In Ophir’s more traditional areas of operation, the main event of note is the Tanzanian election which is expected to be held late in 2015. Whilst all parties are supportive of the nascent oil and gas industry, 0 it is possible that as we move nearer to the elections, any decisions Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 that require cabinet ratification may be delayed. Gulf of Mexico South America West and South Africa 1 Source: IMF Regional Economic Outlook Update, October 2014. Source: RS Platou – units with capability of operating in water depths of >7,500 ft. 4 Ophir Energy plc Governance Financial Supplementary Strategic report report statements information Overview Strategy Performance Business model page 6 M&A cubic metres (bcm) and new LNG supply is only expected to total 150 bcm. The pricing model is evolving in response to the potential for As a consequence of the fall in commodity prices, a number of US shale exports with Henry Hub pricing being used more frequently independent upstream E&P companies have seen their balance as a benchmark. With Henry Hub prices currently around $3.5 per sheets come under pressure. As one of the few companies with MBtu, the cost of landed US LNG into East Asia is now around $10 a strong balance sheet, we are observing a marked increase in the to $12 per MBtu. The IEA report goes on to state that the total cost number of M&A opportunities. If the current oil price environment through the LNG chain is lowest for East Africa. Asia is important as extends throughout 2015 then we would expect the number of it is the most likely end user of East African gas and also, as the report distressed sellers to increase further. This will create opportunities also highlights, many Asian companies are increasingly investing in for well capitalised E&P companies to create value through the upstream part of African LNG projects, with East Africa highlighted selective acquisitions. as potentially having the strongest relative investment. In summary, demand is strong as Asian buyers seek diversity and Exploration security of supply and East African gas provides Asian buyers with a cost competitive source of future supply. There has been a marked reduction in the number of international E&P companies looking to acquire new exploration acreage as the Brent and WTI oil price industry focuses on cost management. In the middle of the last decade, fuelled by a combination of rising commodity prices and 160 the ease of access to capital markets, exploration activity increased 140 dramatically. This resulted in increased competition in licensing rounds 120 where signature bonuses would be high and work programmes would 100 typically involve a commitment to drill a number of firm exploration 80 wells. The cost of acquiring exploration acreage is now realigning to 60 reflect the reduced levels of competition.