23rd Apr 2008 07:00
Island Oil and Gas PLC23 April 2008 Island Oil & Gas plc"Island" or "The Company" Interim Results for the period ended 31 January 2008 Financial Highlights O Turnover: Stg£0.92m from gas sales (2007: Stg£1.2m) O Operating profit: Stg£0.904m (2007: Stg£5.39m loss) O Profit before tax: Stg£0.418m (2007: Stg£5.34m loss) O Extended debt facility with RMB Resources O Cash balance: Stg£1.523m (2007: Stg£2.367m) O Earnings per share: Stg£0.0015 (2007: Stg(£0.0713)) O Bluewater Group investment: 3.75 million shares in Island at Stg£0.60 each, representing 3.22% of the Company's issued share capital Operational Highlights O Considerable progress in Celtic Sea: o Successful test from Schull appraisal well: potential producer of natural gas o Front end engineering contracts awarded for Old Head of Kinsale and Schull O Positive movement on Atlantic Margins: o OMV joins project after asset swap deal o Second significant gas prospect identified on the Killala Licence O South East Europe: new horizons: o Asset swap with OMV facilitates entry into Albania o Exclusive option to acquire upstream and downstream assets in Moldova and participate on a 50/50 basis for opportunities in the Former Soviet Union with Valiexchimp o Acquisition of 50% of Durresi Block, offshore Albania, from Lundin Petroleum O Moroccan Potential: o Island signs a Petroleum Agreement relating to seven Exploration Permits in the Tarfaya Basin, onshore Morocco. The Company is the designated operator in the Tarfaya Permit with 40% equity O Appointment of Karl Prenderville as Commercial Director Paul Griffiths, CEO of Island Oil & Gas plc Commented "This has been a period of considerable progress, driven by the exploitation ofour key differentiator; the ability to operate upstream projects, which has inturn created significant value for our shareholders. We are delighted to have attracted inward investment from major industryplayers. The ability of the management to attract partners such as OMV andBluewater sets us apart in the market and will facilitate faster progresstowards the monetisation of our prospects and assets. By diversifying our portfolio, with strategic entry into South Eastern Europeand Morocco, we have both spread our risk profile, and opened up new upsidepotential. Both regions are proven petroleum provinces, that we believe holdexciting exploration and development options. These interim results, with strong profit before tax and EPS demonstrateIsland's ability to add value in tight market conditions. With predicted longterm high oil and gas prices and a portfolio of projects across the value chainwe remain highly confident for our future prospects." 23 April 2008 Further information: Island Oil & Gas plcPaul GriffithsKarl Prenderville Tel: +353 1 6313755www.islandoilandgas.com Davy (NOMAD and broker)Anthony Farrell Tel: +353 1 679 6363 Landsbanki (UK broker)Simon Robinson Tel: +44 (0)207 426 9000 College Hill (Financial PR)Paddy Blewer Tel: +44 (0)20 7457 2020Nick Elwes Chairman's Statement The six months ended 31 January 2008 has been a period of consolidation forIsland during which the Company has made progress towards realising the value ofits field developments whilst further enhancing the international portfolio. At the beginning of the period we tested the 57/2-3 gas appraisal well at Schullwhich was the culmination of a second successful drilling campaign in the CelticSea. We are now concentrating on development options for the Old Head of Kinsaleand Schull gas fields with a view to creating value to shareholders as quicklyas market conditions dictate. The Company has clearly proved itself as a capable operator which is nowcreating opportunities in other areas such as the Netherlands, Morocco, Albaniaand Moldova. In the Atlantic Margin the Bluewater Group, one of the world's leading providersof Floating Production Storage and Offloading ("FPSO") facilities, purchasedadditional equity in the Connemara Licence further underlining the potential ofthe oil field and the exploration prospects on the Licence. Several wells arescheduled to be drilled by other operators in this prospective area over thenext two years and Island is likely to see a significant uplift in its acreagevaluation with any drilling success. Following completion of reservoir engineering studies on the Amstel field,offshore the Netherlands, we expect to see an improvement in the range ofpotential resources which will increase the potential value of this project.Post 31 January 2008, we have been awarded the Q13b Licence which surrounds theAmstel field, thereby creating the potential to develop the Zaan oil discoveryas a satellite tie-back to the Amstel facilities. Island has further enhanced its international portfolio with a second licenceaward in Morocco as operator and we have signed a Memorandum of Understanding ("MOU") with Valiexchimp giving Island the exclusive right to acquire producingassets in Moldova and participate in any future opportunities in the FormerSoviet Union on ground floor terms. Offshore Albania the Company acquiredLundin's 50% equity in the Durresi Block and immediately reached agreement withBeach Petroleum on a farm-in for 25% equity initially and subsequently up to 45%equity in the Licence. The Company continues to actively pursue significant farmout transactions thatwill progress our near term development projects in order to reach our goal ofgenerating cash flow from production and to provide the financial capability toaccelerate our highly prospective exploration portfolio. The Board was further strengthened with the appointment of Karl Prenderville asCommercial Director in August 2007. Our loan facility through RMB Resources wasincreased to Stg£12 million in December 2007 to reflect the increase in activityrelated to our near-development projects and has been further extended until atleast May 2008. We believe our strategy will significantly enhance shareholdervalue over the coming months through advancing our near term developments andmanaging the portfolio to reduce financial exposure whilst adding partners withthe potential to progress our projects. FINANCIAL RESULTS The Company recorded a profit before taxation and finance income and financeexpense of Stg£0.9 million for the half year period compared to a loss ofStg£5.4 million in the previous comparable period. The profit relates mainly tothe sale of a 10% interest in the Amstel field development in the Netherlands.There were no major write offs during the period. Turnover from our interest in the Seven Heads Gas Field was Stg£0.9 millioncompared to Stg£1.2 million in the previous comparable period, reflecting asmall reduction in gas produced Stg£(0.2 million) combined with lower gas prices(Stg£0.1 million). Cost of sales for the half year of Stg£0.7 million were in line with budget andmainly related to pipeline maintenance during the period. Administration costsfor the half year were Stg£0.8 million compared to Stg£0.7 million in theprevious comparable period. In October 2007, Island secured an additional Stg£4.5 million short term loanfacility ("facility") from RMB Resources ("RMB") increasing the overall facilityto Stg£12 million. In December 2007 RMB extended the loan repayment date and atthe same time surrendered their right to 5,759,631 warrants at an exercise priceof Stg£0.7813 per ordinary share in exchange for 1,000,000 fully paid up shares.The retained earnings reserve was increased by Stg£0.261 million to reflect thenet effect of surrendering the warrants and issuing the fully paid up shares. Cash balances at the period ended amounted to Stg£1.5 million. It is anticipatedthat farmout and asset sale transactions will result in further cash payments tothe Company over the next few months. The financial results for the half year have been prepared in accordance withInternational Financial Reporting Standards ("IFRS"). In accordance with IFRS6,'Exploration for and Evaluation of Mineral Resources', costs incurred prior tothe award of exploration licences have not been capitalised. Stg£0.1 million inthe current period and Stg£0.2 million relating to prior year expenditure hasbeen written off through reserves following the adoption of IFRS6. Also in accordance with International Accounting Standards ("IAS") 23 "BorrowingCosts", borrowing costs directly attributable to the acquisition andconstruction of qualifying assets have been added to the cost of these assets.This amounted to Stg£0.4 million in the current period. Stg£0.3 millionrelating to the prior year has been capitalised and adjusted through reserves. Gas Production Revenue Gas sales revenues for the interim period amounted to Stg£0.92 million comparedwith Stg£1.182 million for the same period last year. This reflects a reductionin both production volumes and average price received in respect of gas producedby the Seven Heads gas field which produced at gross rates ranging from 10.5 -12 Million Standard Cubic Feet per Day ("mmscf"). It is expected that productionrates will be maintained at 10.5 mmscf per day until the end of September 2008. Estimated gross remaining reserves from 1 January 2008 have been revised upwardsto 9.3 billion cubic feet ("bcf") or 1.163 bcf net to Island up from 8.6 bcf or1.075 bcf net to Island according to Marathon's latest estimates. Portfolio Management The Company concluded its asset swap agreement with OMV whereby it swapped 50%equity in Atlantic Margin Licence 3/05, offshore Ireland, for 50% equity andoperatorship of the Durresi Block, offshore Albania. Island subsequentlyacquired the remaining 50% equity in Durresi from Lundin Petroleum and hasalready agreed terms with Beach Petroleum to farm out up to 45% equity. Island has signed an MOU with Valiexchimp S.R.L. giving it the right to acquireboth upstream and downstream assets in Moldova and to participate inopportunities in the Former Soviet Union on a 50/50 basis. Onshore Morocco, Island signed a Petroleum Agreement giving it 40% equity andoperatorship of seven Exploration Permits in the Tarfaya Basin. In Atlantic Margin Licence 1/04, containing the undeveloped Connemara oil field,the Bluewater Group exercised its option to acquire 10% equity by acquiring 3.75million shares in Island at a purchase price of Stg£0.60 per share. Bluewaterhad a second option to acquire a further 10% equity in the Licence for a cashpayment of Stg£2.25 million, which was subsequently exercised after the end ofthe current period in February 2008. Celtic Sea Assets At the beginning of the current period Island completed its 2007 drillingcampaign with a successful test of gas appraisal well 57/2-3 at Schull. The wellflowed at a rate of 21 million standard cubic feet per day and was suspended asa potential producer. Technical and commercial evaluation of the Old Head of Kinsale and Schull gasfields is ongoing aimed at a joint development of both fields through theKinsale facilities. Pegasus International is currently performing front-endengineering studies. The issue of security of gas supply for Ireland has become increasinglyimportant and the Irish Authorities are undergoing a consultation process todecide on the best options for a strategic national gas reserve. Island isparticipating in this process and is also looking at the potential for a gasstorage project with Schull or Old Head of Kinsale. Atlantic Margin Island continues to attract high calibre partners to its Atlantic Margin acreageand the successful sale of equity to the Bluewater Group in respect of theConnemara Licence enhances the partnership with expertise relating to FPSO oilfield developments. It is planned to carry out a feasibility study for apotential pilot development option for the Connemara oil field over the next fewmonths. The Licence also contains several significant exploration prospects. In the Rockall Basin, the addition of OMV as a 50% partner underlines thepotential of the large Killala gas prospect in Licence 3/05. Seismicreinterpretation has identified a second significant gas prospect in theLicence: the Kingfisher Prospect. 3D seismic will be acquired subject to vesselavailability, contract terms and a revaluation of the survey area following theaddition of the new Kingfisher Prospect. Geological and geophysical studies have identified a large oil prospect in theSouthern Slyne Trough (Licence 4/06 "Inishmore") where Lundin Petroleum AB is a50% partner. A 3D seismic acquisition programme over the Licence will becoordinated with the survey planned for the Killala Licence. Several exploration wells are scheduled to be drilled in the Atlantic Marginover the next couple of years by a number of operators. The value of Island'sacreage would be significantly enhanced should any of the drilling besuccessful. Information gathered from the Inishbeg well drilled in 2006 is assisting withtechnical evaluation of the "Inishowen" Licence in the Donegal Basin (Licence 3/06). A 2D seismic acquisition programme is planned for 2009 to furtherinvestigate prospectivity in the acreage. Island and the Bluewater Group have jointly applied for 3 blocks in thePorcupine Basin Licensing Round. After the current period Island and theBluewater Group were successfully awarded this prospective acreage whichcontains at least one significant exploration prospect. Island will operate thenew licence and hold 50% equity. The above portfolio of Atlantic Margin prospects is the subject of an intensefarmout promotion and several oil majors are currently reviewing theopportunity. International Portfolio In the Netherlands, Horizon Energy Partners are close to finalising a reservoirengineering study for the Amstel oil field. It is anticipated the results willshow a potential increase in the range of prospective resources and it isenvisaged that a Field Development Plan will be submitted in the second quarterof 2008 with first oil planned for 2010. Post 31 January 2008, Island has beenawarded the Q13b Exploration Licence offshore the Netherlands which surroundsthe Amstel field. The acreage contains the Zaan discovery, which couldpotentially be tied back through Amstel facilities, and several other prospects. A Memorandum of Understanding ("MOU") was signed with Valiexchimp S.R.L. givingIsland the right to acquire 50% of the Valeni Oil Field, Victorovka Gas Field,Comrat refinery and five land rigs all situated in Moldova. It is expected thistransaction will be completed in the second quarter of 2008 resulting in theCompany's first oil production. Current production rate from the Valeni Field isaround 700 bbls per day. On completion of the deal Island will have theexclusive right to participate on a 50/50 basis with Valiexchimp in newopportunities in the Former Soviet Union. The Company was awarded 40% equity and operatorship of seven Exploration Permitsin the Tarfaya Basin onshore Morocco. The "Tarfaya Permit" is valid for up toeight years and a work programme has been committed to during the initial twoyears and six months phase of the Permit comprising seismic reprocessing andacquisition plus geochemical modelling. A drill or drop decision will be made atthe end of this initial phase of the Permit. In the Durresi Block offshore Albania, Island acquired the remaining 50% equityinterest from Lundin Albania BV and has, in addition, agreed farm out terms withAustralian company Beach Petroleum Limited ("Beach"). The farmout will result inBeach acquiring an initial 25% equity interest in the Durresi Block for backcosts. Island has granted Beach an option to increase its equity to 45% bycontributing 55% of the dry hole cost of one well at a location to be mutuallyagreed between both parties. The Durresi Block covers an area of 4,200 squarekilometres along the Adriatic coast of Albania. It contains the unappraisedA4-1X gas/condensate discovery drilled by Chevron and Agip in 1993 at a time oflower oil and gas prices. Several undrilled oil and gas prospects and leadsexist in the Block along the northern edge of the Apulia Platform. This trend iscurrently the focus of renewed exploration and licence activity in the adjacentItalian offshore blocks. OUTLOOK & PROSPECTS Following completion of the Celtic Sea drilling programme Island and itspartners are evaluating development options for the Old Head of Kinsale andSchull gas fields. These fields have the potential to create significant valuegiven their close proximity to the Kinsale infrastructure resulting in lowerdevelopment costs and the benefit of shared operating costs. They also have thepotential to provide Ireland's strategic gas reserve and/or to be used forcommercial gas storage. The Atlantic Margin, offshore Ireland, will see a significant increase indrilling activity over the next two years and Island's acreage position meansthat we are in a strong position to take advantage of any drilling success. TheCompany is actively seeking additional partners for its Atlantic Margin acreage. In the Netherlands the recent award of the Q13b Exploration Licence will furtherenhance the value of the Amstel field. The Company will continue to progress thedevelopment of the Amstel Field in order to target production and therefore cashflow by 2010. Island's operating capability continues to generate opportunities asdemonstrated by the MOU signed with Valiexchimp in Moldova and the award of theTarfaya Permit in Morocco. We believe this strategy will add significant valuein the future, particularly in relation to oil field rehabilitation projects,and we will continue to pursue further low cost opportunities where the Companysees it has a competitive advantage. The coming months will see further progress towards developing the Old Head ofKinsale, Schull and Amstel fields aimed at generating early cash flow to takeadvantage of predicted continuing high energy prices. The Company will continueto manage the portfolio and seek to acquire, farmout, sell or swap assets wherethe Board feels it is prudent to do so. I look forward to reporting further progress on our field developments and thesuccessful delivery of our strategy to you soon. Bryan Benitz Chairman 23 April 2008 Group Income StatementInterim to 31 January 2008(unaudited) 6 Months Ended 6 Months Ended Year Ended 31 Jan 2008 31 Jan 2007 31 July 2007 Stg£'000 Stg£'000 Stg£'000 (As restated) (As restated) Revenue 920 1,182 1,762Cost of sales (686) (376) (902) Gross profit 234 806 860 Other income - - 401Administration expenses (830) (696) (1,174)Exploration costs written off - (5,500) (4,537)Disposal of licence 1,500 - - Operating profit/(loss) 904 (5,390) (4,450)Finance income 48 61 181Finance expense (534) (15) (729) Profit/(loss) before taxation 418 (5,344) (4,998) Income tax expense (250) - - Profit/(loss) for the period attributable to 168 (5,344) (4,998)equity holders of the parent Earnings per share (Stg£)Basic .0015 (.0713) (.0613)Diluted .0014 (.0713) (.0613) Group Balance SheetAt 31 January 2008(unaudited) 31 Jan 2008 31 Jan 2007 31 July 2007 Stg£'000 Stg£'000 Stg£'000 (As restated) (As restated)Assets Non current assetsIntangible exploration and evaluation assets 60,752 35,390 55,096Property, plant and equipment 1,557 1,943 1,761 62,309 37,333 56,857Current assetsOther receivables 576 1,842 2,612Cash and cash equivalents 1,523 2,367 11,602 2,099 4,209 14,214 Total assets 64,408 41,542 71,071 Equity and liabilities Equity attributable to equity holders of the parent Called up share capital 798 515 762Share premium 51,167 35,175 48,571Share warrants reserve - 259 447Share based payment reserve 756 340 655Unrealised revenue reserve 47 47 47Retained earnings (5,540) (6,317) (5,971) Total equity 47,228 30,019 44,511 Non current liabilitiesProvisions 689 661 675 Current liabilitiesTrade and other payables 4,241 4,321 18,385Interest bearing loans and borrowings 12,000 6,541 7,500Current Tax Liabilities 250 - - 16,491 10,862 25,885 Total liabilities 17,180 11,523 26,560 Total equity and liabilities 64,408 41,542 71,071 Consolidated Cashflow StatementInterim to 31 January 2008(unaudited) 6 Months Ended 6 Months Ended Year Ended 31 Jan 2008 31 Jan 2007 31 July 2007 Stg£'000 Stg£'000 Stg£'000 (As restated) (As restated)Cash flows from operating activities Profit/(loss) before taxation 418 (5,344) (4,998)Finance income (48) (61) (181)Finance expense 534 15 729 Operating profit/(loss) 904 (5,390) (4,450) Adjusted for:Depreciation 205 198 396Gain on disposal of licence (1,500) - -Exploration costs written off - 5,500 4,537Cost of share awards 101 - 315Foreign exchange loss (22) (47) (44) (312) 261 754 Decrease/(increase) in trade and other receivables 2,036 26 (156)Increase in trade and other payables 37 2,407 307 Net cash from operating activities 1,761 2,694 905 Cash flows from investing activities Disposal of oil and gas assets 1,513 - 3,617Expenditure on intangible exploration and evaluation (21,147) (20,892) (41,366)assetsContribution from partners for exploration and 951 2,138 16,742evaluation assetsPurchase of property, plant and equipment - (5) (10)Finance income 48 61 181 Net cash used in investing activities (18,635) (18,698) (20,836) Cash flows from financing activities Net proceeds from issue of share capital 2,631 5,800 19,142Debt arrangement fees (237) - (590)Drawdown of bank loans 4,500 6,500 7,500Finance expenses (99) - (590) Net cash generated by financing activities 6,795 12,300 25,462 Net (decrease)/increase in cash and cash equivalents (10,079) (3,704) 5,531 Cash and cash equivalents at beginning of period 11,602 6,071 6,071 Cash and cash equivalents at end of period 1,523 2,367 11,602 Notes to the interim financial information 1. The results presented in the Interim Statement are unaudited. 2. The accounting policies adopted on transition from Irish GenerallyAccepted Accounting Policies ("GAAP") as previously adopted, to InternationalFinancial Reporting Standards ("IFRS") as adopted by the EU with effect from thetransition date of 1 August 2006 are set out below in the provisional statementof accounting policies. These policies have been applied consistently to allperiods presented in these consolidated unaudited interim financial information. 3. The only impacts on transition arose from the adoption of IFRS 6 'Exploration for and Evaluation of Mineral Resources' and the adoption of anaccounting policy for the capitalisation of interest in accordance withInternational Accounting Standards ("IAS") 23 'Borrowing Costs'. Explanations ofhow the transition to IFRS has affected the previously reported financialposition and results in the periods ended 31 July 2007 and 31 January 2007 underIrish GAAP are shown below: (a) Under IFRS 6 'Exploration for and Evaluation of Mineral Resources'expenditures on non-licensed oil and gas interests are expensed as incurred. Forthe period ended 31 January 2007, the adjustment in the income statement isStg£Nil and the adjustment to the income statement for the year ended 31 July2007 is a loss of Stg£0.2 million. The corresponding adjustment on the balancesheet was to reduce intangible exploration and evaluation assets. (b) Under IAS 23 'Borrowing Costs' interest that relates to expenditure onintangible assets has been capitalised. For the period ended 31 January 2007and the year ended 31 July 2007, Stg£Nil and Stg£0.3 million respectively hasbeen capitalised as intangible exploration and evaluation assets in respect ofborrowing costs and equivalent reductions were made to the finance expense inthe income statement. 4. The calculation of the basic earnings per share is based on the profitfor the financial period of Stg£0.168 million (2007: Stg£5.344 million loss)divided by the weighted average number of ordinary shares in issue during theperiod ended 31 January 2008 of 112,881,853 and during the period ended 31January 2007 of 74,930,617. The calculation of diluted earnings per share isbased on the weighted number of ordinary shares outstanding, adjusted for theeffects of all dilutive potential ordinary shares which comprise share optionsgranted to employees. The dilutive weighted average number of ordinary sharesin issued for the period ended 31 January 2008 was 117,120,241 (2007:76,930,617) PROVISIONAL STATEMENT OF ACCOUNTING POLICIES Basis of preparation The rules of the Alternative Investment Market (AIM) of the London StockExchange require and European Union (EU) Law permits the next annualconsolidated financial statements of the Group for the year ended 31 July 2008to be prepared in accordance with International Financial Reporting Standards(IFRS) issued by the International Accounting Standards Board (IASB) and adoptedfor use in the EU. This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areadopted for use in the EU and effective (or available for early adoption) at 31July 2008 or are expected to be adopted and effective (or available for earlyadoption) at 31 July 2008, the Group's first annual reporting date at which itis required to use IFRS adopted for use by the EU. Based on these recognitionand measurement requirements management has made assumptions about theaccounting policies expected to be applied when the first annual financialstatements are prepared in accordance with IFRS adopted by the EU for the yearended 31 July 2008. The IFRS adopted for use in the EU that will be effective (or available forearly adoption) in the annual financial statements for the year ended 31 July2008 are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ended 31 July 2008. FUNCTIONAL AND PRESENTATION CURRENCY The interim consolidated financial information is presented in Sterling, roundedto the nearest thousand (Stg£'000) except when otherwise indicated. Sterling isthe functional currency of the Company and all of the Group's subsidiaries. Basis of MEASUREMENT The interim consolidated financial information is prepared on a historical costbasis except for the measurement of share options and warrants which are statedat fair value at grant date. USE OF ESTIMATES AND JUDGEMENTS The preparation of financial information requires management to make judgements,estimates and assumptions that affect the application of accounting policies andthe reported amounts of assets, liabilities, income and expenses. Actual resultsmay differ from these estimates. Estimates and underlying assumptions arereviewed on an ongoing basis. Revisions to accounting estimates are recognisedin the period in which the estimate is revised and in any future periodsaffected. In particular, significant areas of estimation uncertainty and criticaljudgements in applying accounting policies that have the most significant effecton the amount recognised in the financial statements are in the following areas: • Measurement of the recoverable amounts of intangible assets • Utilisation of tax losses • Measurement of share-based payments Basis of consolidation The consolidated interim financial information includes the financialinformation of Island Oil & Gas plc and its subsidiaries. Subsidiaries are entities controlled by the Group. Control exists when the Grouphas the power to govern the financial and operating policies of an entity so asto obtain benefits from its activities. In assessing control, potential votingrights that presently are exercisable are taken into account. The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date that control ceases.Intra-group balances and any income and expenses and unrealised gains arisingfrom intra-group transactions are eliminated in preparing the consolidatedinterim financial information. Unrealised losses are eliminated in the same wayas unrealised gains but only to the extent that there is no evidence ofimpairment. REVENUE RECOGNITION Revenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group, that it can be reliably measured, that theproduct passes out of the ownership of the Group to external customers pursuantto enforceable sales contracts and that the significant risks and rewards ofownership of gas have passed to the buyer. Revenue comprises the invoiced valueof gas supplied by the Operator of a gas field which is a jointly controlledasset and excludes trade discounts and value added tax. PENSIONS The Group contributes to a defined contribution pension scheme for certainemployees. Pension scheme costs are accounted for on an accruals basis. SHARE BASED PAYMENTS The Group issues equity settled share options as an incentive to certain keymanagement and staff (including directors). The fair value of share optionsgranted to directors and employees under the Company's option schemes isrecognised as an expense with a corresponding credit to the share based paymentsreserve. The fair value is measured at grant date and spread over the periodduring which the awards vest. The fair value is measured using a binomiallattice model, taking into account the terms and conditions upon which theoptions were granted. The options issued by the Group are subject only to service related vestingconditions. Service related vesting conditions are not taken into account whenestimating the fair value of awards as at grant date; such conditions are takeninto account through adjusting the number of equity instruments that areexpected to vest. In certain instances, the Group issues share warrants to third parties inrelation to the settlement of underwriting service fees. The value of theseshare based payments is determined by reference to the fair value of theservices received and is recorded as a cost in the income statement with acorresponding credit to share warrants reserve. The proceeds received net of any directly attributable transactions costs willbe credited to share capital (nominal value) and share premium when options orshare warrants are converted into ordinary shares. FOREIGN CURRENCY Transactions in foreign currencies are translated to the respective functionalcurrencies of Group entities at exchange rates at the dates of the transactions.Monetary assets and liabilities denominated in foreign currencies at thereporting date are retranslated to the functional currency at the exchange rateat that date. The foreign currency gain or loss on monetary items is thedifference between amortised cost in the functional currency at the beginning ofthe period, adjusted for effective interest and payments during the periodtranslated at the rates on the dates they occur, and the amortised cost infunctional currency translated at the exchange rate at the end of the period.Foreign currency differences arising on retranslation are recognised in profitor loss. TAXATION Income tax expense comprises current and deferred tax. Income tax expense isrecognised in profit or loss except to the extent that it relates to itemsrecognised directly in equity, in which case it is recognised in equity.Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the reporting date, and anyadjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes.Deferred tax is not recognised for the following temporary differences: theinitial recognition of goodwill, the initial recognition of assets orliabilities in a transaction that is not a business combination and that affectsneither accounting nor taxable profit, and differences relating to investmentsin subsidiaries to the extent that they probably will not reverse in theforeseeable future. Deferred tax is measured at the tax rates that are expectedto be applied to the temporary differences when they reverse, based on the lawsthat have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that futuretaxable profits will be available against which temporary difference can beutilised. Deferred tax assets are reviewed at each reporting date and arereduced to the extent that it is no longer probable that the related tax benefitwill be realised. CONVERTIBLE LOAN NOTES Where the Group issued convertible loan notes, the terms of the loan notes areassessed to determine whether they should be presented as debt or equity. Wherethe manner of settlement of the convertible loan notes is only by issue of afixed number of shares, the shares to be issued are shown in equity as soon asthe proceeds are receivable. Where warrants are issued concurrently with thedebt, the proceeds received are apportioned between the shares to be issued andthe warrants to the extent that there is value inherent in the warrants. EARNINGS PER SHARE The Group presents basic and diluted earnings per share ("EPS") data for itsordinary shares. Basic EPS is calculated by dividing the profit or lossattributable to ordinary shareholders of the Company by the weighted averagenumber of ordinary shares outstanding during the period. Diluted EPS isdetermined by adjusting the profit or loss attributable to ordinary shareholdersand the weighted average number of ordinary shares outstanding for the effectsof all dilutive potential ordinary shares, which comprise convertible notes andshare options granted to employees. LEASE PAYMENTS Payments made under operating leases are recognised in profit or loss on astraight-line basis over the term of the lease. Lease incentives received arerecognised as an integral part of the total lease expense, over the term of thelease. EXPLORATION, EVALUATION AND PRODUCTION ASSETs The Group adopts the successful efforts method of accounting for exploration andevaluation costs. All licence acquisition, exploration and evaluation costs areinitially capitalised in cost centres by well, field or exploration area, asappropriate. Directly attributable administration costs and interest payableare capitalised insofar as they relate to specific development activities.Pre-licence costs are expensed in the period in which they are incurred.Exploration and evaluation assets are not amortised but are assessed forimpairment in accordance with the Group's Depletion, Amortisation and ImpairmentPolicy. Exploration and evaluation assets will be transferred to production assetswithin intangible assets when the technical feasibility and commercial viabilityof extracting oil or gas are demonstrable. Subsequent expenditure is capitalisedonly where it either enhances the economic benefits of the production assets orreplaces part of the existing production asset. Any costs associated with thereplacement of assets are expensed to the income statement. Production assetsare amortised in accordance with the Group's Depletion, Amortisation andImpairment accounting policy. COMMERCIAL RESERVES Commercial reserves are proven and probable oil and gas reserves, which aredefined as the estimated quantities of crude oil, natural gas and natural gasliquids which geological, geophysical and engineering data demonstrate with aspecified degree of certainty to be recoverable in future years from knownreservoirs and which are considered commercially producible. There should be a50 per cent statistical probability that the actual quantity of recoverablereserves will be more than the amount estimated as a proven and probable reserveand a 50 per cent statistical probability that it will be less. DEPLETION, AMORTISATION and impairment Impairment reviews on exploration and evaluation assets are carried out on eachcash-generating unit identified in accordance with IAS36 "Impairment of Assets".The Group's cash-generating units are those assets which generate largelyindependent cash flows and are normally, but not always, single developmentareas or fields. Exploration and evaluation assets are assessed for impairment in certaincircumstances including: (i) the period for which the Group has the right to explore in the specific areahas expired or will expire in the near future and is not expected to be renewed (ii) substantive expenditure on further exploration for and evaluation ofresources in a specific area is neither budgeted nor planned (iii) the Group has decided to discontinue exploration and evaluation activitiesin a specific area as commercially viable quantities of oil or gas have not beendiscovered (iv) the carrying amount of an exploration and evaluation asset is unlikely tobe recovered in full from successful development or sale Any such impairment is recognised in the income statement. Where there has been a charge for impairment in an earlier period, that chargewill be reversed in a later period where there has been a change incircumstances to the extent that the discounted future net cash flows are higherthan the net book value at the time. In reversing impairment losses, thecarrying amount of the asset will be increased to the lower of its originalcarrying value or the carrying value that would have been determined (net ofdepletion) had no impairment loss been recognised in prior periods. In relation to production assets, all expenditure carried within each field isamortised from the commencement of production on a unit of production basis,which is the ratio of oil and gas production in the period to the estimatedquantities of commercial reserves at the end of the period plus the productionin the period, generally on a field-by-field basis. Costs used in the unit ofproduction calculation comprise the net book value of capitalised costs plus theestimated future field development costs. Changes in the estimates of commercialreserves or future field development costs are dealt with prospectively. DECOMMISSIONING Provision is made for the decommissioning of oil and gas wells and otheroilfield facilities. The cost of decommissioning is determined throughdiscounting the amounts expected to be payable to their present value at thedate the provision is recorded and is reassessed at each balance sheet date.This amount is regarded as part of the total investment to gain access to futureeconomic benefit and consequently is capitalised as part of the cost of theasset and the liability is included in provisions. Such cost is depleted overthe life of the asset and charged to the income statement. The unwinding of thediscount is reflected as a finance cost in the income statement over theremaining life of the well. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated in the Balance Sheet at cost lessaccumulated depreciation and any recognised impairment loss. Depreciation onproperty, plant and equipment is provided at rates calculated to write off thecost less estimated residual value of each asset on a straight-line basis overits expected useful economic life as follows: • Equipment 33% per annum • Oil and Gas infrastructure 16.7% per annum NON-DERIVATIVE FINANCIAL INSTRUMENTS Non-derivative financial instruments comprise trade and other receivables, cashand cash equivalents, loans and borrowings, and trade and other payables. Trade and other receivables Trade and other receivables are carried at amortised cost less provisions forimpairment. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of the Group'scash management are included as a component of cash and cash equivalents for thepurpose of the statement of cash flows. Loans and borrowings Interest bearing loans and borrowings after initial recognition are carried atamortised cost using the effective interest rate method. Arrangement fees andissue costs of debt are deducted from the debt proceeds on initial recognitionof the liability and are amortised to the income statement as a finance expenseover the term of the debt. Trade and other payables Trade and other payables are carried at amortised cost. JOINTly CONTROLLED ASSETS OR OPERATIONS Jointly controlled assets and operations arise from an arrangement that is ajoint venture carried on with assets that are controlled jointly (whether or notowned jointly), but not through a separate entity. The consolidated financialinformation includes the Group's share of a jointly controlled asset being aninterest in a gas field, the Group's share of expenses incurred by the operatorof the rig and the Group's share of income from the sale of gas from thefacility. ISSUE EXPENSES AND SHARE PREMIUM ACCOUNT Issue expenses of new shares are written off against the premium arising on theissue of share capital. Borrowing Costs Borrowing costs based on the effective interest rate directly attributable tointangible exploration and evaluation assets are added to the cost of thoseassets, until such time as the assets become production assets or are availablefor sale. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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