HUR.L Regulatory News (HUR)

26 May 2023

Hurricane Energy plc

("Hurricane", the "Company", or the "Group")

Full-year Results 2022

Hurricane Energy plc, the UK based oil and gas company, announces its full-year results for the period ended 31 December 2022.

Highlights

Financial results

· Revenues of $310.8 million from six liftings of Lancaster crude (2021: $240.5 million from seven liftings)

· Cash production costs of $37.4/bbl (2021: $28.2/bbl)

· Generated $175.9 million of free cash flow†, equivalent to $56.9/bbl (2021: $135.7 million, $36.2bbl)

· Profit after tax for the period of $108.7 million (2021: $18.2 million)

· Net free cash† of $121.4 million (31 December 2021: $51.5 million)

· Full bond repayment made in July 2022 of outstanding Convertible Bonds leaving the Company debt free

Operations

· Production within guidance with average daily rate of 8,500 bopd (2021: 10,300 bopd)

· Excellent operational uptime of 97%, covering planned and unplanned events

· Crude oil sales of 3.2 Mbbls sold across six cargoes in 2022

· Agreement reached in March 2022 with Bluewater for an extension to the Bareboat Charter for the Aoka Mizu FPSO

· Following technical reassessment, the Greater Warwick Area (GWA) was relinquished in July 2022 by the GWA Joint Venture

Corporate

· In February 2022, Philip Wolfe took over from John Wright as Chairman, followed by Juan Morera being appointed as a shareholder nominated Non-Executive Director in March 2022

· In May and July 2022, Linda Beal and Robin Allan respectively were appointed to the board as Independent Non-Executive Directors

· In November 2022, following receipt of an unsolicited bid for the Company valuing each share at 7.7p which the Board concluded should not be recommended to shareholders, the Company launched a Formal Sale Process , the results of which were announced post period

Post Period

· In March, following the FSP process, the Board recommended an acquisition of the entire issued, and to be issued, share capital of the Company by Prax Exploration & Production PLC, to be effected by means of a Scheme of Arrangement under Part 26 of the Companies Act 2006 (the Scheme), valuing each share at up to 12.5 pence in total

·  Shareholder and applicable regulatory approvals for the recommended acquisition were received in May 2023

· The Court Sanction Hearing to consider the Scheme is scheduled for 7 June 2023. The Scheme remains subject to certain other conditions, including sanction by the Court at the Court Sanction Hearing and the delivery of a copy of the Court Order to the Registrar of Companies. Subject to the Scheme receiving the sanction of the Court, the delivery of a copy of the Court Order to the Registrar of Companies and the satisfaction (or, where applicable, the waiver) of the other Conditions set out in Part III of the Scheme Document, the Scheme is expected to become effective on 8 June 2023.

Antony Maris, CEO of Hurricane, commented:

 "2022 has been both very challenging and a highly successful year for Hurricane, whilst also an extraordinarily volatile period for our sector. During the year, the importance of domestic energy security was exacerbated by the terrible events in Ukraine and by the subsequent concerns over energy supplies across Europe resulting in surging commodity prices. 

The resulting high oil price early in the year, combined with outstanding operational performance at the Company's Lancaster field, significantly strengthened Hurricane's finances. Alongside this, working closely with our FPSO operator, we delivered superb uptime performance and produced towards the upper end of our annual production guidance. The field has now produced more than 15 million barrels.

The delivery of a technically skilled and commercially efficient, debt-free Company enhanced our industry reputation and attracted outside investor interest.

All this is a great credit to the team's ability and commitment which, given the challenges of the last few years in particular, have delivered full value and a great return for Shareholders."

†Designates a non-IFRS measure. See Appendix B to this announcement for definition and reconciliation to nearest equivalent statutory IFRS measures.

Contacts: 

About Hurricane

Hurricane has a 100% interest in and operates the Lancaster field, the UK's first field to produce from a fractured basement reservoir.

Visit Hurricane's website at www.hurricaneenergy.com

Inside Information

This announcement contains inside information as stipulated under the market abuse regulation (EU no. 596/2014). Upon the publication of this announcement via regulatory information service this inside information is now considered to be in the public domain.

Competent Person

The technical information in this release has been reviewed by Antony Maris, Chief Executive Officer, who is a qualified person for the purposes of the AIM Guidance Note for Mining, Oil and Gas Companies. Mr Maris is a petroleum engineer with more than 35 years' experience in the oil and gas industry. He has a B.Sc.(Eng.) Petroleum Engineering (Hons) from the Imperial College of Science and Technology (University of London), Royal School of Mines A.R.S.M., and an MBA from Kingston Business School.

Standard

Reserves and Contingent Resource estimates for the Lancaster field contained in this announcement have been prepared in accordance with the Petroleum Resource Management System guidelines endorsed by the Society of Petroleum Engineers, World Petroleum Congress, American Association of Petroleum Geologists and Society of Petroleum Evaluation Engineers.

Chairman's Statement

Dear shareholder,

I am pleased to present the 2022 annual report for Hurricane Energy, the first year of my chairmanship.

2022 was a busy and important year for Hurricane, and 2023 to date has been transformational for the Company, as we hope to complete the recommended acquisition of Hurricane by Prax Exploration & Production PLC (Prax) (a wholly-owned subsidiary of State Oil Limited) imminently.

The terrible events in Ukraine provided a volatile backdrop for the energy sector throughout 2022, with sharp movements in commodity prices and an enhanced focus on security of energy supply. The imposition by the UK government of the Energy Profits Levy only added to the sense of instability for the sector.

Operationally and commercially 2022 was a strong year for the Company. Production averaged 8,500 bopd from the Lancaster field with uptime of 97%. In July 2022 we were able to pay off our outstanding convertible bonds, as a result of the excellent operational performance at the field, combined with strong oil prices. In May we welcomed Linda Beal to the Board, followed shortly thereafter with Robin Allan joining us in July. Both joined as Independent Non-Executive Directors, and have contributed superbly to our discussions since their arrivals in what has been a busy time for the Board.

Having repaid our debt and established a firmer footing, the Company considered its options in terms of increasing production at Lancaster. However, despite many months of engagement we did not receive the requisite comfort from the regulator, the NSTA, required for the very material investment proposed.

In November 2022, following receipt of an unsolicited bid for the Company valuing each share at 7.7p which the Board concluded should not be recommended to shareholders, and with our largest investor, Crystal Amber, being clear that they wished to monetise their holding in Hurricane and would not support an investment-led growth strategy, the Board launched a Formal Sale Process.

This thorough and exhaustive process culminated in the Board recommending an offer from Prax. Should the Scheme be sanctioned by the Court, I believe Hurricane has an exciting future as part of the wider Prax organisation.

During what has been an exciting but also challenging period, I would like to thank our staff, the Board and our advisors for their continuing hard work during a particularly busy and uncertain time for the Company.

Philip Wolfe

Chairman

25 May 2023

Chief Executive Officer's Review

"A year of continued strong delivery"

Introduction

2022 has been both highly challenging and a highly successful year for Hurricane, whilst also an extraordinarily volatile period for our sector. During the year, the importance of domestic energy security was exacerbated by the terrible events in Ukraine and by the subsequent concerns over energy supplies across Europe resulting in surging commodity prices. In addition, the introduction of the Energy Profits Levy in the UK, followed by a slow decline in product prices back to levels seen at the start of the year, contributed to the challenges faced by an industry with long term investment cycles.

The resulting high oil price early in the year, combined with outstanding operational performance at the Company's Lancaster field, significantly strengthened Hurricane's finances, and led to the full repayment in July 2022 of the outstanding Convertible Bonds. This represented a major milestone for our Company.

Alongside this, working closely with our FPSO operator, we delivered superb uptime performance and produced towards the upper end of our annual production guidance. The field has now produced more than 15 million barrels.

With Hurricane finally underpinned by firm financial foundations, debt-free and with significant cash in hand, we devoted more time to addressing the future of the Company, prioritising the best investment opportunities that could add significant value for shareholders. This, however, attracted attention from outside investors at a time when our largest shareholder had also indicated its desire to monetise the value of its shareholding and that it would not support an investment-led growth strategy.

Following an unsolicited offer for the Company, the Board decided to launch a Formal Sale Process (FSP), which, at the end of a thorough and exhaustive process, delivered an offer from Prax Exploration & Production PLC (Prax). The Court hearing to sanction the Scheme resulting from that offer is scheduled for 7 June 2023.

Operational review

Greater Lancaster Area (GLA)

The year saw a very strong operational performance by the Aoka Mizu FPSO at the Company's Lancaster field. The field has performed well, delivering on average 8,500 barrels of oil per day during the year- towards the upper end of our 2022 production guidance. The anticipated natural decline coupled with increased water cut, offset by high uptime, informed production levels, and these factors are expected to play their part in future field performance.

During the period there were six cargo liftings totalling 3.2 million barrels delivering revenues of $310.8 million.

Over a two-day period in May the Company conducted several flow performance tests on the P7z well that involved temporarily reducing the flow rate from the P6 well. The data obtained will be useful in refining production forecasts for P6. In September the planned annual maintenance shutdown was carried out on the Aoka Mizu with production being successfully restarted ahead of the originally anticipated timeframe.

As a condition of the approval from the Regulator for below bubble point production, renewed production, flare, and vent consents are applied for on an ongoing three-monthly basis. During December 2021, the well gauge pressure reached and declined below bubble point. No production issues arising from reaching bubble point have been observed to date. The Company continues to monitor this closely and has continued to receive the required consents from the Regulator on a three-monthly basis.

Management's production guidance for the full calendar year 2023 is 5,900 - 7,100 bopd. This assumes FPSO production planned uptime of 96.5% and production from the P6 well alone on artificial lift via an electrical submersible pump (ESP). Guidance also includes the impact of an annual maintenance shutdown, anticipated to occur during Q3 2023. 

Hurricane concluded positive negotiations with Bluewater (Aoka Mizu) B.V. (Bluewater), the owner of the Aoka Mizu FPSO, with regards to an extension and announced in March 2022 that it had signed a contract with Bluewater for an extension to the Bareboat Charter beyond the original expiry date of 4 June 2022.

The key terms of the extension are:

1. The charter was extended to cover the remaining economic life of the Lancaster field.

2. Either party can give six months' notice to terminate the charter.

3. The existing day rate and tariff for the vessel remained at $75,000 per day and 8% of revenue respectively.

4. Hurricane agreed to establish a secured deposit account of up to $18.7 million for the benefit of Bluewater to cover the costs associated with the day rate for the six- month notice period and decommissioning in respect of the vessel.

This was an important step forward. It was key that Hurricane and Bluewater found a mutually acceptable deal to enable the Company to continue production beyond repayment of the Convertible Bonds.

Alongside ongoing production operations, the Company evaluated the possibility of drilling an additional production well, the P8 well. Although first discussed with the Regulators in 2021, in early 2022, when the Company recognised that not only would it clear its debt but also potentially have sufficient funds to both fully cover the cost of a new well in Lancaster and also its other operational requirements, we engaged with the Regulators concerning the unique challenges Hurricane faces.

The originally approved development plan included flaring as the approved gas disposal mechanism and, under the NSTA approval of the amendment to this plan, allowed for production below the bubble point.

The Company has worked hard to reduce its emissions and had significant success in achieving reductions through the combined hard work and efforts of our team and Bluewater. Hurricane is fully cognisant of the increased scrutiny and oversight in this area and continues to look at ways of further reducing our overall environmental footprint, where it is economically and commercially viable to do so. However, being fully aware of the challenge concerning flare volumes and the impact that any additional production would have, the Company worked tirelessly with both OPRED and the NSTA to address the environmental impact of new investment.

We believe that the project is consistent with the requirements placed upon Hurricane to maximise economic recovery as part of the OGA Strategy's Central Obligation 2a. Whilst the project would lead to a short-term increase in emissions, we also believe we are fully aligned with the OGA Strategy's Central Obligation 2b, which is to assist the Secretary of State in meeting the country's Net Zero targets.

Interaction on this latter point has been detailed, and rightly both challenging and highly scrutinised. The situation Hurricane faces is that the retrofitting of a new gas export or disposal system to the existing development is technically challenging, with a high capex requirement. The expected recovery of gas from an additional well, including the benefit of the extended life of the field, was such that the economics of the investment were below the threshold considered appropriate for Hurricane to commit to such a project.

We are fully aware of the challenge the NSTA faces in terms of the interaction between the competing objectives of maximising economic recovery whilst reducing emissions. The Company therefore offered that all incremental emissions from the new well (including those associated with the extension of the life of the field) would be covered by verifiable carbon offsetting.

The informal feedback from the NSTA during the six months of interaction was that, even where there is no technical and economically viable solution to mitigate the emissions that is reasonable in the circumstances, then the NSTA still may or may not grant the consents when requested. 

The project and the level of financial commitments are of major significance to the Company, particularly given the risk associated with continued performance of the existing single well. Therefore, whilst the Company believes the proposed P8 project would be within the regulatory guidance, the Board has concluded that, in the absence of any comfort from the Regulator, the additional financial commitments to offshore equipment suppliers and the associated financial risk of proceeding with P8 was too great.

Greater Warwick Area (GWA) & Halifax

In April, the GWA Joint Venture (JV) announced that it had reassessed its understanding of the Greater Warwick area, evaluated both the basement and the Mesozoic potential of the JV's licences, and considered all options for further appraisal and routes to possible development.

In June, Hurricane reported that it had determined that further appraisal and development costs to reach an economic development on the Warwick discovery within the remaining licence term was not feasible for the Company. Further to discussions with the Company's JV partner, Spirit Energy, the JV therefore decided to relinquish the Warwick P2294 licence area. This was in addition to the previously announced decision to relinquish the Lincoln P1368(S) licence sub area.

In addition, in September 2022 the Company determined that the costs required to further evaluate the Halifax licence (P2308) and the low likelihood of a successful economic development meant that the right next step was to relinquish the licence. As with the GWA licences, there was no reasonable expectation that the P2308 licence could generate any near-term cash realisation, and therefore voluntarily relinquishing the licence at that time allowed the Company to focus its time and financial resources on alternative and more attractive opportunities. All previously capitalised costs relating to Halifax have already been impaired and therefore no further impairments were required.

We have delivered all the required information and data to the Regulator and these assets have been relinquished. Activities to close down the JV are ongoing, and this is anticipated to be completed during 2023.

Decommissioning Activities

In early 2022, in accordance with the provisions of the Petroleum Act 1998 and related guidance, Hurricane and Bluewater submitted for the consideration of the Secretary of State for Business, Energy and Industrial Strategy, a draft Decommissioning Programme for the Lancaster Field FPSO. The draft was published to allow interested parties to be consulted on such decommissioning proposals well in advance of forecast cessation of production operations.

Health and Safety

In 2022 Hurricane delivered excellent HSE performance with no Lost Time Incidents or Recordable Incidents throughout the year, and no spills to sea and no loss of containment events. The Lost Time Incident Frequency Rate (LTIFR) for 2022 was nil compared to 1.71 for 2021 and 1.29 for 2020 (figures are per million man-hours).

Throughout the year, the impact of COVID-19 on our operations reduced significantly through the effectiveness of the Government's vaccination programme and relaxation of Government and Health Protection COVID-19 Guidelines. Two occupational illness cases were recorded where occupational transmission of COVID-19 occurred. We retained offshore COVID-19 testing capability, the ability to quarantine positive cases and repatriate confirmed positive COVID-19 cases to shore via our Central Medical Emergency Dispatch (CMED) aviation provider. Where there have been any suspected or confirmed cases offshore, medics have acted promptly to ensure anyone affected was isolated and treated in conjunction with advice from Bluewater's topside doctor. Dedicated Aviation Contractor CMED flights, with attendant paramedics were retained to repatriate suspected or confirmed COVID-19 cases back to shore for further assessment and treatment where necessary. We are pleased to report that COVID-19 did not adversely affect safe operations throughout the year.

Key activities undertaken throughout the year included continued safe production from the Lancaster Field with Bluewater's Aoka Mizu FPSO, completion of our annual planned maintenance shutdown for safety and production critical maintenance, completion of the Deep Cygnus subsea inspection, repair and maintenance (IRM) scope in August 2022 and successful recovery of a fishing net left at the location of the Whirlwind well head. This enabled completion of the seabed clearance at Whirlwind 205/21-5. All this work was completed without incident.

ESG

Despite the challenges the year has provided, Environmental, Social and Governance ("ESG") remains a key area of scrutiny in the Company. In June 2022, Hurricane published its third standalone ESG report, covering the approach to ESG and performance across its operations for the 2021 calendar year.

During 2022, our Scope 1 greenhouse gas emissions were 110,576 tonnes CO₂e, or 35.8 kg/bbl on an intensity basis. This compared with 139,584 tonnes CO₂e, or 37.2 kg/bbl in 2021, and 210,884 tonnes CO₂e and 41.5 kg/bbl in 2020.

These emissions meet the OEUK Scope 1 definition and include CO₂ as well as other greenhouse gases specified by the Kyoto Protocol. These figures are based on Intergovernmental Panel on Climate Change's (IPCC) Fifth Assessment report.

Currently, associated gas production from the Lancaster EPS is partially used as fuel gas for the Aoka Mizu FPSO, with the remainder flared under the consent within the approved Field Development Plan Addendum. We remain fully cognisant of the increased scrutiny and oversight in this area and are committed to continuing to look at ways of further reducing this figure and our overall environmental footprint in 2023 and beyond where it is economically and commercially viable to do so.

Reserves and resources

Since 2021, following the complete re-evaluation of the Lancaster field and its performance, the Company has been consistently in line with its production guidance, announced annually, and its cost base has been very stable year on year, rising mainly as a result of inflationary pressures. 

This demonstrates an excellent understanding of what we have and how to extract it safely, efficiently and at the best value. In addition, based on our performance and interaction with them, the NSTA has agreed, without the need for a lengthy process to amend the formal Field Development Plan, to increase the pressure below the bubble point we can produce to - up to 600 psi from 300 psi.

This change in our depletion management regime and the incorporation of the oil volumes potentially present in the Victory and Rona sandstones, which onlap the Lancaster field, has allowed the transfer to Reserves of some of our Contingent Resources and to extend field life.

Hurricane elected to retain ERC Equipoise Limited (ERCE) to update its Competent Person's Report (CPR) on the Reserves and Contingent Resources of the Lancaster field, published on 16 March 2023 with an effective date of 31 December 2022, which included an asset valuation by ERCE. Their estimates of Lancaster field Reserves and the Contingent Resources are detailed in the tables below.

While the latest CPR shows an increase in the reserves, these reserves will largely be produced in the "tail" so are low contributors to value. We will continue to review trends in production decline, pressure, and water cut that may impact future production and the level of reserves.

In the ERCE CPR, ERCE has evaluated the Reserves for the field, assuming the effective date of 31 December 2022. The estimates of Reserves and the economic limit in each case are summarised in the table below.

A summary of the movements in net attributable 2P Reserves as compared to the previous CPR (effective date of 31 December 2021) is as follows: 

ERCE has also updated its estimates of 2C Resources (Development Unclarified), which require further drilling to convert to Reserves. These are set out in the table below:

New Business Opportunities

In addition to considering investing further in the Lancaster Field, the Company has been actively pursuing potential opportunities outside the Company's current asset base.

Focusing on the UKCS, the Company has continued to evaluate a number of farm in opportunities, acquisitions and mergers. Hurricane's management and staff have extensive experience in both oil and gas, through all stages of the asset life-cycle, and therefore the scope covered a range of new oil and gas investment opportunities. Should the Prax transaction complete, we will continue to look for both asset and corporate level opportunities that will help diversify our asset base, deliver value to shareholders, and strengthen the Company for the future.

Despite the volatility in commodity prices, and the uncertainties these create, Hurricane believes that its strong balance sheet, technical and operational expertise, and proven track record of capital project delivery offer a strong competitive advantage among its peer group.

Formal Sale Process

Following receipt of an unsolicited offer in mid-2022 and after a period of engagement with the offeror, Hurricane received a follow-up offer from that offeror which the Hurricane Board concluded should not be recommended to Hurricane Shareholders. Thereafter, on 2 November 2022, Hurricane announced the initiation of a FSP, to establish whether there was a bidder prepared to offer a value that the Hurricane Board considered to be attractive, relative to the standalone prospects of Hurricane as a publicly traded company and accordingly one that should be recommended to all Hurricane Shareholders. The Board appointed Stifel Nicolaus Europe Limited as its independent financial adviser with regards to the FSP.

The FSP was marketed to a wide audience of potential acquirors with an interest in acquiring assets on the UK Continental Shelf. This process culminated in the Board recommending an offer from Prax Exploration & Production PLC, (a wholly-owned subsidiary of State Oil Limited) which is a leading, British headquartered, international integrated and diversified midstream and downstream energy group. Full details of the recommended offer were published in the Scheme Document on 6 April 2023 and are available on Hurricane's website.

Reduction of Capital

Alongside the FSP, the Company also committed, that if the FSP did not result in a transaction, to commence a significant capital return programme with up to $70 million to be returned to shareholders in Q1 2023, upon completion of a Reduction of Capital.

The High Court approved the Reduction of Capital on 31 January 2023 with the sealed court order subsequently filed with the Registrar of Companies. This completed the Reduction of Capital process, allowing the Company to make capital returns to shareholders and supporting the FSP. 

People and operations

This year has been another challenging one and I would also like to express my thanks to all our colleagues for their hard work, professionalism, and dedication. Hurricane's operational delivery since start-up of the Lancaster field has been first class. What would normally be many months of work on the technical review and development options screening was compressed into a much shorter timeframe without compromising on rigour or quality. The understanding of the field's performance has grown as has our rebuilding an excellent working relationship with the regulator, who recently commended Hurricane for excellent performance.

Since 2021, following the complete re-evaluation of the field and its performance, the Company has been consistently in line with its production guidance, announced annually, and its cost base has been very stable year on year through the hard work of the team to reduce and remove cost pressures, rising mainly as a result of macro-inflationary pressures. 

Following the Government's relaxation of COVID-19 precautionary measures, we reopened the office in February 2022, returning to a hybrid working arrangement preserving some measure of home working. However, we have not forgotten the lessons learnt from the pandemic where we actively encouraged flexible working recognising that employees may have responsibility for childcare, home schooling, family members as well as other obligations. We continue to look at what works best as greater pressures for more interactive office-based work grows.

Outlook

When I joined Hurricane, my priority, working closely with the senior team, was to focus on creating value for shareholders despite the huge technical and financial challenges we faced. The offer from Prax shows how well we, as a team, have done.

Technically, we have demonstrated excellent operational understanding and found ways to improve recovery despite the financial limitations. Commercially, we have cleared our debt, provided a firm financial footing for assessing future opportunities and kept control of our costs despite inflationary pressures.

All this has built an excellent reputation across our industry and attracted outside investors wanting to take advantage of what could we bring to them.

Antony MarisChief Executive Officer25 May 2023

Chief Financial Officer's Review

"A year of continued recovery and consolidation"

Highlights

* Rounded to nearest 100 bopd

† Non-IFRS measures. See Appendix B to the Financial Statements for definition and reconciliation to nearest equivalent statutory IFRS measures.

Overview

2022 was a year of continued recovery and consolidation for Hurricane. The first half of 2022 was an extraordinarily volatile period for our sector due to surging oil prices, exacerbated by the terrible events in Ukraine. Oil prices in the second half of 2022, whilst lower than the levels seen earlier in the year remained above $80 per barrel on a near continuous basis. The high oil price for the year, combined with excellent operational uptime of the Aoka Mizu FPSO at the Lancaster field, has continued to strengthen Hurricane's finances.

Over 3.2 million barrels of Lancaster crude were sold across six cargoes, generating $310.8 million revenue. This increase compared to 2021 is thanks to the strong oil prices seen in 2022 compared to 2021 which have helped to offset the impact of the lower level of production. This, combined with a continued focus on low operating costs and excellent production efficiency of 99%, produced free cashflow† of $175.9 million. Cash capex† in the year was $10.3 million.

Hurricane completed its repayment of Convertible Bonds during the year, with a final payment of $78.5 million being made in July 2022. At 31 December 2022, Hurricane was debt free with a net free cash† balance of $121.4m.

Although uncertainties remain, with oil prices still supportive and a debt free position, Hurricane is in a strong financial position.

Revenue

Revenue recognised for the year was $310.8 million (2021: $240.5 million), with an average realised price of $96.3/bbl (2021: $67.3/bbl) across 6 cargoes comprising 3.2 million barrels (2021: 7 cargoes comprising 3.6 million barrels). Whilst the average Dated Brent price for the year was $101.3/bbl, under the sales and marketing agreement Hurricane has in place with BP, the sale of Lancaster crude is priced by reference to the average of either the Dated Brent price of first or last five days in the month of lifting (at the buyer's option, declared by the 20th of the month). This arrangement means that the reference Dated Brent price for a cargo is typically lower than the spot price at the time of lifting. The lower number of cargoes reflects not only the declining rate of production, but also, where possible, maximising cargo sizes in 2022 to minimise transportation costs per barrel.

The average netback to the contractual Brent price was $2.7/bbl (2021: $2.7/bbl), representing the discount or premium offered by the refinery purchasing the crude, BP's marketing fee, and the freight and port costs incurred by the buyer in transporting Lancaster crude to its ultimate destination. The excellent FPSO uptime achieved means that Hurricane has continued to sell all cargoes on time, within specification and contractual terms, maintaining our reputation as a reliable producer. The sales arrangement with BP means that Hurricane receives cash for a sale typically within five days of the lifting occurring.

Cost of sales

Total cost of sales was $173.4 million, including $81.9 million of DD&A. Cash production costs† were $115.4 million (2021: $105.8 million), equivalent to $37.4 per barrel (2021: $28.2/bbl).

Excluding the revenue-linked incentive tariff, cash production costs per barrel increased from $22.8/bbl in 2021 to $29.3/bbl in 2022. This increase per barrel was driven by lower average production rates in 2022 as well as cost inflation. With a cost base that is largely fixed (i.e. not linked to production rates), natural decline in production and inflationary cost pressures, we expect cash production costs per barrel to increase during 2023; although we continue to look for cost savings internally and with our key contractors where possible.

Impairment of intangible assets and GWA licences

The overall strategic intent of the GWA Joint Venture has previously been the exploration and appraisal of the GWA licence areas, to assess hydrocarbon resource and commercially producible reserves, with the aim of producing reserves and ultimately identifying a fit for purpose field development in line with the GWA Joint Venture objectives and MER UK.

Hurricane together with its joint venture partner Spirit Energy has determined that further appraisal and development costs to reach an economic development on the discoveries in the GWA area within the remaining licence terms is not feasible, and the licences for P1368(S) (Lincoln asset) and P2294 (Warwick asset) were therefore relinquished in July 2022.

In anticipation of the licence Lincoln P1368(S) relinquishment, the carrying value of the Lincoln assets was fully impaired in 2021, resulting in an impairment charge of $54.3 million in that year. The GWA Joint Venture decision to surrender the Warwick P2294 licence subarea gives rise to an impairment charge of $4.1 million for the current year and the carrying value of the Warwick assets has therefore now also been fully impaired.

The aim going forward into 2023 is to bring the GWA JV to an orderly conclusion, with the main activity being the ongoing storage and disposal of joint property.

FPSO lease

In March 2022, Hurricane announced it had concluded an agreement with Bluewater to extend the charter of the Aoka Mizu FPSO beyond June 2022. The key terms of the agreement included:

· either party can give six months' notice to terminate the charter;

· the existing day rate and tariff for the vessel remains at $75,000 per day and 8% of revenue respectively; and

· Hurricane agrees to establish a secured deposit account of up to $18.7 million for the benefit of Bluewater to cover the costs associated with the day rate for the six-month notice period and decommissioning in respect of the vessel.

The revised agreement therefore gives Hurricane the security and flexibility to cover production from the Lancaster field for its remaining economic life, which is forecast to be until August 2025. For the purposes of accounting for the lease under IFRS 16, the lease term as been re-assessed to this date. This has resulted in an increase in the lease liability and corresponding lease asset.

Convertible Bond and debt management

During the second half of 2021, Hurricane completed a series of Convertible Bond buybacks leaving an amount of $78.5 million outstanding at 31 December 2021. This amount was repaid in July 2022, resulting in Hurricane now being in a debt free position.

Net debt and net free cash evolution:

The above chart shows net free cash of $52 million at 31 December 2021 which, after deducting Convertible Bond debt of $79 million shows a net debt position of $27 million at that date. Further to the payment of remaining element of the Convertible Bond debt in July 2022, the net debt position was cleared.

Other profit and loss

Net general and administrative costs (G&A) before non-cash items reduced from $23.6 million in 2021 to $8.7 million in 2022. This decrease was primarily due to significant expenditures having been incurred on the proposed financial restructuring during 2021, as well as the Group implementing cost saving measures such as the right-sizing of headcount (via recruitment freezes and targeted redundancies) by the end of that year.

Cashflow

Net free cash† bridge

1. Including transaction costs

† Non-IFRS measure. See Appendix B to the Financial Statements for definition and reconciliation to nearest equivalent statutory IFRS measure(s).

The Group ended the year with $121.4 million of net free cash†, an increase of $69.9 million from the position of $51.5 million at 31 December 2021.

Free cash flow† for the year was $175.9 million (2021: $135.7 million), equivalent to $56.9/bbl (2021: $36.2/bbl), driven by higher average realised Brent prices offset by the increase in day rate payable (from $25,000 to $75,000 per day) for the Aoka Mizu charter which became effective from June 2021. Cash capex† in the period was $10.3 million.

Restricted funds

As of 31 December 2022, the Group held $60.8 million of cash within restricted funds, relating to decommissioning security arrangements and amounts set aside to cover costs associated with the FPSO lease.

At the start of the year, the Group held £28.0 million ($37.8 million) in trust as security for its decommissioning liability on the Lancaster field, which includes the cost of abandoning the production wells, subsea infrastructure and related FPSO costs. During the year, an additional £5.7 million was placed into Trust following a request from the Regulator as a result of increases to the Group's decommissioning estimates. At 31 December 2022, a total of £33.7 million ($40.6 million) was held in trust as decommissioning security for the Lancaster EPS.

Included within restricted cash, cash equivalents and liquid investments is $20.2 million (2021: $7.9 million) set aside in relation to the Aoka Mizu FPSO bareboat charter. This amount was established and classified as restricted cash following the agreement in March 2022 to extend the FPSO lease. Under the terms of the contract, the Group is required to ring-fence amounts to ensure it could meet its liability to the lessor if the contract is terminated by the Group or the lessor. The $20.2 million amount consists of an original amount of $18.7m originally agreed with the lessor on extension of the lease in March 2022, with an additional $1.5 million subsequently being agreed to be set aside.

Tax

The Group recognised a total net tax charge for 2022 of $1.7 million.

Included in the net tax charge for the period is a tax charge of $6.2 million relating to the Energy (Oil and Gas) Profits Levy Act 2022 (EPL), which was introduced and took effect for profits generated from 26 May 2022 onwards at a rate of 25%.

Offsetting the EPL charge is a credit of $4.6 million representing amounts received in respect of R&D claims during 2022. Hurricane previously made claims for R&D tax credits in respect of financial years 2019 and 2020, including via the surrender of some brought forward tax losses, being R&D spend related to increasing reservoir understanding of fractured basement and optimising productivity and reserves recovery.

Tax losses

Due to the nature of the Group's business, it has accumulated significant tax losses since incorporation. The Group has $214.5 million of ring-fenced trading losses (including certain RDEC credits) and other allowances and supplementary charge losses and investment allowances of $629.8 million, which have no expiry date and would be available for offset against future trading profits, and $333.1 million of capital allowances available against future ring-fenced trading profits. The estimated value of these losses and allowances at prevailing tax rates, including the Group's pre-trading expenditure, future decommissioning costs and non-ring fence losses, is $428.3 million. See note 6.3 in the Financial Statements for further information.

Access to these losses and allowances is likely to be severely restricted at the point at which trading activities end (which would include a permanent cessation of production from the Lancaster EPS). Furthermore, in the event of any corporate transaction, access to the brought forward losses may be restricted if trade was deemed negligible at the point of a change in control or there was deemed to be a major change in the nature or conduct of the entity's trading activities. Furthermore, at prevailing oil prices, the Group will continue to utilise its existing ring fence losses as the Lancaster EPS generates taxable profits.

Going concern

The Directors have considered both the going concern and longer-term prospects of the Group, and have a reasonable expectation that the Group will continue in operational existence throughout the going concern period. For further details and analysis, see the Going Concern section of the Strategic Report.

Richard Chaffe

Chief Financial Officer

25 May 2023

Going concern and the Group's longer-term prospects

Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in this Strategic Report. The Group ended the year with $199.1 million of cash and cash equivalents, of which $138.4 million was unrestricted. After adjusting for working capital items, net free cash† at 31 December 2022 was $121.4 million. The Group's most significant long-term liabilities are committed lease liabilities in respect of the Aoka Mizu FPSO, following the final repayments in respect of the Convertible Bond having been made in July 2022.

Further details of the financial position of the Group, its cash flows and liquidity position are described in the Chief Financial Officer's Review; with the Group's off- and on-balance sheet commitments set out in notes 2.7 and 5.3 of the Group Financial Statements. In addition, note 5.8 to the Group Financial Statements includes the Group's objectives, policies and processes for managing its capital; and note 4.4 includes the Group's objectives concerning its financial risk management objectives; details of its financial instruments; and its exposures to credit, market and liquidity risk.

The Group monitors its capital position and its liquidity risk regularly throughout the year, with cashflow models and forecasts regularly produced and refreshed based on production profiles, latest estimates of oil prices, operating and G&A budgets, working capital assumptions, movements to and from restricted funds, and the Group's debt repayments. Sensitivities are run to reflect different scenarios including changes in reservoir performance, movements in oil price and changes to the timing and/or quantum of capital expenditure projects.

Assessment of going concern

Whilst each of the Principal Risks, which will be outlined in the 2022 Annual Report, has a potential impact on the business, the Directors' assessment of going concern focused on those that are the most critical to the Group's prospects, which are considered to be:

· Production delivery risks;

· FPSO and third-party infrastructure risks; and

· Oil price volatility

The Group's base case going concern assessment assumed the following:

· average Dated Brent oil price of $75/bbl in 2023 and $73/bbl in 2024;

· no sanctioned capital or development projects;

· continued use of the Aoka Mizu FPSO throughout the assessment period; and

· production from the P6 well alone in line with approved guidance and the production profiles consistent with the most recent CPR

· a return of cash by the Company to its shareholders in the form of either

o  a dividend of £103 million being paid to shareholders following the agreement reached on the terms of a recommended acquisition of the Company's entire issued ordinary share capital by Prax Exploration & Production PLC (the terms and details of the recommended offer are set out in the Scheme Document, with completion of the acquisition being subject to court sanction)

o  in event that the above acquisition is not completed, a return of $70 million to its shareholders

Under the base case scenario, the Group had sufficient headroom for a period of at least 12 months to fund ongoing working capital requirements.

Sensitivity analyses were also undertaken to reflect the following:

· a reduction to the forecast oil price curve of $20/bbl; and

· a 20% reduction to forecast production rates

Under the sensitivity cases above, both individually and in aggregate, the Group is projected to have sufficient cash to continue operating for a period of at least 12 months.

Reverse stress tests were also prepared to reflect additional adverse reductions in oil price and production to determine at what price or rate each would need to reduce to such that the Group would not have sufficient cash to continue operating for a period of at least 12 months. In the opinion of management, the likelihood of such a fall in price and/or production rate that would give rise to an inability to continue to operate over this period is remote.

Conclusion

As a result of the going concern assessment presented above, the Directors have a reasonable expectation that, taking into consideration the current macroeconomic situation, the Group has adequate resources to continue in operational existence throughout the going concern period.

Therefore, the Directors continue to adopt the going concern basis of accounting in preparing these consolidated financial statements and the financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

Assessment of the Group's longer-term prospects

The longer-term prospects of the Group are driven by its strategy and business model, whilst factoring in the Group's principal risks and uncertainties.

Assessment of the business is performed over a number of different time periods for differing reasons, which include an annual budget cycle (with reforecasts made as appropriate during the year) and a long-term corporate model which incorporates the latest annual budget and provides forecast cash flow detail, where appropriate, on a field-by-field basis along with cash flows incurred and generated at a corporate level. These forecasts take into account the level of unrestricted cash and cash equivalents at the latest practicable date of preparation of this review, together with the forecast cash flow generation from the Lancaster EPS (based on expected production rates and oil prices as outlined above).

Extending the base case assessment (using average Dated Brent oil prices of $75/bbl in 2023 and $73/bbl in 2024), and on the key assumption that neither the Group nor Bluewater exercises their respective termination options over the bareboat charter of the Aoka Mizu FPSO earlier, the Group is projected to continue generating positive cashflows from operations until approximately the third quarter of 2025.

As the Group is able to exit the FPSO charter giving six-months notice and incurring no termination penalties, it has additional flexibility should oil price and/or production rate give rise to a significantly shorter than expected remaining economic life of the Lancaster EPS, or other factors mean the EPS was operating significantly below break-even level. Furthermore, the Group has placed significant funds in Trust as security to cover estimated decommissioning liabilities for the EPS and FPSO.

Hurricane Energy plc

Group Financial Statements 2022

Group Statement of Comprehensive Income

All results arise from continuing operations.

Group Statement of Financial Position

The Financial Statements of Hurricane Energy plc were approved by the Board and authorised for issue on 25 May 2023. They were signed on its behalf by:

Antony Maris, Chief Executive Officer

Accounting policies applicable to this section as a whole

Commercial reserves

Commercial Reserves are proved and probable oil and gas Reserves, which are defined as the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered to be economically viable. Proved and probable reserve estimates are based on a number of underlying assumptions including oil and gas prices, future costs, oil and gas in place and reservoir performance, which are inherently uncertain. There should be a 50% statistical probability that the actual quantity of Reserves will be more than the amount estimated as proven and probable Reserves and a 50% statistical probability that it will be less. However, the amount of Reserves that will be ultimately recovered from any field cannot be known with certainty until the end of the field's life.

Critical judgements and key sources of estimation uncertainty applicable to this section

Key source of estimation uncertainty - estimation of hydrocarbon Reserves and Contingent Resources

Hydrocarbon Reserves and Contingent Resources are those hydrocarbons that can be economically extracted from the Group's oil and gas assets. The Group's Reserves and Contingent Resources have been estimated based on information compiled by independent qualified persons, using standard recognised evaluation techniques. Inputs provided by management to the independent qualified persons include geological and reservoir information (as updated from data obtained through operation of a field), operating costs and decommissioning estimates. These inputs are challenged by the independent qualified persons and validated against analogue reservoirs, actual historical reservoir and production performance, and the costs of running and decommissioning similar fields and installations.

Changes to Reserves estimates may significantly impact the financial position and performance of the Group. This could include a significant change in the depreciation charge for oil and gas assets, provisions for decommissioning, the results of any impairment testing performed and the recognition and carrying value of any deferred tax assets.

The estimated quantity of remaining proved plus probable Reserves (2P Reserves) at 31 December 2022 in respect of the Lancaster EPS was independently assessed in March 2023 as being 6.6 MMbbl.

Accounting policy

Revenue from contracts with customers is recognised when the Group satisfies its performance obligation of transferring control of oil to a customer. Transfer of control is usually concurrent with both transfer of title and the customer taking physical possession of the oil, which is determined by reference to the contract and relevant Incoterms. These performance obligations are satisfied at a point in time.

The amount of revenue recognised is measured at the transaction price, which is determined primarily by reference to quoted market prices at or around the time of lifting. Where final pricing terms are only available after delivery (e.g. using quoted prices or other information such as discharge quantity that can only be determined after the time of sale), revenue is initially recognised based on relevant prices at the time of sale on a provisional basis and subsequently adjusted. This variable consideration element is deemed highly probable not to result in a significant reversal of revenue as changes in pricing arising from post-sale adjustments are resolved within a short period of time following delivery and are not considered to be material.

Accounting policy

Crude oil inventories

Crude oil inventories are held at the lower of cost and net realisable value. The cost of crude oil is the cost of production, including direct labour and materials, depreciation and an appropriate portion of fixed overheads allocated based on normal operating capacity of the production facilities, determined on a weighted average cost basis. Net realisable value of crude oil is based on the market price of similar crude oil at the balance sheet date and costs to sell, adjusted if the sale of inventories after that date gives additional evidence about its net realisable value.

The cost of crude oil is expensed in the period in which the related revenue is recognised.

For other inventories, cost is determined on a weighted average basis (for fuel and chemicals) or a specific identification basis (for spares and supplies), including the cost of direct materials and (where applicable) direct labour and a proportion of overhead expenses. Items are classified as spares and supplies inventory where they are either standard parts, easily resalable or available for use on non-specific campaigns, and as oil and gas assets or intangible exploration and evaluation assets where they are specialised parts intended for specific projects. Net realisable value is determined by an estimate of the price that could be realised through resale or scrappage based on its condition at the balance sheet date.

Included within cost of sales are costs relating to emissions trading schemes. Provision is made at the end of each period for the cost of allowances required to cover carbon emissions made in the emission reporting period to date. The estimated cost of allowances required is based on the weighted average cost per unit of emissions expected to be incurred for the compliance period, calculated as the carrying amount of any allowances held plus the cost of meeting the expected shortfall (using the market price at the balance sheet date), divided by the expected total number of units of emissions for the compliance period. The provision is held on the Statement of Financial Position within trade and other payables until settled by the delivery of emissions certificates. Allowances granted free of charge are held at nil cost, with any gain on sale of free allowances granted recognised at the time of sale.

Accounting policies

Oil and gas assets are stated at cost less accumulated depreciation and any provision for impairment.

Oil and gas assets - cost

Oil and gas assets are accumulated generally on a field-by-field 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 directly attributable staff and related overhead expenditure, which is allocated via the Group's time writing process, capitalised borrowing costs and the cost of provisions for future restoration and decommissioning.

Right-of-use assets (leased assets) are initially measured at cost, which comprises the initial measurement of the lease liability (see note 5.2), 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. Right-of-use assets are presented within property, plant and equipment on the Statement of Financial Position.

Oil and gas assets - depreciation

Oil and gas properties are depreciated from the commencement of production on a unit-of-production basis. This is the ratio of oil production in the period to the estimated Reserves base, which is the best estimate of proved plus probable Reserves (2P Reserves), at the end of the period, plus the production in the period. Costs used in the unit-of-production calculation comprise the net book values of producing assets, taking into account future development expenditures necessary to bring those Reserves into production. Where the carrying value of oil and gas assets has been impaired by using an expected cash flow approach, the equivalent expected future development costs and expected Reserves and Contingent Resources base are taken into account when determining the depreciation rate.

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 Group Statement of Comprehensive Income. Where conditions giving rise to an impairment subsequently reverse, the effect of the impairment charge is also reversed as a credit to the Group Statement of Comprehensive Income, net of any depreciation that would have been charged since the impairment.

Critical judgement - identification of impairment indicators for oil and gas assets

The asset balance relating to the Lancaster field held within property, plant and equipment is subject to an impairment assessment under IAS 36 'Impairment of Assets', whereby the Group is required to consider if there are any indicators of impairment. The judgement as to whether there are any indicators of impairment takes into consideration a number of internal and external factors, including: changes in estimated commercial Reserves; significant adverse changes to production versus previous estimates of management; changes in estimated future oil and gas prices; changes in estimated future capital and operating expenditure to develop and produce commercial Reserves; the market capitalisation of the Group falling and remaining significantly below the net book value of assets; and any indications that discount rates likely to be applied by market participants in assessing the asset's recoverable amount may have increased.

If an impairment indicator exists, an impairment test, which compares carrying value to the asset's recoverable amount (being the higher of value in use and fair value less cost to sell), is required to be carried out.

Critical judgements and key source of estimation uncertainty - estimated future cash flows of oil and gas assets used for impairment testing

The Group assesses its assets and cash-generating units (CGUs) in each reporting period to determine whether any indicators of impairment exist. Where indicators exist, a formal impairment test is undertaken to estimate the recoverable amount (which is the higher of fair value less costs of disposal (FVLCD) and value in use (VIU)). For the Lancaster field, the recoverable amount was based on VIU.

In making these estimates, a judgement has been made that the agreement on 25 March 2022 for the extension to the Aoka Mizu lease will allow Lancaster EPS operations to continue until such time as the estimated economic limit is reached (August 2025 based on the forecasts for production, oil price and operating costs).

These estimates and assumptions are subject to significant risk and uncertainty, and therefore changes to external factors and internal developments and plans can significantly impact these projections, which could lead to additional impairments or reversals in future periods. Sensitivity analysis to some of these estimates and assumptions are outlined below.

Accounting policy

The Group follows the successful efforts method of accounting for oil and gas exploration and evaluation activities (intangible exploration and evaluation assets) as permitted by IFRS 6 'Exploration for and Evaluation of Mineral Resources'.

Pre-licence costs, which relate to costs incurred prior to having obtained the legal right to explore an area, are charged directly to the Group Statement of Comprehensive Income within operating expenses as they are incurred.

Once a licence has been awarded, all licence fees and exploration and appraisal costs relating to that licence are initially capitalised in well, field or specific exploration cost centres as appropriate pending determination. These costs include directly attributable staff and related overhead expenditure, which is allocated to assets via the Group's timewriting process. Expenditure incurred during the various exploration and appraisal phases is then written off unless commercial Reserves have been established or the determination process has not been completed.

When commercial Reserves have been found and a field development plan has been approved, the net capitalised costs incurred to date in respect of those Reserves are transferred into a single field cost centre and reclassified as oil and gas properties within property, plant and equipment (subject to an impairment test before reclassification). Subsequent development costs in respect of the Reserves are capitalised within oil and gas properties.

If there are indicators of impairment (examples of which include the surrender, expiry or expected non-renewal of a licence; a lack of planned or budgeted substantive expenditure for a particular field; insufficient commercially viable Reserves resulting in a discontinuation of development; and data existing which indicates that the carrying amount of an asset is unlikely to be fully recovered either from successful development or sale), an impairment test is performed comparing the carrying value with its recoverable amount, being the higher of value in use (calculated as the estimated discounted future cash flows based on management's expectations of future oil and gas prices, production and costs) and its estimated fair value less costs to sell. Capitalised costs which are subsequently written off are classified as operating expenses.

The Group may enter into farm-out arrangements, whereby it assigns an interest in Reserves and future production to another party (the farmee). For farm-outs of assets that are in the exploration and evaluation stage, the Group does not recognise any consideration in respect of the farmee's committed or expected carry but continues to hold its remaining interest at the previous cost of the full interest, less any cash consideration received from the farmee upon entering the arrangement.

Critical judgement - identification of impairment indicators for intangible exploration and evaluation assets

Intangible exploration and evaluation assets are assessed for impairment when circumstances suggest that the carrying amount may exceed its recoverable value. This judgement is made with reference to the impairment indicators outlined in note 2.4 above.

Accounting policy

Provisions for decommissioning are recognised in full when wells have been suspended or facilities have been installed. A corresponding amount equivalent to the provision is also recognised as part of the cost of either the related oil and gas exploration and evaluation asset or property, plant and equipment as appropriate. The amount recognised is the estimated cost of decommissioning, discounted to its net present value, and is reassessed each year in accordance with local conditions and requirements. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to the related asset. Where the related asset is fully impaired, the corresponding adjustment is recognised in profit and loss. The unwinding of the discount on the decommissioning provision is classified within finance costs.

Accounting policy

The Share Incentive Plan (SIP) Trust is a separately administered discretionary trust whose assets mainly comprise shares in the Company. Own shares held by the SIP Trust are deducted from shareholders' funds and held at historical cost until they are sold to employees to satisfy share incentive plans. The assets, liabilities, income and costs of the SIP Trust are included in both the Company's and the consolidated Financial Statements.

Accounting policies applicable in general to this section

Financial assets and financial liabilities are recognised on the Group's Statement of Financial Position when the Group becomes party to the contractual provisions of the instrument.

Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All assets and liabilities, for which fair value is measured or disclosed in the Financial Statements, are categorised within the fair value hierarchy, described as follows, based on the lowest-level input that is significant to the fair value measurement as a whole:

Level 1 - quoted (unadjusted) market prices in active markets for identical assets or liabilities;

Level 2 - valuation techniques for which the lowest-level input that is significant to the fair value measurement is directly or indirectly observable; and

Level 3 - valuation techniques for which the lowest-level input that is significant to the fair value measurement is unobservable.

Financial assets

Financial assets are initially recognised at fair value, and subsequently measured at amortised cost, less any allowances for losses using the expected credit loss model, being the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive.

Financial liabilities

Financial liabilities are classified as either financial liabilities at fair value through profit and loss (FVTPL) or as other financial liabilities. The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged or cancelled, or they expire. Upon derecognition, the difference between the consideration paid to extinguish the liability and the carrying value of the liability at time of derecognition is recognised as a gain in the Group Statement of Comprehensive Income , net of any direct transaction costs.

Financial liabilities are classified at FVTPL when the financial liability is either held for trading or it is designated 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 is a derivative that is not a designated or effective hedging instrument.

Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on changes in fair value recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Derivatives (other than embedded derivatives)

Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the Group Statement of Comprehensive Income immediately. The Group does not currently designate any derivatives as hedging instruments.

A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as non-current if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months.

Other derivatives are presented as current assets or current liabilities.

Accounting policy

Cash includes cash on hand and cash with banks and financial institutions.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with three months or less remaining to maturity from the date of acquisition and that are subject to an insignificant risk of change in value.

Liquid investments are defined as short-term investments in fixed-term deposit accounts of between 3- and 12-months' maturity.

Cash and cash equivalents, and liquid investments, include amounts held in escrow or other reserved accounts that are contractually restricted to be used only for certain payments or transactions, and where the approval process for release of those funds is perfunctory, e.g. for dispersal to certain independent third parties for work undertaken as part of the Group's operations. Such amounts are classified as non-current if the payment or transaction is not expected to be realised or settled within 12 months.

Accounting policies

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

Where warrants are granted in conjunction with other equity instruments, which themselves meet the definition of equity, they are recorded at their fair value, which is measured using an appropriate valuation model. Warrants which do not meet the definition of equity are classified as derivative financial instruments.

The component parts of compound instruments, such as Convertible bonds, issued by the Group are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement.

If the conversion feature of a Convertible bond issued does not meet the definition of an equity instrument, that portion is classified as an embedded derivative and measured accordingly. The debt component of the instrument is determined by deducting the fair value of the conversion option at inception from the fair value of the consideration received for the instrument as a whole. The debt component amount is recorded as a financial liability on an amortised cost basis using the effective interest rate method until extinguished upon conversion or at the instrument's maturity date.

Where debt instruments issued by the Group are repurchased for cancellation, the financial liability is derecognised at the point at which cash consideration is settled. Upon derecognition, the difference between the liability's carrying amount that has been cancelled and the consideration paid is recognised as a gain in the Group Statement of Comprehensive Income, net of any direct transaction costs.

Embedded derivatives

Derivatives embedded in financial instruments or other host contracts that are not financial assets 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. Derivatives embedded in financial instruments or other host contracts that are financial assets are not separated; instead, the entire contract is accounted for either at amortised cost or fair value as appropriate.

An embedded derivative is presented as non-current if the remaining maturity of the compound instrument to which the embedded derivative relates is more than 12 months and is not expected to be realised or settled within 12 months.

Borrowing costs

Borrowing costs directly relating to the construction or production of a qualifying capital project under construction are capitalised and added to the project cost during construction until such time as the assets are substantially ready for their intended use, i.e. when they are capable of commercial production. The amount of borrowing costs eligible to be capitalised is reduced by an amount equivalent to any interest income received on temporary reinvestment of those borrowings.