2nd Quarter Results

21st Aug 2008 14:00



THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN OR INTO THE UNITED STATES

TSX-V, LSE-AIM: XEL

August 21, 2008

Xcite Energy Limited

("Xcite Energy" or the "Company")

Results for the 3 Month Period Ended June 30, 2008

Xcite Energy is a heavy oil company focused on the development of discovered resources in the United Kingdom North Sea. The Company holds a 100% working interest in Block 9/3b, the Bentley field, one of the largest undeveloped heavy oil fields in the United Kingdom North Sea. 

The Company is listed on the AIM Market of the London Stock Exchange (AIM) and the TSX Venture Exchange (TSX-V). 

The Company today announces its financial and operational results for the 3 month period ended June 30, 2008 and its outlook for the remainder of 2008.

KEY HIGHLIGHTS

Operational

Successful appraisal well completed on Bentley in February 2008.

Commercial potential of the field confirmed and key objectives met.

Operational update in April 2008 highlighted forecast flow rate of over 4,000 barrels of oil per day from each single production well using existing technologies.

Strengthening of the XER team through management appointments as the Company continues to prepare for the planned early production system.

Financial

Cash balance as at June 30, 2008 was £4.83 million in line with budget.

2008 OUTLOOK

RPS Energy, independent reserves engineer, appointed to prepare an updated Competent Person's Report ("CPR"), which is expected to be completed in Q4 2008.

Programme remains on track to effectively and efficiently commercialise the Bentley field.

Preparation for Full Field Development Plan and early production system continues and will be announced in conjunction with the updated CPR in the second half of 2008.

Early production system to be completed within the anticipated timescale.

Data expected to be received in November 2008 from StatoilHydro's Bressay well, following the well data trade agreement entered into May 2008.

Other identified business opportunities are currently being reviewed.

Richard Smith, Xcite Chief Executive Officer commented:

"The successful appraisal well on the Bentley field and the strengthening of the XER technical and commercial team has enabled us to make significant progress in the programme to commercialise Bentley. We look forward to an equally productive latter half of 2008."

The Company has also filed its Management Discussion and Analysis and Interim Unaudited Financial Statements. These documents can be found for viewing by electronic means on the System for Electronic Document and Analysis Retrieval at www.sedar.com.

ENQUIRIES:

Xcite Energy		+44 (0) 1330 826 740
Richard Smith	Chief Executive Officer
Rupert Cole	Chief Financial Officer
Thomas Weisel Partners (UK) Limited		+44 (0) 20 7877 4300
Paul Colucci	Managing Director
Paul Newman	Managing Director
Strand Partners Ltd.		+44 (0) 20 7409 3494
James Harris	Director
Warren Pearce	Associate Director
Pelham Public Relations		+44 (0) 20 7743 6676
Alisdair Haythornthwaite	Director
Katherine Stewart	Account Manager

The TSX-V has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Forward-Looking Statements

Certain statements contained in this announcement constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to the Company's future outlook and anticipated events or results and, in some cases, can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "target", "potential", "continue" or other similar expressions concerning matters that are not historical facts. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities. While the Company considers these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect. Forward-looking information is also subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what we currently expect. These factors include changes in market and competition, governmental or regulatory developments and general economic conditions. Additional information identifying risks and uncertainties are contained in the Company' prospectus filed with the Canadian securities regulatory authorities, available at www.sedar.com. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.

Management's Discussion and Analysis 

The Management's Discussion and Analysis ("MD&A") of the operating and financial results of Xcite Energy Limited ("XEL" or the "Company") should be read in conjunction with the Company's interim unaudited consolidated financial statements and related notes thereto for the three month period ended June 30, 2008, the audited consolidated financial statements and related notes thereto for the fourteen month period ended December 31, 2007 and the annual MD&A of the Company. This MD&A is dated August 20, 2008. These documents and additional information about XEL are available on SEDAR at www.sedar.com.

XEL is an oil issuer and disclosures pertaining to oil activities are presented in accordance with National Instrument 51-101 ("NI-51-101") of the Canadian Securities Administrators.

This MD&A includes an analysis of the XEL results from January 1, 2008 to June 30, 2008 and from January 1, 2007 to June 30, 2007, which include the results of the operating subsidiary Xcite Energy Resources Limited ("XER"). In this MD&A, XEL and XER are together defined as the "Group". All figures and the comparatives figures contained herein are expressed in Pounds Sterling unless otherwise noted. 

Certain statements in this MD&A may be regarded as "forward-looking statements" including outlook on oil prices, estimates of future production, estimated completion dates of constructions and development projects, business plans for drilling and exploration, estimated amount and timing of capital expenditures and anticipated future debt levels. Forward-looking statements often, but not always, are identified by the use of words such as "seek", "anticipate", "believe", "plan", "estimate", "expect", "targeting" and "intend" and statements that an event or result "may", "will", "should", "could" or "might" occur or be achieved and other similar expressions. 

Information concerning resources may also be deemed to be forward looking statements as such estimates involve the implied assessment that the resources described can be profitably produced in the future. These statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ from those anticipated by the Group. The reader should not place undue importance on forward looking statements and should not rely upon this information as of any other date. While the Company may elect to, it is under no obligation and does not undertake to update this information at any particular time, unless required by applicable securities law.

Summary of Results

The following table summarises the Group's performance for the three month periods ended March 31 and June 30, 2008 and the comparatives for the three month periods ended March 31 and June 30, 2007. The Group has no trading revenue in either period. The interim unaudited consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS and IFRIC interpretations) issued by the International Accounting Standards Board (IASB). The interim unaudited consolidated financial statements of the Company have also been prepared in accordance with IFRS's adopted by the European Union and therefore they comply with Article 4 of the EU IAS Regulation.

  

	Quarter ended June 30, 2008 (unaudited)	Quarter ended March 31, 2008 (unaudited)	Quarter ended June 30, 2007 (unaudited)	Quarter ended March 31, 2007 (unaudited)
	£	£	£	£
Net (loss)/profit	(281,488)	22,244	(95)	(184)
(Loss)/earnings per share (basic and diluted)	(0.00p)	0.00p	(0.00p)	(0.00p)
Total assets	25,184,648	27,787,366	11,417,293	2,288,051

Liquidity and Capital Resources

In June 2007 the Company completed a private placement of new shares, with aggregate proceeds of £10.0 million and associated costs of £0.83 million, resulting in net proceeds of £9.17 million. In November 2007, the Company completed an initial public offering of new shares and dual public listing on AIM in London and the TSX-Venture Exchange in Canada, with aggregate proceeds of £14.92 million and associated costs of £2.0 million, resulting in net proceeds of £12.92 million. The net funds from the private placement and the initial public offering in 2007 were allocated to drilling the appraisal well on Block 9/3b to satisfy the work programme obligations to the Department for Business, Enterprise and Regulatory Reform in the UK. XER spudded the Block 9/3b appraisal well in December 2007 and continued into February 2008 to conduct a successful drill stem test. 

The cash balance of the Company as at June 30, 2008 was £4.83 million, compared with £21.07 million as at December 31, 2007, the decrease being attributable to the Block 9/3b drilling spend, offset by additional investment in share capital of £0.48 million during the period.

Following the success of the drill stem test in February 2008, the remaining proceeds from the 2007 financings are being used to plan for the development of the Bentley field, including fluid and reservoir studies, field development studies and marketing and refining studies, together with the review of other business development opportunities and general corporate working capital requirements.

Lease and Contractual Commitments

At June 30, 2008 the Company had no material lease commitments or contractual obligations.

Operations and Administrative Expenses

The Group is in the development phase and as such no revenue is yet being generated from the Group's assets. Certain key milestones as set out in the original prospectus for the initial public offering have been achieved in the six months ended June 30, 2008, principally being the successful testing of the Block 9/3b-5 appraisal well.

In the six months ended June 30, 2008, total costs of £13.7 million (6 months ended June 30, 2007: £0.3 million) have been capitalised as Exploration and Evaluation ("E&E") Assets in Intangible Assets relating to Block 9/3b, which reflect the work that has been done by XER in the period in bringing forward Block 9/3b, both technically and commercially through the drilling of the appraisal well on Block 9/3b. These costs have been capitalised in accordance with the Group's accounting policies and will be amortised against the revenue from production, if any, from the Bentley field.

The Group has not incurred any additional material research and development costs or deferred development costs over and above those costs capitalised as E&E assets. XEL has incurred costs of operating as a public company amounting to £0.44 million for the six months ended June 30, 2008, including investor relations, Non-Executive Director fees and Stock Exchange fees (six months ended June 30, 2007: £nil). In addition, the Group has expensed £0.09 million in respect of costs incurred in reviewing certain assets relating to a UK Licensing Round for the six months ended June 30, 2008 (six months ended June 30, 2007: £nil).

Share Options, Warrants and Rights

On June 19, 2008 the Company issued 450,000 share options over the Company's ordinary share capital to three members of the XER Management Team. All such options vested immediately with an exercise price of CAD$1.60 (£0.805) and a term of five years. 

No new share warrants or other rights over the Company's ordinary share capital were issued in the six month period ended June 30, 2008. See Note 12 to the interim unaudited consolidated financial statements for details of share warrants exercised during the six month period to June 30, 2008.

Income

Interest income received on funds invested during the six months ended June 30, 2008 amounted to £0.28 million (2007: £0.00 million).

Disclosure Controls and Procedures

In conformance with the Canadian Securities Administrators Multilateral Instrument 52-109, the Company has filed certificates signed by the Chief Executive Officer and the Chief Financial Officer that, amongst other things, deal with the matter of disclosure controls and procedures. 

Outstanding Share Capital

The following table outlines the issuances of ordinary shares of the Company during the six months ended June 30, 2008.

	Ordinary Shares
As at December 31, 2007	60,550,000
Issue of shares through Broker warrant exercise	812,500
Issue of shares through warrant exercise	51,300
As at June 30, 2008	61,413,800

During the six months ended June 30, 2008, the Company received additional funds of £0.48 million through the exercise of certain warrants over the ordinary share capital of the Company.

As at the date of signing this MD&A, the number of shares in issue was 61,413,800 as set out in Note 12 to the interim unaudited consolidated financial statements and the total number of outstanding share options and warrants over the ordinary share capital of the Company was 4,350,000 and 11,824,700 respectively, which would be equal to 16,174,700 further ordinary shares upon full conversion of these options and warrants.

Risk Management

The principal risk factors facing the Group are as follows:

Exploration and development

The nature of oil exploration is such that there is no assurance that exploration activities will be successful. Industry statistics show that few properties that are explored go on to being fully developed. Operations can also be adversely affected by weather conditions and drilling rig and other operating equipment availability outwith the control of the Group.

Commodity pricing

The Group has no control over the market price of crude oil. Suitable hedging arrangements will be considered to mitigate the volatility of oil prices when the Group enters into the production phase.

Financing

Future field development will depend upon the ability of the Group to secure financing, whether this is by joint venture projects, farm down arrangements, public financing or other means.

Currency

The Group's reporting and functional currency is Pounds Sterling. However, the market for heavy crude is in US Dollars. The Group does not currently engage in active hedging to minimise exchange rate risk although this will remain under review as the Group approaches the production phase.

Resource estimation

Oil reserve estimation techniques are inherently judgemental and involve a high degree of technical interpretation and modelling techniques. Incorrect resource estimation may result in inappropriate capital investment decisions being made.

Significant Accounting Judgements and Estimates

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Directors make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual costs. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial period are discussed below.

(a) Income taxes

There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

(b) Fair value of share options and warrants

The Company has valued the fair value of outstanding share options and warrants over the Company's shares using the Black-Scholes valuation methodology. The Company uses judgement to derive such valuation model assumptions that are mainly based on market conditions existing at the Balance Sheet date.

(c) Impairment of Exploration and Evaluation ("E&E") assets

A review is performed at the end of each financial period for any indication that the value of the Group's E&E assets may be subject to impairment. In the event of any such indication, an impairment test is carried out and, if necessary, an impairment representing the surplus of capitalised cost over estimated recoverable value of the related commercial oil reserves is charged. Estimated recoverable value is based upon anticipated discounted net cash flows attributable to such reserves. 

Financial Instruments and Other Derivatives

Details regarding the Group's policies in respect of financial instruments are disclosed in Notes 1 and 11 to the interim unaudited consolidated financial statements.

2008 Outlook

The six months ended June 30, 2008 was a period of high investment by the Company in Block 9/3b. Management believes that after having met the costs of the appraisal well, the Group has sufficient funds to enable it to move forward with the planning of the next stage of the programme to commercialise the Bentley field on Block 9/3b, to compete successfully in future UK licensing rounds and to pursue other identified business opportunities in accordance with its business strategy.

Following the successful drilling and testing of the appraisal well in January 2008, the Group's long term prospects are dependent on the investment of significant capital sums for the commercialisation of the Bentley field on Block 9/3b. 

Consolidated Income Statement 

	Note	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Administrative expenses		(530,552)	(367,280)	(587)	(213)
Operating loss	3	(530,552)	(367,280)	(587)	(213)
Finance income - bank interest		280,751	95,235	308	118
Loss before tax		(249,801)	(272,045)	(279)	(95)
Tax expense	5	(9,443)	(9,443)	-	-
Loss for the period	13	(259,244)	(281,488)	(279)	(95)
Loss per share:
Basic and diluted	6	(0.00p)	(0.00p)	(0.00p)	(0.00p)

Consolidated Statement of Recognised Income and Expense 

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30  2007 (unaudited) £
Loss for the period	(259,244)	(281,488)	(279)	(95)
Total recognised income and expense for the period	(259,244)	(281,488)	(279)	(95)
Attributable to:
Equity shareholders	(259,244)	(281,488)	(279)	(95)

  Consolidated Balance Sheet

	Note		June 30 2008 £ (unaudited)	December 31 2007 £ (audited)
Assets
Non-current assets
Intangible assets	7		20,286,105	6,582,176
Property, plant and equipment	8		25,698	-
Current assets
Trade and other receivables	9		46,000	82,789
Cash and cash equivalents			4,826,845	21,067,134
Total current assets			4,872,845	21,149,923
Total assets			25,184,648	27,732,099
Liabilities
Current liabilities
Trade and other payables	10		2,193,920	5,042,672
Total liabilities			2,193,920	5,042,672
Net assets			22,990,728	22,689,427
Equity
Share capital	12		22,252,625	21,774,150
Retained earnings	13		(887,892)	(730,422)
Merger reserve	13		218	218
Other reserves	13		1,625,777	1,645,481
Total equity			22,990,728	22,689,427

These interim unaudited consolidated financial statements were approved by the Board of Directors and authorised for issue on August 20, 2008 and were signed on its behalf by:

 

Richard Smith	Rupert Cole
Chief Executive Officer	Chief Financial Officer

Consolidated Cash Flow Statement 

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Net cash flow from operating activities
Loss for the period after tax	(259,244)	(281,488)	(279)	(95)
Adjustment for share based payments	82,070	82,070	-	-
Adjustment for interest received	(280,751)	(95,235)	(308)	(118)
Adjustment for depreciation	1,611	1,611	-	-
Movement in working capital
Trade and other receivables	36,789	98,577	(2,517)	(282)
Trade and other payables	(2,848,752)	(2,403,300)	(2,701)	49,732
Net cash flow from operations	(3,268,277)	(2,597,765)	(5,805)	49,237
Cash flow from investing activities
Exploration and evaluation assets	(13,703,929)	(1,205,065)	(295,211)	(127,533)
Purchase of fixed assets	(27,309)	(27,309)	-	-
Contribution to costs received	-	-	257,683	-
Interest received	280,751	95,235	308	118
Net cash flow from investing	(13,450,487)	(1,137,139)	(37,220)	(127,415)
Cash flow from financing activities
Net proceeds from issue of new shares	478,475	-	9,172,330	9,172,330
Cash flow from financing	478,475	-	9,172,330	9,172,330
Net (decrease)/increase in cash and cash equivalents	(16,240,289)	(3,734,904)	9,129,305	9,094,152
Cash and cash equivalents as at January 1/April 1	21,067,134	8,561,749	44,702	79,855
Cash and cash equivalents as at June 30	4,826,845	4,826,845	9,174,007	9,174,007
Cash and cash equivalents comprise:
Cash available on demand	4,826,845	4,826,845	9,174,007	9,174,007

  

Notes to the Interim Consolidated Financial Statements

1 Accounting Policies

Basis of preparation

The interim unaudited consolidated financial statements for the three months ended June 30, 2008 have been prepared in accordance with IAS 34 Interim Financial Reporting. However, the interim unaudited consolidated financial statements for the three months ended June 30, 2008 have not been reviewed or audited by the Company's auditors.

These interim unaudited consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards following the same accounting policies and methods of computation as the audited consolidated financial statements for the financial period ended December 31, 2007. These interim unaudited consolidated financial statements do not include all the information and footnotes required by generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Xcite Energy Limited ("XEL" or "the Company") annual report for the fourteen month period ended December 31, 2007.

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Xcite Energy Resources Limited ("XER"). XEL and XER together comprise the "Group". All inter-company balances and transactions have been eliminated upon consolidation. 

Property, plant and equipment

Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. All repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on assets is calculated using the straight-line method to allocate their cost over their estimated useful life, as follows:

Furniture, fittings and equipment 3-5 years

New accounting standards adopted during the period

During the period the Group has adopted no new standards for the first time.

New standards and interpretations not yet applied

The following new standards and interpretations, which have been issued by the IASB and the IFRIC, have yet to be endorsed by the European Union and/or are effective for future periods and thus have not been adopted in these interim unaudited consolidated financial statements. A description of these standards and interpretations, together with (where applicable) an indication of the effect of adopting them, is set out below. None are expected to have a material effect on the reported results or financial position of the Group.

The IASB issued a revised IAS 1 'Presentation of Financial Statements' in September 2007 effective for accounting periods beginning on or after January 1, 2009. 

The IASB published revisions to IAS 32 'Financial Instruments: Presentation' and consequential revisions to other standards in February 2008 to improve the accounting for and disclosure of puttable financial instruments. The revisions are effective for accounting periods beginning on or after January 1, 2009 but together they may be adopted earlier. 

The IASB published amendments to IFRS 1 and IAS 27 "Cost of an Investment in a Subsidiary, Jointly- Controlled Entity or Associate" in May 2008. A first-time adopter now may use as deemed cost of an investment in a subsidiary, jointly-controller entity or associate either the fair value at the entity's transition to IFRS or the previous GAAP carrying amount at that date. Investors no longer need to determine whether dividends received have been paid from pre or post-acquisition profits, all such dividends now being treated as income in the income statement. The amendments also clarify how to determine the cost of an investment in accordance with IAS 27 when a parent reorganises the operating structure of its group by establishing a new entity as its parent and this new parent obtains control of the original parent by issuing equity instruments in exchange for existing equity instruments of the original parent. Entities are required to apply these amendments for annual periods beginning on or after January 1, 2009, and earlier adoption is permitted.

The IASB issued in May 2008 as part of its Annual Improvements Project an Exposure Draft discussing proposed improvements to existing IFRSs. The Annual Improvements Project has the intention of dealing with a relatively high number of small amendments to existing standards. Most amendments will be effective January 1, 2009. 

The IASB published a revised IFRS 3 'Business Combinations' and related revisions to IAS 27 'Consolidated and Separate Financial Statements' following the completion in January 2008 of its project on the acquisition and disposal of subsidiaries. The standards improve convergence with US GAAP and provide new guidance on accounting for changes in interests in subsidiaries. The cost of an acquisition will comprise only consideration paid to vendors for equity; other costs will be expensed immediately. Groups will only account for goodwill on acquisition of a subsidiary; subsequent changes in interest will be recognised in equity and only on a loss of control will there be a profit or loss on disposal to be recognised in income. The changes are effective for accounting periods beginning on or after July 1, 2009, but both standards may be adopted together for accounting periods beginning on or after July 1, 2007.

The Exposure Draft "Proposed Amendments to IFRS 2 - Vesting Conditions and Cancellations" was issued in February 2006, with the final standard being issued in January 2008. The amendment requires that vesting conditions be restricted to service conditions and non-market performance conditions. Cancellations by parties other than the entity will be accounted for in the same way as cancellations by the entity. The amendments will be applied retrospectively in annual periods beginning on or after January 1, 2009.

Amendment to IAS 23 'Borrowing Costs' was issued in May 2007 and is effective for accounting periods beginning on or after January 1, 2009. The amendment requires borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset to be added to the cost of that asset.

IFRIC 12 'Service Concession Arrangements' was issued in November 2006 and is effective for annual periods beginning on or after January 1, 2008. IFRIC 12 prohibits private sector operators from recognising as their own those infrastructure assets which are owned by the grantor.

IFRIC 13 'Customer Loyalty Programmes' was issued in June 2007 and is effective for annual periods beginning on or after July 1, 2008. IFRIC 13 requires the fair value of revenue relating to customer loyalty rewards to be deferred until all related obligations to the customer have been fulfilled. 

IFRIC 14 'IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction' was issued in June 2007 and is effective for annual periods beginning on or after January 1, 2008. IFRIC 14 clarifies how any asset to be recognised should be determined, in particular where a minimum funding requirement exists. 

IFRS 8 'Operating Segments' was issued in November 2006 and is effective for annual periods beginning on or after January 1, 2009. It requires reportable operating segments to be based on the entity's own internal reporting structure. It also extends the scope and disclosure requirements of IAS 14 Segmental Reporting, the standard which it is replacing. IFRS 8 will require the publication of segment reports, which will, as a minimum, disclose net result and total assets on a segment by segment basis based on management's own internal accounting information.

Status of EU endorsement

Entities in EU Member States which report in accordance with EU-endorsed IFRS can only apply IFRSs and IFRICs where the endorsement process has been completed at the date of approval of their financial statements. Of the standards and interpretations listed above, the following had not yet been endorsed by the European Union at the date these interim consolidated financial statements were authorised for issue:

IFRIC 12 'Service Concession Arrangements';

IFRIC 13 'Customer Loyalty Programmes';

IFRIC 14 'IAS 19 - The limit on a defined benefit asset';

Amendment to IAS 23 'Borrowing Costs'; 

IFRS 3 'Business Combinations (revised)';

Amendments to IAS 1 'Presentation of Financial Statements: A Revised Presentation';

Amendments to IAS 27 'Consolidated and Separate Financial Statements';

Amendment to IFRS 2'Share-Based Payment: Vesting Conditions and Cancellations';

Amendments to IAS 32 and IAS 1 'Puttable Financial Instruments and Obligations Arising on Liquidation';

Improvements to IFRS; and

Amendments to IFRS 1 and IAS 27 'Cost of an investment in a subsidiary, jointly-controlled entity or associate'.

2 Segment Information

The Group only operates in a single business and geographical segment. The Group's single line of business is the exploration and evaluation of oil and gas reserves and the geographical segment in which it currently operates is the North Sea.

  3 Operating Loss

The operating loss on ordinary activities is stated after charging the following:

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Operating lease costs	22,050	11,025	-	-

4 Staff Costs and Directors' Emoluments

The average number of persons employed by the Group (including Executive Directors) during the period was as follows:

 

 

	6 month period ended June 30 2008 (unaudited)	3 month period ended June 30 2008 (unaudited)	6 month period ended June 30 2007 (unaudited)	3 month period ended June 30 2007 (unaudited)
Technical and administration	6	6	3	3

 

The aggregate payroll costs of staff and Executive Directors were as follows:

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Wages and salaries	469,979	264,423	262,555	154,347
Social security costs	57,982	32,562	42,091	28,240
Share based payments	74,115	74,115	-	-
	602,076	371,100	304,646	182,587

 

  b) Executive Directors' emoluments

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	6 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Wages and salaries	319,350	159,675	262,555	154,347
Social security costs	39,846	19,909	42,091	28,240
	359,196	179,584	304,646	182,587

The Executive Directors comprise the key management personnel of the group.

In addition to the above, during the three month period ended June 30, 2008, the Group paid to Roger Ramshaw, Gregory Moroney, Scott Cochlan and A. Murray Sinclair in their capacity as Non-Executive Directors of the Company fees of £15,000, £4,500, £3,000, £4,500 respectively. There were no such equivalent payments for the three month period ended June 30, 2007.

5 Taxation

	6 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2008 (unaudited) £	3 month period ended June 30 2007 (unaudited) £	3 month period ended June 30 2007 (unaudited) £
Overseas tax charges	9,443	9,443	-	-

Current tax is calculated at the rates prevailing in the respective jurisdictions. XEL is incorporated in the British Virgin Islands, a jurisdiction subject to a tax exemption. XER is incorporated in the UK, is considered a company which profits from oil extraction and oil rights, and is therefore subject to current tax on taxable profits at a rate of 30% (June 30, 2007: 30%).

  6 Loss per Share

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The calculation of basic loss per ordinary share is based on a six month period loss of £259,244 (six months to June 30, 2007: loss of £279) and on 61,261,902 (six months to June 30, 2007: 22,244,444), being the weighted average number of ordinary shares in issue during the period. 

For the three month period to June 30, 2008 the calculation of basic loss per ordinary share is based on a loss of £281,488 (three months to June 30, 2007: loss of £95) and on 61,413,800 (three months to June 30, 2007: 21,800,000), being the weighted average number of ordinary shares in issue during the period. 

Details of potentially dilutive financial instruments are given in Note 12 to these financial statements. 

7 Intangible Assets

	Licence Fees
Exploration and Evaluation Assets	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Cost and carrying value:
At January 1, 2008 / November 1, 2006	126,567	66,297
Additions during period	-	60,270
At June 30, 2008 / December 31, 2007	126,567	126,567

 

	Appraisal and Exploration Costs
	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Cost and carrying value:
At January 1, 2008 / November 1, 2006	6,455,609	2,036,813
Additions during period	13,703,929	4,676,479
Contributions to costs received	-	(257,683)
At June 30, 2008 / December 31, 2007	20,159,538	6,455,609

  

	Total
	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Cost and carrying value:
At January 1, 2008 / November 1, 2006	6,582,176	2,103,110
Additions during period	13,703,929	4,736,749
Contributions to costs received	-	(257,683)
At June 30, 2008 / December 31, 2007	20,286,105	6,582,176

 

The costs associated with the appraisal of Block 9/3b have been capitalised in accordance with the Group's accounting policy in Note 1.

Based on the Group's success in drilling its appraisal well on Block 9/3b, and in view of the forecast revenue streams and cash flows of this project, management is satisfied that the carrying amount of the related intangible assets as disclosed above will be recovered in full and that there is no need for any impairment provision. The situation will be monitored by management and adjustments made in future periods if future events indicate that such adjustments are appropriate.

  8 Property, Plant and Equipment

At November 1, 2006 (audited)		Furniture, fittings and computing equipment £
Cost and net book amount		-
Period ended December 31, 2007 (audited)
Opening and closing net book amount		-
At December 31, 2007 (audited)
Cost and net book amount		-
Period ending June 30, 2008 (unaudited)
Opening net book amount		-
Additions		27,309
Depreciation charge		(1,611)
Closing net book amount		25,698

At June 30, 2008 (unaudited)
Cost or valuation		27,309
Accumulated depreciation		(1,611)
Net book amount		25,698

  9 Trade and Other Receivables

	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Indirect taxes receivable	42,325	79,114
Other receivables	3,675	3,675
	46,000	82,789

 

10 Trade and Other Payables

	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Trade payables	1,303,911	2,857,762
Social security and other taxes payable	47,880	33,919
Accruals and other creditors	842,129	2,150,991
	2,193,920	5,042,672

 

11 Financial Instruments

The Group's principal financial instruments are other receivables, trade and other payables and cash, which are denominated in various currencies. The main purpose of these financial instruments is to finance the Group's ongoing operational requirements. 

The Group does not currently trade in derivative financial instruments. The principal financial risks faced by the Group are credit risk, liquidity and foreign currency risk. Policies for the management of these risks, which have been consistently applied throughout the period, are shown below.

Non-market risk

a) Credit risk

Receivables relate to VAT recoverable and an office rent deposit. As such, they are regarded as low risk.

b) Liquidity risk

Group management has responsibility for reducing exposure to liquidity risk and for ensuring that adequate funds are available to meet anticipated requirements. It operates according to the policies and guidelines established by the Board. Cash management is carried out centrally.

	Carrying Amount
	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Financial assets – loans and receivables
- Cash	4,826,845	21,067,134
- Receivables (current)	46,000	82,789
	4,872,845	21,149,923
Financial liabilities – measured at amortised cost
- Payables (current)	2,193,920	5,042,672

 

The management believes that as all financial instruments are short term, the fair values for all such items equate to their carrying amount.

The accounting policies for financial assets and financial liabilities are disclosed in Note 1.

Market risk

c) Interest rate and foreign currency risks

The currency and interest profile of the Group's financial assets and liabilities are as follows:

		Interest Free Liabilities
		June 30 2008 (unaudited) £	December 31 2007 (audited) £
Sterling		1,703,757	2,807,605
CAD$		16,911	62,947
USD$		473,252	2,172,120
		2,193,920	5,042,672

	Floating rate assets	Interest free assets	Total
	June 30 2008 (unaudited) £	June 30 2008 (unaudited) £		June 30 2008 (unaudited) £
Sterling	4,563,956	46,000		4,609,956
CAD$	50,135	-		50,135
USD$	212,754	-		212,754
	4,826,845	46,000		4,872,845

	Floating rate assets	Interest free assets	Total
	December 31 2007 (audited) £	December 31 2007 (audited) £		December 31 2007 (audited) £
Sterling	16,460,016	82,789		16,542,805
USD$	4,607,118	-		4,607,118
	21,067,134	82,789		21,149,923

Sterling floating rate assets earn interest at circa 25 basis points below the Bank of England Base Rate per annum. US$ floating rate assets earn interest at circa 25 basis points below the Federal Reserve Rate per annum. Cash deposits are only kept with banks with "AA" rating or better. The policy of the group is to ensure that all cash balances earn a market rate of interest and that interest rate exposures are regularly reviewed and managed.

(d) Interest rate sensitivity analysis

Interest rate sensitivity analysis has been determined based on the exposure to interest rates for financial instruments during the financial period.

Based on the Group's cash balances during the period, if interest rates had been 50 basis points higher/lower and all other variables were held constant, the Group's loss for the period ended June 30, 2008 would decrease/increase by £37,065 (June 30, 2007; the Group's loss would decrease/increase by £31).

  12 Share Capital

	June 30 2008 (unaudited) Number of shares	December 31 2007 (audited) Number of shares
Authorised
- Ordinary shares of no par value each	Unlimited	Unlimited
Issued and fully paid up
- Ordinary shares of no par value each	61,413,800	60,550,000

 

 

 

	June 30 2008 (unaudited) £	December 31 2007 (audited) £
Authorised
- Ordinary shares of no par value	Unlimited	Unlimited
Issued and fully paid up
- Ordinary shares of no par value	22,252,625	21,774,150

 

Shares issued

During the six month period ended June 30, 2008 the Company issued a further 863,800 ordinary shares for a total consideration of £478,475 following the exercise of certain warrants.

 Stock Option Plan

An element of the Group's reward strategy is the implementation of the Stock Option Plan, the purpose of which is to provide an incentive to the Directors, officers and key employees of the Group to achieve the objectives of the Group; to give suitable recognition to the ability and industry or such persons who contribute materially to the success of the Group; and to attract and retain persons of experience and ability, by providing them with the opportunity to acquire an increased proprietary interest in the Company. The Stock Option Plan is administered by the Remuneration and Nominating Committee.

On January 18, 2008 Mr Scott Cochlan, a Non-Executive Director of the Company, was awarded 100,000 share options over the Company's ordinary share capital. All such options vested immediately with an exercise price of CAD$2.09 (£1.04) and a term of five years.

On June 19, 2008 the Company issued a further 450,000 share options over the Company's ordinary share capital to three members of the XER Management Team. All such options vested immediately with an exercise price of CAD$1.60 (£0.805) and a term of five years. 

At June 30, 2008 there were 4,350,000 options outstanding (December 31, 2007: 3,800,000).

Share warrants 

The Company had the following outstanding warrants over the ordinary share capital of the Company at June 30, 2008:

Security	Holder	Number of ordinary shares	Exercise price	Market price at grant date	Expiry date
Warrants (1)	Shareholders of the company	9,948,700	US$1.50	US$1.00	May 7, 2009
Broker warrants (2)	Thomas Weisel Partners (UK) Limited	700,000	US$1.00	US$1.00	June 26, 2009
Broker warrants (3)	Various	1,012,500	CAD$1.60	CAD$1.60	Nov 15, 2009
Warrants (4)	Ammonite	163,500	US$1.00	US$1.00	Nov 15, 2009

On June 26, 2007, pursuant to the Private Placement, XEL issued 20,000,000 units consisting of ordinary shares and 20,000,000 half-warrants at US$1.00 per unit. Each whole warrant entitles the holder to purchase one ordinary share in XEL at an exercise price of US$1.50 per share at any time until May 7, 2009. On February 15, 2008 the Company received consideration of US$75,000 in respect of the exercise of 50,000 of such warrants and on March 12, 2008 the Company received consideration of US$1,950 in respect of the exercise of 1,300 of such warrants.

Pursuant to the Private Placement, the Company issued to Thomas Weisel Partners (UK) Limited (formerly Westwind Partners (UK) Limited) 1,400,000 broker warrants to purchase 1,400,000 ordinary shares at an exercise price of US$1.00 at any time until June 26, 2009. On January 31, 2008 Thomas Weisel Partners (UK) Limited exercised a total of 700,000 of these warrants for a consideration of US$700,000. 

Pursuant to the Initial Public Offering, XEL issued a total of 1,125,000 broker warrants to the following institutions: Thomas Weisel Partners (UK) Limited 843,750 (75%); Mirabaud Securities Limited 112,500 (10%); Wellington West Capital Markets Inc. 112,500 (10%); and MGI Securities 56,250 (5%), with each warrant entitling the holder to purchase one ordinary share in XEL at an exercise price of CAD$1.60 at any time until November 15, 2009. On February 7, 2008, Wellington West Capital Markets Inc. exercised a total of 112,500 of these warrants for a consideration of CAD$180,000. 

XER entered into an agreement with Ammonite Capital Partners L.P. ("Ammonite") in January 2007 in connection with its proposed funding activities. The agreement contained provisions for XER to award Ammonite warrants over ordinary shares in XER under certain circumstances. XEL assumed responsibility for this agreement at the time that XEL acquired XER. The agreement provided for Ammonite to receive a total of 163,500 warrants, each over one ordinary share in XEL (the "Ammonite Warrants"), with each warrant entitling the holder to purchase one ordinary share in XEL at an exercise price of US$1.00 at any time until November 15, 2009.

 13 Retained earnings and other reserves

	Retained Earnings £	Merger Reserve £	Other Reserves £	Total £
At November 1, 2006	(133)	218	-	85
Loss for the period to December 31, 2007	(730,289)	-	-	(730,289)
Fair value of share warrants and options	-	-	1,645,481	1,645,481
At January 1, 2008 (audited)	(730,422)	218	1,645,481	915,277
Transfer upon exercise of share warrants	101,774	-	(101,774)	-
Fair value of share warrants and options	-	-	82,070	82,070
Loss for the period to June 30, 2008	(259,244)	-	-	(259,244)
At June 30, 2008 (unaudited)	(887,892)	218	1,625,777	738,103

The following explains the nature and purpose of each reserve within owners' equity:

Retained Earnings Cumulative net gains and losses recognised in the Group Balance Sheet.

Merger Reserve The difference between the nominal value of the shares issued to acquire a subsidiary and the nominal value of the shares acquired.

Other Reserves The fair value of share based payment instruments and warrants over shares granted by the Company at the date of grant and still outstanding.

14 Commitments and contingencies

The Group had no commitments or contingencies as at June 30, 2008 other than as accounted for in these interim unaudited consolidated financial statements.

ENDIR EAFPFALPPEFE

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