Corporate Directory Registered Office & Principal Place of Business Empire Oil & Gas NL 229 Stirling Highway Claremont Western Australia 6010 Telephone: +61 8 9286 4600 Facsimile: +61 8 9284 6588 Email: admin@empireoil.com.au Web: ASX code: www.empireoil.com.au EGO (ordinary shares) EGOO (options) Company Secretary Rachel Rees Share Registry Link Market Services Limited Locked Bag A14 Sydney South New South Wales 1235 Telephone: +61 1300 554 474 Facsimile: +61 2 9287 0303 Email: registry@linkmarketservices.com.au Web: www.linkmarketservices.com.au Auditors Ernst & Young 11 Mounts Bay Road Perth Western Australia 6000 ABN 55 063 613 730 Page 2 of 29
Directors Report Your Directors present their report on Empire Oil & Gas NL (Empire or the Parent Entity) and its subsidiaries (collectively referred to as the Group) for the half year ended 31 December. Directors The names of the directors in office during the half-year and until the date of this report are set out below. All of the company s directors are non-executive directors. Directors were in office for the entire period unless otherwise stated: Antonino (Tony) Iannello (Chairman) Stuart Brown Philip Garratt Thomas Vincent Review and Results of Operations Empire is engaged in exploration, development and production of gas and condensate, in the onshore Perth Basin of Western Australia (WA). Empire is the 100% owner of the 10 TJ/day Red Gully Production Facility (RGPF) which has produced over 8.7 PJ of domestic gas and 352 kbbl of condensate since its commissioning in September 2013. Empire also owns of the largest and most extensive (primarily 100% owned) acreage in the highly prospective onshore Perth Basin. Empire has three major domestic gas exploration projects including Red Gully North-1 (RGN-1), Lockyer Deep/North Erregulla and Raven. Operations Highlights Total Gas Production Total gas production for the half-year ended 31 December was 1.2 PJ, down 20% compared to production of 1.5 PJ for the half-year ended 31 December 2015. Total condensate production for the half-year ended 31 December was 35 kbbl, down 36% compared to production of 55 kbbl for the half-year ended 31 December 2015. The decline in production was due to a reduction in gas nominations from Alcoa and the predicted decline in the condensate-gas-ratio over the half-year ended 31 December. ABN 55 063 613 730 Page 3 of 29
Financial Results 6 months ended 31 Dec 6 months ended 31 Dec 2015 Change % Gas revenue 7,328,488 8,219,085 (10.8%) Condensate revenue 1,366,183 2,232,819 (38.8%) Total revenue 8,694,671 10,451,904 (16.8%) Cost of Sales 1 (2,805,667) (3,061,951) (8.4%) Gross Profit 5,889,004 7,389,953 (20.3%) Net other expenses (1,854,320) (2,048,469) (9.5%) EBITDAX 4,034,684 5,341,484 (24.5%) Impairment - - n/a EBITDA 4,034,684 5,341,484 (24.5%) Depreciation / amortisation (Cost of sales) (3,041,908) (3,692,216) (17.6%) Depreciation (General) (61,029) (38,512) 58.5% EBIT 931,747 1,610,756 (42.2%) Net finance costs (281,833) 51,331 n/a Profit of the Group before income tax 649,914 1,662,087 (60.9%) Income tax (loss) / benefit (266,328) (508,022) (47.6%) Profit of the Group after income tax 383,586 1,154,065 (66.8%) The Group realised a gross profit of A2,847,097 (2015: A3,697,737) and a net profit of A383,586 (2015: A1,154,065) for the half-year ended 31 December. The Group s result includes the following: Decrease in total gas revenue to A7,328,488 (2015: A8,219,085) and condensate revenue to A1,366,183 (2015: A2,232,819). Reduction in the cost of sales to A2,805,667 (2015: A3,061,951) due to implementation of cost saving initiatives at Red Gully including the revised operations and maintenance contract. No impairment of exploration and evaluation expenditure during the current half-year. Increase in finance costs to A302,800 (2015: A63,898) due to a A255,636 interest expense relating to the Mineral Resources Limited (ASX: MIN) revolving working capital facility and A47,164 (2015: A50,346) relating to notional interest from the unwinding of the restoration provision in respect of the Red Gully facility. Decrease in statutory income tax expense to A266,328 (2015: A502,022), however no tax cash payments were made due to the utilisation of the deferred tax asset. Exploration Red Gully North-1 Well Remediation Programme and Production Testing A summary of the work carried out at RGN-1 is provided below: Date Activity 14 October Enerdrill Rig-1 contracted 1 Cost of Sales includes all direct costs and royalty costs associated with the production revenue, excluding depreciation, amortisation and impairment. ABN 55 063 613 730 Page 4 of 29
Date Activity 11 November Enerdrill Rig-1 mobilised to site Mid-November Approval for remedial workover was given by the WA DMP 13 November Enerdrill Rig-1 started remedial cementing program 25 November Upper completion packer successfully removed 29 November Lower completion packer removed after significant delay caused by sand/shale debris 8 December Cement bond log analysis completed which confirmed remedial cement squeeze successful between the Upper D and C sands, and above the C sand. 12 December Operations suspended for 16 days to allow the crews to take necessary field leave. Workover operations were extended by approximately 13 days, beyond the original plan of 24 day 28 December Operations resumed. C Sand was re-perforated. Pressure testing on the completion tubing was successful. However pressure on the casing annulus indicating that the upper packer had not sealed 11 January 2017 Testing equipment was mobilised to RGN-1 and the Upper D sand was perforated. No flow to surface was measured 25 January 2017 Government approval was received to proceed with the C sand test Two separate production tests were then performed on the C sand for 8 hours and 27.5 hours respectively 25 January 2017 Results from C sand production testing show 1.29mmcfd gas and 405 bpd condensate flows Underway Empire will now perform a detailed review of the test data followed by a reserve assessment to understand the size of the C sand gas/condensate discovery and its potential commerciality Figure 1: Red Gully North-1 C Sand Test ABN 55 063 613 730 Page 5 of 29
The RGN-1 remediation and test program confirmed the discovery of a new light oil in the C sand at Red Gully North-1. The second C sand 24hr test program flowed 405 bopd (50.1 API) with associated gas of 1.29 mmscf/day and 735 bwpd. Initial laboratory analysis of test samples has indicated that the C sand discovery is a volatile (light) oil with associated gas. Further analysis is underway to determine commerciality and should be complete in April. Empire is currently planning to commence an Extended Production Test (EPT) in Q3 2017 which, if successful will enable Empire to book oil reserves for the field. Assuming adequate reserves are established, Empire will commence commercial production at RGN-1, either as a standalone operation or tied back into Empire s Red Gully Production Facility. The oil discovery in the Upper Cattamarra C sand opens up a new light oil play in EP 389 and PL 18/PL 19 close to Empire s production hub. Empire has initiated a review of historical data over the C sand in previously drilled wells to determine if there is overlooked oil potential within EP 389 and the production licenses. The costs of the RGN-1 remediation and test are now expected to be approximately A4 million (including the A0.45 million spent prior to the remediation operation) due to operational challenges encountered during the workover and the extended test duration. Acreage Evaluation During the half-year ended 31 December, preparations were made to submit a renewal application for EP 389, which is in its final year of the current five year exploration permit term. A renewal application will be submitted late Q1 2017 ahead of the expiry of the final year of the current permit term on 26 April 2017. The renewal application will require a statutory relinquishment which will be excised from the southern portion of the permit where no leads were identified following the Black Swan Airborne Geophysical Survey. The central and northern portion of EP 389 which surround the Red Gully production licences and RGPF, are expected to be retained as part of the renewed permit. The central and north portion of EP 389 contains all the significant leads identified on the Black Swan Airborne Geophysical Survey which was acquired by Empire in 2015. Empire is in the early stages of planning a 2D seismic survey (the Black Cormorant Seismic Survey) to mature leads, identified by the Black Swan Airborne Geophysical Survey, into prospects for future drilling. The Black Cormorant 2D Seismic Survey will focus on maturing leads identified in EP 389 and EP 432. Should the leads to be targeted by the planned Black Cormorant Seismic Survey in EP 389 mature to drillable prospects, the commercialisation of any discovery would be enhanced due to the proximity of the RGPF (Figure 2). Figure 2: Red Gully Project Location (Black Swan survey, January ) ABN 55 063 613 730 Page 6 of 29
In EP 432 the Black Swan Airborne Geophysical Survey identified a number of large leads in the central portion of EP 432, close to existing gas trunk lines. It is likely that any future drilling would target Permian sandstone of the Kingia/Highcliff formations in which the Waitsia discovery to the north, was made. These reservoirs are expected be at relatively shallow drilling depths and are close to mature, hydrocarbon source rocks. The play fairway is also located in a part of the basin which has very limited seismic and well data so development of the play is at an early stage. Significant upside potential for large-scale wet gas is currently interpreted. The play will be further evaluated by the acquisition of the planned Black Cormorant Seismic Survey which will aim to mature leads to drillable prospects. Empire is planning to undertake the Black Cormorant Seismic Survey in Q1 2018, subject to regulatory approval, funding and stakeholder engagement for land access approvals. Corporate Debt Repayment and New Working Capital Facility During August, Empire successfully completed the A15 million repayment of the ERM Power Pty Ltd (ASX: EPW) debt facility through the drawdown of the Mineral Resources Limited (ASX: MIN) revolving working capital facility. The new revolving working capital facility carries an annual interest rate equal to the Australian Bank Bill Swap Rate (BBSW mid) plus 5% and a three year term. The facility carries first ranking security over EP 389, PL 18 and PL 19 and an unsecured guarantee by Empire. Mineral Resources Limited was also granted 7.5 million unlisted call options over new unissued shares with an exercise price of A0.50 expiring on 11 August 2018. Legal Matters Proceedings against former directors, Messrs Marshall, Joyce and Warris, continue with Empire and its legal advisors confident of the course of action being pursued, in order to recover A441,632 of Parent Entity money spent by the defendants in legal costs incurred in defamation proceedings. Cash Flows Net cash flows provided by operations during the half year ended 31 December were A2,897,328 (up 185% from half-year ended 31 December 2015: A1,015,785). There was an increase of A189,366 in the cash balance from A2,913,850 at 30 June to A3,103,216 at 31 December. The relative stability in the cash balance reflects the increase in cash flows from operations, offset by exploratory drilling costs incurred related to the Red Gully North-1 well during the half year. Changes to Contributed Equity There were no new shares issued during the half year ended 31 December. Since the end of the previous financial year, no dividend has been paid or declared. Risk Management and Corporate Governance The Group s risk management and corporate governance statements were included in the 30 June annual report. These statements remain current. Business Strategies and Prospects for Future Financial Years The Company s strategic objective is to create long-term shareholder value by successful gas and oil exploration and the continued production of gas and condensate. ABN 55 063 613 730 Page 7 of 29
To achieve its strategic objectives the Group is planning to undertake the following activities: i. Continue to produce the Red Gully field reserves safely and cost effectively. ii. Review the pressure, sample and flow rate data recovered from Red Gully North-1, perform a reserve analysis and assess the commerciality of the gas condensate accumulation discovered at Red Gully North- 1. iii. Fund and drill highly prospective exploration well(s) in the EP 368 and EP 432 exploration permits. iv. Identify further high graded exploration wells in the other tenements; and v. Investigate opportunities available to acquire high quality oil & gas assets, to supplement the Group s current oil & gas portfolio. The Directors advise that while all statements made are currently true and correct to the best of the Directors knowledge and belief, shareholders must have regard to the Group s continuing petroleum exploration activities with their inherently unpredictable risk and possible consequential effects upon the Group s financial position. The risks faced by the Group that are likely to have an effect on the Group s future prospects, and how the Group manages these risks include: i. The exploration for, and development of, gas and oil reserves involves a high degree of risk. The ultimate development of a Group s project into a producing well is dependent on a number of factors, including successful studies, obtaining all the necessary permits and licences, native title, land owner and joint venture partner approvals and the required project funding. To mitigate these risks, the Group undertakes systematic and staged exploration and testing programs, maintains its permits in good standing, and negotiates in good faith with native title claimants and landowners. Subject to the results of its exploration and evaluation, the Group undertakes technical and economic studies to advance a project to the development and construction phases. These steps to mitigate risks have been adopted by the Board and management team. The construction phase for a Group project will require additional financing. Failure to obtain financing may result in delays or an indefinite postponement of a project s development. There is no assurance that additional capital or other forms of financing will be available if needed or that, if available, the terms of financing will be favourable to the Group. Development of any Group project is also dependent on the granting of licences and other permits necessary to allow construction and production to commence. As with any exploration and development project, there is no guarantee that the Group will be successful in its applications or in maintaining all the required permits and licences to commence construction and subsequently enter into production. ii. Converting exploration success into a commercial project also involves risk. The decision as to whether a prospect is considered commercial is dependent on many technical and financial assumptions and uncertainties. The Group utilises specialised consultants where necessary to ensure information is as technically accurate as possible. Forward looking financial assumptions are obtained through market data where possible, otherwise internally approved forecast and budgets are utilised. However, changes in market assumptions can cast ongoing uncertainty on the commerciality of projects. iii. The price that can be obtained for gas and oil may have an adverse effect on a Group project. The price of gas and oil can fluctuate markedly due to factors beyond the Group s control. Price fluctuations may affect the Group s ability to operate economically as a producer. The Group currently does not engage in hedging or derivative transactions to manage commodity price risk. However, in the future the Group may review this policy. ABN 55 063 613 730 Page 8 of 29
The Group s growth and ability to finance its activities may be affected by global economic conditions or slowdown in financial markets. These impacts may be on the Group or its customers. Items that may affect financial markets include contraction in credit markets resulting in a widening of credit risk, devaluations and volatility in global equity, commodity, foreign exchange and energy markets and lack of market liquidity Subsequent Events There have been no other events subsequent to reporting date which would have a material effect on the Group's financial statements as at 31 December. Auditor s Independence Declaration A copy of the auditor s independence declaration is set out on page 10. This report is made in accordance with a resolution of the Board of Directors. Antonino Mario (Tony) Iannello Chairman and Non-Executive Director Perth, 14 March 2017 ABN 55 063 613 730 Page 9 of 29
Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Auditor s Independence Declaration to the Directors of Empire Oil & Gas NL As lead auditor for the review of Empire Oil & Gas NL for the half-year ended 31 December, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and b) no contraventions of any applicable code of professional conduct in relation to the review. This declaration is in respect of Empire Oil & Gas NL and the entities it controlled during the financial period. Ernst & Young R J Curtin Partner 14 March 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RC:KW:EMPIRE:048
Consolidated Statement of Profit or Loss and Other Comprehensive Income for the 6 months ended 31 December Continuing Operations Note Revenue 3 8,694,671 10,451,904 Cost of sales 5 (5,847,575) (6,754,167) Gross profit 2,847,096 3,697,737 2015 Other income 4 24,245 4,650 Other expenses 5 - (74,492) General and administrative expenses 5 (1,939,594) (2,017,139) Operating profit 931,748 1,610,756 Finance income 6 20,967 115,229 Finance costs 6 (302,800) (63,898) Profit before tax 649,914 1,662,087 Income tax expense 7 (266,328) (508,022) Profit for the period 383,586 1,154,065 Other comprehensive income to be reclassified to profit or loss in subsequent periods - - Total comprehensive income for the period 383,586 1,154,065 Profit for the period attributable to: Equity holders of the parent 382,472 1,163,909 Non-controlling interest 1,114 (9,844) 383,586 1,154,065 Total comprehensive income for the period attributable to: Equity holders of the parent 382,472 1,163,909 Non-controlling interest 1,114 (9,844) 383,586 1,154,065 Profit per share on earnings attributable to the ordinary equity holders of the Company From continuing operations: Cents Cents Basic and Diluted Earnings per Share 0.37 1.14 The accompanying notes form part of these Financial Statements. ABN 55 063 613 730 Page 11 of 29
Consolidated Statement of Financial Position As at 31 December Assets Current Assets Note 31 Dec 30 June Cash and cash equivalents 3,103,216 2,913,850 Trade and other receivables 8 3,015,279 3,035,982 Prepayments 138,179 120,589 Inventories 88,312 80,595 Total Current Assets 6,344,986 6,151,016 Non-Current Assets Restricted cash 133,358 133,358 Property, plant and equipment 9 2,237,677 2,186,160 Oil and gas properties 10 33,778,601 36,024,295 Exploration and evaluation assets 11 33,215,712 29,923,195 Deferred tax asset 7 6,016,673 6,283,000 Total Non-Current Assets 75,382,021 74,550,008 Total Assets 81,727,007 80,701,024 Liabilities Current Liabilities Trade and other payables 12 2,251,483 1,906,412 Provisions 13 184,667 146,193 Non-interest bearing liabilities 14 145,781 15,066,392 Total Current Liabilities 2,581,931 17,118,997 Non-current liabilities Provisions 13 3,516,006 3,468,842 Interest bearing liabilities 15 15,100,000 - Total Non-Current Liabilities 18,616,006 3,468,842 Total Liabilities 21,197,937 20,587,839 Net Assets 60,529,070 60,113,185 Equity Issued Capital 16 95,857,327 95,857,327 Treasury shares 16 (87,337) (87,337) Share-based payment reserve 17 4,020,658 3,988,359 Accumulated losses (39,249,604) (39,632,076) Capital and reserves attributable to: Owners of Empire Oil & Gas NL 60,541,044 60,126,273 Non-controlling interest (11,974) (13,088) Total Equity 60,529,070 60,113,185 The accompanying notes form part of these Financial Statements. ABN 55 063 613 730 Page 12 of 29
Consolidated Statement of Changes in Equity For the 6 months ended 31 December Issued Capital Treasury Shares Accumulated Losses Share-based Payment Reserve Total Non-Controlling Interest Total Equity As at 1 July 95,857,327 (87,337) (39,632,076) 3,988,359 60,126,273 (13,088) 60,113,185 Profit / (loss) for the period - - 382,472-382,472 1,114 383,586 Other comprehensive income - - - - - - - Total comprehensive income - - 382,472-382,472 1,114 383,586 Share based payment - - - 32,299 32,299-32,299 At 31 December 95,857,327 (87,337) (39,249,604) 4,020,658 60,541,044 (11,974) 60,529,070 Issued Capital Treasury Shares Accumulated Losses Share-based Payment Reserve Total Non-Controlling Interest Total Equity As at 1 July 2015 95,669,990 - (36,343,645) 3,815,014 63,141,359-63,141,359 Profit / (loss) for the period - - 1,163,909-1,163,909 (9,844) 1,154,065 Other comprehensive income - - - - - - - Total comprehensive income - - 1,163,909-1,163,909 (9,844) 1,154,065 Issue of share capital 187,337 - - - 187,337-187,337 Acquisition of treasury shares - (87,337) - - (87,336) - (87,337) Share based payment - - - 94,697 94,697-94,697 At 31 December 2015 95,857,327 (87,337) (35,179,736) 3,909,711 64,499,966 (9,844) 64,490,122 The accompanying notes form part of these Financial Statements. ABN 55 063 613 730 Page 13 of 29
Consolidated Statement of Cash Flows For the 6 months ended 31 December Cash flows from operating activities Condensate and gas revenue received 8,748,329 6,786,188 Interest received 20,967 114,368 Other income 12,245 4,650 Payments to suppliers, contractors and employees (5,630,099) (5,887,602) Finance costs paid (254,114) (1,819) Net cash provided by operating activities 2,897,328 1,015,785 2015 Cash flows from investing activities Payment for property, plant and equipment (213,121) (310,232) Expenditure on oil and gas properties (372,758) (222,399) Expenditure on exploration (2,451,472) (5,419,668) Proceeds on farm-out of exploration permits 150,000 150,000 Net cash used in investing activities (2,887,351) (5,802,299) Cash flows from financing activities Proceeds from borrowings 15,100,000 - Repayment of borrowings (14,920,611) (2,898) Proceeds from issue of shares - 187,337 Acquisition of treasury shares - (87,336) Net cash provided by financing activities 179,389 97,103 Net increase/(decrease) in cash and cash equivalents 189,366 (4,689,411) Cash and cash equivalents at the beginning of the period 2,913,850 11,487,033 Cash and cash equivalents at the end of the period 3,103,216 6,797,622 The accompanying notes form part of these Financial Statements. ABN 55 063 613 730 Page 14 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 1. Corporate Information The interim condensed consolidated financial statements of Empire Oil & Gas NL (Empire or the Parent Entity) and its subsidiaries (collectively, the Group) for the six months ended 31 December were authorised for issue in accordance with a resolution of the directors on 14 March 2017. Empire Oil & Gas NL is a for profit company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Stock Exchange. The Group is engaged in oil & gas exploration, development and production. 2. Basis of Preparation and Changes to the Group s Accounting Policies a) Basis of Preparation The interim condensed consolidated financial statements for the six months ended 31 December have been prepared in accordance with AASB 134 ing. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual financial statements as at 30 June as well as in conjunction with public announcements. b) Significant accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group s annual consolidated financial statements for the year ended 30 June, except the adoption of new and revised standards and interpretations which became effective 1 July. New and revised standards and interpretations These amendments are effective for annual periods beginning on or after 1 July. The adoption of these amendments had no material impact on the financial position or performance of the Group. AASB 2014-3 AASB 2014-4 AASB 2014-9 AASB 2015-1 Amendments to Australian Accounting Standards Accounting for Acquisitions of Interests in Joint Operations Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to AASB 116 and AASB 138) Amendments to Australian Accounting Standards Equity Method in Separate Financial Statements Amendments to Australian Accounting Standards Annual Improvements to Australian Accounting Standards 2012 2014 Cycle AASB 2015-2 Amendments to Australian Accounting Standards Disclosure Initiative: Amendments to AASB 101 The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. ABN 55 063 613 730 Page 15 of 29
3. Revenue For the 6 months ended 31 December 2015 Sale of Condensate and Gas 8,694,671 10,451,904 4. Other Income Land access and hire income 2,868 3,000 Other income 9,377 1,650 Foreign exchange gain 12,000-5. Operating Profit Operating profit is stated after charging: Cost of sales 24,245 4,650 Depreciation 1,602,334 1,598,381 Amortisation 1,439,574 2,093,835 Total depreciation and amortisation 3,041,908 3,692,216 Direct costs 2,718,723 2,957,809 Royalty 86,944 104,142 Total direct costs and royalties 2,805,667 3,061,951 Total Cost of Sales 5,847,575 6,754,167 Other expenses Depreciation rental assets - 6,305 Other - 68,187 General and administrative expenses Employee benefit expenses: - 74,492 Salaries and wages 1,133,259 1,160,306 Post-employment benefits superannuation contributions 110,642 109,989 Equity settled share based payments 32,299 94,697 Other 134,777 102,616 1,410,977 1,467,608 Non-Executive Directors fees (i) 162,500 250,000 Consulting and professional fees (ii) 473,489 381,339 Legal fees 359,282 410,647 Operating lease rentals 132,565 137,297 Depreciation office assets 61,029 32,207 Other expenses 283,529 416,473 Expense recovery (iii) (943,777) (1,078,432) 1,939,594 2,017,139 (i) (ii) (iii) The 31 December 2015 non-executive directors fees include shares worth 100,000 issued to four non-executive directors, which was approved at the Annual General Meeting held on 25 November 2015. Consulting and professional fees include audit fees, business development expenditure, debt refinancing costs and investor relation fees. The expense recoveries represent costs, including time spent by the Consolidated Entity s employees on exploration and production interests, which get recharged to the applicable exploration and production interests. ABN 55 063 613 730 Page 16 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 6. Finance Income / Costs Finance Income For the 6 months ended 31 December 2015 Interest income 20,967 115,229 Finance Costs Interest expense 255,636 13,552 Notional interest from unwinding discount on restoration provision 47,164 50,346 302,800 63,898 7. Income Tax The Group calculates the period income tax expense using the tax rate that would be applicable to expected total annual earnings. The major components of income tax expense in the interim consolidated statement of profit or loss are: Income tax (expense) / benefit For the 6 months ended 31 December 2015 Current income tax expense - - Adjustments recognised in the current period in relation to the current tax of prior years Deferred income tax (expense) / benefit related to the origination and reversal of deferred taxes Adjustment in respect of deferred income tax of prior years: decrease in DTA pertaining to R&D claim received - - (207,755) (508,022) (58,573) - Income tax (expense) / benefit recognised in the statement of profit or loss (266,328) (508,022) The Group s net deferred tax asset at 31 December is 6,016,673. (30 June : 6,283,000) The net deferred tax asset is recognised based on the assumption that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised in future. 8. Trade and Other Receivables 31 December 30 June Trade receivables 2,796,452 2,774,737 Interest receivable 3,470 1,517 Other receivables 197,146 259,727 Joint Operation Receivable 18,211-3,015,279 3,035,982 ABN 55 063 613 730 Page 17 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 9. Property Plant and Equipment Land Plant & Equipment Camp & Accessories Furniture & Fittings IT Hardware & Software Cost 1,437,916 253,750 823,495 517,221 297,883 3,330,265 Accumulated depreciation (180,105) (124,397) (516,440) (221,923) (49,723) (1,092,588) Net carrying amount at 31 December Total 1,257,810 129,353 307,055 295,299 248,160 2,237,677, Reconciliation: Opening net carrying amount at 1 July 1,303,042 130,866 554,292 197,960-2,186,160 Additions at cost - 42,329 - - 176,331 218,660 Retirements (1,423) - - - (1,423) Transfers between asset classes - (22,488) (208,264) 123,923 106,829 - Depreciation (45,233) (19,930) (38,973) (26,584) (34,999) (165,719) Closing net carrying amount at 31 December 1,257,810 129,354 307,055 295,299 248,161 2,237,677 Land Plant & Equipment Camp & Accessories Furniture, Fittings & Improvements Cost 1,437,916 344,967 1,100,011 319,990 3,202,884 Accumulated depreciation (134,874) (214,101) (545,719) (122,030) (1,016,724) Net carrying amount at 30 June Reconciliation: Total 1,303,042 130,866 554,292 197,960 2,186,160, Opening net carrying amount at 1 July 2015 1,392,998 67,729 386,025 93,803 1,940,555 Additions at cost - 133,991 221,007 146,779 501,777 Depreciation (89,956) (70,854) (52,740) (42,622) (256,172) Closing net carrying amount at 30 June 1,303,042 130,866 554,292 197,960 2,186,160 ABN 55 063 613 730 Page 18 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 10. Oil and Gas Properties Red Gully Processing Facility Development Projects in Development Cost 32,283,464 21,798,847 617,359 54,699,670 Accumulated depreciation and amortisation Net carrying amount at 31 December Total (8,167,062) (12,754,007) - (20,921,069) 24,116,402 9,044,840 617,359 33,778,601 Reconciliation: Opening net carrying amount at 1 July 25,390,732 10,484,414 149,149 36,024,295 Additions / improvements 135,189-556,334 691,523 Transfers 88,124 - (88,124) - Depreciation (1,497,643) - - (1,497,643) Amortisation - (1,439,574) - (1,439,574) Closing net carrying amount at 31 December 24,116,402 9,044,840 617,359 33,778,601 Cost 32,060,151 21,798,847 149,149 61,202,685 Accumulated depreciation and amortisation Net carrying amount at 30 June (6,669,419) (11,314,433) - (17,983,852) 25,390,732 10,484,414 149,149 36,024,295 Reconciliation: Opening net carrying amount at 1 July 2015 28,021,430 21,851,669-49,873,099 Additions / improvements 397,156-149,149 546,305 Rehabilitation provision adjustments - 18,883-18,883 Depreciation (3,027,854) - - (3,027,854) Amortisation - (4,191,599) - (4,191,599) Impairment - (7,194,539) - (7,194,539) Closing net carrying amount at 30 June 25,390,732 10,484,414 149,149 36,024,295 At 31 December the Group assessed whether an indicator of impairment existed. Indicators of impairment include changes in future selling prices, future costs and reserves. As a result, the recoverable amount of the Red Gully cash generating unit was formally estimated. Based on the estimated recoverable amount no impairment was identified. ABN 55 063 613 730 Page 19 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 10. Oil and Gas Properties (Continued) The estimated future cash flows for the value-in-use calculation are based on estimates, the most significant of which are the 2P hydrocarbon reserves, future production profiles, commodity prices (contracted and uncontracted), operating costs and any future development costs necessary to produce the reserves. The following assumptions were used in the assessment of the cash generating unit s recoverable amount: The 2P hydrocarbon reserves per the July reserve assessment performed by Valmap Pty Ltd. A consistent post-tax discount rate of 9.5% at 30 June and 31 December (Pre-tax discount rate of 11.3%. (30 June : 12.0%)) An inflation rate of 2.0%. (30 June : 2.0%) Gas prices are based on a combination of current contractual agreements and longer term observable price forecasts Foreign exchange rates were based on the forward exchange rates at the date of assessment. The AUD:USD forward curve range applied was A0.73:US1 to A0.69:US1 over the period 2017 to 2023 (30 June : 0.76:US1 to A0.71:US1) Brent crude oil prices were derived from forward price curves and long-term views of global supply and demand, building upon past experience of the industry and consistent with external sources. The oil price forward curve range applied was US52/bbl to US59/bbl (30 June : US49/bbl to US64/bbl) Operating and Capital costs are based on the Group s latest budget and forecast. 11. Exploration and Evaluation Assets 6 months ended 31 Dec 12 months ended 30 June Opening net carrying amount at 1 July 29,923,195 15,724,414 Additions exploration and evaluation expenditure 3,442,517 14,498,782 Farm-out of interests in exploration permits (150,000) (300,000) Exploration impairment losses / write-downs - - Closing net carrying amount 33,215,712 29,923,195 On 2 September 2015 the Group completed a farm-out agreement covering its South Perth Basin acreage. Under the agreement, Pilot Energy earned 60 per cent equity in the Group s South Perth Basin permits EP 416 and EP 480. Pilot Energy has assumed operatorship and the Group will maintain a 40 per cent nonoperated interest. Pilot Energy has paid the Group 450,000 in three instalments. The first two instalments were received during the period ended 30 June, with the final instalment received in November. The Department of Mine and Petroleum formally approved the transfers on 10 February. The recoverability of the carrying amount of exploration expenditure assets is dependent upon the successful commercialisation or disposal of the assets at amounts in excess of their current values. Ultimate recoupment of this expenditure is dependent upon the continuance of the Group s right to tenure of the areas of interest and the discovery of commercially viable oil and gas reserves, their successful development and exploitation, or, alternatively, sale of the respective areas of interest at an amount at least equal to book value. Impairment losses are provided when the carrying amount exceeds the recoverable amount. Exploration expenditure is written off and any related impairment losses released when permits are relinquished or disposed. ABN 55 063 613 730 Page 20 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 12. Trade and Other Payables 31 December 30 June Trade payables 877,975 961,407 Other payables (i) 1,373,508 945,005 2,251,483 1,906,412 (i) The increase in the other payables balance at 31 December pertains mainly to exploratory drilling expense accruals in respect off the Red Gully North-1 well in the EP 389 exploration permit. 13. Provisions Current 6 months ended 31 Dec 12 months ended 30 June Employee Benefits 184,667 146,193 Non-Current Restoration and rehabilitation 3,516,006 3,468,842 Opening balance at 1 July 3,468,842 3,350,848 Adjustment to provision - 18,883 Notional interest from unwinding discount on restoration provision 47,164 99,111 Closing balance 3,516,006 3,468,842 The provision is an estimate of the expected restoration and rehabilitation costs in 2026, discounted to present value terms, to rehabilitate the Red Gully Processing Facility site and production wells. Adjustments to the provision are made at each reporting date, influenced by changes in inflation rates, discount rates and estimated cash outflows. ABN 55 063 613 730 Page 21 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 14. Non-Interest Bearing Liabilities 31 December 30 June Secured long-term loan - 14,920,611 Shareholder loan 145,781 145,781 Net carrying amount at end of the period 145,781 15,066,392 During 2015, ERM Pty Limited (ERM) provided an interest-free loan, secured by a second-ranking charge over Empire s and Empire Oil Company (WA) Limited s land and other property, which was repayable at the latest on 31 August. On 30 June, Empire Oil & Gas NL announced that Empire and Mineral Resources Limited had executed a binding term sheet in relation to a new working capital facility to be used to refinance the ERM debt obligation. On 11 August, Empire and Mineral Resources Limited executed final documentation in relation to the 15.1 million revolving working capital facility to refinance the ERM debt obligation. The facility was drawn down on 12 August, extinguishing the liability to ERM. Details of the new facility are detailed in Note 15, as the loan is interest bearing. The shareholder loan represents an interest-free and unsecured loan from Wharf Resources Plc, a 10% shareholder in Cattamarra Farms Pty Ltd, for the purchase of land on which the Red Gully Processing Facility and production wells are situated. 15. Interest Bearing Liabilities 31 December 30 June Secured long-term loan 15,100,000 - Net carrying amount at end of the period 15,100,000 - On 11 August, Empire and Mineral Resources Limited executed final documentation in relation to the 15.1 million revolving working capital facility to refinance the ERM debt obligation. The facility was drawn down on 12 August, extinguishing the liability to ERM. The loan is secured by as first ranking security comprising mortgages over EP 389, PL 18 and PL 19 and an unsecured guarantee by Empire. The loan accrues interest at Bank Bill Swap Rate plus 5% per annum and has a term of 3 years. 16. Issued Capital a. Authorised shares 31 December 30 June Ordinary Shares Fully Paid 95,857,327 95,857,327 ABN 55 063 613 730 Page 22 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 16. Issued Capital (Continued) 31 December 30 June b. Movement in ordinary share capital Number of Shares Number of Shares Beginning of the financial year 102,233,536 95,769,990 10,204,953,594 95,669,990 Issued during the year: 100 : 1 share consolidation (i) - - (10,102,902,542) - Shares issued to directors - - 182,484 100,000 102,233,536 95,769,990 102,233,536 95,769,990 Shares issued to employee share trust 171,453 87,337 171,453 87,337 102,404,989 95,857,327 102,404,989 95,857,327 (i) A 100 to 1 share consolidation of Empire Oil & Gas NL shares was completed on 8 December 2015. 31 December 30 June c. Treasury shares Number of Shares Number of Shares Beginning of the financial period 171,453 87,337 - - Acquired during the period - - 171,453 87,337 End of the financial period 171,453 87,337 171,453 87,337 The employee share rights issued during the prior period, fully vested on 23 September. 31 December 30 June 31 December 30 June d. Movement in share options Number of Listed Options Number of Employee Options Beginning of the financial period 7,853,059-1,720,000 172,000,000 Issued during the period - - - - 7,853,059 785,248,011 1,720,000 172,000,000 100 : 1 share consolidation(i) - (777,394,952) - (170,280,000) End of the financial period 7,853,059 7,853,059 1,720,000 1,720,000 (i) A 100 to 1 share consolidation of Empire Oil & Gas NL shares was completed on 8 December 2015. No options were exercised or lapsed during the period (31 December 2015: nil) ABN 55 063 613 730 Page 23 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 16. Issued Capital (Continued) The range of exercise prices for the employee options outstanding at 31 December are 2 to 7. The exercise prices were adjusted from 2 to 7 cents as at 30 June 2015 to 2 to 7, reflecting the 100 to 1 share consolidation during the period ended 31 December 2015. The expiry date of the 1,720,000 employee options range from 5 May 2019 to 19 April 2020. The 7,853,059 listed options were issued as part of the entitlement offer completed during the year ended 30 June 2015. The exercise price of the listed options is 0.90, adjusted from 0.9 cents as a result of the 100 to 1 share consolidation, and the options are exercisable on or before 28 April 2018. A further 7,500,000 unlisted options were issues to Mineral Resources Limited as part of the debt refinancing announced in August. These options have an exercise price of 0.50 and are exercisable on or before 11 August 2018. 17. Reserves Share Option Reserve The share option reserve of 4,020,658 (30 June : 3,988,359) reflects the cost of share related sharebased payments, based on the fair value of options issued. The reserve comprises the credit to equity for equity-settled share-based payment arrangements under AASB 2 Share-based payments. The standard requires that the expense be charged to the profit and loss component of the statement of comprehensive income, while a credit needs to be raised against equity over the vesting period. 18. Segment Information The Group operates in only one business and geographical segment being predominantly in the area of oil and gas exploration, development and production in Western Australia. The Group considers its business operation in oil and gas exploration, development and production to be its primary and only reporting segment. 19. Group Structure and Joint Operations On 2 September 2015 the Group completed a farm-out agreement covering its South Perth Basin acreage. Under the agreement, Pilot Energy will earn 60 per cent equity in the Group s South Perth Basin permits EP 416 and EP 480. Pilot Energy will also assume operatorship and the Group will maintain a 40 per cent non-operated interest. Pilot Energy will pay the Group a total of 450,000 in three instalments. The Department of Mines and Petroleum formally approved the transfers on 10 February. The final instalment has been received during the period ended 31 December. ABN 55 063 613 730 Page 24 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December 20. Fair Value Measurement of Financial Instruments The directors consider that the carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair value. The fair values of the financial assets and financial liabilities are determined as follows: the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and the fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis. 21. Subsequent Events There have been no other events subsequent to reporting date which would have a material effect on the Group's financial statements as at 31 December. 22. Commitments and Contingencies Contingencies There has been no material change to the contingent assets and liabilities as disclosed in the most recent annual report. Commitments Exploration Commitments The Group has certain commitments to meet minimum expenditure requirements on the exploration and evaluation assets it has an interest in. Outstanding exploration commitments are as follows: 31 December 30 June Not later than one year 8,866,000 9,230,000 Later than one year and not later than five years 23,586,000 23,586,000 Greater than five years - - 32,452,000 32,816,000 The Group has certain commitments to meet minimum expenditure requirements on the exploration and evaluation assets it has an interest in. These obligations may vary over time depending on the Group's exploration programme and movements. The obligations are also subject to variation by regulation, joint venturing or relinquishing some of the relevant tenements. The Group is considering options to meet its full contracted expenditure commitments. These include: a) Negotiating with government on revised work programs and extensions of licences; b) Considering Joint Venture partners to enable it to meet required exploration commitments, in exchange for an interest in the tenements; and c) Considering other alternative funding options including equity funding options. ABN 55 063 613 730 Page 25 of 29
22. Commitments and Contingencies (Continued) Lease Expenditure Commitments Operating leases (non-cancellable): 31 December 30 June Not later than one year 165,841 244,382 Later than one year and not later than five years 5,031 40,730 Greater than five years - - Aggregate lease expenditure contracted for at reporting date 170,872 285,112 The lease commitment relates to the office lease at 229 Stirling Highway, Claremont, which expires on 31 August 2017. Hire Purchase Commitments There has been no material change to the hire purchase commitments as disclosed in the most recent annual report. ABN 55 063 613 730 Page 26 of 29
Notes to the Consolidated Financial Statements For the 6 months ended 31 December Directors' Declaration In accordance with a resolution of the Directors of Empire Oil & Gas NL, I state that: In the opinion of the Directors (a) the Financial Statements and Notes of the Group for the half-year ended 31 December are in accordance with the Corporations Act 2001; including: (i) giving a true and fair view of the Group s Financial Position as at 31 December and of its performance for the half-year ended on that date; and (ii) complying with Accounting Standard AASB 134 ing and the Corporations Regulations 2001. (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. On Behalf of the Board Antonino Mario (Tony) Iannello Chairman and Non-Executive Director Perth, 14 March 2017 ABN 55 063 613 730 Page 27 of 29
Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au To the members of Empire Oil & Gas NL Report on the Half-Year Financial Report We have reviewed the accompanying half-year financial report of Empire Oil & Gas NL, which comprises the condensed statement of financial position as at 31 December, the condensed statement of comprehensive income, condensed statement of changes in equity and condensed statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting and other explanatory information, and the directors declaration of the consolidated entity comprising the company and the entities it controlled at the half-year end or from time to time during the half-year. Directors Responsibility for the Half-Year Financial Report The directors of the company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity s financial position as at 31 December and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As the auditor of Empire Oil & Gas NL and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report. A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Independence In conducting our review, we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor s Independence Declaration, a copy of which is included in the Director s Report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation RC:KW:EMPIRE:049