88 Energy Regulatory News (88E)

88 Energy Limited 

Interim Report 

88 Energy Limited (ASX: 88E; AIM: 88E) ("88 Energy" or "the Company") is pleased to announce its interim results for the half year ended 30 June 2020.

A copy of the Company's Interim Report, extracts from which are set out below, has been lodged on the ASX and is also available on the Company's website at www.88energy.com.

Media and Investor relations:

OPERATING AND FINANCIAL REVIEW

During the period, the Group has continued its principal activities in Alaska. A summary of significant activities is below:

Highlights for the first half of 2020:

Project Icewine

· The Permit to Drill for the Charlie-1 exploration well was approved by the Alaska Oil and Gas Conservation Commission (AOGCC) on the 11 February 2020;

· The Charlie-1 well spudded on 2 March 2020 with the well intersecting all the of the pre-drill targets safely and efficiently;

· Total Depth of 11,112' was reached on 30 March 2020, having drilled through and logged all of the targets in the well, including the HRZ;

· Results from the Logging While Drilling (LWD) program were largely consistent with those seen in the nearby Malguk-1 well, with shows and elevated log response recorded over several horizons, with the wireline logging program commencing shortly after reaching Total Depth;

· The Charlie-1 exploration well confirmed a large condensate discovery in the Torok formation, in both the Middle Stellar and Lower Stellar targets;

· Initial petrophysical interpretation indicated hydrocarbon pay in both the Torok and Seabee formations, with additional confirmatory work underway;

· Post well analysis ongoing to confirm the composition and gas to liquid ratio of the Torok discovery, with excellent Vertical Seismic Profile data obtained from the well which will be used in conjunction with other log data and the existing 3D seismic to remap targets, and conduct other post well analysis;

· Detailed logs and sidewall cores were also acquired in the HRZ formation, which will now be analysed over the coming months; and

· The well was plugged and abandoned in April, with the cost of the well within budget.

Off-market Takeover Bid for XCD Energy Limited

· 88 Energy announced its intention to make an off-market takeover offer to acquire all of the fully paid ordinary shares and listed options on issue in XCD Energy Limited on 27 April 2020, with XCD Energy shareholders entering into pre-bid acceptance agreements with 88 Energy in respect of 18.5% of shares on issue and 6.8% of listed options on issue;

· The Board of Directors of XCD Energy on 7 May unanimously recommended that XCD Energy securityholders accept the improved Offers from 88 Energy, in the absence of a superior proposal and subject to the independent expert concluding that the offer is fair and reasonable, or not fair but reasonable. 88 Energy and XCD Energy also announced they had entered into a Bid Implementation Agreement;

· As at 30 June 2020, 88 Energy had a relevant interest in 85.67% of XCD Energy's shares and 81.35% of XCD Energy's listed options, with the Offer being extended to 13 July 2020;

· Subsequent to 30 June 2020, 88 Energy announced it would compulsorily acquire the remaining shares and listed options in XCD having reached over 90% of acceptances in the Offers. Compulsory acquisition was completed on 17 August; and

· The merger creates an Alaska focused oil explorer with:

§ A diversified portfolio of 3 key project areas; Project Icewine, Yukon Leases and Project Peregrine at various stages of project maturity;

§ Board, management and technical team with a proven capability and track record; and 

§ Increased scale, market presence, funding capability and share trading liquidity.

Yukon Acreage

· Discussions continue with nearby resource owners to optimise the monetisation strategy of the acreage; and

· Permitting underway ahead of potential drilling in 2021 - subject to farm-out.

Western Blocks

· The Western Block leases were relinquished in the half-year by the Joint Venture.

PROJECT ICEWINE

Project Icewine Conventional

· Charlie-1 Exploration Well

The Permit to Drill which was submitted prior to the end of 2019, as planned, and was approved by the Alaska Oil and Gas Conservation Commission (AOGCC) on the 11 February 2020.

Construction of the ice road which commenced in late December 2019 was fully completed together with the ice pad at the Charlie-1 drilling location, by mid-February 2020. Mobilisation of the Nordic Rig#3 to site began shortly after completion of the ice road and the Charlie-1 well was spudded on 2 March 2020.

The Charlie-1 well reached its Total Depth of 11,112' (TVD) on 30th March 2020, having drilled through and logged all of the targets in the well, including the HRZ. Results from the Logging While Drilling program are largely consistent with those seen in the nearby Malguk-1 well, drilled by BP in 1991, with shows and elevated log response recorded over several horizons.

The wireline logging program commenced shortly after Total Depth was reached, and concluded on 6 April 2020.

The company announced on 7 April 2020 that the Charlie-1 appraisal well had proved the presence of mobile hydrocarbons, in the form of condensate gas, in the Torok Formation in both the Middle Stellar and Lower Stellar targets. Hydrocarbons were successfully recovered to surface from both targets using a state-of-the-art downhole sampling tool (Ora). Upper Stellar was not tested due to the sub optimal location that it was intersected by the well.

In the Seabee Formation, Initial petrophysical interpretation also indicated hydrocarbon pay in the Seabee Formation and additional confirmatory analysis is under way. An attempt was made to take a sample from the Lower Lima target, being the better of the two Lima targets. This attempt was unsuccessful due to insufficient reservoir quality; however, given that these targets were not intersected optimally, there still may be good potential for higher quality reservoir at a different location. Excellent Vertical Seismic Profile ("VSP") data was obtained in the well, which is being used in conjunction with other log data and the existing 3D seismic, to remap these targets. Sidewall core analysis will also assist with determining where improved reservoir is likely to exist. Mud gas, observed while drilling, in the Seabee indicated that the hydrocarbons at this horizon are heavier than those in the Torok and this is the horizon where "live oil" was observed across the shakers in the nearby Malguk-1 well.

Sampling was also completed in the Schrader Bluffs Formation from the base of the Indigo target, which was found to be water bearing. The Charlie prospect was found to be poorly developed and was not sampled. Oil shows in this interval are likely to be related to residual oil that is not trapped in the system.

Premier informed the Joint Venture during the quarter that it will withdraw from the project, as the well did not meet their pre-drill expectations.

The cost of the well remains within the expected budget and Premier Oil is continuing to pay costs in relation to the drilling operations and post well testing and site clean up.

The well was plugged and abandoned ("P&A") in line with standard industry practice in April 2020.

Project Icewine Unconventional

Detailed logs and sidewall cores were acquired in the HRZ formation during drilling of the Charlie-1 well, which will be analysed over the coming months.

The HRZ remains a viable target and options to commercialise this potentially large resource continue to be pursued. The Joint Venture plans to conduct a formal farm-out process to fund further appraisal.

Deferral of Project Icewine Lease Rental Payments

On 4 May 2020, Alaska Department of Natural Resources ("DNR") granted Accumulate Energy Alaska, Inc an extension of time within which to make payments on annual oil and gas lease rentals due to the State of Alaska in 2020. For oil and gas lease rentals due in June, July, and September of 2020, a 6-month extension was given to make rental payments due in these periods. For oil and gas lease rentals due in October and November of 2020, a 3-month extension was given.

YUKON LEASES

Discussions continued during the half-year with nearby lease owners to optimise the monetisation strategy for existing discovered resources located in the vicinity of the Yukon Leases. The Yukon Leases contain the 86 million barrel Cascade Prospect*, which was intersected peripherally by Yukon Gold-1, drilled in 1994, and classified as an historic oil discovery. 88 Energy recently acquired 3D seismic (2018) over Cascade and, on final processing and interpretation, high-graded it from a lead to a drillable prospect. The Yukon Leases are located adjacent to ANWR and in close proximity to recently commissioned infrastructure.

Permitting continued ahead of a future possible drilling campaign - subject to farm-out.

# Refer announcement 7th November 2018

Cautionary Statement: The estimated quantities of petroleum that may be potentially recovered by the application of a future development project relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration, appraisal and evaluation are required to determine the existence of a significant quantity of potentially movable hydrocarbons.

WESTERN BLOCKS

During the half-year an assessment of the strategy for future of leases continued with a decision to relinquished the acreage in the half-year by the Joint Venture.

PLACEMENT TO RAISE A$5 MILLION

On the 24 January 2020, the Company announced that it had successfully completed a capital raise of A$5 million (before costs), with the placement made to domestic and international institutional and sophisticated investors through the issue of 238 million ordinary shares at A$0.021 (equivalent to £0.011) per New Ordinary Share.

OFF-MARKET TAKEOVER BID FOR XCD ENERGY LIMITED

On 27 April 2020, 88 Energy announced its intention to make an off-market takeover offer to acquire all of the fully paid ordinary shares and listed options on issue in XCD Energy Limited, an oil exploration company with operations on the North Slope of Alaska, USA.

88 Energy entered into pre-bid acceptance deeds with major XCD Energy shareholders and listed option holders in respect of 18.5% of the XCD Energy shares and 6.8% of the XCD Energy listed options on issue. Pursuant to these deeds, the Shareholders accepted the Proposed Offer, in the absence of a superior proposal.

The transaction creates an Alaska-focused oil exploration and appraisal company with a diversified portfolio of three highly prospective project areas: Project Icewine, Yukon Leases and Project Peregrine and provides an attractive investment proposition for existing and new shareholders.

Key benefits of the transaction include:

o the creation of an established oil exploration and appraisal company with an attractive and complementary portfolio of exploration assets - at various stages of project maturity;

o enhanced strategic, commercial, technical and financial strength to optimise funding of operations, including an increased level of liquidity and exposure to a larger global investor base giving greater financing flexibility;

o the ability to optimise operational activity across the combined group's highly prospective exploration / appraisal portfolio with potential synergies associated with future project development and infrastructure requirements; and

o a strong board, management and technical team with a proven track record for advancing projects and delivering on milestones, including two 3D and one 2D seismic survey, drilling of four exploration wells safely and on budget over a 5 year period as well as execution of farm-in/farm-out transactions.

On 7 May 2020, 88 Energy and XCD Energy Limited announced they had agreed to merge and had entered into a Bid Implementation Agreement, with the Board of Directors of XCD Energy unanimously recommend to XCD Energy shareholders and listed optionholders that they accept the Offers, in the absence of a superior proposal and subject to the independent expert concluding that the offer is fair and reasonable or not fair but reasonable.

The Offers were subject to only a limited number of conditions, including a 90% minimum acceptance condition. The full list of conditions to the Offers are set out in the announcement of 7 May 2020 in Schedule 2 of the BIA provided in Annexure A to the announcement. Further details regarding the Offers were contained in the Bidder's Statement, which was announced and sent to XCD Energy securityholders on 25 May 2020.

On 18 June 2020, 88 Energy announced that it had declared its recommended off-market takeover offers for all of the ordinary shares and listed options in XCD Energy free from all defeating conditions, having reached a relevant interest in 59.27% of XCD Energy's shares and 28.53% of XCD Energy's listed options on 17 June 2020.

In addition, 88 Energy announced that XCD Energy shareholders and listed option holders who validly accepted the Offers made to them before they were declared unconditional will be issued their consideration by 26 June 2020. Any XCD Energy shareholders and listed option holders who are yet to validly accept the Offers made to them will be issued with their 88 Energy shares and listed options within 7 business days of their acceptance being processed.

Further, 88 Energy stated in its announcement of 18 June 2020 that if the Company acquires a relevant interest in XCD Energy of 90% or more, 88 Energy intends to proceed with compulsory acquisition of any outstanding XCD Energy shares and listed options under Part 6A of the Corporations Act. If this occurs, XCD Energy security holders who have their XCD Energy shares and listed options acquired compulsorily will not be eligible for accelerated payment terms.

Prior to 30 June 2020, the Offers were extended to 13 July 2020, and as at 30 June 2020 with 88 Energy had a relevant interest in 85.67% of XCD Energy's shares and 81.35% of XCD Energy's listed options, with the Offer was extended to 13 July 2020. Subsequent to quarter end, on 9 July 2020 88 Energy announced it will compulsorily acquire the remaining shares and listed options in XCD having reached over 90% of acceptances in the Offers, with compulsory acquisition completed on 17 August 2020.

FINANCIAL

For the period ended 30 June 2020 the Company recorded a loss of $4.020 million (30 June 2019: $29.325 million loss). The loss was largely attributable to expenditure associated with the impairment of capitalised costs associated with the relinquishment of the Western blocks during the half-year, together with general and administrative costs, finance costs and employee benefits expense.

No dividends were paid or declared by the Company during the period.

As at 30 June 2020, the Group had cash on hand of $7.274 million (31 December 2019: $15.903 million) which includes A$ 0.434 million associated with cash held by the recently acquired XCD Energy Limited group of companies and $6.840 million associated with the 88 Energy group of companies, and also included A$0.498 million in restricted cash held which is for JV operations. Net assets totalled A$75.801 million (31 December 2019: $64.598 million), with the significant increase in net assets largely due to the off-market takeover of XCD Energy Limited.

SUBSEQUENT EVENTS

The following events occurred subsequent to the period end;

· 88 Energy announced it will compulsorily acquire the remaining shares and listed options in XCD having reached over 90% of acceptances in the Offers. The Compulsory Acquisition process was completed on 17 August 2020;

· On 4 August 2020, Sarah Smith resigned as Company Secretary;

· On 17 August 15,000,000 shares were issued in lieu of cash fees for digital marketing services provided at a deemed issue price of $0.005 per share; and

· The impact of the Coronavirus (COVID-19) pandemic is ongoing and while it has not significantly impacted the entity up to 30 June 2020, it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly developing and is dependent on measures imposed by the Australian and United States Governments and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided.

There were no other subsequent event. 

The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

The consolidated statement of financial position should be read in conjunction with the accompanying notes.

The consolidated statement of cash flows should be read in conjunction with the accompanying notes.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE HALF YEAR ENDED 30 JUNE 2020

1. CORPORATE INFORMATION

The consolidated financial statements of the Company for the six months ended 30 June 2020 were authorised for issue in accordance with a resolution of the Directors on 2 September 2020.

88 Energy Limited is a for-profit, limited company incorporated and domiciled in Australia whose shares are publicly traded. The principal activities of the company and its subsidiaries (the Company) are oil and gas exploration with a portfolio of exploration interests in Alaska.

2. BASIS OF PREPARATION AND CHANGES TO THE COMPANY'S ACCOUNTING POLICIES

(a) Basis of Preparation

The half year financial report for the six months ended 30 June 2020 is a general purpose financial report prepared in accordance with requirements of the Corporations Act 2001 and Australian Accounting Standard AASB 134: Interim Financial Reporting.

The half year financial report has been prepared on a historical cost basis, except for available for sale assets, which have been measured at fair value. Unless otherwise noted, the carrying value of financial assets and liabilities as disclosed in the half year financial report approximates their fair value. The company is domiciled in Australia and all amounts are presented in Australian dollars, unless otherwise noted.

For the purpose of preparing the half year financial report, the half-year has been treated as a discrete reporting period.

The half year financial report does not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company's annual financial statements as at 31 December 2019, together with any public announcements made during the period.

The accounting policies adopted in the preparation of the half year financial report are consistent with those followed in the preparation of the Company's annual financial report for the year ended 31 December 2019, except as follows:

(i) Asset Acquisition

Where an acquisition does not meet the definition of a business combination the transaction is accounted for as an asset acquisition. The consideration transferred for the acquisition of an asset comprises the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs with regards to the acquisition are capitalised. Identifiable assets acquired and liabilities assumed in the acquisition are measured initially at cost and if not available their faire values at the acquisition date.

(b) Adoption of new and revised accounting standards

The half yearly reports have not adopted any new or revised accounting standards which have a material impact on the Company.

(c) Significant Judgements and Estimates

In addition to significant estimates and judgements disclosed in the 2019 Annual Report, we note the following;

(i) Alaska's Clear and Equitable Share ("ACES") tax rebate program

The ACES rebate is presented separately and deducted from exploration and evaluation assets. As at 30 June 2020, the Group had a tax credit receivable of US$19.1 million (A$27.8 million) from the State of Alaska, which has a fair value in the Statement of Financial Position of A$23.5 million. As at the reporting date, management have considered whether there is any objective evidence as to whether there are any indicators of impairment in accordance with AASB 9 Financial Instruments and believe this amount will be recoverable from the Alaskan DOR as a cash rebate in full based on the current legislative arrangements in Alaska. The timing and extent of payments is expected to vary however it is anticipated that all amounts will be received on or before 2021. The accretion of the receivable will be recognised as finance income.

(ii) Impairment of capitalised exploration and evaluation expenditure

The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, and are only recognised if the rights of the area of interest are current and either:

(a) the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or

(b) activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves and active and significant operations in, or in relation to, the area of interest are continuing.

Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability and facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit shall not be larger than the area of interest. Once the technical feasibility and commercial viability of the extraction of resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified from exploration and evaluation assets to Oil & Gas Properties.

The recoverability of the carrying amounts of exploration and evaluation assets is dependent on the successful development and commercial exploitation or sale of the respective area of interest.

Factors which could impact the future recoverability include the level of reserves and resources, future technological changes which could impact the cost of production, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices.

To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable in the future, this will reduce profits and net assets in the period in which this determination is made.

(iii) Asset Acquisition

The acquisition of XCD Energy Limited does not meet the definition of a business combination and as such the transaction has been accounted for as an asset acquisition.

Purchase prices related to asset acquisitions are allocated to the underlying acquired assets and liabilities based on cost and/or their estimated fair value at the time of acquisition. The determination of fair value requires the Company to make assumptions, estimates and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individually identifiable assets and liabilities. As a result, the purchase price allocation impacts 88 Energy Limited's reported assets and liabilities, future net earnings due to the impact on future depreciation and amortisation expense and impairment tests. No goodwill or deferred tax implications will arise on the acquisition and transaction costs of the acquisition will be included in the capitalised cost of the asset.

(d) Going concern

As at 30 June 2020, the Group had working capital (current assets less current liabilities) of $2.93 million (31 December 2019: $10.71 million) with cash on hand of $7.27 million (31 December 2019: $15.90 million) and a comprehensive net loss of $(2.86) million (30 June 2019: $29.32 million) with cash out flow from operating activities for the half-year of $(2.47) million (30 June 2019: $2.55 million).

The Group also has of note ongoing lease holding costs in Alaska as well as commitments due in relation to the Brevet debt. The ability of the Group to continue as a going concern is principally dependent upon its ability to manage the Company's working capital requirements and, if required, raise alternative funds. These conditions indicate a material uncertainty that may cast significant doubt about the ability of the Group to continue as a going concern and, therefore, it may be unable to realise its assets and discharge its liabilities in the normal course of business.

In addition to the above, the World Health Organisation announced that the Coronavirus (COVID-19) had become a pandemic on 11 March 2020. The impact of the COVID-19 pandemic is ongoing and whilst has had no financial impacts for the Group up to 30 June 2020, it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly developing and is dependant on measures imposed by the Australian and United States Government and other countries, such as maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. The full impact of COVID-19 and timing of easing of restrictions continues to evolve. At the reporting date, it is uncertain what the effect will be on the group and potentially it will have a post balance date impact. The Directors are continuing to explore alternative options in an effort to mitigate the possible impacts of COVID-19.

The financial statements have been prepared on the basis the Group will continue to meet their commitments and can therefore continue normal business activities and realise its assets and settle liabilities in the normal course of business.

In arriving at this position, the Directors are confident of the ability of the Group to manage its working capital requirements, or raise funding through various other alternatives including;

• Raising funds through issue of new shares;

• Sale of Alaskan Tax Credits to a third party which would lower debt and interest commitments; and

• Managing the Company's working capital requirements.

These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts or classifications of liabilities that might be necessary should the Group not be able to continue as a going concern.

The Directors are satisfied the Group is a going concern and therefore have prepared the financial statements on the basis the Group will continue to meet its commitments and can therefore continue normal business activities and realise its assets and settle liabilities in the normal course of business.

4. SEGMENT INFORMATION

Identification of reportable segments

For management purposes during the period ended 30 June 2020 the Company was organised into the following strategic unit:

· Oil and Gas exploration in Alaska, USA.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors.

The Board of Directors review internal management reports on a periodic basis that is consistent with the information provided in the statement of profit or loss and other comprehensive income, statement of financial position and statement of cash flows. As a result no reconciliation is required, because the information as presented is used by the Board to make strategic decisions.

Management has determined, based on the reports reviewed by the Board of Directors and used to make strategic decisions, that the Group has one reportable segment being Oil & Gas Exploration in Alaska, USA. Such structural organisation is determined by the nature of risks and returns associated with each business segment and define the management structure as well as the internal reporting system.

* Includes 198,965,783 of shares committed and unissued, including A$ 140,000 in relation to Longreach Capital committed and unissued shares

Share-based payment reserve

The share-based payment reserve is used to record the value of share-based payments provided to outside parties, and share-based remuneration provided to employees and directors. Refer to Note 13 for further details.

Foreign currency translation reserve

The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity.

13. SHARE BASED PAYMENTS

Share-based payment transactions recognised during the reporting period were as follows:

No options were granted in the half-year ended 30 June 2020.

Shares have been issued in connection with the acquisition of XCD Energy Limited. Refer note 14 for details.

14. ACQUISITION OF XCD ENERGY LTD

88 Energy announced its intention to make an off-market takeover offer to acquire all of the fully paid ordinary shares and listed options on issue in XCD Energy Limited on 27 April 2020. As of 17 June 2020 the offer became unconditional and 88 Energy obtained control of XCD Energy Limited. As at 30 June 2020 88 Energy held 85.67% of the issued capital of XCD Energy Limited.

The net effect of the adjustments made to the values of assets and liabilities, as included at 17 June 2020, on the acquisition of XCD Energy Ltd are as follows:

(ii) refer to Note 7