We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for real-time alerts, custom portfolio, and market movers
| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| I3 Energy Plc | LSE:I3E | London | Ordinary Share | GB00BDHXPJ60 | ORD 0.01P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -0.10 | -0.90% | 11.00 | 10.90 | 10.96 | 11.14 | 10.62 | 10.98 | 4,987,735 | 16:35:09 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Crude Petroleum & Natural Gs | 208.44M | 41.95M | 0.0349 | 3.14 | 131.73M |
From Apr 2021 to Apr 2024
TIDMI3E
RNS Number : 3877A
i3 Energy PLC
01 June 2021
1 June 2021
i3 Energy plc
("i3", "i3 Energy", or the "Company")
Final Results for the year ended 31 December 2020
i3 Energy plc (AIM:I3E) (TSX:ITE), an independent oil and gas company with assets and operations in the UK and Canada, is pleased to announce the audited results for the year ended 31 December 2020. A copy of the Company's financial statements will be posted to shareholders and made available shortly on the Company's website at https://i3.energy together with a Notice of Annual General Meeting ("AGM"). The AGM will be held at 11:00 am BST on 30(th) June 2021 at the offices of W H Ireland at 24 Martin Lane, London, EC4R0DR.
Hot Features
Premium
CANADA UK AND CORPORATE
------------------------------------------------ ---------------------
Completed 3 September GAIN ACQUISITION SERENITY Counterparty negotiations
2020 ongoing
Completed 30 TOSCANA ACQUISITION GBP11.7 MILLION Profit after tax
October 2020
Total 2020 Revenue GBP13 MILLION 3.78 AND 3.46 Basic and diluted
PENCE EPS
Production acquisitions 9,000+ BOEPD GBP29 MILLION Equity raised
2P reserve addition 58 MMBOE 1H 2019 LOAN Aligned to i3's
NOTES transformation
Leasehold position 497k ACRES TSX:ITE Secondary listing
in Toronto
Net production 467 2021 ONWARD Dividend distributions
wells of up to 30% of
FCF
Highlights and Outlook
-- Obtained a corporate foothold in Western Canadian Sedimentary Basin ("WCSB") production assets and management team through a debt acquisition of Toscana Energy Income Corporation ("Toscana" or "TEIC") and entry into an Option agreement to acquire all issued and outstanding shares of TEIC
-- i3 Energy plc ("i3") paid CAD3.4 million (c.USD2.5 million), half in March 2020 and half at end-December, to acquire all of TEIC's outstanding debt and to assume the role of senior-secured lender to Toscana, which was in default under its CAD28 million (c.USD21 million) senior and subordinated credit facilities and was conducting a competitive strategic review process; i3 additionally issued 4,399,224 ordinary shares to TEIC shareholders at completion of the TEIC acquisition, concluded via a Plan of Arrangement in October
-- i3 acquired TEIC's 2019 year-end 2P reserves of 4.65 MMboe (53% oil, 47% gas) with a reserve life index of 14.7 years, Q4 2019 production of 1,065 boepd at USD2,661/boepd and USD0.61/boe 2P
-- Built on WCSB position with major acquisition of producing assets and infrastructure in Alberta and Saskatchewan from Gain Energy Ltd. ("Gain") contemporaneous with i3 entering an onward sale of Gain's Saskatchewan assets to Harvard Resources Inc ("Harvard"), leaving i3 with all of Gain's Alberta assets (the "Gain Assets") post completion in September 2020
-- The Gain Assets were acquired for CAD35 million (USD26 million) and provided i3 with approximately 9,000 boepd of long-life, low-decline production and 54 MMboe 2P reserves at highly attractive acquisition metrics of 1.1x next twelve months ("NTM") net operating income ("NOI" = revenue less royalties, opex and transportation and processing), USD2,876/boepd, and USD0.48/boe 2P
-- Suspended trading on AIM to separately conclude the reverse take-overs ("RTO") of the Gain Assets and Toscana. i3 entered into a Management Services Agreement with Toscana to manage i3's enlarged Canadian portfolio and staff base between the closing of the Gain Asset RTO and the conclusion of its Plan of Arrangement with TEIC
-- Placed 581,147,255 new ordinary shares at 5 pence per share for total fundraising of GBP29 million to acquire the Gain Assets and announced it would issue 75,184,252 options at an exercise price of 5 pence (subject to vesting conditions as disclosed in the Company's August AIM Readmission document) to staff and board of the enlarged group following its Readmission to AIM and the completion of the Gain Asset and Toscana transactions
-- Concluded the Gain Asset and Toscana transactions in September and October, respectively, with the Company being listed thereafter on both AIM and the TSX
-- Completed key amendments to i3's May 2019 Loan Notes, replacing obligations to enter a development funding facility for the Company's UK assets with obligations to achieve certain production and funding levels during 2020 and 2021 (these replacement obligations have been fully satisfied through i3's funding and acquisition of the Gain Assets). In exchange for the amendment, all 55,981,044 warrants associated with the May 2019 Loan Notes had their exercise price reset to GBP0.0001 per share, and the loan note amendments also required the repricing of 16,157,612 i3 management and director options to GBP0.0001 per share.
-- Progressed farm-down process for Serenity and Liberator in the UK North Sea and conducted a site survey over future appraisal and potential development well locations.
Post Period and Outlook
The Company announced on 4 January 2021 that it had relinquished UK Continental Shelf ("UKCS") licence P.1987 as it was at the end of its two-year term and i3 had determined the contingent resources associated with the licence were sub-commercial on a stand-alone basis. i3 may re-apply for the licence in the future if it is justified following the appraisal of the prospective Liberator West and/or Minos High areas, or after further drilling at its Serenity discovery. The relinquishment results in significant savings in licence fees and has no impact on the Company's P.2358 licence which contains the vast majority of i3's resource potential in the UK North Sea.
Also on 4 January, the Company announced that it had replaced one of its brokers, Mirabaud Securities, with Tennyson Securities, the new home of the oil and gas corporate finance, equity research and sales team that departed Mirabaud Securities.
On 10 January, the Company issued options over a total of 13,166,358 ordinary shares to key staff that joined its Canadian subsidiary, i3 Energy Canada Ltd., following the acquisition of Gain's oil & gas assets. The options were issued in accordance with the rules of the Company's Employee Share Option Plan at an exercise price of GBP0.061 per share, the closing price on 8 January 2021. One-third of the options vested immediately, with a further one-third vesting in July 2021 if production exits at or above 9,000 boepd, and 100 per cent will vest if there is an addition of 5,000 boepd or, alternatively, 25 MMboe 2P reserves. The options will otherwise fully vest on the third anniversary.
On 10 January, the Company also issued options over a total of 75,184,252 ordinary shares as described in the Gain-related Readmission document released on 11 August 2020. The options were issued in accordance with the rules of the Company's Employee Share Option Plan at an exercise price of GBP0.05 per share. Options issued to employees of i3 Canada contain the same vesting conditions as the GBP0.061 options described in the paragraph above. Of the options issued to employees of i3 North Sea Limited, one-third of the options vested immediately, with a further one-third vesting at the spud of the next Serenity / Liberator appraisal well, and 100 per cent will vest upon a third-party reserve auditor attributing 25 MMbbls 2P post drilling of a Serenity / Liberator appraisal well. The options will otherwise fully vest on the third anniversary. Of the options issued to the executive and non-executive directors and one corporate employee, one-third of the options vested immediately, with a further one-third vesting upon the earlier of spud of the next Serenity or Liberator appraisal well; and July 2021 production exits being at or above 9,000 boepd, and 100% will vest upon the earlier of a third-party reserve auditor attributing 25 MMbbls 2P post drilling of a Serenity or Liberator appraisal well and the addition of 5,000 boepd or 25 MMboe 2P reserves. The options will otherwise fully vest on the third anniversary.
On 23 February, the Company announced that production between November 2020 and January 2021 had remained predictably stable at 9,150 boepd (41% liquids), with expected 2021 net operating income ("NOI" = revenue minus royalties, opex, transportation and processing) of CAD35 million (USD27.6 million). i3 stated on 5 May that Q1 2021 production had been 8,856 boepd (41% liquids), outperforming expectations, and updating its 2021 NOI forecast to CAD38 million (USD31 million).
Also on 23 February, i3 announced that in December 2020, it had completed an 80 hour flow-test on a horizontal Falher formation well located on its Noel acreage in Northeast British Columbia, Canada. The flow-test ran for a sustained period at 4,200 mcf/d (700 boepd) on a 1/4" choke. The Company has reiterated on 5 May that the Noel well is expected to be brought on production at approximately 500 boepd during the second quarter of 2021, following tie-in.
On 5 May, the Company announced that during February and early March, the following oil and propane hedges were executed:
Commodity Period bbl/d Type CAD/bbl
Crude 1/Apr/21 31/Dec/21 200 SWAP $73.70
---------- ----------- ------ ----- --------
Crude 1/Apr/21 31/Dec/21 200 SWAP $75.20
---------- ----------- ------ ----- --------
Crude 1/Mar/21 31/Dec/21 350 SWAP $64.50
---------- ----------- ------ ----- --------
Propane 1/Apr/21 31/Dec/21 200 SWAP $32.45
---------- ----------- ------ ----- --------
During March and April, a number of natural gas swaps were executed for the period between 1 June to 31 October 2021, totalling volumes of 21.4 MMscfd at an average price of CAD2.83/mcf. There were no commodity hedges in place in 2020.
In May the Company provided an update on its continued expansion into the prolific Clearwater play in Alberta, Canada. In February and March of 2021, i3 took advantage of winter access to re-enter three suspended gas wells to confirm the presence of oil within the 148 km(2) of historically gas-focused Clearwater acreage it had acquired as part of its 2020 purchase of Toscana. Encouragingly, oil samples were recovered from multiple intervals in two of the three wells, and i3 has commenced planning for an appraisal and development drilling programme to be implemented during the winter drill window in either Q4 2021 or Q1 2022. Further, the Company acquired a 15-year lease on 18 km(2) of land in the emerging Cadotte area through an Alberta Crown Land sale for under USD300k, and also entered a farm-in agreement that could earn it up to net 29 km(2) of land (for its 50% working interest) through the drilling of up to 9 wells at a net cost of USD7 million. Each well is expected to have a payout between one and two years and an initial production rate of approximately 150 bopd following start-up. The first farmout well is expected to be spud in Q2 2021.
On 17 May, i3 announced that it had successfully restructured legacy contracts and agreements for equipment, oil field services, and warrants with Baker Hughes, a GE Company, and GE Oil & Gas Limited (collectively referred to as "BHGE" hereafter). In summary, the remainder of a GBP5.8 million contract for subsea trees and wellheads was cancelled, 5,277,045 warrants had an exercise price reduction to GBP0.0001 per share (the "Warrant Shares"), and an outstanding contingent payment for GBP3 million in oil field services and equipment that becomes payable at such time as the Company receives consideration from any sale or farm-down of its Serenity or Liberator assets will be reduced by the exercise value of the Warrant Shares, the market value of the Warrant Shares from time to time, all dividends received by BHGE associated with the Warrant Shares, and certain payments to be made to BHGE across 2021 totalling GBP374,383. The purpose of this restructuring was to enable i3 to become a dividend payer, as certain conditions of the abovementioned contracts prevented it from reducing its share premium account - a required step in order for i3 to effect dividend distributions to its shareholders. Also announced on 17 May was i3's confirmation that it had received consent from all other pertinent creditors to proceed with the proposed reduction of its share premium account, as described below.
On 18 May, i3 affirmed that its Board considers it highly desirable that the Company has the maximum flexibility to consider the payment of dividends and otherwise return value to shareholders. The Company is generally precluded, however, from the payment of any dividends or other distributions or the redemption or buy-back of its shares in the absence of sufficient distributable reserves. The Company's share premium account currently stands at approximately GBP63 million. As at 28 February 2021, the Company had a retained earnings deficit of approximately GBP11 million. i3 proposes that its share premium account be cancelled. The proposed reduction of capital (the "Capital Reduction") is intended to eliminate the retained earnings deficit and create distributable reserves equal to the balance. i3 has called a Notice of General Meeting of its shareholders and recommends that they vote in favour of the proposed Capital Reduction. If the proposed cancellation of the Company's share premium account is approved by Shareholders at the General Meeting, it will be subject to the scrutiny of, and confirmation by, the UK High Court, which will take due account of the protection of creditors and, subject to that confirmation and registration by the Registrar of Companies in England and Wales of the order of the High Court, is expected to take effect on or around 1 July 2021. A Capital Reduction approved by i3's shareholders and the High Court will allow it to pay the CAD2 million (GBP1.16 million) maiden dividend announced on 31 March, and to enable its intention to make regular, half-yearly dividend payments in the future.
On 31 May, the Company announced that it had exercised a Right of First Refusal ("ROFR") to acquire the entire 49.5% operated interest held by Anegada Oil Corporation in its South Simonette property ("Anegada Interest"), taking i3 from a 49.5% non-operated interest to a 99% operated interest in the asset. Post acquisition and as Operator, i3 will bring two suspended wells back onto production in July at a total estimated cost of USD 1.16 million (USD 0.58 million for each of i3's current and acquired Anegada Interest) by installing gas lift in one and repairing an electrical submersible pump in the other, resulting in an expected increase to i3's corporate production of 720 boepd (41% oil, 4% NGLs, 55% gas) and NTM NOI of USD 5.2 million; effectively increasing the Company's exposure to oil by 20% and expected NTM NOI by over 16%. The combined rate associated with the Anegada Interest for the three wells is estimated to be 430 boepd. The 2P reserves and associated valuation estimate for the Anegada Interest are 4.9 mmboe and USD 30.9 million, respectively, based on GLJ's YE 2020 reserves evaluation, reflecting the high-impact potential oil resource identified in the Lower Montney formation at South Simonette. With all three wells on production, the forecasted next twelve months net operating income for the Anegada Interest is estimated at USD 3.2 million. At a total cost to i3 of USD 4.78 million for the acquisition and two well reactivation in July, the Company is acquiring the Anegada Interest and reinstating production for 1.49x NTM forecasted NOI of USD 3.2 million, USD 11,111/boepd, and USD 0.95/boe (2P), materially below the averages since Q4 2020 for similar Western Canadian transactions of 4.53x NTM NOI, USD 32,067/boepd, and USD 5.61/boe. For i3's already-owned 49.5% South Simonette interest (and incremental to i3's current share of production from the existing producing well) the reactivation of the two wells in July is estimated to increase i3's production by 290 boepd and NTM NOI by USD 2.0 million. The Company deems this acquisition to be highly strategic to its Montney acreage where it now has a 99% operated interest at South Simonette, a 100% operated interest at North Simonette, and gross overriding royalty interests of 5% to 15% across a 41 km(2) area of the Middle Montney interval between its North and South Simonette acreage. If fully exploited, i3 believes that North and South Simonette could deliver peak net production of approximately 26,000 boepd. The Anegada interest has a very healthy LLR of 46.1.
Negotiations continue with multiple potential farm-in partners for the Serenity field appraisal drilling programme.
The Company's focus for the remainder of 2021 will be on 4 key areas:
1 The growth of i3's Canadian business by way of operational excellence, capital deployment and strategic upsizing in core areas;
2 The farmout of its UK licences to conduct further appraisal drilling at Serenity and/or Liberator;
3 Dividend distributions to its shareholders of up to 30% of free cash flow and to return value to stakeholders as it is generated; and
4 Conducting its operations safely and in an environmentally secure manner
The Company continuously evaluates opportunities to strengthen its balance sheet whilst maintaining tight control of its costs and working capital position.
Majid Shafiq, CEO of i3 Energy plc, commented:
"2020 truly was a transformational year for i3. We entered the year on the back of a recently completed three well drilling programme on our UK licenses. Drilling on the Liberator discovery was disappointing but was offset by the discovery of the Serenity oil field. The beginning of the year was spent analysing the results and updating our geological models. We remain confident in the potential in the Liberator field and the Minos High prospect to the west, however we decided to focus our initial appraisal efforts on the Serenity field and commenced a farm-out process, which we hope to conclude in the near future and then commence planning for appraisal drilling to delineate the field. The first few months of 2020 saw two massive market dislocations in the form of an unprecedented collapse in the oil price due to the breakdown of market sharing arrangements between the major national oil producers and the demand destruction caused by the advent of the global coronavirus pandemic. Amid this turmoil, we recognised a time-limited opportunity to acquire long-life production assets in Canada at market lows and set about sourcing deals which could be financed through the UK capital markets. We exited October having re-negotiated our existing debt obligations, completed two material transactions in Canada, conducted two reverse takeover re-admissions to the AIM market in London, listed the company on the Toronto Stock Exchange and financed these deals with an oversubscribed equity placing in extremely difficult market conditions. The remainder of the year was spent
aggregating our UK business, the Toscana corporate transaction and the asset base acquired from Gain Energy into one organisational structure. We emerged from 2020 as a cash-flow generating production business with a diverse portfolio of assets, able to support a regular dividend and with multiple catalysts for share price appreciation. Following shareholder and court approval of our balance sheet re-structuring we will soon pay our maiden dividend and commence a cycle of regular cash returns to our shareholders. We see tremendous potential for growth, in Canada both organically through exploitation of untapped potential in our current asset base and through accretive acquisitions and in the UK through the drill bit. We also recognise that climate change is having and will have an increasing impact on the way we conduct our business and our ESG strategy will evolve as we progress through the energy transition to ensure we remain relevant to our shareholders and stakeholders. Finally, I would like to pay tribute to our staff both in the UK and Canada, who worked tirelessly through very difficult circumstances last year to transform the company and bring about a massive change in its circumstances and prospects."
Enquiries:
i3 Energy plc
Majid Shafiq (CEO) / Graham Heath c/o Camarco
(CFO) Tel: +44 (0) 203 781 8331
WH Ireland Limited (Nomad and Joint
Broker)
James Joyce, James Sinclair-Ford Tel: +44 (0) 207 220 1666
Canaccord Genuity Limited (Joint
Broker)
Henry Fitzgerald- O'Connor, James Tel: +44 (0) 207 523 8000
Asensio
Tennyson Securities (Joint Broker) Tel: +44 (0) 207 186 9030
Peter Krens
Camarco
Owen Roberts, James Crothers, Violet Tel: +44 (0) 203 781 8331
Wilson
Notes to Editors:
i3 Energy is an oil and gas Company with a low cost, diversified, growing production base in Canada's most prolific hydrocarbon region, the Western Canadian Sedimentary Basin and appraisal assets in the North Sea with significant upside.
The Company is well positioned to deliver future growth through the optimisation of its existing 100% owned asset base and the acquisition of long life, low decline conventional production assets.
i3 is dedicated to responsible corporate practices and the environment, and places high value on adhering to strong Environmental, Social and Governance ("ESG") practices. i3 is proud of its performance to date as a responsible steward of the environment, people, and capital management. The Company is committed to maintaining an ESG strategy, which has broader implications to long-term value creation, as these benefits extend beyond regulatory requirements.
i3 Energy is listed on the AIM market of the London Stock Exchange under the symbol I3E and on the Toronto Stock Exchange under the symbol ITE. For further information on i3 Energy please visit https://i3.energy/
The information contained within this announcement is deemed by the Company to constitute inside information under the Market Abuse Regulation (EU) No. 596/2014.
Chairperson's and Chief Executive's Statement
Overview of the year
i3 is pleased with the results of 2020 given how the year began for the Company. Mixed drilling results from its 100% working interest three-well drilling programme in the UK North Sea at Liberator and Serenity, followed by a price war amongst commodity super-powers whilst the world entered the COVID pandemic, saw oil demand destruction that drove the West Texas Intermediate crude benchmark into negative territory for the first time in history. For a non-revenue generating company with a dwindling cash balance in a market largely closed to oil & gas financings, i3 started 2020 in uncomfortable territory. Recognising an opportunity to acquire production assets on very attractive metrics in the market depression that ensued, i3 employed creative acquisition, divestment, and funding strategies to both stabilise and grow the business.
i3 had an excellent drilling result at its Serenity prospect in H2 2019. The typical market reaction that would be expected from such a result was offset by the unexpectedly poor results we had at our wells in the much smaller Liberator Phase I area. Not having the financial capacity to conduct further drilling activity on a 100% basis, shortly into 2020 the Company began seeking farm-in partners. This process was all but halted as oil & gas companies shelved capital programs in light of unprecedented world events. A farm-down and resulting equity raise to shore up the Company's balance sheet and to fund its portion of a Serenity appraisal was unlikely to happen on a timeline that would see i3 survive. To offset the concentration risk of our UK appraisal portfolio - a risk exacerbated by a lack of capital markets appetite to fund appraisal-style portfolios during times of sector uncertainty - i3 urgently required a low-cost, low-decline production portfolio that would remain cash generative under distressed market conditions. It became critical that the Company acquire assets that would provide internal free cash flow to grow the company and provide near-term returns to our shareholders, while balancing the geological, project life cycle, project capital intensity and capital market risks it faced as a UK-focused entity with a pre-production asset portfolio.
After considering several global oil and gas basins and specific opportunities, we concluded that the Western Canadian Sedimentary Basin provided a time-limited opportunity to build a strong production portfolio on superior metrics. A short to medium term lack of infrastructure to transport Canadian oil and gas to international markets, in combination with depressed gas prices in North America due to the growth in gas supply from shale drilling, had resulted in many small, overleveraged producers reaching a financial breaking point. Many of these companies held quality production assets with solid growth potential, but burdensome debt and closed equity capital markets left them unable to fund maintenance opex or growth capex. Their assets were available on acquisition metrics we deemed to be highly attractive.
In March 2020, i3 announced that it had acquired all of the rights and interests in the senior-secured and subordinated debt of Toscana. As a result of accessing debt to acquire assets in a much stronger commodity environment, Toscana had struggled for some years and was in default under the terms of its debt facility agreements. i3 purchased Toscana's CAD28 million senior and junior debt facilities for a total of CAD3.4 million. At the same time, the Company announced its entry into an Option agreement with Toscana to acquire 100% of its issued share capital in exchange for 4,399,224 i3 ordinary shares. On 23 June 2020, i3 announced that it had exercised its Option with Toscana which, based on available published financial information at the time, constituted a reverse take-over under the AIM Rules for Companies. After later completing its transaction with Toscana at the end of October, i3's enlarged share capital was also listed on the TSX.
Toscana's strong management and operations teams and modest production and reserves base provided a foundation for i3's entry into Canada. As stated in March 2020, i3 intended to swiftly leverage the TEIC platform to execute an M&A driven growth strategy to build a large, low capital intensity, long-life production base in the WCSB. On 23 June 2020, with further detail on 6 July, i3 announced the planned acquisition of all the petroleum assets of Gain, a private Canadian company with assets in the WCSB for CAD80 million. Under the AIM Rules, the Gain transaction also constituted a reverse take-over, and at the Company's request its shares were suspended from trading on AIM until such time as i3 either published a "Readmission document" detailing the Gain transaction or provided confirmation that discussions had ceased. Across the following month, the executive tested institutional demand while considering the potential dilution of conducting a sizeable transaction against a poor sector backdrop and, partly to reduce dilution, on 7(th) August announced its intention to sell a portion of Gain's portfolio (those assets located in Saskatchewan), and complete a GBP 29 million equity fundraise to fund the balance . The sale of 1,050 boepd in Saskatchewan to Harvard for CAD45 million, representing approximately 7x NTM NOI, decreased the Company's equity requirement by almost 50% while seeing i3 retain the majority of the Gain portfolio representing 83% of the NTM NOI, 88% of the production, 79% of the PDP reserves, 87% of the 2P reserves, and 74% of the 2P NPV10. The Company is proud to have brought this complex transaction to completion, having acquired 54 MMboe 2P and over 9,000 boepd while raising equity capital equal to 5 times its market cap during a period of unrivalled difficulty for the oil sector.
i3 published its Gain-related Readmission document on 11 August and completed the Gain acquisition and back-to-back sale of Saskatchewan assets to Harvard on 3 September. Concurrently, i3 entered into a Management Services Agreement with Toscana to manage i3's enlarged staff base in Canada and the Gain Assets until the Toscana-related AIM Readmission, Plan of Arrangement to acquire TEIC, and i3's TSX listing concluded during the course of September and October. During one of the worst periods in our sector's history, i3 transformed itself into a self-funding going concern through the Toscana and Gain acquisitions, adding approximately 9,000 boepd and 58 MMboe of 2P reserves to its portfolio at approximately 1.0 times 2021 net operating income.
As stated at the time of these transactions, the Board and Management are focused on delivering consistent value to shareholders. i3 committed to becoming a dividend payer that distributes up to 30% of its free cash flow, and to protecting this commitment through a conservative hedging program. Each of these is well underway with our maiden dividend expected to be paid in July 2021 and a substantial portion of i3's expected 2021 production hedged to manage commodity price risk. Residual free cash flow above the dividend will be redeployed to acquire additional production assets conditional on the associated acquisition metrics competing with the organic returns achievable through the development of our proven undeveloped (PUD) and 2P inventory. A proportion of all incremental production will continue to be hedged in order to secure future cash flow, and the Company will remain commercial in monetizing assets when third-party interest warrants consideration.
Reflecting on i3's pre-2020 portfolio then, our team remains confident in its belief that the Serenity discovery holds a company-making resource, and we expect that the next appraisal drilling there will prove this premise.
Production Operations
Click on, or paste the following link into your web browser, to view Figure 1
http://www.rns-pdf.londonstockexchange.com/rns/3877A_1-2021-6-1.pdf
Note: The above figures are unaudited and demonstrate volumes in the month produced. They are based on a combination of the lease operating statements of Gain Energy Ltd., Firenze Energy Ltd. (the operating subsidiary of Toscana Energy Income Corporation), and i3 Energy Canada Ltd., and are intended to represent the monthly production attributed to i3 Energy plc's Canadian operations from the effective dates of each transaction consummated between these entities.
Following the closing of the Gain asset transaction on 4 September 2020 and the Toscana corporate transaction on 30 October 2020 our initial focus was the integration of these businesses in Canada and into i3 Energy plc. In parallel with that process, we immediately began a detailed review of the asset portfolio to identify production optimisation and cost reduction opportunities. We focussed on maintaining high uptime, minimising operating costs, optimising operated processing facilities and infrastructure and actively implementing high return workovers to offset natural production declines. These efforts managed to substantially increase aggregate average net production across H2 2020. The aggregate decline rate across the portfolio has been approximately half that predicted by the competent persons reports produced for the purposes of the 2020 reverse takeovers accompanying the acquisition of the assets, which is a testament to the quality of the assets in the portfolio and the dedication of our workforce. In parallel with operational activity, we also commenced a review of reservoir performance for the producing assets and identified a number of mature fields where redevelopment, particularly through the implementation of relatively low-cost secondary recovery projects could materially increase production and ultimate hydrocarbon recovery. These studies have advanced, and we hope to commence implementation of some of these projects in 2021, including tie-in of the Noel well in British Columbia which is expected to be onstream in the middle of 2021 at up to 500 boepd. Operating our assets in a safe and secure manner is fundamental to our business and during Q4 2020 we commenced the integration of the health and safety policies and procedures for the combined Gain and Toscana portfolio. There were thirteen routine regulatory government inspections during the fourth quarter all of which returned satisfactory results and all reportable HSE incidents were categorised as minor in nature apart from a release of produced water from the Y-Battery at Simonette, which was contained on the lease and subsequently remediated in Q1 2021.
Financial discipline
i3's 2020 equity fundraise to acquire its WCSB production portfolio didn't conclude until late Q3. Having entered 2020 with less than GBP1.2 million of net current assets demanded financial discipline, spend control and payables management across the year. Sizeable residual commitments from i3's 2019 drilling programme were renegotiated and extended (out to mid-2021 in some instances), with creditors being stern but creative in working with the Company. With the onset of appraisal delays at Serenity, i3's UK staff moved to half-time working while the farmout market softened, and corporate staff shifted focus towards securing a cash generative business in Canada.
i3 transformed itself into an oil and gas production company via complex asset and funding transactions concluded in late 2020. These were costly as the Company tried to balance frugality with timing and deal risk. Post completion, the simultaneous integration of numerous businesses - i3 UK, Toscana, and Gain's portfolio and staff - increased costs and expenses on a one-time basis.
With the portfolios and teams now integrated, we expect to bring future costs back in line with our peers in each jurisdiction.
Board changes
On 1 January 2020, David Knox, i3's Chairman since the Company's listing on AIM in 2017, took on significant additional responsibility as Chair of Snowy Hydro Limited, Australia's largest renewable energy provider. After nearly 3 years as the Chairperson of i3 Energy, he stepped down to ensure he had the necessary capacity to focus on this new role during a critical and trying time in Australia amidst unprecedented wildfires and environmental pressures.
Linda Beal became Interim Chairperson, with i3 expecting to conduct a formal search to replace David in due course.
On 8 December 2020, i3 appointed John Festival (a former Toscana board member) as a Non-executive Director of the Company.
Governance
The Board recognises its responsibility for the proper management of the Company and is committed to maintaining a high standard of corporate governance. The Directors also recognise the importance of sound corporate governance commensurate with the size and nature of the Company and the interests of its Shareholders. The Quoted Companies Alliance has published a set of corporate governance guidelines for AIM companies, which include a code of best practice comprising principles intended as a minimum standard, and recommendations for reporting corporate governance matters. The Directors intend to comply with the QCA Corporate Governance Guidelines for Smaller Quoted Companies so far as it is practicable having regard to the size and current stage of development of the Company. The Board currently comprises two executive Directors (being the Chief Executive Officer and the Chief Financial Officer) and four non-executive Directors (including the interim Chairperson).
The Board's decision-making process is not dominated by any one individual or group of individuals. The composition of the Board will be reviewed regularly and modified as appropriate in response to the Company's changing requirements. The Board has established an Audit Committee, Corporate Governance Committee, Health Safety Environment and Security Committee, Reserves Committee, and Remuneration Committee to ensure proper adherence to sound governance and decision making.
Environmental Stewardship
i3 is committed to conducting its operations to be in full compliance with both provincial and state environmental regulations and reporting obligations. In Q4 2020 we commenced the integration of the reporting systems and databases inherited from Toscana and with the Gain assets into i3's ESG management system and the development of a corporate ESG strategy. Central to that strategy is a commitment to achieve net zero carbon emissions by 2050. In December 2020 we commenced the development of a strategy to minimise fugitive GHG emissions from our production infrastructure. The first element of this was a plan to replace hi-bleed natural gas pneumatic controllers with low-bleed models across our portfolio in addition to conversions to instrument air; these projects commenced in December. These initiatives qualify for carbon credits which can be sold or used to offset future carbon tax obligations. The Company also takes very seriously its asset retirement obligations and is an active participant in the Government of Alberta's Site Rehabilitation Program ("SRP") and Saskatchewan's Accelerated Site Closure Program ("ASCP"). We received grants totalling CAD179,000 in Q4 2020 which contributed to our decommissioning operations in our Wapiti, Simonette, Marten Creek and Clair field locations.
Looking ahead
2020 was a transformational year for the Company, necessitated by a fight to survive and a desire to flourish. The hours required to accomplish this seemed innumerable for our staff, as a constant series of hurdles had to be overcome on a near-daily basis. We thank each of them for their part in the result - a company that is stable, cash flow generating, and excited about its future plans.
Moving forward then, i3 will continue to grow its Canadian production business through our stated strategy of being acquisitive when systemic or situational drivers offer good value and drilling our ever-growing inventory of high-quality proven undeveloped and 2P reserves when doing so offers better returns than the M&A market. In the UK, we will progress our appraisal and development plans at Serenity and Liberator as and when capital becomes available from potential partners. Beyond our current business, we see climate change as the most urgent matter of our time and deem it critical to act in a manner that exhibits this concern. Though we believe in this hydrocarbon-dependent world that oil and gas will remain a necessary part of the energy and industrial sector for decades yet, we understand that petroleum-based energy companies have a crucial role to play in the transition to net zero. As we enlarge the oil and gas business, we have worked so hard to reenergise across the last 18 months, we look forward to our balanced and intentional future transformation into an energy company that benefits society for generations to come.
As always, we extend gratitude to our capital providers for their ongoing support. We will fight hard to honour the trust you extended to us during such an uncertain time in our industry's history. As promised, i3 will continue to manage our Canadian and UK businesses in a manner that maximizes value creation and distributed returns.
"Linda Beal" "Majid Shafiq" Linda Beal Majid Shafiq Interim Non-Executive Chairperson Chief Executive Officer 31 May 2021 31 May 2021
Consolidated Statement of Comprehensive Income
Notes Year Ended Year Ended
31 December 31 December
2020 2019
Restated
*
-------------------------------------------- ----- ------------ ------------
GBP'000 GBP'000
Revenue 6 12,991 -
Production costs (8,075) -
Depreciation and depletion 12 (4,854) -
------------ --------------
Gross profit 62 -
Administrative expenses 7 (5,755) (5,317)
Acquisition costs 4 (1,542) -
Gain on bargain purchase 4 25,211 -
------------ --------------
Operating profit / (loss) 17,976 (5,317)
Finance costs 8 (7,368) (5,534)
Profit / (loss) before tax 10,608 (10,851)
Tax credit for the year 9 1,110 -
------------ --------------
Profit (loss) for the year 11,718 (10,851)
============ ==============
Other comprehensive (loss):
Items that may be reclassified subsequently
to profit or loss:
Foreign exchange differences on translation
of foreign operations (147) -
------------ --------------
Other comprehensive (loss) for the
year, net of tax (147) -
Total compressive income / (loss)
for the year 11,571 (10,851)
============ ==============
Earnings / (loss) per share Pence Pence
Earnings / (loss) per share - basic 11 3.78 (13.42)
Earnings / (loss) per share - diluted 11 3.46 (13.42)
------------ --------------
All operations are continuing.
The accompanying notes form an integral part of these financial statements.
* The presentation, description, and classification of certain comparative lines have been restated - see Note 2.
Consolidated Statement of Financial Position
Assets Notes 31 December 31 December
2020 2019
------------------------------------- ----- ----------- -----------
GBP'000 GBP'000
Non-current assets
Property, plant & equipment 12 108,509 8
Exploration and evaluation assets 13 48,809 46,528
Deferred tax asset 9 1,052 -
Deposit 4 678 -
Total non-current assets 159,048 46,536
Current assets
Cash and cash equivalents 6,178 19,070
Trade and other receivables 14 8,731 305
Inventory 164 -
----------- -----------
Total current assets 15,073 19,375
Current liabilities
Trade and other payables 15 (13,156) (18,205)
Borrowings and leases 16 (28) -
Decommissioning provision 17 (1,234)
Total current liabilities (14,418) (18,205)
Net current assets 655 1,170
Non-current liabilities
Non-current accounts payable 15 (3,000) (3,000)
Borrowings and leases 16 (17,958) (13,046)
Decommissioning provision 17 (65,549) -
----------- -----------
Total non-current liabilities (86,507) (16,046)
Net assets 73,196 31,660
=========== ===========
Capital and reserves
Ordinary shares 18 70 11
Deferred shares 18 50 50
Share premium 18 61,605 32,572
Share-based payment reserve 19 6,337 3,803
Warrants - LNs 16 9,714 11,375
Foreign currency translation reserve (147) -
Accumulated deficit (4,433) (16,151)
Shareholders' funds 73,196 31,660
=========== ===========
The accompanying notes form an integral part of these financial statements.
The consolidated financial statements of i3 Energy plc, company number 10699593, were approved by the Board of Directors and authorized for issue on 31 May 2021.
Signed on behalf of the Board of Directors by:
"Majid Shafiq"
Majid Shafiq
Director
Consolidated Statement of Changes in Equity
Ordinary Share Deferred Share-based Warrants Foreign Accumul-ated Total
shares premium shares payment - LN currency deficit
reserve translation
reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------- -------- -------- ----------- -------- ------------ ------------ --------
Balance at 31 December
2018 4 9,215 50 686 - - ( 5,300) 4,656
Total comprehensive
loss for the year - - - - - (10,851) (10,851)
Transactions with
owners:
Issue of share capital 18 7 23,357 - - - - - 23,363
Warrants - LNs - - - - 11,375 - - 11,375
Share-based payment
expense 19 - - - 3,117 - - - 3,117
-------- -------- -------- ----------- -------- ------------ ------------ --------
Balance at 31 December
2019 11 32,572 50 3,803 11,375 - ( 16,151) 31,660
-------- -------- -------- ----------- -------- ------------ ------------ --------
Total comprehensive
income for the year - - - - - (147) 11,718 11,571
Transactions with
owners:
Issue of share capital 18 58 27,372 - - - - - 27,430
Exercise of warrants
- LNs 19 1 1,661 - - (1,661) - - 1
Share-based payment
expense 19 - - - 2,534 - - - 2,534
-------- -------- -------- ----------- -------- ------------ ------------ --------
Balance at 31 December
2020 70 61,605 50 6,337 9,714 (147) ( 4,433) 73,196
======== ======== ======== =========== ======== ============ ============ ========
The accompanying notes form an integral part of these financial statements.
The following describes the nature and purpose of each reserve within equity:
Reserve Description and purpose
Ordinary shares Represents the nominal value of shares issued
Share premium account Amount subscribed for share capital in excess of nominal
value
Deferred shares Represents the nominal value of shares issued, the
shares have full capital distribution (including on
wind up) rights and do not confer any voting or dividend
rights, or any of redemption
Share-based payment Represents the accumulated balance of share-based
reserve payment charges recognised in respect of share options
granted by the Company less transfers to retained
deficit in respect of options exercised or cancelled/lapsed
Warrants - LNs Represents the accumulated balance of share-based
payment charges recognised in respect of warrants
granted by the Company in respect to warrants granted
to the loan note holders
Foreign currency Exchange differences arising on consolidating the
translation reserve assets and liabilities of the Group's non-Pound Sterling
functional currency operations (including comparatives)
recognised through the Consolidated Statement of Other
Comprehensive Income.
Retained earnings Cumulative net gains and losses recognised in the
Consolidated Statement of Comprehensive Income
Note: The issued share capital comprises of both ordinary and deferred shares and the consolidated nominal value exceeds the required minimum issued capital of GBP 50,000.
Consolidated Statement of Cash Flow
Notes Year ended Year ended
31 December 31 December
2020 2019
Restated *
------------------------------------------- ----- ------------ ------------
GBP'000 GBP'000
OPERATING ACTIVITIES
Profit / (loss) before tax 10,608 (10,851)
Adjustments for:
Depreciation and depletion 12 4,854 9
Gain on bargain purchase 4 (25,211) -
Finance costs 8 7,368 5,534
Unrealized FX loss / (Gain) 7 68 (28)
Stock-based payments expense - employees 7 336 1,206
Operating cash flows before movements
in working capital:
(Increase) in trade and other receivables (7,217) (146)
Increase in trade and other payables 4,974 295
Increase in inventory 69 -
------------ ------------
Net cash used in operating activities (4,151) (3,981)
------------ ------------
INVESTING ACTIVITIES
Business acquisitions 4 (18,474) -
Cash assumed on business acquisitions 4 262 -
Expenditures on property, plant &
equipment (229) (3)
Expenditures on exploration and evaluation
assets (17,403) (21,032)
Expenditure on decommissioning oil
and gas assets 17 (131) -
Tax credit for R&D expenditure 9 383 -
------------ ------------
Net cash used in investing activities (35,592) (21,035)
------------ ------------
FINANCING ACTIVITIES
Proceeds on issue of ordinary shares,
net of issue costs 18 27,253 23,363
Proceeds on issuance of H1-2019 LNs 16 - 22,000
Repayment CLNs 16 - (433)
Interest and other finance charges
paid 8 (114) (1,200)
Lease payments 16 (10) -
Net cash from financing activities 27,129 43,730
Effect of exchange rate changes on
cash (278) (242)
------------ ------------
Net (Decrease) / Increase in cash
and cash equivalents (12,892) 18,472
Cash and cash equivalents, beginning
of year 19,070 598
------------ ------------
CASH AND CASH EQUIVALENTS, OF
YEAR 6,178 19,070
============ ============
Net debt reconciliation is shown in note 16
The accompanying notes form an integral part of these financial statements.
* The presentation, description, and classification of certain comparative lines have been restated - see Note 2.
Notes Forming Part of the Financial Statements
1 Summary of significant accounting policies
General Information and Authorisation of Financial Statements
i3 Energy plc ("the Company") is a Public Company, limited by shares, registered in England and Wales under the Companies Act 2006 with registered number 10699593. The Company's ordinary shares are traded on the Toronto Stock Exchange and the AIM Market operated by the London Stock Exchange. The address of the Company's registered office is New Kings Court, Tollgate, Chandler's Ford, Eastleigh, Hampshire, SO53 3LG.
The Company and its subsidiaries (together, "the Group") principal activities consist of the development and production of oil and gas on the UK Continental Shelf and the Western Canadian Sedimentary Basin.
2 Basis of preparation
The financial statements have been prepared under the historic cost in accordance with international accounting standards in conformity with the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No. 1606/2002 as it applies in the European Union in accordance with the requirement of the AIM rules.
The financial information is presented in Pounds Sterling (GBP, GBP), which is the Company's functional currency, and rounded to the nearest thousand unless otherwise stated. The functional currency of the Company's UK subsidiary, i3 Energy North Sea Limited, is GBP, and the functional currency of its Canadian subsidiary, i3 Energy Canada Limited, is CAD.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied unless otherwise stated. The Company has elected not to present individual financial statements as it is not required to do so.
Basis of Consolidation
The consolidated financial statements consolidate the audited financial statements of i3 Energy plc and the financial statements of its subsidiary undertakings made up to 31 December 2020.
Subsidiaries are entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
Going concern
The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. The use of this basis of accounting takes into consideration the Group's current and forecast financing position, additional details of which are provided in the going concern section of the Directors' Report and within the Group's Strategic Report on page 33 of the Company's Annual Report.
Restatement and reclassification of comparative information
Following the acquisitions completed in 2020, commencement of production, and a review of the financial statements, the Group has elected to change the presentation and classification of certain items within the Statement of Consolidated Income and the Statement of Cash Flow. There has been no change to the reported total comprehensive loss for the year ended 31 December 2019.
Expenses related to the issuance of warrants of GBP1,911 thousand was previously presented within administrative expenses. This expense is now presented within finance costs.
Interest and other finance charges paid of GBP1,200 thousand was previously presented as a cash outflow from operating activities. This is now presented as a cash outflow from financing activities.
3 Significant accounting policies
The Gain and Toscana acquisitions resulted in the production and sale of oil and gas by the Group for the first time. As a result, the following accounting policies were adopted during the financial year:
-- Property, plant and equipment - oil and gas assets -- Inventory -- Decommissioning provisions -- Joint operations -- Revenue -- Foreign operations -- Business combinations
All other accounting policies adopted are consistent with those applied in the previous financial year, unless otherwise indicated.
Financial instruments
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and cash held on current account or on short-term deposits at variable interest rates with original maturity periods of up to three months. Any interest earned is accrued monthly and classified as interest income within finance income.
Trade and other receivables
Trade and other receivables are initially recognised at fair value when related amounts are invoiced then carried at this amount less any impairment of these receivables using the expected credit loss model. A provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of receivables is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.
Trade and other payables
These financial liabilities are all non-interest bearing and are initially recognised at the fair value of the consideration payable.
Loan Notes
These financial liabilities are all interest bearing and are initially recognised at amortised cost and include the transaction costs directly related to the issuance. The transaction costs are amortised using the effective interest rate method over the life of the Loan Notes.
Financial liabilities at Fair Value Through Profit or Loss ("FVTPL")
Financial liabilities at FVTPL comprise of the Company's convertible loan notes payable. Financial liabilities are classified as at FVTPL when the financial liability is (i) contingent consideration that may be paid by an acquirer as part of a business combination to which IFRS 3 applies, (ii) held for trading, or (iii) it is designated as at FVTPL.
A financial liability is classified as held for trading if:
-- it has been incurred principally for the purpose of repurchasing it in the near term; or
-- on initial recognition it is part of a portfolio of identified financial instruments that the Company manages together and has a recent actual pattern of short-term profit-taking; or
-- it is a derivative that is not designated and effective as a hedging instrument.
A financial liability other than a financial liability held for trading or contingent consideration that may be paid by an acquirer as part of a business combination may be designated as at FVTPL upon initial recognition if:
-- such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
-- the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed, and its performance is evaluated on a fair value basis, in accordance with the Company's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
-- it forms part of a contract containing one or more embedded derivatives, and IFRS Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the 'other gains and losses' line item in the statement of comprehensive income.
Embedded derivatives
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL.
Leases
Lease liabilities are initially measured at the present value of lease payments unpaid at the commencement date. Lease payments are discounted using the incremental borrowing rate (being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions) unless the rate implicit in the lease is available. The Group currently uses the rate implicit in the lease as the discount rate for all leases. For the purposes of measuring the lease liability, lease payments comprise fixed payments.
Right-of-use assets are measured at cost, which comprises the initial measurement of the lease liability, plus any lease payments made prior to lease commencement, initial direct costs incurred and the estimated cost of restoration or decommissioning, less any lease incentives received. The right-of-use assets is depreciated on a straight-line basis over their expected useful lives. Right-of-use assets are subject to an impairment test if events and circumstances indicate that the carrying value may exceed the recoverable amount.
Lease repayments made are allocated to capital repayment and interest so as to produce a constant periodic rate of interest on the remaining lease liability balance.
Right-of-use assets are presented within property, plant and equipment. Lease liabilities are presented within borrowings and leases. In the cash flow statement, lease repayments (both the principal and interest portion) are presented within cash used in financing activities, except for payments for leases of short-term and low-value assets and variable lease payments, which are presented within cash flows from operating activities.
Leases of low-value items (such as office equipment) and short-term leases (where the lease term is 12 months or less) are expensed on a straight-line basis to the statement of comprehensive income.
Inventory
Inventories comprise oil and gas in tanks and field parts and supplies, all of which are stated at the lower of production cost (including royalties, depletion and amortisation of plant, property and equipment), and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less marketing costs. The cost of inventory is expensed in the period in which the related revenue is recognised.
Equity
Equity instruments issued by the Company are usually recorded at the proceeds received, net of direct issue costs, and allocated between called up share capital and share premium accounts as appropriate.
Foreign currency
Transactions denominated in currencies other than functional currency are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rate of exchange ruling at the balance sheet date. All differences that arise are recorded in the statement of comprehensive income. The functional currency of the Company is GBP, and the Group results and financial position are presented in GBP.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated at exchange rates prevailing on the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in a separate component of equity (attributed to non--controlling interests as appropriate).
Taxation
Tax is recognised in the consolidated Statement of Comprehensive Income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity respectively.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill; deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilised.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax assets and liabilities are not discounted.
Intangible assets - Exploration and evaluation expenditures (E&E)
Development expenditure
Expenditure on the construction, installation and completion of infrastructure facilities such as platforms, pipelines and the drilling of development wells, including service, is capitalized initially within intangible fixed assets and when the well has formally commenced commercial production, then it is transferred to property, plant and equipment and is depreciated from the commencement of production as described in the accounting policy for property, plant and equipment.
Drilling costs and intangible licenses
The Group applies the successful efforts method of accounting for oil and gas assets, having regard to the requirements of IFRS 6 'Exploration for and Evaluation of Mineral Resources'. Costs incurred prior to obtaining the legal rights to explore an area are expensed immediately to the Statement of Comprehensive Income.
Expenditure incurred on the acquisition of a licence interest is initially capitalised within intangible assets on a field by field basis. Costs are held, unamortised, within Petroleum mineral leases until such time as the exploration phase of the field area is complete or commercial reserves have been discovered. The cost of the licence is subsequently transferred into property, plant and equipment and depreciated over its estimated useful economic life.
Exploration expenditure incurred in the process of determining exploration targets is capitalised initially within intangible assets as drilling costs. Drilling costs are initially capitalised on a well by well basis until the success or otherwise has been established. Drilling costs are written off on completion of a well unless the results indicate that hydrocarbon reserves exist and there is a reasonable prospect that these reserves are commercially viable. Drilling costs are subsequently transferred into 'Drilling expenditure' within property, plant and equipment and depreciated over their estimated useful economic life.
Impairment
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. This includes consideration of the IFRS 6 impairment indicators for any intangible exploration and evaluation expenditure capitalised as intangible assets. Examples of indicators of impairment include whether:
(a) the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future and is not expected to be renewed.
(b) substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned.
(c) exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area.
(d) sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.
If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Any impairment identified is recorded in the statement of comprehensive income.
Property, plant and equipment
Oil and gas assets - cost
Oil and gas assets are accumulated generally on a cost generating unit (CGU) basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the intangible exploration and evaluation asset expenditures incurred in finding commercial reserves transferred from intangible exploration and evaluation assets. The cost of oil and gas properties also includes the cost of directly attributable overheads, borrowing costs capitalised and the cost of recognising provision for future restoration and decommissioning.
Oil and gas assets - depreciation
Oil properties, including certain related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortised over proved plus probable reserves. Licence acquisition, common facilities and future decommissioning costs are amortised over total proved plus probable reserves. The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities.
Oil and gas assets - impairment
An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the carrying value of an oil and gas property may exceed its recoverable amount.
The carrying value is compared against the expected recoverable amount of the asset, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. The cash-generating unit applied for impairment test purposes is generally the field, except that a number of field interests may be grouped as a single cash-generating unit where the cash inflows of each field are interdependent.
Any impairment identified is charged to the income statement. Where conditions giving rise to impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the income statement, net of any depreciation that would have been charged since the impairment.
Non-oil and gas assets
Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided on all property, plant and equipment to write off the cost less estimated residual value of each asset over its expected useful economic life on a straight-line basis at the following annual rates:
-- Office equipment 20% or straight line over the life of the equipment - whichever is the lesser
-- Field equipment - between 5% and 25% -- All assets are subject to annual impairment reviews
Decommissioning provision
Liabilities for decommissioning costs are recognised when the group has an obligation to plug and abandon a well, dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Where an obligation exists for a new facility or item of plant, such as oil production or transportation facilities, this liability will be recognised on construction or installation. Similarly, where an obligation exists for a well, this liability is recognised when it is drilled. An obligation for decommissioning may also crystallise during the period of operation of a well, facility or item of plant through a change in legislation or through a decision to terminate operations; an obligation may also arise in cases where an asset has been sold but the subsequent owner is no longer able to fulfil its decommissioning obligations, for example due to bankruptcy. The amount recognised is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The provision for the costs of decommissioning wells, production facilities and pipelines at the end of their economic lives is estimated using existing technology, at future prices, depending on the expected timing of the activity, and discounted using a risk-free rate.
An amount equivalent to the decommissioning provision is recognised as part of the corresponding intangible asset (in the case of an exploration or appraisal well) or property, plant and equipment. The decommissioning portion of the property, plant and equipment is subsequently depreciated at the same rate as the rest of the asset. Other than the unwinding of discount on or utilisation of the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding asset where that asset is generating or is expected to generate future economic benefits. If government assistance is obtained to reduce the liability, the carrying value of the decommissioning provision and the corresponding E&E or PP&E asset are reduced by the estimated amount of the extinguished liability.
Joint operations
Substantially all of the Group's exploration and production activities are conducted jointly with others and, accordingly, these consolidated financial statements reflect only the Group's interest in such activities.
Revenue
Revenue from contracts with customers is recognised, net of royalties, when or as the group satisfies a performance obligation by transferring control of a promised good or service to a customer. The transfer of control of oil, natural gas, natural gas liquids and petroleum, and other items usually coincides with title passing to the customer and the customer taking physical possession. The group principally satisfies its performance obligations at a point in time; the amounts of revenue recognised relating to performance obligations satisfied over time are not significant.
When, or as, a performance obligation is satisfied, the group recognises as revenue the amount of the transaction price that is allocated to that performance obligation. The transaction price is the amount of consideration to which the group expects to be entitled. The transaction price is allocated to the performance obligations in the contract based on standalone selling prices of the goods or services promised.
Contracts for the sale of commodities are typically priced by reference to quoted prices. Revenue from term commodity contracts is recognised based on the contractual pricing provisions for each delivery. Certain of these contracts have pricing terms based on prices at a point in time after delivery has been made. Revenue from such contracts is initially recognised based on relevant prices at the time of delivery and subsequently adjusted as appropriate. All revenue from these contracts, both that recognised at the time of delivery and that from post-delivery price adjustments, is disclosed as revenue from contracts with customers.
Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements.
Processing income is recognized at the time the services are rendered.
Finance income
Finance income consists of bank interest on cash and cash equivalents which is recognised as accruing on a straight-line basis, over the period of the deposit.
Share-based payments
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value excludes the effect of non-market-based vesting conditions.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company's estimate of equity instruments that will eventually vest. At each balance sheet date, the Company revises its estimate of the number of equity instruments expected to vest as a result of the effect of non-market-based vesting conditions. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.
Business combinations
Acquisitions of business are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition -- date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition -- related costs are recognised in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non -- controlling interests in the acquiree, and the fair value of the acquirers previously held equity interest in the acquiree (if any) over the net of the acquisition -- date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition -- date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non -- controlling interests in the acquiree and the fair value of the acquirers previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.
Changes in accounting standards
The standards which applied for the first time this year have been adopted and have not had a material impact.
IFRS 11 'Joint Operations'
The standard is effective on or after 1 January 2020. The amendments to IFRS 11 are related to changes in group composition. If a joint operation becomes a subsidiary during the year, the previously held interest in the joint operation should be remeasured at fair value. However, no such remeasurement is required in the joint operation if the entity obtains joint control of another entity that is a joint operation. The amendments did not have a material impact on the Company's financial statements.
IFRS 3 'Business Combination'
The standard is effective for periods beginning on or after 1 January 2020 and will be applied prospectively. The amendments narrowed and clarified the definition of business and introduced an election to use a fair value concentration test. This is a simplified assessment that results in an asset acquisition, if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets. If an election to use a concentration test is not made, or the test failed, then the assessment focuses on the existence of a substantive process. The amendment did not have a material impact on the Company's financial statements as both the Gain and the Toscana acquisitions met the definition of a business and the asset concentration test was not applied.
IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Account Estimates and Errors'
The amendments are effective for periods beginning on or after 1 January 2020. Both the amendments to IAS 1 and IAS are related to the definition of material and did not have a material impact on the Company's financial statements.
Critical accounting judgements and key sources of estimation uncertainty
The preparation of financial statements using accounting policies consistent with IFRS requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of income and expenses. The preparation of financial statements also requires the Directors to exercise judgement in the process of applying the accounting policies. Changes in estimates, assumptions and judgements can have a significant impact on the financial statements.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively from the period in which the estimates are revised.
There are no critical judgements identified, apart from those involving estimations (which are dealt with separately below) that the Directors have made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
Critical Accounting Judgements
The following are critical judgments, apart from those involving estimations (which are presented separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognise in the financial statements.
Carrying value of intangible exploration and evaluation assets
At 31 December 2020, the Group held oil and gas E&E assets of GBP48.8m (2019: GBP46.5m), note 13. The carrying value of E&E assets are assessed for impairment when circumstances suggest that they carrying amount may exceed its recoverable value. In making this judgement the Management considers the indicators of impairment in the intangible exploration and evaluation asset accounting policies set out above. In particular, Management has considered the expiration of the P.1987 licence on 31 December 2020, concluding that this does not represent an indicator of impairment. Further discussion is provided in note 13.
Carrying value of property, plant and equipment - oil and gas assets
At 31 December 2020, the Group held oil and gas PP&E assets of GBP108.5m (2019: nil), note 12, which were acquired through the Gain and Toscana acquisitions which completed in the period, note 4. These assets are subject to an annual impairment assessment under IAS 36 'Impairment of assets' whereby Management is first required to consider if there are any indicators of impairment, and if so, Management is then required to estimate the asset's recoverable amounts. The judgement over indicators of impairment considers several internal and external factors, including changes in estimated commercial reserves, changes in oil prices, and changes in expected future operating and capital expenditure, decommissioning expenditure, increases in cost of capital which may indicate a higher discount rate is likely required in assessing the assets recoverable amount. After considering the above, Management has concluded that there was no indicators of impairment of oil and gas PP&E assets as at 31 December 2020.
Fair value judgements for businesses acquired
The Group completed 2 acquisitions during the year ended 31 December 2020. Management has applied judgement in concluding that the Group had acquired a business in both the Gain and Toscana acquisitions. In accordance with IFRS 3 'Business combinations', management has then applied judgement in estimating the fair value of assets acquired and liabilities assumed, which included estimates relating to oil and gas reserves, future production rates, oil and gas prices, operating and capital expenditure, decommissioning expenditure, and discount rates. Further details are provided in note 4.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Commercial hydrocarbon reserves estimates
Commercial hydrocarbon reserves are those that can be economically extracted from the Group's oil and gas assets. These estimates are based on information compiled by independent qualified persons as at 31 December 2020 and consider a number of factors, including assumptions about future commodity prices, production rates, operating costs, exchange rates, and various geological and geophysical technical factors to model reservoir size, quality, and extractability. Reserve estimates may change from period to period. Changes to reserves estimates may have a material impact on the depreciation charge for oil and gas PP&E assets, the decommissioning provision, the carrying value of deferred tax assets, and the Group's conclusions around indicators of impairment for oil and gas PP&E assets. The reserve reports are available at https://i3.energy/.
The Group estimates it had acquired 57.8 MMboe of proved plus probable reserves through the Gain and Toscana acquisitions. A 1.0 MMboe increase/decrease in this estimate would have decreased/increased the oil and gas depreciation charge for the period by GBP144 thousand, respectively.
Decommissioning costs
At 31 December 2020 the Group had recorded a decommissioning provision of GBP66.8 million (2019: nil), which were assumed through the Gain and Toscana acquisitions which completed in the period, note 4. In estimating the amount of the provision, Management makes various assumptions around costs, time to abandonment and inflation rates, which are discounted at long term government bond rates, see note 17.
The most difficult, subjective or complex assumptions include the inflation rate and the discount rate. A 0.5% increase/decrease in the inflation rate would have increased/decreased the decommissioning provision by GBP9.9 million and GBP8.3 million, respectively. A 0.5% increase/decrease in the discount rate would have decreased/increased the decommissioning provision by GBP8.2 million and GBP10.0 million, respectively.
Recognition and measurement of deferred tax assets
At 31 December 2020, the Group held deferred tax assets of GBP1.1 million (2019: nil) which result from deductible temporary differences at the Group's Canadian operations. In accordance with IAS 12 'Income Taxes', deferred tax assets shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. The Group has generated positive cash flows and profits from its Canadian operations following the completion of the Gain and Toscana acquisitions and expects to continue to do so in the future. Management has applied judgement in determining the extent to which it is probable that taxable profits will be available based on estimates of future profits, which include estimates of commercial reserves, oil prices, operating and capital expenditure, and decommissioning expenditure. If future taxable profits differ from these estimates, the recoverability of the deferred tax asset could be impacted.
4 Business combinations
The Group completed two business acquisitions during the period. Acquisition costs of GBP1.5 million relating to the two acquisitions have been recognised in the statement of comprehensive income.
Gain acquisition
On 6 July 2020 ("Gain PSA Date") the Group through its wholly owned subsidiary i3 Energy Canada Limited ("i3 Canada") entered into a binding purchase and sale agreement to acquire 100% of the petroleum and infrastructure assets from Gain Energy Ltd. ("Gain") for gross consideration of CAD80 million. On 4 August 2020 i3 Canada entered into a binding purchase and sale agreement to sell the petroleum and infrastructure assets held by Gain which are in Saskatchewan, to Harvard Resources Inc. ("Harvard") for CAD45 million, which was conditional only on the completion of the Gain acquisition. The assets retained by i3 following the purchase from Gain and sale to Harvard are solely in Alberta and shall be referred to as the "Gain Assets".
The transaction completed on 3 September 2020 ("Acquisition Date") at which point i3 obtained control of the Gain Assets, which consist of 242 Gain-operated wells at an average working interest of 78%, 1,044 non-operated wells at an average working interest of 14%, and the associated infrastructure. The acquisition enabled the Group to diversify its portfolio and to obtain cash flow generating assets.
The Gain Assets are an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return, and therefore constitute a business. Accordingly, the transaction has been accounted for in accordance with IFRS 3 'Business Combinations' which requires the assets acquired and liabilities assumed to be recognised on the acquisition date at their fair value. Legal title to the Saskatchewan assets passed directly from Gain to Harvard and the consideration for the Saskatchewan assets was paid directly from Harvard to Gain, and therefore the net acquisition price of CAD35 million has been allocated across the assets acquired and liabilities assumed in Alberta.
The acquisition had an effective date of 1 May 2020 and therefore acquisition price of CAD35 million was (i) reduced by CAD7.2 million for the income generated from all of Gain's assets between the "Economic Effective Date" of 1 May 2020 and the Acquisition Date; (ii) increased by CAD1.5 million for interest accruing from the Economic Effective Date to the Acquisition Date at Canadian Prime + 2.0% on the Gross consideration; and (iii) increased by CAD1.1 million to compensate Gain for its management of the assets between the Gain PSA Date and the Acquisition Date, resulting in a net consideration of CAD30.4 million (GBP17.4 million).
The fair value of oil and gas assets is estimated based on pre-tax net present value of PDP reserves as derived from a reserves report by a firm of independent reservoir engineers dated 30 June 2020, adjusted for production in the intervening period, discounted at a rate of 10%. The fair value of the decommissioning provision is estimated based on rates published by the AER. These represent a level 3 valuation in the IFRS 13 fair value hierarchy as they are based on valuation techniques that use inputs which are not based on observable market data. The fair value of the assets acquired and liabilities assumed exceed the consideration by GBP19.2 million, the gain on bargain purchase. It is likely that the gain on bargain purchase arose due to the oil price recovery between the date the purchase price was agreed and the acquisition date.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
3 September
2020
GBP'000
--------------------------------------------------- -----------
Net consideration to allocate 17,444
Property, plant and equipment - oil and gas assets 93,027
Inventory 233
Decommissioning provisions (50,887)
Deferred tax liability (5,680)
Gain on bargain purchase (19,249)
--------------------------------------------------- -----------
Total 17,444
=================================================== ===========
The Gain assets contributed GBP12.1 million revenue (net of royalties) and GBP0.3 million to the Group's Gross profit for the period between the acquisition date and the reporting date. If the acquisition of the Gain assets had been completed on the first day of the financial year, Group revenues for the year would have been GBP34.9 million and Group operating netback would have been GBP11.8 million. Operating netback is a non-IFRS measure, refer to Appendix B. It is considered impractical to present the impact on profit as if the acquisition had competed on the first day of the financial year as it would require estimation of commercial reserves, future development costs, various judgements over the decommissioning provision, and certain administrative costs, all of which are not readily available to Management, and therefore the impact on operating netback has been presented instead.
Toscana acquisition
On 30 March 2020 ("Loan Purchase Date") the Company purchased the rights and interests in Toscana Energy Income Corporation's ("Toscana") CAD24.8 million senior debt facility and CAD3.2 million junior debt facility for total consideration of CAD3.0 million and CAD0.4 million, respectively, with the cash consideration paid 50% upfront and 50% in early-2021. The Company also acquired an option to purchase 100% of the issued and outstanding common shares of Toscana, a TSX listed oil and gas company with operations in the WCSB. On 23 June 2020 ("Arrangement Agreement Date") the Company exercised this option for a total consideration of 4,399,215 ordinary shares of i3. The transaction completed on 30 October 2020 ("Acquisition Date") following at which point i3 obtained control of Toscana. The acquisition enabled the Group to diversify its portfolio, increase operating cash flow, and provides an interest in a Canadian operator.
The Toscana assets are an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return, and therefore constitute a business. Accordingly, the transaction has been accounted for in accordance with IFRS 3 'Business Combinations' which requires the assets acquired and liabilities assumed to be recognised on the acquisition date at their fair value.
The fair value of oil and gas assets is estimated based on pre-tax net present value of PDP reserves as derived from a reserves report by a firm of independent reservoir engineers dated 30 June 2020, adjusted for production in the intervening period, discounted at a rate of 10%. The fair value of the decommissioning provision is estimated based on rates published by the AER. These represent a level 3 valuation in the IFRS 13 fair value hierarchy as they are based on valuation techniques that use inputs which are not based on observable market data. The carrying amount of the acquired working capital is considered to represent the fair value. The fair value of the assets acquired and liabilities assumed exceed the consideration by GBP6.0 million, the gain on bargain purchase. It is likely that the gain on bargain purchase arose due to the oil price recovery between the date the purchase price was agreed and the acquisition date.
The fair value of the 4,399,215 ordinary shares issued as part of the consideration paid for Toscana was determined based on the closing trading price of 4.05 pence on 30 October 2020, totalling GBP178 thousand. This, together with the CAD3.4 million (GBP2.0 million), results in net consideration of GBP2.2 million.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.
30 October
2020
GBP'000
--------------------------------------------------- ----------
Net consideration to allocate 2,186
Cash and cash equivalents 262
Trade and other receivables 926
Property, plant and equipment - oil and gas assets 21,799
Deposit 683
Deferred tax asset 6,073
Trade and other payables (3,390)
Decommissioning provisions (18,205)
Gain on bargain purchase (5,962)
--------------------------------------------------- ----------
Total 2,186
=================================================== ==========
The net cash outflow arising on acquisition was GBP0.7 million, which consists of the GBP2.0 million cash consideration to acquire Toscana's debt, less the GBP0.3 million cash and cash equivalent balances acquired, less the second instalment of GBP1.0 million which was paid in early 2021.
Toscana contributed GBP0.9 million revenue (net of royalties) and lost GBP0.2 million to the Group's Gross profit for the period between the acquisition date and the reporting date. If the acquisition of Toscana had been completed on the first day of the financial year, Group revenues for the year would have been GBP17.0 million and Group operating netback would have been GBP4.9 million. Operating netback is a non-IFRS measure, refer to Appendix B. It is considered impractical to present the impact on profit as if the acquisition had competed on the first day of the financial year as it would require estimation of commercial reserves, future development costs, various judgements over the decommissioning provision, and certain administrative costs, all of which are not readily available to Management, and therefore the impact on operating netback has been presented instead.
5 Segmental Reporting
The Chief Operating Decision Maker (CODM) is the Board of Directors. In 2019, they considered that the Group operated in a single segment, that of corporate activities in the UK and oil and gas exploration, appraisal and development on the UKCS, and therefore comparative 2019 information has not been presented. Following the Gain and Toscana acquisitions in 2020, they consider that the Group operates as two segments, as follows:
-- UK / Corporate - That of Corporate activities in the UK and oil and gas exploration, appraisal and development on the UKCS.
-- Canada - That of oil and gas production in the WCSB.
Such components are identified on the basis of internal reports that the Board reviews regularly.
The following is an analysis of the Group's revenue and results by reportable segment in 2020:
UK / Corporate Canada Total
GBP'000 GBP'000 GBP'000
----------------------------- -------------- -------- --------
Revenue - 12,991 12,991
Production costs - (8,075) (8,075)
Depreciation and depletion (5) (4,849) (4,854)
----------------------------- -------------- -------- --------
Gross (loss) / profit (5) 67 62
Administrative expenses (3,335) (2,420) (5,755)
Acquisition costs (989) (553) (1,542)
Bargain purchase gain 5,962 19,249 25,211
----------------------------- -------------- -------- --------
Operating profit 1,633 16,343 17,976
Finance costs (7,108) (260) (7,368)
----------------------------- -------------- -------- --------
(Loss) / profit before tax (5,475) 16,083 10,608
Tax credit for the year 383 727 1,110
----------------------------- -------------- -------- --------
(Loss) / profit for the year (5,092) 16,810 11,718
============================= ============== ======== ========
The following is an analysis of the Group's assets and liabilities by reportable segment as at 31 December 2020 and the capital expenditure for the year then ended:
UK / Corporate Canada Total
GBP'000 GBP'000 GBP'000
--------------------------- -------------- -------- ---------
Total assets 48,932 125,189 174,121
Total liabilities (24,160) (76,765) (100,925)
Capital expenditure - E&E 2,281 - 2,281
Capital expenditure - PP&E - 697 697
6 Revenue
All revenue is derived from contracts with customers and is comprised of the sale of oil and gas and processing income, net of royalties, as follows:
2020 2019
GBP'000 GBP'000
------------------------------------- -------- --------
Oil and natural gas liquids 7,274 -
Natural Gas 5,978 -
Royalties (830) -
------------------------------------- -------- --------
Revenue from the sale of oil and gas 12,422 -
Processing income 569 -
------------------------------------- -------- --------
Total revenue 12,991 -
======== ========
All revenue is from the Group's Canadian operations and is recognised at the point in time when title transfers to the purchaser.
7 Administrative expenses
2020 2019
GBP'000 GBP'000
Restated *
------------------------------ -------- -----------
Directors' fees 229 159
Employee costs** 2,879 2,726
Professional fees*** 1,207 1,906
Realised FX (gain) / loss (16) (268)
Unrealised FX loss 68 28
Other 1,388 766
------------------------------ -------- -----------
Total administrative expenses 5,755 5,317
======== ===========
* The presentation, description, and classification of certain comparative lines have been restated - see Note 2.
** Group staff costs comprised:
2020 2019
GBP'000 GBP'000
------------------------------------------ -------- --------
Wages, salaries and benefits 3,293 2,871
Stock-based payments expense - employees 336 1,206
Less: capitalised exploration expenditure (750) (1,351)
------------------------------------------ -------- --------
Charge to the profit or loss 2,879 2,726
======== ========
i3 Energy plc had no staff during the year ended 31 December 2020 (2019 - Nil) and therefore no payments were made. Director remuneration is disclosed in note 10.
The average number of persons employed by the Group, including Executive Directors, was:
Average number of persons employed 2020 Number 2019 Number
------------------------------------ ------------ ------------
Operations 13 8
Corporate and administration 7 4
------------------------------------ ------------ ------------
Total 20 12
============ ============
*** Included within professional fees are fees payable to the Company's auditor and its associates for the following:
2020 2019
GBP'000 GBP'000
------------------------------------------- -------- --------
Audit services
The audit of the Company's annual accounts 80 37
The audit of the Company's subsidiaries - -
------------------------------------------- -------- --------
Total audit fees 80 37
Reporting accountant work in relation
to 2020 admission documents 170 -
Total 250 37
======== ========
8 Finance Costs
2020 2019
GBP'000 GBP'000
Restated *
----------------------------------------- -------- -----------
Accretion of loan notes 2,355 2,251
Interest expense on loan notes 2,487 1,372
Stock-based compensation - warrants
(note 19) 2,198 1,911
Unwinding of discount on decommissioning
provision (note 17) 214 -
Bank charges and interest on creditors 114 -
-------- -----------
Total finance costs 7,368 5,534
======== ===========
* The presentation, description, and classification of certain comparative lines have been restated - see Note 2.
9 Taxation
Taxation credit
The below table reconciles the tax charge for the year to the expected tax charge based on the result for the year and the corporation tax rate.
2020 2019
GBP'000 GBP'000
Profit (loss) before income tax 10,608 (10,851)
Rate of Corporate Tax 40% 40%
--------- ---------
Expected tax charge / (credit) 4,243 (4,340)
Effects of:
Interest and other not deductible for
SCT 491 363
Permanent differences (4,415) 1,372
Foreign tax rate difference (3,747) -
Derecognition of deferred tax asset 2,701 2,570
R&D tax credit received (383) 35
--------- ---------
Total income tax (credit) (1,110) -
========= =========
Of which: 2020 2019
GBP'000 GBP'000
Current tax - prior years (383) -
Deferred tax - current year (727) -
--------- ---------
Total income tax (credit) (1,110) -
========= =========
During the year the Group received GBP383 thousand in R&D tax refunds in the UK in respect of the 2017 and 2018 fiscal years. The difference on foreign tax rate results from the 23% rate of corporate taxation at its Canadian subsidiary.
Deferred tax
The components of the net deferred tax asset and the movements during the year is summarised as follows:
At 31 December Acquired Recognised FX movement At 31 December
2019 during the in income 2020
year
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- -------------- ----------- ---------- ----------- --------------
UK:
Deferred tax assets:
Losses 23,467 - 2,297 - 25,764
Valuation allowance (4,846) - (1,392) - (6,238)
Deferred tax liabilities:
PP&E (18,621) - (905) - (19,526)
-------------- ----------- ---------- ----------- --------------
Net deferred tax - - - - -
asset
Canada:
Deferred tax assets:
Decommissioning
provision - 15,891 (535) 4 15,360
Losses - 5,845 (177) (43) 5,625
Other - 38 120 (1) 157
Valuation allowance - (7,974) - 62 (7,912)
Deferred tax liabilities:
PP&E - (13,407) 1,319 (90) (12,178)
-------------- ----------- ---------- ----------- --------------
Net deferred tax
asset - 393 727 (68) 1,052
Net deferred tax
asset - 393 727 (68) 1,052
============== =========== ========== =========== ==============
A deferred tax asset has not been recognised in respect of tax losses and allowances in the UK due to uncertainty over the availability of future taxable profits in the UK to offset these losses against.
The Group recognised a net deferred tax asset through the Gain and Toscana acquisitions of GBP393 thousand, and a deferred tax recovery of GBP727 thousand for changes in net deductible temporary differences in the year. The deferred tax asset has been recognised in Canada to the extent that the Group anticipates probable future taxable profits to against which the assets can be utilised.
The Group's estimated tax pools are summarised in the following table. The non-capital tax loss pools in Canada expire over a period of 20 years. All other tax pools do not expire.
31 December 31 December
2020 2019
GBP'000 GBP'000
-------------------------------------- ----------- -----------
UK:
Taxable losses 20,585 14,942
Mineral extraction allowances 48,809 46,528
----------- -----------
69,394 61,470
Canada:
Canadian exploration expense 3,068 -
Canadian development expense 4,698 -
Canadian oil and gas property expense 39,311 -
Undepreciated capital cost 8,383 -
Non-capital losses 24,456 -
Other 684 -
-------------------------------------- ----------- -----------
Total 80,600 -
=========== ===========
10 Directors Remuneration
Salary / Bonus Share based payments Total
Fees
GBP'000 GBP'000 GBP'000 GBP'000
--------------------- -------- ------- -------------------- -------
2020
Executive Directors
Majid Shafiq 313 389 30 732
Graham Heath 244 329 19 592
Non-Executive
Directors
David Knox 22 - - 22
Neill Carson 57 - 6 63
Richard Ames 54 - 6 60
Linda Beal 70 - - 70
John Festival 6 - - 6
--------------------- -------- ------- -------------------- -------
Total 766 718 61 1,545
======== ======= ==================== =======
2019 Salary / Bonus Share based payments Total
Executive Directors Fees
Majid Shafiq 271 - 319 590
Graham Heath 201 163 146 510
Neill Carson - 110 - 110
Non-Executive
Directors
David Knox 60 - - 60
Neill Carson 35 - 30 65
Richard Ames 45 - 30 75
Linda Beal 15 - - 15
--------------------- -------- ------- -------------------- -------
Total 627 273 525 1,425
======== ======= ==================== =======
During the year the Company contributed GBP2 thousand to i3's CEO's pension scheme (2019 - GBP2 thousand).
The total amount of Directors' fees to the Non-Executive Directors, in 2020, in the amount of GBP59 thousand (2018 - GBP116 thousand) had been accrued. The accrued Non-Executive Directors' fees were paid 5 January 2021.
11 Earnings per share
From continuing operations
Basic earnings or loss per share is calculated as profit/(loss) for the period, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element.
Diluted earnings or loss per share amounts are calculated by dividing losses or profits for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of shares that would be issued on the conversion of dilutive potential ordinary shares into ordinary shares.
The calculation of the basic and diluted earnings per share is based on the following data:
Year Ended Year Ended
31 December 31 December
2020 2019
------------------------------------------ ------------ ------------
Earnings
Earnings (loss) for the purposes of
basic and diluted earnings per share
being net loss attributable to owners
of i3 Energy (GBP'000) 11,718 (10,851)
Weighted average number of shares
Weighted average number of Ordinary
Shares - basic 309,889,077 80,869,438
Effect of dilutive potential ordinary
shares:
Share options 2,399,909 -
Warrants 26,700,708 -
------------ ------------
Weighted average number of Ordinary
Shares - diluted 338,989,694 80,869,438
Basic earnings / (loss) per share (pence) 3.78 (13.42)
Diluted earnings / (loss) per share
(pence) 3.46 (13.42)
The Share options and Warrants were anti-dilutive in 2019 as the Group incurred a loss. Prior to their repricing on 28 October 2020 and 23 June 2020 (note 20), respectively, these instruments were anti-dilutive as their exercise prices exceeded the average market price of the Ordinary Shares over this period. The Share options and Warrants were dilutive following their re-pricing and their impact is presented in the table above.
12 Property, plant and equipment
Oil and gas Right of use Other fixed Total
assets assets assets
------------------------------- ----------- ------------ ----------- -------
Cost
As at 1 January 2019 - - 19 19
Additions - - 3 3
------------------------------- ----------- ------------ ----------- -------
As at 31 December 2019 - - 22 22
Acquisitions 114,826 - 114,826
Additions 697 110 - 807
Changes to decommissioning
estimates (2,310) - - (2,310)
Decommissioning settlements
under SRP (note 17) (104) - - (104)
Exchange movement 84 (2) - 82
------------------------------- ----------- ------------ ----------- -------
As at 31 December 2020 113,193 108 22 113,323
Accumulated depreciation
As at 1 January 2019 - - (5) (5)
Charge for the year - - (9) (9)
------------------------------- ----------- ------------ ----------- -------
As at 31 December 2019 - - (14) (14)
Charge for the year (4,843) (6) (5) (4,854)
Exchange movement 54 - - 54
------------------------------- ----------- ------------ ----------- -------
As at 31 December 2020 (4,789) (6) (19) (4,814)
Carrying amount at 31 December
2019 - - 8 8
------------------------------- ----------- ------------ ----------- -------
Carrying amount at 31 December
2020 108,404 102 3 108,509
=========== ============ =========== =======
Right of use assets consist of certain field vehicles whose leases commenced in September 2020.
13 Exploration and evaluation assets (Intangible)
Year Ended Year Ended
31 December 31 December
2020 2019
GBP'000 GBP'000
As at 1 January 46,528 5,707
Additions 2,281 40,821
------------ ------------
As at 31 December 48,809 46,528
============ ============
The Directors have considered the carrying value of the exploration and evaluation assets as at 31 December 2020 and concluded that no indicators of impairment arose during the period. In reaching this conclusion, the Directors has given particular attention to the relinquishment of UKCS Licence P.1987 which reached the end of its two-year second term on 31 December 2020. Licence P.1987 encompasses UK Block 13/23d which contains contingent resources for the Group's Liberator asset, which have been evaluated as sub-commercial by i3 and in an 'independent competent person' report and as such do not represent a viable commercial development. i3 may choose to re-apply for Licence P.1987 licence in the future if justified by its appraisal of the Liberator West / Minos High prospective areas and/or the Serenity discovery. The relinquishment will result in a significant saving in licence fees whilst i3 progresses its appraisal of resources on its adjoining P.2358 Licence.
This relinquishment has no impact on Licence P.2358, which commenced its four-year second term on 30th September 2020 and contains the vast majority of the resources and potential reserves in the Company's UK acreage. Licence P.2358 includes the Serenity discovery and the Liberator West and Minos High prospective areas, which will be the focus of plans for appraisal and exploration drilling.
14 Trade and other receivables
31 December 31 December
2020 2019
GBP'000 GBP'000
---------------------------------- ----------- -----------
Trade receivables 6,295 -
VAT receivables 46 290
JV receivables 864 -
Prepayments & other receivables 1,526 15
----------- -----------
Total trade and other receivables 8,731 305
=========== ===========
Other receivables are all due within one year.
The fair value of other receivables is the same as their carrying values as stated above and they do not contain any impaired assets.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security.
15 Trade and other payables
31 December 31 December
2020 2019
GBP'000 GBP'000
------------------------------- ----------- -----------
Trade creditors 7,780 12,024
Accruals 5,146 6,181
JV Payables 230 -
Total trade and other payables 13,156 18,205
=========== ===========
The average credit period taken for trade purchases is 30 days. No interest is charged on the trade payables. The carrying values of trade and other payables are considered to be a reasonable approximation of the fair value and are considered by the Directors as payable within one year.
Non-current accounts payable
On 2 July 2019 the Group agreed with a supplier that GBP3.0 million of oilfield service and oilfield equipment contract payments will not become payable until such time as i3 has received its first sales revenues from Liberator Phase I. This payable has been recorded as a non-current accounts payable. On 17 May 2021 the terms were restructured, see note 23.
16 Borrowings
H1-2019 loan note facility
In May 2019, the Company completed a GBP22 million H1-2019 loan note facility ("H1-2019 LN"). The H1-2019 LNs have a term of 4 years, maturing on 31 May 2023 and bearing interest, payable on a quarterly basis at the Company's option (i) in cash at a rate of 8% per annum, or (ii) in kind (at i3's option) at a rate of 11% per annum by the issuance of additional H1-2019 LNs.
The noteholders were granted warrants ("H1-2019 LN Warrants") in the notional amount of GBP1 for each GBP1 of loan notes issued, with H1-2019 Warrants being issued proportionately across three series. The H1-2019 LN Warrants vested on the issue date and expire 4 years thereafter and can be exercised through either/or a combination of a cash payment and/or surrender of H1-2019 LNs plus accrued interest equal to the aggregate notional amount of the H1-2019 LN Warrants being exercised. Each H1-2019 LN Warrant gives the holder the right to convert the notional amount into such number of shares as is derived by dividing the notional amount by the exercise price.
Notional Exercise Shares to Share price Time to Value (
amount of price upon be issued at issuance maturity GBP/share)
warrants issuance upon exercise ( GBP) (years)
( GBP) ( GBP/share) of warrants
Tranche
1 7,333,333 0.4070 18,018,018 0.39 4 0.2557
Tranche
2 7,333,333 0.4810 15,246,015 0.39 4 0.2435
Tranche
3 7,333,333 0.5550 13,213,213 0.39 4 0.2313
Total fair value of the Tranche 1, Tranche 2 and Tranche 3 warrants on issuance was GBP11,375,184 and was bifurcated from the debt contract and classified as equity.
The H1-2019 LNs are comprised of the following components: the debt contract, the conversion feature, the interest rate payment option and the early conversion feature (at i3's option). At inception the debt component was recorded at an estimated fair value of GBP10,624,816. The debt balance is unwound using the effective interest rate method to the principal value at maturity with a corresponding non-cash accretion charge to earnings.
On the 23 June 2020 the Company amended the 30 April 2020 Development Funding Long-stop Date (previously amended on 8 November 2019 when the Majority Noteholders of the Company's secured loan notes agreed to extend the date by which the Company must either inter into a reserves based lending facility or find an alternative means of funding to achieve first oil from the Liberator field, to 30 April 2020). As the Company was not in a position to enter into such a facility by 30 April 2020, the Company and the Majority Noteholders have come to an agreement to waive this condition in return for certain amendments to the May 2019 Loan Note Instrument and the associated Warrant Instruments.
The Loan Note Instrument Amendments are as follows:
The obligation to enter into a development facility for Liberator by a certain date has been removed. A new Corporate Development Long-stop Date had been set for 30 September 2020 prior to which i3 has to achieve one of the following Corporate Development Longstop Conditions:
-- Secure firm irrevocable commitments for a minimum GBP15mm of unsecured or fully subordinated financing, subject only to closing mechanics; or
-- Agree a farm-out and/or funding term sheet, subject only to legal documentation to fund the drilling of a least one appraisal well on Serenity during 2020 or 2021; or
-- Execute an acquisition agreement for at least 2500 boepd of production net to i3.
In addition, the Company has an obligation to achieve net corporate production at or above 5000 boepd by 30 April 2021. These requirements were met with the completion of the Gain acquisition on 3 September 2020.
The Loan Note Instrument amendments include the requirement that the currently outstanding i3 management options will be cancelled, and replacement options will be issued to i3 staff and directors which replicate the terms of the adjusted Loan Note warrants (the "New Options") in relation to the exercise price, to seek alignment between the Noteholders and management (note 20).
The Warrant Instrument Amendments are as follows:
All warrants associated with the Loan Notes will have their strike prices reset to the nominal value of i3 shares (GBP0.0001/share). The Company calculated the difference in the fair value of the unmodified and modified warrants at the modification date of June 23, 2020 resulting in an additional expense of GBP2,199 thousand recognized in share-based payment expense (note 19).
The Loan Note Instrument Amendments is a related-party transaction under Rule 13 of the AIM Rules for Companies as a result of the Company's largest shareholder, Bybrook Capital LLP (owning 13.87% of the Company's issued shares) being a Loan Note holder. In addition, the amendments to the managements options is a related-party transaction for the purposes of Rule 13 of the AIM Rules for Companies. In relation to these transactions, Linda Beal is considered to be independent for the purposes of AIM Rule 13. Having consulted with WH Ireland Limited, the Company's Nominated Advisor ("Nomad"), the independent director considers that the terms of the related-party transactions are fair and reasonable insofar as shareholders are concerned.
The H1-2019 LNs are redeemable before the maturity date and the holders are secured against the Company's assets. The Company may repay all or part of the H1-2019 LNs within the first 12 months at 116% of par and at par plus accrued interest thereafter. The fair value of the repayment option is nil at 30 June 2020.
Interest expense and accretion expense to 31 December 2020 was GBP2,486 and GBP2,355 respectively.
Borrowings reconciliation
Convertible H1-2019 LN Leases Total
loan notes
("CLNs")
GBP'000 GBP'000 GBP'000 GBP'000
-------------------- ----------- ---------- ------- --------
At 1 January
2019 592 - - 592
Issued - 22,000 - 22,000
H1-2019 LN Warrants - (11,375) - (11,375)
Increase through
interest (152) 1,227 - 1,075
Accretion expense 1,194 - 1,194
Conversion of
CLNs (65) - - (65)
Repayment of
CLNs (368) - - (368)
Foreign exchange (7) - - (7)
----------- ---------- ------- --------
At 31 December
2019 - 13,046 - 13,046
New leases - - 110 110
Increase through
interest - 2,486 1 2,487
Accretion expense - 2,355 - 2,355
Lease payments - - (10) (10)
Exchange movement - - (2) (2)
----------- ---------- ------- --------
At 31 December
2020 - 17,887 99 17,986
=========== ========== ======= ========
Convertible H1-2019 LN Leases Total
loan notes
("CLNs")
GBP'000 GBP'000 GBP'000 GBP'000
--------------- ----------- ---------- ------- -------
Of which:
Current - 28 28
Non-current - 17,887 71 17,958
----------- ---------- ------- -------
At 31 December
2020 - 17,887 99 17,986
=========== ========== ======= =======
17 Decommissioning provision
Year Ended
31 December
2020
GBP'000
-------------------------------------------------- ------------
At 1 January
Liabilities assumed through business combinations
(note 4) 69,092
Liabilities settled (109)
Liabilities settled under SRP (104)
Change in estimates (2,310)
Unwinding of discount (note 8) 214
At 31 December 66,783
============
Year Ended
31 December
2020
GBP'000
--------------- ------------
Of which:
Current 1,234
Non-current 65,549
At 31 December 66,783
============
The decommissioning provision relates to liabilities assumed through the Gain and Toscana acquisitions for the abandonment, reclamation, and remediation of wells and facilities. The wells and facilities are expected to be decommissioned at the end of their useful life, which ranges from 2021 to 2071. Estimated costs have been inflated at a rate of 1.0% per annum and discounted at a rate of 1.21% per annum. The change in estimate is largely due to increases in market interest rates from the date of the acquisitions, which was 1.04% at the time of the Gain acquisition and 1.25% at the time of the Toscana acquisition. Abandonment costs are forecast to occur between 1 and 50 years.
Liabilities settled reflect work undertaken in the year. This includes wells decommissioned under Alberta's Site Rehabilitation Program ("SRP") whereby certain costs of settling the Group's liabilities were borne by the Government of Canada. Where liabilities were settled through the SRP a corresponding decrease to the decommissioning asset was recorded.
Liabilities settled reflect work undertaken in the year. This includes wells decommissioned under Alberta's Site Rehabilitation Program ("SRP") whereby certain costs of settling the Group's liabilities were borne by the Government of Canada. Where liabilities were settled through the SRP a corresponding decrease to the decommissioning asset was recorded.
18 Authorised, issued and called-up share capital
Issuance Ordinary Deferred Nominal Ordinary Deferred Share Share Share
date shares shares value per shares shares premium issuance premium
Share before costs after
share Share
issuance issuance
costs costs
Shares Shares GBP GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
As at 31 December 2018 41,017,438 5,000 - 4 50 9,538 323 9,215
Issued at 37
pence/share 18 Mar 19 11,005,527 - 0.0001 1 - 4,071 266 3,805
Issued at 37
pence/share 01 Apr 19 32,237,716 - 0.0001 3 - 11,925 704 11,221
Issued at 37
pence/share 04 Apr 19 2,131,538 - 0.0001 - - 788 - 788
Issued at 37
pence/share 05 Apr 19 983,059 - 0.0001 - - 364 - 364
Issued at 37
pence/share 31 May 19 5,405,405 - 0.0001 1 - 1,999 100 1,899
Issued at 43
pence/share 31 May 19 653,002 - 0.0001 - - 281 - 281
Issued at 35
pence/share 06 Dec 19 14,285,715 - 0.0001 2 - 4,999 - 4,999
----------- ---------- --------- ---------- ---------- --------- ---------- ---------
As at 31 December 2019 107,719,400 5,000 - 11 50 33,965 1,393 32,572
Warrants
exercised
at 0.01
pence/share 24 Aug 20 6,788,945 - 0.0001 1 - - - 1,661
Issued at 5
pence/share 28 Aug 20 581,147,255 - 0.0001 58 - 28,999 1,806 27,194
Issued for
Toscana
acquisition
(note 4) 30 Oct 20 4,399,215 - 0.0001 - - 178 - 178
700,054,815 5,000 - 70 50 63,142 3,199 61,605
=========== ========== ========= ========== ========== ========= ========== =========
The ordinary shares confer the right to vote at general meetings of the Company, to a repayment of capital in the event of liquidation or winding up and certain other rights as set out in the Company's articles of association.
The deferred shares do not confer any voting rights at general meetings of the Company and do confer a right to a repayment of capital in the event of liquidation or winding up, they do not confer any dividend rights or any of redemption.
No dividends were proposed. (2019 - Nil).
19 Stock-based payments
During the year the Group had share based payment expense of GBP2,534 thousand (2019: GBP3,117 thousand).
Employee and NED Share Options
During the year the Group had share based payment expense relating to the issuance of share options of GBP335 thousand (2019: GBP1,206 thousand). Details on the employee and NED share options outstanding during the period are as follows:
Number of Weighted average Weighted average
options exercise price contractual
life
(pence)
---------------------------- ------------ ---------------- ----------------
At 1 January 2019 4,853,853 59.37 9.19
Granted during the year 7,398,160 37.28 10.00
------------ ---------------- ----------------
At 31 December 2019 12,252,013 46.03 8.91
Cancelled - 28 October 2020 (12,252,013) 46.06 8.09
Issued - 28 October 2020 12,128,955 0.01 4.00
Issued - 3 December 2020 4,028,659 0.01 4.00
At 31 December 2020 16,157,614 0.01 3.85
============ ================ ================
On 28 October 2020, the Group cancelled all 12,252,013 employee and NED share options ("Old Options") and replaced them with 12,128,955 newly issued options ("New Options") which replicated the terms of the modified 1H-2019 LN warrants. The Old Options were issued between 2017 and 2019 and had exercise prices ranging from 21.50 pence to 63.50 pence and a term of 10 years. The New Options have an exercise price equal to the nominal value of i3 shares of 0.01 pence, a term of 4 years, and certain non-market based vesting conditions. The incremental fair value of GBP130 thousand was expensed in 2020 as all vesting conditions had been achieved. The fair values were calculated using the Black Scholes model with inputs for stock price of 4.30 pence, exercise price of 0.01 pence, time to maturity of 4 years, volatility of 116%, and the Risk-Free Interest rate of 0.273%.
On 3 December 2020, the Group issued 4,028,659 employee share options on terms which replicated the New Options described above. The fair value of GBP205 thousand was expensed in 2020 as all vesting conditions had been achieved. The fair value was calculated using the Black Scholes model with inputs for stock price of 6.10 pence, exercise price of 0.01 pence, time to maturity of 2.94 years, volatility of 120%, and the Risk-Free Interest rate of 0.291%.
All 16,157,614 outstanding employee share options as at 31 December 2020 were fully vested and exercisable.
Warrants
During the year the Group had share based payment expense relating to the modification and issuance of warrants of GBP2,198 thousand (2019: GBP1,911 thousand). Details on the warrants outstanding during the period are as follows:
Number of Weighted average Weighted average
warrants exercise price contractual
life
(pence)
--------------------------- ------------ ---------------- ----------------
At 1 January 2019 - - -
Granted during the year 61,002,357 46.98 3.52
------------ ---------------- ----------------
At 31 December 2019 61,002,357 46.98 3.04
Modified - 23 June 2020 (55,981,044) 46.09 2.67
Modified - 23 June 2020 55,981,044 0.01 2.67
Exercised - 24 August 2020 (6,788,945) 0.01 2.77
At 31 December 2020 54,213,412 5.27 1.98
============ ================ ================
On 23 June 2020, the Group modified all 46,477,246 1H-2019 LN Warrants and 9,503,798 work fee warrants ("Old Warrants") to reset their strike price equal to the nominal value of i3 shares 0.01 pence. The Old Warrants were split across 3 tranches with exercise prices ranging from 40.70 pence to 55.50 pence (see note 16), and the work fee warrants had an exercise of 40 pence. The incremental fair value of GBP2,198 thousand was expensed in 2020. The incremental fair values were calculated using the Black Scholes model with inputs for stock price of 6.10 pence, exercise price of 0.01 pence, time to maturity of ranging from 1.38 to 2.94 years, volatility of 120%, and the Risk-Free Interest rate of 0.291%.
On 24 August 2020, 6,788,945 warrants were exercised, and GBP1.7 million was reclassified from the Warrants-LN to the Share premium accounts within equity.
EMI Options
The Company operates an Employee Management Incentive (EMI) share option scheme. Grants were made on 14th April 2016 and 6th December 2016. The scheme is based on eligible employees being granted EMI options. The right to exercise the option is at the employee's discretion for a ten-year period from the date of issuance. 500,000 options were exercisable at both 31 December 2019 and 2020 at a price equal to GBP0.11 per share respectively. If the options remain unexercised after a period of ten years from the date of grant the options expire. Employees who leave i3 Energy have 60 days to exercise the Options prior to them being forfeited. The options outstanding at 31 December 2020 have a weighted average exercise price of GBP0.11 and a weighted average remaining contractual life of 5.92 years.
20 Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Remuneration of Key Management Personnel
Directors of the Group are considered to be Key Management Personnel. The remuneration of the Directors is set out in note 10.
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.
Ultimate parent
There is no ultimate controlling party of the Group.
21 Financial instruments and capital risk management
All financial instruments are carried at amortised cost.
Financial Risk Management
Financial Risk Factors
The Group's activities expose it to a variety of financial risks; market risk (including foreign currency risk and price risk), credit risk and liquidity risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.
Risk management is carried out by the Board of Directors under policies approved at Board meetings. The Board frequently discusses principles for overall risk management including policies for specific areas such as foreign exchange.
a Market Risk i Foreign Exchange Risk
The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the UK pound sterling and the Canadian dollar and US Dollar. Foreign exchange risk arises from recognised monetary assets and liabilities (USD and CAD bank accounts) where they may be denominated in a currency that is not the local functional currency. The Group mitigates is foreign exchange exposure by holding monetary assets and liabilities primarily in the local functional currency. All of the monetary assets and liabilities held by the Group's Canadian operations were held in CAD, the functional currency, and therefore there is no foreign exchange exposure in the Canadian operations. The UK operations held net monetary liabilities denominated in CAD of GBP977 thousand. A 10% strengthening of GBP against CAD would have increased profit after tax by GBP89 thousand, and a 10% weakening of GBP to CAD would have decreased profit after tax by GBP109 thousand. The UK operations held net monetary liabilities denominated in USD of GBP2,181 thousand. A 10% strengthening of GBP against USD would have increased profit after tax by GBP197 thousand, and a 10% weakening of GBP to USD would have decreased profit after tax by GBP241 thousand. The impact on equity is the same as the impact on profit after tax.
The Group is also exposed to exchange differences on translation of its foreign operations in Canada, which resulted in a loss of GBP185 thousand for the year ended 31 December 2020. A 10% strengthening of GBP against CAD as at 31 December 2020 would have resulted in a loss on translation of GBP4,522 thousand, and a 10% weakening of GBP to CAD would have resulted in a gain of GBP5,201 thousand. Profit after tax would not be impacted.
b Credit Risk
Credit risk arises from cash and cash equivalents and trade receivables from the sale of hydrcarbons. It is Group policy to assess the credit risk of new customers.
The Group considers the credit ratings of banks in which it holds funds in order to reduce exposure to credit risk. The Group will only keep its holdings of cash with institutions which have a minimum credit rating of 'A'. The Group sells hydrocarbons to reputable purchasers and are settled the month following their sale. Long-term deposits for decommissioning provisions are lodged with government bodies. The carrying value of cash and cash equivalents and trade and other receivables represents the Group's maximum exposure to credit risk at year end.
The Group considers that it is not exposed to major concentrations of credit risk.
The Group holds cash as a liquid resource to fund its obligations. The Group's cash balances are held in Sterling Canadian Dollar, and US Dollar. The Group's strategy for managing cash is to maximise interest income whilst ensuring its availability to match the profile of the Group's expenditure. This is achieved by regular monitoring of interest rates and monthly review of expenditure forecasts.
c Liquidity Risk
The Group has relies upon debt and equity funding, and cash flow from its Canadian operations to finance operations. The Directors are confident that adequate funding will be forthcoming with which to finance operations. Controls over expenditure are carefully managed.
The Group ensures that its liquidity is maintained by a management process which includes projecting cash flows and considering the level of liquid assets in relation thereto, monitoring Balance Sheet liquidity and maintaining funding sources and back-up facilities.
The Group's expected cash flows for its financial liabilities are presented in the following table and includes undiscounted principal and expected interest payments.
6 Months 6-12 months 1-2 years 2+ years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- -------- ----------- --------- -------- -------
Trade and other
payables 13,155 - - - 13,155
Non-current payable
* - - - 3,000 3,000
H1 2019 LNs - - - 22,000 22,000
H1 2019 PIK interest
** - - - 9,680 9,680
Leases 15 15 17 - 47
Total 13,170 15 17 34,680 47,882
======== =========== ========= ======== =======
* The non-current payable will not become payable until such time as i3 has received its first sales revenues from Liberator Phase I (see Note 15). As there is no fixed term and revenue is not expected from Liberator Phase I for at least 2 years, this has been categorised as 2+ years.
** The H1 2019 LNs have an early redemption option and the interest can be paid in either cash or in kind (see note 16). The table assumes no early redemption and that all interest is paid in kind at the maturity.
d Commodity Price Risk
Commodity price risk in the Group primarily arises from price fluctuations in markets for the Group's oil and gas products. The Group currently does not actively managed commodity price risk through entering into fixed price contracts or other hedging activities. This Group continually reviews its hedging strategy and may take measures to mitigate commodity price risk in the future. The Group entered into certain commodity hedge contracts in 2021, see note 23.
Capital Risk Management
The Group's objectives when managing capital are to safeguard the Group's ability to position as a going concern and to continue its development and production activities. The capital structure of the Group consists of borrowings and leases of GBP17,986 thousand at 31 December 2020 (2019 - GBP13,046 thousand) (note 16), has capital, defined as the total equity and reserves of the Group of GBP79,888 (2019 - GBP31,660) and cash and equivalents of GBP6,178 (2019 - GBP19,070).
The group monitors its level of cash resources available against future planned exploration and evaluation activities and may issue new shares in order to raise further funds from time to time.
22 Commitments
1 year 1-2 years 3-4 years 5+ years Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- ------- --------- --------- -------- -------
Operating 57 11 - - 68
Transportation 1,605 1,099 340 121 3,165
Total 1,662 1,110 340 121 3,233
======= ========= ========= ======== =======
Operating commitments relate to offices leases in the UK that expires in April 2022 and a field office lease in Canada that expires in July 2021. Transportation commitments relate to take-or-pay pipeline capacity in Alberta.
In addition to the above, as at 31 December 2020, the Company had cancellation exposure to certain long-lead items for its Liberator development totalling GBP3,960 thousand (2019 - GBP3,960 thousand).
23 Events after the reporting period
On 4 January 2021 the Company announced that it had relinquished UKCS licence P.1987 as it was at the end of its two-year term and i3 had determined the contingent resources associated with the licence were sub-commercial on a stand-alone basis. i3 may re-apply for the licence in the future if it is justified following the appraisal of the prospective Liberator West and/or Minos High areas, or after further drilling at its Serenity discovery. The relinquishment results in a significant savings in licence fees and has no impact on the Company's P.2358 licence which contains the vast majority of i3's resource potential in the UK North Sea.
Also on 4 January, the Company announced that it had replaced one of its brokers, Mirabaud Securities, with Tennyson Securities, the new home of the oil and gas corporate finance, equity research and sales team that departed Mirabaud Securities.
On 10 January, the Company issued options over a total of 13,166,358 ordinary shares to key staff that joined its Canadian subsidiary, i3 Energy Canada Ltd., following the acquisition of Gain's oil & gas assets. The options were issued in accordance with the rules of the Company's Employee Share Option Plan at an exercise price of GBP0.061 per share, the closing price on 8 January 2021. One-third of the options vested immediately, with a further one-third vesting in July 2021 if production exits at or above 9,000 boepd, and 100 per cent will vest if there is an addition of 5,000 boepd or, alternatively, 25 MMboe 2P reserves. The options will otherwise fully vest on the third anniversary.
On 10 January, the Company also issued options over a total of 75,184,252 ordinary shares as described in the Gain-related Readmission document released on 11 August 2020. The options were issued in accordance with the rules of the Company's Employee Share Option Plan at an exercise price of GBP0.05 per share. Options issued to employees of i3 Canada contain the same vesting conditions as the GBP0.061 options described in the paragraph above. Of the options issued to employees of i3 North Sea Limited, one-third of the options vested immediately, with a further one-third vesting at the spud of the next Serenity / Liberator appraisal well, and 100 per cent will vest upon a third-party reserve auditor attributing 25 MMbbls 2P post drilling of a Serenity / Liberator appraisal well. The options will otherwise fully vest on the third anniversary. Of the options issued to the executive and non-executive directors and one corporate employee, one-third of the options vested immediately, with a further one-third vesting upon the earlier of spud of the next Serenity or Liberator appraisal well; and July 2021 production exits being at or above 9,000 boepd, and 100% will vest upon the earlier of a third-party reserve auditor attributing 25 MMbbls 2P post drilling of a Serenity or Liberator appraisal well and the addition of 5,000 boepd or 25 MMboe 2P reserves. The options will otherwise fully vest on the third anniversary. .Of the options issued to the executive and non-executive directors and one corporate employee, one-third of the options vested immediately, with a further one-third vesting upon the earlier of spud of the next Serenity or Liberator appraisal well; and July 2021 production exits being at or above 9,000 boepd, and 100% will vest upon the earlier of a third-party reserve auditor attributing 25 MMbbls 2P post drilling of a Serenity or Liberator appraisal well and the addition of 5,000 boepd or 25 MMboe 2P reserves. The options will otherwise fully vest on the third anniversary.
On 23 February, the Company announced that production between November 2020 and January 2021 had remained predictably stable at 9,150 boepd (41% liquids), with expected 2021 net operating income ("NOI" = revenue minus royalties, opex, transportation and processing) of CAD35 million (USD27.6 million). i3 stated on 5
May that Q1 2021 production had been 8,856 boepd (41% liquids), outperforming expectations, and updating its 2021 NOI forecast to CAD38 million (USD31 million).
Also on 23 February, i3 announced that in December 2020, it had completed an 80-hour flow-test on a horizontal Falher formation well located on its Noel acreage in Northeast British Columbia, Canada. The flow-test ran for a sustained period at 4,200 mcf/d (700 boepd) on a 1/4" choke. The Company has reiterated as recently as 5 May that the Noel well is expected to be brought on production at approximately 500 boepd during the second quarter of 2021, following tie-in.
On 5 May, the Company announced that during February and early March, the following oil and propane hedges were executed:
Commodity Period bbl/d Type CAD/bbl
Crude 1/Apr/21 31/Dec/21 200 SWAP $73.70
---------- ----------- ------ ----- --------
Crude 1/Apr/21 31/Dec/21 200 SWAP $75.20
---------- ----------- ------ ----- --------
Crude 1/Mar/21 31/Dec/21 350 SWAP $64.50
---------- ----------- ------ ----- --------
Propane 1/Apr/21 31/Dec/21 200 SWAP $32.45
---------- ----------- ------ ----- --------
During March and April, a number of natural gas swaps were executed for the period between 1 June to 31 October 2021, totalling volumes of 21.4 MMscfd at an average price of CAD2.83/mcf.
In May the Company provided an update on its continued expansion into the prolific Clearwater play in Alberta, Canada. In February and March of 2021, i3 took advantage of winter access to re-enter three suspended gas wells in search of oil on the 148 km(2) of historically gas-focused Clearwater acreage it had acquired as part of its 2020 purchase of Toscana. Encouragingly, oil samples were recovered from multiple intervals in two of the three wells, and i3 has commenced planning for an appraisal and development drilling programme to be implemented during the winter drill window in either Q4 2021 or Q1 2022. Further, the Company acquired a 15-year lease on 18 km(2) of land in the emerging Cadotte area through an Alberta Crown Land sale for under USD300k, and also entered a farm-in agreement that could earn it up to net 29 km(2) of land (for its 50% working interest) through the drilling of up to 9 wells at a net cost of USD7 million. Each well is expected to have a payout between one and two years and an initial production rate of approximately 150 bopd following start-up. The first farmout well is expected to be spud in Q2 2021.
On 17 May, i3 announced that it had successfully restructured legacy contracts and agreements for equipment, oil field services, and warrants with Baker Hughes, a GE Company, and GE Oil & Gas Limited (collectively referred to as "BHGE" hereafter). In summary, the remainder of a GBP5.8 million contract for subsea trees and wellheads was cancelled, 5,277,045 warrants had an exercise price reduction to GBP0.0001 per share (the "Warrant Shares"), and an outstanding contingent payment for GBP3 million in oil field services and equipment that becomes payable at such time as the Company receives consideration from any sale or farm-down of its Serenity or Liberator assets will be reduced by the exercise value of the Warrant Shares, the market value of the Warrant Shares from time to time, all dividends received by BHGE associated with the Warrant Shares, and certain payments to be made to BHGE across 2021 totalling GBP374,383. The purpose of this restructuring was to enable i3 to become a dividend payer, as certain conditions of the abovementioned contracts prevented it from reducing its share premium account - a required step in order for i3 to effect dividend distributions to its shareholders. Also announced on 17 May was i3's confirmation that it had received consent from all other pertinent creditors to proceed with the proposed reduction of its share premium account, as described below.
On 18 May, i3 affirmed that its Board considers it highly desirable that the Company has the maximum flexibility to consider the payment of dividends and otherwise return value to shareholders. The Company is generally precluded, however, from the payment of any dividends or other distributions or the redemption or buy-back of its shares in the absence of sufficient distributable reserves. The Company's share premium account currently stands at approximately GBP62 million. As at 28 February 2021, the Company had a retained earnings deficit of approximately GBP11 million. i3 proposes that its share premium account be cancelled. The proposed reduction of capital (the "Capital Reduction") is intended to eliminate the retained earnings deficit and create distributable reserves equal to the balance. i3 has called a Notice of General Meeting of its shareholders and recommends that they vote in favour of the proposed Capital Reduction. If the proposed cancellation of the Company's share premium account is approved by Shareholders at the General Meeting, it will be subject to the scrutiny of, and confirmation by, the UK High Court, which will take due account of the protection of creditors and, subject to that confirmation and registration by the Registrar of Companies in England and Wales of the order of the High Court, is expected to take effect on or around 1 July 2021. A Capital Reduction approved by i3's shareholders and the High Court will allow it to pay the CAD2 million (GBP1.16 million) dividend associated with its Q1 20201 cash flow that it announced on 31 March, and to enable its intention to make regular, half-yearly dividend payments in the future.
On 31 May, the Company announced that it had exercised a Right of First Refusal ("ROFR") to acquire the entire 49.5% operated interest held by Anegada Oil Corporation in its South Simonette property ("Anegada Interest"), taking i3 from a 49.5% non-operated interest to a 99% operated interest in the asset. Post acquisition and as Operator, i3 will bring two suspended wells back onto production in July at a total estimated cost of USD 1.16 million (USD 0.58 million for each of i3's current and acquired Anegada Interest) by installing gas lift in one and repairing an electrical submersible pump in the other, resulting in an expected increase to i3's corporate production of 720 boepd (41% oil, 4% NGLs, 55% gas) and NTM NOI of USD 5.2 million; effectively increasing the Company's exposure to oil by 20% and expected NTM NOI by over 16%. The combined rate associated with the Anegada Interest for the three wells is estimated to be 430 boepd. The 2P reserves and associated valuation estimate for the Anegada Interest are 4.9 mmboe and USD 30.9 million, respectively, based on GLJ's YE 2020 reserves evaluation, reflecting the high-impact potential oil resource identified in the Lower Montney formation at South Simonette. With all three wells on production, the forecasted next twelve months net operating income for the Anegada Interest is estimated at USD 3.2 million. At a total cost to i3 of USD 4.78 million for the acquisition and two well reactivation in July, the Company is acquiring the Anegada Interest and reinstating production for 1.49x NTM forecasted NOI of USD 3.2 million, USD 11,111/boepd, and USD 0.95/boe (2P), materially below the averages since Q4 2020 for similar Western Canadian transactions of 4.53x NTM NOI, USD 32,067/boepd, and USD 5.61/boe. For i3's already-owned 49.5% South Simonette interest (and incremental to i3's current share of production from the existing producing well) the reactivation of the two wells in July is estimated to increase i3's production by 290 boepd and NTM NOI by USD 2.0 million. The Company deems this acquisition to
be highly strategic to its Montney acreage where it now has a 99% operated interest at South Simonette, a 100% operated interest at North Simonette, and gross overriding royalty interests of 5% to 15% across a 41 km(2) area of the Middle Montney interval between its North and South Simonette acreage. If fully exploited, i3 believes that North and South Simonette could deliver peak net production of approximately 26,000 boepd. The Anegada interest has a very healthy LLR of 46.1.
24 Operating income statement of the Anegada Interest
In accordance with the AIM Rules for Companies relating to the acquisition by the Company of the Anegada Interest the operating income statement of the Anegada Interest for the twelve months to 31 December 2020 are presented below:
Anegada Interest Operating Statement of Income Before Depletion and Taxation
Twelve Months Ended
31 December 2020 (unaudited)
GBP
Revenue
Production Revenue 2,359,407
Net Royalties (99,963)
------------------------------
Net Revenues 2,259,444
Operating Expense (631,303)
------------------------------
Total expenses (631,303)
------------------------------
Net Income Before Depletion and Taxation 1,628,141
==============================
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our Privacy Policy.
END
FR DKDBPPBKKAAK
(END) Dow Jones Newswires
June 01, 2021 02:15 ET (06:15 GMT)
1 Year I3 Energy Chart |
1 Month I3 Energy Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
