Cabot Energy Regulatory News (CAB)

Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. With the publication of this announcement, this information is now considered to be in the public domain.

3 June 2019

Cabot Energy Plc

("Cabot Energy", the "Group" or the "Company")

Full Year Audited Results

Publication of Annual Report and Notice of AGM

Cabot Energy (AIM: CAB), the AIM quoted oil and gas company focussed on creating predictable production growth in Canada, announces its audited full year results for the year ended 31 December 2018.

2018 Group Highlights

Production & Financial

· Average gross crude oil production of 703 barrels of oil per day ("bopd"), up 71% (2017: 411 bopd)

· US$47 per barrel average crude oil sales price achieved, up 10% (2017: US$43 per barrel)

· US$12.2 million revenue, up 154% (2017: US$4.8 million)

· Under US$20 per barrel average production costs, reduced by 38% (2017: US$32 per barrel)

· US$3.9 million Canada gross profit before depletion and amortisation*, a tenfold increase from the previous year (2017: US$0.34 million)

· US$6.2 million loss before tax (2017: US$4.0 million loss)

· US$0.9 million cash on the balance sheet as at 31 December 2018 (31 December 2017: US$1.8 million)

· US$15.5 million gross equity raise in January 2018

Upgraded Reserves and Resources

Canada

· 26% increase in Net Proven Plus Probable ("2P") reserves to 3.6 million barrels of oil equivalent ("mmboe") (2017: 2.9mmboe)

· 2P net present value (pre-tax), using a 10 per cent discount rate ("NPV10") value of US$48.3 million or US$13.4/barrels of oil equivalent ("boe") 

· 339% increase in net 2P reserves plus mid-case contingent and prospective resources of 42.2 mmboe, and 282 well locations were generated from a basin-wide study and land acquisitions

Italy

· Total mean gross prospective resources of 933 mmboe (793 mmboe net to Cabot Energy):

- 653 mmboe gross in the Adriatic Cygnus Prospect (513 mmboe net to Cabot Energy); and

- 280 million barrels ("mmbbl") gross in the Sicily Channel Vesta Prospect (all net to Cabot Energy)

Operations

· Performance of the six horizontal wells drilled in the winter of 2017/2018 were assessed to inform the basis of learning and estimated forward production type curves for these and planned new wells

· Independent facilities review for all the Group's main processing and pipelines in the area confirmed at least 30,000 barrels of liquid per day ("blpd") capacity available for fluids processing and transportation

· Southern Adriatic seismic ante-operam largely completed, ready to progress permits in Italy once 18-month Italian government review of hydrocarbon prospecting, exploration and development activities is completed

Corporate

· Acquisition of 25% of the Canadian assets to take the Group's ownership to 100% ownership and operatorship, to maximise efficiency and returns

· Overhaul of management team with appointment of Scott Aitken as Chief Executive Officer, Petro Mychalkiw as Chief Financial Officer and Campbell Airlie as Chief Technical Officer

· Significant strengthening of all operational and reporting controls to ensure robust internal processes are in place following outcome of strategic, operational and financial review

· Reservoir operations team now Calgary based to increase efficiency, responsiveness and ownership of operations and work programmes

Post Period End

· Fundraise of £2.53 million (US$3.4 million) in March 2019

· Revenue for Q1 2019 of US$2.0 million (Q1 2018: US$3.4 million)

· Average Q1 2019 gross production of 511 bopd (Q1 2018: 725 bopd)

· Average Q1 2019 crude oil sales price of approximately US$44 per barrel (Q1 2018: US$51) and an average Edmonton Light Oil ("Edmonton") price discount to the West Texas Intermediate ("WTI") price of approximately 9%, reflecting the restoration of the historic price differential

· Engaged a specialist financial advisory firm to source Canada asset-level debt finance for the development drilling of the Company's proven and probable reserves in Canada, commencing with a fully funded 2019 summer work programme

· While management remain confident that the debt finance discussions will result in a successful outcome for the Group, no debt commitments have yet been secured

· Supportive majority shareholder, High Power Petroleum ("H2P"), has indicated its willingness to provide limited short-term funding, pending the satisfactory progression of the ongoing debt finance discussions

Scott Aitken, Chief Executive Officer, commented: "2018 has been a year of necessary transition for Cabot Energy, with significant cultural and operational changes implemented throughout the Group.

"Despite growing average annual production in Canada by 71% to 703 bopd, enabling a 154% increase in revenues, the Board uncovered significant unbudgeted cost overruns. Since joining as CEO in June 2018, I made it a priority to comprehensively upgrade the Company's financial planning, reporting and controls processes.

"From an operational standpoint, we achieved a 339% reserves and resources upgrade in Canada with a 282 well location inventory, underlining our confidence to deliver sustainable production growth. In Italy, an independent resources report reinforced the Group's belief that we have a leading position which offers world-scale, high-impact exploration potential. The key now is to optimise the potential of our assets by adopting a managed, lean approach. To this end, we are encouraged that our renewed focus on financial and operational discipline has successfully reduced production costs to less than US$20/bbl.

"The Board is currently in advanced discussions to secure both short-term funding from its shareholder H2P and has also engaged a specialist financial advisory firm to source Canada asset-level debt financing to ensure that Cabot Energy is fully funded to commence its 2019 summer work programme and support the growth of the business. The heavy lifting has now been completed and, provided we secure appropriate financing, we believe we will be in a greatly improved position to deliver sustainable value for all shareholders from our contrasting portfolio of production and exploration assets."

*Gross profit before depletion and amortisation is a measure of profitability which is not specifically defined under IFRS or other generally accepted accounting principles. It is a measure of a company's operating performance which can be used to compare profitability among companies, as it eliminates the effects of accounting for acquisitions and capital expenditures.

Enquiries:

Note to Editors:

Cabot Energy (AIM: CAB) is an oil and gas company focussed on creating predictable production growth in Canada. Comprehensive information on Cabot Energy and its oil and gas operations, including press releases, annual reports and interim reports are available from Cabot Energy's website: www.cabot-energy.com

Operational Review

2018 has been a year of transition with significant structural and operational changes implemented throughout the Group. Despite the overall strength of the Group's production and exploration asset base in Canada and Italy, it became apparent in 2018 that cost overruns and unobtainable production targets had led to past operational and financial deficiencies.

Led by CEO Scott Aitken, the new management team conducted a comprehensive strategic, operational and financial review upon their appointment in 2018. This aimed to generate a deeper understanding of where the shortfalls were and how the Group could document and unlock the significant potential upside for shareholders. Based on the findings of that review, in the second half of 2018, the Company implemented the following key priorities:

· Improved the robustness of financial controls, reporting transparency and cost management under a new Chief Financial Officer;

· Completed a forensic assessment of the Group's balance sheet and obligations to third parties;

· Better defined and managed work streams in subsurface and operational planning, driven by the new role of Chief Technical Officer;

· Increased the effectiveness of the integration and communication between the central technical team and the local management teams; and

· Strengthened the Italian asset management team by adding a dedicated Italian-speaking executive.

Immediate results of these efforts were evident, including:

· Reduction in production costs to less than US$20/bbl and achievement of revised production guidance of 700 bopd for 2018;

· Reduction of US$0.7 million and rescheduling of US$1.4 million of legacy Canadian trade creditor payables;

· Increases in Canadian 2P reserves of 26% to 3.6 mmboe, and gross resources of 339% to 42.2 mmboe with a 282 well location inventory identified;

· Verification of Canadian assets fluids processing and pipeline transportation capacity in excess of 30,000 blpd; and

· Increase in Italian offshore mean gross prospective resources to 933 mmboe (793 mmboe net to Cabot Energy).

The forensic review and subsequent changes implemented by the Company have given management a clear view of the necessary requirements going forward. It provides Cabot Energy with a stable and sustainable base on which to build the business, focussed on creating predictable production growth in Canada, aligned with world-scale high-impact exploration potential in Italy.

Canadian assets indicate growth potential

The Group's 100% owned and operated production operations in north west Alberta, Canada, extend over 74,000 acres (as at 31 December 2018) and includes extensive processing and storage facilities. Management proactively acquires and releases land to optimise ownership in accordance with subsurface analysis. 31 wells are currently in production and a further 14 existing wells have the potential to be returned to production through intervention and work over operations.

Total gross oil production in Canada in 2018 increased 71% to approximately 256,400 bbls gross (2017: 150,000 bbls), at an average of 703 bopd (2017: 411 bopd) with no Lost Time Incidents.

As part of the operational review, the new management team prioritised subsurface analysis and planning as a core strength area for the Group, with new workflows and management of deliverables being implemented by CTO Campbell Airlie. Critically, the performance of the six horizontal wells drilled in the winter of 2017/2018 was assessed to inform the basis of learning and forward production estimates for these and similar new wells.

The annual reserves and resources report, which was independently generated by McDaniel & Associates Consultants Ltd, Calgary and announced on 6 November 2018, showed an increase in gross 2P reserves of 26% to 3.6 mmboe and a net present value (pre-tax), using an NPV10, of the net 2P reserves of US$48.3 million (net to the Group), or US$13.4/boe.

Growth potential was also illustrated by the 339% increase in gross 2P reserves and resources to 42.2 mmboe which was generated from a basin-wide study and land acquisitions. This results in 282 well locations which are able to be drilled in the Group's predominantly 100% owned and operated mineral rights.

The Group commissioned a third party, Atlas BA Consulting Inc., to conduct an independent facilities review for all its main processing and pipelines in the area and confirmed a greater than 30,000 blpd capacity available for fluids processing and transportation.

The comprehensive cost analysis of the Company's Canadian operations identified significant previous operating and capital expenditure cost overruns compared with the approved budgets, resulting in significant creditor liabilities and insufficient funds for a 2018 summer work programme. As a result, the 2018 summer work programme was cancelled, with work being restricted to non-discretionary safety and environment-related activities. This resulted in a declining overall production in the second half of 2018.

Moving forward, a zero-based budgeting structure for new operating and capital expenditures has been implemented. Operational planning, procurement, cost control and reporting systems have now been implemented to the standard required for a multi-well, multi-rig capital expenditure programme in preparation for future funding of drilling activities which we believe will unlock cashflow and demonstrable shareholder value in a reasonable time frame.

Italian assets offer the opportunity for high returns on investment

The Group has a portfolio of 5 exploration permits and 7 applications which have the potential to generate high returns on investment over the medium- to long-term. The portfolio is focussed offshore in southern Adriatic and Sicily Channel.

The Company made strong progress in Italy in 2018 and further strengthened its Italian operations in July with the appointment of Hugo d'Apice as Business Development Director. Hugo focusses on and manages the operated and non-operated permits held in Italy alongside the subsurface activities to study and explore the prospects and leads.

In November 2018, the Group published the results of an independent resources report produced by Lloyds Register Senergy on its 100% owned and operated assets in Italy. These results reinforced the Group's belief that it has a leading position in Italy with over 1 Bboe identified prospects and discoveries. In particular, the Company's southern Adriatic and Sicily Channel permits provide world-scale exposure to high-impact offshore exploration.

The report stated total mean gross prospective resources of 933 mmboe (793 mmboe net to Cabot Energy), split between gross 653 mmboe in the Adriatic Cygnus Prospect (513 mmboe net to Cabot Energy) and gross 280 mmbbl in the Sicily Channel Vesta Prospect (all net to Cabot Energy).

As announced on 14 February 2019, the Italian government signed a decree which enacts the suspension of work on all oil and gas exploration permits or applications for new exploration permits in Italy whilst a review is undertaken.

The suspension will be lifted as soon as consensus is reached on the terms under which the different areas will proceed with oil and gas exploration. In the event that no consensus is reached within 24 months, the suspension will be lifted. The legislation enables the Italian government to reappraise the exploration permits it has granted.

All Cabot Energy's exploration permits went through a rigorous environmental review and the Group is optimistic for a positive outcome. The Group is prepared to rapidly progress its permits as soon as the review is completed, whenever that occurs within the next 18 months.

Offshore permits

Adriatic: The Group received approval from the Environmental Impact Assessment to conduct a 3D seismic programme over the permit areas. A positive opinion has been received on the pre-seismic ante-operam work subsequently undertaken.

Sicily Channel: The EIA and exploration drilling permit have now been received for the Vesta oil prospect.

The Group is in negotiations to secure funding for 100% of the drilling costs for exploration wells in each of the Cygnus and Vesta oil prospects via a farm-out of our permit interests. This would optimise the cost of exploration versus the upside of these prospects.

Onshore permits

Po Valley Cascina Alberto: The Group previously farmed out the Po Valley Cascina Alberto exploration permit to Shell Italia, whereby the Group has a carry on US$4 million of seismic costs and US$50 million on the drilling of an exploration well for which Cabot Energy has a 20% carried interest. Shell Italia has made systematic planning progress, engaging with over 100 local communities in advance of its proposed 500 line-km 2D seismic acquisition programme.

Finally, Italian government approval of the potential transaction with Rockhopper plc was not received by the long stop date of 31 December 2018. As announced on 3 January 2019, the Group and Rockhopper plc mutually agreed to not proceed with the proposed transaction.

As part of the Group's renewed focus, the Board is in the process of assessing the Group's strategic options for its onshore Italy assets.

Australian assets

The Group held onshore exploration interests in the Otway Basin South Australia. However, as announced post period, the Board took the decision to relinquish this onshore exploration permit and reached an agreement with The Department for Energy and Mining of the Government of South Australia in order to focus the Group's financial and operational resources on Cabot Energy's core assets.

Market backdrop and Edmonton Light Oil price

After the downturn post-2014, the global oil markets recovered significantly until October 2018. They fell sharply during Q4 2018, with West Texas Intermediate closing the year at US$45.33 (WTI approximately US$63 in mid-May 2019). As first reported by the Group on 20 November 2018, the Group's Canadian crude oil revenues were unexpectedly and adversely impacted by the increased discount of the Edmonton Light Oil contract price from the West Texas Intermediate crude oil benchmark price. Encouragingly, the spread between WTI and Edmonton prices returned to normal historical levels from January 2019 onwards. With Alberta government commitments to bolster pipeline capacity, the Group remains reasonably confident in the outlook for the Edmonton Light Oil price.

Board changes

As a result of cost overruns and unobtainable production targets identified in 2018, the Board and the executive management team were restructured over the course of the year.

Scott Aitken was appointed Chief Executive Officer, bringing more than 27 years' experience in the oil and gas industry, with 15 years as CEO. Petro Mychalkiw and Campbell Airlie, who were both previously Cabot Energy Non-Executive Directors, were appointed respectively as Chief Financial Officer and Chief Technical Officer. All three of these executives, who were appointed to the leadership team in June 2018, are co-founders of High Power Petroleum LLC, the Company's supportive majority shareholder. Together they deliver a wealth of experience of successfully working together in operational and senior executive roles in the oil and gas industry. The Board believes that the quality of the new management team's experience will underpin the execution of Cabot Energy's forward strategy.

In July 2018, James Dewar joined the Board as Interim Independent Non-Executive Chairman, bringing over 35 years of oil and gas experience in public and private companies, plus extensive audit committee chair experience. Furthermore, Rachel Maguire was appointed to the Board as an Independent Non-Executive Director in November 2018, adding valuable expertise in the field of investor relations, public company reporting and corporate governance.

Group Financial Review

Overview

Despite raising net equity of US$15.3 million in January 2018, the Group's liquidity position deteriorated immediately. The Canadian operations generated a 94% increase in gross revenue (total field production) from US$6.3 million to US$12.2 million in 2018 (of which 75% was attributable to the Group in 2017 and 100% attributable to the Group in 2018) and improved gross margins. However, the combination of significant Canadian creditor payments in 2018, reflecting the cost overruns incurred by previous management, declining production in H2 2018, largely due to the forced cancellation of the Canada 2018 summer work programme, and significant negative Edmonton crude volatility in Q4 2018, resulted in a Group cash balance of only US$0.9 million and net trade creditors of US$4.8 million at the end of 2018.

Whilst Canada production costs per barrel improved significantly year-on-year (from US$32/bbl in 2017 to less than US$20/bbl in 2018), crude sales royalties per barrel increased (from US$6/bbl in 2017 to US$11/bbl in 2018), reflecting commercially non-optimal well designs implemented by previous management in H1 2018.

Whilst the Group's liquidity was challenging during 2018, the Group's business fundamentals improved year-on-year. Improved production levels, higher full year prices and netbacks were underpinned by a focus on improved operating and corporate cost controls and an overhaul of financial and operating procedures following changes to the Board and executive management in June 2018.

Income statement

The Group's Canadian crude oil revenues increased by 154% year-on-year from US$4.8 million in 2017 to US$12.2 million in 2018. The Group also earned a small amount of other income in both years. Annual gross oil production (total field production) increased by 71% to approximately 256,000 bbls or 703 bopd (2017: approximately 150,000 bbls or 411 bopd) and the Group's net share increased from 74.5% in 2017 to 99.5% in 2018 as a result of the transaction with High Power Petroleum ("H2P") which closed in January 2018. Largely due to the forced cancellation of the planned 2018 summer work programme, as a consequence of the Group's severe cash constraints, gross oil production in the second half of 2018 at 645 bopd was significantly lower than the first half production of 761 bopd.

Whilst both the annual average WTI benchmark price and the Group's Edmonton sales price (after crude transportation and marketing costs) increased year-on-year from US$51/bbl in 2017 to US$65/bbl and from US$43/bbl to $47/bbl respectively, there was significant WTI and Edmonton price volatility during Q4 2018 due to extended United States Mid-West refinery shut-ins for maintenance and the resulting glut of local Alberta oil supply. As a direct result, the Group's Edmonton sales price fell sharply to an average in Q4 2018 of only US$25/bbl, representing a 45% discount to the WTI benchmark price; this compared with an average 5% discount during 2017. The Group's Edmonton sales price has since improved significantly (February-April average US$55/bbl, a WTI discount of 6%) with a more stable forward price forecast at this time.

Excluding the depletion and amortisation expense for the Canadian oil and gas property, plant and equipment ("PP&E"), both gross margin and netback (crude sales price less production costs, expressed per barrel of oil produced - a measure of performance which is not specifically defined under IFRS or other generally accepted accounting principles) improved significantly year-on-year. Production netback excluding depletion and amortisation increased from 9% or US$3.70/bbl in 2017 to 31% or US$14.69/bbl in 2018, reflecting higher crude sales prices achieved in 2018 and improved economic recovery of fixed costs of production, partly offset by higher repair expenditures and higher crown royalties (predominantly a function of higher production levels and higher selling prices, offset by a well cost recovery factor based upon the well type).

* Netback is a measure of profitability which is not specifically defined under IFRS or other generally accepted accounting principles. It is a measure of oil and gas sales revenue net of royalties, production and transportation expenses and is commonly used across the oil and gas industry as a benchmark to compare performance between time periods.

Group administrative expenses increased by 10% from US$2.9 million in 2017 to US$3.2 million in 2018. Whilst Board cash compensation during 2017 was reduced (salaries paid to the Board were temporarily reduced during 2017 and substituted with nil-cost options granted), there was a small administrative headcount increase during 2018 and US$0.8 million was incurred to settle contractual employment liabilities to former Directors. On an ongoing annualised basis Board fees and salaries for the new Board are now US$0.3 million lower than the previous Board.

The Group's key commercial transaction during the year with its major shareholder H2P, pursuant to which the Group's working interest in the Canadian assets increased from 75% to 100%, (combined with US$12.1 million further investment in the Company by H2P which resulted in its shareholding in the Company increasing from 29% to 56%) was accounted for as a business combination and resulted in certain accounting gains and losses being recognised in the Income Statement.

Of the Group's impairment expense of US$0.4 million in 2018, US$0.3 million relates to specific Canadian assets. Based upon the Group's current understanding of new legislation enacted by the Italian government in February 2019, there is no impairment trigger in respect of the Group's offshore exploration asset carrying values and no impairment expense has been recognised.

Group earnings before interest, taxation, depletion, depreciation and amortisation ("EBITDA") improved from a loss of US$2.6 million in 2017 to a loss of US$2.4 million in 2018. Adjusted EBITDA (adjusting for non-recurring and exceptional items), improved from a loss of US$2.4 million in 2017 to a profit of US$0.1 million in 2018.

Balance sheet position

The Group's net current liabilities at 31 December 2018 were US$4.5 million (2017: net current liabilities US$6.3 million). The Company raised net equity proceeds of US$15.3 million in January 2018 (US$15.5 million gross), which were proposed to be invested in the winter and summer work programmes in Canada. Unbudgeted cost overruns resulted in significant creditor liabilities and the effective cancellation of the summer work programme. The incoming management team therefore conducted a post year end fundraise, see below. The net US$12.8 million increase in non-current assets and the $1.7 million increase in non-current provisions predominantly reflect the accounting and financial impact of the H2P transaction (see note 5).

Cash flows and liquidity

Net cash outflows from operating activities reduced from US$1.9 million in 2017 to US$0.1 million in 2018, predominantly due to higher sales volumes, realised prices and gross margin, partially offset by higher general and administrative expenses including one-off restructuring expenses and the payment of environmental remediation costs of approximately US$1.3 million (see note 2). Cash outflows from investing activities increased by US$11.6 million year-on-year. The US$13.1 million paid for Canadian property, plant and equipment in 2018 reflected payments for the Canada H1 2018 work programme and the partial settlement of outstanding 2017 Canadian creditors. The Group also paid US$1.2 million for ongoing capitalised exploration in Canada and offshore Italy. The Company paid US$1.6 million of the US$1.75 million deferred cash consideration, pursuant to the terms of the H2P transaction (see note 5).

The Group cash balance at 31 December 2018 was only US$0.9 million and on 31 December 2018 the Company announced that it was in advanced discussions with the Company's other significant shareholders regarding an equity fundraise to enable the settlement of the overdue Canadian trade creditors and provide short term working capital through to the end of Q1 2019 (see note 1 "Going concern basis of preparation" for further information regarding the Group's creditors, short term cashflows and liquidity).

Post year end

In March 2019, the Company raised £2.53 million (US$3.17 million) in gross equity proceeds, before expenses from a subscription and open offer, providing sufficient liquidity for the Group to fund the partial settlement of outstanding Canadian and Group trade creditors and to provide short-term working capital. The Company is in advanced discussions to source Canada asset-level debt finance for the development drilling of Cabot Energy's proven and probable reserves in Canada, commencing with a fully funded 2019 summer work programme.

Outlook

In the second half of 2018, the new management team implemented changes to rectify the pre-existing cost overruns and lack of robust financial controls. The majority of the heavy lifting has now been completed and the Group entered 2019 having established the foundations to underpin a stable and sustainable platform to deliver its strategy of creating predictable production growth.

Looking ahead, the combined effect of funds raised in March, the beneficial impact on crude sales prices achieved following the restoration of the Edmonton / WTI oil price differential, tight cost control and anticipated short-term funding from H2P are sufficient to see the Group through to the end of June 2019. The Group has engaged a specialist financial advisory firm and it is now in advanced discussions to source Canada asset-level debt finance for the development drilling of Cabot Energy's proven and probable reserves in Canada, so the Group will be fully funded for the commencement of the 2019 summer work programme.

The management team retains a strong belief in the exciting future prospects for the Company. Recognising the Italian government's current moratorium, the Group's near-term Strategy 2020 is to simplify Cabot Energy's story and focus on Canada, building on a track record of execution and cost control. In the mid-term, the Group's Strategy 2021 and beyond is to build out the Canadian business, creating cashflow in support of a move towards a dividend policy; and to explore upside potential in Italy. The Group will do this by leveraging its key competitive strengths which are its robust asset portfolio and its intelligent production optimisation.

Publication of Annual Report and Accounts and Notice of AGM

The Company's 2018 Annual Report and Accounts, along with the Notice of AGM, has been posted to shareholders and published on the Company's website (www.cabot-energy.com). The AGM will be held at 11:00 a.m. on 25 June 2019 at the offices of Baker Botts LLP, 41 Lothbury, London EC2R 7HF.

Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2018

Consolidated Statement of Financial Positionas at 31 December 2018

Consolidated Cash Flow Statementfor the year ended 31 December 2018

The Group had one significant non-cash transaction during the year to 31 December 2018 (2017: none), being the issue of ordinary shares in the Company to a value of US$7,040,000 as part of the consideration for the acquisition of H2P Canada (see note 5).

Consolidated Statement of Changes in Equity for the year ended 31 December 2018

Consolidated Statement of Changes in Equity for the year ended 31 December 2017

1. Basis of preparation

The financial information which comprises the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and related notes is derived from the full Group consolidated financial statements for the year ended 31 December 2018, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The financial information has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's consolidated financial statements for the year ended 31 December 2018 and are not the Group's statutory accounts. The accounting policies are detailed in the Group's consolidated financial statements for the year ended 31 December 2018 which will be presented on the Group's website ( www.cabot-energy.com ).

The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 December 2018 or 2017. Statutory accounts for 2017 have been delivered to the registrar of companies, and those for 2018 will be delivered in due course. The auditor has reported on those accounts; their report for the year ended 31 December 2018 was unqualified, but the audit opinion draws attention to a material uncertainty concerning the Group's ability to continue as a going concern without qualifying their report and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The functional currency of the Parent Company is considered to be the US Dollar and the Group financial information is presented in US Dollars.

Going concern basis of preparation

The Group's business activities, together with the factors likely to affect its future development and performance are set out in the Chairman's and Chief Executive's Statements and the Review of Operations. The financial position of the Group, its net cash position and net liabilities are described in the Financial Review.

At 31 December 2018 the Group had cash of US$0.9 million, trade and other receivables of US$0.7 million and trade and other payables of US$5.5 million. Since mid-2018 the Group has been paying down a significant outstanding Canadian trade payables position which reflected the cost over-runs on budgeted activities in addition to unbudgeted work programme activities in 2017 and H1 2018 in Canada. The Group's Canadian subsidiary Cabot Energy Inc. has successfully negotiated with its suppliers to reduce the amounts owed by some US$0.7 million and has agreed extended payment terms over 2019.

Whilst the independent reserves report announced on 6 November 2018 was a positive endorsement of the performance and development value of the Group's Canadian assets, its release coincided with an unprecedented and unexpected increase in the discount of the Group's Edmonton Light Oil selling price compared to the West Texas Intermediate benchmark price, as announced by the Group on 20 November 2018. Although the update on 1 February 2019 highlighted the temporary success of the Alberta government's intervention in curtailing production and restoring the discount to normal historic levels since December 2018, the continuing Edmonton Light Oil sales price uncertainty and the Group's reduced Canada production volumes prevented the Group from accessing debt financing on acceptable terms or trade finance via its crude oil sales marketeer at that time.

On 12 February 2019 the Group announced a two-stage funding approach in response to the uncertainty caused by the volatility of the Edmonton oil price in Q4 2018 and in March 2019 the Group successfully completed the first stage of its plan raising US$3.2 million before expenses from existing shareholders. The Board is reasonably confident that the equity proceeds raised, combined with higher than planned revenues from improved crude oil sales prices in 2019 and other planned measures, will be sufficient to see the Group through to the end of June 2019. The Directors are currently addressing new debt financing at the asset level to fund development drilling of the Group's proven and probable reserves, delivering production and cashflow growth.

The Board has reviewed and considered the possible outcomes of future operations and forecast cash flows, in conjunction with accounts, budgets and financial plans, and believe that future external capital could be found to allow the Group to continue. This understanding leads the Directors to believe that the Group has sufficient resources to continue in operation at least until 12 months after the date of this document and are managing the Group's assets to realise further capital to allow the development and growth of the business during that time and beyond. The financial statements are therefore prepared on a going concern basis.

Failure to complete a new fundraising by the end of Q2 2019 would indicate the existence of a material uncertainty which would cast significant doubt upon the Group's continued ability to operate as a going concern as it may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial statements do not include the adjustments that would result if the Group and the Company were unable to continue as a going concern.

2. Other Operating Costs

Environmental remediation costs and penalties

During 2016 the Group discovered that one of the Rainbow area pipelines acquired in late 2015 had suffered corrosion in the past which had resulted in pinhole leaks. Fluid, mainly salt water, had seeped into the surrounding earth. The Group's Canadian subsidiary worked with the Alberta Energy Regulator ("AER") and specialist environmental contractors to clean up and remediate the effects of the leaks. The cost of the on-going clean up and internal pipeline inspections required to restart or maintain operations during 2018 was US$865,000 (2017: US$1,198,000). The Group is in discussions with the AER regarding potential penalties of up to approximately US$0.5 million in relation to the leaks. The Group believes that it has a strong argument to mitigate the expected penalties and has provided US$250,000. In addition, the Group incurred US$149,000 other minor environmental remediation expenses during the year.

Share option costs

Following the further investment by H2P in January 2018, H2P became the majority shareholder in the Company causing all outstanding share options to be exercisable with immediate effect. The remaining US$670,000 unrecognised fair value of the options due to be charged over the remaining vesting period was recognised in full upon the change in control.

Legal and professional fees

Legal and professional expenses incurred in relation to the restructuring of the Board and the executive management team and the implementation of the strategic, operational and financial review.

Business acquisition costs

Rockhopper Civita Limited

On 8 June 2017, the Company announced that, subject to Italian regulatory approval, it would acquire Rockhopper Civita Limited, which owns onshore production and development gas assets in Italy, from Rockhopper Mediterranean Limited, a wholly owned subsidiary of Rockhopper Exploration Plc. As the required regulatory had not occurred by 31 December 2018, on 3 January 2019 the Company announced that both parties had mutually agreed not to proceed with the proposed transaction Legal and professional expenses of US$100,000 (2017: US$196,000) incurred in relation to the proposed acquisition have been expensed as incurred in accordance with IFRS 3 "Business Combinations".

H2P UK and its 100% subsidiary H2P Canada

Legal and professional expenses of US$115,000 (2017: US$60,000) incurred in relation to the acquisition have been expensed as incurred in accordance with IFRS 3 "Business Combinations". Further details of the acquisition are disclosed in note 5.

3. Intangible Assets

a) Exploration and Evaluation Assets

Intangible assets consist of the Group's exploration projects which are pending determination of technical feasibility and commercial viability of extracting a mineral resource.

Fair value adjustments

Fair value adjustments in the year arise on the step acquisition of the 25% of the Canadian assets owned by H2P Canada. As there is not currently a market for exploration assets in North West Alberta, the fair market value of the Canadian intangible assets at the time of the acquisition was deemed to be nil and similarly no value was ascribed to the Canadian E&E assets acquired as part of the acquisition (see note 5).

Impairment losses

The Group tests intangible assets for impairment when there is an indication that assets might be impaired. In performing impairment tests the Group compares the carrying value of intangible assets to their value recoverable amount and also where the Group has tangible oil and gas assets with commercial reserves, the carrying value is compared to the recoverable amount of both intangible and tangible assets.

Italy - Following the passage of legislation on 12 February 2019 the Italian government signed a decree which enacted the suspension of work on oil and gas exploration permits or applications for new exploration permits in Italy whilst a review is undertaken. The Ministries of Economic Development and Environment will review all areas in the Italian onshore and offshore territories as part of the PTESAI Bill, to determine which are suitable for sustainable hydrocarbon prospecting, exploration and development activities. The period given for the review is up to 18 months. The suspension will be lifted as soon as consensus is reached on the terms under which the different areas will proceed with oil and gas exploration. In the event that no consensus is reached within 24 months, the suspension will be lifted. The Group's exploration permits have been through rigorous environmental assessments with no issues noted and the Directors have no reason to believe at this time that the review will result in the permits being revoked. Consequently, the Directors do not believe the review in itself constitutes an asset impairment trigger and the carrying value of the permits in the southern Adriatic have not been impaired based on the potential value of the permits following any successful exploration and appraisal, and the continued level of interest in the permits by industry participants.

An additional impairment loss of US$53,000 has been recognised against the costs capitalised in respect of the Sicily Channel permits, CR146 and CR149. These permits have only a very limited time remaining in which to drill a well which limit the chances of farming out the costs of drilling.

Canada - The Directors have assessed the carrying value of the Canadian E&E assets and have concluded that that there are no facts or circumstances to suggest that the carrying value of the assets exceeds its future recoverable amount.

Australia - An additional impairment loss of US$21,000 has been recognised against the costs capitalised in respect of the Australian PEL629 licence.

As announced on 9 April 2019, the Group reached an agreement post-period with The Department for Energy and Mining of the Government of South Australia to relinquish this onshore exploration permit in order to focus financial and operational resources on the Group's core assets.

Contractual commitments

At the year end the contractual commitments for capital expenditure in respect of intangible assets in Italy was US$nil (2017: $138,000), of which the Group's share was US$nil (2017: US$138,000).

The comparative tables for 2017 are detailed below:

b) Computer software

c) Goodwill

Goodwill arising on H2P Canada acquisition

Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group's previously held equity interest (if any) in the entity over net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.

The fair values ascribed to the remeasured assets and liabilities acquired were less than the consideration and thus goodwill of US$1.119 million was recognised (note 5). The amount of the goodwill recognised in the transaction reflects the importance placed by the Group in avoiding dilution of its ownership of the assets down to 50%, the perceived value and savings available from full control of the operations and ability to fully realise the value added from subsurface evaluations the cost of which would not have been recoverable from H2P under the standard Canadian joint operating agreements in place.

Goodwill is not amortised but is reviewed for impairment at least annually.

4. Property, Plant and Equipment

a) Oil and Gas Assets

Additions

Developed additions in the year of US$8,198,000 relate to the Rainbow assets as the Group invested in increasing production.

Changes in estimates

Changes in estimates in the year of US$98,000 relates to changes in abandonment liabilities for the Rainbow and Virgo area wells, reflecting increased estimates for changes in the condition of wells and actual costs incurred in abandonment below the original estimates. The Group matches abandonment estimates calculations made by the AER in measuring operators' liabilities for abandonment in the province.

Acquisitions

Canadian developed acquisitions of US$9,597,000 in the year relate to the fair value of Rainbow and Zama assets re-acquired in January 2018, including the associated abandonment liabilities (see note 5).

Fair value adjustments

Fair value adjustments of US$6,520,000 arise on the step acquisition of the Rainbow and Zama assets to align the value of existing assets with the value of the assets acquired (see note 5).

2018 Impairment

The Group tests assets for impairment when there is an indication that assets might be impaired. In performing impairment tests the Group compares the carrying value of property, plant and equipment cash generating units and allocated goodwill to their recoverable amount:

- Eight wells which are in the process of being abandoned and have no reserves were fully impaired by US$72,000 as a result of writing off increases in their carrying value brought about as a result of the changes in estimates for abandonment.

- One well was impaired by a total of US$122,000 to its value in use where capital expenditure was incurred, but reserves did not subsequently increase by enough to pay for the expenditure and one wells was fully impaired by US$145,000 following water breakthrough into the well bore.

All impairments were calculated using a value-in-use technique with post-tax cash flows calculated based on proven and probable reserves using a post-tax discount rate of 10%. The oil price per barrel used was a weighted average over the overall life of the field of US$77 per barrel (WTI) based on prices ranging from US$67 in Q4 2018 to US$87 beyond 2032.

Contractual commitments

At the year end the contractual commitments for capital expenditure in respect of property, plant and equipment was US$nil (2017: US$nil), of which the Group's share was US$nil (2017: US$nil).

The comparative tables for 2017 are detailed below:

b) Non-Oil and Gas Assets

5. Business acquisitions

Pursuant to a Share Purchase Agreement (the "SPA") dated 19 December 2017 between H2P and the Company, the satisfaction of all conditions precedent and the approval by the Company shareholders on 5 January 2018, the Company acquired 100% of the common shares of H2P UK and its wholly-owned subsidiary H2P Canada (the "Acquisition"). Prior to completion of the Acquisition, H2P Canada held a 25% interest in the Canadian assets and an option to acquire a further 25% interest for US$4,000,000 consideration (the "H2P Option"), acquired in December 2016.

The rationale for the Acquisition was to maximise the cashflow benefits to the Group from the Canadian assets by holding as large a working interest in the assets as possible. The Group believed that allowing the exercise of the H2P option from both a cashflow, and investor relations point of view, was a step backwards for the business in terms of it becoming strongly cashflow positive and growing production. Avoiding the exercise of the option and finding alternative forms of funding elsewhere was a strong preference.

The consideration for the Acquisition was a total of US$8,790,000, equivalent to H2P's 50% share of the pre-tax net present value of the Canadian oil & gas proven reserves as at 30 September 2017, as calculated by McDaniel & Associates Ltd less the H2P Option cost and as adjusted for fourth quarter production and reserve additions, settled by the issue of 103,796,081 new ordinary shares, at a price of GBP0.05 per share and deferred cash consideration of US$1,750,000 million payable in monthly instalments between February 2018 and January 2019. Under the SPA, the H2P Option was terminated on completion of the Acquisition. The consideration has therefore been allocated between the cost of the H2P Option termination and the cost of the business combination.

Following the completion of the Acquisition, the Group's working interest in the Canadian assets increased from 75% to 100% and the Group obtained control over the previously held joint operation.

The Acquisition has been accounted for as a business combination under IFRS 3, Business Combinations. Having acquired a controlling interest, 100% of the financial results of the Canada operations have been consolidated in the Company's consolidated financial statements from the SPA economic effective date of 1 January 2018. The assets and liabilities assumed as at January 5, 2018 have been recognised at their respective fair values as shown in the table below. As control was achieved in stages, assets and liabilities recognised as part of the previously held 75% interest have also been remeasured at fair value.

Consideration:

Consideration split between business combination and loss on option termination:

The consideration agreed exceeded 25% of the adjusted valuation of the assets by $2,178,000. This amount has been recognised in the income statement as the portion of the consideration paid to extinguish the H2P option.

5. Business acquisitions continued

Identifiable assets acquired, and liabilities assumed:

The fair values ascribed to the remeasured assets and liabilities acquired were less than the consideration and thus goodwill of US$1,119,000 was recognised. The amount of the goodwill recognised in the transaction reflects the importance placed by the Group in avoiding dilution of its ownership of the assets down to 50%, the perceived value and savings available from full control of the operations and ability to fully realise the value added from subsurface evaluations the cost of which would not have been recoverable from H2P under the standard Canadian joint operating agreements in place.

Remeasurement of previously held interest at fair value:

Acquisition costs of US$115,000 have been incurred and expensed in the period (see note 2). Of the US$1,750,000 deferred cash consideration, US$1,633,000 had been settled at 31 December 2018.

The revenue generated, and expenses incurred by the re-acquired 25% of the operation since the date of acquisition (5 January 2018) were US$3,051,000 and $3,291,000 respectively. Of the US$3,291,000 expenses, US$2,073,000 relates to production costs, US$900,000 relates to depletion and amortisation of property, plant and equipment, US$254,000 relates to other operating expenses and US$65,000 relates to finance costs for the unwinding of discount on decommissioning provisions. Cash outflow from the operation post acquisition was US$1,495,000 and comprised net revenue and investments in oil and gas assets.

6. Post Balance Sheet Events

Between the balance sheet date of 31 December 2018 and the date that the 2018 financial statements have been signed, the following developments have been announced which have a material impact on, or the understanding of, this financial information:

On 12 February 2019 the Company announced an equity capital raise comprising a subscription with H2P and City Financial and an open offer on the basis of 1 open offer share for every 85.97 existing 1 pence ordinary shares. The funds raised were proposed to be used to fund the partial settlement of outstanding balances with trade creditors in Canada and the UK and provide short term working capital for the Group's immediate needs. A proposed share capital reorganisation to consolidate every 100 existing ordinary shares into one new ordinary share was also announced on 12 February 2019.

Following the passing of the resolutions at the General Meeting on 4 March 2019, the Company's 661,987,000 existing ordinary shares were consolidated on the basis of one new ordinary share for every 100 existing ordinary shares and such resulting ordinary shares then sub-divided into one new ordinary share of 1p and one deferred share of 99p.

The Company raised new finance of US$3,174,000 through the subscription and open offer. A further US$205,000 worth of equity was issued in settlement of amounts owed to creditors in Canada. Following the share reorganisation and subscription and open offer, the Company's issued ordinary share capital comprises 31,935,750 new ordinary shares. The costs associated with the subscription and open offer amounted to US$237,000.