Annual Report PDF

THE POWER TO BE DIFFERENT

Our vision is to become a leading full cycle exploration and production player, running assets to the highest standard and achieving great commercial deals.

The Directors present their consolidated strategic report for Spirit Energy Limited (the ‘Company’) and its subsidiaries (together, the ‘Group’ or ‘Spirit Energy’) for the year ended 31 December 2019.

FINANCIAL KPIS

Adjusted operating profit
£207m
Adjusted profit after tax
£37m
Adjusted operating cash flow
£548m
Lifting cost per barrel
£12.20/boe
SPIRIT ENERGY’S STRATEGY
IS TO ADD VALUE AS A LEAN, AGILE
AND SUSTAINABLE COMPANY.
Principal activities and strategy

Spirit Energy is a leading independent oil and gas operator in Europe, with 2019 production of 45.8 million (2018: 46.8 million) barrels oil equivalent (‘mmboe’), and at the end of 2019, had proven and probable (‘2P’) reserves of 284mmboe (2018: 270mmboe). We have operated and non-operated interests across the UK, Norway, the Netherlands and Denmark, with 33 producing fields and 136 exploration licences.

Spirit Energy’s strategy is to add value as a lean, agile and sustainable company with a focus on growth in North-West Europe.

Our strategy is to:

Create a winning Spirit platform​​ ​

To challenge the way we work, always seeking streamlined and efficient delivery, to be a lean and agile business with distinctive core capabilities.

Deliver the potential

The need for constant and relentless performance, focus on everything we do to achieve industry-leading safety standards, deliver every possible barrel of production, and keep control of our costs to generate superior returns and be resilient to fluctuations in oil and gas prices.

Grow the reserves pipeline

To continuously replenish production with new resource acquisition and deliver the project pipeline.

Spirit Energy made good progress against the strategy in 2019. We made several significant new discoveries in particular in the Greater Warwick Area, grew our reserves base by net 14mmboe after accounting for production, delivered cost savings particularly in the mature Morecambe asset, extended the life of most of our mature assets most notably in Statfjord, demonstrated strong performance in our operated assets and delivered better than industry-average safety performance with a TRIF (total recordable incident frequency) rate of 0.18 compared to 0.30 industry average. However, production performance was below target for the year and lower than 2018 but this was still better than the P50 estimate for the year. Overall, in a year where gas prices were 29% lower than 2018 and where we continued to spend £470 million to grow the business, it was a tremendous achievement to deliver positive Free Cash Flow.

45.8m
barrels of oil equivalent (mmboe) in 2019

Our performance

Free cash flow
£117m

Description
Adjusted operating cash flow less purchases of PP&E and intangibles and proceeds from sales of PP&E and intangibles.

Relevance to Group strategy
Reflects cash flow available for Shareholder dividends and servicing finance.

IFRS 15 revenue
£1,300m
Sale of gas £567m
Sale of oil and liquids £629m
Pipeline tariff revenue £74m
Other revenue £30m
Geographic
£1,579m
UK £1,009m
Norway £323m
Switzerland £169m
USA £58m
Netherlands £15m
Rest of the world £5m

Section 172(1) Directors’ Duty

As a result of being responsible for overseeing our Strategy described above, the Directors remain conscious of the impact their decisions can have on employees, communities and the environment.

Proactive engagement remains a central focus for the Board, which ensures the Directors have regard to the matters set out in S.172(1) (a) to (f) of the Companies Act. They receive regular stakeholder insights and feedback, which enables them to place stakeholder considerations at the very heart of the Board’s decisions as follows:

Section Reference Page
Decisions for the long-term success of the Company

Strategic report – Our strategy

Directors’ report – Going concern review

Strategic report – Future developments in business

Directors’ report – Governance framework

Note 22 – Sources of finance

10

17

13

18

55

How the Board engages with stakeholders and how the
Directors have regard to the need to foster the Company’s business relationships with all of its stakeholders, and
the effect of that regard

Strategic report – Business relationship

Directors’ report – Employment policies

Directors’ report – Governance framework

16

17

18

Risks

Strategic report – Principal risks and uncertainties

Note S2 – Financial risk management

14

67

Training and information

Strategic report – Employee engagement and culture

Directors’ report – Employment policies

15

17

Policies and procedures Directors’ report – Governance framework 18
Capital allocation and dividend policy

Directors’ report – Governance framework

Note 10 – Dividends

18

45

Culture and workforce

Strategic report – Employee engagement and culture

Directors’ report – Employment policies

15

17

Key performance indicators (KPIs)

In order to monitor the delivery of our strategy, we have identified KPIs which are used across the business to manage the assets and identify opportunities to improve performance and adapt operating plans to changing circumstances. Performance against KPIs is tracked and reviewed at monthly meetings of the Executive Committee and is reported to the Board of Directors. The Directors believe that these financial KPIs provide additional useful information on business performance and underlying trends. These measures are used for internal performance purposes. The adjusted measures in this report are not defined terms under IFRS and may not be comparable with similarly titled measures reported by other companies. Please refer to page 88 for definitions and reconciliation of adjusted performance measures to the statutory results. The following tables discuss the financial and non-financial KPIs for the current year with prior year comparatives.

Financial KPIs

KPI Description Relevance to Group strategy 2019
Performance for year
2018
Performance for year
Adjusted operating profit Operating profit before exceptional items and unrealised re-measurements
of energy contracts(i)
Reflects company
profitability performance
£207 m £426 m

Adjusted profit after tax

Profit for the year after tax before exceptional items and unrealised
re-measurements of energy contracts and related taxation(i)
Reflects company
profitability performance
£37 m £89 m
Adjusted operating cash flow Net cash flow from operating activities before payments
relating to exceptional charges
Reflects cash flow available for capital expenditure £548 m £913 m
Free cash flow Adjusted operating cash flow
less purchases of PP&E and intangibles and proceeds from
sales of PP&E and intangibles
Reflects cash flow available for Shareholder dividends
and servicing finance
£117 m £444 m
Lifting cost per barrel All field operating costs and tariffs (net of costs incurred for running a third-party terminal at Barrow) Reflects competitive cost structure and ability to generate cash flow
in a low-price environment
£12.2/boe £13.7/boe

(i) A description of exceptional items and re-measurements of energy contracts is provided in note 2 within the notes to the Financial Statements.

 

Non-financial KPIs

KPI Description Relevance to Group strategy 2019
Performance for year
2018
Performance for year
Total recordable incident frequency (‘TRIF’) rate Total recordable incidents per 200,000 hours for operated assets Reflects safety performance
which is a core foundation
of a sustainable company
0.18 0.20
Process safety incident rate (‘PSIR’) Number of Tier 1 and Tier 2 process safety incidents per 200,000 hours
for operated assets
Reflects safety performance
which is a core foundation
of a sustainable company
0.07 0.11
Production Production of gas, oil and liquids Core driver of revenue generation
and long-term sustainability
of production
45.8 mmboe 46.8 mmboe
Reserves/production 2P reserves/current year production Reflects long-term sustainability of production 6.2 5.8

Operating review

Annual production was down 2% compared to 2018 to 45.8mmboe, but within the target range of 45mmboe to 55mmboe for 2019, with a slight increase in gas production volumes offset by lower liquids production. We saw improved operational performance from the operated Morecambe field which largely offset natural decline across the portfolio and lower availability at Statfjord. Our 2P reserves were 14mmboe higher at the end of 2019 than at the end of 2018, with 64mmboe of positive revisions more than offsetting the impact of production and the Valemon and Sindre divestments in the year. The Statfjord life extension resulted in 31mmboe of the revision, with positive revisions also recognised at Kvitebjorn, Cygnus and South Morecambe. Overall this represented a reserves/production ratio of 6.2 times (2018: 5.8 times).

Lifting costs decreased from £13.7/boe in 2018 to £12.2/boe in 2019, the decrease principally reflecting improvements in underlying costs and reflecting favourable foreign exchange. The main contributors were the delivery of Morecambe asset efficiency savings, lower Trees asset intervention, lower maintenance costs on GMA, and lower tariff costs driven by lower production.

We continued to achieve a substantial cost saving across our operated decommissioning portfolio. Focussed project execution delivered first oil on Oda ahead of schedule and under budget. In 2019, three wells were drilled in the Greater Warwick Area, in which Spirit Energy owns a 50% interest. The Lincoln Crestal well confirmed the presence of light oil and produced at potentially commercial rates. The Warwick area yielded mixed results. Warwick Deep proved unsuccessful with water production and minor oil encountered. Warwick West was a discovery and confirmed the presence of light oil which was produced to surface during well testing. Further technical analysis is required to understand reservoir quality in this area. A further eight exploration and appraisal wells were drilled in 2019, and the last of which (the Wintershall Dea operated Bergknapp prospect) was a discovery.

Future developments in business

Our objective remains to deliver production in the range of 45–55mmboe per annum and to reduce average unit lifting costs through production efficiency and cost efficiency programmes to below £12/boe.

We plan to continue to reinvest up to 80% of our operating cash flow on capital projects across our operated portfolio in Chestnut and Chiswick, and non-operated portfolio on Statfjord life extension, GWA, and the Nova development in Norway which is proceeding as planned, with production due to begin in the fourth quarter of 2021. The field has an estimated 77mmboe of 2P reserves and Spirit Energy owns 20%.

Furthermore, we expect to participate in up to four exploration wells in 2020 in our Norway operations.

The Group continues to execute decommissioning projects and in 2020 will be focussing primarily on Morecambe.

In February 2020, we signed a deal for the sale of the Danish assets Hejre and Solsort to Ineos, which we expect to complete later this year.

80%
of cashflow reinvested
For the foreseeable future, natural gas and oil will continue to be a vital part of energy demand. Spirit Energy is proud to be part of an industry that accounts for a significant share of the energy mix.

Financial review

Group revenue decreased by £547 million, or 28%, to £1,431 million (2018: £1,978 million) principally due to lower commodity prices and adverse foreign exchange movements.

Cost of sales were £1,192 million, 3% lower than 2018. The decrease in costs principally represents lower lifting costs.

Operating costs of £180 million were £22 million lower than £202 million in 2018 reflecting improvements in underlying general and administrative costs.

The statutory operating loss was £115 million in 2019 compared to profit of £512 million in 2018. Operating loss included exceptional costs of £516 million (2018: exceptional income of £91 million). This comprised net impairments of £548 million (post-tax £408 million) on certain fields, predominantly due to decreases in price forecasts and portfolio rationalisations, and a reversal in unused decommissioning provisions of £32 million (post-tax £20 million) relating to assets previously impaired through exceptional items. Loss after taxation for the year is £271 million (2018: profit £191 million).

Alternative performance measures

Adjusted operating profit was down £219 million or 51% to £207 million principally due to lower commodity price, lower production, and higher depreciation charges following 2018 asset write-backs, offset by favourable lifting costs and operating costs.

Adjusted profit after tax was down £52 million, or 58%, to £37 million (2018: £89 million). This reflects the overall decline in adjusted operating profit and higher net financing costs.

Adjusted operating cash flow was down 40% to £548 million, driven primarily by lower commodity prices, higher tax payments relating to 2018 tax liabilities, and adverse working capital movements. After capital expenditure of £470 million, the Group generated free cash flow of £117 million in 2019 compared to £444 million in 2018.

Principal risks and uncertainties

Spirit Energy is exposed to risks arising from compliance, environmental, strategic, operational and financial factors. Accordingly, our management system includes a risk, assurance and control framework to ensure that consistent methods and processes are applied across the business to manage risks and opportunities arising in delivering our strategy. The risks associated with Brexit and our mitigating actions are discussed within the exit from the European Union section.

Key risks include significant operational risks, particularly relating to the safe and reliable operation of the business, retention and succession of key people and effective and available information systems and security. Spirit Energy invests heavily in its resource capability and management systems including standards, policies, procedures and controls to minimise the severity of the impact and probability of such risks arising. We also maintain a comprehensive insurance programme against losses incurred in the operation of our assets and executing exploration drilling, capital developments and decommissioning projects.

Risks associated with Spirit Energy’s ambitious strategic objectives such as the transformation of operational performance and achieving long-term sustainability are managed through a number of initiatives under the governance of the Executive Committee, supported by relevant project management discipline and specialist functional expertise.

Spirit Energy monitors and ensures compliance with regulatory requirements. The risks associated with compliance include market conduct, financial crime, data protection, competition and various reporting obligations such as the Modern Slavery Act.

We manage liquidity risks through an agreed financial framework to build sustainable long-term cash flow underpinning the Group’s liquidity requirements and capital investments. Spirit Energy has significant cash and cash equivalents of £361 million, and a £250 million revolving unsecured credit facility provided by its Shareholders (refer to note 22b), which together are expected to cover its liquidity requirements for the foreseeable future. Investments and dividends will be managed to ensure that we maintain a working capital liquidity buffer. In the event of a potential liquidity shortfall, Spirit Energy can access external borrowings and request funding from Shareholders. In addition, exposures to commodity prices, foreign exchange rate movements and credit risk are managed through agreed hedging and treasury policies.

The recent global outbreak of COVID-19 together with the significant drop in commodity prices has presented greater challenges to the business particularly in relation to operational risks and liquidity risks noted above. On the former, Spirit Energy has measures in place to respond to the operational impact of COVID-19. More recently on 4 April 2020 a crewmember was evacuated from the floating production, storage and offloading vessel at the Chestnut field after presenting with flu like symptoms. Operations were temporarily suspended on the unit and following a deep clean of the vessel, and a crew change, production was restarted on 13 April 2020. With respect to the latter, Spirit Energy continues to operate within its Financial Framework which aims to adapt to the lower price environment through measures to reduce operating costs, capital expenditure and decommissioning spend. The impact of the current prices on the impairments booked in 2019 is set out in note 7(c).

Spirit Energy is also exposed to high inherent risks such as IT security, data protection and fraud which are mitigated through a framework of relevant controls. The energy transition section within this report describes the principal environmental risks Spirit Energy faces in the current climate.

Energy Transition

How to provide the energy needed for a growing and more prosperous global population that does not damage our environment beyond repair is one of the greatest challenges of our time. Our energy systems need to become cleaner to support long-term prosperity because the world runs on energy, opportunities are fostered by energy and lives are supported by energy.

Decarbonising the energy systems that support families and economies across our planet is a highly complex issue. For the foreseeable future, natural gas and oil will continue to be a vital part of global and domestic energy demand. Spirit Energy is proud to be part of an industry that accounts for a significant share of the energy mix.

We are equally proud that our expert workforce, supply chains, research activity, technology development and deployment and dynamic system of infrastructure, supply chains, expert workforce, research activity and technology development and deployment has a fundamental role in the transition to a net-zero carbon future.

Our ambition is to be a top-quartile operator in terms of carbon intensity amongst our peers. Our immediate focus is on building solid baseline measurements and prioritising the most cost-effective interventions with an aim to make further progress in decarbonising our operated assets; minimising our primary production emissions through improved operational efficiency, reduced flaring and fugitive leak detection and repair programmes; reviewing the feasibility of low-carbon electricity to supply our operations, and determining appropriate emission reduction targets and setting related management incentives.

Employee engagement and culture

In 2019, we conducted a number of employee engagement and health and wellbeing surveys, and the feedback from our teams has been reviewed to make Spirit Energy an even better place to work.

Some of the comments focused on leadership capability and, more specifically, inconsistency of experience from one manager to another. This is only natural, as people are unique, and a lot of benefit is seen in the diversity that exists across the organisation. However, that can also lead to different approaches, behaviours and expectations, and so the Spirit Leadership Expectations were introduced to guide behaviours that are expected from all managers across Spirit Energy. Members of the Executive Committee have completed their leadership assessments and development conversations, and these are being rolled out across Spirit Energy at all levels.

The “Free Spirits” employee network of engagement champions was successfully launched during the year to find and implement changes, big and small, to improve and embed the culture of Spirit Energy. Leaning on the strength and numbers of our diversity and inclusion organisation, The Network, the Free Spirits have been instrumental in supporting strategic initiatives across the organisation.

Spirit Energy published its first gender pay gap report in Q2 2019. In support of gender balance, Spirit Energy also signed the AXIS Network pledge; was active in promoting STEM careers for women; and sponsored POWERful Women, with Executive Committee members taking on Ambassador roles.

A new Learning and Development programme is being launched in 2020. Employees will be able to find out about learning opportunities, online training, external courses and further education.

PAY GAP REPORT

CLOSING OUR GENDER PAY GAP

Spirit Energy published its first gender pay gap report in Q2 2019.

OUR COLLEAGUES

Business relationships

Spirit Energy aims to build enduring relationships with suppliers driven by our core values of care, agility, courage, delivery and collaboration. We measure ourselves by these values and work closely with our suppliers in encouraging them to do the same, seeing them as an extension of our teams. During our annual supplier conference, we had over 120 suppliers in attendance and for the first-time recognised suppliers with the Spirit Energy Supply Chain Awards for operating in line with our values.

In 2019 we awarded major contracts in the Operations & Maintenance categories, which have helped us reduce complexity and build stronger, deeper relationships with the selected suppliers. In preparation for our operational separation from our Shareholder Centrica plc, we set up our own indirect contracts. For those categories, this meant setting up a new Spirit Energy Supply Chain; building new relationships and accessing new suppliers.

In addition, as licence operator, Spirit Energy works closely with the Oil and Gas Authority (“OGA”) and holds regular check-ins regarding business development and ongoing operations.

Exit from the European Union

The UK left the EU on 31 January 2020. The UK has now entered into the transition period which means EU law will continue to apply to, and within, the UK until the end of December 2020 (unless extended), and existing arrangements largely continue to apply. Therefore, the immediate impact on the Company of the UK leaving the EU is limited in the short term. Extricating from the European Union treaties is a task of immense complexity, but the Company is keeping the possible impacts on the business stemming from this under review, and also from the possibility of a no-deal Brexit at the end of the transition period in the event that a trade agreement is not reached so that appropriate action can be taken. There are also potential tax consequences of the withdrawal and these will continue to be reassessed at each reporting date to ensure the tax provisions reflect the most likely outcome following the withdrawal.

Approval

This report was approved by the Board of Directors on 27 May 2020 and signed on its behalf by:

Chris Cox
Director and Chief Executive Officer