Rockrose Energy : Annual Report and Financial Statements

RNS Number : 6090X RockRose Energy plc 30 April 2019

ROCKROSE ENERGY PLC

ANNUAL REPORT AND FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2018

Company Registration No. 09665181

ROCKROSE ENERGY PLC

CONTENTS

STRATEGIC REPORT	3
REMUNERATION REPORT	8
DIRECTORS' REPORT	15
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS	20
INDEPENDENT AUDITORS' REPORT	21
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	27
CONSOLIDATED STATEMENT OF FINANCIAL POSITION	28

COMPANYSTATEMENT OF FINANCIAL POSITION	29
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY	30
COMPANYSTATEMENT OF CHANGES IN EQUITY	31
CONSOLIDATED STATEMENT OF CASH FLOWS	32
COMPANYSTATEMENT OF CASH FLOWS	34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	35
COMPANYINFORMATION	64

ROCKROSE ENERGY PLC

STRATEGIC REPORT

The Directors present their Strategic Report on RockRose Energy PLC ('the Company' or together with its subsidiaries, 'the Group') for the year ended 31 December 2018.

The Group's strategy, business andfuture developments

2018 was a year of significant delivery for RockRose Energy PLC. Your Company continues to make strong progress having completed two further acquisitions, increasing current production to around 11,000 boepd on a full year pro-forma basis. We have also observed an increase in the economic life of the portfolio with dates for decommissioning being pushed back in line with the government's MER strategy. The Company sees the cash cost of decommissioning averaging around 20-25% of annual EBITDA for the next five years at current hydrocarbon prices. The Company completed the acquisition of Dyas BVon 1 October for a consideration of $124 million (€107 million) adding approximately 6,000 boepd, along with cash balances of $90.6 million. The effective date of the acquisition was 1 January 2018. It also acquired a 30.43% stake in the Shell operated Arran field for a nominal consideration of $1. This development will add a further 8.6 mmboe of 2P reserves and estimated 5,200 boepd of initial net production from2021.

Having built a significant non-operated business in the North Sea producing 10,000 - 12,000 boepd, the Board decided to explore the possibility of acquiring an operatorship in the North Sea. Having analysed and rejected several opportunities the Company made an offer for Marathon Oil Corporation's UK assets. On 25 February 2019 the Company signed a Sale & Purchase Agreement (SPA) to acquire 100% of Marathon Oil U.K. LLC ("MOUK") and 100% of Marathon Oil West of Shetland Limited, ("MOWOS") subsidiaries of Marathon Oil Corporation ("Marathon Oil"). Total consideration is circa $140 million. A deposit of $10 million was paid on signing the SPA, of which 50% is refundable if completion does not occur. Completion is anticipated to occur early in the second half of 2019. Upon announcement of the intention to acquire Marathon, shares in the Company were suspended on the London Stock Exchange. The Company will, post completion, publish a readmission document and apply for the shares to resume trading on the London Stock Exchange.

MOUK holds 40% operated interests in fields in the Greater Brae Area and MOWOS holds a 28% interest in the BP plc operated Foinaven Field unit and a 47% interest in Foinaven East. The acquisition also includes interests in the SAGE, Brae- Forties and WOSPS infrastructure providing additional tariff income. Upon completion, this acquisition is anticipated to add circa 35 million boe of 2P reserves (21 million boe on a 1P basis). This gives the Company a net 2P position as at 1 January 2019 on completion in excess of 70 million and 2P+2C of 86 million boe. Anticipated production for the assets being acquired is circa 10,500- 12,000 boepd in 2019, taking the Company's total net anticipated production for 2019 to circa 21,000-24,000 boepd. The effective date of the acquisition is 1 January 2019 and upon completion the MOUK and MOWOS assets and teams in Aberdeen, Peterhead and offshore will transfer with MOUK and MOWOS to RockRose. This is a significant development for the Group not only doubling its size but also allowing it to pursue further opportunities as an operator and to utilise the experienced teams within the Marathon entities.

On 1 March the Company made a formal offer to the board of directors of Independent Oil and Gas plc ("IOG") with a proposal for an all cash takeover offer for IOG (the "Proposal"). The terms of the Proposal were that RockRose would offer 20p in cash per ordinary share ("IOG Share") for the entire issued and to be issued share capital of IOG (the "Possible Offer") which would value the total share capital of IOG at £26.6 million. The Possible Offer, if made, would represent a premiumof 51 per cent. to the closing price of IOG on 26 February, the day of the initial approach by RockRose to IOG and a premiumof 58 and 44 per cent to the 30 and 60 day volume-weighted average price respectively, up to the period ended 26 February. The Proposal was rejected by the board of directors of IOG.

During the course of 2018, we have continued to examine both the upside opportunities presented by our existing portfolio together with the timings and costs related to decommissioning. Overall capital expenditure for 2019 is anticipated to be around $85 million as we continue to invest in our assets. A significant proportion of this is related to Arran where first gas is on target to

be delivered early in 2021. Production life of the Ross & Blake fields is being extended from2024 to at least 2029, giving an incremental net 2P reserves of more than 4.2MMboe. This also requires investment and there is a 35 day "walk to work" campaign scheduled for June this year to ensure the Bleo Holmvessel can continue to provide a route to market for Ross & Blake hydrocarbons. (Walk to work involves the use of a vessel that is stationed adjacent to the production facilities, allowing more efficient use of manpower resulting in a more cost effective maintenance period). The evaluation of the Tain discovery is also being progressed by the operator, Repsol, with a view to reaching a Field Development Plan by the end of 2019. Further evaluation of the infill opportunities in the Repsol operated Blake Channel and Flank areas also continues.

The productive life of the Group's other assets continues to be extended. During the year the anticipated dates for cessation of production at B-Block have been extended from2019 to 2021, Mordred and Galahad have been extended from2020 to 2023, the decommissioning of Galley from2021 to 2024 in addition to the material extension of Ross & Blake from2024 to 2029 mentioned above. In the Netherlands, the cessation of production at Hanze has been extended from2025 to 2031. Active decommissioning is ongoing in a number of areas, with the final phases of decommissioning the Halfweg asset being completed and the heavy lift at MarkhamST-1 anticipated to take place this summer in the Netherlands. RockRose have commissioned an audit by ERC Equipoise of the various operators estimates of timing and costing of decommissioning. The detail of this report will be included in the readmission document to be published following completion of the Marathon acquisition. The main conclusion of the report is that the weighted average timing of the net post tax decommissioning cost has been extended from2026 (at acquisition) to 2031 today.

ROCKROSE ENERGYPLC

STRATEGIC REPORT (CONTINUED)

Since the acquisition of the Netherlands assets a successful development well was drilled on Block A18 adding a further 200 boepd (net). The Petrogas operated, B10 and A15 appraisal wells (RockRose equity of 14.63% and 28.23% respectively) were successfully drilled in Q1 2019. The logging data shows the Pleistocene Q reservoir units are as prognosed, and in some cases better than prognosed. The operator is currently evaluating the well results.

The Group implemented its hedging strategy during the reporting year, hedging 900,000 barrels at an average price of $67.82 per barrel. These hedges had all lapsed by the end of the year. During April 2019, the Company entered into a hedging agreement by hedging 3,000 boepd of its oil production at $69 for a period of 13 months fromMay 2019.

As far as RockRose is concerned, we do not anticipate any direct post-Brexit issues for the business as oil is an international commodity there should be no impact on our UK operations. We are also currently a non-operator in the Netherlands with no employees and few EU suppliers and therefore envisage little impact on our Dutch operations. The Company will continue to evaluate the position as pre and post negotiations progress.

As at 31 December 2018 cash and cash equivalents and restricted cash on the balance sheet stood at $121.3 million (details of cash and cash equivalents are given in note 18, and details of restricted cash are given in note 19). Please see the table below for the breakdown:

Results Summary*
	31 December	31 December
	2018	2017
	$'000	$'000
Revenue	153,072	7,436
Pro forma Revenue (including Dyas)**	230,965	-
Adjusted EBITDA (1)	77,192	(4,339)
Pro forma adjusted EBITDA (including Dyas)**	111,992	-
Profit after tax	38,859	74,074
Net cash generated from/(used in) operating activities	83,449	(27,474)
Cash and Cash equivalents	67,944	64,955
Restricted Cash (2)	53,347	55,336
Total Cash	121,291	120,291

* The results for 2018 include the post-acquisition results (i.e. three months) of the Dyas entities.

**As effective date of the acquisition was 1 January 2018, pro forma results include full year results as if the Dyas entities had been included from that date.

(1)Adjusted earnings before interest, tax, depreciation and amortisation (Adjusted EBITDA) is considered by the Company to be a useful additional measure to help understand underlyingperformance as major non-cash items are eliminated, e.g. gain on acquisition, depreciation and amortisation.

(2)RockRose, as part of its stewardship of its interest in fields, has become party to various decommissioning security agreements, which has resulted in restricted cash balances being placed with the trustees and letter of credit providers under the terms of these agreements. The amounts placed in restricted cash will continue to vary over the time they are in place, which will depend on certain assumptions, for example the oil price and anticipated dates of cessation of production.

The goodwill arising fromthe business combinations was $18.7 million which has been immediately written off. We have valued these assets using the following commodity prices: $81/bbl oil and €27/MWH gas for Q3 2018, $80/bbl oil and €25/MWH gas

for 2019 and $76/bbl oil and €23/MWH gas for 2020, which were the long-termforecasts at the point of completion.

Operational andFinancial Update

∙Strong revenue of $153 million with average realised oil price of $72.95/bbl and gas price of $46.04/boe

∙Average production of 6,389 boepd of which 1,558 boepd relates to gas production. Pro forma production of 10,755 boepd of which 5,414 boepd relates to gas production.

∙Return to shareholders of $30.4 million (£23 million (£1.50per share)) in February 2018

∙Share buyback of just under 20% of issued share capital for cash of $22.0 million (£16.4 million (£5.60per share)) in November 2018

∙Cash at Bank as at the date of this announcement is $120 million, of which $40 million is restricted.

ROCKROSE ENERGYPLC

STRATEGIC REPORT (CONTINUED)

RockRose Energy PLC would like to thank our joint venture partners and particularly the operators of our assets for their responsible stewardship during 2018 particularly in relation to adherence to HSE policies and minimising our environmental impact.

Employees

The Company has a small teamof highly dedicated professionals. The table below shows the current gender breakdown of the Company as at 31 December 2018.

Male		Female	Total
Directors	3	0	3
Senior Managers	2	1	3
Employees	7	3	10
Total	12	4	16

With the acquisition of Marathon and becoming an operator the number of employees will significantly increase.

Health, Safety andEnvironment (HSE)

The health and safety of people, the protection of the environment and compliance with all applicable legal and internal requirements, as well as industry best practice, are critical to the overall success of RockRose Energy.

Currently the Company is a non-operator but aims to work with the operators of the fields in which we are partners to ensure they are operating in a safe and environmentally responsible way. With the acquisition of Marathon and RockRose assuming operatorship, the Company will endeavour to maintain and, where necessary, improve the policies and procedures which Marathon currently has in place.

Financial review

The Group generated revenue of $153 million during 2018 with total sales of 2,332,164 boe realising an average oil price of $72.95/bbl and gas price of $46.04/boe.

AdjustedEBITDA

Adjusted EBITDA is considered by the Company to be a useful additional measure to help understand underlying performance as major non-cash items are eliminated, eg. gain on acquisition, depreciation and amortisation.

Adjusted EBITDA for the year was $ 77.2 million (2017: $(4.3) million loss) and the profit after taxwas $38.9 million (2017: $74.1 million profit).

	31 December 2018	31 December 2017
	$'000	$'000
Operating profit (1)	24,310	73,843
Add back depreciation and amortisation(1)	34,222	1,669
Add back write-off of goodwill(1)	18,660	7,974
Deduct gain on acquisition(1)	-	(87,825)
AdjustedEBITDA	77,192	(4,339)

(1)Please refer to the Statement of Comprehensive Income

In summary, we have made significant progress in delivering the stated strategy for the Group. We have acquired assets that are generating cash, created a strong balance sheet and have significant upside potential.

ROCKROSE ENERGYPLC

STRATEGIC REPORT (CONTINUED)

Principal risks anduncertainties

The principal risks and uncertainties of the Group relate to the following:

a)Reserves discovery, development and project delivery - Exploration activities in the Group's licence interests have, given the nature of the exploration activities, inherent uncertainty with respect to whether commercially viable and technically feasible hydrocarbon reserves will be found or can be recovered.

b)Operational performance - The Group's production volumes (and therefore revenue) are dependent on the performance of its producing assets. The Group's producing assets are subject to operational risks including no critical spare equipment or plant availability during the required plant maintenance or shutdowns; asset integrity and health, safety, security and environment incidents; and low reserves recovery from the field and exposure to natural hazards such as extreme weather events. These risks are partially managed by the experience of the operators, which are companies with relevant technical knowledge, skills and resources.

c)Commodity prices - The Group's results are sensitive to crude oil and natural gas prices which are dependent on a number of factors including world supply and demand. See note 25 of the financial statements for a sensitivity analysis and potential exposure.

d)Decommissioning cost estimates and timing - The Group's assets values in use are sensitive to changes in the decommissioning cost estimates. Any increase in the cost estimates would result in an increased decommissioning provision and could trigger an enhanced cash cost exposure in the future.

e)Fluctuations in exchange rates - The Group's statement of comprehensive income, statement of financial position and statement of cash flows are reported in US dollars and may be affected by fluctuations in exchange rates for British Pound Sterling and Euro. See note 25 of the financial statements for a sensitivity analysis and potential exposure.

f)Credit - The challenging credit environment during recent years has highlighted the importance of governance and management of credit risk. The Group's exposure to credit risk takes the formof a loss that would be recognised if counterparties, who are our customers as shown in note 25 of the financial statements, failed to, or are unable to, meet their payment obligations. See note 25 of the financial statements for a sensitivity analysis and potential exposure.

Going concern

The Directors have considered the application of the going concern basis of accounting and are satisfied that for the foreseeable future the Group will continue in operational existence and will have adequate resources to meet its liabilities as they fall due. The Directors continue to adopt the going concern basis of accounting in preparing the financial statements.

Key performance indicators

The Directors are of the opinion that the following constitutes the Company's key performance indicators:

§Revenue

§Lifting cost per barrel of oil

§Barrels of oil equivalent produced per day (boepd)

§Booked reserves

§Date and amount of decommissioning

The Group's revenue has increased to $153.1 million in 2018 (2017: $7.4 million).

The lifting cost per barrel includes direct operating costs, tariffs and insurances and excludes depreciation, depletion and amortisation of oil and gas assets. The lifting cost per boe was $35 in 2018 (2017: $38). The lifting costs per boe for oil were $36.43 (2017:$38.0) and gas were $21.62 (2017:$nil).

The Group's profit before tax was $7.4 million (2017: profit of $74.1 million). Included in the profit of 2018 is goodwill write off recognised on the acquisition of RockRose CS1 NL BV (formerly Dyas BV) on 1 October 2018 of $16.4 million. The accounting for this acquisition is further explained in note 2 to the financial statements.

Currently the Company only measures financial performance indicators. With the acquisition of Marathon it is the intention to