Announcement PDF 2024 ANNUAL REPORT For the Year Ended 30th June 2024 ASX:SHE STONEHORSEENERGY.COM STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 Corporate Directory Directors Robert Gardner Executive Chairman David Deloub Executive Director Jay Stephenson Non-executive Director Michael McFadyen Non-executive Director Company Secretary Jay Stephenson Registered Office Street: Postal: Share Registry Suite 4, 182 Claisebrook Road Computershare Registry Services Perth WA 6000 Street: PO Box 52 WEST PERTH WA 6872 Telephone: +61 (0)8 6141 3500 Facsimile: +61 (0)8 6141 3599 Email: info@stonehorseenergy.com.au Website: www.stonehorseenergy.com Level 11, 172 St Georges Terrace Perth WA 6000 Postal: GPO Box D182 Perth WA 6840 Telephone: 1300 787 272 (investors within Australia) +61 (0)8 9323 2000 Securities Exchange Auditor Australian Securities Exchange Hall Chadwick Audit WA Pty Ltd Street: Street: Exchange Plaza Level 10, Central Park 152-158 St Georges Terrace PERTH WA 6000 ASX Code: P a g e |i SHE 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 2024 ANNUAL REPORT 30 JUNE 2024 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 .......................................................................................................................................................... 50 • Independent Auditor's Report ............................................................................................................................................. 51 • Corporate Governance Statement....................................................................................................................................... 56 P a g e | ii STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 Directors' Report The Directors present their report together with the summary of the financial information of Stonehorse Energy Limited (ASX: SHE) (the Company) and its controlled entities (“Group” or “Consolidated Entity”) for the financial year ended 30 June 2024 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 Mr David Deloub Mr Jay Stephenson Executive Chairman Executive Director Non-executive Director • Mr Michael McFadyen Non-executive Director (appointed on 16 May 2024) Directors have been in office since the start of the financial year to the date of this report unless otherwise stated, except for Mr Micael McFadyen, effective 16 May 2024. 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. Nature of operations and principal activities Please refer to paragraph 9 Information on directors. The Group 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 2024. P a g e |1 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 5. Review of Operations Operational Highlights ➢ Stonehorse successfully completed the drilling, stimulation, and tie-in operations for the two Canadian wells with the Caroline 1 well commencing production in mid-October 2023 and the Wapiti well in early January 2024. ➢ The combined production from Stonehorse’s Canadian working interests in oil and gas wells was above internal forecasts and generated approximately 97,500 BOE from October 2023 through June 2024, for a combined average of 380 BOEPD over that period. ➢ Net production was up 132% from the previous year with total annualised production of 205,401 BOE from July1 2023 to June 30th 2024. ➢ The US oil and gas well portfolio continues to produce in line with forecasts for what is now seasoned production. ➢ The Stonehorse Board strengthened with the appointment of Mr Michael McFadyen to the Board as a Non-Executive Director, effective 16 May 2024 ➢ Negotiations progressing on participation in a multi well opportunity with a target for agreement in Q4 2024 and details to follow. 5.1. Operations review The Group continues to implement its stated strategy of adopting a flexible approach to building a portfolio of high-quality oil and gas production assets with working interest percentages reflecting risk appetite and capital availability. The following sets out the major changes to the Company from both a corporate and operational perspective during the reporting period and up to the date of the Directors report. It was an impressive first half of the financial year for Stonehorse Energy with the Pine Cliff Caroline well producing over 70,000 BOE of raw production on an 8/8ths basis from flush production on October 19th to 31st December 2023. In addition, the drilling, completion and tie-in was also successfully completed at Wapiti, with well producing to sales on the 1st January 2024. The second half has been challenging with softer commodities prices and egress restraints related to the proposed drilling and completion of the Caroline 2 well delaying drilling and completion activities. In response to this the Company, through its technical and commercial resources based in Calgary, has identified several additional well opportunities for potential investment. These opportunities are being reviewed and high graded to ensure these meet the company’s risk/return hurdles. The current potential investments include a multi-well liquids rich play southeast of the current assets and others in Alberta and Saskatchewan. a. Corporate Activities The Company achieved a positive operating cashflow for the 12 months ending 30 June 2024. Strategic investment of $5.236 million in exploration and evaluation during the reporting period to expand the production assets portfolio resulted in the cash and cash equivalents decreasing by $4.039 million to $6.339 million at the end of the reporting period. The Company entered into a Participation Agreement with Canadian based Certus Oil & Gas Inc to earn a 26.25% Net Working Interest in the Caroline 1-27-33-05 liquids rich gas well located in Central Alberta, Canada1. Note as of December 2023 Certus Assets were acquired by Pine Cliff Energy which is the current operator of the Caroline well and joint lands. The Company also entered a Farmout, Option and Participation Agreement with Canadian based Gryphon Oil Corp (Gryphon) to earn a 18.75% Net Working Interest in the Wapiti 16-02-65- 08 light oil well located in Northern Alberta, Canada2. 1 Stonehorse Energy (ASX:SHE) ASX Announcement 21 July 2023 – Stonehorse Increases Oil and Gas Investment in Canada 2 Stonehorse Energy (ASX:SHE) ASX Announcement 29 August 2023 – Stonehorse Makes Further Oil and Gas Investment in Canada P a g e |2 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 Both the Caroline 1-27-33-05 liquids rich gas well and the Wapiti 16-02-65-08 light oil well were successfully drilled, tested and evaluated, equipped and tied-in to permanent production facilities with production brought online from 19 October 2023 and 1 January 2024 respectively. Mr Michael McFadyen was appointed to the Board as a Non-Executive Director, effective 16 May 20243. Mr McFadyen’s extensive experience includes over three decades of direct involvement in the oil and gas industry, spanning both offshore and onshore exploration and production (E&P). His career highlights 22 years in global offshore roles and 12 years in North American onshore projects. Mr McFadyen will be an asset to the Stonehorse board as a seasoned oil and gas executive, with extensive operational experience adding a new dimension to the Company’s collective expertise. 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 as we continue targeting growth for the company. Visit the Investor Hub here: https://investorhub.stonehorseenergy.com/welcome b. Existing Business Activities Canadian Assets In July 2023, the Company agreed to participate in the drilling, completion, and tie-in of the liquids rich Certus Caroline 1-27-33 gas well for an agreed investment of CAD$2.52 million4. Wapiti well Caroline well Figure 1. Location of the Caroline and Wapiti wells located in central Alberta, CA. With nearby infrastructure and support of local stakeholders, the well was successfully drilled and completed on an existing pad site and tied into Certus production battery 3 miles away during the reporting period. The Caroline well has been producing since 19 October 2023 and is in the Sundre area of Central Alberta, Canada, which has a history of successful oil and gas operations for over 60 years. 3 Stonehorse Energy (ASX:SHE) ASX Announcement 16 May 2024 – Appointment of Non-Executive Director 4 Stonehorse Energy (ASX:SHE) ASX Announcement 21 July 2024 – Stonehorse Increases Oil and Gas Investment in Canada P a g e |3 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 Figure 2. Caroline Liquids Rich Gas Well Site The Company has continued to support the operator of the Caroline well to drill a second well in the section. Delays caused by low gas prices and egress infrastructure restraints are the primary reasons for deferral of the well. Additional egress is being worked and planning for a second well is underway to be executed when gas prices are more favourable. Caroline HZ 103 Raw Production History 256 Producing Days (through June 2024) 8000 275 7000 225 200 5000 175 4000 150 125 3000 100 2000 Condensate bbl/day 250 6000 Gas mcf/day 300 75 IP 256 Gas: 5174 mcfd IP 256 Condensate: 196 1000 Raw Gas Condensate 25 24-Jun 17-Jun 3-Jun 10-Jun 27-May 20-May 6-May 13-May 29-Apr 22-Apr 8-Apr 15-Apr 1-Apr 25-Mar 18-Mar 11-Mar 4-Mar 26-Feb 19-Feb 12-Feb 5-Feb 29-Jan 22-Jan 15-Jan 8-Jan 0 1-Jan 0 50 Producing Days Figure 3. Caroline 01-27 Well production history for 2024 An increase in the facility capacity, as well as the removal of a down hole choke in February 2024 resulted in the 30% increase in well productivity P a g e |4 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 In August 2023, the Company agreed to participation in the drilling, completion, and tie-in of the Gryphon, Wapiti 16-02-65-08 light oil well for an agreed investment of CAD$1.38m5. The arrangement with Gryphon includes a negotiated one well commitment to earn 3 sections. With success on the well, Stonehorse has the further option to participate in a second well drilled off the same pad on the same terms along with the option to select a further 3 sections of land in which it can elect to further participation. Figure 4. Image of the Gryphon Wapiti well site with drill rig. The Gryphon Wapiti well was brought online on 1 January 2024 and while it has failed to meet initial expectations, the operator is planning to divest the assets of the company which may provide an opportunity to monetise the future production of this well. After a twelve-month hiatus due to the new owner's sale of production assets and subsequent restructuring, Stonehorse is now receiving further payments from its initial Proton investment. The Company expects to recover its entire initial capital investment of $333,000, plus interest, by June 20256. The Company, through its technical and commercial resources based in Calgary, has also identified several additional well opportunities for potential investment. These opportunities are being reviewed and high graded to ensure these meet the company’s risk/return hurdles. The current potential investments include a multi-well oil play and others in Alberta and Saskatchewan. Well Name Reference Number Stonehorse, Canada Caroline 1-27-33 Working Interest County State Operator 26.25% Sundre, Alberta Pine Cliff Energy Ltd Wapiti 18.75% Wapiti, Alberta Gryphon Petroleum Corp 16-02-65-08 Table 1. Current Portfolio of (non-operated) working interests in Canada. 5 Stonehorse Energy (ASX:SHE) ASX Announcement 29 August 2023 – Stonehorse Makes Further Oil and Gas Investment in Canada 6 Stonehorse Energy (ASX:SHE) ASX Announcement 31 July 2024 – Quarterly Activities Report for June 2024 P a g e |5 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 U.S. Assets The current oil and gas well portfolio consisting of 11 operating wells in North America continues to perform in line with forecasts delivering seasoned production, however sustained soft natural gas prices in North America have continued to impact total net operating revenues. The Company’s Jewell well in Oklahoma, USA is delivering seasoned production of approximately 7,000 BOE per month for Stonehorse and continues to be its best performing asset in the US portfolio. The Company continues assessing a number of onshore investment opportunities in North America aimed at diversifying the risk and production portfolio of the Company. Well Name Reference Number Stonehorse, United States of America Burgess 28-1 Working Interest County, State Operator 96.81% Ellis, Oklahoma Black Mesa Energy Sutton 2H-52 25.00% Hansford, Texas Strat Land Exploration Bullard 1-18-07UWH 15.60% Rimrock Resources Henry Federal 1-8-5XH 2.30% Randolph 1-34-27XHM 0.21% Randolph 3-34-27XHM 0.21% Randolph 4-34-27XHM 0.21% Jewell 1-13-12SXH 41.50% Newberry 12-1 21.70% Mitchell 12-1 50.00% Thelma 1-32 50.00% Gravin, Oklahoma Blaine, Oklahoma Blaine, Oklahoma Blaine, Oklahoma Blaine, Oklahoma Carter, Oklahoma Carter, Oklahoma Carter, Oklahoma Murray, Oklahoma Continental Resources Continental Resources Continental Resources Continental Resources Black Mesa Energy Black Mesa Energy Black Mesa Energy Black Mesa Energy Table 2. Current Portfolio of (non-operated) working interests in the United States. Australian Assets Stonehorse has a 25% Working Interest in the Myall Creek property located in the Surat Basin, Queensland. 1. Myall Creek-2 Lower Tinowon reservoir is an over pressured, stratigraphically controlled, laterally continuous reservoir found throughout the Myall Creek and Riverside gas fields in southeast Queensland. A workover in January 2022 and interpretation of data from the Myall Creek #2 well confirmed the Tinowon C is a fracture stimulation candidate. 2. Additional reservoirs intersected in the Myall Creek #2 well including the Upper Rewan and Bandana Sandstones also appear to be gas saturated. Despite delays due to former operator Armour Energy being placed into administration and it’s subsequently restructure (Armour has now been acquired by a privately held Company ADZ Energy Pty Ltd (ADZ), the agreed intention of the joint venture parties is to progress and complete the planned frac stimulation and realise production revenue and ultimately a return on the Myall Creek 2 investment. ADZ continues to progress the frac design, however Stonehorse has been advised that all frac operations have been delayed into 2025 due to frac spreads being in high demand through the second half of 2024 with none available until December 2024 at the earliest. ADZ’s plan is to combine the MC-2 frac with the new well fracs as P a g e |6 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 this will be more cost and time efficient. The hole in the tubing previously identified has led to planned “pull and replace” scheduled for Q4 this calendar year with the frac now planned in Q2CY257. Well Name Reference Number Stonehorse, Australia Myall Creek Myall Creek-2 Working Interest County State Operator 25% Surat Basin, Qld ADZ Energy Pty Ltd Table 3. Current Portfolio of (non-operated) working interests in Australia. Forward-Looking Statements and Other Disclaimers This operations section of the annual report may include forward-looking statements. Forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions, which are outside the control of Stonehorse Energy Limited (“Stonehorse Energy” or “the Company”). These risks, uncertainties and assumptions include commodity prices, currency fluctuations, economic and financial market conditions in various countries and regions, environmental risks and legislative, fiscal or regulatory developments, political risks, project delay or advancement, approvals and cost estimates. Actual values, results or events may be materially different to those expressed or implied in this announcement. Given these uncertainties, readers are cautioned not to place reliance on forward-looking statements. Any forward-looking statements in this announcement speak only at the date of issue of this announcement. Subject to any continuing obligations under applicable law and the ASX Listing Rules, Stonehorse Energy does not undertake any obligation to update or revise any information or any of the forward-looking statements in this announcement or any changes in events, conditions or circumstances on which any such forward looking statement is based. This announcement does not constitute investment advice. Neither this announcement nor the information contained in it constitutes an offer, invitation, solicitation or recommendation in relation to the purchase or sale of shares in any jurisdiction. Shareholders should not rely on this announcement. This announcement does not take into account any person's particular investment objectives, financial resources or other relevant circumstances and the opinions and recommendations in this announcement are not intended to represent recommendations of particular investments to particular persons. All securities transactions involve risks, which include (among others) the risk of adverse or unanticipated market, financial or political developments. The information set out in this announcement does not purport to be all-inclusive or to contain all the information, which its recipients may require in order to make an informed assessment of Stonehorse Energy. You should conduct your own investigations and perform your own analysis in order to satisfy yourself as to the accuracy and completeness of the information, statements and opinions contained in this announcement. To the fullest extent permitted by law, the Company does not make any representation or warranty, express or implied, as to the accuracy or completeness of any information, statements, opinions, estimates, forecasts or other representations contained in this announcement. No responsibility for any errors or omissions from this announcement arising out of negligence or otherwise is accepted. 7 Stonehorse Energy (ASX:SHE) ASX Announcement 31 July 2024 – Quarterly Activities Report for June 2024 P a g e |7 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 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 ownership of the unit into the “royalty interest” and “working interest”. 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. 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 P a g e |8 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 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 property, natural resources or equipment, environmental damage or pollution, clean‐up responsibilities and 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 The Company’s key project interests are situated in North America. Accordingly, the Company is subject to the risks associated in operating in foreign countries. These risks include economic, social or political instabilities or change, hyperinflation, currency non-convertibility 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 likely to change. This may result in alterations to development plans which may, in turn, adversely affect the Company’s operations 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. 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 markets. If the price of commodities declines this could have an adverse effect on the Company’s exploration, development and possible production activities, and its ability to fund these activities, which may no longer be profitable. P a g e |9 STONEHORSE ENERGY LIMITED AND ITS CONTROLLED ENTITIES ABN 13 086 972 429 ANNUAL REPORT 30 JUNE 2024 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 policies, the funds available for exploration and development will be reduced and the value and/or title to the Company’s assets may be at risk. The Company insures its operations in accordance with industry practice. However, in certain circumstances the Company’s insurance may not be of a nature o