Sound Energy : Half yearly fcial & audit reports / ltd reviews

Half Yearly Report 2021

Contents
Statement from the Executive Chairman .....................................................................................................................................	1
Operations review ........................................................................................................................................................................	3
Independent Review Report ........................................................................................................................................................	6
Condensed Interim Consolidated Income Statement .................................................................................................................	7
Condensed Interim Consolidated Balance Sheet .........................................................................................................................	8
Condensed Interim Consolidated Statement of Changes in Equity .............................................................................................	9
Condensed Interim Consolidated Cashflow Statement .............................................................................................................	10
Notes to the Condensed Interim Consolidated Financial Statements .......................................................................................	11
Shareholder Information ...........................................................................................................................................................	18

Sound Energy plc

Statement from the Executive Chairman

Fuelling the Energy Transition

Whilst the effects of COVID-19 meant a continuation of a challenging business environment during the first half of 2021, the Company was able to maintain delivery on its strategy of progressing towards becoming a revenue generating Company. The Tendrara Horst development will help fuel the energy transition by providing lower carbon footprint fuel in Morocco. Our substantial exploration base may indeed provide a future energy supply, however monetising our discovered resource now will provide domestic LNG to the industrial users in Morocco displacing presently imported fuels with a deeper carbon footprint. Key milestones achieved were the announcement of the acquisition of an additional Eastern Morocco interest from Schlumberger (completed post period end) and, also post period, the execution of the conditional LNG Sales Agreement with Afriquia Gaz. The latter was a transformational milestone for the Company as it seeks to move into a cash generative position and become the leading gas developer in Morocco. Additionally post period the Anoual Licence agreement was extended a further year due to force majeure.

Protecting Shareholder Equity and Company Cash

The Company was able to successfully restructure its Luxembourg listed EUR 28.8m 5% senior secured notes by engaging proactively with noteholders to agree a suitable restructuring without substantial equity dilution.

Post period £2.0 million of equity was placed with Afriquia Gaz at 1.25p per share in connection with the LNG Sales Agreement, providing the Company with important liquidity.

The Company has received notices of potential taxation claims from the Moroccan Tax Authorities which are being robustly challenged. In the Company's view, these stem from a fundamental misunderstanding by the tax authority of the Hydrocarbon Code in Morocco and of historical licence awards. Post the half year, one of the claims put forward has been judged as redundant by the Local Tax Committee.

Eastern Morocco Portfolio

In June the Company announced that it had entered into a sale and purchase agreement with Schlumberger Holdings II Limited to acquire the entire issued share capital of Schlumberger Silk Route Services Limited. With this acquisition now completed, the Group has increased participating interests in Anoual and Greater Tendrara of 75%. A Profit Sharing Deed has been entered into whereby Schlumberger gains a minority share in the profits from the concession development. The acquisition positions the Company to generate enhanced returns, cashflow and value as it moves forwards towards the phased development of the TE-5 Horst via the Phase 1 Micro LNG (mLNG) development and the Phase 2 pipeline development.

Phase 1 Micro LNG Development

Post review period, the Group announced an important milestone - the signature of an LNG Gas sales Agreement with Afriquia Gaz, which is the first such agreement to be reached in Morocco. The agreement, which remains subject to the satisfaction of conditions precedent, is a ten year take or pay LNG GSA where Afriquia Gaz commits to purchase not less than 100,000 cubic metres a year of gas produced and liquified from the Phase 1 Development Concession joint venture. The agreement was accompanied by a £2 million equity investment by Afriquia Gaz into Sound Energy. The Company is now in the advanced stages of negotiating an $18 million loan from Afriquia Gaz, with a 6% annual coupon and a 12-year term, that on completion will see Sound Energy fully funded for the Phase 1 development at Tendrara, even with its increasing participating interest following completion of the Schlumberger Silk Route Services acquisition.

Phase 2 Tendrara TE-5 Development

The Group continued to make progress in advancing the development of the Tendrara TE-5 discovery. Despite the difficulties imposed by the Covid-19 pandemic, positive discussions with ONEE have continued in order to finalise the long term take or pay gas sales agreement for gas offtake. This will form a key building block to support project sanction of the proposed TE-5 Phase 2 development.

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Sound Energy plc

Statement from the Executive Chairman

Corporate

In March 2021 we announced the proposals in relation to the restructuring of the Company's Luxembourg listed EUR 28.8m 5% senior secured notes and in April these proposals were approved. The restructured debt now has a coupon of 2% (with a deferred 3% coupon paid at redemption), a six-year maturity to 21 December 2027 and the outstanding amount will be partially amortised at a rate of 5% every six months commencing 21 December 2023. Additionally, EUR 3,479,999 of the secured notes was converted into ordinary shares in the Company at a conversion price of 2.125 pence per ordinary share. The restructuring of the debt position is a key milestone for the Company, and I am delighted that we managed to execute this without major dilution to existing shareholders. It allows Sound Energy now to focus on the progression and completion of our Phase 1 and Phase 2 projects from a stable financial platform.

Additionally, in March we received the first payment for the disposal of Badile land in northern Italy, receiving sales proceeds of circa EUR 183,000 net of fees. We expect to receive the consideration for the sale of the second tranche of land later in 2021.

A huge amount of work has been completed so far this year and much remains to be concluded during the remainder of

2021. Having secured a long-term LNG sales agreement with Afriquia Gaz, we have established a route to market for our gas and following completion of the proposed $18M loan from Afriquia Gaz, the Company will have financing for the Sound Energy share of the Phase 1 development. With important catalysts to come in the near term, I look forward to updating shareholders further as we progress towards the development phase of the project and to becoming a revenue generating business. I would like to thank all our staff, contractors, partners, noteholders, shareholders and other stakeholders for their commitment and support. I feel confident that Sound Energy is moving in the right direction and is building a business that will deliver real value for our investors by playing our part in fuelling the energy transition.

Graham Lyon

Chairman (Executive)

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Sound Energy plc

Operations review

Tendrara Development: Micro LNG

Sound Energy is pursuing the Field Development Plan underpinning the Tendrara Production Concession centred around, the TE-5 Horst gas discovery. The development is progressing in two phases. Phase 1 is intended to prioritise early first cash flows from the Concession via a micro liquified natural gas ("mLNG") production scheme ahead of Phase 2 to development of the full field that will include the installation of a 120km gas export pipeline to fully unlock the gas potential of this region.

Progress of the Phase 1 Development Project

This first phase focuses on area of the existing TE-6 and TE-7 wells of the TE-5 Horst. First gas is planned to be achieved by tying the currently suspended TE-6 and TE-7 gas wells with flowlines connected to the inlet of a skid mounted, micro LNG plant. The environmental impact assessment for the micro LNG facility has been approved under the existing field development plan.

Following the Company announcing on the 23 December 2020 that it had signed a letter of exclusivity with Italfluid Geoenergy S.r.l. with the intention to negotiate and enter a binding project contract, the parties have continued to make significant progress on these discussions throughout 2021. The project contract will include the necessary design, construction, commissioning, operation, and maintenance of the micro LNG facilities under a lease arrangement. The micro LNG facilities, which will also treat, and process raw gas produced from the wells prior to liquefaction, is the substantial part of the surface facilities required to be built and operated as part of this first phase of development. LNG will be delivered on- site to the outlet of the micro LNG facilities for sale and distribution to the industrial market.

During 2021 a binding gas offtake and sales agreement was negotiated with Afriquia Gas SA, part of the Moroccan Akwa Group, and a national leader in the distribution of liquefied petroleum gas, butane and propane. Post-period, a binding gas sales agreement was signed with Afriquia Gaz with a 10-year take or pay commitment from first gas to sell a minimum of 100 million standard cubic metres per annum priced at $6-8.346 per MMBtu (from the plant). Afriquia Gaz will be responsible for the transportation, distribution and marketing of the LNG including the associated capital costs of these downstream operations beyond the outlet of the LNG plant.

The agreement with Afriquia Gaz SA included a UK £2 million equity investment for a 9.8% stake of Sound Energy plc and access to loan financing consisting of an US$ 18 million loan note, the final details of which are under discussion.

Additionally, the Company has held discussions with a number of technical consultancies and contractors for the provision of well and flow line services required to tie the TE-6 and TE-7 wells into the micro LNG facilities.

Next key steps to progress the project include execution of the funding documentation for the US$ 18 million loan note with Afriquia Gaz and execution of the micro LNG plant contract with Italfluid Geoenergy to allow to Company and joint venture partners to take the final investment decision ('FID') for Phase 1 of the TE-5 Horst gas development by year end.

Eastern Morocco

Development and Exploration

Our Eastern Morocco Licences comprising the Tendrara Production Concession, Anoual and Greater Tendrara are positioned in a region containing a continuity of the established petroleum plays of Algerian Triassic Province and Saharan Hercynian Platform. The presence of the key geological elements of the Algerian Trias Argilo-Gréseux Inférieur or 'TAGI' gas play are already proven within the licence areas with the underlying Palaeozoic, representing a significant upside opportunity to be explored.

These licences cover a surface area of over 23,000 square kilometres, but so far only thirteen wells have been drilled, of which six are either located within or local to the Tendrara Production Concession. Exploration drilling beyond the region of the Production Concession has been limited and the Group maintains a portfolio of features identified from previous operators' studies, plus new targets identified by Sound Energy from the recent geophysical data acquisition, processing and ongoing interpretation studies. These features are internally classified as either prospects, leads or concepts based on their level of technical maturity and represent potential future exploration drilling targets.

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