10th Sep 2012 07:00
Magnolia Petroleum Plc / Index: AIM / Epic: MAGP / Sector: Oil & Gas
10 September 2012
Magnolia Petroleum Plc (`Magnolia' or `the Company') Interim Resultsfor the Six Months to 30 June 2012
Magnolia Petroleum Plc, the AIM quoted US focused oil and gas exploration and production company, announces its interim results for the six month period ended 30 June 2012.
Highlights
* Excellent progress made towards building a significant oil and gas company
focused on the proven Bakken and Three Forks Sanish plays in North Dakota,
and the Mississippi Lime, Woodford / Hunton formations in Oklahoma
* Revenues for H1 2012 of US$282,208, an increase of 129% on the same period
last year (US$123,238) and 17% up on the revenues for the whole of 2011
(US$241,038), with 80 producing wells at the period end
* Loss per share increased to US$0.14, compared to US$0.04 for H1 2011 and
US$0.09 for the year to December 2011 reflecting the impact of the costs of
increased activity during the period and the expenses of being an AIM
quoted company
* Leases over 4,000 net mineral acres acquired in the period, predominantly
in the Mississippi Lime formation, bringing total to 5,506 net mineral
acres
* Total investment of US$2.36m in the period, partially funded by US$2.15m of
share issues; cash outflow of US$718,101 for the period
* Post the period end the Company has secured £10 million equity financing
facility, against which it has drawn down £761,000, and raised a further £
565,000 in a placing
* Strong pipeline of opportunities across all formations both as participant
and operator - over 600 potential drilling locations on existing acreage
* Fulfilling strategy of increasing size of average working and net revenue
interests - Thomason well 12.5% / 9.375% and Prucha well 25% / 18.75% (post
period end)
* Now participating in 83 producing wells and a further 18 either being
drilled or waiting to spud alongside leading operators such as Marathon Oil
and Devon Energy
Magnolia CEO, Steven Snead said, "Thanks to a significant increase in thenumber of producing wells during the period, our first half revenues haveexceeded those of the last full year. Post the period end, the number ofproducing wells in which we have an interest has continued to increase, andcurrently stands at 83, as has the size of our average interests and we are oncourse for our target of 100 producing wells at the year end, compared to just64 at the start of the year.
"With the increase in the number of wells which either have, or are due to, come on stream in the second half, in several of which we have materially larger interests, we believe that revenues for the second half will continue to increase significantly. However, with a further 600 potential drilling locations on our acreage, along with our plans to drill our first well as operator to the Mississippi Lime formation later this year, we believe that this is just the beginning of a period of considerable and sustained growth."
Chief Executive's Statement
Our overall objective is to build Magnolia into a significant US onshore oiland gas company focused on proven, producing, oil rich formations such as theBakken/ Three Forks Sanish, North Dakota, and the Mississippi Lime and Woodford/ Hunton, Oklahoma. As previously stated, to achieve this goal, we intend tomaterially grow our net production and revenues by continuing to participate inwells with leading operators, and, at the same time, acquire leases to drilland operate wells in the reopening Mississippi Lime formation inOklahoma.During the period under review, I am pleased to report excellentprogress has been made towards delivering on our strategy.The six months under review has seen us build on the momentum created followingour admission to AIM in November 2011. Since Magnolia's inception, all but oneof the wells in which we have participated, have generated a commercial return.We have maintained this excellent success rate during the first half whichserves to highlight the robustness and potential of our business model. Havingbuilt up such an impressive track record, we are now advancing plans to scaleup our operations and, in the process, create significant value forshareholders.The number of producing properties in which Magnolia has an interest in hasalready risen to 83 from 64 at the time of our admission to AIM. With a further18 at various stages of development, this number is expected to riseconsiderably in the near future and we are confident we will surpass our targetof having interests in 100 producing wells by the end of the year. This is justthe start. We are receiving multiple proposals to participate in new wells fromleading operators such as Marathon Oil and Chesapeake Energy, and with 600potential drilling opportunities on our existing acreage we have a strongpipeline to drive future revenue growth.Not only are we increasing the number of producing wells we are participatingin, but also the average size of Magnolia's interest. In May this year, wereported the initial production rate of the Thomason well where we have a9.375% net revenue interest, our largest to date. The Montecristo well, inwhich Magnolia has a 5.3486% net revenue interest, has recently been spud andis currently drilling and, post period end, we announced our participation inthe Prucha well operated by Devon Energy in which we have a 25% workinginterest / 18.75% net revenue interest. Subject to the drilling results, thiswell on its own has the potential to materially add to our net production andrevenues.The Thomason, Montecristo and Prucha wells are producing from and are targetingthe Mississippi Lime formation in Oklahoma, a historic oil play that has beenreopened thanks to the application of modern technology such as horizontaldrilling and fracture stimulation. Magnolia, along with leading companies suchas Sandridge Energy and Chesapeake Energy, believe the Mississippi Lime to bewhere the prolific Bakken Formation was just a few years ago, where similartechniques have transformed recovery rates that have led to North Dakotaovertaking Alaska to become the second most productive state in the US, behindTexas.For a small oil company with big ambitions like Magnolia, being able to getinto a reopening play early is crucial and our extensive experience and localknowledge has allowed us to do just that. Since the turn of the year we haveacquired 3,967 net mineral acres within the boundaries of the Mississippi Limeformation with interests of up to 100%, surpassing the ambitious targets we setourselves at the time of our listing. This acreage includes 84 provenundeveloped locations with an additional 250 increased density locations inwhich Magnolia could propose and/or operate. As we already hold a licence tooperate in Oklahoma, we are advancing plans to drill our first well as operatorlater this year.Meanwhile, in June we assumed operatorship for the first time through thesuccessful work over of two producing wells (Osage Lynn and Solman) that hadbeen acquired in February 2012. Importantly, our production from these twoshallow wells is holding our Mississippi Lime acreage, meaning it is now `HeldBy Production' and therefore will not expire. We intend to drill down to theMississippi Lime formation in due course.The speed with which we have acquired our acreage and increased the number ofproducing wells has been made possible by the support of both existing and newshareholders. In March 2012, we successfully raised £1.3 million ($2.15million) in a heavily oversubscribed placing of 100,115,270 new ordinary sharesin the Company at a price of 1.3 pence per share, a level considerably higherthan the fundraising at the time of our admission to AIM.Post the period end, we raised a further £565,000 via the issue of 26,588,235new ordinary shares, the majority of which with Henderson Global Investors, ata price of 2.125 pence per share. At the same time, we signed an agreement fora £10 million Equity Financing Facility (`EFF') with Darwin Strategic Limited,a majority owned subsidiary of Henderson Global Investors' Alphagen Volantisfund. We are delighted to welcome an institution of the calibre of Henderson toour shareholder register which we view as a major vote of confidence in ourbusiness model and track record. We have since drawn down £761,000 against theEFF.The half year numbers reported today provide a readymade snapshot of theprogress made by the Company over the period. By 30 June 2012, Magnolia hadinterests in 80 producing properties, generating revenues of US$282,208 overthe six months, surpassing the US$241,038 in revenues generated during the lastfull year. Gross margins increased significantly to 54.5%. This was due to theinitial production rates across the various wells which came on stream duringthe period. Over time the gross margin for individual wells will tend todecrease as the production rates follow their natural decline curve (assumingconstant commodity prices) however it is expected that Magnolia's overall grossmargin should remain at around current levels for the next year as a result ofnew wells coming on stream.The increase in activity coupled with the higher costs of being quoted on AIMled to an increase in administrative expenses to US$486,256 (compared toUS$65,069 in the same period last year and US$213,228 for the whole of lastyear). We expect administrative expenses for the second half to stabilise andto reduce as a percentage of revenues.During the period, the Company invested a total of US$2.36 million; of whichapproximately US$1.42 million was used to increase our leased acreage andUS$0.94 million was invested in drilling new wells. This expenditure has beencapitalised in line with the Company's accounting policies leading tonon-current assets increasing to a total of US$4.09 million.The drilling activity in the second half will see further significant fundsinvested as we continue to bring our portfolio of opportunities intoproduction. The scale of drilling opportunities in which Magnolia may elect toparticipate means that the Company is expected to remain cash consuming in thenear term. The EFF helps provide the Company with the funding necessary tosatisfy these potential investment opportunities.The second half will continue to experience growth as we build on the progresswe have made so far and we look forward to reporting further substantialincreases in revenues as our activity in the oil rich plays in which we have agrowing presence continues to increase. We recognise a tremendous opportunityto create substantial shareholder value has opened up right on our doorstep andfollowing the steps we have taken, Magnolia is well placed to take fulladvantage and, in the process, become a significant oil and gas company.Finally, I would like to thank the management team, directors and our advisorsfor all their considerable effort and dedication over the period, and also ourshareholders, both new and old, for their continued support.Steven SneadChief Executive Officer10 September 2012Operations Report
The Bakken / Three Forks Sanish Formations, North Dakota
During the first half, six new wells targeting the Bakken and Three ForksSanish formations, North Dakota, were brought into production, bringing thetotal number of wells in which Magnolia has an interest in these two reservoirsto 20. Post period end, we also announced our participation in an additionalwell targeting the Bakken, the Curtis Kerr well, operated by Marathon Oil, inwhich Magnolia has a 1.46677% net revenue interest.Four of the six wells brought on stream during the period are producing fromthe prolific Bakken, a reservoir which the 2008 US Geological Survey (`USGS')estimated to hold mean undiscovered recoverable volumes of 3.65 Bbbls and 1.85Tcf. Daily production from the Bakken is currently 660,000 bopd and isestimated to exceed 700,000 bopd by 2013 and 1.2 MMbopd by 2019. Initialproduction rates for these four wells were Eckelberg 14-23 H well at 1,263 bopdand 625 MCF, Quill 2-12-3H well at 877 bopd; Skunk Creek 14H at 212 bopd, andStocke 1-4-9H at 295 bopd. The first two were particularly impressive, withSkunk Creek 14H and Stocke 1-4-9H in line with expectations.The remaining two wells, Skunk Creek 15H and Eckelberg 14-23 TF, are producingfrom the Three Forks Sanish formation, a separate reservoir lying directlybelow the Bakken. At 2,303bopd and 1,234bopd and 602MCF respectively, theinitial production rates for both wells exceeded the directors' expectationsand in the case of Skunk Creek 15H are Magnolia's best rates recorded to date.There is a natural decline curve in the production rates associated with newwells and it will not be until next year that the Company will know the levelat which the average production rate will stabilise.A state study evaluating oil reserves in the Three Forks Sanish formation inwestern North Dakota concluded that there could be as much as 2 billion barrelsof recoverable oil in this formation. The projection is based on more than 200well measurement logs and 85 sets of testimony from technical experts. As theThree Forks Sanish lies beneath the Bakken, the number of wells which can bedrilled per section doubles to eight (four per formation), providing Magnoliawith a total of 197 proven development locations on its acreage, 92 on theBakken and 105 on the Three Forks Sanish, as set out in the Competent Person'sReport by Moyes & Co. dated 25 October 2011. Magnolia holds leases in respectof 11,520 gross acres across 18 sections, equating to 412 net mineral acreswithin the boundaries of the two formations.
Significantly, the initial production rates from the Skunk Creek 15H and Eckelberg 14-23 TF wells are expected to lead to an upgrade in Magnolia's Three Forks Sanish reserves in an updated Competent Person's Report to be commissioned in Q1 2013. This report will also provide an update on the expected average production rates for the formation.
Mississippi Lime Formation, Oklahoma
During the six month period, Magnolia acquired 3,967 net mineral acres in theMississippi Lime formation with an average net revenue interest of 79%,considerably higher than historical levels. This acreage includes leases withworking interests of up to 100%, 84 proven undeveloped locations with anadditional 250 increased density locations in which Magnolia could propose and/or operate.From a standing start, Magnolia now has interests in five horizontal wellsproducing from the Mississippi Lime, all of which had initial production rateswhich were ahead of expectations: Brady 17-27-12 1H (702.5 boepd); Lois Rust7-27-12 1H (353.75 boepd); LaDonna 19-28-16 1H (297 boepd); Thomason 10-27-121H (441 boepd) and Westline 30-28-16 1H (403 boepd).A further six wells are at various stages of drilling and/ or completion and anadditional four waiting to spud. Magnolia's working and net revenue interestsin a number of these wells are considerably higher than has historically beenthe case in line with the Company's strategy - Prucha 1-23H (25% / 18.75%);Otis 2-27-12 1H (4.412805% / 3.3702%); Montecristo 6-1H (6.7704% / 5.3486%).The Mississippi Lime is an historic oil and gas system that has been producingat depths ranging from 4,500 to 7,000 feet from several thousand vertical wellsfor over 50 years. As with the Bakken, new technology and horizontal drillinghas reopened the oil play. Due to the relatively shallow depths and less tightrock formation, drilling costs at between US$2.4 million and US$3.5 million perwell in the Mississippi Lime are considerably lower than those in the Bakken,which should lead to shorter payout periods than with the Bakken wells.Horizontal wells generally have shorter lateral lengths of between 2,500ft and5,000ft and are fracture stimulated in 6-12 stages - less than those in theBakken play. Drilling times are relatively short at between 17 and 28 days fromspud to total depth.
Woodford / Hunton Formations, Oklahoma
During the six months under review, Magnolia participated in four wells in theWoodford/ Hunton formations, bringing the overall total to 12. Of these, theZenyatta 2-6 well targeting the Hunton was brought into production with aninitial production rate of 17 bopd. Due to it being a vertical well andtherefore at a significantly lower cost to drill, this initial production ratewas in line with expectations. The well was drilled at a total cost to Magnoliaof approximately US$8,246. Three other wells, the Bollinger 1-27H, targetingthe Woodford, and the SPS 6-26 and the Beebe 24-W1H targeting the Hunton, areat various stages of drilling/ completion.The Woodford / Hunton formations in Oklahoma are, as with the Mississippi Lime,reservoirs that have been reopened following the introduction of horizontaldrilling and stimulation technology. As a result the Woodford oil play inparticular is increasingly being drilled by leading operators. Magnolia holdsleases in respect of approximately 67,200 gross mineral acres, 781 net mineralacres, giving rights to participate in the drilling of wells in 105 sectionslocated in 32 counties in central Oklahoma.
Summary
Magnolia has 83 producing wells, a further nine at various stages of drilling/completion and nine additional wells waiting to spud. The Company remains ontrack to drill its first vertical well as operator before the end of the yearin Oklahoma and as a result, we are confident of meeting the target of 100producing wells by the end of 2012 and reporting a corresponding increase inrevenues attributable to the Company.A new Competent Person's Report will be commissioned in the first quarter of2013, to be published later that year. This will include an update on the levelof Magnolia's reserves, which are expected to show a significant increasefollowing the commencement of production at our Three Forks Sanish wells andthe increase in our leased acreage, as well as commenting on the averageproduction rates for the portfolio of producing wells.Rita WhittingtonChief Operations OfficerSummary of WellsCategory Number of wells Producing 83 Being Drilled / Completed 9
Elected to participate / waiting to
9spud TOTAL 101This summary excludes four out of six wells acquired as part of the acquisitionof 800 gross acres with a 100% working interest in Osage County, Oklahoma, asannounced on 10 February 2012. These four wells are currently `shut in' andwill require a workover programme at some point in the future to bring backinto production.
Glossary
`boe' means barrels of oil equivalent: a unit of energy based on the approximate energy released by burning one barrel (42 US gallons or 158.9873 litres) of crude oil.
There are 42 gallons (approximately 159 litres) in one barrel of oil, whichwill contain approximately 5.8 million British Thermal Units (MBtus) or 1,700kilowatt hours (kWh). The value is necessarily approximate as various grades ofoil have slightly different heating values. BOE is used by oil and gascompanies in their financial statements as a way of combining oil and naturalgas reserves and production into a single measure.
`boepd' means barrels of oil equivalent per day
`bopd' means barrels of oil per day
`Mcf' means thousand cubic feet
Contact Details
For further information on Magnolia Petroleum Plc visit www.magnoliapetroleum.com or contact the following:
Steven Snead Magnolia Petroleum Plc +01 918 449 8750 Rita Whittington Magnolia Petroleum Plc +01 918 449 8750 Antony Legge / James Thomas Daniel Stewart & Company Plc +44 (0) 20 7776 6550 John Howes / John-Henry Northland Capital Partners +44 (0) 20 7796 8800Wicks Limited Lottie Brocklehurst St Brides Media and Finance +44 (0) 20 7236 1177 Ltd Frank Buhagiar St Brides Media and Finance +44 (0) 20 7236 1177 Ltd
Condensed Consolidated Statement of Comprehensive Income
period ended 30 June 2012 Note 6 months to 6 months to 30 June 2012 30 June 2011 Unaudited Unaudited US $ US $ Continuing Operations Revenue 282,208 123,238 Operating expenses (128,514) (75,938) ______ ______ Gross Profit 153,694 47,300 Administrative expenses (486,256) (65,069) Impairment of mineral leases (204,973) (122,619) ______ _______ Operating Loss (537,535) (140,388) Finance income - - Finance costs - - ______ _______ Loss from ordinary activities (537,535) (140,388) before tax Taxation - - ______ _______
Loss for the period attributable (537,535) (140,388)
to the equity holders of the Company ______ _______ Other comprehensive income: Exchange differences on (18,282) 1,194
translating foreign operations
______ _______
Total comprehensive income for (555,817) (139,194) the period attributable to the equity holders of the Company ______ _______ Loss per share attributable to 4 (0.14) (0.04) the equity holders of the Company (expressed in cents per share) - basic and diluted
Condensed Consolidated Balance Sheet
As at 30 June 2012ASSETS Notes 30 June 31 December 2012 2011 Unaudited Audited US $ US $ Non-Current Assets
Property, plant and equipment 5 1,761,507 861,975
Intangible assets 6 2,325,841 1,111,634 ________ ________ Total Non Current Assets 4,087,348 1,973,609 Current Assets
Trade and other receivables 119,029 70,308
Cash and cash equivalents 159,576 874,037 ________ _______ Total Current Assets 278,605 944,345 ________ ________ Total Assets 4,365,953 2,917,954 ________ ________ EQUITY & LIABILITIES Equity Called up share capital 1,100,400 926,128 Share premium account 4,015,229 2,218,877
Warrants and options reserve 66,603 66,603
Merger reserve 1,975,950 1,975,950
Reverse acquisition reserve (2,250,672) (2,250,672)
Translation reserve (144,906) (126,624) Retained losses (1,040,253) (502,718) ________ ________
Total Equity - Capital and 3,722,351 2,307,544
Reserves ________ ________ Non-Current Liabilities Trade and other payables - 278,431 _______ _______
Total Non-Current Liabilities - 278,431
_______ _______ Current Liabilities Trade and other payables 643,602 331,979 _______ _______ Total Current Liabilities 643,602 331,979 _______ _______
Total Equity and Liabilities 4,365,953 2,917,954
_______ _______
Condensed Consolidated Statement of Changes in Equity
Share Share Merger Warrants Reverse Translation Retained and Acquisition Options Capital Premium Reserve Reserve Reserve Reserve Earnings Total US $ US $ US $ US $ US $ US $ US $ US $ As at 1 January 587,336 1,347,983 1,867,790 66,603 (2,250,672) (115,693) (160,271) 1,343,0762011 Comprehensive income Loss for the - - - - - - (140,388) (140,388)period Other comprehensive income Currency - - - - - 1,194 - 1,194 translation differences _______ ________ ________ ______ ________ _______ _______ ________ Total - - - - - 1,194 (140,388) (139,194)comprehensive income for the period _______ ________ ________ ______ ________ _______ _______ ________ As at 30 June 587,336 1,347,983 1,867,790 66,603 (2,250,672) (114,499) (300,659) 1,203,8822011 _______ ________ ________ ______ ________ _______ _______ ________ As at 1 January 926,128 2,218,877 1,975,950 66,603 (2,250,672) (126,624) (502,718) 2,307,5442012 Comprehensive income Loss for the - - - - - - (537,535) (537,535)period Other comprehensive income Currency - - - - - (18,282) - (18,282) translation differences ________ ________ ________ ______ ________ _______ _______ ________ Total - - - - - (18,282) (537,535) (555,817)comprehensive income for the period ________ ________ ________ ______ ________ _______ _______ ________ Transactions with Owners Proceeds from 174,272 1,980,507 - - - - - 2,154,779share issue Share issue - (184,155) - - - - - (184,155)costs ________ ________ ________ ______ ________ _______ _______ ________ Total 174,272 1,796,352 - - - - - 1,970,624Transactions with owners ________ ________ ________ ______ ________ _______ _______ ________ As at 30 June 1,100,400 4,015,229 1,975,950 66,603 (2,250,672) (144,906) (1,040,253) 3,722,3512012 ________ ________ ________ ______ ________ _______ _______ ________
Condensed Consolidated Cash Flow Statement
6 months ended 30 June 2012 6 months to 6 months to 30 June 2012 30 June 2011 Unaudited Unaudited US $ US $
Cash inflow/(outflow) from operating
activities Loss before tax (537,535) (140,388) Depreciation and amortisation 41,747 56,236 Exchange difference (24,208) 1,032 Impairment of mineral leases 204,973 122,619
(Increase)/decrease in trade and other (47,873) 166
receivables
Increase in trade and other payables 65,921 4,073
_______ _______
Net cash (outflow)/inflow from (296,975) 43,738
operating activities _______ _______
Cash flows from investing activities Purchases of intangible assets (1,415,471) - Purchases of property, plant and (941,279) (127,893)
equipment _______ _______
Net cash used in investing activities (2,356,750) (127,893)
_______ _______
Cash flows from financing activities Proceeds from issue of ordinary shares 2,154,779 -
Issue costs (184,155) - Repayment of borrowings (35,000) - _______ _______ 1,935,624 - _______ _______ Net decrease in cash and cash (718,101) (84,155) equivalents
Cash and cash equivalents at the 874,037 97,523
beginning of the period
Exchange gain on cash and cash 3,640 2,888
equivalents _______ _______
Cash and cash equivalents at the end of 159,576 16,256
the period _______ _______
Notes to the unaudited financial statements
1. General information
The principal activity of the Group is the acquisition, exploration and development of oil and gas properties primarily located onshore in the United States.
The address of its registered office is The Fitzpatrick Building, 188 -194 York Way, London N7 9AS.
2. Basis of preparation The condensed consolidated interim financial statements have been prepared inaccordance with the requirements of the PLUS Rules for Issuers. As permitted,the Company has chosen not to adopt IAS 34 "Interim Financial Statements" inpreparing this interim financial information. The condensed interim financialstatements should be read in conjunction with the annual financial statementsfor the year ended 31 December 2011, which have been prepared in accordancewith International Financial Reporting Standards (IFRS) as adopted by theEuropean Union.The interim financial information set out above does not constitute statutoryaccounts within the meaning of the Companies Act 2006. It has been prepared ona going concern basis in accordance with the recognition and measurementcriteria of International Financial Reporting Standards (IFRS) as adopted bythe European Union. Statutory financial statements for the year ended 31December 2011 were approved by the Board of Directors on 21 May 2012 anddelivered to the Registrar of Companies. The report of the auditors on thosefinancial statements was unqualified.
3. Accounting policies
The same accounting policies, presentation and methods of computation arefollowed in this condensed consolidated financial information as were appliedin the preparation of the Company's annual audited financial statements for theyear ended 31 December 2011.
The presentational currency of the Group is US dollars.
4. Loss per share - basic and diluted
The calculation of loss per share is based on a loss of $537,535 for the 6 months ended 30 June 2012 (6 months ended 30 June 2011: loss $140,388) and the weighted average number of shares in issue in the period to 30 June 2012 of 379,439,522 (30 June 2011: 341,038,441).
5. Property, plant and equipment
6. Drilling Motor Producing properties costs and Vehicles Total equipment $ $ $ $ Cost At 1 January 2012 457,648 612,199 - 1,069,847 Additions 668,002 258,277 15,000 941,279 At 30 June 2012 1,125,650 870,476 15,000 2,011,126 Depreciation At 1 January 2012 97,958 109,914 - 207,872 Charge for the period 16,193 25,554 - 41,747 At 30 June 2012 114,151 135,468 - 249,619
Net Book Amount at 31 December 359,690 502,285 - 861,975
2011 Net Book Amount at 30 June 2012 1,011,499 735,008 15,000 1,761,507 6. intangible assets Cost Goodwill Drilling Mineral Total $ costs leases $ $ $ At 1 January 2012 356,216 364,998 390,420 1,111,634 Additions - - 1,415,471 1,415,471 Exchange movements 3,709 - - 3,709 Impairment - - (204,973) (204,973) As at 30 June 2012 359,925 364,998 1,600,918 2,325,841 Amortisation At 1 January 2012 and - - - - At 30 June 2012
Net Book Amount at 31 December 2011 356,216 364,998 390,420 1,111,634
Net Book Amount at 30 June 2012 359,925 364,998 1,600,918 2,325,841 Impairment review
Drilling costs and mineral leases represent acquired intangible assets with anindefinite useful life and are tested annually for impairment. As disclosedwithin Accounting Policies, expenditure incurred on the acquisition of mineralleases is capitalised within intangible assets until such time as theexploration phase is complete or commercial reserves have been discovered.Exploration expenditure including drilling costs are capitalised on a well bywell basis if the results indicate the existence of a commercially viable levelof reserves.
The directors have undertaken a review to assess whether circumstances exist which could indicate the existence of impairment as follows:
* The Group no longer has title to the mineral lease.
* A decision has been taken by the Board to discontinue exploration due to
the absence of a commercial level of reserves. * Sufficient data exists to indicate that the costs incurred will not be fully recovered from future development and participation.
Following their assessment the directors recognised an impairment charge to the cost of mineral leases of $204,973 (2011 - $122,619) in respect of expired mineral leases.
The Directors believe that no impairment is necessary on the carrying value ofgoodwill. Goodwill arose on the reverse acquisition of Magnolia Petroleum Plc.The goodwill represents the value of the parent company being an AIM quotedentity to Magnolia Petroleum Inc.
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