26th Oct 2007 15:00
Max Petroleum PLC26 October 2007 Part2 NOTES TO THE ACCOUNTSFor the year ended 31 March 2007 1. Accounting policies Basis of accounting These financial statements have been prepared under the historical costconvention in accordance with Generally Accepted Accounting Principles in theUK, the Companies Act 1985 and applicable accounting standards. The accountingpolicies, where applicable, are in accordance with the Statement of RecommendedPractice "Accounting for Oil and Gas Exploration, Development, Production andDecommissioning Activities" published by the Oil Industry Accounting Committee("SORP - Accounting for Oil and Gas Activities"). Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and all subsidiary undertakings. All intercompany transactions havebeen eliminated. As a consolidated profit and loss account is published, aseparate profit and loss account for the parent company is omitted from theGroup financial statements by virtue of Section 230 of the Companies Act 1985. Stocks Crude oil stocks are valued at production cost. Materials and supplies stocksare valued on a first-in, first-out basis at the lower of cost or estimated netrealisable value. Tangible fixed assets Tangible fixed assets are included in the balance sheet at cost, lessaccumulated depreciation and any provision for impairment. Tangible fixed assetsare depreciated on a straight line basis at rates sufficient to write off thecost, less estimated residual values, of individual assets over their estimateduseful lives. Improvements to leasehold 2-10 (or over the remaining lifeproperty years of the lease if shorter)Office systems, equipment and 4-10furniture yearsPlant and equipment 4 yearsMotor vehicles 4 years Intangible fixed assets - oil and gas properties The Group follows the full-cost method of accounting for oil and gas propertiesunder which all costs for exploration and development expenditures includingfinancing costs and related foreign exchange differences with respect toproperties under development are capitalised in depletable cost pools based ongeographic areas. Proceeds from the disposal of interests are deducted from thefull cost pool. The amounts included within intangible fixed assets include thefair value that was paid for the acquisition of licences in Kazakhstan duringthe period ended 31 March 2006. These licences have been capitalised to theGroup's Kazakhstan full cost pool. The capitalised costs of intangible oil and gas assets are subject todepreciation when they are determined to have proved and probable ("commercial")reserves, at which point the capitalised costs plus the estimated future coststo develop the underlying commercial reserves are amortised using theunit-of-production method using total estimated reserves. Investments inunevaluated properties and major development projects are not amortised untilcommercial reserves associated with the projects can be determined or untilimpairment occurs. Commercial reserves are stated as defined in the SORP -Accounting for Oil and Gas Activities. Test production The Group accounts for oil and gas turnover relating to test production inaccordance with the SORP - Accounting for Oil and Gas Activities, creditingturnover for the proceeds received from the sale of test production with anoffsetting charge to cost of sales resulting in no net margin being recognised. Asset impairments Intangible fixed assets are reviewed for impairments at least annually and ifevents or changes in circumstances indicate that the carrying amount may not berecoverable. When a review for impairment is conducted, the recoverable amountis assessed by reference to the net present value of expected future cash flowsof the relevant income generating unit or disposal value, if higher. If an assetis impaired, a provision is made to reduce the carrying amount to its estimatedrecoverable amount. Abandonment Provision is made for the present value of the future cost of abandonment of oiland gas wells and related facilities. This provision is recognised when theasset is installed. The estimated costs, based on engineering cost levelsprevailing at the balance sheet date, are computed on the basis of the latestassumptions as to the scope and method of abandonment. The corresponding amountis capitalised as part of tangible fixed assets and is amortised on aunit-of-production basis as part of the depreciation, depletion and amortisationcharge. Any adjustment arising from the reassessment of estimated cost ofdecommissioning is capitalised, whilst the charge arising from the unwinding ofthe discount applied to the abandonment provision is treated as a component ofthe interest charge. Foreign currencies In the financial statements of subsidiary undertakings, transactions denominatedin foreign currencies are recorded in the local currency at actual exchangerates at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the period end are reported at the rates ofexchange prevailing at the period end. Any gain or loss arising from a change inexchange rate subsequent to the date of the transaction is included as anexchange gain or loss in the profit and loss account. For the purpose of consolidation, monetary assets and liabilities are translatedusing the closing rate at the balance sheet date. Non-monetary items aremeasured at the exchange rate in effect at the historical transaction date andare not translated at each balance sheet date. Profit and loss accounts aretranslated at their historical exchange rate. Translation gains and losses arerecorded in administrative expenses for the year. The Group's functional andreporting currency is the US dollar. The average and year-end historicalexchange rates between the US dollar and other currencies were: 2007 2006 Average rate Closing rate Average rate Closing rate--------------------------------------------------------------------------------GB pounds 1.89 1.96 1.78 1.74Kazakh tenge 124.56 123.84 133.15 128.45-------------------------------------------------------------------------------- Revenue recognition Revenues from crude oil and natural gas sales are recognised when the oil andgas has been lifted and the risk of loss transferred to a third-party purchaser.The Group uses the entitlement method to account for its turnover from sales ofoil and gas production. Corporation tax Corporation tax is provided on taxable profits, if any, at the current tax rate. Deferred tax Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents have occurred at that date which will result in an obligation to paymore, or a right to pay less, tax. Deferred tax assets are recognised only to the extent that the directorsconsider that it is more likely than not that there will be suitable taxableprofits from which the future reversal of the underlying timing differences canbe deducted. Acquisition accounting The Group utilises the purchase method of accounting for acquisitions ofsubsidiaries, undertakings, joint ventures or associates, whereby the totalpurchase price is allocated to the underlying assets and liabilities based ontheir fair market values. Any excess of the cost of the acquisition over thefair values of the identifiable net assets is recognised as goodwill, while anydeficiency is charged to the profit and loss account in the period of theacquisition. Fixed asset investments Fixed asset investments are included in the balance sheet at cost less anyprovisions for impairment. Cash Cash and cash equivalents comprise cash in hand, current balances and depositswith banks and similar institutions, which are readily convertible to cash andwhich are subject to insignificant risk of changes in value. Operating leases Rentals under operating leases are charged to the profit and loss on a straightline basis over the term of the relevant leases. Convertible debt instruments The Group records the proceeds received from the issuance of convertible debtinstruments, net of issuance costs, as an allocation between long-term debt andequity reserve based on the Group's estimate of the fair value of the bondwithout consideration of its conversion feature. Interest expense on the netcarrying value of the long-term debt portion of the convertible bonds iscalculated at a constant interest rate used to estimate the fair value of thedebt portion of the convertible bonds on the date of issuance. Share based payments The Company uses shares and share options as consideration for goods andservices received from suppliers and employees. The Company recognises the cost of these transactions at the fair value of thegoods and services received by reference to open market prices. Where these arenot readily available costs are recognised at the fair value of the instrumentsissued. The Company uses the Black-Scholes valuation model to value shareoptions issued. Where options do not vest immediately the Company recognises the cost of theoptions on a straight line basis from the date of grant to the date when theoptions become exercisable (the vesting period). Pension obligations The Group does not incur any expenses in relation to pensions for its employees.In accordance with the legal requirements of the Republic of Kazakhstan, theGroup withholds pension contributions from employee salaries and transfers theminto third party state or private pension funds at the direction of theemployee. The Group is not responsible for the administration of the pensionfunds or future distributions to the employees. 2. Exceptional items During the period ended 31 March 2006, the Group settled litigation brought by athird party claiming certain rights to the Group's interest in its Blocks A&Eand East Alibek subsoil use licenses in the Republic of Kazakhstan. The claimwas settled for $1.4 million, including $0.5 million in cash and 1.5 millionordinary shares valued at $0.9 million, or 35p per share. 3. Segmental reporting The Group's operational activities are wholly focused in the Republic ofKazakhstan. The Company's head office is in London. Turnover The Group's external turnover of $1.5 million for the year ended 31 March 2007was generated wholly from sales of its crude oil test production fromoperations, originating from and destined within, the Republic of Kazakhstan. 2007 2006 United Republic of United Republic of Kingdom Kazakhstan Elimination Group Kingdom Kazakhstan Elimination Group US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000---------------------------------------------------------------------------------------------------------------Turnover fromexternalparties - 1,502 - 1,502 - - - -Inter-segmental turnover 4,893 233 (5,126) - - - - ---------------------------------------------------------------------------------------------------------------- 4,893 1,735 (5,126) 1,502 - - - ---------------------------------------------------------------------------------------------------------------- Loss onordinaryactivitiesbeforetaxation (16,532) (8,220) - (24,752) (21,112) (2,554) - (23,666)---------------------------------------------------------------------------------------------------------------Net assets 53,891 159,655 - 213,546 43,414 170,224 - 213,638---------------------------------------------------------------------------------------------------------------Capitalexpenditure:Intangiblefixed assets -acquisitioncosts - 185,701 - 185,701 - 187,646 - 187,646Intangiblefixed assets -explorationand appraisalcosts - 51,778 - 51,778 - 6,293 - 6,293Decommissioningcosts - 1,479 - 1,479 - 911 - 911Otherintangiblecosts - 324 - 324 - - - ----------------------------------------------------------------------------------------------------------------Tangible fixedassets 138 1,340 - 1,478 96 362 - 458--------------------------------------------------------------------------------------------------------------- 4. Operating loss Operating loss is stated after charging/(crediting):--------------------------------------------------------------------------------Note Note 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------Exchange loss/(gain) (803) 302Operating lease rentals 657 41Depreciation 184 17Share based payments 7 9,846 6,642Exceptional item 2 - 1,389 Services provided by the Group's auditor and network firms During the year the group (including its overseas subsidiaries) obtained thefollowing services from the group's auditor at costs as detailed below: 2007 2006 S$'000 US$'000--------------------------------------------------------------------------------Fees payable to company auditor for the audit of parentcompany and consolidated accounts 385 172Non-audit services:Fees payable to the company's auditor and its associates forother services:Audit of company's subsidiaries pursuant to legislation 241 144Other services 17 -Tax services 202 --------------------------------------------------------------------------------- 5. Interest-------------------------------------------------------------------------------- 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------Interest receivable 1,729 553--------------------------------------------------------------------------------Interest payable:Convertible bond (4,138) -Other (102) (28)Interest expense capitalised to oil and gas properties 2,182 --------------------------------------------------------------------------------- (2,058) (28)--------------------------------------------------------------------------------Net interest receivable (payable) (329) 525-------------------------------------------------------------------------------- Interest payable relating to the convertible bond includes stated and effectiveinterest expense plus amortization of debt issuance costs. Other interestpayable includes accretion expense for decommissioning costs for the Group's oiland gas properties. 6. Cash flow relating to major non-cash transactions Share based payments During the year ended 31 March 2006, the Company issued 137.6 million ordinaryshares and 50 million share options exercisable at 100p with a combined value of$95.8 million as partial consideration for the acquisition of three subsoillicenses in the Republic of Kazakhstan. Furthermore, the Company made grants ofshare options to various directors, employees, consultants, and advisors of theGroup during 2007 and 2006. As the fair values of the acquired oil and gas exploration licenses were notreadily available due to the uncertainty surrounding the acquired underlying oiland gas reserves, these were determined partly by reference to the instrumentsissued as consideration. Shares issued as purchase consideration were valued atmid-market prices as at the date of allotment and share options were valuedindependently using the Black-Scholes valuation model. The total fair value ofshares and options issued as consideration was $67.2 million and $28.6 million,respectively. Summary of non-cash items Note 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------Operating cash flowShare based payments charge - valuation of options granted for services 9,846 6,642Share based payment - litigation settlement 2 - 889-------------------------------------------------------------------------------- 9,846 7,531-------------------------------------------------------------------------------- Capital expenditure and financial investmentShare based payments as consideration for acquisitions: - 36,530Samek International LLP and the A & E Blocks subsoillicence - 23,137Samek Development Enterprise LLP and the East Alibeksubsoil licence - 36,180Alga Caspiygas LLP and the Astrakhanskiy subsoil licenceShare based payments capitalised to oil and gas properties 1,484 -Oil and gas property costs reclassified as pre-paidmarketing costs 17 (1,823) -Non-cash interest expense capitalised to oil and gasproperties 1,283 -Asset retirement obligation provision 670 911-------------------------------------------------------------------------------- 1,614 96,758--------------------------------------------------------------------------------FinancingShare based payments:Fair value of shares issued as consideration - 67,218Fair value of shares issued in litigation settlement - 889Valuation of share options granted as consideration - 35,272-------------------------------------------------------------------------------- - 103,379-------------------------------------------------------------------------------- 7. Share based payments The Company has granted share options to various directors, employees, strategicconsultants and advisors to the Group to provide incentives for long-termperformance and retention. Furthermore, additional options were issued aspartial consideration for the acquisition of oil and gas properties inKazakhstan to align the Company's and the sellers' interests subsequent to theacquisition. No share options have been granted which are subject to anyperformance criteria except, in respect of directors and employees, theircontinued service with and employment by the Group. The Company operates on awholly equity-settled principle. The opportunity to be granted share options isavailable to all employees after an initial probationary period. The vesting terms of the share options differ between the agreements of thevendors and those engaged by the Company and are as follows: • Options granted to vendors vest immediately and have a three year term from date of grant. • Options granted to consultants and advisors typically vest in part within six months and proportionately on anniversaries thereafter with a three year term from date of grant. • Options to directors and employees typically vest in part after one year and proportionately thereafter with a seven year term from date of grant. • In October 2005, an exceptional form of share option was granted to two senior executive directors and a consultant responsible for the Company's capital raising activities prior to its listing on AIM, the acquisition of the Company's initial two subsoil licenses in oil and gas properties in Kazakhstan, and the AIM Admission of the Company. The option incorporates a non-dilution clause for one year, vesting in part on the first anniversary of grant and proportionately thereafter for a term of ten years. The maximum term of options granted is ten years and in the normal course ofbusiness, seven years. As at 31 March 2007, the Company had 108.3 million share options outstanding,reflecting cumulative grants of 113.3 million, net of 4.4 million exercisedshare options and 0.6 million share options that had been cancelled or forfeitedby the recipient. The share option table below sets out the options granted,exercised and outstanding at 31 March 2007 and 2006. 2007 2006-------------------------------------------------------------------------------------------- Number of Weighted Weighted Number of Weighted Weighted share options average average share options average average exercise market exercise exercise price price on price price (pence) exercise (pence) (pence) (pence) -------------------------------------------------------------------------------------------- Outstanding at start of period 102,518,013 77.0 - -Granted 10,249,300 142.8 103,068,013 76.8Forfeited orcancelled (605,000) 49.8 - -Exercised (3,910,000) 34.4 99.8 (550,000) 35.0 101.1Outstanding atend of period 108,252,313 84.9 102,518,013 77.0-------------------------------------------------------------------------------------------- The directors retain independent consultants to carry out a fair value reviewand valuation of the share options granted by the Company. The purpose of thereview is to ensure that the true cost of the options is properly reflected inthe cost of investments in the Group and Company balance sheets and in the costof services charged to the Group profit & loss account. The Black-Scholes valuation model is used to determine the fair value of theshare options issued by the Company. Given the limited trading history of theCompany, which was admitted on AIM in October 2005, a representative sample ofcompanies from the oil & gas sector with operations in a similar geographicregion in order to determine expected share price volatility. 2007 2006 Weighted average Weighted average-------------------------------------------------------------------------------- Exercise price of option contract 142.8p 77.0pShare price on date of grant 104.8p 86.4pExpected term before option exercise 3.9 years 2.9 yearsRisk free interest rate 4.8% 4.5%Expected dividend yield - -Expected share volatility 38% 40%-------------------------------------------------------------------------------- The following table represents the weighted averages of the variables used intheir assumptions: The model also assumes lengths of vesting period to date of exercise. The Directors concluded that the average fair value of the options issued duringthe current year was 28% or 28 pence ($0.53) (2006: $0.66). The Company hasrecorded a charge to administration expenses in its profit & loss account forthe value of services of $9.9 million (2006: $6.6 million) and capitalised $1.5million (2006: $28.6 million) to intangible costs relating to its oil and gasproperties. The share based payment reserve is stated as $46.6 million (2006:$35.3 million). The Company did not modify or vary any share option arrangements during theperiod. The following table summarises share option activity during the current year to31 March 2007 and the prior period from 8 April 2005 to 31 March 2006. Foroptions outstanding at the end of the period, the range of exercise prices andthe average remaining life, analysed into the main groups of recipients, were asfollows: 2007 2006-------------------------------------------------------------------------------------------------------------------- Weighted Average Weighted Average average remaining average remaining Exercise Number of exercise contractual Exercise Number of exercise contractual price range share options price life price range share price life (p) (p) (years) (p) options (p) (years) Directors 35.0-120.5 27,062,542 54.9 7.90 35.0-120.5 27,562,542 49.6 8.83Employees 25.0-450.0 13,783,300 129.0 5.88 25.0-120.0 5,489,000 95.5 6.79Advisorycommittee 35.0-100.0 4,500,000 78.3 5.80 100.0 3,000,000 100.0 7.00Other advisorsand consultants 35.0-120.5 12,906,471 44.6 7.16 35.0-120.5 16,466,471 42.5 6.95Acquisitionvendors (Note) 100.0 50,000,000 100.0 1.79 100.0 50,000,000 100.0 2.75-------------------------------------------------------------------------------------------------------------------- 108,252,313 84.9 3.90 102,518,013 77.0 5.40-------------------------------------------------------------------------------------------------------------------- Note: As disclosed in the Related Parties note on page (_1_), certain employees,a former officer and a former non-executive director of the Company beneficiallyown 6 million share options granted to the acquisition vendors. Mr. DMyrzagaliyev, the former non-executive director, and several other individualshave voluntarily agreed to amend the structure through which their beneficialinterests in the share options are held, where they will remain until theyexpire under their terms in January 2009. The average closing market price of the Company's ordinary 0.01p shares duringthe year was 104.7p (2006: 97.2p). 8. Particulars of employees The number of staff employed by the Group during the financial period were asfollows: 2007 2006-------------------------------------------------------------------------------- Average in As at Average in As at period 31 March Period 31 March--------------------------------------------------------------------------------Administrative 66 99 7 23Exploration and production operations 34 65 6 28Directors 5 5 4 5------------------------------------------------------------------------------- 105 169 17 56-------------------------------------------------------------------------------- The aggregate payroll costs of the above were:-------------------------------------------------------------------------------- 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------Wages and salaries 12,612 2,181Social security 850 4-------------------------------------------------------------------------------- 13,462 2,185-------------------------------------------------------------------------------- Wages and salaries include the cost of tax gross-up for expatriate employeeswhose contracts provide for them to receive salaries without deduction of localtaxes. Directors' emoluments The directors' aggregate emoluments in respect of qualifying services were:-------------------------------------------------------------------------------- 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------Directors salaries 893 423Directors fees 104 114Benefits in kind 96 6-------------------------------------------------------------------------------- 1,093 543--------------------------------------------------------------------------------Highest paid directorSalary 487 227Benefits in kind 81 --------------------------------------------------------------------------------- 568 227-------------------------------------------------------------------------------- None of the Group's directors exercised share options while serving in theircapacity as directors during the two years ended 31 March 2007. The Group made the following payments to third parties for the provision ofservices by directors:-------------------------------------------------------------------------------- 2007 2006 US$'000 US$'000 -------------------------------------------------------------------------------Capma Pty Ltd in relation to C Kyriakou - 43Myrzaly Ltd in relation to D Rigoll - 39-------------------------------------------------------------------------------- In May 2006, the Company's former Chief Executive Officer, Mr. Steven Kappelle,entered into a £3 million demand loan with a third party secured by a legalcharge over Mr. Kappelle's Max Petroleum share option agreement dated 26 October2005, although Mr. Kappelle's share option agreement explicitly states that theunderlying share option may not be assigned, transferred or charged. The demandloan bears interest at 15% per annum and becomes immediately due and payable inthe event Mr. Kappelle i) ceases his employment with Max Petroleum or ii) if theshare price of Max Petroleum trades below £1 per share for more than fiveconsecutive days. 9. Taxation Analysis of tax charge in year-------------------------------------------------------------------------------- 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------United Kingdom corporation tax at 30% - -Overseas taxation - --------------------------------------------------------------------------------- - -Deferred tax - ---------------------------------------------------------------------------------Tax charge for the period - --------------------------------------------------------------------------------- Tax reconciliation:Loss on ordinary activities before taxation (24,752) (23,666) Tax at 30% (7,426) (7,100)Effects of expenses not deductible for tax purposes 548 3,399Effects of deferred tax assets not recognised - losses 4,597 2,249 - other 2,281 1,452--------------------------------------------------------------------------------Total current tax charge for the period - --------------------------------------------------------------------------------- The Group's principal business activities are in the Republic of Kazakhstan andare subject to a corporate income tax rate of 30%. The Group has generatedrecurring net operating losses and no deferred tax assets have been recognisedwith respect to such losses. 10. Loss attributable to the members of the parent company The loss on ordinary activities before and after tax dealt with in the accountsof the parent company was $(19.3) million (2006: $(21.5) million). 11. Loss per share 2007 2006--------------------------------------------------------------------------------Loss per ordinary share (US cents) (7.5) (13.6)Diluted loss per ordinary share (US cents) (7.5) (13.6)-------------------------------------------------------------------------------- Loss per share is calculated using the loss for the period divided by theweighted-average number of ordinary shares outstanding during the period. In theyear ended 31 March 2007, the Group generated a loss for the period of $23.0million (2006: $23.3 million) with 304,734,178 weighted-average sharesoutstanding during the period (2006: 171,929,939). Diluted loss per share is calculated using the weighted average number ofordinary shares outstanding assuming the conversion of its potentially dilutiveequity derivatives outstanding. All of the Group's equity derivatives wereanti-dilutive for the years ended 31 March 2007 and 2006 respectively. The Grouphad total equity derivatives outstanding of 138,920,136 as at 31 March 2007(2006: 102,518,013). 12. Intangible fixed assets Proved Unproved Properties Properties Other TotalGroup US$'000 US$'000 US$'000 US$'000--------------------------------------------------------------------------------CostAs at 31 March 2006 - 194,850 - 194,850Additions - 46,053 341 46,394Reclassifications - (1,945) - (1,945)--------------------------------------------------------------------------------As at 31 March 2007 - 238,958 341 239,299--------------------------------------------------------------------------------DepreciationAs at 31 March 2006 - - - -Charge for the period - - 17 17--------------------------------------------------------------------------------As at 31 March 2007 - - 17 17--------------------------------------------------------------------------------Net book valueAs at 31 March 2007 - 238,958 324 239,282--------------------------------------------------------------------------------As at 31 March 2006 - 194,850 - 194,850-------------------------------------------------------------------------------- The Group reclassified $1.9 million of acquisition costs capitalised tointangible fixed assets, to reflect an exchange of limited acreage in itslicence area in Blocks A&E as a prepayment of crude oil processing costs inconjunction with the Group's right to free processing of up to 300,000 metrictons of crude oil per year through 2010 under its cooperation agreement withKazMunaiGas E&P. The prepaid processing costs are being amortised over the lifeof the cooperation agreement. Reconciliation Acquisition Exploration and Development Decommissioning Group oil andof oil and gas costs appraisal costs costs costs gas propertiespropertiesGroup US$'000 US$'000 US$'000 US$'000 US$'000---------------------------------------------------------------------------------------------As at 31 March2006 187,646 6,293 - 911 194,850Reclassification of costs (1,945) - - - (1,945)Additions - 45,485 - 568 46,053---------------------------------------------------------------------------------------------As at 31 March 2007 185,701 51,778 - 1,479 238,958--------------------------------------------------------------------------------------------- The abandonment asset at 31 March 2007 was $1.5 million (2006: $0.9 million). As at 31 March 2007, the Group had successfully drilled and completed four ofeight exploration wells, making its first discovery on Block E in the ZhanaMakat field. In accordance with Kazakhstan law, the Group was only allowed toproduce each well for a three-month test period pending receipt of regulatoryapproval to conduct a long-term appraisal drilling program to gather informationnecessary to prepare a full field development plan. The Group receivedregulatory approval in August 2007 to put the field on production and drill anadditional 12 appraisal and development wells. The Group produced 60,000 barrels of test oil production as at 31 March 2007which, after accounting for inventory movement, generated $1.5 million inturnover. In accordance with the SORP - Accounting for Oil and Gas Activities,the Group has recognised oil revenues of $1.5 million (2006: $nil) in itsconsolidated profit and loss account offset by $1.5 million in costs of sales(2006: $nil). The Group had an additional 22,000 barrels of production in crudeoil inventory as of 31 March 2007. The Group will begin depleting its evaluatedoil and gas property costs on a prospective basis beginning in the period ended30 September 2007. Acquisitions The Group did not complete any acquisitions during the year ended 31 March 2007.During 2006, however, the Group acquired three subsoil licenses in the Republicof Kazakhstan for a total of $163.1 million, including $67.3 million in cash and137.6 million ordinary shares and 50.0 million share options exercisable at 100pwith a combined value of $95.8 million. The fair value of the consideration isconsidered to approximate to the value of the assets acquired. Cash Non-cash Total consideration consideration consideration US$'000 US$'000 US$'000--------------------------------------------------------------------------------Madiran Investments B.V.October 2005 - acquisition of80% interest in holdingcompany of Samek InternationalLLP, operator of A & E Blockssubsoil contract 13,303 36,530 49,833--------------------------------------------------------------------------------Sherpico Investments LtdOctober 2005 - acquisition of80% interest in holdingcompany of Samek DevelopmentEnterprise LLP, operator ofEast Alibek subsoil contract 10,973 23,137 34,110--------------------------------------------------------------------------------MPAHL(1) and Vasse Investments LtdJanuary 2006 - acquisition ofcompanies holding 100% of AlgaCaspiyGas LLP, operator ofAstrakhanskiy Block 43,039 36,180 79,219-------------------------------------------------------------------------------- (1) Max Petroleum Astrakhanskiy Holding Ltd (change of name from Kazgas Ltd) 13. Tangible fixed assets Improvements Office systems, to leasehold equipment and Plant and MotorGroup property furniture equipment vehicles Total US$'000 US$'000 US$'000 US$'000 US$'000--------------------------------------------------------------------------------CostAt 31 March 2006 12 415 3 45 475Additions 36 557 109 485 1,187--------------------------------------------------------------------------------At 31 March 2007 48 972 112 530 1,662--------------------------------------------------------------------------------DepreciationAt 31 March 2006 1 13 - 3 17Charge for the 4 133 2 28 167period --------------------------------------------------------------------------------At 31 March 2007 5 146 2 31 184--------------------------------------------------------------------------------Net book valueAt 31 March 2007 43 826 110 499 1,478--------------------------------------------------------------------------------At 31 March 2006 11 402 3 42 458-------------------------------------------------------------------------------- Improvements Office systems, to leasehold equipment and Plant and MotorCompany Property Furniture equipment vehicles Total US$'000 US$'000 US$'000 US$'000 US$'000--------------------------------------------------------------------------------CostAt 31 March 2006 12 91 - - 103Additions 35 45 - - 80--------------------------------------------------------------------------------At 31 March 2007 47 136 - - 183--------------------------------------------------------------------------------DepreciationAt 31 March 2006 1 6 - - 7Charge for the 4 34 - - 38year --------------------------------------------------------------------------------At 31 March 2007 5 40 - - 45--------------------------------------------------------------------------------Net book valueAt 31 March 2007 42 96 - - 138--------------------------------------------------------------------------------At 31 March 2006 11 85 - - 96-------------------------------------------------------------------------------- 14. Fixed assets investments Subsidiary undertakingsCompany 2007 2006 US$'000 US$'000--------------------------------------------------------------------------------CostOpening 163,162 -Additions - 163,162--------------------------------------------------------------------------------Closing 163,162 163,162--------------------------------------------------------------------------------Net book valueOpening 163,162 -Closing 163,162 163,162-------------------------------------------------------------------------------- The following summarises the Company's participation in the group structure: --------------------------------------------------------------------------------Subsidiary Country of Effective Proportion Nature of Statutoryundertakings incorporation holding of voting business year end ights held SherpicoInvestmentsLtd UK 80% 80% Holding Company 31 MarMadiranInvestmentsB.V. Netherlands 80% 80% Holding Company 31 DecSamekDevelopmentEnterprise LLP Kazakhstan (1) 80% 80% Operating 31 Dec CompanySamekInternationalLLP Kazakhstan (1) 80% 80% Operating 31 Dec CompanyVasseInvestmentsLtd BVI 100% 100% Holding Company 31 MarMax PetroleumAstrakhanskiy BVI 100% 100% Holding Company 31 MarHoldings Ltd('MPAHL') (2)Alga CaspiygasLLP Kazakhstan (1) 100% 100% Operating 31 Dec Company (1) Indirect shareholding of parent company (2) Change of name from Kazgas Ltd The results of the above subsidiaries have all been included in the consolidatedaccounts. The Company's foreign subsidiaries have calendar year ends for localstatutory reporting purposes only. Max Petroleum PLC acquired an 80% interest in Sherpico Investments Ltd andMadiran Investments B.V. on 27 October 2005. Sherpico Investments Ltd acquired a controlling interest and 100% of SamekDevelopment Enterprise LLP, and Madiran Investments B.V. acquired a controllinginterest and 100% of Samek International LLP, on 21 September 2005. Max Petroleum Plc acquired a 100% interest in each of MPAHL and VasseInvestments Ltd on 12 January 2006. MPAHL owns a 30% interest and VasseInvestments Ltd owns a 70% interest, in Alga Caspiygas LLP. 15. Stocks 2007 2006 Group Group US$'000 US$'000 --------------------------------------------------------------------------------Materials and supplies 7,064 3Crude oil inventory 448 - -------------------------------------------------------------------------------- 7,512 3 -------------------------------------------------------------------------------- Materials and supplies are principally comprised of drilling equipment to beused in the exploration and development of the Group's oil and gas properties inKazakhstan. 16. Debtors falling due within one year 2007 2006 Group Company Group Company US$'000 US$'000 US$'000 US$'000 --------------------------------------------------------------------------------Trade debtors 174 - 52 52Other debtors 2,119 138 1,142 852Amounts owed by Group undertakingsLoans from the Company to itssubsidiaries, non-interest bearing andrepayable on demand* - 91,457 - 36,296Other amounts due from subsidiaries - 2,581 - 1,438 -------------------------------------------------------------------------------- 2,293 94,176 1,194 38,638 -------------------------------------------------------------------------------- * The Company does not intend to demand repayment of loans within one year Other debtors includes recoverable Kazakh VAT, social taxes and compulsorybudget payments. The carrying amount of debtors is a reasonable approximation offair value. 17. Prepayments Prepayments falling due after one year 2007 2006 Group Company Group Company US$'000 US$'000 US$'000 US$'000 --------------------------------------------------------------------------------Prepaid marketing costs 1,338 - - - -------------------------------------------------------------------------------- 1,338 - - - -------------------------------------------------------------------------------- Prepayments falling due within one year 2007 2006 Group Company Group Company US$'000 US$'000 US$'000 US$'000 --------------------------------------------------------------------------------Advances to suppliers 7,675 - 1,279 -Prepaid marketing costs 485 - - -Other 1,787 890 491 491 -------------------------------------------------------------------------------- 9,947 890 1,770 491 -------------------------------------------------------------------------------- Total prepayments 11,285 890 1,770 491 -------------------------------------------------------------------------------- Prepaid marketing costs of $1.8 million, net of current year charge, resultingfrom the Group's co-operation agreement with KazMunaiGaz E&P, have beenreclassed from intangible oil and gas assets (note 12) to prepayments fallingdue within and after one year. 18. Creditors: Amounts falling due within one year 2007 2006 Group Company Group Company US$'000 US$'000 US$'000 US$'000 --------------------------------------------------------------------------------Trade creditors 10,232 179 969 449Other creditors 186 4 262 4Taxation and social security 1,643 163 479 109Accruals and deferred income 1,143 1,086 652 498 -------------------------------------------------------------------------------- 13,204 1,432 2,362 1,060 -------------------------------------------------------------------------------- 19. Convertible bond Max Petroleum completed an offering of convertible debentures on 8 September2006, raising a total of $75 million before issuance costs, through the issuanceof convertible bonds bearing interest at 6.75% per annum, payable semi-annually,convertible at an initial conversion price of £1.33 per ordinary share, subjectto certain anti-dilution adjustments. The convertible bonds will mature inSeptember 2011, at which time the Group will be required to redeem the principalamount of the convertible bonds then outstanding. The holders of the bonds havea right to convert the bonds through to final maturity. Furthermore, the holderswill have certain rights to force the Group to redeem the bonds if certainmaterial events of default occur such as revocation of the Group's licences toits oil and gas properties in Kazakhstan. The Group has the right to redeem thebonds after three years if the bonds trade at an average price of 130% of theconversion price for a minimum of 20 out of 30 consecutive trading days or if atany time a minimum of 85% of the bonds have been converted. The Group allocated the proceeds of the convertible bonds, net of debt issuancecosts of $3.2 million, between long-term debt and equity reserve based on theGroup's estimate of the fair value of the bond without consideration of itsconversion feature. The Group used an interest rate of 11% to estimate the fairvalue of the debt portion of the convertible bonds on the date of issuance. TheGroup allocated $10.8 million of the net proceeds from the bond offering to theequity component. Interest expense on the net carrying value of the long-termdebt portion of the convertible bonds is calculated at the effective interestrate of 11%. The fair value of the convertible bond as at 31 March 2007 isdetermined by reference to published closing price quotation from the ChannelIslands Stock Exchange on that date. During the year ended 31 March 2007, the Group incurred $4.2 million in interestexpense, of which $2.1 million was capitalised to unevaluated oil and gasproperties recorded as intangible fixed assets. A reconciliation of the amounts outstanding on the convertible bond is asfollows: Company and group 2007 2006 US$'000 US$'000 --------------------------------------------------------------------------------Proceeds from convertible bond issue 75,000 -Debt issuance costs (3,223) - --------------------------------------------------------------------------------Net proceeds from convertible bond issue 71,777 - Convertible bond - debt portion 60,970 -Convertible bond - equity portion 10,807 - --------------------------------------------------------------------------------Net proceeds from convertible bond issue 71,777 - Net proceeds convertible bond - debt portion 60,970 -Notional interest incurred during the period 974 -Amortization of debt issuance costs 309 - --------------------------------------------------------------------------------Closing convertible bond debt value 62,253 - --------------------------------------------------------------------------------Fair value 93,000 - -------------------------------------------------------------------------------- 20. Provision for liabilities and other charges 2007 2006 ----------------------------------------------------------------------------------------- Abandonment Other US$'000 Total US$'000 Abandonment Other US$'000 Total provision provision US$'000 US$'000 US$'000 -----------------------------------------------------------------------------------------Opening 949 57 1,006 - - -balanceAdditions 568 - 568 911 57 968Settlements - (57) (57) - - -Accretionexpense 102 - 102 38 - 38 -----------------------------------------------------------------------------------------Ending 1,619 - 1,619 949 57 1,006balance ----------------------------------------------------------------------------------------- The abandonment provision at the beginning of the year related to the cost ofnon-producing oil and gas wells in the Group's license areas at the time theywere acquired. The amount provided at the year end was revised to include theestimated abandonment costs of new wells drilled in the year. The abandonmentprovision reflects the present value of internal estimates of futuredecommissioning costs of the Company's oil and gas wells as at the relevantbalance sheet date determined using local pricing conditions and requirements. 21. Share capital The Company has two classes of share capital, which carry no right to fixedincome. The deferred share class was created in 2005 in a capital restructuringand no further shares will be issued. A deferred share carries no voting ordividend rights. The Company resolved on 25 August 2006 to increase the authorized ordinary sharecapital to 800 million shares. During the year the Company issued 3,910,000ordinary shares wholly in respect of exercise of share options for totalproceeds of $2.5 million. In the prior period, the Company issued all302,940,329 ordinary shares for total proceeds of $202.0 million. Number of shares Authorized share capital Issued share capital -------------------------------------------------------------------------------- Ordinary shares Deferred shares Ordinary shares Deferred shares of 0.01p each of 14.99p each of 0.01p each of 14.99p each -------------------------------------------------------------------------------- At 8 April 2005 - - - -Increase 400,000,000 400,000,000 302,940,329 28,253,329 --------------------------------------------------------------------------------At 1 April 2006 400,000,000 400,000,000 302,940,329 28,253,329Increase 400,000,000 - 3,910,000 - --------------------------------------------------------------------------------At 31 March2007 800,000,000 400,000,000 306,850,329 28,253,329 -------------------------------------------------------------------------------- Nominal value Authorized share capital Issued share capital --------------------------------------------------------------------------------------------------- Ordinary shares Deferred shares Total Ordinary shares Deferred shares Total of 0.01p each of 14.99p each all of 0.01p each of 14.99p each US$'000 US$'000 classes US$'000 US$'000 all US$'000 classes US$'000--------------------------------------------------------------------------------------------------- At 8 April - - - - - -2005Increase 70 104,318 104,388 54 7,864 7,918---------------------------------------------------------------------------------------------------At 1 April 70 104,318 104,388 54 7,864 7,9182006Increase 87 - 87 1 - 1---------------------------------------------------------------------------------------------------At 31 March2007 157 104,318 104,475 55 7,864 7,919--------------------------------------------------------------------------------------------------- 22. Share premium Year ended Period from 31 March 2007 8 April 2006 to 31 March 2006Company and Group US$'000 US$'000---------------------------------------------------------------------------------At 1 April 2006 194,114 -Premium on shares issued during the period 2,522 194,114--------------------------------------------------------------------------------At 31 March 2007 196,636 194,114-------------------------------------------------------------------------------- 23. Other Reserves--------------------------------------------------------------------------------Company and Group Convertible Share based Total bond equity payments reserve reserve US$'000 other US$'000 reserves US$'000--------------------------------------------------------------------------------At 1 April 2006 - 35,272 35,272--------------------------------------------------------------------------------Share basedpayments - 11,330 11,330Convertiblebond issued,equity portion 11,292 - 11,292Convertiblebond issuancecosts, equityportion (485) - (485)--------------------------------------------------------------------------------Net additions 10,807 11,330 22,137--------------------------------------------------------------------------------At 31 March2007 10,807 46,602 57,409-------------------------------------------------------------------------------- 24. Reconciliation of movement in shareholders' funds Group Year ended Period from 31 March 2007 8 April 2006 to 31 March 2006 US$'000 US$'000--------------------------------------------------------------------------------At 1 April 2006 213,999 ---------------------------------------------------------------------------------Retained loss for the period (22,994) (23,305)Shares issued in the period 2,523 202,032Other reserves:Share based payment reserve 11,330 35,272Convertible bond issued, equity portion 10,807 ---------------------------------------------------------------------------------Net additions 1,666 213,999--------------------------------------------------------------------------------At 31 March 2007 215,665 213,999-------------------------------------------------------------------------------- Company Year ended Period from 31 March 2007 8 April 2006 to 31 March 2006 US$'000 US$'000--------------------------------------------------------------------------------At 1 April 2006 215,826 -Retained loss for the period (19,332) (21,478)Shares issued in the period 2,523 202,032Other reserves:Share based payment reserve 11,330 35,272Convertible bond issued, equity portion 10,807 ---------------------------------------------------------------------------------Net additions 5,328 215,826--------------------------------------------------------------------------------At 31 March 2007 221,154 215,826-------------------------------------------------------------------------------- 25. Ultimate controlling party The Company has no ultimate controlling party. 26. Related parties Horizon Services N.V. ("Horizon") Horizon owns a 20% indirect interest in the Company's subsoil licenses forBlocks A&E and East Alibek in the Republic of Kazakhstan through its 20%interest in two of the Company's subsidiaries, Madiran Investments B.V.("Madiran") and Sherpico Investments Ltd ("Sherpico"). Madiran owns 100% ofSamek International LLP ("SI"), the sole operator of the Blocks A & E subsoillicence and Sherpico is the 100% owner of Samek Development Enterprise LLP("SDE"), the sole operator of the East Alibek subsoil licence. In October 2005, the Company entered into agreements with Horizon committing theCompany to fund the first $200 million of expenditures on Blocks A & E and thefirst $100 million of expenditures on East Alibek, after which the parties wouldbe responsible for their respective share of costs. Horizon also has a right tosell its 20% interest in Madiran and Sherpico to the Company in exchange forordinary shares priced at an average of prevailing mid-market closing pricesprior to completion. During the period the value of transactions with Horizon was $nil and at 31March 2007 the balance owing to or from Horizon was $nil (2006: $nil). Samek LLP During the prior period to 31 March 2006, the Company acquired through Madiranand Sherpico the controlling interest in SI and SDE, respectively, from SamekLLP. During the financial year to 31 March 2007, Samek LLP closed its offices andtemporarily relocated with SI and SDE to the Group's new offices. SI rechargedoperating costs and service charges incurred by Samek LLP of $135,000 and at 31March 2007 an amount was due from Samek LLP of $38,000 (2006: amount due toSamek LLP $97,000). Mr Garifolla Kachshapov Mr. Kachshapov is the owner of Horizon Services N.V. and Samek LLP. He alsocontrols 15 million shares in the Company held by two companies, Incomeborts Ltdand Norgulf Holdings Ltd. In October 2005, the Company entered into service agreements with Mr Kachshapovemploying his services as a manager of SI and general director of SDE inKazakhstan. Under the terms of the service agreements Mr. Kachshapov receives$200,000 per annum, which consists of a salary of $100,000 from each of SI andSDE. Mr Chris Kyriakou Mr. Kyriakou, a former director who resigned 18 July 2005, was a director ofthree companies which engaged in related party transactions with the Companyduring the period ended 31 March 2006, including Toledo Mining Corporation PLC("TMC"), Tarquin Resources PLC ("Tarquin"), and Capma Pty Ltd ("Capma"). No directors fees were paid to Mr Kyriakou during the year ended 31 March 2007,(2006: to Capma, $43,000). TMC and Tarquin provided management andadministrative services during the prior period. The total charge to the Companyduring the year ended 31 March 2007 was $nil (2006: $233,000). There were nobalances payable at 31 March 2007 and 2006. None of Mr Kyriakou, TMC or Tarquin have disclosed an interest in the Company'sshares as at 31 March 2007. During the prior period TMC and Tarquin subscribedfor and sold 7.3 million shares in the Company. Mr David Rigoll Mr Rigoll, a former director who resigned 30 June 2005, controls directly orthrough Tigakhan Ltd, two companies involved in related party transactions withthe Company, Myrzaly Ltd ("Myrzaly") and Condor Investment & Trading Corporation("Condor"). The Company paid no fees to Myrzaly during the year to 31 March 2007. During theprior period the Company paid to Myrzaly Mr Rigoll's directors fees of $39,000and consulting fees of $40,000. There were no balances payable at 31 March 2007and 2006. The Company entered into a consulting agreement with Condor on 1 October 2005for the provision of the services of Mr Rigoll at a fee of £150,000 per annum.The Company and Condor agreed to terminate the agreement on 1 October 2006.During the year the Company paid Condor $434,000, including a payment of$284,000 in lieu of notice (2006: fees of $131,000). As discussed below, Diego Production Ltd ("Diego") received 18.75 million shareoptions priced at £1 in January 2006 as a vendor party to the Astrakhanskiyacquisition. In July 2007, it was disclosed to the Company that Mr. Rigoll wasthe beneficial owner of 10 million shares resulting from the partial exercise ofthe Diego share option. The closing market price on the day of the optionexercise was 209.5p. Mr Rigoll's disclosed indirect interest in the ordinary share capital of theCompany was: As at 31 March 2007 2006--------------------------------------------------------------------------------Myrzaly Limited - 18,000,000Condor Investment and Trading Corporation - 11,775,000Tigakhan Limited 3,175,030 6,000,000Tigerkhan Limited 34,000,000 ---------------------------------------------------------------------------------Diego Production Limited - --------------------------------------------------------------------------------- 37,175,030 35,775,000-------------------------------------------------------------------------------- Of these holdings 29,775,000 ordinary shares are held subject to a lock-inagreement effective until 26 October 2007. Such shares were locked-in to 26October 2006 and are subject to orderly market terms for the period of twelvemonths thereafter. As at 31 March 2007 and 2006, Condor held 10,281,271 share options priced at35-120.5 pence (average 46.9p) which became exercisable (in part) on 27 October2006. Subsequent to 31 March 2007, Condor has exercised the following options: Date exercised Number of Average Closing market shares exercise price price--------------------------------------------------------------------------------24 April 2007 3,333,333 35.0p 163.0p7 June 2007 1,550,269 72.6p 189.0p-------------------------------------------------------------------------------- Note that the above table does not reflect the 10 million share optionsexercised by Diego in July 2007. Set-off Agreement between parties to A & E Blocks and East Alibek acquisitions During the acquisition of A & E Blocks and East Alibek, a number of loan andconsideration transactions occurred between parties related by the principal,sale and purchase agreements. On completion all parties were fully settled butno closing document was completed to this effect. On 4 August 2006, an omnibus letter of agreement of set-off was completedbetween Max Petroleum PLC, Sokol Holdings Inc., Horizon Services N.V., SamekLLP, Mr Kachshapov, Madiran Investments B.V. and Sherpico Investments Ltdwherein all parties confirmed that at completion on 27 October 2005 there wereno monies due from any one party to each other nor would any other liabilityarise under the relative agreements. Share Options issued to related parties as part of the Astrakhanskiy Acquisition In January 2006, the Company issued a total of 50 million share options aspartial consideration for the acquisition of the Astrakhanskiy license (the"Astrakhanskiy Options"), including 12.5 million to Manty Investment ServicesLtd ("Manty"), 18.75 million to Fantara Company, Inc. ("Fantara") and 18.75million to Diego. As part of an internal investigation recently conducted by theCompany, it has become evident that certain employees in Kazakhstan beneficiallyown 6 million of the Astrakhanskiy Options originally issued to Manty, including(i) 2.1 million share options distributed to a number of the Company'sexpatriate employees in Kazakhstan, including its former Chief OperatingOfficer, Mr. Ole Udsen, and (ii) the Group's Kazakhstan partner received 5million share options of which he allocated 1.1 million to unrelated third partyadvisors, retaining 3.9 million of the Astrakhanskiy Options. The Group'sKazakhstan partner further allocated 1.95 million to Mr. Dauren Myrzagaliyev,the Group's sole Kazakh non-executive director at the time of the AstrakhanskiyAcquisition, and retained 1.95 million for himself. The Group's former Chief Executive Officer, Mr Kappelle, has denied receiving adirect or indirect beneficial interest in any of the Astrakhanskiy Options. TheBoard understands from Mr Kappelle and others that Mr David Rigoll wasresponsible for the grant of the Astrakhanskiy Options to the Group's personnel,with the assistance of Mr Kappelle and Mr David Risbey (a director of both FCIand Manty). Mr Rigoll was one of the Company's founding shareholders, and at thetime of the allocation was working for the Company under a consulting agreementwith Condor. No beneficial interest in any of the Astrakhanskiy Options had beendisclosed by Mr Rigoll to the Board prior to July 2007, when it was disclosedthat Mr Rigoll was the beneficial owner of 10 million shares resulting from thepartial exercise of Diego's Astrakhanskiy Options. Mr Kachshapov, Mr Myrzagaliyev, and several lower-level expatriate employeeshave voluntarily agreed to amend the structure through which their beneficialinterests in the Astrakhanskiy Options are held, where they will remain untilthey expire under their terms in January 2009. Mr. Myrzagaliyev has alsovoluntarily resigned his employment with the Company. Messrs. Kappelle andUdsen, and five other employees in Kazakhstan have been dismissed for breachesof contract, and in certain cases, fiduciary duty. The Company has also reservedits right to pursue claims in relation to related party transactions. In June 2007, Manty exercised a total of 2 million options, generating proceedsof $4.0 million. The Company understands that the Manty options exercised wereheld by a non-related party. In July 2007, Diego exercised 10 million options, generating proceeds of $20.0million. The Company understands the ultimate beneficial owner of the sharesallotted from the Diego option exercise was Mr. Rigoll, either directly orindirectly through his ownership in Tigakhan Ltd. 27. Financial instruments The Group's principal financial instruments comprise cash, and short-termdeposits. Together with the issue of equity share capital, the main purpose ofthese is to finance the Group operations and expansion. The Group has otherfinancial instruments such as trade debtors and trade creditors which arisedirectly from normal trading. The Group has not entered into any derivative or other hedging instruments. The disclosures below, with the exception of currency risk, exclude short-termdebtors and creditors as permitted by Financial Reporting Standard 13. The main risks arising from the Group's financial instruments are interest raterisk and liquidity risk. The Board reviews and agrees policies for managing eachof these risks and these are summarised below. The interest receivable relatesto interest earned on bank deposits. Interest payable relates to bank overdraftinterest. Interest rate risks The Company finances its operations through the use of cash deposits at variablerates of interest for a variety of short term periods, depending on cashrequirements. The rates are reviewed regularly and the best rate obtained in thecontext of the Group's need. Liquidity risks The Group's policy throughout the year has been to ensure that it has adequateliquidity by careful management of its working capital. The liquidity exposureof the Group's cash deposits and overdraft facility was as follows: Amount held at bank and on deposit amounted to $28.8 million (2006: $18.7million). Currency risks The Group invoices export crude oil sales in US dollars and domestic crude oilsales in the local currency, the Kazakh tenge. The Group does not hedge itsforeign currency positions and holds the majority of its cash and cashequivalents in US dollars. Fair values The Directors have reviewed the accounts and have concluded that, other than asdisclosed relating to the convertible bond, there is no significant differencebetween the book values and the fair values of the assets and liabilities of theGroup as at 31 March 2007 and 2006. 28. Operating lease commitments Company 2007 2006 US$'000 S$'000--------------------------------------------------------------------------------Within 1 year 226 75Within 2-5 years 484 56After 5 years - --------------------------------------------------------------------------------- Group 2007 2006 US$'000 US$'000 -------------------------------------------------------------------------------Within 1 year 825 695Within 2-5 years 484 789After 5 years - --------------------------------------------------------------------------------- 29. Commitments The Group is committed under its subsoil licences to certain future expendituresincluding minimum work programmes, social infrastructure contributions andreimbursement of historic costs incurred by the Kazakhstan Government.Qualifying licence, exploration and development expenditure by the licenceholders is deducted from these future commitments. The Group also has ongoinglicense commitments pertaining to social contributions and training of localpersonnel. The Group's commitment remaining under its subsoil licences as at 31 March 2007totalled $69.3 million (2006: $79.1 million). 30. Post balance sheet events Issued share capital movements The Company's issued ordinary share capital has increased from 306,850,329 to324,033,931. Since the balance sheet date, the Company has issued 17,183,602ordinary shares in respect of exercise of share options, recognising $29.0million in net proceeds. Macquarie credit facilityIn June 2007, the Group entered into a $100 million revolving mezzanine credit facility with Macquarie Bank Limited ("Macquarie") to finance the development of Max Petroleum's oil & gas assets in Kazakhstan. The credit facility has a four-year term and bears interest at a rate ranging from LIBOR plus 4% to LIBOR plus 6.5%, depending upon the underlying value of the Group's proved oil and gas reserves. The credit facility has an initial borrowing base of $20 million, with the proceeds specifically committed to fund Max Petroleum's appraisal and development of the Zhana Makat field on Block E. The borrowing capacity under the facility is subject to review and adjustment on a periodic basis, with the total availability at any given time subject to a number of factors, including commodity prices and reserve levels. Borrowings under the credit facility may be repaid at any time without penalty. The credit facility is collateralized by the Group's investment in Blocks A&E and is subject to standard covenants, representations, and warranties. Upon completion of the credit facility agreement, the Company issued Macquarie a five-year warrant to acquire 5 million ordinary shares in Max Petroleum at an exercise price of 160.6p per share. Future increases in the borrowing base beyond $20 million will trigger the issuance of additional warrants dependent upon certain borrowing base thresholds, not to exceed an aggregate of 15 million additional shares at an exercise price equal to the higher of i) a 10% premium to the 30-day volume weighted average price prior to issuance or ii) the prevailing conversion price of the Group's outstanding convertible debt. Trial Production Project Approval In August 2007, the Company received regulatory approval for its trialproduction project ("TPP") for the appraisal of its Zhana Makat discovery onBlock E in western Kazakhstan. The approved TPP, valid for a period up to threeyears, allows the Company to produce existing wells in the field and to drilland produce a total of 21 exploration and development wells in order to gatheradditional data necessary to prepare a full field development plan. Additionalappraisal wells may be added to the TPP in the future, dependent upon drillingresults and the agreement of local regulatory authorities. Supplemental disclosure - oil and gas reserves and resources (unaudited) The Group's estimates of proved and probable reserve quantities are taken fromthe Group's Competent Person's evaluation report for the Zhana Makat field as of31 March 2007. Proved reserves are estimated reserves that geological andengineering data demonstrate with reasonable certainty to be recoverable infuture years under existing economic and operating conditions, while probablereserves are estimated reserves determined to be more likely than not to berecoverable in future years under existing economic and operating conditions. All of the Group's oil and gas assets are located in the Republic of Kazakhstan. Oil GasGroup proved plus probable reserves Mbbls Bcf Mboe--------------------------------------------------------------------------------As at 1 April 2006 - - -Revisions of previous estimates - - -Discoveries & extensions 9,877 - 9,877Acquisitions - - -Divestitures - - -Production (60) - (60)-------------------------------------------------------------------------------- 9,817 - 9,817Minority interest 1,963 - 1,963--------------------------------------------------------------------------------Balance as at 31 March 2007 7,854 - 7,854-------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MXP.L