Announcement PDF ASX:SHE 20 23 ANNUAL REPORT For the Year Ended 30th June 2023 Corporate Directory Directors Securities Exchange Robert Gardner Executive Chairman Street: Exchange Plaza Level 10, Central Park 152-158 St Georges Terrace Perth WA 6000 David Deloub Executive Director Jay Stephenson Non-executive Director ASX Code: SHE Company Secretary Share Registry Jay Stephenson Computershare Registry Services Registered Office Street: Level 11, 172 St Georges Terrace Perth WA 6000 Street: Suite 4, 182 Claisebrook Road Perth WA 6000 Postal: GPO Box D182 Perth WA 6840 Postal: PO Box 52 WEST PERTH WA 6872 Telephone: 1300 787 272 (investors within Australia) +61 (0) 8 9323 2000 Telephone: +61 (0)8 6489 1600 Facsimile: +61 (0)8 6489 1601 Email: info@stonehorseenergy.com.au Website: www.stonehorseenergy.com Auditor Hall Chadwick Audit WA Pty Ltd Street: 283 Rokeby Road Subiaco WA 6008, Australia Telephone: +61(0) 8 9426 0666 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 ANNUAL REPORT 30 JUNE 2023 Contents Directors' Report.................................................................................................................................................................... 1 Remuneration Report .......................................................................................................................................................... 14 Auditor's independence declaration.................................................................................................................................... 19 Consolidated statement of profit or loss and other comprehensive income ...................................................................... 20 Consolidated statement of financial position ..................................................................................................................... 21 Consolidated statement of changes in equity ..................................................................................................................... 22 Consolidated statement of cash flows ................................................................................................................................. 23 Notes to the Financial Statements ....................................................................................................................................... 24 Directors' Declaration .......................................................................................................................................................... 48 Independent Auditor's Report ............................................................................................................................................. 49 Corporate Governance Statement....................................................................................................................................... 53 Additional Information Required for Listed Public Companies.............................................................................................60 P a g e | ii STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Directors' Report Your Directors present their report together with the summary of the financial information of Stonehorse Energy Limited (ASX: SHE) (the Company) and its controlled entities (the Group) for the financial year ended 30 June 2023 and the auditor's report thereon. 1. Directors The names of Directors in office at any time during or since the end of the year are: Mr Robert Gardner Executive Chairman Mr David Deloub Executive Director Mr Jay Stephenson Non-executive Director Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. For additional information of Directors including details of the qualifications of Directors please refer to paragraph 9 Information on directors of this Directors' Report. 2. Company secretary The following person held the position of Company Secretary at the end of the financial year: Mr Jay Stephenson 3. Please refer to paragraph 9 Information on directors. Nature of operations and principal activities The Company) is an Australian based Exploration and Production (E&P) energy company. Its overall objective is to implement its strategy of building a portfolio of geographically and geophysically diverse, high quality well bore assets with Working Interest (WI) percentages reflecting risk appetite and capital availability. 4. Dividends paid or recommended There were no dividends paid or recommended during the financial year ended 30 June 2023. P a g e |1 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Directors' Report 5. Review of Operations Operations review Stonehorse Energy Limited (ASX: SHE) (Stonehorse or the Company) is pleased to present this review of operations for the full year ending 30th June 2023. • • • • We are pleased to report that the existing Stonehorse portfolio of working interests in oil and gas wells located in the United States continues to provide stable production revenue increasingly enhanced by the upward trend in commodity prices. More importantly, the Company is extremely excited about our two recent “new-drill” investments in North and West Central Alberta, an established and highly regarded oil and gas provinces. These investments have been significantly enhanced through experienced partners in both projects and support from our local technical and commercial team and are expected to make a significant contribution to our total oil and gas production. The focus on identifying and developing these investment opportunities in Canada and Importantly, the establishment of these new partnerships, represents a critical step in building a series of strong relationships with local established E&P companies in the region. OPERATIONAL HIGHLIGHTS ➢ An investment to upgrade a thermal oil well in Saskatchewan with Alberta based partner Proton Technologies Canada (Superb Operating Co.). ➢ Partnered with Certus Oil & Gas Inc (Certus) to earn a 26.25% Net Working Interest in the proposed Certus 01-27-33 liquids rich gas well located in Central Alberta, Canada. ➢ Partnered with Gryphon Petroleum Corporation (Gryphon) to earn a 18.75% Working Interest in the proposed Wapiti 16-0265-08 light oil well located in Northern Alberta, Canada. ➢ Stonehorse launches Investor Hub and invites investors to sign up to learn more about its projects https://investorhub.stonehorseenergy.com/welcome. OPERATIONAL ACTIVITIES Canadian Assets Certus 01-27-33 well Stonehorse Energy agreed to participate in the proposed drilling, completion, and tie-in of the liquids rich Certus 01-27-33 gas well for an agreed investment of $2.52 MM CAD. The following table provides a summary of the proposed 2-mile lateral well. Figure 1. Location of the Certus 1-27-33 well P a g e |2 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 The well location and operation is underway in the Sundre area of Central Alberta. This area has a legacy of successful oil and gas operations for over 6 decades. The operation has the infrastructure and support of local stakeholders. The well is being drilled and completed on an existing pad site and tied into Certus production battery 3 miles away. Production will be partially processed (dewatered and measured) and then transported through a third-party pipeline to AltaGas operated Harmattan deep cut gas plant where condensate and NGLs will be extracted and marketed (sold) by a major integrated E&P Company. Offset Operator Wells Well: 3-34-33-05W5 Well:1-27-33-05W5 Figure 2: Map of Certus held land (Yellow) offset wells and the Certus 1-27-33 well. Success of the 01-27-33 well will open the door to an additional 2-3 offset development wells in the area at an earned working interest of 26.25%. As per the land map above there is significant running room in the area for additional farm-in opportunities. Certus O&G Processing Battery 1-27-33 proposed pad extension Figure 3. Map showing proposed Certus1-27-33 well location and O&G processing Battery. P a g e |3 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Wapiti 16-02-65-08 well Stonehorse Energy has agreed to an initial participation in the proposed drilling, completion, and tie-in of the Wapiti 16-02-65-08 light oil well for an agreed investment of $1.38 MM CAD. The arrangement with Gryphon includes a negotiated one well commitment to earn 3 sections. With success on the well, Stonehorse has the option to participate in a second well drilled off the same pad on the same terms earning 3 additional sections of core development acreage. The planned spud date for the first well is mid-October 2023. Figure 4: The planned Wapiti Development Area The proposed Wapiti horizontal well opportunity is analogous to Wapiti Cardium reservoir pool ~20 km North with 22.5 mmbbl cumulative production to date. Gryphon currently owns six highly prospective sections of crown land at 100% Working Interest. The proposed Wapiti well directly offsets a thick (10.5 m), porous (9.5%) Cardium upper shoreface sand. The drilling well plan will use offset vertical well penetrations, seismic and measurement while drilling to effectively place the wellbore in the target reservoir. Based on offset well production in the area the anticipated type curve recovery is 240 mboe/well. South Wapiti Figure 5. South Wapiti Cardium reservoir light oil opportunity. P a g e |4 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Technical analysis has identified a 10.5m pay zone with 9.5% average porosity. Upper shoreface (USF) sand is key to strong production and is present in the targeted well path. The USF sand serves as a conduit for oil stored in mid-lower sand beneath. With success of the first well comes the opportunity to participate in a second (development) well with the potential of up to 34 more wells in the earned area. Figure 6. Six sections of Selected lands in area of earning. Proton (Superb) Energy – KP5 well The financial investment in the Proton Energy (Superb) KP5 well was made at the beginning of the second quarter 2023 and workover operations were completed in May 2023. The oil production rate has fluctuated around 25 BOPD with the well currently producing ~40 BOPD. The well is currently being optimized with pump speed and offset steam/air injection. The operator is also reviewing stimulation options to increase the productivity (rate) of the well. P a g e |5 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 North American Assets The current oil and gas well portfolio consisting of 11 operating wells in North America continues to perform strongly with all but 1 well now having paid out and continues to deliver seasoned production. Total net operating revenues have been impacted by softer oil and gas prices in North America with natural gas, expected to strengthen over the last quarter of 2023 into the Northern hemisphere winter season. Portfolio production BOE/Month 60,000 50,000 40,000 30,000 20,000 10,000 Sutton Burgess Bullard Jewel 1/04/2023 1/01/2023 1/10/2022 1/07/2022 1/04/2022 1/01/2022 1/10/2021 1/07/2021 1/04/2021 1/01/2021 1/10/2020 1/07/2020 1/04/2020 1/01/2020 1/10/2019 1/07/2019 1/04/2019 1/01/2019 1/10/2018 1/07/2018 1/04/2018 1/01/2018 1/10/2017 - TOTAL Figure 7. BOE production rate for the 4 main producing US oil and gas assets. Total production decline showing a flattening off due to the production time of these wells. Recent Canadian investment in a liquids rich gas well in Alberta expected to lift daily average BOE. Australian Assets Myall Creek-2 (Surat Basin, QLD) The timing of the planned fracture stimulation continues to be late November/ early December 2023 and is designed to coincide with the JV partners ability to take advantage of forecast eastern seaboard natural gas prices. OPERATIONAL STRATEGY AND OBJECTIVES The current strategy of Stonehorse is to build a portfolio of high quality well bore assets by taking non-operated working interests in wells reflecting risk appetite and capital availability. The Company has recently established a technical and commercial capability in Alberta, Canda and has been focusing on identifying and assessing multiple investment opportunities in the oil and gas provinces located in the Western Canadian Sedimentary Basin. P a g e |6 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 EVENTS SUBSEQUENT TO REPORTING DATE Subsequent to 30th June the Company announced the successful completion of the drilling operations for the Certus,01-27-33 well, located in Central Alberta, Canada. The drilling was safely completed with production casing set and cemented, and now primed for the forthcoming fracture stimulation phase. The Caroline well reached its target depth of 5,626 m MD with production casing successfully cemented in place on 12th September. The drilling operations were executed without any safety incidents, highlighting the company's commitment to ensuring the safety of its staff and environment. Preliminary evaluations confirm good quality reservoir with frack sleeves in place for an optimal subsequent fracture stimulated well completion. Preparations are currently underway for the fracture stimulation of the Caroline well. The stimulation campaign is scheduled to commence on 25th September. Based on current assessments, the Caroline well is projected to access prospective resources and confirm productivity post completion through a brief well test prior to tie-in to permanent production facilities. We anticipate first production mid Q4 2023. In mid-July Stonehorse formally launched its Investor Hub. The Investor Hub is a dedicated platform for investors to learn more about Stonehorse Energy and our latest activities during this period of anticipated growth for the company. Visit the Investor Hub here: https://investorhub.stonehorseenergy.com/welcome. Appendix 1: Well Name Reference Number Working Interest County, State Operator Burgess 28-1 96.81% Ellis, OK Black Mesa Energy Sutton 2H-52 25.00% Hansford, TX Strat Land Exploration Bullard 1-18-07UWH 15.60% Gravin, OK Rimrock Resources Henry Federal 1-8-5XH 2.30% Blaine, OK Continental Resources Randolph 1-34-27XHM 0.21% Blaine, OK Continental Resources Randolph 3-34-27XHM 0.21% Blaine, OK Continental Resources Randolph 4-34-27XHM 0.21% Blaine, OK Continental Resources Jewell 1-13-12SXH 41.50% Carter, OK Black Mesa Energy Newberry 12-1 21.70% Carter, OK Black Mesa Energy Mitchell 12-1 50.00% Carter, OK Black Mesa Energy Thelma 1-32 50.00% Murray, OK Black Mesa Energy Stonehorse US Stonehorse Canada Caroline 1-27-33 26.25% Sundry, AB Certus Wapiti 16-02-65-08 18.75% Wapiti, AB Gryphon 25.00% Surat Basin, Qld Armour Energy Stonehorse Australia Myall Creek Myall Creek-2 Table 1. Current Portfolio of wellbore interests. P a g e |7 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Glossary D&C Drill and Complete BCF Billion cubic feet. BOE Barrels of Oil Equivalent DSU Development unit or Drilling Spacing Unit (DSU) is the geographical area in which an initial oil and or gas well is drilled and produced from the geological formation listed in the spacing order. The spacing unit combines all interest owners for the purpose of sharing in production from oil and or gas wells in the unit. A spacing order establishes the size of the unit, divides the w s f “ s” “w k s” E&P Exploration and Production EUR Ultimate Economic Recovery NWI Net Working Interest NGL Natural Gas Liquids Mcfd 1,000 cubic feet (of gas) per day MMcfd 1,000,000 cubic feet (of gas) per day Mboe 1,000 barrels of oil equivalent MMboe 1,000,000 barrels of oil equivalent NWI Net Working Interest – Working interest net of promote, overrides and royalties. O&G Oil and Gas WI Working Interest - Percentage of ownership in a lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing and operating a well or unit Spud Commencement of drilling the well. Company Specific Risks Oil and Gas exploration and development risks The business of oil and gas exploration, project development and production, by its nature, is highly speculative and contains elements of significant risk with no guarantee of success. Ultimate and continuous success of these activities is dependent on many factors such as: (i) (ii) (iii) (iv) (v) (vi) the discovery and/or acquisition of economically recoverable reserves; access to adequate capital for project development; design and construction of efficient development and production infrastructure within capital expenditure budgets; securing and maintaining title to interests; obtaining consents and approvals necessary for the conduct of oil and gas exploration, development and production; and access to competent operational management and prudent financial administration, including the availability and reliability of appropriately skilled and experienced employees, contractors and consultants. Whether or not income will result from projects undergoing exploration and development programs depends on successful exploration and establishment of production facilities. Factors including costs, actual hydrocarbons and formations, flow consistency and reliability and commodity prices affect successful project development and operations. P a g e |8 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Oil and gas exploration may involve drilling operations and exploration activities which do not generate a positive return on investment. This may arise from dry wells, but also from wells that are productive but do not produce sufficient revenues to return a profit after accounting for drilling, operating and other associated costs. The production from successful wells may also be impacted by various operating conditions, including insufficient storage or transportation capacity, or other geological and mechanical conditions. In addition, managing drilling hazards or environmental damage and pollution caused by exploration and development operations could greatly increase the associated cost and profitability of individual wells. There is no assurance that any exploration on current or future interests will result in the discovery of an economic deposit of oil or gas. Even if an apparently viable deposit is identified, there is no guarantee that it can be economically developed. Operational Risks Oil and gas exploration and development activities involve numerous operational risks, including encountering unusual or unexpected geological formations, mechanical breakdowns or failures, human errors and other unexpected events which occur in the process of drilling and operating oil and gas wells. The occurrence of any of these risks could result in substantial financial losses to the Company due to injury or loss of life, damage to or destruction of , s c s q , v ,c s sb s regulatory investigation, amongst other factors. Damages occurring to third parties as a result of such risks may give rise to claims against the Company which may not be covered fully by insurance or at all. Sovereign risks T ’s k j c ss s N c cc , s s bj c sks ss c d in operating in foreign countries. These risks include economic, social or political instabilities or change, hyperinflation, currency nonconvertibility or instability and changes of law affecting foreign ownership, government participation, taxation, working conditions, rates of exchange, exchange control, exploration licensing, export duties, repatriation of income or return of capital, environmental protection, labour relations as well as government control over natural resources or government relations that require the employment of local staff or contractors or require other benefits to be provided to local residents. Contractual and Joint Venture Risk The Directors are not able to presently assess the risk of financial failure or default by a participant in any joint venture to which the Company is, or may become, a party or the insolvency or other failure by any of the contractors engaged by the Company for any exploration or other activity. Any such failure or default could adversely affect the operations and performance of the Company and the value of the Shares. INDUSTRY RISKS Oil and Gas Reserves and Production Estimates Oil and Gas Reserves and production estimates are expressions of judgement based on knowledge, experience and industry practice. Estimates which were valid when originally calculated may alter significantly when new information or techniques become available. In addition, by their very nature, resource estimates are imprecise and depend to some extent on interpretations which may prove to be inaccurate. As further information becomes available through additional fieldwork and analysis the estimates are like c T s s s v sw c , , v s ff c ’s ns and the value of the Shares. Commercial Risk The oil and gas exploration industry is competitive and there is no assurance that, even if commercial quantities of those resources is discovered by the Company on its current projects or future projects it may acquire an interest in, a profitable market will exist for sales of such resources. There can be no assurance that the quality of any such resources will be such that they can be extracted economically. P a g e |9 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Commodity Price Volatility and Exchange Rate Risks If the Company achieves success leading to oil and gas production, the revenue it will derive through the sale of resources it may discover exposes the potential income of the Company to commodity price and exchange rate risks. Commodity prices fluctuate and are affected by many factors beyond the control of the Company. Such factors include supply and demand fluctuations for oil and gas, technological advancements, forward selling activities and other macro-economic factors such as inflation expectations, interest rates and general global economic conditions. Furthermore, international prices of various commodities are denominated in United States dollars whereas the income and expenditure of the Company are and will be taken into account in Australian currency. This exposes the Company to the fluctuations and volatility of the rate of exchange between the United States dollar and the Australian dollar as determined in international k s If c fc s c s sc v v s ff c ’s x , v possible production activities, and its ability to fund these activities, which may no longer be profitable. Insurance Risks Exploration for and development of oil and gas involves hazards and risks that could result in the Company incurring losses or liabilities that could arise from its operations. If the Company incurs losses or liabilities which are not covered by its insurance c s, f s v b f x v w b c v / ’s ssets may be at risk. The Company insures its operations in accordance with indus c c H w v , c c c s c s ’s insurance may not be of a nature or level to provide adequate insurance cover. The occurrence of an event that is not covered or fully covered by insurance could have a material adverse effect on the business, financial condition and results of the Company. Insurance against all risks associated with oil and gas exploration and production is not always available and, where available, the costs can be prohibitive or not adequate to cover all claims. Commercialisation T ’s f s, f b , w k b b b s cc ssf s f sc c s s T ’s b s s further dependent upon a number of factors, including matters which may be beyond the control of the Company. The Company may not be successful in securing identified customers or market opportunities. T ’s b s k s c n will be negatively impacted in the event it is unable to secure adequate transportation and processing. Access will depend on the proximity and capacity of pipelines and processing facilities. Furthermore, the Company may be required to develop its own pipeline infrastructure or secure access to third party pipeline infrastructure in order to deliver oil and gas to key markets or customers, or to directly deliver gas to key markets or customers. The development of its own pipeline infrastructure will be subject to the Company obtaining relevant approvals including pipeline licences. GENERAL INVESTMENT RISKS General Economic Conditions General economic conditions, introduction of tax reform, new legislation, the general level of activity within the resources industry, v s s f s c c xc s v v s ff c ’s x , development and possible production activities, as well as on its ability to fund those activities. Volatility in Global Credit and Investment Markets Global credit, commodity and investment markets may experience uncertainty and volatility. The factors which may lead to this situation are outside the control of the Company and may impact the price at which the Shares trade regardless of operating f c ff c ’s b s q / b c v s bj c v s, f q P a g e | 10 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 Government and Legal Risk The introduction of new legislation or amendments to existing legislation by governments (including introduction of tax reform), developments in existing common law or the respective interpretation of the legal requirements in any of the legal jurisdictions w c v ’s s c c b s, c c v s ss s, s tely the financial performance of the Company, or the Shares. The same adverse impact is possible by the introduction of new government policy or amendments to existing government policy, including such matters as access to lands and infrastructure, compliance with environmental regulations, taxation and royalties. 5.1. Operating results The Group realised Revenue of $4,145,886 (2022: $7,748,216) and a net profit for the year amounted to $812,351 (2022: profit of $3,603,325). The financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the ordinary course of business. Details of the Company's assessment in this regard can be found in Note 17.1 Basis of preparation. 5.2. Financial position As at 30 June 2023, the Group's cash and cash equivalents decreased by $2,435,731 from $8,275,134 at 30 June 2022 to $10,710,865 and had working capital of $9,158,406 (June 2022: $7,182,454). 6. Significant changes in state of affairs Other than referred to in section 5 Review of Operations, no significant changes in the state of affairs of the Group occurred during the financial year. 7. Events subsequent to reporting date On 21 July 2023, the Group announced that it had entered into a Participation Agreement with Canadian based Certus Oil & Gas Inc (Certus) to earn a 26.25% Net Working Interest in the Certus 1-27-33 liquids rich gas well located in Central Alberta, Canada. The capital commitment for the investment is $2.52 million CAD. On 29 August 2023, the Group announced that it had Farmout, Option and Participation Agreement with Canadian based Gryphon Oil Corp (Gryphon) to earn a 18.75% Working Interest in the proposed Wapiti 16-02-65-08W6M light oil well located in Northern Alberta, Canada. The Capital commitment for this investment is $1.4m CAD. There are no other significant events following the end of financial year.. 8. Likely developments Other than matters referred to in sections 3 and 0 of this Directors' Report, no other likely developments, future prospects and business strategies of the operations of the Group and the expected results of those operations have been included in this report as the Directors believe that the inclusion of such information would be likely to result in unreasonable prejudice to the Group. P a g e | 11 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2023 9. Information on directors Mr Robert Gardner  Chairman (Executive) – Appointed 29 September 2010 Experience and Qualifications  Mr Gardner is a Perth based business proprietor, with over 28 years' experience in the mining industry. Mr Gardner has developed a number of projects that are now major assets of ASX listed companies and has extensive experience in the China region. Mr Gardner is also a major shareholder in the Company. Interest in Securities  54,103,750 ordinary Shares in Stonehorse Energy Limited. Directorships held in other listed entities  Executive Chairman of Dragon Mountain Gold Limited, from October 2010 to present. Mr David Deloub  Managing Director (Executive) - Appointed 1 December 2017 Experience and Qualifications  Mr Deloub has over 30 years of experience in the finance and corporate sectors and holds a degree in economics and post graduate qualifications in banking and finance. Mr Deloub was a director of Patersons Capital Partners, a boutique advisory firm focusing on strategic and financial advice to ASX listed small cap companies. He has considerable corporate finance, business development, management and operational experience in Australia, the United States and Africa. Interest in Securities 