21st Dec 2007 18:42
Max Petroleum PLC21 December 2007 MAX PETROLEUM PLC ("MAX PETROLEUM" OR THE "COMPANY" AND TOGETHER WITH ITS SUBSIDIARIES, THE "GROUP") (AIM: MXP) 2007 INTERIM RESULTS ANNOUNCEMENT Max Petroleum Plc, an oil and gas exploration and development company focused onKazakhstan, today announced its interim results for the six months ended 30September 2007. A summary of the Group's financial and operational highlights for the period areas follows: Financial • Group loss for the period of $13.8 million (2006: $10.3 million), or $.044 per share (2006: $.034 per share) • Revenue of $6.6 million from the sale of 127,398 barrels of crude oil ("bbls"), or $51.72 per bbl (2006: revenue of $65,000 from the sale of 2,335 bbls, or $27.84 per bbl) • Export sales of 94,909 bbls generating revenue of $5.7 million, or $59.96 per bbl (2006: nil), and domestic sales of 32,489 bbls, generating revenue of $0.9 million, or $27.64 per barrel • Cost of sales of $4.2 million, or $33.20 per bbl, including $1.9 million attributable to 40,532 bbls of test production during the period, or $46.83 per bbl, and $2.3 million relating to 86,866 bbls of commercial production, or $26.85 per bbl • Capital expenditures for oil and gas exploration and appraisal costs totalling $32.8 million (2006: $17.5 million) • Net cash used in operating activities of $4.7 million (2006: $3.6 million) • Cash balance of $24.6 million as of 30 September 2007 (FYE 2007: $28.8 million) • Entered into a $100 million mezzanine credit facility with Macquarie Bank Limited in June 2007, with an initial borrowing base of $20 million, $5 million drawn down as at 30 September 2007 and $11.4 million drawn down to date. Borrowing base under review to increase borrowing capacity • Raised $29.1 million in net proceeds through the exercise of 17.2 million share options during the period, and an additional $1.6 million from the exercise of 2.4 million options subsequent to 30 September 2007 • Costs of the internal investigation leading to the dismissal of the Company's CEO, COO and five senior managers was approximately $2.3 million as of 30 September 2007 Operational • Began commercial production from the Zhana Makat oil field in August 2007, estimated to contain 9.8 million barrels of proved and probable reserves • Production of approximately 2,400 bbls per day suspended in December 2007 pending regulatory approval of gas utilisation plan and permit for gas flaring, which is expected shortly • Regulatory approval for three-year trial production project obtained in August 2007 allowing 21 early production and appraisal wells to be drilled in Zhana Makat • Drilled a total of 18 wells in Block E to date, including 14 successful wells, all of which were in Zhana Makat, and 4 dry holes • One drilling rig and one workover rig currently operating in Block E • Drilled one dry hole in the Group's East Alibek license area, which was plugged and abandoned in October 2007 • Ongoing seismic exploration programme resulting in 1,800 km2 of 3D seismic data (60% processed) and 2,758 km of 2D data (100% processed and interpreted) as of December 2007 • In excess of 890 million barrels of oil equivalent in mean risked resources (2.6 billion of unrisked mean resources) identified by the competent person from a total of 15 prospects in three blocks Jim Jeffs, Executive Chairman, commented: "The investigation that led to the termination of senior management earlierthis year was a serious challenge to our business and an inevitable distractionfrom the implementation of our strategy. Those events did, however, bring abouta renewal of management, identification and correction of several operationalweaknesses and a detailed examination of how best to capitalise on theopportunities ahead. I believe that the resolve of the board and management ofMax Petroleum has been strengthened during this time. We remain determined tobuild our business and take maximum advantage of the undoubted potential of ourassets." 21 December 2007 Enquiries: Max Petroleum PLC Michael B. Young T: +44 (0)20 7355 9590 Chief Financial Officer Peter Moss T: +44 (0)7834 572837 Investor Relations Manager Merlin Tom Randell T: +44 (0)20 7653 6620 David Simonson WH Ireland Ltd Daniel Bate T: +44 (0) 161 832 2174 David Youngman Donald Dorn-Lopez, Petroleum Engineering and Geology Manager, is the qualifiedperson that has reviewed and approved the technical information contained inthis announcement. Mr. Dorn-Lopez, a senior geophysicist with over 27 years ofexperience, is a member of the Society of Exploration Geophysicists, theEuropean Association of Geoscientists and Engineers, the Society of PetroleumEngineers, and the American Association of Petroleum Geologists. CHAIRMAN AND CHIEF EXECUTIVE OFFICERS STATEMENT Dear Shareholder, Max Petroleum's latest interim period and the months immediately following havebeen a time of change and volatility for the Group. While the recent internalinvestigation and resulting dismissal of seven senior officers and linemanagers, including the Company's former CEO and COO, was a trying chapter inthe Group's history for both our shareholders and employees, we have been ableto address these challenges and focus on running our business. We believe theGroup has one of the most prospective portfolios of oil and gas assets of anyindependent oil and gas company in the world and we intend to convert theseassets into significant tangible value for the Group and its shareholders. Besides the investigation and personnel issues, which have already been clearlydisclosed in the Group's 2007 annual financial statements available on theCompany's website (www.maxpetroleum.com), the Group's principal operationalactivities during the six months ended 30 September 2007 were as follows: • commencement of commercial production and meaningful oil sales from August 2007 upon the receipt of regulatory approval of a 21 well trial production project in the Zhana Makat field; • expansion of its seismic exploration programme to include three seismic crews working simultaneously in Block A, Block E, and Astrakhanskiy, with a fourth crew added in late 2007; and • intensification and acceleration of its efforts to establish farm-out relationships to exploit the Company's deep portfolio and appointment of the Company's interim COO, Lee Kraus, to manage the process. To date, the Group has drilled a total of 18 wells in Block E, including 14successful wells drilled in the Zhana Makat area, and 4 dry holes. A dry holewas also drilled in the East Alibek license area and was plugged and abandonedin October 2007. The Group currently has one drilling rig and one workover rigoperating in Block E and is evaluating its 2008 drilling program in light of thegeological and geophysical data resulting from its seismic explorationprogramme. On 17 December 2007, the Group announced the temporary suspension of productionfrom the Zhana Makat field pending approval of the Company's proposed gasutilisation plan by the Ministry of Energy and Mineral Resources ("MEMR"). Wehave filed the permit application with the MEMR and are working hard to expeditethe approval, which is expected to be received shortly without any materialnegative impact to the Group. The Group's interim financial statements reported herein have been prepared on abasis consistent with International Financial Reporting Standards ("IFRS") asadopted by the European Union. Results of operations The Group recognised a loss of $13.8 million, or $.044 per ordinary share, forthe six months ended 30 September 2007, compared to a loss of $10.3 million, or$.034 per ordinary share, during the same period in 2006. The Group generated revenue of $6.6 million, or $51.72 per bbl, from the sale of127,398 bbls of crude oil during the half-year ended 30 September 2007.Comparatively, the Group generated revenue of $65,000, or $27.84 per bbl, fromthe sale of 2,335 bbls of crude oil during the prior period. An additional19,748 bbls of crude oil production was held as crude oil inventory as of 30September 2007. Total crude oil sales during the latest half-year consisted ofexport sales totalling 94,909 bbls, generating $5.7 million in revenue, or$59.96 per bbl, and domestic sales of 32,489 bbls, generating revenue of $0.9million, or $27.64 per bbl. All prior period sales were domestic. Cost of sales incurred during the interim period ended 30 September 2007totalled $4.2 million, or $33.20 per bbl, including $1.9 million, or $46.83 perbbl, attributable to 40,532 bbls of test production and $2.3 million, or $26.85per bbl, relating to 86,866 bbls of commercial production, respectively. TheGroup accounts for the sale of test production by crediting revenue for theproceeds, net of VAT, with an offsetting charge to cost of sales, resulting inno net margin being recognised. As a result, the cost of sales for the sixmonths ended 30 September 2006 was $65,000, or $27.84 per bbl. The Group incurred total administrative expenses of $14.8 million for the sixmonths ended 30 September 2007, compared to $11.1 million for the same period in2006. Administrative expenses for both periods reflect costs incurred to staffup and run the Group's operations in the United Kingdom and Kazakhstan.Administrative expenses for the current period include a non-cash share basedpayment charge of $3.3 million, compared to a $5.8 million share based paymentcharge from the prior period. Administrative costs in the current half-yearreflect approximately $2.3 million in expenses incurred through the balancesheet date due to the recently completed internal investigation, which led tothe dismissal of the Company's former CEO, COO, and five additional employees. Liquidity and capital resources As at 30 September 2007, the Group's cash position was $24.6 million. Group netcash used in operating activities during the period was $4.7 million compared to$3.6 million in 2006. In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited (the "Macquarie Facility") to finance thedevelopment of Max Petroleum's oil and gas assets in Kazakhstan. The MacquarieFacility has a four year term and bears interest at a rate ranging from LIBORplus 4% to LIBOR plus 6.5%, depending upon the underlying value of the Group'soil and gas reserves. The Macquarie Facility has an initial borrowing base of$20 million, of which $5.0 million had been borrowed as of 30 September 2007. During the half-year to 30 September 2007, Max Petroleum issued 17.2 millionordinary shares upon the exercise of share options, generating $29.1 million innet proceeds. Subsequent to the balance sheet date, Max Petroleum has issued 2.4million ordinary shares in respect to the exercise of share options, resultingin cash proceeds of $1.6 million. The Group expects to fund its exploration and development programme, as well asits administrative and operating expenses through calendar year 2008 using acombination of existing working capital, borrowings from the Macquarie Facility,and expected proceeds from the sale of future oil and gas production. The Groupwill also consider raising capital through farm-out initiatives and throughadditional debt and/or equity issuances as required to more fully explore anddevelop its asset base. We look forward to soon announcing a new permanent Chief Executive Officer withwhom the Board and our employees look forward to working with to accelerate theexploitation of our assets for the benefit of our shareholders. We believe asolid foundation has been laid for a productive 2008. James A. Jeffs Robert B. HollandExecutive Chairman Interim Chief Executive Officer INDEPENDENT REVIEW REPORT TO MAX PETROLEUM PLC Introduction We have been engaged by the Company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30September 2007, which comprises the balance sheet, income statement, statementof changes in equity, cash flow statement and related notes. We have read theother information contained in the half-yearly financial report and consideredwhether it contains any apparent misstatements or material inconsistencies withthe information in the condensed set of financial statements. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the AIM Rules for Companies which requirethat the financial information must be presented and prepared in a formconsistent with that which will be adopted in the Company's annual financialstatements. This half-yearly report has been prepared in accordance with the basis set outin Note 2. As disclosed in Note 2, the next annual financial statements of theCompany will be prepared in accordance with IFRSs as adopted by the EuropeanUnion. The accounting policies are consistent with those that the directorsintend to use in the next annual financial statements. Our responsibility Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half-yearly report based on our review. Thisreport, including the conclusion, has been prepared for and only for the Companyfor the purpose of the AIM Rules for Companies and for no other purpose. We donot, in producing this report, accept or assume responsibility for any otherpurpose or to any other person to whom this report is shown or into whose handsit may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion herein. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly report for thesix months ended 30 September 2007 is not prepared, in all material respects, inaccordance with the basis set out in Note 2 and the AIM Rules for Companies. PricewaterhouseCoopers LLPChartered AccountantsLondon 21 December 2007 CONDENSED CONSOLIDATED BALANCE SHEET (IN THOUSANDS OF US$) -------------------------------------------------------------------------------- Unaudited Audited as at as at 30 September 31 March Note 2007 2007--------------------------------------------------------------------------------AssetsNon-current assetsIntangible - exploration and appraisal 4 239,667 230,573expendituresOil and gas properties 4 22,102 -Intangible assets - other 4 143 324Plant and equipment 4 3,579 1,478Prepayments 995 1,338-------------------------------------------------------------------------------- 266,486 233,713 Current assetsInventories 13,430 7,512Trade and other receivables 7,255 2,293Prepayments 10,035 9,947Cash and cash equivalents 24,566 28,772-------------------------------------------------------------------------------- 55,286 48,524--------------------------------------------------------------------------------Total assets 321,772 282,237-------------------------------------------------------------------------------- LiabilitiesNon-current liabilitiesBorrowings 5 66,222 62,253Provision for liabilities and other charges 6 2,456 1,619-------------------------------------------------------------------------------- 68,678 63,872 Current liabilitiesTrade and other payables 22,682 13,204-------------------------------------------------------------------------------- 22,682 13,204--------------------------------------------------------------------------------Total liabilities 91,360 77,076--------------------------------------------------------------------------------Net assets 230,412 205,161-------------------------------------------------------------------------------- Capital and reservesShare capital 7,922 7,919Share premium 225,747 196,636Other reserves 7 68,044 57,409Retained losses (66,770) (53,007)-------------------------------------------------------------------------------- 234,943 208,957Minority interests in equity (4,531) (3,796)--------------------------------------------------------------------------------Total equity 230,412 205,161-------------------------------------------------------------------------------- The notes on pages (_£_) to (_£__) form an integral part of this condensedconsolidated half-yearly financial information. CONDENSED CONSOLIDATED INCOME STATEMENT (IN THOUSANDS OF US$) -------------------------------------------------------------------------------- Unaudited Unaudited six months six months ended ended 30 September 30 September 2007 2006 Note--------------------------------------------------------------------------------Revenue 6,589 65Cost of sales 8 (4,230) (65)--------------------------------------------------------------------------------Gross profit 2,359 -Exploration and appraisal costs (517) -Administrative expenses (14,784) (11,134)--------------------------------------------------------------------------------Operating loss 9 (12,942) (11,134)Finance income 613 338Finance costs (2,169) (486)--------------------------------------------------------------------------------Loss before taxation (14,498) (11,282)Income tax expense - ---------------------------------------------------------------------------------Loss for the period (14,498) (11,282)--------------------------------------------------------------------------------Attributable to:Equity holders of the Company (13,763) (10,342)Minority interests (735) (940)-------------------------------------------------------------------------------- (14,498) (11,282)--------------------------------------------------------------------------------Loss per share for loss attributableto the equity holders of the Companyduring the period- Basic (US cents) (4.4) (3.4)- Diluted (US cents) (4.4) (3.4)-------------------------------------------------------------------------------- All financial results presented are from continuing operations. The notes on pages (_£_) to (_£__) form an integral part of this condensedconsolidated half-yearly financial information. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (IN THOUSANDS OF US$) Attributable to equity holders of the Company Share Share premium Other reserves Retained Minority Total capital losses Total interest equity ----------------------------------------------------------------------------------------------------Balance at 1 April 2006 7,918 194,114 35,272 (23,305) 213,999 (361) 213,638----------------------------------------------------------------------------------------------------Net income/ (expense)recogniseddirectly inequity - - - - - - -Loss for the half-year - - - (10,342) (10,342) (940) (11,282)----------------------------------------------------------------------------------------------------Total recognisedincomeandexpense forthe half-year - - - (10,342) (10,342) (940) (11,282)----------------------------------------------------------------------------------------------------Issue of sharecapital -exercise ofshareoptions - 678 - - 678 - 678Share based payments - - 6,476 - 6,476 - 6,476Convertible bond issued- equityportion - - 11,292 - 11,292 - 11,292--------------------------------------------------------------------------------------------------- Convertible bondissuancecosts -equity portion - - (485) - (485) - (485)--------------------------------------------------------------------------------------------------- - 678 17,283 - 17,961 - 17,961---------------------------------------------------------------------------------------------------Balance at 30 September2006 7,918 194,792 52,555 (33,647) 221,618 (1,301) 220,317--------------------------------------------------------------------------------------------------- Attributable to equity holders of the Company Share Share premium Other reserves Retained Minority Total capital losses Total interest equity ---------------------------------------------------------------------------------------------------Balance at 1 April 2007 7,919 196,636 57,409 (53,007) 208,957 (3,796) 205,161---------------------------------------------------------------------------------------------------Net income/ (expense)recogniseddirectly inequity - - - - - - -Loss for the half-year - - - (13,763) (13,763) (735) (14,498)---------------------------------------------------------------------------------------------------Total recognisedincomeandexpense forthe half-year - - - (13,763) (13,763) (735) (14,498)---------------------------------------------------------------------------------------------------Issue of sharecapital -exercise ofshareoptions 3 29,111 - - 29,114 - 29,114Share based payments - - 4,313 - 4,313 - 4,313Warrants issued - - 6,322 - 6,322 - 6,322--------------------------------------------------------------------------------------------------- 3 29,111 10,635 - 39,749 - 39,749---------------------------------------------------------------------------------------------------Balance at 30 September2007 7,922 225,747 68,044 (66,770) 234,943 (4,531) 230,412--------------------------------------------------------------------------------------------------- The notes on pages (_£_) to (_£__) form an integral part of this condensedconsolidated half-yearly financial information CONDENSED CONSOLIDATED CASH FLOW STATEMENT (IN THOUSANDS OF US$) ------------------------------------------------------------------------------------------------ Unaudited Unaudited six months six months ended ended 30 September 30 September 2007 2006------------------------------------------------------------------------------------------------Cash flows from operating activitiesReconciliation of operating loss to net cash flow from operatingactivities------------------------------------------------------------------------------------------------Operating loss (12,942) (11,134)Adjustments for:- Depreciation, depletion and amortisation 1,335 132- Share based payments charge, net of 3,329 5,847capitalisationChanges in working capital:- Inventories (5,918) (1,981)- Trade and other receivables (4,962) 683- Prepayments 4,996 (2,080)- Trade and other payables 9,478 4,976------------------------ ----- -------- -------- --------Net cash used in operating activities (4,684) (3,557)------------------------ ----- -------- -------- -------- Cash flows from investing activitiesPurchases of plant and equipment (2,151) (504)Payments for exploration and appraisal expenditures and producing (28,554) (16,327)assetsInterest received 613 338------------------------ ----- -------- -------- --------Net cash used in investing activities (30,092) (16,493)------------------------ ----- -------- -------- -------- Cash flows from financing activitiesProceeds from issuance of ordinary shares 29,114 678Proceeds from issuance of convertible bonds - 71,777Proceeds from borrowings 4,119 -Interest paid (2,663) (362)------------------------ ----- -------- -------- --------Net cash generated from financing activities 30,570 72,093------------------------ ----- -------- -------- -------- Net (decrease)/increase in cash and cash (4,206) 52,043equivalentsCash and cash equivalents at beginning of 28,772 18,731period ----- -------- -------- --------------------------------Cash and cash equivalents at end of period 24,566 70,774------------------------ ----- -------- -------- -------- The notes on pages (_£_) to (_£__) form an integral part of this condensedconsolidated half-yearly financial information. NOTES TO CONDENSED CONSOLIDATED HALF-YEARLY FINANCIAL INFORMATION 1. General information Max Petroleum plc ("Max Petroleum" or the "Company") and its subsidiaries(together the "Group") is in the business of exploration, development andproduction of oil and gas assets within the Republic of Kazakhstan. MaxPetroleum is a public limited company incorporated and domiciled in the UnitedKingdom. The address of its registered office is 2nd Floor, 81 Piccadilly,London, W1J 8HY, United Kingdom. The Company has its primary listing on the Alternative Investment Market ("AIM")of London Stock Exchange plc. This condensed consolidated financial information for the separate interimperiod ended 30 September 2007 was approved for issue on 21 December 2007. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these financialstatements are set out below. These policies have been consistently applied toall periods presented, unless otherwise stated. Basis of preparation The period beginning 1 April 2007 is the first period for which it becamemandatory for the Group to comply with International Financial ReportingStandards ("IFRS"). The consolidated financial results of the Group for the six months ended 30September 2007 have been prepared in accordance with IFRS as adopted by theEuropean Union, IFRIC interpretations and the Companies Act 1985 with theexception of IAS 34 Interim financial reporting which AIM quoted companies neednot comply with. The Group expects to apply in its first annual auditedfinancial statements for the financial year ending 31 March 2008. Comparativeinformation for the six months ended 30 September 2006 and full-year ended 31March 2007 have been restated under IFRS. The consolidated financial statements have been prepared under the historicalcost convention. The following reconciliations to the balances reported in the Group's 30September 2006 interim report and 31 March 2007 full-year financial reportprepared under United Kingdom Generally Accepted Accounting Principles ("UKGAAP") are detailed in Note 13 below: • UK GAAP equity as at 1 April 2006, 30 September 2006 and 31 March2007; and • UK GAAP loss for the interim and full-year period ended 30 September2006 and 31 March 2007, respectively. The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise its judgment in the process of applying the Group's accountingpolicies. The areas involving a higher degree of judgment or complexity, orareas where assumptions and estimates are significant to the financialstatements are disclosed in Note 4. The Group's interim financial results do not comprise statutory accounts withinthe meaning of Section 240 of the Companies Act 1985. Statutory accounts forthe year ended 31 March 2007, which were prepared and reported under theprevious UK GAAP, were approved by the board of directors on 26 October 2007 anddelivered to the Registrar of Companies. The report of the auditors on those UKGAAP accounts was unqualified, did not contain an emphasis of matter paragraphand did not contain any statement under Section 237 of the Companies Act 1985. This half-year financial report should be read in conjunction with the annualfinancial statements of the Group as at 31 March 2007 prepared in accordancewith UK GAAP, as well as any public announcements made by the Group during theinterim period ended 30 September 2007. The Group's public announcements areavailable on the Group's website (www.maxpetroleum.com). Standards, amendments and interpretations to existing standards that are not yeteffective and have not been early adopted The following new standards, amendments to standards or interpretations aremandatory for the first time for the financial year ending 31 March 2008: • IFRS 7, Financial instruments: Disclosures, effective for annualperiods beginning on or after 1 January 2007 • IAS 1, Amendments to capital disclosures, effective for annual periodsbeginning on or after 1 January 2007 • IFRS 4, Insurance contracts, revised implementation guidance,effective when an entity adopts IFRS 7 As this interim report contains only condensed financial statements, and asthere are no material financial instrument related transactions in the period,full IFRS 7 disclosures are not required for this interim reporting period. Thefull IFRS 7 disclosures, including the sensitivity analysis to market risk andcapital disclosures required by the amendment of IAS 1, will be provided in theannual financial statements for the year ended 31 March 2008. The following new standards, amendments to standards and interpretations havebeen issued, but are not effective for the financial year ending 31 March 2008and have not been adopted earlier by the Group: • IAS 23 Borrowing costs(Amendment)• IFRS 8 Operating segments• IFRIC 12 Service concession arrangements• IFRIC 13 Customer loyalty programmes• IFRIC 14 Limit on a defined benefit asset, minimum funding requirements and their interaction The directors anticipate that the adoption of these Standards andInterpretations in future periods will have no material impact on the financialstatements of the Group except for additional disclosures, when the relevantstandards come into effect. The following are the key accounting policies of the Group under IFRS: Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over whichthe Group has the power to govern the financial and operating policies generallyaccompanying a shareholding of more than one half of the voting rights. Theexistence and effect of potential voting rights that are currently exercisableor convertible are considered when assessing whether the Group controls anotherentity. Subsidiaries are fully consolidated from the date on which control istransferred to the Group. They are de-consolidated from the date that controlceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets acquired and liabilities and contingentliabilities assumed in a business combination are measured initially at theirfair values at the acquisition date, irrespective of the extent of any minorityinterest. The excess of the cost of acquisition over the fair value of theGroup's share of the identifiable net assets acquired is recorded as goodwill.If the cost of acquisition is less than the fair value of the net assets of thesubsidiary acquired, the difference is recognised directly in the incomestatement. Inter-company transactions, balances and unrealised gains on transactionsbetween Group companies are eliminated. Unrealised losses are also eliminatedbut considered an impairment indicator of the asset transferred. Accountingpolicies of subsidiaries have been changed where necessary to ensure consistencywith the policies adopted by the Group. (b) Transactions and minority interests The Group applies a policy of treating transactions with minority interests astransactions with parties external to the Group. Disposals to minority interestsresult in gains and losses for the Group that are recorded in the incomestatement. Purchases from minority interests result in goodwill, being thedifference between any consideration paid and the relevant share acquired of thecarrying value of net assets of the subsidiary. Intangible - exploration and appraisal expenditure The Group follows the successful efforts method of accounting for itsexploration and evaluation expenditures with one exception. Unlike successfulefforts where geological and geophysical costs are expensed when incurred, theGroup has continued to capitalise these costs following acquisition of thelicence. The costs of licence acquisitions and geological and geophysicalexploration and appraisal costs are amortised over a period of the lower of 25years or the expected life of reserves from the date the seismic data has beenfully evaluated. In line with IFRS 6, the Group expenses any pre-acqusitionlicence costs directly to the income statement. The Group's policy requires initial capitalisation of all licence acquisitionand geological and geophysical exploration and appraisal costs to well, field orspecific exploration licences as appropriate, pending determination of theexistence of commercial reserves. Similarly, the costs of successfulexploratory wells containing hydrocarbons are capitalised, while drillingexpenditures and directly attributable operational overheads associated with anexploratory dry hole are expensed to the income statement. When an oil or gas field has been approved for development, the accumulatedexploration and appraisal costs are transferred to oil and gas properties. Oil and gas properties Development expenditure is stated at cost less accumulated depletion and anyimpairment in value. Where commercial production in an area of interest hascommenced, the capitalised costs together with any estimated future costsnecessary to develop the underlying proved and commercial reserves are amortisedusing the unit-of-production ("UOP") method over the total estimated reserves.Costs are amortised only once commercial reserves associated with a developmentproject can be determined and commercial production has commenced. Changes in factors such as estimates of proved and commercial reserves thataffect UOP calculations do not give rise to prior year financial periodadjustments and are dealt with on a prospective basis. Plant and equipment Plant and equipment are included in the balance sheet at cost, less accumulateddepreciation and any provision for impairment. Plant and equipment aredepreciated on a straight line basis at rates sufficient to write off the cost,less estimated residual values, of individual assets over their estimated usefullives. Improvements to leasehold 2-10 (or over the remaining life of theproperty years lease if shorter)Office systems, equipment and 4-10furniture yearsPlant and equipment 4-10 yearsMotor vehicles 4 years Residual values and useful lives are reviewed and adjusted if appropriate, ateach balance sheet date. Inventories Crude oil inventories are valued at the lower of cost or market value. Materialsand supplies inventories are valued on a first-in, first-out basis at the lowerof cost or estimated net realisable value. Impairment - exploration and appraisal expenditures Exploration and appraisal expenditures are tested for impairment whenreclassified to oil and gas properties or whenever facts and circumstancesindicate impairment. An impairment loss is recognised for the amount by whichthe exploration and appraisal expenditure carrying amount exceeds theirrecoverable amount. The recoverable amount is the higher of the exploration andappraisal expenditure fair value less costs to sell and their value in use. Forthe purposes of assessing impairment, the exploration and appraisal expendituressubject to testing are grouped with existing cash-generating units of productionfields that are located in the same geographical region. Impairment - oil and gas properties Proven oil and gas properties are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable. An impairment loss is recognised for the amount by which theasset's carrying amount exceeds its recoverable amount. The recoverable amountis the higher of an asset's fair value less costs to sell and value in use. Forthe purposes of assessing impairment, assets are grouped at the lowest levelsfor which there are separately identifiable cash flows. Provision for 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 exploration and appraisal expenditure or oil and gasproperties and is amortised on a UOP basis as part of the depreciation,depletion and amortisation charge. Any adjustment arising from the reassessmentof estimated cost of decommissioning is capitalised, whilst the charge arisingfrom the unwinding of the discount applied to the abandonment provision istreated as a component of the interest charge. Revenue recognition Revenue comprises the fair value of the consideration received or receivable forthe sale of goods and services in the ordinary course of the Group's activities.Revenue is shown net of value-added tax, returns, rebates and discounts andafter eliminating sales within the Group. Revenue is recognised when the amount can be reliably measured, it is probablethat future economic benefits will flow to the entity and when specific criteriahave been met for each of the Group's activities as described below. 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 revenue from sales ofoil and gas production, whereby the Group recognises revenue based on its directownership interest in its underlying oil and gas properties. The Group accounts for test production by crediting revenue for the proceeds,net of VAT, with an offsetting charge to cost of sales resulting in no netmargin being recognised. Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that aresubject to risks and returns that are different from those of segments operatingin other economic environments. Foreign currencies In the financial statements of the Group's subsidiaries, transactionsdenominated in foreign currencies are recorded in the local functional currencyat actual exchange rates at the date of the transaction. Monetary assets andliabilities denominated in foreign currencies at the period end are reported atthe rates of exchange prevailing at the period end. Any gain or loss arisingfrom a change in exchange rate subsequent to the date of the transaction isincluded as an exchange gain or loss in the income statement. Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of such transactions andfrom the translation at year-end exchange rates of monetary assets andliabilities denominated in foreign currency are recognised in the incomestatements. 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. Income statement is translated attheir historical exchange rate. Translation gains and losses are recorded inadministrative expenses for the year. The Group's functional and presentationcurrency is the US dollar. Taxation The current income tax charge is calculated on the basis of the tax laws enactedor substantively enacted at the balance sheet date in the countries where theGroup's subsidiaries operate and generate taxable income. Managementperiodically evaluates positions taken in tax returns with respect to situationsin which applicable tax regulation is subject to interpretation and establishesprovisions where appropriate on the basis of amounts expected to be paid to thetax authorities. Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. However,the deferred income tax is not accounted for if it arises from initialrecognition of an asset or liability in a transaction other than a businesscombination that at the time of the transaction affects neither accounting nortaxable profit or loss. Deferred income tax is determined using tax rates (andlaws) that have been enacted or substantially enacted by the balance sheet dateand are expected to apply when the related deferred income tax asset is realisedor the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable thatfuture taxable profit will be available against which the temporary differencescan be utilised. Financial assets The Group classifies its financial assets in the following categories: loans andreceivables, and available-for-sale. The classification depends on the purposefor which the financial assets were acquired. Management determines theclassification of its financial assets at initial recognition. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. They are includedin current assets, except for maturities greater than 12 months after thebalance sheet date. These are classified as non-current assets. The Group'sloans and receivables comprise 'trade and other receivables' and cash and cashequivalents in the balance sheet. Loans and receivables are carried at amortised cost using the effective interestmethod. (b) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are eitherdesignated in this category or not classified in any of the other categories.They are included in non-current assets unless management intends to dispose ofthe investment within 12 months of the balance sheet date. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost using the effective interest method, less provisionfor impairment. A provision for impairment of trade receivables is establishedwhen there is objective evidence that the Group will not be able to collect allamounts due according to the original terms of the receivables. Significantfinancial difficulties of the debtor, probability that the debtor will enterbankruptcy or financial reorganisation, and default or delinquency in payments(more than 30 days overdue) are considered indicators that the trade receivableis impaired. The amount of the provision is the difference between the asset'scarrying amount and the present value of estimated future cash flows, discountedat the original effective interest rate. The carrying amount of the asset isreduced through the use of an allowance account, and the amount of the loss isrecognised in the income statement. When a trade receivable is uncollectible, itis written off against the allowance account for trade receivables. Subsequentrecoveries of amounts previously written off are credited against the incomestatement. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, current balances and depositswith banks and similar institutions with original maturities of three months orless and bank overdrafts are shown within borrowings in current liabilities onthe balance sheet. Share capital Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares or options are shown in equity as adeduction, net of tax, from the proceeds. Trade payables Trade payables are recognised initially at fair value and subsequently measuredat amortised cost using the effective interest method. Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value isrecognised in the income statement over the period of the borrowings using theeffective interest method. The fair value of the liability portion of a convertible bond is determinedusing a market interest rate for an equivalent debt instrument. This amount isrecorded as a liability on an amortised cost basis until extinguished onconversion or maturity of the bonds. The remainder of the proceeds is allocatedon the conversion or maturity of the bonds. This is recognised and included inshareholders' equity, net of income tax effects. Borrowing costs incurred for the construction of any qualifying asset arecapitalised during the period of time that is required to complete and preparethe asset for its intended use. Other borrowing costs are expensed. 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. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. Operating leases Rentals under operating leases are charged to the income statement on a straightline basis over the term of the relevant leases. 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. 3. Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. Critical accounting estimates and judgments The Group makes estimates and assumptions concerning the future. The resultingaccounting estimates will, by definition, seldom equal the related actualresults. The estimates and assumptions that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities within thenext financial year are discussed below. Estimation of oil and gas reserves Proved oil and gas reserves are the estimated quantities of oil and gas whichgeological and engineering data demonstrate with reasonable certainty to berecoverable in future years from known reservoirs under existing economic andoperating conditions. Estimates of oil and gas reserves are inherentlyimprecise, require the application of judgement and are subject to futurerevision. Accordingly, financial and accounting measures (such as thestandardised measure of discounted cash flows, depreciation, depletion andamortisation charges, and decommissioning provisions) that are based on provedreserves are also subject to change. Capitalised exploration and appraisal expenditure In making decisions about whether to continue to capitalise exploration andappraisal expenditure, it is necessary to make judgements about the probablecommercial reserves and the level of activities that constitute on-goingappraisal determination process. If there is a change in any judgement in asubsequent period, then the related capitalised exploration and appraisalexpenditure would be expensed in that period, resulting in a charge to income. Provision for abandonment Estimates of the amounts of provision for abandonment recognised are based oncurrent legal and constructive requirements, technology and price levels. Asactual outflows may be different from estimates due to changes in laws,regulations, technology, prices and conditions, and can take place many years inthe future, the carrying amounts of provisions are regularly reviewed andadjusted to take account of such changes. In relation to provision for abandonment, the estimated interest rate used indiscounting the cash flows is reviewed at least annually. 4. Capital expenditure Intangible - exploration and appraisal Intangible expenditures assets - other Oil and gas Plant and properties equipment Total US$'000 US$'000 US$'000 US$'000 US$'000 -------- -------- -------- -------- -------Balance as at 1 230,573 - 324 1,478 232,375April 2007Additions 32,809 - 8 2,151 34,968Intangible - (517) - - - (517)exploration andappraisalcosts expensedReclassifications (22,628) 22,628 (183) 183 -Depreciation, (570) (526) (6) (233) (1,335)depletion and -------- -------- -------- -------- -------amortisation -------- -------- -------- -------- -------Balance as at 30 239,667 22,102 143 3,579 265,491September 2007 -------- -------- -------- -------- ------- As at 30 September 2007, the Group had drilled a total of 14 shallow oil wellsin Block E, of which 11 were successful. In August 2007, Max Petroleum receivedapproval for a three-year trial production project ("TPP") for its initialdiscovery in the Zhana Makat field, which allows a total of 21 early productionand appraisal wells to be drilled in the field and placed on production toevaluate the reservoir performance before entering the first phase of commercialdevelopment. Approval of the TPP resulted in a reclassification of $22.6 millionfrom 'intangible - exploration and appraisal expenditures' to 'oil and gasproperties' on the balance sheet. The Group sold 127,398 bbls during the latest interim period, including 40,532bbls of test oil production, which, after accounting for inventory movement,generated $6.6 million in revenue. The Group recognised oil revenues relating totest production of $1.9 million (2006: $65,000) in its consolidated incomestatement offset by $1.9 million in costs of sales (2006: $65,000). The Groupsold 86,866 bbls of production subsequent to the approval of the TPP, generatingcommercial revenues of $4.7 million and related cost of sales of $2.3 million,including $1.1 million from the amortisation of capitalised costs related toevaluated oil and gas properties. The Group had approximately 20,000 bbls ofproduction in crude oil inventory as at 30 September 2007. Exploration and appraisal expenditures are tested for impairment whenreclassified to oil and gas properties or whenever facts and circumstancesindicate impairment. In September 2007 there was no impairment in relation tothe transfer of the Zhana Makat assets. Proven oil and gas properties are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable. At 30 September 2007 there was no indication of impairment for theGroup's proven oil and gas properties. Assets that are subject to amortisation are reviewed for impairment wheneverevents or changes in circumstance indicate that the carrying amount may not berecoverable. There was no indication of such impairment as at 30 September2007. Financial assets were reviewed for impairment as at 30 September 2007 with noindication of impairment. 5. Borrowings Movements in borrowings are analysed as follows: Convertible Bank borrowings Total bond borrowingsSix months ended 30 US$'000 US$'000 US$'000September 2007 -------- -------- -------- -------------------------------Balance as at 1 April 62,253 - 62,2532007Drawdown of loan facility - 5,000 5,000Debt issuance cost - (2,462) (2,462)capitalisedNotional interest incurred 957 - 957during the periodAmortisation of debt 274 200 474issuance cost ----------------------- -------- -------- -------- --------Balance as at 30 September 63,484 2,738 66,2222007 ----------------------- -------- -------- -------- -------- Convertible bond The Company completed an offering of convertible debentures on 8 September 2006,raising a total of $75 million before issuance costs, through the issuance ofconvertible 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. Bank borrowings In June 2007, the Group entered into a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited (the "Macquarie Facility") to finance thedevelopment of Max Petroleum's oil and gas assets in Kazakhstan. The MacquarieFacility has a four year term and bears interest at a rate ranging from LIBORplus 4% to LIBOR plus 6.5%, depending upon the underlying value of the Group'soil and gas reserves. The Macquarie Facility has an initial borrowing base of$20 million, of which $5 million borrowed as of 30 September 2007 and $11.4million borrowed as of the date of this report. Upon closing, the Company issued Macquarie with a five year warrant to acquire 5million ordinary shares in the Company at an exercise price of 160.6p per share. In accordance with IFRS, these warrants have been recorded at fair valuecreating a warrant reserve, with an offsetting adjustment to prepaid debtissuance costs, which is amortized over the life of the Macquarie Facility asthe corresponding borrowing base is drawn down by the Company. 6. Provisions for liabilities and other charges Abandonment provisionSix months ended 30 September 2007 US$'000----------------------- ------- -------- --------Balance as at 1 April 2007 1,619Additions 771Accretion expense 66----------------------- ------- -------- --------Balance as at 30 September 2007 2,456----------------------- ------- -------- -------- 7. Other reserves Convertible Share based bond equity payments reserve reserve Warrant Total other reserves reserves US$'000 US$'000 US$'000 US$'000 Balance as at 1 April 2007 10,807 46,602 - 57,409Share based payments - 4,313 - 4,313Warrants issued - - 6,322 6,322----------------- -------- -------- -------- --------Balance as at 30 September 10,807 50,915 6,322 68,0442007 ----------------- -------- -------- -------- -------- 8. Cost of sales Six months ended 30 September 2007 2006 US$'000 US$'000----------------------- --------- ---------Operating costs:- commercial production 1,095 -- test production 1,898 65Royalties 141 ------------------------ --------- ---------Depreciation, depletion and amortisation of oil 1,096 -and gasproperties----------------------- --------- --------- 4,230 65----------------------- --------- --------- 9. Operating loss The following items of an unusual or significant nature have been charged tooperating loss during the interim period: Six months ended 30 September 2007 2006 US$'000 US$'000----------------------- --------- ---------Exploration and appraisal costs 517 -Share based payments, net of capitalised 3,329 5,847portionInvestigation costs 2,261 ------------------------ --------- --------- The costs of the internal investigation leading to the dismissal of theCompany's CEO, COO and five senior managers was approximately $2.3 million as of30 September 2007. The investigation is more fully discussed in Note 14 to theGroup's financial statements. 10. Share based payments During the interim period ended 30 September 2007, Max Petroleum granted 1.9million options to various officers and employees of the Group with exerciseprices ranging from 152.5p to 197.5p per share. The options all have a term ofseven years. Furthermore, various consultants to the Group exercised a total of17.2 million options during the six months ended 30 September 2007, generatingnet proceeds of $29.1 million. The total number of options outstanding as of 30September 2007 and 30 September 2006 were 93,016,311 and 106,465,513,respectively. The average fair value of the options granted during the latest interim periodwas $1.37 compared to an average fair value of $0.55 for options granted duringthe interim period ended 30 September 2006. Max Petroleum recorded a charge forthe value of services of $3.3 million million for the six months ended 30September 2007, net of $1.0 million in related costs capitalised to intangibleassets. During the interim period ended 30 September 2006, the Group recorded acharge of $5.8 million related to the amortisation of share based payments forservices, net of $0.6 million in costs capitalised to intangible assets. Ashare based payment reserve of $50.9 million and $41.7 million were outstandingas at 30 September 2007 and 30 September 2006, respectively. In October 2007, the Company issued an additional 564,800 options to ODLSecurities, its broker at the time of its listing on AIM, as full settlement ofa claim of compensation owed to ODL by the Company with regards to the Company'slisting on AIM in October 2005. 11. Loss per share Loss per share is calculated on the loss for the relevant financial period usingthe weighted average number of ordinary shares outstanding. The Group had a lossof $13.8 million and $10.3 million for the six months ended ended 30 September2007 and 30 September 2006, respectively, with corresponding weighted averagenumber of ordinary shares outstanding of 316.2 million and 303.6 million. The Group's potentially dilutive securities, including its outstandingconvertible debt (see Note 5), outstanding share options (see Note 10) andwarrants (see Note 7), were all anti-dilutive for the periods ended 30 September2007 and 30 September 2006, respectively. 12. Non-cash transactions The fair value of share options issued in the six months to 30 September 2007was $2.7 million (2006: $2.6 million). The Group has expensed share basedpayment charges to administration expenses in its income statement andcapitalised charges to intangible - exploration and appraisal expenditures. During the period to 30 September 2006, the Group reclassified approximately$1.9 million of acquisition costs capitalised to intangible - exploration andappraisal expenditures, as a prepayment of crude oil processing costs inconjunction with the Group's right to free processing of up to 300,000 tonnes ofcrude oil per year through 2010 under its cooperation agreement entered intowith KazMunaiGaz E&P. In September 2006 the Group issued $75 million of convertible bonds bearinginterest at 6.75% per annum. Interest expense on the net carrying value of thedebt portion is charged at the estimated rate of 11% per annum which the Groupused to calculate the fair value of the debt portion. In June 2007 the Group completed a $100 million revolving mezzanine creditfacility with Macquarie Bank Limited with an initial borrowing base of $20million, of which $5 million (net proceeds after debt issuance costs was $4.1million) was drawn down at 30 September 2007. Upon completion the Company issueda warrant to acquire 5,000,000 ordinary shares in Max Petroleum at an exerciseprice of 160.6p. The warrant was valued independently using the Black-Scholesvaluation model; the fair value of $6.3 million was booked to other reserveswith an offsetting adjustment to prepaid debt issuance costs, which is amortizedover the life of the Macquarie Facility as the corresponding borrowing base isdrawn down by the Company. Summary of non-cash items ----------------------- --------- --------- Six months Six months ended ended 30 September 30 September 2007 2006 US$'000 US$'000----------------------- --------- ---------Operating activitiesDepreciation, depletion and amortisation 1,335 132Share based payments charge - valuation of options 3,329 5,847granted for servicesPrepayment - crude oil processing costs - 1,945Prepayment - debt issuance costs, fair value of 4,741 -warrant --------- ----------------------------------------- 9,405 7,924----------------------- --------- ---------Investing activitiesShare based payments capitalised to intangibles - 984 629exploration and appraisalexpendituresOil and gas property costs reclassified as pre-paid - (1,945)processing costsNon-cash interest expense capitalised to intangibles - 1,926 25exploration and appraisalexpendituresAsset retirement obligation provision 837 57-------------------------------- --------- --------- 3,747 (1,234)----------------------- --------- ---------Financing activitiesConvertible bond - debt issuance cost amortisation (274) -Convertible bond - notional interest incurred (957) (124)Debt issuance costs - fair value of warrant (1,453) --------------------------------- --------- --------- (2,684) (124)----------------------- --------- --------- 13. Reconciliation of net assets and loss under UK GAAP to IFRS Reconciliation of loss Group----------------------- --------- --------- Twelve months Six months ended ended 31 Mar 2007 30 Sept 2006 US$'000 US$'000Reconciliation of loss for the Noteperiod --------- --------- ----------------------------------Loss after taxation reported under UK (24,752) (11,282)GAAPExploration and appraisal costs (a) (8,385) -------------------------- --------- --------- ---------Loss after taxation reported under (33,137) (11,282)IFRS --------- --------- ----------------------------------Attributable to:Equity holders of the Company (29,702) (10,342)Minority interest (3,435) (940)------------------------- --------- --------- ---------Loss for the period reported under (33,137) (11,282)IFRS --------- --------- ---------------------------------- Reconciliation of equity Group 31 Mar 2007 30 Sept 2006 1 Apr 2006 Note US$'000 US$'000 US$'000 ---------------------- ------- -------- -------- --------Total equity under 213,546 220,317 213,638previous UK GAAPAdjustments to retainedlosses:Exploration and appraisal (a) (8,385) - -costs ---------------------- ------- -------- -------- --------Total equity under IFRS 205,161 220,317 213,638---------------------- ------- -------- -------- --------Attributable to:Equity holders of the 208,957 221,618 213,999CompanyMinority interests in (3,796) (1,301) (361)equity ---------------------- ------- -------- -------- -------- 205,161 220,317 213, 638---------------------- ------- -------- -------- -------- Explanation of reconciling items between UK GAAP and IFRS (a) On adoption of the successful efforts method of accounting, $8.4 millionof drilling expenditures associated with unsuccessful wells were expensed in thefinancial year ended 31 March 2007. (b) On adoption of successful efforts, there was no depletion oramortisation charge in relation to intangible - exploration and appraisalexpenditures, and oil and gas properties as commercial production commenced on 1August 2007. (c) The general principle in IFRS 1 requires a first-time adopter to applyIAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financialinstruments: recognition and measurement retrospectively and separate allcompound financial instruments into a debt and equity portion. The Groupcompleted its $75 million convertible bond offering in September 2006 which wasaccounted for under UK GAAP FRS 26 Financial Instruments: Recognition andMeasurement. There are no material differences between IFRS and UK GAAP in thisarea and hence no impact to the Group on transition to IFRS. (d) The Group had adopted UK GAAP FRS 20 for all periods which it hasreported in the accounting for share based payments. This standard is verysimilar to that of IFRS 2. As such there are no material differences. (e) The Group does not have a foreign currency translation reserve asrequired by IAS 21 The Effects of Changes in Foreign Exchange as the Group andits subsidiaries have the same functional currency. (f) Under IAS 19 Employee Benefits, the monetary value of any unusedvacation carried forward by employees at the year end must be accrued for. TheGroup has been accounting for its employees' holiday accrual, hence there is nilimpact arising from the transition to IFRS. Major elections made under IFRS 1 First-time Adoption of International FinancialReporting Standards (a) The Group has elected not to apply IFRS 3 Business Combinationsretrospectively to past business combinations as they occurred prior to the dateof transitioning to IFRS. (b) As permitted under IAS 23 Borrowing costs, the Group re-affirms itspolicy to capitalise interest on intangible - exploration and appraisalexpenditures, and oil and gas properties. (c) The Group has elected not to measure individual items of property, plantand equipment at fair value at the date of transition to IFRS. The Groupassumes UK GAAP costs of property, plant and equipment as being equal to IFRSdeemed costs. Explanation of material adjustments to the cash flow statement for 2006 There are no material differences between the cash flow statement presentedunder UK GAAP and IFRS. 14. Post balance sheet events Investigation into the undisclosed receipt of Astrakhanskiy options by relatedparties On 6 September 2007, the Company suspended its former Chief Executive Officer,Steve Kappelle, and its Chief Operating Officer, Ole Udsen, pending the outcomeof an internal investigation, which included potential breaches of theiremployment contracts. The investigation was led by Barlow Lyde & Gilbert LLP, a leading internationallaw firm. The investigation primarily focused on certain related partytransactions, including the undisclosed receipt of beneficial interests inoptions over six million shares in Max Petroleum by certain employees andmembers of senior management, including the Group's COO, Mr. Ole Udsen, thatwere issued by the Company as partial consideration for the Astrakhanskiycontract area acquired in January 2006. At the time of the acquisition and upuntil the time of the investigation, the Board believed these options were forthe benefit of the vendors of the partnership that originally held theAstrakhanskiy licence. The investigation also uncovered evidence of breaches of employment contracts bycertain employees of the Company involving two oil and gas companies operatingin Kazakhstan, in which Mr. Kappelle held equity interests that were notdisclosed to the Board. As a result of the investigation, the Group dismissed Messrs. Kappelle andUdsen, as well as five other employees, for breach of contract and, in certaincases, breach of fiduciary duty. The findings of the investigation, resulting dismissals and applicable relatedparty disclosure are more fully described in the Company's 2007 annual financialstatements. Share options As a result of the recent dismissals of Mr. Kappelle, the Company's former CEO,and six other employees of the Company, options in respect of 7,397,669 ordinaryshares in the Company expired unexercised. On 29 October 2007, the Company granted a total of 4.9 million share options tovarious directors, officers and employees of the Company, including a grant of 1million share options to each of Messrs. Robert Holland, Executive Director andInterim CEO, and Lee Kraus, Executive Director and Interim COO, at an exerciseprice of 78p per share, of which one third are exercisable immediately with theremainders becoming exercisable in equal amounts on 29 October 2008 and 29October 2009. The remaining 2.9 million option grants have an exercise price of78p per share with a three year vesting period. During November and December 2007, Mr. Kappelle, a former director and CEO ofthe Company, exercised options over a total of 2.4 million ordinary shares at anexercise price of 35p per share. The options exercised were originally grantedby the Company to Mr. Kappelle in October 2005 and are part of those which hadvested prior to his dismissal on 17 October 2007. Temporary suspension of production in Zhana Makat December 2007, production from the Zhana Makat field was temporarily suspendedpending approval of the Group's proposed gas utilisation plan by the Ministry ofEnergy and Mineral Resources ("MEMR"). The Group has filed the permitapplication with the MEMR and anticipates that approval of the gas utilisationplan, as well as the associated gas flaring permit, will be obtained shortly.Upon receipt of such approval, the Group will resume production in the ZhanaMakat field without any anticipated material impact on the Group's ongoingoperations. East Alibek well In October 2007 the Group drilled the East Alibek well to its total depth of3,530 metres. The well encountered oil shows in the KT-2 formation innon-commercial quantities and the Group has plugged and abandoned the well. Thetotal cost of the well is estimated at $11.5 million, of which $9.5 million hadbeen incurred as of 30 September 2007. Copies of the interim financial statements are being sent to the Company'sshareholders on or before 7 January 2008 and will be available on the Company'swebsite, (www.maxpetroleum.com). This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MXP.L