Jim McKerlie Chairman AGM. Competent Person Statement

Transcription

1 Annual Report 2013

2 The Cooper Basin, with substantial remaining Reserves and Resources, is the best placed oil and gas region in Australia to supply east coast gas demand, and an investment in Drillsearch offers the purest leverage to this market thematic. Jim McKerlie Chairman AGM The Annual General Meeting will be held at the Museum of Sydney, AGL Theatre, Level 2, Corner of Phillip and Bridge Streets, Sydney NSW on Wednesday, 20 November 2013, commencing at 10.00am. RIG 826 DRILL RIG SECURED UNDER LONG-TERM CONTRACT The Weatherford 826 drilling rig has been contracted for up to 42 months, delivering certainty and cost efficiencies to Drillsearch s long-term drilling programs. Competent Person Statement The information in this report that relates to Reserves and Resources is based on information compiled by Mr David Evans, Chief Technical Officer of Drillsearch. Mr Evans is a Competent Person and a Fellow of the Geological Society London. Mr Evans is a full-time employee of the Company. Mr Evans has sufficient experience that is relevant to the Company s Reserves and Resources to qualify as a Competent Person as defined in the 2012 Edition of the Australasian Code for Reporting of Exploration results, Mineral Resources and Ore Reserves. Mr Evans consents to the inclusion in the report of the matters based on his information in the form and context in which it appears. S&P/ASX 200 INCLUSION TO THE S&P/ASX 200 Acknowledging Drillsearch s continued growth throughout Financial Year 2013 the Company was admitted into the S&P/ASX 200.

3 3,377 km 2 ONSHORE 3D SEISMIC ACQUISITION Drillsearch conducted Australia s largest onshore 3D seismic survey over its Central Cooper Unconventional acreage, ATP 940P (1,052 km 2 ) as well as in the Inland Cook, Northern and Western Wet Gas, and the Western Flank Oil acreage areas. JOINT VENTURE WITH SANTOS TO ACCELERATE WESTERN COOPER WET GAS COMMERCIALISATION Drillsearch achieved a major milestone in accelerating wet gas commercialisation through the establishment of a major Joint Venture with Santos. 65% Drilling Success rate Drillsearch participated in the drilling of 27 exploration, appraisal and development wells during the Financial Year with 17 being successful. Contents Highlights Inside front cover Performance summary 2 Chairman s report 4 Managing director s report 9 Business overview 12 Table of tenements 13 Reserves and Resources 16 Drilling Program 17 Oil Business 18 Wet Gas Business 21 Unconventional Business 24 Corporate sustainability 26 Board of Directors 28 Senior Executive Team 30 Corporate governance statement 31 Directors report 35 Remuneration report 45 Auditor s independence declaration 56 Independent auditor s report 57 Directors declaration 59 Financial report 60 Consolidated statement of profit or loss and other comprehensive income 61 Consolidated statement of financial position 62 Consolidated statement of changes in equity 63 Consolidated statement of cash flows 64 Notes to the financial statements 65 Shareholder information 100 Corporate directory Inside back cover 2013 Annual Report 1

4 Performance Summary Key Financial Highlights: Record 2P Reserves of 28.5 mmboe, a 157% increase on 2012 Reserves. Record annual production up 173% to 1.1 mmboe for the financial year driven by significant growth in Western Flank Oil production and the resumption of Wet Gas sales. Record annual sales revenue of $102.2 million, an increase of 352% on the prior year. Record net profit after tax of $45.1 million, up 351% on financial year Drillsearch secured a $50 million credit facility with the Commonwealth Bank of Australia, providing additional corporate liquidity to underpin future work programs. Successful completion of convertible note issue, raising US$125 million which included an upsize option of US$25 million. Strategy Our vision is to become a leading Australian mid-tier oil and gas exploration and production company. To achieve this vision we: Explore our current Cooper Basin acreage for conventional oil and gas. Develop and commercialise our significant unconventional gas potential resource. Pursue attractive opportunities to expand our acreage position either through the acquisition of assets directly or through mergers. Convertible Note Issue US$125 million convertible notes were issued by the Company (via its wholly-owned subsidiary Drillsearch (Finance) Pty Limited) on 3 May 2013 and 13 May These are due to expire September The convertible notes carry a fixed coupon of 6.00% per annum, paid semi- annually, for a term of approximately five years and are convertible into Drillsearch shares at an initial conversion price of US$1.66 per share, representing a conversion premium of approximately 35% above A$1.19, being the closing price of the Shares on the ASX on 26 April The convertible notes were eligible for conversion commencing on or after 13 June 2013 (subject to shareholder approval for the conversion of those convertible notes issued in excess of the 15% ASX Listing Rule 7.1 capacity) and up to the tenth day prior to the maturity date (1 September 2018), into fully paid Drillsearch ordinary shares, unless previously redeemed, converted, purchased or cancelled. No convertible notes have been converted up to 30 June On conversion by the holder, and subject to any conversion price adjustments, Drillsearch (Finance) Pty Limited may elect to settle the convertible notes in cash or Drillsearch ordinary shares. Based on the initial conversion price, up to 75,301,203 new Drillsearch ordinary shares could be issued. The final number of shares to be issued may be impacted by any adjustments to the conversion price under the terms of the convertible note issue. 2

5 The DRILLSEARCH JOURNEY: RAPID TRANSITION FROM AN EXPLORER TO A BALANCED E&P COMPANY... BREAKING RECORDS. Drillsearch delivered record performance in Financial Year 2013, underpinned by the development of the Western Flank Oil Fairway and continuing strong commodity pricing. Our balance sheet is well positioned to support future organic growth. Ian Bucknell Chief Financial Officer P Reserves by Oil/Gas Oil Gas 93% 7% 91% 9% 90% 10% 67% 33% 72% 28% 1.4 mmboe 1.3 mmboe 8.5 mmboe 11.1 mmboe 28.5 mmboe Production Oil Gas 14% 86% 16% 84% 13% 87% 22% 78% 27% 73% 0.2 mmboe 0.2 mmboe 0.1 mmboe 0.4 mmboe 1.1 mmboe Capital Expenditure Development Exploration 44% 56% 39% 61% 12% 88% 18% 82% 27% 73% $4.7 million $8.9 million $17.7 million $37.3 million $143.0 million Indexed Four Year Performance Price, Volume & Performance (Rebased) 600% Drillsearch S&P/ASX200 Energy 500% 400% 300% 200% 100% 0% 01 Jul Jul Jul Jul Jul 13 Source: ASX Shares Over the past four years Drillsearch has outperformed the ASX 200 Energy Index (values are indexed to base 100 from 1 July 2009) Annual Report 3

6 CHAIRMAN s Report The combination of the uncontracted domestic gas supply and the additional material LNG demand is likely to see new gas supply contracts executed at materially higher prices in coming years, which bodes well for Drillsearch. Dear Shareholder, The Financial Year (FY) 2013 has been an important period for Drillsearch during which we have bolstered the Company s position. We have well and truly established our presence in the Cooper Basin, taking major, positive steps in our transition from an explorer to a significant oil and gas producer. Not only have we achieved record net profit, production levels and sales revenues during the year, but we have advanced and consolidated our footprint in the Cooper Basin. These positive results stem from our highly focused strategy, as depicted opposite, of growing Reserves, production and Underlying Net Profit After Tax (NPAT) 1 in order to generate value for our shareholders. This year s results are a major uplift from those in the FY 2012, underpinned by the substantial effort and activities of prior years. If you do the right things, the rights things will happen. Some of the activities that have led to this year s pleasing results include: Ongoing exploration success using 3D seismic data as a base Completion of infield and export infrastructure in the Western Flank Oil Fairway Completion of the Bauer-to-Lycium pipeline which provides greater certainty over the delivery of oil to market Signing of a new, firm Gas Sales Agreement with SACBJV, allowing the recommencement of wet gas production Tie-in of the Canunda wet gas discovery Commencement of shale gas exploration with the largest onshore 3D seismic survey conducted in Australia, leading to our first shale gas exploration well which spudded on 19 September 2013 Maintaining our high standards of Health, Safety, Security, Environment and Community (HSSEC) with no Lost Time Injuries in operations during the year. 1. The underlying net profit is unaudited but is derived from audited accounts by removing the impact of non-recurring items from the reported audited net profit. Drillsearch believes that the non- IFRS profit reflects a more meaningful measure of the company s underlying performance. 4

7 Additionally, this year we have taken several steps that will deliver additional positive results in future years including: Actively expanding our footprint in the Cooper Basin with the successful on-market acquisition of Acer Energy A series of transactions as part of our Joint Venture partnership with Santos that are designed to accelerate exploration and development in Western Cooper Wet Gas Project areas while increasing Drillsearch s total Reserves and Resources. This year has been a year of transformation for Drillsearch with considerable effort going into operations, organisational development and overall expansion. This has set the Company on a strong growth trajectory for both the near-term and into the future. It has also positioned us extremely well to deliver on our existing potential, and participate in the exciting energy future that is evolving in Australia and the rest of the world. East coast gas demand vs. LNG: A once-in-a-generation market opportunity With our extensive Cooper Basin assets now coming on line, Drillsearch is poised and ready to capitalise on the nearterm Australian gas market dynamics to deliver genuine and significant long-term shareholder returns. The eastern Australian gas market has reached a crucial juncture with existing gas supply contracts expiring from 2012 through 2017, leaving significant levels of future domestic gas demand uncontracted. The following diagram illustrates the emerging situation and highlights the opportunity for Drillsearch as our capacity to supply gas increases while uncontracted gas demand emerges. Uncontracted Eastern Australian Gas Demand by State (PJ) NSW & ACT QLD SA TAS VIC Source: Core Energy Group; 2013 In addition, the major liquefied natural gas (LNG) projects across Australia need to source secure supplies of gas to feed their capacity. A number of the projects have already contracted the majority of lower cost reserves and resources available from the east coast. Therefore, there is likely to be upward pressure on domestic gas prices until the LNG requirements are met, and at this point there are still shortfalls anticipated for the LNG projects. The combination of the uncontracted domestic gas supply and the additional material LNG demand is likely to see new gas supply contracts executed at materially higher prices in coming years, which bodes well for Drillsearch. This market dynamic is creating great interest in unconventional production sources which will not come on line in the near-term but may offer sufficient capacity to play a material role in longer term supply. Drillsearch is extremely well placed to ride the unconventional wave. Our partnerships with QGC and Santos provide the unique position of having Gas Sales Agreements with two Gladstone LNG projects. Our Cooper Basin asset base has substantial Reserves and Resources, established infrastructure and commercialisation partnerships in place to both develop and buy our gas. This means Drillsearch is extremely well placed to capitalise on this major opportunity in the Australian gas market. Excellent progress achieved during FY 2013 PLUS a platform in place to grow in the future I commenced my report to shareholders this year with our positive results, and elsewhere in this Annual Report these are explained and presented to you in greater detail. I would also like to convey to you the progress we have made in maturing as an organisation and preparing ourselves for the attractive opportunities emerging in the energy sector. Drillsearch has seen these opportunities coming for several years and has worked hard to be a strong and capable company that is able to play a leading role in the market developments. We have continued to develop and strengthen our HSSEC capabilities to meet the growing demands that accompany our increasingly complex operational footprint as well as State and Federal Government legislative requirements. This is a priority for your Board and we are pleased with the focus that management has put on this area as we move into greater operational activity. Drillsearch has continued to focus on our strategy, with the Board involved in strategic reviews twice a year that look at major industry trends, question our position, re-appraise our priorities, rework our capital allocation, appraise our needs for people and skills, and recalibrate our performance measurement metrics so that we constantly get feedback on our own performance. There was overall pride across the Company when we were admitted to the S&P/ASX 200 Index. This is a great achievement having come from a very small company with fewer than 10 people. To ensure we act and deliver to the standards expected of an ASX 200 company, I instigated two internal programs. The first is the Q200 Initiative which is a quality program that sets an expectation of behaviours and performance required of an ASX 200 company. When we fall below these standards, the matter is reported to the Board, along with an explanation of what happened and critically, what will be done to ensure this is not repeated. From the Chairman to the support team, we have all learnt from this initiative and done so in a positive collaborative environment. The second is a formal Innovation Initiative where the Board receives a monthly report on ideas, changes in process, new technologies adopted, smarter ways of doing things or examples of creative thinking. The author receives recognition, and Drillsearch is able to promote an environment where all ideas count and everyone is thinking 2013 Annual Report 5

8 Chairman s Report of continuous improvement. I applaud the Drillsearch team, from top to bottom, for embracing these initiatives that aim to continuously improve and innovate the Company. The opportunities before us can only be exploited if we are an innovative, lean and focused company. Drillsearch needs to have the rocks that will deliver hydrocarbons and increasingly we are demonstrating through our growing production and reserves, that we do. Beyond this however is an absolute need to have good people and have them motivated in the right way so we can manage the exploration, development and production process to achieve a successful commercial result. In this year s Remuneration Report I have outlined in detail the transformational journey we have taken as a business and how the Board used the most appropriate remuneration approach for the circumstances at each stage of our development. We have constantly refined our Remuneration Policy over the last five years to be in accordance with good corporate governance while meeting our business objectives. We are meticulous in having the objectives in our business plan cascading down to senior management s personnel plans and those of their teams, and for the Key Performance Indicators that we set being tied to what we strive to achieve as a business overall. We further invest in our people with a robust human resources (HR) management system and this year we have appointed a talented HR General Manager who will work on assessing our competencies and build out a career development and training system. I am proud that Drillsearch has a team that is extremely diverse in gender, ethnicity and in the way they think. Board renewal has also been a focus this year. The Board of Directors has grown with the addition of two non-executive Directors: Philip Bainbridge, a senior international oil and gas executive who will bolster the technical capabilities and experience of the Board, and Teik Seng (TS) Cheah, a finance and investment banking executive based in Singapore who will bring international funds management experience. I also advise that Dato Beng Kai (BK) Choo will not be standing for re-election at this year s Annual General Meeting (AGM). BK has been on the Board since March 2009 and has played a major role in the stabilisation of the Board from a turbulent past, in developing and monitoring our commercial direction, and in shareholder relations. BK has made a major contribution to Drillsearch and on behalf of the Board, I thank him. Outstanding prospects going into Financial Year 2014 While we have made excellent progress in FY 2013, there is work to be done so that the positive momentum carries through to the new Financial Year and beyond. The outlook for Drillsearch and its growth trajectory is excellent, and our plans for FY 2014 aim to further develop and strengthen our position as a significant Australian energy company. We have a substantial program of exploration and appraisal work scheduled for our Oil and Wet Gas assets, with significant potential for increases in production and Reserves. With higher total annual production targeted in FY 2014, we expect another increase in net profit in the coming year. In the Unconventional Business, the drilling of Drillsearch s first unconventional exploration wells in ATP 940P with Joint Venture partner QGC are particularly exciting events. They have the potential to unlock the huge unconventional potential in the Cooper Basin which, if successful, could transform the Company and industry. Given the outlook for the gas market in eastern Australia, Drillsearch is well placed to contribute to the impending challenges. With our focused strategy and impressive track record for growth, Drillsearch has cemented its place as a Cooper Basin oil and gas company with an exciting future, especially considering the potential of industry consolidation. Drillsearch is determined to be at the forefront of developments in the Cooper Basin and beyond and to deliver value for our shareholders. Thank you to staff and shareholders It has been a year of major achievement for Drillsearch as we have matured and grown as an organisation. I would like to acknowledge the efforts and contributions of my fellow Board members during the year as we maintained the highest possible standards of corporate governance. I would also like to welcome TS Cheah and Phil Bainbridge to our renewed Board of Directors. I would particularly like to thank Managing Director Brad Lingo and the senior management team, as well as the broader Drillsearch team, for all their hard work during the year. Lastly, I would like to thank all our shareholders for your loyal support of the Company. We look forward to delivering further value and wealth creation in Financial Year 2014 as we grow to become a significant Cooper Basin oil and gas company. Yours sincerely, Jim McKerlie Chairman 6

9 2P Reserves increased by 157% to 28.5 mmboe Driven by PEL 91 and Wet Gas exploration success and the transfer of PEL 106A Resources to Reserves Record annual production up 173% to 1.1 mmboe Driven by significant growth in Western Flank Oil production and the resumption of Wet Gas sales 2013 Annual Report 7

10 Record Western Flank Oil Fairway production Exceeds 10,000 barrels of oil per day due to the commissioning of the Bauer-to-Lycium pipeline in May

11 Managing Director s REPORT The Company is in the black with net profit of $45.1 million. This record profit can be attributed to record high annual total production and sales revenue driven by growth from the Western Flank Oil Fairway and the Western Cooper Wet Gas project. Dear Shareholder, I am proud to report that the FY 2013 was one of continuing substantial growth for Drillsearch. We are making great strides towards becoming a significant Cooper Basin-focused oil and gas producer, which makes it an ideal time to reflect on the recent achievements of the Company. We remain dedicated to our strategy of growing Reserves, production and cash flow from our Cooper Basin oil and gas acreage. This focus is continuing to deliver positive results, building on our consistent track record of growth over the past four years across our three core businesses of Oil, Wet Gas and Unconventional, as well as for the Company as a whole. I am pleased to present an excellent set of results for FY The highlight of this Financial Year was a significant increase in both Reserves growth and production, made possible by the delivery of infield and export production facilities within the Cooper Basin. These positive operational developments have led to an increase in cash flows from operations enabling the Company to reinvest in additional growth. I am confident that our strategy will deliver sustainable long-term growth for the Company, particularly as we enter FY 2014 with an anticipated ramp up in production and cash flow from our Oil and Wet Gas Businesses, and the targeting of the first Reserves and Resources from our Unconventional Business. Our continued progress and success in these areas will reinforce our strong position as a Cooper Basin-focused oil and gas producer, while driving growth in long-term shareholder value in the process. We re in the black and setting records The Company is in the black with a net profit result of $45.1 million, a 352% increase on last year. This record profit result can be attributed to the Company s achievement of record-high annual production of 1.1 million barrels of oil equivalent (mmboe) and sales revenue of $102.2 million, driven by production growth from the Western Flank Oil Fairway and the Western Cooper Wet Gas project. The Oil Business contributed to much of the gain in Reserves, production and cash flow during the year, with the completion of the Bauer-to-Lycium pipeline being a major milestone allowing the Company to expand oil production volumes and reliability. In addition, exploration success in the Western Flank Oil Fairway has contributed significantly to overall Reserves growth. The excellent results for the year, both operationally and financially, form a platform for further growth and demonstrate Drillsearch s commitment to our strategy. We will be looking to maintain the positive momentum achieved during FY 2013 by reinvesting capital to target additional increases in overall Reserves, oil and wet gas production and cash flows from our core businesses. Growing Reserves 2P Reserves of 28.5 mmboe The Company s latest independent Reserves update, announced on 15 August 2013, saw total 2P Reserves increase to 28.5 mmboe as at 30 June 2013, an increase of 157% during the Financial Year. This growth was driven by a combination of exploration, development and production success in the Western Flank Oil Fairway, particularly the Bauer Oil Field, and the Western Cooper and Northern Wet Gas project areas Annual Report 9

12 Managing Director s Report The FY 2013 exploration and appraisal drilling campaign in PEL 91 in the Western Flank Oil Fairway was a tremendous success with four new oil discoveries from five exploration wells drilled. The new oil discoveries of Pennington-1 and Kalladeina-2 alone not only replaced Reserves from all production during the year but delivered additional Reserves growth. Meanwhile, the ongoing success of the Bauer Oil Field appraisal and development program has proven that the oil field is much larger than originally expected, possibly extending as far north as the Bauer North-1 oil discovery. This has the potential to increase Reserves significantly, sustaining the Oil Business well into the medium-term and positioning Drillsearch as a major Cooper Basin oil producer. Also contributing to the total Reserves increase were the conversion of Contingent Resources from existing wet gas discoveries in PEL 106A in the Western Cooper Wet Gas project and an increase in the Estimated Ultimate Recovery (EUR) from the producing fields within the Middleton Gas Project. As part of the 30 June 2013 Reserves upgrade, 2C Contingent Resources increased by approximately 41% to 14.8 mmboe during FY This resulted from the addition of Resources from wet gas discoveries in PEL 101 and from permits PRL 14, 17 and 18 in the Northern Wet Gas project acquired as part of the Acer Energy transaction. Following the successful acquisition of Acer Energy, which was completed in January 2013, Drillsearch currently holds the largest portfolio of discovered, undeveloped and uncommitted conventional gas Resources in the Cooper Basin. The outlook for Reserves growth in 2014 is particularly positive with additional exploration and appraisal work planned for the Western Flank Oil Fairway and Wet Gas Projects, as well as the drilling of our first shale gas exploration wells in ATP 940P to assess the huge potential for unconventional hydrocarbons in the Cooper Basin. The ongoing growth in Drillsearch s total Reserves and Resources will underpin a ramp-up of oil and wet gas production and associated sales revenues in the coming years, building on the Company s capabilities as a significant, high-growth Cooper Basin producer. Growing Production record annual production of 1.1 mmboe Drillsearch achieved a Company record with total annual production of 1.1 mmboe in FY 2013, a 173% increase on last year. The major increase was attributable to the commissioning of the Bauer-to-Lycium Oil Pipeline and recommencement of production from the Western Cooper Wet Gas project. The Bauer-to-Lycium Oil Pipeline was completed and commissioned in April 2013, and the pipeline is operating at its nameplate capacity of 10,000 barrels of oil per day (bopd). Despite delays in commissioning the pipeline, production exit rates as at end June 2013 were above expectation at 12,620 bopd (7,572 net to Drillsearch). Excess volumes have been trucked to Moomba production facilities since May Total production growth during the year also resulted from wet gas production recommencing at the Middleton Gas Plant on 17 March 2013 after being shut-in during the December quarter 2012 for the expansion of the region s gas gathering network. Wet gas production restarted following the signing of a new, firm Gas Sale Agreement (GSA) with the South Australian Cooper Basin Joint Venture (SACBJV) for 10 billion cubic feet (BCF) of raw gas on a three-year term. This was another milestone for Drillsearch in the commercialisation of our Wet Gas assets, securing certainty over forward production and cash flow in the medium-term. We are proud that Drillsearch is the only party independent of the SACBJV to successfully commercialise our Wet Gas Resources in the Cooper Basin. This positions Drillsearch extremely favourably given the near-term outlook for the Australian east coast gas markets. The pipeline tying the Canunda Wet Gas Field to the Middleton Gas Plant was also completed and commissioned, with initial production commencing in July The Middleton, Brownlow and Canunda Wet Gas Fields are now all producing and with long-term GSAs in place and we anticipate a nearterm uplift in wet gas liquids production and sales revenues from the Wet Gas Business. The record annual production results have set the platform for additional growth across the Oil and Wet Gas Businesses. We are targeting higher total production in FY 2014, with the Company s total annual production forecast of mmboe. This is an ambitious production target which we believe is attainable given the progress we have made in the Western Flank Oil Fairway and Western Cooper Wet Gas projects. The achievement of the forecast production will drive significant near-term growth in sales revenues and cash flows. Growing Cash Flow record annual sales revenue of $102.2 million Annual sales revenue also reached a Company record of $102.2 million for FY 2013, an exponential increase of 356% on the prior year total of $22.4 million. This record result is directly attributable to the major increases in total production in the Oil and Wet Gas Businesses, and represents a step-change in the Company s cash flows from operations which will be reinvested for additional growth. Oil prices maintained strength during the year, particularly during the March quarter 2013, while pricing for our Wet Gas sales has been consistently strong. The outlook for oil prices remains robust which is material given our expected increase in production in the coming year. In addition, the east coast gas market fundamentals are such that we anticipate strong cash flows in return for production and exploration success in our Wet Gas Business, with greater certainty as a result of the long-term GSAs we have in place with the SACBJV and leading Cooper Basin producer, Santos. In July 2013 we formed an important partnership with Santos Limited comprising a series of transactions designed to accelerate development and commercialisation of PEL 106A in the Western Cooper Wet Gas project. This included a long-term GSA for Western Cooper Wet Gas production, locking in sales terms and cash flows through to

13 Corporate and Financial Highlights Drillsearch ended the year in a strong financial position, with cash reserves of $36.1 million and an undrawn $50 million credit facility in place with the Commonwealth Bank of Australia. A major corporate highlight of the year was the all-cash takeover of Acer Energy, which consolidated Drillsearch s position in the Western Cooper Basin. The transaction was completed efficiently with the use of a bridge facility from the Commonwealth Bank of Australia in addition to funds from an equity capital raising. The Company has had strong support from the investment community throughout the year, particularly from institutional investors and existing shareholders in two major equity raisings during the year, totalling $100 million. These were used to fund the Acer Energy transaction, as well as to accelerate development and production activities in our Oil and Wet Gas Businesses. We also implemented a diversification of capital sources on our balance sheet with a US$125 million convertible note issue, significantly improving the Company s funding capacity while achieving an optimal funding mix as we pursue further growth. The Company has also maintained its presence in the S&P/ASX 200 index following our inclusion in September 2012, widening our potential investor universe and investment appeal. In addition to financial strength, during the year we expanded and bolstered the senior management team as we position the Company for additional near-term growth. Peter Fox has joined as Chief Commercial Officer and Margaret Fittler has joined as General Manager Human Resources. These additions broaden the management team s skill sets across crucial business areas as we continue to target growth across the board. Positive outlook for FY 2014 Drillsearch has powered through into FY 2014 with strong positive momentum and a continued focus on growth, and we are well positioned to add to the major achievements of In the Oil Business, to build on the successful outcomes from the Western Flank Oil Fairway, at least 14 exploration, appraisal and development wells are planned in the PEL 91 project area for FY 2014 from an extensive portfolio of highvalue McKinlay, Namur and Birkhead oil prospects. These were selected based on 3D seismic data that now covers over 59% of the PEL 91 permit and has been the key to our exploration success in the Western Flank Oil Fairway. Total production from the Bauer Oil Field is expected to ramp up in FY 2014, with 8 to 11 production wells expected to come on line, supplemented by production from the Chiton and Hanson Oil Fields. In the Wet Gas Business, appraisal of our existing wet gas discoveries is likely to drive Reserve growth in the coming year while we are confident that continuing exploration in the Western Cooper and Northern Wet Gas project areas will deliver additional medium-term growth. Both wet gas discoveries of FY 2013, Moruya-1 and Narrabeen-1 in PEL 106A, will undergo appraisal and development FY 2014 as part of the newly formed Joint Venture with Santos. Furthermore, the GSAs in place for wet gas production will ensure a degree of certainty over cash flows from the Wet Gas Business. In the Unconventional Business, the drilling of our first shale gas well Anakin-1 in ATP 940P commenced on 9 September 2013 with the Weatherford 826 drilling rig, targeting multi-zone tight gas Patchawarra Sandstones and REM shale gas intervals working with Joint Venture partner QGC. A total of four well locations have been selected for the drilling campaign together with Joint Venture partner QGC. This follows the 1,052 km 2 Winnie 3D seismic survey completed during the year the largest onshore 3D seismic program in Australia to date and our first milestone in shale and tight gas exploration in our unconventional acreage. This is an exciting time for the Company with encouraging initial results from shale gas wells drilled by peer companies in the Cooper Basin, as well as ongoing international interest in farming into our unconventional acreage. The long-term optionality of the Unconventional Business supplements our current growth areas of Oil and Wet Gas, forming a sustainable strategy for long-term growth of the Company. As a result of the Company s prudent capital management and raisings during the year, as well as our partnership with Santos in the Western Cooper Wet Gas project, we are well funded for exploration, appraisal and development, and production activities for the near-term. Thank you for your support The coming year is set to be one of major activity for Drillsearch and I look forward to leading the Company, and our talented and expanding team, forward into an exciting period of continued growth in FY I would like to recognise and thank the staff of Drillsearch for their efforts and contributions over the past 12 months through a rapid phase of growth. I would also like to thank you our shareholders for your ongoing support of the Company throughout the year. Drillsearch is maintaining a positive track record of delivering on our stated strategy of growing Reserves, production and cash flow across our core Oil, Wet Gas and Unconventional Businesses. I look forward to reporting to you throughout FY 2014 on the ongoing positive progress and growth of Drillsearch. Yours sincerely Brad Lingo Managing Director 2013 Annual Report 11

14 Business Overview Drillsearch completed an all-cash takeover for Acer Energy Limited Aimed at consolidating the Company s position in the Cooper Basin 12

15 Table of Tenements Drillsearch has three focused business units: Oil, Wet Gas and Unconventional. Permits included in each business stream as at 15 September 2013 are tabled below. Note that some permits are included in more than one business stream and permits identified for divestment have been excluded from the table. To see the Company s Table of Tenements as at 30 June 2013, go to page 98. Project Area Operator Ownership Interest Oil Western Flank Oil PEL 91 and PPL 212 (Cooper) Beach Energy Limited 60% PEL 182 (Cooper) Senex Energy Limited 40% Inland-Cook Oil ATP 539P (Eromanga) Great Artesian Oil & Gas Ltd 1 100% ATP 549P Cypress Block (Eromanga) Australian Gasfields Limited 40% ATP 549P West Block (Eromanga) Great Artesian Oil & Gas Ltd 1 33% ATP 920P (Eromanga) 100% ATP 924P (Eromanga) 100% Eastern Margin Oil ATP 299P & PL s Tintaburra (Eromanga) Santos Limited 40% ATP 783P Chandos Block (Eromanga) 100% Wet Gas Western Wet Gas ATP 932P (Eromanga) 100% PEL 91 (Cooper) Beach Energy Limited 60% PEL 106A (Cooper) Santos Limited 40% PEL 106B and PPL 239 (Cooper) Beach Energy Limited 50% PEL 107 (Cooper) Beach Energy Limited 60% PEL 513 (Cooper) Santos Limited 40% PRLA 26 Udacha (Cooper) Beach Energy Limited 75% Northern Wet Gas PEL 101 (Cooper) Acer Energy Ltd 1 80% PEL 103 (Cooper) Acer Energy Ltd 1 100% PEL 103A (Cooper) Acer Energy Ltd 1 75% PRL 14 (Cooper) Acer Energy Ltd 1 100% PRL 17 (Cooper) Acer Energy Ltd 1 100% PRL 18 (Cooper) Acer Energy Ltd 1 100% Unconventional Arrabury Trough ATP 932P (Eromanga) 100% Central Unconventional ATP 940P (Eromanga) Circumpacific Energy (Australia) Pty Limited 1 40% Southern and Western Unconventional PEL 106A (Cooper) Santos Limited 40% PEL 106B (Cooper) Beach Energy Limited 50% PEL 107 (Cooper) Beach Energy Limited 60% PEL 513 (Cooper) Drillsearch (513) Pty Limited 1 40% Notes: 1. Subsidiary of. 2. Permits subject to grant. 3. Canadian Coyote Energy Ltd (formally Circumpacific Energy Corporation) has signed agreements to transfer ownership and operatorship of these permits to Drillsearch and its subsidiaries upon grant Annual Report 13

16 South Australia

17 Queensland

18 Business OVERVIEW Reserves and Resources Drillsearch s independently audited Reserves and Resources as at 30 June 2013 were announced subsequent to the year end on 15 August The review was conducted by RISC and DeGolyer and MacNaughton, in line with the Company s policy of supporting Reserves and Resources estimates with third party audit review and verification. Net Reserves & Contingent Resources as at 30 June 2013 Business Segment Reserves 1P mmboe 2P mmboe 3P mmboe Western Flank Oil Western Cooper Wet Gas Middleton Gas Project Western Cooper Wet Gas PEL 106A Gas Project Northern Cooper Wet Gas Eastern Cooper Oil Total Reserves Business Segment Contingent Resources 1C mmboe 2C mmboe 3C mmboe Western Flank Oil Western Cooper Wet Gas Middleton Gas Project Western Cooper Wet Gas PEL 106A Gas Project Northern Cooper Wet Gas Eastern Cooper Oil Total Contingent Resources

19 Drilling Program Drillsearch s drilling program for the 2013 Financial Year comprised 27 wells, all of which were drilled in the South Australian and South West Queensland Cooper-Eromanga Basin, detailed in the table below. An overall success rate of 65% was achieved for exploration, appraisal and development drilling during the Financial Year. Drilling Program for Financial Year 2013 Category Project Area Well Tenement Result Status Oil Exploration Western Flank Oil Pennington-1 PEL 91 Oil Discovery Cased & Suspended Kalladeina-2 PEL 91 Oil Discovery Cased & Suspended Smoky-1 PEL 91 Oil Shows Plugged & Abandoned Sceale-1 PEL 91 Oil Discovery Cased & Suspended Congony-1 PEL 91 Oil Discovery Cased & Suspended Inland-Cook Oil Triclops-1 ATP 539P Dry Hole Plugged & Abandoned Tibor-1 ATP 539P Dry Hole Plugged & Abandoned Oil Appraisal / Development Eastern Margin Oil Olive Oyl-1 ATP 299P Dry Hole Plugged & Abandoned Western Flank Oil Bauer-5 PEL 91 Oil Discovery Cased & Suspended Bauer-6 PEL 91 Oil Discovery Cased & Suspended Bauer-7 PEL 91 Oil Discovery Cased & Suspended Bauer-8 PEL 91 Oil Discovery Cased & Suspended Bauer North-1 PEL 91 Oil Discovery Cased & Suspended Bauer-9 PEL 91 Oil Discovery Cased & Suspended Bauer-10 PEL 91 Oil Discovery Cased & Suspended Eastern Margin Oil Mulberry-36 PL 295 Oil Discovery Cased & Suspended Toobunyah-7 PL 29 Oil Discovery Cased & Suspended Toobunyah-8 PL 29 Oil Discovery Cased & Suspended Toobunyah-9 PL 38 Dry Hole Plugged & Abandoned Wet Gas Exploration Western Wet Gas Coorabie-1 PEL 106B Gas Shows Cased & Suspended 3 1. Drilling commenced under Acer Energy supervision. 2. Suspended due to mechanical issues. 3. Technical studies to assess potential for unconventional gas. Rosetta-1 PEL 106B Gas Shows Plugged & Abandoned Destrees-1 PEL 106B Gas Shows Plugged & Abandoned Wamberal-1 PEL 106A Water Saturated Plugged & Abandoned Moruya-1 PEL 106A Gas Shows Cased & Suspended Euler-1 PEL 106B Dry Hole Plugged & Abandoned Narrabeen-1 PEL 106A Gas Shows Cased & Suspended Northern Wet Gas Cypress-1 PEL 103 Suspended 1,2 For the five years since July 2009, Drillsearch has achieved an overall success rate of 71% for exploration, appraisal and development drilling. Five Year Drilling Success Rate Number of Wells Drilling Success Rate Year Exploration Appraisal Total Exploration Appraisal Total FY % 100% 83% FY % 50% FY % 100% FY % 100% 83% FY % 90% 65% Total % 93% 71% 2013 Annual Report 17

20 Oil Permit Summary FY P Reserves 72% 28% 2P Oil Reserves growth was driven by successful exploration drilling in PEL 91 Oil Gas FY 2013 Production 27% 73% Oil production growth was driven by the commissioning of the Bauer-to- Lycium export pipeline in May 2013 Oil Gas Oil Permit Summary for FY 2013 Western Flank Oil Fairway Inland-Cook Oil Fairway Eastern Margin Oil Fairway Permit PEL 91 PEL 182 DLS Interest 60% 40% Operator BPT (40%) SXY (52.5%) Discoveries 11 2 Fields in production 3 3D seismic coverage 59% or 1,156 km 2 2.6% or 45 km 2 Permit ATP 539P ATP 549P W* ATP 920P ATP 924P DLS Interest 100% 33.3% 100% 100% Operator DLS DLS DLS DLS Discoveries Fields in production 3D seismic coverage 22% or 275 km² 46% or 248 km² Permit ATP 299P** ATP 783 DLS Interest 40% 100% Operator STO (60%) DLS Discoveries 19 Fields in production 10 3D seismic coverage 82% or 734 km² * Drillsearch announced on 4 July 2013 that it had farmed out a 33.3% interest in ATP 549P-W to Santos Limited reducing its interest in the permit to 33.3%. ** Drillsearch announced on 4 July 2013 that it had acquired an additional 29% interest in the Tintaburra Block takings its interest to 40% Financial Year Operational Summary Seismic 2P Reserves mmboe Production boe C&S Wells drilled Completed P&A 2D km 3D km 2 Oil Western Flank , Inland-Cook Eastern Margin , Total , ,397 18

21 The Oil Business was a major driver behind the Company s increases in Reserves, production and cash flow during the 2013 Financial Year. This growth was driven by the Company s continued active exploration, appraisal and development program in the Western Flank Oil Fairway. This program also included the completion of the Bauer Central Production Facilities and the construction and commissioning of the Bauer-to-Lycium Oil Export Pipeline. The completion of these facilities made possible the ramp up in oil production and sales revenues from the Western Flank Oil Fairway to record levels. Ongoing exploration success in the Western Flank Oil Fairway also delivered continuing oil Reserves growth with four new oil discoveries. Across PEL 91 in the Western Flank Oil Fairway, 3D seismic data has provided the Company with an extensive portfolio of high-value McKinlay and Namur oil prospects for future exploration. Together with progress in the Inland-Cook Oil Fairway and Eastern Margin Oil Fairway, Drillsearch expects the Oil Business to continue to drive near-term growth and value in the Company. Western Flank Oil Fairway PEL 91 The Company continues to hold a desirable position in the Western Flank Oil Fairway with a 60% interest in PEL 91 (Beach Energy is Operator with a 40% interest). The Joint Venture has worked together effectively since late 2002 to achieve great successes in PEL 91, which continued during the Financial Year. The ongoing achievements in the area have been demonstrated by upgrades to the Company s independently audited 2P Oil Reserves. Drillsearch announced its 30 June 2013 Reserves update on 15 August The update included a 145% increase in 2P Reserves during the Financial Year for the combined PEL 91 oil fields in the Western Flank Oil Fairway, to 7.6 mmboe (net) (30 June 2012: 3.1 mmboe net). These increases were driven by an extensive drilling program during the Financial Year with seven appraisal and development wells drilled in the Bauer Oil Field and five exploration wells in the greater PEL 91 permit area. Of the seven appraisal and development wells drilled, all were cased and suspended as future oil producers. This success in Bauer Oil Field drilling has proven that the field is larger than originally modelled, extending as far north as the Bauer North-1 Oil Discovery. In addition, appraisal and development in the Bauer Oil Field has not only replaced the Reserves produced during the 2013 Financial Year but delivered additional 2P Reserves growth. Of the five exploration wells drilled in the Western Flank Oil Fairway, four wells Pennington-1, Kalladeina-2, Sceale-1 and Congony-1 were cased and suspended as future oil producers. Only one, Smoky-1, was plugged and abandoned after encountering water in the primary and secondary targets. This represents an 80% success rate for exploration wells drilled in PEL 91 during the Financial Year. All wells were drilled on 3D seismic data, and the high success rate demonstrates the value of our strategy of utilising 3D seismic data acquisition to unlock the potential of this play. In the June 2013 quarter the PEL 91 Joint Venture completed the 485 km 2 Caseolus 3D seismic survey and the dataset acquired is currently being processed. The Caseolus 3D seismic, together with previously completed 3D seismic datasets, cover 59% of the PEL 91 permit, providing a deep inventory of 3D seismic-defined oil prospects and leads. The Bauer-5 through Bauer-10 wells, together with the Bauer North-1 well, have all been completed and are undergoing connection. Currently, eight wells Bauer-1 to Bauer-8 are connected and producing into the Bauer Central Oil Production Facility. For a majority of the Financial Year oil production from the Bauer, Hanson and Chiton Oil Fields was constrained by the availability of trucks to go to Moomba. Construction of the Bauer-to-Lycium Pipeline commenced in December 2012 and the pipeline was commissioned in May It is currently operating at nameplate capacity of 10,000 bbls per day (gross). Additional volumes from Bauer and production from Chiton and Hanson continue to be trucked to Moomba, supplementing pipeline deliveries of oil. Following the exploration, appraisal and development success in the Financial Year in the Western Flank Oil Fairway, the Joint Venture is embarking on additional work to further increase Reserves, production and cash flow from the PEL 91 permit area. This will include the acquisition, processing and interpretation of seismic data; the drilling of exploration, appraisal and development wells; and the completion of discoveries for production. The Joint Venture will also undertake a program to refurbish and upgrade production facilities where required. Inland-Cook Oil Fairway ATPs 539P, 549P W, 657P, 920P and 924P The Inland-Cook Oil Fairway refers to a set of contiguous permits located in the South West Queensland region of the Cooper-Eromanga Basin, along the Queensland and South Australian borders. The term Inland-Cook refers to the Inland Oil Field in the north and the Cook Oil Field in the south. Permits ATP 920P and ATP 924P were granted to Drillsearch by the Queensland Government during the Financial Year, effective as of 1 March During the Financial Year Drillsearch completed acquisition of the 600 km 2 Kaden 3D seismic survey covering the southern portion of ATP 539P and the northern portion of the adjacent ATP 549P W permit. The Company identified and matured a number of prospects on which two commitment wells were drilled in ATP 539P during the March 2013 quarter. Triclops-1 spudded on 14 January 2013 and Tibor-1 spudded on 7 February 2013; both exploration wells targeting the Hutton Sandstone and sands in the Birkhead Formation. Both wells encountered oil shows in several zones but were assessed as not commercial and both wells were plugged and abandoned. Subsequent to the year end, Drillsearch agreed to a series of binding transactions with Santos Limited. This included a farm-out of ATP 549P W with Santos earning a 33.33% interest in the permit by drilling a commitment exploration well and carrying Drillsearch in relation to this well cost Annual Report 19

22 Business OVERVIEW In addition, Drillsearch has agreed to transfer ownership of ATP 657P to Blue Energy Limited while retaining certain royalty interests. Drillsearch is actively seeking farm-in partners for its remaining Inland-Cook permits as the Company believes tactical partnering is the optimal way to evaluate this extensive exploration portfolio. More than 30 local and international oil companies have participated in Drillsearch s data room for its Inland-Cook permits to date. Eastern Margin Oil Fairway ATP 299P and 783P Drillsearch has long held an 11% interest in the Santosoperated Tintaburra Block which consists of a number of Production Licences (PLs) and the exploration licence ATP 299P in the Eastern Margin Oil Fairway. During the Financial Year a total of four wells were drilled: one exploration well, two appraisal wells and one development well. Two wells were cased and suspended as future oil producers while two wells were plugged and abandoned. Subsequent to the year end, Drillsearch agreed to a series of binding transactions with Santos Limited, including the acquisition of an additional 29% interest in the Tintaburra block, increasing Drillsearch s interest in the block to 40%. The Tintaburra Joint Venture s work program for FY 2014 includes the drilling of a number of appraisal and development wells across the permit and the reinstatement of long-term, inactive wells to production. The ATP 783P Chandos Block is located in the Eromanga Basin, Queensland. The exploration permit covers 1,618 km 2 and is located in the Warrabin Trough. The permit is positioned along the northern margin of the Permian Edge, and is approximately 35 km north of the Kenmore Oil Field and 14 km north of the Bodalla oil field. During the Financial Year Drillsearch has continued to reinterpret seismic data and work up an inventory of leads and prospects. The Company is actively seeking a farm-in partner for ATP 783P with an active data room in operation. 20

23 Wet Gas Permit Summary FY P Reserves 72% 28% 2P Wet Gas Reserves growth was driven by wet gas drilling success and conversion of PEL 106A Resources to Reserves Gas Oil FY 2013 Production 27% 73% Oil production growth was driven by the resumption of wet gas production in March 2013 Gas Oil Wet Gas Permit Summary Western Wet Gas project area Northern Wet Gas project area Permit PEL 106A* PEL 106B PEL 107 PEL 513* DLS Interest 40% 50% 60% 40% Operator STO (60%) BPT (50%) BPT (40%) STO (60%) Discoveries Fields in production 1 shut in 3 3D seismic coverage 97% or 317 km² 99.6% or 177 km² 57% or 233 km² 64% or 951 km² Permit PEL 101 PEL 103 inc PRLs PEL 103A DLS Interest 80% 100% 75% Operator DLS DLS DLS Discoveries 3 4 Fields in production 3D seismic coverage 99% or 152 km² 30% or 97 km² (94 km² PRL) * Drillsearch announced on 4 July 2013 that it had farmed out a 60% interest in this permit along with operatorship to Santos Limited reducing its interest in the permit to 40% Financial Year Operational Summary 2P Reserves Production Wells drilled Seismic mmboe boe C&S Completed P&A 2D km 3D km 2 Wet Gas Western project area , Northern project area* Total , * Acer Energy Limited s production from the Northern Wet Gas project area up to 31 December was 3,061 bbls of oil and this was prior to the date of acquisition as such is not included in the table above Annual Report 21

24 Business OVERVIEW There were important developments for the Wet Gas Business during the year, including the successful takeover of Acer Energy Limited and its Wet Gas resources which consolidated Drillsearch s footprint in the Cooper Basin. Another highlight of the year was the Company s continued success in wet gas commercialisation with the signing of a new, firm Gas Sales Agreement (GSA) with the South Australian Cooper Basin Joint Venture (SACBJV), locking in sales terms and certainty over production for three years. Following the signing of the new GSA, production and gas sales revenue recommenced from the Western Wet Gas project area in March Western Wet Gas Project Area Operated PELs 106A and 513 The Western Wet Gas project area, comprising permits PEL 106A and PEL 513, was 100% owned and operated by Drillsearch during the Financial Year. The permits are both located in the South Australian Cooper Basin and cover the southern-central portion of the Patchawarra Trough. PEL 513 also covers the highly prospective Wooloo-Allunga Trough to the south west of the Moomba Gas Field. During the Financial Year the Santos-operated SACBJV completed the acquisition of the 385 km 2 Andree Leleptian 3D seismic survey, which covers a large portion of PEL 106A and 513 permits. By participating with the SACBJV in the 3D seismic survey, Drillsearch was able to execute a robust exploration program across a highly prospective portion of the permit based on 3D seismic data. In April 2013, a three-well exploration program commenced in PEL 106A using the Weatherford 826 drilling rig. The first well, Wamberal-1, was plugged and abandoned after encountering water bearing sands in the primary target. The second well, Moruya-1, was cased and suspended for further evaluation after wireline logs confirmed wet gas saturation in both good quality and tight sands. The final well, Narrabeen-1, spudded in late June 2013 and was a wet gas discovery, and was subsequently cased and suspended for future appraisal. In PEL 513, Drillsearch acquired the 320 km 2 Munathiri 3D seismic survey, with seismic data processing and interpretation currently ongoing. Subsequent to the year end, Drillsearch announced on 4 July 2013 that it had entered into a series of binding transactions with Santos Limited to accelerate Western Cooper Wet Gas commercialisation. Santos acquired a 60% interest and operatorship in the Western Cooper Wet Gas Project by committing to fund a work program valued by Drillsearch at $ million. The series of transactions includes: In PEL 106A, Santos funding a $75 million firm work program of exploration, appraisal and field development works; In PEL 513, Santos funding a firm work program valued by Drillsearch at $45 million covering all outstanding firm permit work commitments, including the acquisition of 100 km 2 of 3D seismic data, and drilling six firm commitment exploration wells plus one additional contingent exploration well; and A firm GSA for Western Cooper Wet Gas production through to 2025, with both fixed and oil-linked gas pricing to a Maximum Daily Quantity (MDQ) of 70 mmscfd of raw gas. Drillsearch announced its 30 June 2013 Reserves update on 15 August 2013, including a 113% increase in 2P Reserves during the Financial Year for the combined Wet Gas Business, to 20.3 mmboe (net) (30 June 2012: 7.5 mmboe net). This increase was driven by the conversion of 2C Resources of existing PEL 106A discoveries to 2P Reserves. This was due to the independent Reserve auditors recognising the commerciality of the existing PEL 106A discoveries upon the signing of a GSA with Santos Limited in July 2013 to sell gas produced from PEL 106A. Western Wet Gas Project Area Non-operated PELs 106B and 107 PEL 106B and PEL 107 are located in the South Australian Cooper Basin and together form part of the Western Wet Gas project area. Drillsearch has a 50% interest in PEL 106B and a 60% interest in PEL 107 with Beach Energy holding the remaining interest and operating both permits. During the Financial Year, extended production testing (EPT) was undertaken at the Coolawang and Haslam wet gas discoveries in PEL 106B and the Southend Wet Gas Discovery in PEL 107. All three wells were part of the successful Western Wet Gas Fairway exploration program undertaken during the 2012 Financial Year. The EPTs have provided Drillsearch with enhanced estimates of Reserves and Contingent Resources. With all three wells close to pipeline infrastructure, the EPTs will also assist in the formulation of the forward development plan for these Wet Gas discoveries. The PEL 106B Joint Venture drilled four wet gas exploration wells during the Financial Year. The first well in the program, Coorabie-1, was cased and suspended for future technical studies to assess the potential for unconventional gas, while gas shows were encountered at both Rosetta-1 and Destrees-1 wells; however, reservoir quality associated with the shows was poor and as such both were plugged and abandoned. The final well, Euler-1, was also plugged and abandoned after no hydrocarbons were encountered. For six months of the year, gas production from the Middleton Gas Plant in PEL 106B was shut in while the Joint Venture negotiated a new, firm GSA with the SACBJV for wet gas production. The new GSA replaces the previous GSA and provides for the sale of 10 billion cubic feet (BCF) of raw gas on a firm basis for a three-year term with a MDQ of 35 mmscfd of raw gas. Under the GSA the Joint Venture sells untreated raw gas consisting of condensate, LPG and sales gas, and will be paid for each component. Condensate and LPG pricing is linked to international product pricing, less specific transport and processing charges. Gas sales are priced on a confidential basis, reflecting transport and processing costs of the SACBJV in producing sales gas quality for onward sale. 22

25 Production recommenced in March 2013 following signing of the new GSA. Production quantities were enhanced via the completion and connection of the Canunda Wet Gas Field, which was completed in June The Canunda Field is condensate rich and will add to Drillsearch s ability to generate cash flow while also increasing sales gas production. As at the Financial Year end, the Middleton, Brownlow and Canunda wet gas fields were all in production. Activities planned for the 2014 Financial Year include further drilling of exploration, appraisal and development wells, and completing and testing wet gas discoveries to production. The development and tie-in of the Coolawang wet gas discovery to the Middleton Gas Plant is also expected to be completed during the 2014 Financial Year, together with the continued processing and interpretation of 3D seismic data to gain an increased understanding of the permit area. Northern Wet Gas Project Area PEL 101 and 103 In January 2013, Drillsearch successfully completed the acquisition of Acer Energy Limited which subsequently became a wholly-owned subsidiary of Drillsearch. One of the primary drivers of the acquisition was the prospectivity of Acer s Wet Gas assets, including the existing wet gas discoveries in PEL 101 and PEL 103, which now form the Northern Wet Gas Project Area. The PEL 101 block is located 70 km north of the Moomba facilities and covers much of the north central portion of the Patchawarra Trough, extending southward to include part of the GMI Ridge. Previous exploration in this part of the Cooper Basin has been successful in discovering a number of gas fields which produce from Triassic and Permian reservoirs. PEL 101 is surrounded by production leases and producing gas fields. During the Financial Year Drillsearch conducted the 478 km 2 Coolabah 3D seismic survey which was completed in March 2013, covering PEL 101 in its entirety. PEL 101 is an area with a large number of leads on 2D seismic, and was previously without any 3D seismic coverage. The PEL 101 Joint Venture consists of Drillsearch as Operator at 80% and Mid Continent Equipment (Australia) at 20%. The PEL 103 permit is located about 90 km northeast of the Moomba facilities and is 100% owned and operated by Drillsearch. PEL 103 encompasses PEL 103A of which Drillsearch owns 75% and is operated by Avery Resources which holds the remaining 25%. Structurally the permits cover the south eastern apex of the Innamincka Dome, separating the two main Cooper Basin depocentres: the Nappamerri and Patchawarra Troughs. Following exploration success in Flax, PRL 14 was issued on 14 May 2007 to provide security of tenure over the Flax Oil Field where a production testing facility has been constructed. PRLs 17 and 18 were subsequently issued on 28 January 2009 to encompass the discovered resources of the Yarrow Gas Field and Juniper Oil Field. Drillsearch holds 100% interest in all three PRLs. The Cypress-1 wet gas exploration well was drilled in PEL 103 in late November During drilling, significant downhole mechanical problems were encountered and the well could not reach its intended total depth and in late December 2012 the drilling of the well was suspended. Activities planned for the 2014 Financial Year include further exploration, appraisal and development drilling; the reinstatement of liquids production from the Flax Field; and finalisation of processing and interpretation of 3D seismic data in the area. Northern Wet Gas Project Area 2013 Annual Report 23

26 Unconventional Permit Summary Unconventional Project Areas FY 2013 Capital Expenditure 4% 7% 41% 48% Oil Gas Unconventional Corporate In the Unconventional Business, shale gas, and tight sand exploration commenced in ATP 940P during the year with Joint Venture partner QGC (BG Group). The ATP 940P Joint Venture completed the 1,052 km² Winnie 3D seismic program the largest onshore 3D seismic survey in Australia. Based on the 3D seismic, four well locations have been selected with the first Anakin-1 spudded on 19 September The exploration wells will be drilled with the Weatherford 826 rig, and field preparation activities have commenced at the first two well locations. Unconventional Permit Summary Southern and Western Unconventional Central Unconventional Permit PEL 106A* PEL 106B PEL 107 PEL 513* DLS Interest 40% 50% 50% 40% Operator STO (60%) BPT (50%) BPT (50%) STO (60%) Wells for Evaluation Moruya, Haslam, Baird, Southend Narrabeen Coolawang 3D seismic coverage 97% or 317 km² 99.5% or 157 km² 57% or 231 km² 64% or 951 km² Permit ATP 940P DLS Interest 40% QGC (BG Group) 60% Operator DLS Discoveries Fields in production 3D seismic coverage 45% or 1,134 km 2 * Drillsearch announced on 4 July 2013 that it had farmed out a 60% interest in this permit along with operatorship to Santos Limited reducing its interest in the permit to 40% Financial Year Operational Summary Seismic 2P Reserves mmboe Production boe C&S Wells drilled Completed P&A 2D km 3D km 2 Unconventional Central 8 1,052 Western Total 8 1,052 24

27 Central Unconventional Project Area ATP 940P ATP 940P is located in the South Western area of Queensland s Cooper-Eromanga Basin, 75 km west of Jackson. It overlies the southern edge of the Jurassic to Cretaceous Eromanga Basin and the southern margin of Permian to Triassic Cooper Basin. Drillsearch formed a strategic Joint Venture with QGC, a B G Group company in July Drillsearch is Operator of the permit with a 40% interest and QGC with 60%. The permit is immediately adjacent to Beach Energy s shale gas acreage at PEL 218 and ATP 855P where they have already drilled a number of unconventional wells with promising results. The Beach and Chevron deal announced in February 2013 adds additional impetus and interest to the play. During the year, the 1,052 km 2 Winnie 3D seismic survey was acquired in the ATP 940P permit. The primary objective of the Winnie 3D seismic survey was to delineate the Nappamerri Trough REM Shale and deeper tight gas play fairway. The survey also targeted early identification of shale and tight gas sweet spots and drilling hazards within the Nappamerri Trough play fairway. WesternGeco, a business unit of Schlumberger Limited, was awarded the survey following a competitive tendering process involving the world s leading seismic acquisition companies. Utilising the proprietary Uniq 3D seismic acquisition system, the survey incorporated some of the most advanced technology currently available to the onshore seismic industry. The ATP 940P Joint Venture is preparing for an initial four well exploration drilling campaign program. The wells Anakin-1, Charal-1, Padme-1 and Amidala-1 are mapped on 3D seismic to target multi-layered tight gas Patchawarra Sandstones and REM shale gas intervals. Site preparations are underway for the initial four well drilling program which commenced with the spudding of Anakin-1 on 19 September Drillsearch and its Joint Venture partner, QGC are embarking on further appraisal, development and exploration activities in the ATP 940P acreage. This includes the ongoing interpretation of the Winnie 3D seismic survey with the aim of optimising future well locations and the drilling, coring, testing and completing of shale exploration wells in the Central Unconventional Fairway. Southern and Western Unconventional Project Areas PEL 106A, 106B, 107, and 513 The Southern and Western Cooper Unconventional Project Areas cover Drillsearch s permit holdings in PEL 106A, 106B, 107, and 513. Drillsearch holds varying interests in these permits outlined in the table on page 24. In addition to primarily targeting conventional sands of the Patchawarra Formation, Drillsearch s approach to unconventional in this area has a secondary objective, to identify oil and gas resources in the tight sands of the Patchawarra, Tirrawarra, Epsilon and Toolachee Formations as well as the shale gas potential within the Roseneath and Murteree Shale and Permian Coals. As part of the drilling of Moruya-1, Drillsearch cut two 30 metre cores targeting conventional and unconventional reservoir sequences in the Patchawarra Formation. Routine and special core analysis is currently being undertaken to better understand their rock properties. Planning is underway to re-enter and stimulate tight sands and deep coals in the Western Cooper Unconventional project area. This process will be accelerated under the new Joint Venture with Santos announced on 4 July As part of this agreement, Santos will acquire a 60% interest and operatorship in PEL 106A and PEL 513. As Drillsearch continues to experience strong growth across the Company, it is increasingly important that we acknowledge and deliver on our corporate and social responsibilities to internal and external stakeholders. Drillsearch is firmly committed to being a high-achieving corporate citizen in the oil and gas industry with full and proper consideration of our responsibilities to our staff, shareholders, landowners, suppliers, Joint Venture partners and broader stakeholder groups including Governments as well as the environments and communities in which we operate. Drillsearch Board and senior management visit ATP 940P in South West Queensland during the 1,052 km 2 Winnie 3D seismic acquisition, September Annual Report 25

28 Corporate Sustainability Health, Safety, Security and Environment The Company continues to strive for the highest standards in the areas of Health, Safety, Security, Environment and Community HSSEC. The Company s commitment to the safety and security of our employees, the broader community and the environment remains at the forefront of the Company s operations planning and implementation. We are proud to announce that the 2013 Financial Year was free of Lost Time Injuries in operations. During the 2013 Financial Year, Drillsearch continued to develop and strengthen its HSSEC management systems that in the previous year had supported the transition from a non-operated base to 100% Drillsearch operated projects. The Company has expanded its HSSEC team in this period, appointing specialist staff to meet the increasing HSSEC demands that accompany multiple and often simultaneous operational footprints. A wide-ranging HSSEC system review has been undertaken, driven by the increasing complexity of the Company s operations and the necessity to provide day-to-day activities with relevant, robust systems support. The evolution of system architecture and content to better reflect State and Federal Government legislative requirements, and the progression towards a standards-based Company, places Drillsearch in a solid position as exploration projects mature, and existing and future production assets are brought towards commissioning and operation. Drillsearch adopts an holistic approach to the recognition of the Environment and Community as important aspects of its operations. The Company s HSSEC philosophy focuses on operations in remote areas where the appropriate health, safety and environment resources are imperative to ensuring all our employees and contractors return home after work safely and without long-term or unnecessary harm to the environment. Cultural Heritage Drillsearch maintains its strong commitment to developing robust working relationships with Traditional Owners across our Queensland and South Australian operations. During the 2013 Financial Year, field work area clearances were undertaken in PEL 101 with the Yandruwandha Yawarrawarrka people, in PEL 513 with the Dieri People and in ATP 940P with the Wongkamara people. The clearances in ATP 940P comprised both the surveying of new work areas associated with exploration drilling and a follow-up audit of cultural sites identified in the 2012 survey preceding the Winnie 3D seismic survey. Given the large investment into the avoidance and minimisation of impacts to Aboriginal heritage during that survey, Drillsearch and the Wongkumara people were motivated to review the performance of preclearance surveys and the acquisition methodology offered by WesternGeco. Diversity Drillsearch seeks to sustain its competitive advantage by fostering a diverse workforce. Diversity is an integral part of Drillsearch s ability to attract, retain and develop the best talent, promoting a work place conducive to the appointment of well-qualified employees, senior management and Board candidates. Our goal is to create an environment where there is appropriate diversity to maximise the achievements of corporate goals. Drillsearch s appointment of people of diverse gender, ethnic and cultural background to the Board and to senior positions within the Company is evidence of the Company s dedication to building a strong and diverse workforce. Drillsearch recognises that its people are the Company s most important asset, and subsequently seeks to create an environment where innovation and diversity of thought is cultivated. The Company is committed to maintaining and promoting a corporate culture which embraces diversity in order to maximise the achievements of its corporate goals. 26