Delivering growth - fp.fo risks and uncertainties 31 ... Company balance sheet 72 Group cash flow statement 73 ... (excluding hedging gains)

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  • Deliveringgrowth

    Faroe Petroleum plc Annual Report and Accounts 2016

  • Our hub focus, successes and future plans Read more on pages 10-15

    More information is available online at: www.faroe-petroleum.com

    With our hub area focus, centred aroundUla, Njord and Brage, we are setfor amajor growth phase as we take advantage of low industry costs and our strong balance sheet and invest across our core assets in 2017 and beyond.

  • ContentsStrategic report 02OverviewHighlights 02Chairmans and Chief Executives statement 04Market overview 08Our hub focus 10

    Growing to the next level 12Financial discipline 14Exploration success 15

    Our business 16Our strategy 18Key performance indicators 19

    PerformanceOperational report 20Financial review 26Risk management and internal controls 30Principal risks and uncertainties 31

    Governance 34Chairmans introduction 34Board of Directors 36Directors report 38Statement of Directors responsibilities 40Corporate governance report 41Directors Remuneration Committee report 44Directors remuneration policy 45Annual report on remuneration 50Audit Committee report 60

    Accounts 63Independent auditors report 63Group income statement 69Group statement of other comprehensive income 70Company statement of other comprehensive income 70Group balance sheet 71Company balance sheet 72Group cash flow statement 73Company cash flow statement 74Group statement of changes in equity 75Company statement of changes in equity 76Notes to the accounts 77

    Other information 121Officers and professional advisers 121Glossary 122

    Growing our business Read more on pages 12

    Exploration success Read more on pages 15

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    01Faroe Petroleum plcAnnual Report and Accounts 2016

  • HighlightsStrategic reportOverview

    Our solid operational and financial performance give us a strong position for further exploration, acquisitions and growth in 2017 and beyond

    Operational2016 saw a significant growth in 2P reserves and the completion of the DONG production portfolio acquisition

    17,395 boepdTotal average economic production for 2016 at 17,395 boepd (2015: 10,530 boepd)

    DiscoveryDiscovery of Brasse field

    2P | 81.3 mmboe2P Reserves increased by 42% with closing reserves at 81.3 mmboe (2015: 57.4 mmboe)

    2C | 90.9 mmboe2C Contingent Resources decreased to 90.9mmboe (2015:98.3 mmboe)

    96.8mcash and net cash at 31December 2016

    94.8mrevenue (excluding hedginggains)

    $250mRBL facility with $100m accordion secured undrawn

    NOK1bnNew EFF facility secured

    66mraised from equity placing

    33.5mpre-tax exploration and evaluation expense

    8.1mdevelopment and production investments (excludes acquisitions)

    FinancialUS$250m Reserve base Lending Facility secured and a further US$100m on accordian basis (7 years maturity)

    02 Faroe Petroleum plcAnnual Report and Accounts 2016

  • OutlookHigh quality investment programme progressing to deliver material organic production growth

    Three wellsThree wells scheduled for 2017, all benefitting fromNorways 78% exploration tax rebate

    Capex2017 exploration and appraisal capex is estimated to be approximately 45 million pre-tax (10.5 million post-tax) and development and production capex for 2017 is expected to be approximately 90 million

    13,000-15,000 boepdProduction guidance for 2017, split 60% liquids (oil and condensate) and 40% gas

    Hedging92% of 2017 and 38% of 2018 expected post tax gas production hedged at average floor of 40p / therm and 32% of expected 2017 post tax oil production hedged at a floor of $55 / boe

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    03Faroe Petroleum plcAnnual Report and Accounts 2016

  • John Bentley Chairman

    Graham Stewart Chief Executive

    In an otherwise difficult and challenging market due to low oil prices, the Company successfully doubled its production and increased 2P Reserves by 42% during the year. With new discoveries and maturing existing discoveries, Faroe now hasa portfolio of significant production and development, pre-development, appraisal and exploration projects, centred around our core hubs of Brage, Njord and Ula. These projects can realise substantial value, particularly in arising commodity price environment, and should continue tolower the Companys operating costs in the medium term. Faroes successful exploration track record has added significant value last year and over many years, and exploration will continue to be a core element of the business. The Company successfully entered into a new seven-year Reserve Base Lending (RBL) credit facility and a new four-year Exploration Finance Facility (EFF) in December 2016, both with improved terms. With year-end net cash of 97 million and an undrawn RBL, Faroe is particularly well placed to pursue growth both organically and through potential new acquisitions.

    Consistent strategy is delivering resultsFaroes strategy is to grow value from its reserves and resources through monetising exploration and appraisal successes, participating in selective development projects and pursuing value accretive asset transactions; all of which we have a strong track record in. This strategy, underpinned by cash flow from good quality production assets, a strong balance sheet and rigorous financial discipline, has delivered exceptional results for Faroe, creating a strong platform for continued growth, and isbenefiting from significant sector-wide cost reduction. The Group continues to pursue its successful exploration strategy and has built a substantial prospect inventory for future wells, all funded from cash flow and Norwegian fiscal incentives.

    Strategic reportOverview

    Chairmans and Chief Executives statement

    We are well positioned to grow materially in the near future in order to deliver our goal of becoming a leading independent pan-North Sea E&P company

    04 Faroe Petroleum plcAnnual Report and Accounts 2016

  • Faroes successful exploration track record has added significant value last year and over many years, and exploration will continue tobe a core element of the business

    Successful acquisition of Norwegian production portfolio and oversubscribed share issueIn July 2016, Faroe announced the acquisition of four producing assets in the Norwegian North Sea from DONG for a consideration of $70.2 million at an effective date of 1 January 2016. The acquired assets, two of which are operated, added 2P developed reserves of 19.8 mmboe together with 2C resources of 11.1 mmboe, and accounted for 56% of Faroes average economic production in 2016. The deal also includes tax balances of $109 million. Completion of the acquisition occurred on 6 December 2016, with a total net consideration payable of $30.4 million after adjustments for cashflow between the effective and completion date. The acquisition creates a new strategic hub for Faroe, centred around the Ula platform (Faroe 20%) already a host for the producing Blane (Faroe 30.5%), Tambar (Faroe 45%) and Oselvar (Faroe 55%) fields and the Oda field development (Faroe 15%). As well as the strategic nature of the deal, the acquired assets have a material and complementary impact on production, reserves, resources, cash flow and debt capacity. Having assessed a large number of potential acquisition opportunities in recent times, this portfolio of assets stood out as an excellent strategic fit, with substantial upside, and delivering material multi-faceted synergies.

    In parallel with the acquisition, the Company raised 66 million (before expenses) of equity capital in a significantly oversubscribed share placing and open offer. The share issue ensures that Faroe continues to take advantage of growth potential within our portfolio in a capital efficient manner, taking advantage of upside opportunities and progressing pre-development projects towards monetisation while maintaining balance sheet strength.

    Production portfolio performing well and 2P Reserves up significantlyThe Companys tax efficient production portfolio remains core to Faroes strategy and is a principal source of funding. Following the acquisition of the DONG assets, Faroe delivered net average economic production of 17,395 boepd in 2016 with an average economic opex per boe of $25. Faroes production is spread across a balanced portfolio of assets with a production split of approximately 75% in Norway and 25% in the UK. With record high production, the production portfolio generated EBITDAX for the Group of approximately 65 million (including EBITDAX from the DONG assets from effective date of 1 January 2016).

    2P Reserves were estimated at 81.3 mmboe at 1 January 2017, which is an increase of 42% over the year and represent reserves replacement of approximately five times. The significant increase is a result of both the acquisition of producing assets from DONG and positive reserve revisions across the portfolio.

    Board of DirectorsPage 36

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    05Faroe Petroleum plcAnnual Report and Accounts 2016

  • Development and pre-development projects progressing wellFaroes successful exploration programme has delivered a number of commercial discoveries which are now progressing towards development. Consequently, there is real potential for Faroe to benefit from material near and medium-term organic growth in production and cash flow from its existing portfolio.

    On the shallow water Centrica-operated Oda oil field development project (Faroe 15%), an FDP was submitted in December 2016. Oda has estimated gross reserves of 46 mmboe in an excellent reservoir and will be developed as a subsea tie-back to Ula (Faroe 20%). Gross plateau production is expected to be 35,000 boepd with