2015 financial report

for the year ended 30 June 2015

Galilee Energy Limited ABN 11 064 957 419

and controlled entities

Contents

Directors' report 3

Remuneration report 6

Auditor's independence declaration 13

Financial report

Consolidated statement of profit & loss and other comprehensive income 14

Consolidated statement of financial position 15

Consolidated statement of changes in equity 16

Consolidated statement of cash flows 17

Notes to the financial statements 18

Directors' declaration 48

Independent auditors review report 49

In accordance with a resolution of the Board, the directors present their report on the consolidated entity ('Galilee' or 'Company') consisting of Galilee Energy Limited and the entities it controlled at the end of or during the year ended 30 June 2015. The financial statements have been reviewed and approved by the directors based on the recommendation of the Audit Committee.

Directors

The directors of Galilee in office during the year and up to the date of this report were: Dr David King Non-executive Chairman Since 31/10/2013 Appointed Director 24/09/2013 Peter Lansom Managing Director Since 31/10/2013 Appointed Director 24/09/2013

Paul Bilston Executive Director Since 31/10/2013 Appointed Director 24/09/2013 Ray Shorrocks Non-executive Director Appointed 02/12/13

Principal Activities

Galilee Energy Limited (Galilee) is a Brisbane based energy company with a portfolio spanning Australia, Chile and North America.

The principal activity of the consolidated entity is oil and gas exploration and production. The foundation asset of the Company is the development of coal seam gas in the Galilee Basin near Longreach in Queensland. Further to this, the Company has significantly expanded its exploration portfolio during the year with the addition of exciting new oil and gas projects in the USA and South America.

Strategy

Galilee has taken measured steps to transition from a company solely focused on its coal seam gas tenements in the Galilee Basin to a company with an international portfolio of exploration and production assets. The aim is to build a balanced portfolio of short and long term growth opportunities in the conventional and unconventional hydrocarbon sector.

Results from operations

The loss for the year was $9.974 million (2014: $2.601 million).

The increased loss for the year reflects the increased exploration expenditure and evaluation incurred during the year amounting to $8.789 million compared to exploration expenditure of $0.711 million in the 2014 year. The increase is due to the commencement of exploration activities in the United States.

Dividends

No dividends were paid to members during the financial year. Since the end of the financial year, the directors have not recommended the payment of any dividend.

Review of Operations

The company has made significant progress in implementing its growth strategy during the year.

As announced on 4 June 2015, after an extended negotiation, Galilee acquired the balance (50%) of ATP 529P from AGL Energy Limited which subject to the satisfaction of several conditions was effective from 1 June 2015. This has allowed the company to progress its plans for maximising the value of its foundation asset based on the technical review carried out in early 2014.

As part of its broader strategy to build a production base, the company made progress in a number of areas. In Illinois, the company drilled 4 low cost wells to test large shallow oil prospects. Whilst commercially unsuccessful, these wells provided significant evidence of hydrocarbons in the area.

In Kansas, the company successfully completed a 3D seismic survey over a 40 square mile area and is significantly advanced on the development of a number of attractive drill ready prospects. These prospects are shallow and low cost targets that provide the company a solid platform of prospects once commodity prices recover.

A significant portion of the company's activity during the year has been in Lavaca County, Texas where the company has participated in two exploration wells. The Hoffer B1 well was the most important of these and intersected gas bearing sands in the Middle Midcox. These sands flowed an aggregate of 6 million standard cubic feet of gas per day (MMscfd) with demonstrated liquids content ranging as high as 50 bbls of condensate per million cubic feet of gas produced (bbls/MMscf).

Review of Operations (continued)

Unfortunately the cement integrity across these zones was insufficient to allow testing to continue and after a number of attempts to repair this, the decision was made to abandon these zones and drill an offset well (Hoffer A) to test these zones. This well is expected to spud in November 2015.

The company also drilled the Dworsky Hass 1 well in Lavaca County, but this well did not recover commercial hydrocarbons.

The third part of the Company's strategy is to build low cost, early stage positions in under explored areas. In May 2014 Galilee signed a memorandum of understanding (MOU) with Chile's state owned oil and gas company, Empresa Nacional del Petróleo (ENAP) to jointly explore for unconventional hydrocarbons in the Magallanes Basin in southern Chile. During the year the company completed the technical review of the basin and identified a large (potentially multi-TCF) coal seam gas resource in the basin. The company has now moved forward and applied for a CEOP (Chilean permit application) across the area of interest in the basin.

Significant changes in state of affairs

The Company continues its growth strategy and there were no other significant changes in the Company's activities.

Matters subsequent to the end of financial year

Since the end of the financial year the Company completed the acquisition of the remaining 50% interest in ATP 529P from AGL Energy Limited (AGL) originally announced on 4 June 2015. ATP 529P is a coal seam gas permit located in the Galilee Basin in Queensland. The acquisition, which was announced by the Company on 4 June 2015 sees the Company assume full operatorship of the Glenaras pilot project.

As a result of the acquisition the Company assumes all exploration and rehabilitation commitments for the permit. However, other than the purchase of plant and equipment valued at $55,000 (including GST) the transaction was at no upfront cost to the Company and also required AGL to contribute $590,000 to Galilee to support the estimated future rehabilitation costs with respect to the permit.

Environmental regulation

The Company conducts its operations in compliance with the Queensland Petroleum Act and the Mineral Resources Act. Environmental considerations are reviewed with and approved by the Queensland Department of Environment and Resource Management and Environmental Protection Authority. The Company has not reported any material breaches of any of its environmental licence conditions nor has it been notified of any material environmental breaches by any government agency during the year. The Company is not aware of any breaches in environmental regulations in relation to its interests in the USA and South America.

Directors and officers insurance

The Company has agreed to indemnify the directors, officers and secretaries of the Company and its subsidiaries against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as a director or officer of the Company, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses.

During the financial year, the Company paid premiums for directors' and officers' liability insurance. The contract prohibits disclosure of the details of the nature of the liabilities covered or the premium paid.

The Company has not indemnified its auditors, BDO Audit Pty Ltd.

Proceedings on behalf of the Company

No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purposes of taking responsibility on behalf of the Company for all or any part of those proceedings.

Meetings of directors

The number of meetings of the Company's board of directors and of the audit committee during the year ended 30 June 2015, and the numbers of meetings attended by each director were:

Name Meetings of

Directors

Meetings of Audit Committee

Meetings of Risk Committee

A = Number of meetings attended

B = Number of meetings eligible to attend

# = Not member of committee Information on Directors Dr David King

Chairman - Independent Non -executive

Dr King was a founder and non-executive director of Sapex Ltd, Gas2Grid Ltd and Eastern Star Gas Ltd. He has substantial natural resource related experience, having previously served as managing director of North Flinders Mines Ltd and CEO of Beach petroleum and Claremont Petroleum. Dr King is a Fellow of the Australian Institute of Company Directors; a Fellow of the Australasian Institute of Mining and Metallurgy; and a Fellow of the Australian Institute of Geoscientists.

Other directorships in listed companies - current

Cellmid Ltd Appointed 18/01/08

African Petroleum Corporation Ltd Appointed 01/07/13

Special responsibilities

Chairman and member of Finance and Audit Committee

Interest in shares and options

280,000 shares in Galilee Energy Limited

Peter Lansom

Managing director

Peter holds a Bachelor of Petroleum Engineering (Honours) degree from the University of NSW and has over 25 years' experience in conventional and unconventional exploration and development, working with Comet Ridge Ltd, Eastern Star Gas (ESG), Origin Energy and Santos. He has significant expertise in subsurface engineering, asset valuation, field development planning and commercial and corporate finance. In his past role at Origin, in the key management position of chief petroleum engineer, he had responsibility for delivering the corporate year end petroleum reserves report and ensuring that consistently high standards in sub-surface engineering were maintained across that Company's assets. In his recent role as executive director at ESG, Peter had overall engineering responsibility for the exploration and pilot development of the Company's CSG assets in NSW which resulted in certifying 3P reserves of over 3500 PJ over a 5 year period, and saw the Company grow to a $900 million market capitalisation.

Special responsibilities

Managing Director

Interest in shares and options

4,596,728 shares in Galilee Energy Limited

Paul Bilston

Executive Director

With 18 years' experience in the Oil and Gas sector Paul has worked in a number of senior technical, commercial and management roles domestically and overseas. Early in his career, Paul worked in engineering consulting as a senior engineer and as project manager / director for Worley and GHD. This was followed by senior management roles with AGL Energy, head of CSG for AJ Lucas (where he sold the Gloucester CSG Project to AGL for $370M) and recently as managing director of ASX listed Challenger Energy.

Special responsibilities

Member of Risk Committee

Interest in shares and options

4,600,165 shares in Galilee Energy Limited

Ray Shorrocks

Non-executive Director

With over 20 years' experience working in the investment banking industry, Ray is highly conversant and experienced in all areas of mergers and acquisitions and equity capital markets, including a significant track record of transactions in the metals and mining, industrials and property sectors.

Other directorships in listed companies - current

Patersons Securities Limited Appointed 01/10/07

Special responsibilities

Chairman Finance, Risk and Audit Committees

Interest in shares and options

100,000 shares in Galilee Energy Limited Stephen Rodgers

Company Secretary

Mr Rodgers is a lawyer with over 25 years' experience and holds a Bachelor of Laws degree from Queensland University of Technology. Stephen practiced law with several firms in Brisbane and for many years operated his own specialist commercial and property law practice before joining the ASX listed Sunshine Gas Limited as the in-house Legal and Commercial Counsel. After the successful takeover of SGL by QGC in 2008 Stephen was appointed as Company Secretary and Legal Counsel to Comet Ridge Limited, a position he still holds. Stephen has extensive experience in the operation and running of an ASX listed oil and gas company.

Remuneration Report (audited)

The remuneration report is set out under the following main headings:

A Principles used to determine the nature and amount of remuneration B Details of remuneration

1. Service agreements

2. Share-based compensation

3. Key management personnel shareholdings

The objective of the Company's executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms to market best practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices:

• competitiveness and reasonableness

• acceptability to shareholders

  
  

• performance linkage / alignment of executive compensation

• transparency

• capital management.

• Principles used to determine the nature and amount of remuneration

  In consultation with external remuneration consultants when required, the Board determines the remuneration policies of the Company, reviews the remuneration of senior management and determines the remuneration of executive directors. Non-executive director remuneration is considered by the Board within the overall limits approved by shareholders.

• alignment to shareholders' interests:

• has economic profit as a core component of plan design focuses on sustaining medium to long term growth in shareholder wealth and delivering a return on assets, as well as focusing the executive on key non-financial drivers of value

• designed to attract and retain high calibre executives. Alignment to program participants' interests:

• rewards capability and experience

• reflects competitive reward for contribution to growth in shareholder wealth

• provides a clear structure for earning rewards

  
  

  The framework provides a mix of fixed and variable pay, and long-term incentives. Non-executive directors

  Fees and payments to non-executive directors reflect the demands that are made on, and the responsibilities of, the directors. Non-executive directors' fees and payments are reviewed annually by the Board to ensure fees are appropriate and in line with the market.

  Directors' fees

  
  

  The current base remuneration was last reviewed on 17 May 2010 with effect from 1 July 2010. The chairman's fees are determined independently to the fees of non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to the determination of his own remuneration. In accordance with the provisions of Listing Rule 10.11 of the Official Listing Rules of the ASX Limited, a meeting of shareholders held on 27 November 2009 approved the sum of $600,000 per annum to be the total aggregate annual remuneration payable to non- executive Directors of the Company. The current total of non-executive remuneration is $125,000.

  Executive pay

  
  

  The executive remuneration and reward framework has the following components:

  
  

• base pay and non-monetary benefits

• short term incentives

• share based payments, and

• other remuneration such as superannuation and long service leave.

  
  

  The combination of these comprises the executive's total remuneration. Base pay and non-monetary benefits

  Structured as a total employment cost package which may be delivered as a combination of cash and prescribed non- financial benefits at the executives' discretion.

  Executives are offered a competitive base pay that comprises the fixed component of pay and rewards. Base pay for senior executives is reviewed annually to ensure the executive's pay is competitive with the market. An executive's pay is also reviewed on promotion.

  
  

  Short Term Incentives.

  
  

  Generally paid in cash and structured with a focus on delivery of specific short term objects aligned with the companies strategies and goals and the Executives role in meeting these targets.

  Share-based payments

  
  

  Share based payments - options or rights are issued to executives generally over a period based on a long term incentive basis. These long term incentives include specific price targets that relate to the expected outcomes from strategies that have been given a high level of importance in relation to the future growth of the Company.

  Superannuation and long service leave

  
  

  Included in the employment package for key management personnel is the statutory obligation for superannuation and long service leave.

  Relationship between remuneration and Company performance

  
  

  Other than as described in D below (options) there is no direct link between the remuneration of the key management personnel and Company performance. The Company is currently focused on the exploration stage across its projects. Consequently, opportunities for broad performance based incentives are limited.

  Given that remuneration must be commercially reasonable to attract the right calibre of directors and executives, there can be no direct link between remuneration, Company performance and shareholder wealth at the Company's current stage of development.

  The Company issues options to provide an incentive for directors and key management personnel to align their interests with the medium to long term interests of shareholders.

  Item Unit 2015 2014 2013 2012 2011

  The table below sets out summary information about the Company's revenues, earnings, and movements in shareholders' wealth for the five years to 30 June 2015:

  
  

  Revenue - continuing operations	$'000s	799	1,103	1,593	2,237	1,022
  Net profit/(loss) before tax - continuing operations	$'000s	(9,974)	(2,601)	(6,496)	(6,261)	(4,571)
  Net profit(loss) after tax	$'000s	(9,974)	(2,601)	(6,496)	(6,261)	21,430
  Basic earnings/(loss) per share	cents	(6.4)	(1.7)	(4.3)	(4.1)	14.1
  Last traded share price	cents	11.0	13.0	13.0	13.5	19.0
  Remuneration - salary and fees	$'000s	800	1,112	926	912	1,271

  
  

  There were no dividends paid or returns of capital by the company in the five years.

  
  

• Details of remuneration

  Details of the remuneration of the directors and the other key management personnel (as defined in AASB 124 Related Party Disclosures) of Galilee Energy Limited and the Galilee Energy Group (Group) are set out in the following tables:

  Short-term benefits

  & fees

  Post

  Employment

  Share-based

  Payments %

  
  

  30 June 2015 Salary & fees

  Non-cash benefits

  Termination payments

  Super- annuation

  Retirement benefits

  Performance

  Rights Total

  Performance Based

  Directors $ $ $ $ $ $ $

  Dr D King 68,493 - - 6,507 - - 75,000

  P Lansom 306,216 - - 18,783 - 21,267 346,266 6.14%

  P Bilston 269,319 - - 18,783 - 19,494 307,596 6.34%

  R Shorrocks 45,661 - - 4,338 - - 49,999

  Other employees S Brodie

  (redundancy

  110,063 - 226,203 2,072 - - 338,338

  31/8/14) Total 799,752 - 226,203 50,483 - 40,761 1,117,199

  
  

  
  

  
  

  Short-term benefits

  & fees

  
  

  Post Employment

  
  

  Share-based

  Payments %

  
  

  30 June 2014 Salary & fees

  Non-cash benefits

  Termination payments

  Super- annuation

  Retirement benefits

  Performance

  Rights Total

  Performance Based

  Directors $ $ $ $ $ $ $

  Dr D King 50,656 - - 4,686 - - 55,342 P Lansom 210,960 - - 12,418 - - 223,378

  P Bilston 184,480 - - 12,325 - - 196,805

  R Shorrocks 26,645 - - 2,465 - - 29,110 R Camarri 16,473 - - - - - 16,473

  Resigned 30/10/13

  
  

  LC Rathie 66,196 - - 1,271			- -	67,467
  A Young 114,880 - - -			- -	114,880
  P Jensen 4,931 - - -			- -	4,931
  Resigned 30/10/13 G Haworth	153,435	- - 6,389	- -	159,824
  Ceased 4/11/13
  Other employees S Brodie	283,829	- - 17,775	- 6,489	308,093	2.10%
  Total	1,112,485	- - 57,329	- 6,489	1,176,303

  Resigned 30/10/13

  
  

  Resigned 30/10/13

  
  

  The key management personnel of Galilee Energy Limited and of the Group includes the directors of the Company. For the year ended 30 June 2014 key management personnel also included Simon Brodie (Chief Financial Officer).

  
  

• Service agreements

  Remuneration and other terms of employment for key management personnel:

  Peter Lansom, Managing Director

  Term of agreement - open-ended agreement commencing 31 October 2013

  
  

• Base salary of $325,000 including superannuation

• Salary rate is reviewed annually in line with a performance review

• Short Term Incentive (STI) up to a maximum of 30% of the base salary, which will be paid in cash.

• The required notice period on termination is three months by either party

• The agreement provides for six months payment for termination under certain conditions.

  Paul Bilston, Executive Director

  Term of agreement - open-ended agreement commencing 31 October 2013

  
  

• Base salary of $300,000 including superannuation

• Salary rate is reviewed annually in line with a performance review

• Short Term Incentive (STI) up to a maximum of 25% of the base salary, which will be paid in cash.

• The required notice period on termination is three months by either party

• The agreement provides for six months payment for termination under certain conditions.

• Share based compensation

Directors' share options

No options were granted as remuneration during the year. Currently, there are no KMP share options on issue.




Performance rights

During the year, performance rights were granted to the executive directors in accordance with the Galilee Energy Limited Performance Rights Plans for employees and contractors. The object of the plans is to:

1. provide an incentive for employees/contractors to remain in their employment and continue to provide services to the Group in the long term;

2. recognise the ongoing efforts and contributions of employees/contractors to the long term performance and success of the Group; and

3. provide employee/contractors with the opportunity to acquire performance rights, and ultimately shares in Galilee Energy Limited.

All performance rights granted during the year vest subject to a market condition in addition to the employee/contractor satisfying a service condition relating to the completion of a specified period of employment/engagement. The market condition required is a share price hurdle which is to be achieved at each vesting date.

Performance rights granted during the year are as follows




Number of Service Period Vesting Grant Fair Performance




Issue No	Rights
Tranche 1	1,150,000
Tranche 2	1,150,000
Tranche 3	1,150,000

From	To	Date	Date	Value	Condition
1-Jul-14	31-Dec-15	31-Dec-15	20-Nov-14	2.8 cents	Share price 25 cents
1-Jul-14	31-Dec-16	31-Dec-16	20-Nov-14	3.7 cents	Share price 30 cents
1-Jul-14	31-Dec-17	31-Dec-17	20-Nov-14	4.2 cents	Share price 35 cents




The fair value of performance rights is measured at grant date and is determined using a binomial or Black-Scholes pricing model that takes into account the term of the performance right, the underlying share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the performance right.




1. Share based compensation (continued

   Where the performance rights are granted subject only to service conditions and non-market performance conditions, in accordance with the relevant accounting standard, it is assumed that the service condition will be met and the Galilee Energy Limited share price at grant date is used to determine the fair value of the performance rights issued. The non- market performance conditions are taken into account based on the number of performance rights that actually vest. Where the performance rights are granted subject to a market condition in addition to the service condition, the pricing model also takes into account the probability that the market condition will be satisfied/not satisfied during the term of the performance rights e.g. 'monte carlo' simulation technique.

   The balances of performance rights at reporting date and the movements of during the year are as follows:

   
   

   
   

   Name	Balance at start	Granted as remuneration	Exercised Expired	Balance at end
   P Lansom	-	1,800,000	- -	1,800,000
   P Bilston SC Brodie	- 1,600,000	1,650,000 -	- - - (1,600,000)	1,650,000 -
   1,600,000	3,450,000	- (1,600,000)	3,450,000

   
   

   At 30 June 2014 the following options and performance rights were outstanding and have subsequently lapsed:

   
   

   Name	Balance at start	Granted as remuneration	Exercised Expired	Balance at end
   G Haworth	3,000,000	- - (3,000,000)	-
   SC Brodie	2,000,000	- - (400,000)	1,600,000
   5,000,000	- - (3,400,000)	1,600,000

   The Board's current policy does not allow directors and executives to limit their risk exposure in relation to equities or options without the approval of the Board.

2. Key management personnel shareholdings

The number of ordinary shares in Galilee Energy Limited held by each KMP of the Group during the financial year is as follows:







the year
Directors
Dr David King	280,000	-	-	- 280,000
Peter Lansom	4,588,498	-	8,230	- 4,596,728
Paul Bilston	4,600,165	-	-	- 4,600,165
Ray Shorrocks	-	-	100,000	- 100,000
Total	9,468,663	-	108,230	- 9,576,893

30 June 2015 Balance at beginning of year

Granted as remuneration during

Shares acquired Other changes Balance at endof

year




End of audited remuneration report

Rounding of Amounts to Nearest Thousand Dollars




Pursuant to class order 98/100 issued by the Australian Securities & Investments Commission, amounts in the Directors' report and the financial report have been rounded off to the nearest thousand dollars unless otherwise indicated.

Non-audit services

The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor's expertise and experience with the Company are important.

Details of the amounts paid or payable to the auditor (BDO Audit Pty Ltd) for audit and non-audit services provided during the year are set out below.

The Board of directors has considered the position and, in accordance with the advice received from the audit committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:

• all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of the auditor

• none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants.

During the year the following fees were paid or payable for non-audit services provided by the auditor of the parent Company, its related practices and non-related audit firms.

Non-audit services

30 Jun 15 30 Jun 14

$ $

Tax consulting and compliance services 20,816 22,650

Auditor's independence declaration

The auditor's independence declaration is included on Page 13 of the financial report for the year.

Signed in accordance with a resolution made pursuant to s306(3) of the Corporations Act 2001. On behalf of the Directors

Dr David King Chairman

Brisbane 30 September 2015