Financial Results

18th Apr 2008 14:00

Xcite Energy Limited18 April 2008 THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN OR INTO THE UNITED STATES TSX-V, LSE-AIM: XEL April 18, 2008 Xcite Energy Limited ("Xcite Energy" or "the Company") Results for the 14 Month Period Ended December 31, 2007 Xcite Energy is a heavy oil company focused on the development of discoveredresources in the United Kingdom North Sea. The Company holds a 100% workinginterest in the 9/3b block, the Bentley field, one of the largest undevelopeddiscoveries in the United Kingdom North Sea. The Company is listed on the AIM Market of the London Stock Exchange (AIM) andthe TSX Venture Exchange (TSX-V). The Company today announces its financial and operational results for the 14month period ended December 31, 2007 and its outlook for the remainder of 2008. PERIOD HIGHLIGHTS and KEY MILESTONES Operational • December 2007 - drilling operations commenced on the 9/3b-5 appraisal well - Successful appraisal well completed on Bentley in February 2008 - All key objectives were met and results confirmed commercial potential of the field - Licence secured for a further 4 years beyond the initial term through completion of the required work programme - Plans now in place for the next phase in the commercialisation of Bentley Financial • June 2007 - completion of an oversubscribed Private placement of shares - Raised US$20million (approximately £10 million) • November 2007 - completion of an oversubscribed Initial Public Offering of shares - Listed on the TSX-V and AIM - Raised CAD$30 million (approximately £15 million) • Cash balance as at December 31, 2007 was £21.07 million, compared with £0.14 million as at October 31, 2006 2008 OUTLOOK • RPS Energy, independent reserve engineers, have been engaged to prepare an updated Competent Person's Report incorporating the technical data collected from the 9/3b-5 appraisal well • The Company intends to participate in the 25th Licence Round in the United Kingdom North Sea • The Company continues to assess further opportunities to farm-in or swap into production to further enhance shareholder value, through close cooperation with selected groups • The Company intends to submit a Field Development Plan to the UK Department for Business, Enterprise and Regulatory Reform by the end of 2008, and is targeting early phased development to commence in 2009 Richard Smith, Xcite Chief Executive Officer commented "We are very pleased with the progress that we have made during 2007. TheCompany's management team has been putting the building blocks in place since2003 when we were first awarded the block, and 2007 saw us able to pass a numberof key milestones, in both operational and financial terms, as Xcite progressestowards the development of the Bentley Field. Following the successful fundraisings in Toronto and London and the successfulappraisal drilling result on our Bentley well, we are confident that we willcontinue the momentum through 2008 and beyond. The Company has filed the following reports required under National Instrument51-101 Standards of Disclosure for Oil and Gas Activities: Form 51-101F1Statement of Reserves Data and Other Oil and Gas Information; and Form 51-101F3Report of Management and Directors on Oil and Gas Disclosure. In addition tothese forms, the Company has also filed its Management Discussion and Analysisand Audited Financial Statements. These documents can be found for viewing byelectronic means on the System for Electronic Document and Analysis Retrieval atwww.sedar.com ENQUIRIES: Xcite Energy +44 (0) 1330 826 740 Richard Smith Chief Executive OfficerRupert Cole Chief Financial Officer Thomas Weisel Partners (UK) Limited +44 (0) 20 7877 4477 Paul Colucci Managing DirectorPaul Newman Managing Director Strand Partners Ltd. +44 (0) 20 7409 3494 James Harris DirectorWarren Pearce Associate Director Pelham Public Relations +44 (0) 20 7743 6676 Alisdair Haythornthwaite DirectorKatherine Stewart Account Executive The TSX-V does not accept responsibility for the adequacy or accuracy of thisrelease. Forward-Looking Statements Certain statements contained in this announcement constitute forward-lookinginformation within the meaning of securities laws. Forward-looking informationmay relate to the Company's future outlook and anticipated events or resultsand, 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 expressionsconcerning matters that are not historical facts. These statements are based oncertain factors and assumptions including expected growth, results ofoperations, performance and business prospects and opportunities. While theCompany considers these assumptions to be reasonable based on informationcurrently available to us, they may prove to be incorrect. Forward-lookinginformation is also subject to certain factors, including risks anduncertainties that could cause actual results to differ materially from what wecurrently 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 theCompany' prospectus filed with the Canadian securities regulatory authorities,available at www.sedar.com. The Company disclaims any intention or obligation toupdate or revise any forward-looking statements whether as a result of newinformation, future events or otherwise, except as required under applicablesecurities regulations. XCITE ENERGY LIMITED - FINANCIAL STATEMENTS For the 14 month period ended December 31, 2007 Officers and Professional AdvisorsDirectors SolicitorsRichard E. Smith (appointed July 5, 2007) United KingdomRupert E. Cole (appointed January 18, 2008) Stikeman ElliottStephen A. Kew (appointed July 5, 2007) Dauntsey House 4B Fredericks PlaceNon-Executive Directors London EC2R 8ABRoger S. Ramshaw (appointed August 30, 2007)A. Murray Sinclair (appointed September 26, 2007) Marriott HarrisonGregory J. Moroney (appointed September 26, 2007) Staple CourtScott R. Cochlan (appointed January 18, 2008) 11 Staple Inn Buildings London WC1V 7QHCompany SecretaryRupert E. Cole Canada Stikeman Elliott S.E.N.C.R.L., s.r.l. / LLPRegistered office 1155, boul. Rene-Levesque OuesGeneva Place, Waterfront Drive 40e etagePO Box 3469 Road Town Montreal, Quebec H3B 3V2Tortola, VG1110British Virgin Islands British Virgin Islands Conyers Dill & PearmanGroup operations office PO Box 3140, Romasco PlaceBanchory Business Centre Wickhams Cay 1, Road TownHill of Banchory Business Park Tortola, VG1110Burn O'Bennie RoadBanchory StockbrokersAberdeenshire AB31 5ZU Thomas Weisel Partners (UK) LimitedUnited Kingdom 10 Dominion Street London EC2M 2EEAuditors United KingdomBDO Stoy Hayward LLPEmerald House Nominated AdvisorEast Street Strand Partners LimitedEpsom 26 Mount RowSurrey KT17 1HS London W1K 3SQUnited Kingdom United Kingdom Principal bankers RegistrarsHSBC plc Computershare Investor Services Inc.8 London Street 100 University AvenueBasingstoke 9th Floor, North TowerHampshire RG21 7NU Toronto, Ontario M5J 2YUnited Kingdom Canada Stock exchanges AIM, London Stock Exchange Code: XEL TSX, TSX-Venture Exchange Code: XEL Board of Directors Richard E. Smith is Chief Executive Officer and Director of XER and the Company.From 2000 until joining XER in 2003, Mr. Smith was Programme Director atGranherne, formerly of the Halliburton group of companies, where he wasresponsible for the creation and formation of a business providing programmemanagement services to clients in the international onshore and offshore oil andgas business. Mr. Smith is a Chartered Engineer and has over 25 years ofexperience in engineering and business management in onshore and offshore oiland gas projects. He is a Fellow of the Institute of Civil Engineers and aCorporate Member of the Institute of Marine Engineers and the Royal Institute ofNaval Architects. Rupert E. Cole is Chief Financial Officer and Director of XER and the Company.From 2002 until joining XER in 2003, Mr. Cole was Programme Management BusinessAdviser at Granherne, a company within the Halliburton group of companies,providing strategic, commercial and financial advice to upstream oil and gasservices providers. From 1990 to 1996, Mr. Cole was Finance Director at Harpur,an international downstream service provider to major oil companies. Mr. Cole isa Chartered Accountant and has over 20 years of experience in corporate finance. Stephen A. Kew is Exploration and Development Director of XER and the Company.Mr. Kew has been a director for 3 Sigma Limited since 1999, a petroleumengineering consultancy company in the upstream oil and gas business. Mr. Kew isa Petroleum Engineer and has over 34 years of development engineering andproject management experience in the oil and gas industry, including previousexperience in respect of Block 9/3b. He is an associate of the Institution ofChemical Engineers, a member of the Society of Petroleum Engineers and formerPresident of the Scottish Oil Club. Roger S. Ramshaw is the Chairman and a Non-Executive Director of the Company.From 2002 until his retirement in 2003, Mr. Ramshaw was Chairman and ManagingDirector of ConocoPhillips (UK) Ltd, where he led the company's exploration,development and production business on the UK Continental Shelf. From 1999 to2002, he was President of Conoco Venezuela Ltd. Mr. Ramshaw has over 30 years ofdomestic and international experience in operations, project and commercialactivity in the petroleum industry. Gregory J. Moroney is a Non-Executive Director of the Company and Chairman ofthe Remuneration and Nominating Committee. Mr. Moroney is the Founding andManaging Member of Energy Capital Advisors LLC of Greenwich, Connecticut, whichhe founded in 2003 to assist independent energy companies and energy fundmanagers in North America in their fund-raising activities. Mr. Moroney is alsoa director of BreitBurn Energy Partners, L.P., an oil and gas limitedpartnership listed on NASDAQ. From 1993 to 2002, he was head of the StructuredFinance Group for the Energy and Natural Resource Sector - Western Hemisphere atDeutsche Bank Securities in New York. Mr. Moroney has over 25 years ofexperience as an energy finance specialist. A. Murray Sinclair is a Non-Executive Director of the Company and Chairman ofthe Audit Committee. Since June 2003, Mr. Sinclair has been the ManagingDirector of Quest Capital Corp., an asset-backed lending organisation listed onthe TSX, AMEX and AIM Stock Exchanges which focuses on providing financialservices, specifically mortgages and bridge loans, to small and mid-capcompanies. Since December 1996, Mr. Sinclair has also been a director of QuestManagement Corp., a management company wholly-owned by Quest Capital Corp. Mr.Sinclair serves on the board of directors of a number of public companies. Scott R. Cochlan is a Non-Executive Director of the Company and was appointedJanuary 18, 2008. Mr. Cochlan is a partner at the law firm of Blake, Cassels &Graydon LLP in the securities group. Mr. Cochlan has represented senior andjunior public issuers in numerous aspects of general corporate law andsecurities regulatory matters including corporate governance, continuousdisclosure, regulatory compliance and transaction negotiation and completion.Mr. Cochlan also has extensive experience in representing both issuers andunderwriters in a wide variety of complex private and public financing matters(equity and debt), including cross-border financings, mergers, acquisitions andother business reorganizations and restructurings. Mr. Cochlan holds a lawdegree from the University of Calgary and a B.A. from the University of WesternOntario. Mr. Cochlan has received a number of recognitions as a leading lawyerin his field. Chairman's and Chief Executive's review The founders of the operational company, Xcite Energy Resources Limited ("XER"),have been pursuing their ambition to become a significant independent producerof heavy oil from the North Sea since 2003 when they were awarded their corelicence in Block 9/3b, but 2007 has been the first period of operations forXcite Energy Limited ("XEL" or the "Company"). It is a period which has seenseveral significant steps made towards that goal and we are very pleased withthe results from the 9/3b-5 appraisal well that was spudded on the Bentley fieldat the end of the year. Although XEL and XER, together the "Group", will consider additional attractiveheavy oil properties by participating in future Seaward Licensing Rounds andconsider any aligned acquisition or joint venture opportunities, the primaryfocus during 2007 has been to obtain financing to appraise and conductpreliminary development planning for the Bentley field in which it has a 100%working interest. Three previous wells had confirmed a large accumulation ofoil in the Dornoch formation on Bentley, but no samples were obtained and twoattempts to perform drill stem tests were unsuccessful. Key successes for theGroup have been: 1. To secure the Bentley licence by completing the required work programme; and 2. Due to the excellent work of our technical team, we were able to design and manage a drilling and testing program that obtained significant samples and characterised the reservoir fluids by testing the 9/3b-5 well using technical insights obtained since the original wells were drilled in the 1970's and 1980's. Some key milestones during 2007 have been: June: XEL became the holding company of XER and the funding vehicle for the Group; and November: Completion of an oversubscribed Private Placement of shares raised US$20 million (£10 million). Completion of an oversubscribed Initial Public Offering of shares and listing on the TSX-Venture Exchange in Canada and AIM in London raised CAD$30 million (£15 million). December: Drilling operations on the 9/3b-5 appraisal well began. Changes in the business environment during 2007 have continued to support theGroup's strategy. High oil prices have persisted and, although most forecasterspredict a fall-back from recent peaks, general sentiment is that the longer-termfloor prices have risen. The UK authorities continue to encourage theinvolvement of small companies prepared to bring new ideas and approaches to theexploitation of the nation's undeveloped resources. Also, a number of prominent heavy oil projects, for example, the Captain andGrane fields, have benefited greatly from the application of new technology toimprove production rates and recovery. They have been very successful. Thishas engendered a growing interest in the undeveloped heavy oil resources of theNorth Sea, estimated by the BERR to be in excess of 9 billion barrels. In particular, the move by StatoilHydro (the Grane operator) into the Marinerand Bressay fields, both in the same Quadrant 9 as the Bentley field, is seen asa very positive development for the Group. The original Board of Directors comprising Richard Smith, Stephen Kew and RupertCole was joined prior to the Initial Public Offering in November by RogerRamshaw as Non-Executive Chairman, together with Non-Executive Directors GregMoroney and Murray Sinclair. We were pleased to welcome Scott Cochlan to theBoard in January 2008, completing the intended Board composition and providing awell balanced team. As the Group develops beyond its current phase, we believethe very diverse range of experience we have succeeded in attracting to theBoard will be a huge asset to us. The Board has put in place the appropriate structure to meet the requirements ofbeing a public company and to implement the appropriate practices of goodgovernance taking guidance from the 'Guidance for Smaller Quoted Companies' ofthe Quoted Companies Alliance, 2004. Audit and Remuneration and Nominatingcommittees have been established and are chaired by Murray Sinclair and GregMoroney respectively. We are very pleased with the results from the Bentley well test, which wasannounced on February 4, 2008 and we look forward to an exciting period aheadwhen we can lay the foundations for significant oil production and revenue fromwhat have, until now, been neglected assets. Of course there will be manychallenges on the road but we have the right team to tackle them. Roger Ramshaw Richard SmithChairman Chief Executive Officer April 17, 2008 Management Discussion and Analysis The Management's Discussion and Analysis ("MD&A") of the operating and financialresults of Xcite Energy Limited ("XEL" or the "Company") should be read inconjunction with the Company's audited consolidated financial statements andrelated notes for the fourteen month period ended December 31, 2007. This MD&Ais dated April 17, 2008. These documents and additional information about XELare available on SEDAR at www.sedar.com. XEL is an oil issuer and disclosures pertaining to oil activities are presentedin accordance with National Instrument 51-101 ("NI-51-101"). This MD&A includes an analysis of the XEL results from its date of incorporationon January 5, 2007 to December 31, 2007, which include the results of theoperating subsidiary Xcite Energy Resources Limited ("XER") for the fourteenmonths from November 1, 2006 to December 31, 2007. XEL acquired XER on June 26,2007. The comparative results comprise the twelve months for XER to October 31,2006. In this MD&A, XEL and XER are together defined as the "Group". Allfigures and the comparatives figures contained herein are expressed in PoundsSterling 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, estimatedcompletion dates of constructions and development projects, business plans fordrilling and exploration, estimated amount and timing of capital expendituresand anticipated future debt levels. Forward-looking statements often, but notalways, are identified by the use of words such as "seek", "anticipate", "believe", "plan", "estimate", "expect", "targeting" and "intend" and statementsthat an event or result "may", "will", "should", "could" or "might" occur or beachieved and other similar expressions. Information concerning reserves may also be deemed to be forward-lookingstatements as such estimates involve the implied assessment that the resourcesdescribed can be profitably produced in the future. These statements are basedon current expectations, estimates and projections that involve a number ofrisks and uncertainties, which could cause actual results to differ from thoseanticipated by the Group. The reader should not place undue importance onforward-looking statements and should not rely upon this information as of anyother date. While the Company may elect to, it is under no obligation and doesnot undertake to update this information at any particular time, unless requiredby applicable securities law. Summary of Results The following table summarises the Group's performance in the fourteen months toDecember 31, 2007 and the comparative of the twelve months to October 31, 2006.The Group has no trading revenue in either period. The consolidated financialstatements of the Company have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS and IFRIC interpretations) issued by theInternational Accounting Standards Board (IASB). The consolidated financialstatements of the Company have also been prepared in accordance with IFRS'sadopted by the European Union and therefore they comply with Article 4 of the EUIAS Regulation. 14 Months ended 12 Months ended December 31 October 31 £ £ 2007 2006 Net (loss)/profit (730,289) 48Loss per share (basic and diluted) (0.02p) 0.00pTotal assets 27,732,099 2,248,620 Liquidity and Capital Resources In June 2007, the Company completed the Private Placement of new shares, withaggregate proceeds £10 million and associated costs of £0.83 million, resultingin net proceeds of £9.17 million. In November 2007, the Company completed an Initial Public Offering of new sharesand 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 £2.00 million,resulting in net proceeds of £12.92 million. Of the aggregate costs of £2.83 million in relation to the Private Placement andInitial Public Offering, £2.35 million has been offset against share capital inthe Balance Sheet and £0.48 million has been charged to the Income Statement. The net funds from the Private Placement and the Public Offering were allocatedto drilling the appraisal well on Block 9/3b to satisfy the work programmeobligations to the BERR. XER spudded the Block 9/3b appraisal well in December2007 and continued into February 2008 to conduct a successful drill stem test. The cash balance as at December 31, 2007 was £21.07 million, compared with £0.14million as at October 31, 2006, the increase being attributable to the netproceeds of the Private Placement and Initial Public Offering less the operatingcosts of the Group during the period. Lease and Contractual Commitments On November 12, 2007 the Group committed to a work programme to drill theappraisal well on Block 9/3b through a contract with AGR Peak Well ManagementLimited for £7.5 million (US$15 million), of which £7.0 million remainedcommitted at the Balance Sheet date. Operations and Administrative Expenses As noted above, the net proceeds received from the Private Placement and InitialPublic Offering were, in aggregate, £22.09 million. Since these financing transactions occurred, XEL has incurred the costs ofoperating as a public company, including investor relations, non-executivedirectors' fees and stock exchange fees amounting to £0.06 million for theperiod to December 31, 2007. XER significantly increased its operational expenditure in the period since June2007 in support of the work programme to drill the Bentley well in December2007, including the costs of an operational office in Aberdeen, increasedexternal contractor support, seismic data licences and staff costs. In the period under review, total costs of £4.74 million (2006: £0.62 million)has been capitalised as Exploration and Evaluation Assets in Intangible Assetsrelating to Block 9/3b, which reflect the work that has been done by XER in theperiod in bringing Block 9/3b forward, both technically and commercially and thedrilling of the appraisal well on Block 9/3b. These costs have been capitalisedin accordance with the Group's accounting policies and will be amortised againstthe revenue from production, if any, from the Bentley field. In October 2006 and January 2007, XER received £0.27 million and £0.26 millionrespectively, from a former business partner as non-performance payments inrespect of costs relating to the Block 9/3b asset following that partner'swithdrawal from its relationship with XER under its contractual terms. Thisaggregate cash injection enabled XER to settle a number of third partyliabilities with business partners, with the remaining amount being used forfurther expenditure relating to Block 9/3b. These non-performance payments havebeen offset against the capitalised costs of Block 9/3b. Share Options, Warrants and Rights In the period to December 31, 2007, the Company issued aggregate share optionsto Directors and management of 3,800,000 under the Stock Option Plan. The totalcost to the Company in respect of share based payment transactions under theStock Option Plan is £0.82 million (2006: £nil). Of this total, £0.30 millionhas been charged to the Income Statement and £0.52 million has been capitalisedunder intangible assets in accordance with the Company's accounting policy. In the period to December 31, 2007, the Company issued aggregate warrants over atotal of 12,688,500 shares in the Company in connection with the PrivatePlacement and the Initial Public Offering. The total charge to the Company inrespect of these warrants is £0.82 million, of which £0.80 million has beenoffset against share capital in the Balance Sheet and £0.02 million has beencharged to the Income Statement. Income Interest income received on funds invested up to December 31, 2007 amounted to£0.25 million. Related Party Transactions Related party transactions are detailed in Note 14 to the financial statements. Disclosure Controls and Procedures In conformance with the Canadian Securities Administrators MultilateralInstrument 52-109, the Company has filed certificates signed by the ChiefExecutive 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 ordinary share issues, warrants and shareoption exercises during the period. Ordinary Shares As at November 1, 2006 -Initial share subscription 1Share exchange 21,799,999Issued at Private Placement 20,000,000Issued at Initial Public Offering 18,750,000As at December 31, 2007 60,550,000 As at the date of signing these financial statements, the number of shares inissue was 61,413,800 as set out in Note 15. 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 thatexploration activities will be successful. Industry statistics show that fewproperties that are explored go on to being fully developed. Operations canalso be adversely affected by weather conditions and drilling rig and otheroperating equipment availability outwith the control of the Group. Commodity pricing The Group has no control over the market price of crude oil. Suitable hedgingarrangements will be considered to mitigate the volatility of oil prices whenthe Group enters into the production phase. Financing Future field development will depend upon the ability of the Group to securefinancing, 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, themarket for heavy crude is in US Dollars. The Group does not currently engage inactive hedging to minimise exchange rate risk although this will remain underreview as the Group approaches the production phase. Resource estimation Oil reserve estimation techniques are inherently judgemental and involve a highdegree of technical interpretation and modelling techniques. Incorrect resourceestimation may result in inappropriate capital investment decisions being made. Significant Accounting Judgements and Estimates Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. The Directors make estimates and assumptions concerning the future. Theresulting accounting estimates will, by definition, seldom equal the relatedactual costs. The estimates and assumptions that have a significant risk ofcausing a material adjustment to the carrying value of assets and liabilitieswithin the next financial period are discussed below. (a) Income taxes There are many transactions and calculations for which the ultimate taxdetermination is uncertain during the ordinary course of business. The Grouprecognises liabilities for anticipated tax audit issues based on estimates ofwhether additional taxes will be due. Where the final tax outcome of thesematters is different from the amounts that were initially recorded, suchdifferences will impact the income tax and deferred tax provisions in the periodin 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 warrantsover the Company's shares using the Black-Scholes valuation methodology. TheCompany uses judgement to derive such valuation model assumptions that aremainly 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 indicationthat the value of the Group's E&E assets may be subject to an impairment. In theevent of any such indication, an impairment test is carried out and, ifnecessary, an impairment representing the surplus of capitalised cost overestimated recoverable value of the related commercial oil reserves is charged.Estimated recoverable value is based upon anticipated discounted net cash flowsattributable to such reserves. Financial Instruments and Other Derivatives Details regarding the Group's policies in respect of financial instruments aredisclosed in Notes 1 and 10 to the financial statements. 2008 Outlook Management believe that after meeting the costs of the appraisal well, therewill be sufficient funds in the Group to enable it to move forward to plan thenext stage of the programme to commercialise the Bentley field on Block 9/3b, tocompete successfully in future UK licensing rounds and to pursue otheridentified business opportunities in accordance with its business strategy. Following the successful drilling and testing of the appraisal well in January2008, the Group's long term prospects are dependent on the investment ofsignificant capital sums for the commercialisation of the Bentley field on Block9/3b. Report of the Remuneration and Nominating Committee The Remuneration and Nominating Committee, in accordance with its writtencharter, reviews and makes recommendations to the Board concerning theappointment, remuneration and benefits and performance of executive managementand Directors. The Remuneration and Nominating Committee consists of three Non-ExecutiveDirectors, two of whom are independent within the meaning of MI 52-110. Thechairman of the Remuneration and Nominating Committee is Gregory J. Moroney. Basic salary and benefits The remuneration of the Directors during the 14 month financial period (2006: 12month) was as follows: Basic Other compensation 2007 2006 Salary (a) Total Total (b) £ £ £ £ Richard E Smith 188,284 41,833 230,117 7,725Rupert E Cole 188,284 41,833 230,117 7,725Stephen A Kew 157,034 33,237 190,271 - (a) Other compensation comprises cash allowances in lieu of pensioncontributions, company car and fuel allowances, private healthcare allowancesand allowances for life insurance and permanent health insurance cover. (b) The employment agreements between XER and Mr Smith, Mr Cole and Mr Kew intheir capacity as Executive Directors did not become effective until October2006. They provided that all three directors be paid a salary of £150,000 andother compensation benefits equal to a cash allowance of £35,400. The XER service contracts for Mr Smith, Mr Cole and Mr Kew were signed onSeptember 1, 2003 and amended on October 24, 2007. The Groups' policy is to review salary and benefits annually against market dataand analysis and to adjust accordingly. The service and employment contractsfor the Executive Directors are not of fixed duration but continuation in officeas a director is subject to annual re-election by shareholders. The Group'spolicy is for Executive Directors to have service and employment contracts withprovision for termination of no longer than twelve months notice. The fees for the Non-Executive Directors in respect of their duties aredetermined by the Board and are reviewed on an annual basis. Letters ofAppointment for the Non-Executive Directors provide for termination of theappointment with one month notice by either party. In accordance with theCompany's Articles of Association, Non-Executive Directors will retire after aterm of two years at which point they may, subject to being eligible, offerthemselves for re-election. All Non-Executive Directors receive remuneration at the rate of £1,500 per dayin respect of their services to the Group. During the period the Group paid toRoger Ramshaw and Gregory Moroney in their capacity as Non-Executive Directorsof the Company fees of £13,500 and £6,000 respectively. There were no suchequivalent payments for 2006. Charges in respect of share based payments for theNon-Executive Directors in the period to December 31, 2007 were £86,441 (2006:£nil). Beneficial Interests The beneficial interests of the Directors in the ordinary share capital of theCompany are as follows: Shares Options Warrants(2) Richard E. Smith 6,300,000 1,000,000 -Rupert E. Cole 6,300,000 1,000,000 -Stephen A. Kew 6,300,000 1,000,000 -Roger S. Ramshaw - 200,000 -Gregory J. Moroney - 100,000 67,575A. Murray Sinclair - 100,000 - Scott R. Cochlan (1) 25,000 100,000 - (1) Scott R. Cochlan was appointed to the Board on January 18, 2008 at whichtime 100,000 share options were awarded and vested immediately with an exerciseprice of CAD$2.09 (£1.04) and a term of five years. (2) See Note 14 for information about these warrants All share options, which vested immediately, were granted to the Directors onNovember 16, 2007 at the date of the Initial Public Offering (except for ScottR. Cochlan as noted below) with an exercise price of CAD$1.60 (£0.805) and aterm of five years. Further details of the stock options in issue are given inNote 11 to the financial statements. There has been no trading of shares by the Directors since the period end. Share options An element of the Group's reward strategy is the implementation of the StockOption Plan, the purpose of which is to provide an incentive to the Directors,officers, employees, consultants and other personnel of the Group ("Optionees")to achieve the objectives of the Group; to give suitable recognition to theability and industry of such persons who contribute materially to the success ofthe group; and to attract and retain persons of experience and ability, byproviding them with the opportunity to acquire an increased proprietary interestin the Company. The Stock Option Plan is an unapproved stock option plan which is not intendedto qualify for HM Revenue & Customs in the UK but complies with the rules andpolicies of the TSX-Venture stock exchange. The Stock Option Plan is administered by the Remuneration and NominatingCommittee. The number of options granted to an Optionee and the exercise pricethereof are set at the time of grant, subject to any limitations imposed by theStock Option Plan or any relevant regulatory authority; provided that if theordinary shares are listed on a stock exchange, the exercise price shall not belower than the market price of the ordinary shares on the date of the grant,where "market price" is defined as the highest closing trading price of theordinary shares on any stock exchange on which the ordinary shares are listed onthe day of grant. The exercise of an option may be conditional on the performance of the Companyand, if the Remuneration and Nominating Committee so determines, on theperformance of a subsidiary and/or the performance of the Optionee over suchperiod and measured against such objective criteria as shall be determined bythe Remuneration and Nominating Committee and notified in writing to theOptionee when the option is granted. Signed on behalf of the Remuneration and Nominating Committee by: Gregory J. Moroney Non-Executive Director April 17, 2008 Report of the Independent Auditors To the Directors of Xcite Energy Limited We have audited the consolidated financial statements of Xcite Energy Limitedand its subsidiary (collectively referred to as the "Group") for the 14 monthperiod ended December 31, 2007, which comprise the Consolidated IncomeStatement, the Consolidated Statement of Recognised Income and Expense, theConsolidated Balance Sheet, the Consolidated Cash Flow Statement, and relatednotes. These financial statements have been prepared under the accountingpolicies set out therein. Respective responsibilities of directors and auditors The Group's directors are responsible for the preparation of the financialstatements in accordance with International Financial Reporting Standard (IFRS)as adopted by the European Union. The Directors prepare financial statements for each financial period/year whichgive a true and fair view of the state of affairs of the Group and of the profitor loss of the Group for that period/year. In preparing those financialstatements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theGroup. They are also responsible for safeguarding the assets of the Group andhence for taking reasonable steps for the prevention and detection of fraud andother irregularities. All of the current directors are responsible for having taken all the steps thatthey ought to have taken to make themselves aware of any information needed bythe Group's auditors for the purposes of their audit and to establish that theauditors are aware of that information. Our responsibility is to audit the financial statements in accordance withInternational Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a trueand fair view. We read the Management's Discussion and Analysis, the Chairman'sand Chief Executive's Review and the Report of the Remuneration and NominatingCommittee and consider the implications for our report if we become aware of anyapparent misstatements or material inconsistencies with the financialstatements. We also report to you if we have not received all the informationand explanations we require for our audit. This report is made solely to the Group's directors as a body. Our audit workhas been undertaken so that we might state to the Group's directors thosematters we are required to state to them in the auditor's report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Group and the Group's directorsas a body, for our audit work, for this report, or for the opinions we haveformed. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgments made by the directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the Group's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion the Group financial statements give a true and fair view, inaccordance with International Financial Reporting Standards, of the state of theGroup's affairs as at December 31, 2007 and of its loss for the period thenended. BDO Stoy Hayward LLP Chartered Accountants Epsom, Surrey, England. April 17, 2008. CONSOLIDATED INCOME STATEMENT For the 14 months ended December 31, 2007 (In Pounds Sterling) NOTES 14 Months ended 12 Months ended December 31, October 31, 2007 2006 £ £ Administrative expenses (981,846) (188) ________ ________ Operating loss 3 (981,846) (188) Finance income - bank interest 251,557 257 ________ ________(Loss)/profit before tax (730,289) 69 Tax expense 5 - 21 ________ ________(Loss)/profit for the period (730,289) 48attributable to equity holders ________ ________ Loss per share attributable toequity holders of the parentCompany - Basic and diluted 6 (0.02p) 0.00p All results are derived from continuing operations. The notes on pages 19 to 34 form part of these financial statements. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE For the 14 months ended December 31, 2007 (In Pounds Sterling) NOTES 14 Months ended 12 Months ended December 31, October 31, 2007 2006 £ £ (Loss)/profit for thefinancial period (730,289) 48 _________ _________ Total recognised income andexpense for the period (730,289) 48 Attributable to: _________ _________ Equity holders of theCompany (730,289) 48 _________ _________ CONSOLIDATED BALANCE SHEET At December 31, 2007 (In Pounds Sterling) Notes December 31, 2007 October 31, 2006 £ £AssetsNon-current assetsIntangible assets 7 6,582,176 2,103,110 Current assetsTrade and other receivables 8 82,789 3,132Cash and cash equivalents 21,067,134 142,378 ________ ________Total current assets 21,149,923 145,510 ________ ________Total assets 27,732,099 2,248,620 LiabilitiesCurrent liabilitiesTrade and other payables 9 5,042,672 2,248,535 ________ ________Total liabilities 5,042,672 2,248,535 ________ ________Net assets 22,689,427 85 ________ ________EquityShare capital 11 21,774,150 -Retained earnings 12 (730,422) (133) Merger reserve 12 218 218Other reserves 12 1,645,481 - _______ ________Total equity 22,689,427 85 ________ ________ The financial statements were approved by the Board of Directors and authorisedfor issue on April 17, 2008 and were signed on its behalf by: Richard Smith Rupert ColeChief Executive Officer Chief Financial Officer CONSOLIDATING CASH FLOW STATEMENT For the 14 months ended December 31, 2007 (In Pounds Sterling) 14 Months ended 12 Months ended December 31, October 31, 2007 2006 £ £Net cash flow from operating activities (Loss)/profit for the period after tax (730,289) 48Adjustment for interest received (251,557) (257) Adjustment for share based payments 840,818 - Adjustment for share issue costs 484,534 - Movement in working capital- trade and other receivables (79,657) 32,507- trade and other payables 2,794,137 455,516 ________ ________Net cash flow from operations 3,057,986 487,814Cash flow from investing activitiesExploration and evaluation assets (4,479,066) (348,457)Interest received 251,557 257 ________ ________Net cash flow from investing activities (4,227,509) (348,200) ________ ________Cash flow from financing activitiesNet proceeds from issue of shares 22,094,279 4 _________ ________Cash flow from financing activities 22,094,279 4 ________ ________Net increase in cash and cash equivalents 20,924,756 139,618Cash and cash equivalents at November 1 142,378 2,760 ________ ________Cash and cash equivalents at December 31/October 31 21,067,134 142,378 ________ ________Cash and cash equivalents comprise:Cash available on demand 21,067,134 142,378 ________ ________ XCITE ENERGY LIMITED - NOTES TO THE FINANCIAL STATEMENTS For the 14 months ended December 31, 2007 1 Accounting Policies Basis of preparation The principal accounting policies adopted in the preparation of the consolidatedfinancial statements are set out below. The consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS and IFRIC interpretations)issued by the International Accounting Standards Board (IASB). The consolidatedfinancial statements have also been prepared in accordance with IFRSs adopted byThe European Union and therefore they comply with Article 4 of the EU IASRegulation. The consolidated financial statements have been prepared on a going concernbasis. Basis of consolidation The Company was incorporated with the sole purpose of acquiring its controllinginterest in its directly held, wholly owned, subsidiary Xcite Energy ResourcesLimited ("XER"). XER was acquired through a transaction under common control, asdefined in IFRS 3 Business Combinations. As a result of the transaction, theequity shareholders of Xcite Energy Limited ("XEL" or the "Company") and XERbecame the equity shareholders of the combined entities. The Directors note thattransactions under common control and those that involve a new shell company(XEL) with no business of its own acquiring a controlling interest in anexisting entity (XER), are outside the scope of IFRS 3 and that there is noguidance elsewhere in IFRS covering such transactions. IFRS contains specific guidance to be followed where a transaction falls outsidethe scope of IFRS. This guidance is included at paragraphs 10 to 12 of IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. This requires,inter alia, that where IFRS does not include guidance for a particular issue,the Directors may also consider the most recent pronouncements of other standardsetting bodies that use a similar conceptual framework to develop accountingstandards. In this regard it is noted that the UK Accounting Standards Board(ASB) has issued an accounting standard covering acquisitions and mergers (FRS6). FRS 6 allows for merger accounting to be applied where two or more companiesare combined to form one group on terms such that the equity shareholders ineach company become the equity shareholders in the combined entity. Having considered the requirements of IAS 8, and the guidance included withinFRS 6, it is considered appropriate to apply merger accounting when dealing withthe transaction in which the Company acquired its controlling interest in XER(together the "Group") in order to provide a true and fair view. The effect ofthe above is: • New shares issued by XEL as consideration for the merger are recorded at their nominal amount in books of XEL; • The net assets of XER and XEL are combined using existing book values; • No amount is recognised as consideration for goodwill or negative goodwill; and • The consolidated profit and loss includes profits of each company for the entire period, regardless of the date of the merger, and the comparative amounts in the consolidated accounts are restated to the aggregate of the amounts recorded by the two companies. Revenue Revenue arises from the sale of oil produced from Block 9/3b on the UKContinental Shelf and reflects the actual sales value, net of VAT and overridingroyalties. Revenues are recognised when the risks and rewards of ownershiptogether with effective control are transferred to the customer and the amountof revenue and associated costs incurred in respect of the relevant transactioncan be reliably measured. Revenue is not recognised unless it is probable thatthe economic benefits associated with the sales transaction will flow to theGroup. Finance income is recognised on an accruals basis and is disclosed separately onthe face of the Income Statement. Share based payments The Company has a Stock Option Plan as described in Note 11. The share basedpayment expense arising under this Stock Option Plan is recorded in the IncomeStatement or as a direct reduction in share capital or as an increase inexploration and evaluation assets for all options granted in the period, with acorresponding increase recorded in the appropriate reserve account. The sharebased expense is calculated on the estimated fair values at the time of thegrant and the expense is recognised over the vesting period of the options. Uponthe exercise of the stock options, consideration paid together with the amountpreviously recognised in reserves is recorded as an increase in share capital.In the event that vested options expire unexercised, previously recognised sharebased payment expense associated with such stock options is not reversed. In theevent that options are cancelled, previously recognised share based paymentexpense associated with the unvested portion of such stock options is reversed. Where equity instruments are granted to persons other than employees, the IncomeStatement is charged with the fair value of the goods and services received. Intangible fixed assets - Exploration and Evaluation Assets Capitalisation Certain costs (other than payments to acquire the legal right to explore)incurred prior to acquiring the rights to explore are charged directly to theIncome Statement. All costs incurred after the rights to explore an area havebeen obtained, such as geological and geophysical costs and other direct costsof exploration (drilling, trenching, sampling and technical feasibility andcommercial viability activities) and appraisal are accumulated and capitalisedas intangible Exploration and Evaluation ("E&E") assets. E&E costs are not amortised prior to the conclusion of appraisal activities. Atcompletion of appraisal activities if technical feasibility is demonstrated andcommercial reserves are discovered, then, following development sanction, thecarrying value of the relevant E&E asset will be reclassified as a developmentand production asset, but only after the carrying value of the relevant E&Easset has been assessed for impairment, and where appropriate, its carryingvalue adjusted. If after completion of appraisal in an area it is not possibleto determine technical feasibility and commercial viability, or if the legalright to explore expires or if the Group decides not to continue exploration andevaluation, the carrying value of the E&E asset is written off to the IncomeStatement in the period the relevant events occur. Impairment If and when facts and circumstances indicate that the carrying value of an E&Easset may exceed its recoverable amount an impairment review is performed. This is carried out by identifying groups of assets, within the E&E asset, whichtogether form the Cash Generating Unit ("CGU") and comparing the carrying valueof the CGU with its recoverable amount and any resulting impairment loss iswritten off directly to the Income Statement. The recoverable amount of the CGUis determined as the higher of its fair value less costs to sell and its valuein use. Foreign currency The functional currency of the Group is Pounds Sterling. Transactions enteredinto by Group entities in a currency other than the functional currency arerecorded at the rates ruling when the transactions occur. Foreign currencymonetary assets and liabilities are translated at the rates ruling at theBalance Sheet date. Exchange differences arising on the retranslation ofunsettled monetary assets and liabilities are similarly recognised immediatelyin the Income Statement. Financial assets The Group's financial assets are classified as loans and receivables andcomprise the following: Other receivables - these are measured on initial recognition at fair value andare subsequently measured at amortised cost. Appropriate allowances forestimated irrecoverable amounts are recognised in profit or loss when there isobjective evidence that the asset is impaired. Cash and cash equivalents - comprise cash on hand and are subject to aninsignificant risk of changes in value. Financial liabilities The Group's financial liabilities comprise trade and other payables and arerecognised on initial recognition at fair value and are subsequently measured atamortised cost. Current taxation The total tax expense represents the sum of current and deferred tax. Currenttax is based on the taxable profit for the period. The taxable result may differfrom the net result as reported in the Income Statement as it may excludecertain items of income or expense that are taxable or deductible in otherperiods and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that havebeen enacted or substantively enacted by the Balance Sheet date. Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount ofan asset or liability in the Balance Sheet differs to its tax base. Recognition of deferred tax assets is restricted to those instances where it isprobable that taxable profit will be available against which the difference canbe utilised. The amount of the asset or liability is determined using tax ratesthat have been enacted or substantively enacted by the Balance Sheet date andare expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Deferred tax assets and liabilities are offset when the Group has alegally enforceable right to offset current tax assets and liabilities and thedeferred tax assets and liabilities relate to taxes levied by the same taxauthority on either: • The same taxable group company; or • Different group entities which intend either to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actual costs. The estimates and assumptions that have a significant risk of causing amaterial adjustment to the carrying value of assets and liabilities within thenext financial period are discussed below. (a) Income taxes There are many transactions and calculations for which the ultimate taxdetermination is uncertain during the ordinary course of business. The Grouprecognises liabilities for anticipated tax audit issues based on estimates ofwhether additional taxes will be due. Where the final tax outcome of thesematters is different from the amounts that were initially recorded, suchdifferences will impact the income tax and deferred tax provisions in the periodin which such determination is made. (b) Fair value of share options and warrants The Group has valued the fair value of the outstanding share options andwarrants over the Company's shares using the Black-Scholes valuationmethodology. The Group uses judgement to derive such valuation model assumptionsthat 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 indicationthat the value of the Group's E&E assets may be subject to an impairment. In theevent of any such indication, an impairment test is carried out and, ifnecessary, an impairment representing the surplus of capitalised cost overestimated recoverable value of the related commercial oil reserves is charged.Estimated recoverable value is based upon anticipated discounted net cash flowsattributable to such reserves. New accounting standards adopted during the period During the period the Group has adopted the following new standards for thefirst time: IFRIC 10 'Interim Financial Reporting and Impairment'; and IFRS 7 'Financial Instruments: Disclosures'. IFRIC 10 prohibits impairment losses recognised in Interim Reports from beingreversed in the next annual financial statements. There has been no affect onthe Group's reported results on financial position arising from the adoption ofIFRIC 10. IFRS 7, and the complementary amendment to IAS 1, 'Presentation of financialstatements - Capital disclosures', revises and enhances the previous disclosuresrequired by IAS 32 and IAS 30. The impact of the adoption of IFRS 7 has been toexpand the disclosures provided in these Financial Statements (see note 10).There has been no effect on the Group's reported results or financial position. New standards and interpretations not yet applied The following new standards and interpretations, which have been issued by theIASB and the IFRIC, are effective for future periods and have not been adoptedearly in these financial statements. A description of these standards andinterpretations, together with (where applicable) an indication of the effect ofadopting them, is set out below. None are expected to have a material effect onthe reported results or financial position of the Group. The IASB issued a revised IAS 1 'Presentation of Financial Statements' inSeptember 2007 effective for accounting periods beginning on or after 1 January2009. The IASB published revisions to IAS 32 'Financial Instruments: Presentation' andconsequential revisions to other standards in February 2008 to improve theaccounting for and disclosure of puttable financial instruments. The revisionsare effective for accounting periods beginning on or after 1 January 2009 buttogether they may be adopted earlier. The IASB published a revised IFRS 3 'Business Combinations' and relatedrevisions to IAS 27 'Consolidated and Separate Financial Statements' followingthe completion in January 2008 of its project on the acquisition and disposal ofsubsidiaries. The standards improve convergence with US GAAP and provide newguidance on accounting for changes in interests in subsidiaries. The cost of anacquisition will comprise only consideration paid to vendors for equity; othercosts will be expensed immediately. Groups will only account for goodwill onacquisition of a subsidiary; subsequent changes in interest will be recognisedin equity and only on a loss of control will there be a profit or loss ondisposal to be recognised in income. The changes are effective for accountingperiods beginning on or after 1 July 2009, but both standards may be adoptedtogether for accounting periods beginning on or after 1 July 2007. Amendment to IAS 23 'Borrowing Costs' was issued in May 2007 and is effectivefor accounting periods beginning on or after January 1, 2009. The amendmentrequires borrowing costs that are directly attributable to the acquisition,construction or production of a qualifying asset to be added to the cost of thatasset. IFRIC 11 'IFRS 2 - Group and Treasury Share Transactions' was issued in November2006 and is effective for annual periods beginning on or after March 1, 2007.IFRIC 11 clarifies the accounting for share based transactions which fall withinthe scope of IFRS 2. IFRIC 12 'Service Concession Arrangements' was issued in November 2006 and iseffective for annual periods beginning on or after January 1, 2008. IFRIC 12prohibits private sector operators from recognising as their own thoseinfrastructure assets which are owned by the grantor. IFRIC 13 'Customer Loyalty Programmes' was issued in June 2007 and is effectivefor annual periods beginning on or after July 1, 2008. IFRIC 13 requires thefair value of revenue relating to customer loyalty rewards to be deferred untilall related obligations to the customer have been fulfilled. IFRIC 14 'IAS 19 - The limit on a defined benefit asset, minimum fundingrequirements and their interaction', was issued in June 2007 and is effectivefor annual periods beginning on or after January 1, 2008. IFRIC 14 clarifieshow any asset to be recognised should be determined, in particular where aminimum funding requirement exists. IFRS 8 'Operating Segments' was issued in November 2006 and is effective forannual periods beginning on or after January 1, 2009. It requires reportableoperating segments to be based on the entity's own internal reporting structure.It also extends the scope and disclosure requirements of IAS 14 SegmentalReporting, the standard which it is replacing. IFRS 8 will require thepublication of segment reports, which will, as a minimum, disclose net resultand total assets on a segment by segment basis based on management's owninternal accounting information. Status of EU endorsement Entities in EU Member States which report in accordance with EU-endorsed IFRScan only apply IFRSs and IFRICs where the endorsement process has been completedat the date of approval of their financial statements. Of the standards andinterpretations listed above, the following had not yet been endorsed by theEuropean Union at the date these 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'; and • IFRS 3 'Business Combinations (revised)'. 2 Segment Information The Group only operates in a single business and geographical segment. TheGroup's single line of business is the exploration and evaluation of oil and gasreserves and the geographical segment in which it currently operates is theNorth Sea. 3 Operating Loss The operating loss on ordinary activities is stated after charging thefollowing: 2007 2006 £ £ Auditors' remuneration: Group audit fee 25,000 - Audit of subsidiary pursuant to legislation 20,000 - Tax advisory 9,500 - Fees in respect of Initial Public Offering 65,000 - Non-statutory audit and advisory fees (1) 39,500 - Operating lease costs 22,050 - ________ ________ (1) Pursuant to the Initial Public Offering, the Company's auditorsprovided non-statutory audit and advisory services to XER for the period fromincorporation to July 2006. 4 Staff Costs and Directors' Emoluments a) The average number of persons employed by the Group (including ExecutiveDirectors) during the period was as follows: 2007 2006 Technical and administration 4 3 ________ ________ The aggregate payroll costs of staff and Executive Directors were as follows: 2007 2006 £ £ Wages and salaries 704,367 15,458 Social security costs 87,731 1,334 Share based payments charge 691,529 - ________ ________ 1,483,627 16,792 ________ ________ b) Executive Directors' emoluments 2007 2006 £ £ Wages and salaries 654,367 15,458 Social security costs 81,115 1,334 Share based payments charge 648,309 - ________ ________ 1,383,791 16,792 ________ ________ The Executive Directors comprise the key management personnel of the group. In addition to the above, during the period the Group paid to Roger Ramshaw andGregory Moroney in their capacity as Non-Executive Directors of the Company feesof £13,500 and £6,000 respectively. There were no such equivalent payments for2006. Charges in respect of share based payments for the Non-ExecutiveDirectors in the period to December 31, 2007 were £86,441 (2006: £nil). 5 Taxation 2007 2006 £ £ Overseas tax charges - 21 ________ ________ Current tax is calculated at the rates prevailing in the respectivejurisdictions. XEL is incorporated in the British Virgin Islands, a jurisdictionsubject to a tax exemption. XER is incorporation in the UK and therefore subjectto current tax on taxable profits at a rate of 30% (2006: 30%). 6 Loss per Share Basic loss per share is calculated by dividing the loss attributable to ordinaryshareholders by the weighted average number of ordinary shares outstandingduring the period. The calculation of basic loss per ordinary share is based ona loss of £730,289 (2006: £48 profit) and on 32,380,357 (2006: 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 11 tothese financial statements. Details of shares issued since the period end aregiven in Note 15 to these financial statements. 7 Intangible Assets Exploration and Evaluation Assets Licence fees December 31, 2007 October 31, 2006Cost and carrying value £ £ At November 1 66,297 36,162 Additions 60,270 30,135 ________ ________At December 31/October 31 126,567 66,297 ________ ________ Appraisal and exploration costs December 31, October 31, 2007 2006Cost and carrying value £ £ At November 1 2,036,813 1,718,491Additions - Costs capitalised 4,676,479 585,613 - Contributions to costs received (257,683) (267,291) ________ ________At December 31 /October 31 6,455,609 2,036,813 ________ ________ TOTAL December 31, 2007 October 31, 2006 Cost and carrying value £ £ At November 1 2,103,110 1,754,653 Additions - Costs capitalised 4,736,749 615,748 - Contributions to costs received (257,683) (267,291) ________ ________At December 31 /October 31 6,582,176 2,103,110 ________ ________ The costs associated with the appraisal of Block 9/3b have been capitalised inaccordance with the Group's accounting policy in Note 1. Based on the Group's success in drilling its final appraisal well on Block 9/3b,and in view of the forecast revenue streams and cash flows of this project, theBoard is satisfied that the carrying amount of the related intangible assets asdisclosed above will be recovered in full and that there is no need for anyimpairment provision. The situation will be monitored by management andadjustments made in future periods if future events indicate that suchadjustments are appropriate. 8 Trade and Other Receivables December 31, 2007 October 31, 2006 £ £ Indirect taxes receivable 79,114 - Other receivables 3,675 3,132 ________ ________ 82,789 3,132 ________ ________ 9 Trade and Other Payables December 31, 2007 October 31, 2006 £ £ Trade payables 2,857,762 170,148 Directors' loan accounts - 1,954,125 Social security and other taxes payable 33,919 28,262 Accruals and other creditors 2,150,991 96,000 ________ ________ 5,042,672 2,248,535 ________ ________ 10 Financial Instruments The Group's principal financial instruments are other receivables, trade andother payables and cash, which are denominated in various currencies. The mainpurpose of these financial instruments is to finance the Group's ongoingoperational requirements. The Group does not currently trade in derivative financial instruments. Theprincipal financial risks faced by the Group are credit risk, liquidity andforeign currency risk. Policies for the management of these risks, which havebeen 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, theyare regarded as low risk. b) Liquidity risk Group management has responsibility for reducing exposure to liquidity risk andfor 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 December 31, October 31, 2007 2006 £ £Financial assets - loans and receivables - Cash 21,067,134 142,378 - Receivables (current) 82,789 3,132 _________ _________ 21,149,923 145,510 _________ _________ Financial liabilities - measured at amortised cost - Payables (current) 5,042,672 2,248,535 _________ _________ The period end position in relation to financial instruments as shown above isnot considered to be materially representative of the position during thefinancial period. This is due to the significant funding transactions thatoccurred in June and November 2007 and the resulting significant increase inexpenditure to undertake the drilling of the appraisal well on Block 9/3b. The management believes that as all financial instruments are short term, thefair values for all such items equate to their carrying amount. Of the above cash balance of £21.07 million, the Group had a cash balance of£7.11 million (2006: £nil) held in escrow by an independent firm of solicitorsin order to satisfy certain contractual requirements for the drilling of thefinal appraisal well on Block 9/3b. The accounting policies for financial assets and financial liabilities aredisclosed in Note 1. Market risk c) Interest rate and foreign currency risks The currency and interest profile of the Group's financial assets andliabilities are as follows: Interest free liabilities December 31, 2007 October 31, 2006 £ £ Sterling 2,807,605 2,248,535 CAD$ 62,947 - US$ 2,172,120 - ________ ________ 5,042,672 2,248,535 ________ ________ Floating rate Interest free assets assets December 31, 2007 December 31, 2007 Total £ £ £ Sterling 16,460,016 82,789 16,542,805 US$ 4,607,118 - 4,607,118 ________ ________ ________ 21,067,134 82,789 21,149,923 ________ ________ ________ Floating rate Interest free assets assets October 31, 2006 October 31, 2006 Total £ £ £Sterling 142,378 3,132 145,510 ________ ________ ________ Sterling floating rate assets earn interest at circa 25 basis points below theBank of England Base Rate per annum. US$ floating rate assets earn interest atcirca 25 basis points below the Federal Reserve Rate per annum. Cash depositsare only kept with banks with "AA" rating. The policy of the group is to ensurethat all cash balances earn a market rate of interest and that interest rateexposures are regularly reviewed and managed. (d) Interest rate sensitivity analysis Interest rate sensitivity analysis has been determined based on the exposure tointerest rates for financial instruments during the financial period. Based on the Group's cash balances during the period, if interest rates had been50 basis points higher/lower and all other variables were held constant, theGroup's loss for the period ended December 31, 2007 would decrease/increase by£25,650 (2006; the Group's profit would increase/decrease by £26). 11 Share Capital Number of shares December 31, October 31, 2007 2006Authorised- Ordinary shares of no par value each Unlimited UnlimitedIssued and paid up- Ordinary shares of no par value each 60,550,000 21,800,000 ________ ________ £ value of shares December 31, October 31, 2007 2006 Authorised- Ordinary shares of no par value Unlimited UnlimitedIssued and paid up- Ordinary shares of no par value 21,774,150 - ________ ________ Xcite Energy Limited is registered in the British Virgin Islands under the BVIBusiness Companies Act 2004. Under BVI laws and regulations there is no conceptof "share premium", and all proceeds from the sale of no par value equity sharesis deemed to be share capital of the Company. The costs of the PrivatePlacement of £0.83 million and certain costs totalling £1.52 million of theInitial Public Offering have been offset against the gross proceeds from theissue of new shares in the period. In addition, share based payment charges andcharges in respect of the fair value of share warrants of £0.80 million havebeen offset against the gross proceeds from the issue of these shares. Shares issued XEL was incorporated on January 5, 2007. On June 5, 2007 one ordinary share wasissued to the subscriber to the Memorandum of Association of the Company. On June 26, 2007, pursuant to a reorganisation transaction, XEL issued21,799,999 ordinary shares to the existing shareholders of XER in exchange forthe entire share capital of XER. On June 26, 2007 XEL undertook a private placement of 20,000,000 ordinary sharesraising proceeds of £10 million (£9.17 million net of expenses). On November 16, 2007 XEL completed an Initial Public Offering of 13,168,750 newordinary shares at CAD$1.60 per share to raise £10.43 million and 5,581,250 newordinary shares at £0.805 per share to raise a further £4.49 million. ThisInitial Public Offering realised total new equity funds of £14.92 million(£12.92 million net of expenses) and was immediately followed by a dual listingof the Company's shares on the Toronto Stock Exchange - Venture division and theAIM in London. Stock Option Plan An element of the Group's reward strategy is the implementation of the StockOption 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 whocontribute materially to the success of the Group; and to attract and retainpersons of experience and ability, by providing them with the opportunity toacquire an increased proprietary interest in the Company. The Stock Option Plan is administered by the Remuneration and NominatingCommittee. At December 31, 2007 there were 3,800,000 options outstanding (2006:nil). Details of the Directors' interests in ordinary shares held under theStock Option Plan are given in the Report of the Remuneration and NominatingCommittee. The following input assumptions were used in the share option pricing model: Share bid price CAD$1.45Exercise price CAD$1.60Expected volatility 31.0%Expected life 5 yearsExpected dividends 0.0%Risk-free interest rate 3.97% In light of the Company's recent dual-listing on the TSX-V and AIM StockExchanges, the expected share price volatility was determined by a review of theshare trading performance of comparable oil and gas companies in the sameindustry sector. The total cost to the Company in respect of share based payment transactionsunder the Stock Option Plan in the period to December 31, 2007 was £0.82 million(2006: £nil). Of this total, £0.30 million has been charged to the IncomeStatement and £0.52 million has been capitalised under intangible assets inaccordance with the Company's accounting policy. Share warrants The Company had the following outstanding warrants over the ordinary sharecapital of the Company at December 31, 2007: Security Holder Number of ordinary Exercise price Market price at Expiry date shares grant date Warrants (1) Shareholders of 10,000,000 US$1.50 US$1.00 May 7, 2009 the company Broker Thomas Weisel 1,400,000 US$1.00 US$1.00 June 26, 2009warrants (2) Partners (UK) Limited Broker Various 1,125,000 CAD$1.60 CAD$1.60 Nov 15, 2009warrants (3) Warrants (4) Ammonite 163,500 US$1.00 US$1.00 Nov 15, 2009 (1) On June 26, 2007, pursuant to the Private Placement, XEL issued 20,000,000units consisting of ordinary shares and 20,000,000 half-warrants at US$1.00 perunit. Each whole warrant entitles the holder to purchase one ordinary share inXEL at an exercise price of US$1.50 per share at any time until May 7, 2009. (2) Pursuant to the Private Placement, the Company issued to Thomas WeiselPartners (UK) Limited (formerly Westwind Partners (UK) Limited) 1,400,000 brokerwarrants to purchase 1,400,000 ordinary shares at an exercise price of US$1.00at any time until June 26, 2009. (3) Pursuant to the Initial Public Offering, XEL issued a total of 1,125,000broker warrants to the following institutions: Thomas Weisel Partners (UK)Limited 843,750 (75%); Mirabaud Securities Limited 112,500 (10%); WellingtonWest Capital Markets Inc. 112,500 (10%); and MGI Securities 56,250 (5%), witheach warrant entitling the holder to purchase one ordinary share in XEL at anexercise price of CAD$1.60 at any time until November 15, 2009. (4) 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 overordinary shares in XER under certain circumstances. XEL assumed responsibilityfor this agreement at the time that XEL acquired XER. The agreement provided forAmmonite to receive a total of 163,500 warrants, each over one ordinary share inXEL (the "Ammonite Warrants"), with each warrant entitling the holder topurchase one ordinary share in XEL at an exercise price of US$1.00 at any timeuntil November 15, 2009. The following input assumptions were used in the option pricing model for therespective warrants: Warrants(1) Broker Warrants Broker Warrants(3) Warrants(4) (2) Share bid price US$1.00 US$1.00 CAD$1.45 US$1.00Exercise price US$1.50 US$1.00 CAD$1.60 US$1.00Expected volatility 36.0% 36.0% 36.0% 36.0%Expected life 2 years 2 years 2 years 2 yearsExpected dividends 0.0% 0.0% 0.0% 0.0%Risk-free interest rate 4.77% 4.77% 3.97% 4.77% Notes (1) to (4) above refer to instrument classifications given above. As set out above, in the period to December 31, 2007, the Company issuedaggregate warrants over a total of 12,688,500 shares in the Company inconnection with the Private Placement and the Initial Public Offering. The totalcharge to the Company in respect of these warrants is £0.82 million, of which£0.80 million has been offset against share capital in the Balance Sheet and£0.02 million has been charged to the Income Statement. 12 Retained earnings and other reserves Retained Merger Other Earnings Reserve Reserves Total £ £ £ £ At November 1, 2005 (181) 214 - 33 Profit for the year to October 31, 2006 48 - - 48 Share capital issued - 4 - 4 _______ _______ _______ _______ At November 1, 2006 (133) 218 - 85 Loss for the period to December 31, 2007 (730,289) - - (730,289) Fair value of share options and warrants - - 1,645,481 1,645,481 _______ _______ _______ _______At December 31, 2007 (730,422) 218 1,645,481 915,277 _______ _______ _______ _______ 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 payments and warrants over shares granted by the Company at the date of grant. 13 Commitments and contingencies On November 12, 2007 the Group committed to a work programme to drill theappraisal well on Block 9/3b through a contract with AGR Peak Well ManagementLimited for £7.5 million (US$15 million), of which £7.0 million remainedcommitted at the Balance Sheet date (2006: £nil). 14 Related party transactions During the period XER paid consulting fees to Richard West for work undertakenby him in connection with the drilling of the Bentley appraisal well on Block 9/3b before he became a Director of XER and a member of the management team,amounting to £15,405 (2006: £nil). XER entered into an agreement with Ammonite Capital Partners L.P. ("Ammonite")in January 2007 in connection with its proposed funding activities. Gregory J.Moroney is a consultant to Ammonite. The agreement contained provisions for XERto pay success fees to Ammonite and award it warrants over ordinary shares inXER under certain circumstances. XEL assumed responsibility for this agreementat the time that XEL acquired XER. The agreement provided for Ammonite toreceive a total of 163,500 warrants, each over one ordinary share in XEL, at thetime of the public offering and listing of XEL (the "Ammonite Warrants"). In theevent that XEL undertakes a second significant offering of ordinary shares,Ammonite would become entitled to receive a further 109,000 warrants, each overone ordinary share in XEL (the "Second Ammonite Warrants"). Ammonite was awarded, pursuant to the agreement, a success fee of US$134,435(£62,218). Mr Moroney has personally received through Ammonite (i) 40.5% of thissuccess fee, representing US$54,496 (£27,248), (ii) work fees of US$33,543(£16,772) and (iii) 41% of the Ammonite Warrants, entitling him to receive67,575 Ordinary Shares issuable upon the exercise of the Ammonite Warrants. Inthe event of a further significant offering of ordinary shares by XEL, MrMoroney would be entitled to 45% of the Second Ammonite Warrants, which wouldentitle him to receive 49,050 ordinary shares issuable upon the exercise of theSecond Ammonite Warrants. 15 Subsequent events On February 4, 2008 the Company was pleased to announce the results of itssuccessful appraisal well on the Bentley field, with all principal objectives ofthe reservoir evaluation programme being met. These objectives included: • Obtaining a crude oil sample to establish the key fluid parameters including API gravity, viscosity, TAN (total acid number) and the metals content of the oil; • Flowing crude oil to surface through a drill stem test at rates commensurate with the well conditions, completion approach and pump capacity, and to recover the oil produced; • Obtaining a water sample from the aquifer for chemical analysis and for calibration of wireline logs; • Confirming the characteristics of the reservoir; and • Obtaining productivity data on which to model potential production profiles. Based on the success of the 9/3b-5 appraisal well, the Company now intends tore-process the 3D seismic data over the Block to confirm the results of itsrecent 3D interpretation, which indicated a material increase in STOIIP comparedto the 2D seismic. In addition, the Company will move forward to plan further and identify theoptimum methodology for the future commercial development of the Bentley field.As part of this work programme, the Company intends to update the work performedby RPS Energy Canada Ltd to provide a revised Competent Person's Report. Since December 31, 2007, certain warrants over the Company's shares have beenexercised resulting in 863,800 additional shares being issued and aggregatefunds of £0.48 million being received by the Company. The total number ofshares in issue at the date of these financial statements was 61,413,800. This information is provided by RNS The company news service from the London Stock Exchange

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