Q3 2013 Financial Results

Graham Forbes

[email protected]

+44 (0)1224 652 151

Richard Smith

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+44(0) 1224 652 172

FTI Consulting

Edward Westropp

[email protected]

+44 (0)207 269 7230

Georgia Mann

[email protected]

+44 (0)207 269 7212

Cenkos Securities

Jon Fitzpatrick

[email protected]

+44 (0)207 397 8900

Neil McDonald

[email protected]

+44 (0)131 220 6939

RBC Capital Markets

Tim Chapman

[email protected]

+44 (0)207 653 4641

Matthew Coakes

[email protected]

+44 (0)207 653 4871

HIGHLIGHTS THIRD QUARTER 2013

Record financial results

· Q3 2013 cashflow from operations increased by over 150% to $77.8 million (Q3 2012: $30.1 million) resulting in Q3 YTD 2013 cashflow from operations of $185.3 million (Q3 YTD 2012: $74.8 million) - Q3 YTD 2013 cashflow per share $0.63 (Q3 YTD 2012: $0.29)

· Q3 2013 net earnings of $54.1 million (Q3 2012: $4.9 million) and Q3 YTD 2013 net earnings of $109.8 million (Q3 YTD 2012: $48.1 million) - Q3 2013 earnings per share of $0.17

· Netbacks of over $70 / barrel of oil equivalent ("boe")

· Q3 2013 average realised oil price of $109 / bbl (Q3 2012: $113 / bbl), including hedging 

· Net drawn debt of $357 million at September 30, 2013 (zero net drawn debt at December 31, 2012)

· UK tax allowances pool of $993 million at quarter end. Norwegian tax receivable of $88 million

· Approximately 3.4 million barrels of future 2013-14 oil production hedged at a weighted average price of approximately $102 / bbl (approximately 30% puts / 70% swaps)

Oil dominated production

· Average production in Q3-2013 was 11,942 barrels of oil equivalent per day ("boepd"), 96% oil, reflecting the impact of shutdowns during the quarter

· Total pro-forma production for 2013 is forecast to average approximately 13,000 boepd; this reflects inclusion of full year production from the assets acquired as part of the Valiant Petroleum plc ("Valiant") acquisition, which completed on April 19, 2013. This is lower than originally anticipated for the year due primarily to production deferrals resulting from the longer than anticipated duration of maintenance shutdown activities that impacted the Cook and Causeway Area fields during the second half of the year, and delay to completion of the electrical submersible pump ("ESP") related works on the Taqa-operated host facility for Causeway

Continued strong progress on Stella

· Drilling of the Stella "A1" development well was successfully completed during the quarter, with the clean-up test performed on the well resulting in a maximum flow rate of 10,835 boepd. Operations are progressing according to plan on the "A2" development well, with drilling of the horizontal reservoir section scheduled to commence shortly

· Solid progress continues to be made on execution of the "FPF-1" floating production facility modifications programme. The vessel has been re-floated following completion of the dry dock related marine system works and work has commenced on the main topsides processing plant construction and installation activities

· Execution of the 2013 subsea infrastructure installation work programme is nearing completion, with the remaining works now focused on finishing the tie-in of the infield flowlines and umbilicals

Enhanced debt facilities

· The Company has extended and improved its long term senior bank debt financing facilities, increasing its Reserve Based Lending ("RBL") facility from $430 million to $610 million and established a new five year $100 million corporate facility

· Further farm-outs of the three UK exploration well commitments transferred as a result of the Valiant Petroleum plc ("Valiant") acquisition were executed during the quarter. When combined with the previously announced farm-outs, on completion, Ithaca will be fully carried for the forecast cost of drilling the wells and in addition will receive over $8 million in cash from the farm-out parties

SUMMARY STATEMENT OF INCOME

(1) Average realised price before hedging

(2) Q3 2013 weighted average number of shares of 317.4 million and Q3 YTD 2013 weighted average number of shares of 294.6 million

SUMMARY BALANCE SHEET

CORPORATE STRATEGY

Ithaca Energy Inc. ("Ithaca" or the "Company") is a North Sea oil and gas operator focused on the delivery of lower risk growth through the appraisal and development of UK undeveloped discoveries, the exploitation of its existing UK producing asset portfolio and a Norwegian exploration and appraisal business centred on the generation of discoveries capable of monetisation prior to development.

The Company has a solid and diversified UK producing asset base generating significant free cashflow from mainly oil production.

Ithaca's goal is to generate sustainable long term shareholder value by building a highly profitable 25kboepd North Sea oil and gas company.

Execution of the Company's strategy is focused on the following core activities:

• Maximising cashflow and production from the existing asset base.

• Delivery of lower risk development led growth through the appraisal of undeveloped discoveries.

• Delivering first hydrocarbons from the Ithaca operated Greater Stella Area development.

• Monetising proven Norwegian asset reserves derived from exploration and appraisal drilling prior to the development phase.

• Continuing to grow and diversify the cashflow base by securing new producing, development and appraisal assets through targeted acquisitions and licence round participation.

• Maintaining financial strength and a clean balance sheet, supported by lower cost debt leverage.

OPERATIONS UPDATE

PRODUCTION

Total production in Q3-2013 was 11,942 boepd, 96% oil. This represents an increase of over 130% on the same quarter in 2012 (Q3-2012: 5,061 boepd), driven primarily by the additional assets acquired as a result of the Valiant acquisition.

Production during the quarter was derived from the operated Athena, Causeway Area (Causeway and Fionn), Beatrice, Jacky and Anglia fields and the non-operated Dons (Don Southwest and West Don), Cook, Broom and Topaz fields.

OPERATIONAL ACTIVITIES

Operational activities in Q3-2013 were dominated by maintenance shutdown activity on certain of the Company's main fields.

Total production during the quarter was impacted by commencement of the major planned maintenance shutdown of the Taqa-operated North Cormorant platform, which serves as the host facility for the Causeway Area fields. The shutdown commenced at the end of August 2013, with production being reinstated in late October 2013, approximately two weeks behind the original plan. The extended shutdown duration and post-shutdown close-out activities have resulted in slippage in execution of the plan to complete the remaining platform modifications required to deliver power to the Causeway electrical submersible pump package installed in the well. It is anticipated that these platform workscopes will now be completed in 2014, resulting in deferment of ESP driven incremental Causeway production.

Production during Q3-2013 was also affected by a significant unplanned shutdown of the Shell operated Cook field in August 2013. The Operator commenced the shutdown in early August 2013 in order to undertake an inspection of the infield flowline connecting the field to its host facility, the Anasuria floating production, storage and offloading vessel. The inspection was completed around mid-October 2013, enabling the reinstatement of production. The shutdown duration was longer than initially anticipated by the field Operator due to delays incurred in mobilising a diving support vessel to undertake the inspection works and field re-start operations. However, the inspection confirmed the integrity of the pipeline thus avoiding an extended shutdown in 2014 which was planned to cost $8 million (net).

During the quarter diagnostic testing confirmed that the ESP pumps in the "P4" well on the Athena field had failed. The net production impact of this has been successfully mitigated by the optimisation of the other wells on the field and the processing facilities, such that it represents a net production deferment to Ithaca of just over 300 bopd. The options for reinstating full production from the well, via either a workover or sidetrack, are currently under evaluation.

Minor planned maintenance shutdowns were incurred during the quarter on the Anglia and Topaz gas fields to accommodate the completion of maintenance activities on the gas gathering systems servicing the fields.

PRODUCTION OUTLOOK

Total pro-forma production for 2013 is forecast to average approximately 13,000 boepd; this reflects inclusion of full year production from the assets acquired as part of the Valiant acquisition, which completed on April 19, 2013. This is lower than originally anticipated for the year primarily as a result of production deferrals resulting from the longer than anticipated duration of the maintenance shutdown activities that have impacted the Cook and Causeway Area fields during the second half of the year, and delay to completion of the ESP related works on the Taqa-operated host facility for Causeway. Maintenance activities on the host facility for the Dons fields, the Northern Producer floating production facility, is also scheduled to result in a modest reduction in production from the fields over approximately two weeks in the final quarter of 2013. These works are being completed in order to improve the future uptime performance of these facilities over the longer term.

GREATER STELLA AREA DEVELOPMENT UPDATE

Strong progress during the quarter on execution of the key GSA development workscopes

Strong progress has continued to be made with development of the Greater Stella Area ("GSA") and a number of key milestones have been closed out, including completion of both the first Stella development well and the dry dock related works and re-float of the FPF-1.

DRILLING PROGRAMME

During the quarter the first Stella development well was successfully drilled, completed and tested using the ENSCO 100 jack-up drilling rig. The 30/6a-A1Z ("A1") well is the first of four development wells that are to be drilled on the Stella field prior to the start-up of production. 

The A1 well was drilled to a total vertical depth subsea of 9,739 feet, with a 2,499 foot horizontal reservoir section completed in the Palaeocene Andrew sandstone reservoir, close to the targeted transition between the oil rim and gas condensate cap. As anticipated prior to drilling, the reservoir quality encountered by the well was in line with previous appraisal wells drilled on the field. The well intersected a net reservoir interval of 1,312 feet.

A clean-up and production flow test was performed on the well. The purpose of this was to clean out the drilling fluids used to complete the well, to ensure that it is configured for the immediate start-up of production following the hook-up of the FPF-1, gain further information on the productivity of the well and obtain hydrocarbon fluid samples.

The well flowed at a maximum rate of 10,835 boepd on a 7/8-inch choke, with the full production potential of the well limited by the capacity of the well test equipment on the drilling rig. The maximum flow rate of 10,835 boepd corresponds to 6,499 bopd of oil and 26 million standard cubic feet of gas per day ("MMscf/d") of liquids rich gas. Fluid samples show that the oil is of high quality, approximately 42° API.

The processing facilities that will be used on the FPF-1 to separate and export oil and gas produced from the field will increase the overall oil relative to gas production rate associated with the A1 well, compared to that which can be achieved from the simple separation facilities available for the purposes of the well test. 

Following completion of the A1 well, the ENSCO 100 rig moved directly on to drilling of the Stella A2 well. Operations are progressing to plan on the well, with drilling of the horizontal reservoir section scheduled to commence shortly.

Management of the Stella drilling and completion operations is being performed by Advanced Drilling Technology International ("ADTI") under "turnkey" contract arrangements.

FPF-1 MODIFICATIONS PROGRAMME

Solid progress was made during the quarter with execution of the FPF-1 dry dock related marine system refurbishment and hull life extension works, resulting in the vessel exiting the dry dock facility and being re-floated in early October. This marked a major milestone in execution of the FPF-1 modifications programme, allowing the main topsides processing plant construction and installation activities to commence. 

Three additional sponsons have been added to the pontoons on the FPF-1, involving the construction and installation of approximately 2000 tonnes of steelwork blocks, to provide enhanced buoyancy. Four buoyancy "blisters" are being fabricated and will be added to the columns of the FPF-1 during the next phase of operations, in parallel with the topsides construction works. These modifications are designed to ensure that the FPF-1 can accommodate the new topsides processing equipment that is to be installed on the main deck and achieve strong operational uptime performance.

Processing plant equipment and materials for the topsides of the vessel continue to flow to the yard, with most of the major long lead pieces of equipment having now been delivered to site in readiness for installation. Work is progressing on construction of the pre-assembled units and racks that are to be installed on the vessel, which will contain structural steel, pipework spools, cable trays and equipment. The associated preparatory work on the main deck of the FPF-1 is also underway, involving the installation of the structural steelwork on which the units and racks will be located.

The FPF-1 modifications and upgrade programme is being managed by Petrofac under the terms of a lump sum incentivised contract. The modification works are being undertaken at the Remontowa shipyard in Gdansk, Poland.

SUBSEA INFRASTRUCTURE WORKS

Execution of the main subsea infrastructure manufacturing and installation programme, which is being undertaken by Technip UK Limited under the terms of an integrated Engineering, Procurement, Installation and Construction contract, has continued to make rapid progress over Q3-2013.

Installation of the main subsea structures that will be used for the production and export of hydrocarbons to and from the FPF-1 was completed during the quarter. The 60km 10-inch gas export pipeline from the FPF-1 to the BP operated Central Area Transmission System ("CATS") pipeline has also now been fully installed following completion of trench backfill, tie-in and as laid survey operations. The pipeline is now configured to receive gas exports upon the start-up of production from the Stella field. No modifications are required to the onshore Teeside Gas and Liquids Processing ("TGLP") terminal to receive and process the rich gas that will be exported from the FPF-1 through the CATS pipeline.

Installation of the flexible infield flowlines and static umbilicals that connect the Stella field drill centre manifolds to the FPF-1 riser bases has now been completed and diving operations will commence shortly to complete the tie-in of these components. Completion of the tie-in operations will mark the end of the 2013 subsea infrastructure installation campaign.

Planning for the remaining subsea infrastructure installation programme is well advanced. The programme will involve tie-in of the wells, installation of the dynamic flexible risers and umbilicals that will connect the riser bases to the FPF-1, the vessel mooring spread and the oil export facilities.

GSA LICENCES

The GSA coventurers have elected to relinquish licence P.1814 (Block 29/10d), containing the Helios discovery. The licence terms required a commitment to be made to either drilling a well on the block or relinquishing it by October 2013. Such a well commitment was not deemed appropriate by the coventurers at this time.

CORPORATE ACTIVITIES

Enlarged senior debt facility established, along with a new corporate debt facility

Fully carried positions plus a positive cash balance established through farm-outs of the 3 UK exploration wells commitments transferred from Valiant

NEW DEBT FACILITIES

The planned enlargement of the Company's $430 million RBL facility was completed in October in order to incorporate the assets acquired as part of the Valiant acquisition and enable retirement of the $350 million bridge credit facility taken out to facilitate the acquisition. The increased $610 million facility is based on conventional oil and gas industry borrowing base financing terms, with a loan term until June 2017, and is available to fund on-going development activities and any producing asset acquisitions.

A new $100 million five year corporate debt facility has also been established, providing additional financial flexibility for the Company to add new appraisal / development opportunities to the existing portfolio. This facility is based on normal corporate debt covenants, relating to EBITDAX ("Earnings before Interest Tax Depreciation, Amortisation and Exploration costs") coverage of debt and interest obligations.

OIL SALES AGREEMENTS

The Company has entered into an extension of its existing agreement with BP Oil International Limited for the marketing of niche grade crudes and its oil sales agreement with Shell Trading International Limited ("Shell") for production from the Cook, Dons, Causeway Area and Broom producing fields. Future volumes from the Stella field may also be included. This latter agreement includes the ability for Ithaca, at its option, to receive pre-payments for future crude sales to Shell.

UK EXPLORATION FARM-OUTS

In line with the Company's stated objective at the time of the Valiant acquisition, further farm-outs have been completed to restructure and de-risk the 3 UK exploration well commitments transferred as a result of the acquisition. Ithaca will now be fully carried for the forecast cost of drilling the UK exploration commitment wells and in addition will receive over $8 million in cash from the farm-out parties.

The status of the UK exploration farm-outs are summarised below. In addition to these transactions, the Company has also withdrawn from a number of licences in the portfolio transferred from Valiant.

· Handcross - P1631 & P1832 (Blocks 204/14c, 204/18b & 204/19c): farm-outs have been executed with RWE Dea UK SNS Limited, a subsidiary of Edison International SpA, Oyster Petroleum Limited and Sussex Energy Limited. The agreements provide Ithaca with a fully carried 31% (operated) working interest and also a cash payment. Handcross is a Palaeocene prospect located in the West of Shetland sector of the UK Continental Shelf ("UKCS"). An exploration well is scheduled to be drilled on the prospect using the Stena Carron drillship, with operations anticipated to commence in late 2013.

· Isabella - P1820 (Blocks 30/6b, 30/11a & 30/12d): farm-out executed with Maersk Oil North Sea UK Limited and a subsidiary of Edison International SpA. The agreement provides Ithaca with a fully carried 10% non-operated working interest and also a cash payment. Isabella is a gas condensate prospect located in the UK Central North Sea. The licence work programme requires an exploration well to be drilled on the prospect by early 2015.

· Beverley - P1792 (Blocks 21/30f, 22/26c): farm-out executed with Shell UK Limited, resulting in Ithaca reducing its 40% interest in the non-operated Central North Sea exploration well to 20%, in return for a partial carry of the costs of a well on the Beverley prospect. The licence work programme requires an exploration well to be drilled on the prospect by early 2015.

HANDCROSS WELL

The Company is in the process of preparing for the drilling of the operated exploration well on the Handcross prospect located in the West of Shetlands basin. The Stena Carron drillship will be used for the drilling operations and it is anticipated that it will be on location at the end of 2013.

LANGLITINDEN WELL

Drilling of an exploration well on the Det norske operated Langlintinden prospect is scheduled to commence in late 2013 (5% Ithaca working interest). The well is being drilled on the licence PL659, located in the Norwegian sector of the Barents Sea, in the vicinity of the 2008 Caurus gas discovery located on the same licence.

Q3 2013 RESULTS OF OPERATIONS

REVENUE

Quarterly revenue of $114.1 million , reflecting a realised average oil price of $109/bbl

Three Months Ended September 30, 2013

Revenue increased by $72.5 million in Q3 2013 to $114.1 million (Q3 2012: $41.6 million). This was mainly driven by an increase in oil sales volumes, partially offset by a reduction in the oil price.

Oil sales volumes increased primarily due to the inclusion of sales from the Dons and Causeway fields following the acquisition of Valiant (April 2013). The additional Cook acquisition (transaction completed in Q1 2013) also added to the increase in oil sales offset by lower volumes from the Beatrice and Jacky fields.

Average realised oil prices increased quarter on quarter from $110/bbl in Q3 2012 to $113/bbl in Q3 2013. The average Brent price for the quarter was $110.3/bbl compared to $109.6/bbl for Q3 2012. The Company's realised oil prices do not strictly follow the Brent price pattern given the various oil sales contracts in place, with certain field sales sold at a discount or premium to Brent. The higher premium to Brent achieved this quarter was predominantly driven by significant premiums on the uplift of oil cargoes from Nigg. This increase in average realised oil price was offset by a realised hedging loss of $4/bbl in Q3 2013.

Gas sales remained relatively steady quarter on quarter, although volumes remain modest, accounting for only 2% of total revenue.

Nine Months Ended September 30, 2013

Revenue increased by $184.3 million in Q3 YTD 2013 to $302.2 million (Q3 YTD 2012: $117.9 million). This movement mainly comprises an increase in oil sales volumes, partially offset by a reduction in oil price.

In line with the above quarterly movement, oil sales volumes increased primarily due to the inclusion of sales from the Dons and Causeway fields acquired from Valiant, as well as the additional interest acquired in the Cook field and Athena coming onstream in Q2 2012, partially offset by lower volumes from the Beatrice and Jacky fields attributable to planned shutdowns. 

Total gas sales increased primarily as a result of higher realised gas prices, with an increase from $38/boe to $43/boe, partially offset by lower production volumes in the period.

COST OF SALES

Three Months Ended September 30, 2013

Cost of sales increased in Q3 2013 to $77.3 million (Q3 2012: $27.1 million). This increase was attributable to increases in operating costs, depletion, depreciation and amortisation ("DD&A") and movement in oil and gas inventory.

Operating costs increased in the quarter to $41.9 million (Q3 2012: $20.9 million) primarily due to the inclusion of costs for the Dons and Causeway fields acquired from Valiant, plus the additional acquired interest in the Cook field.

Unit operating costs decreased to $38/boe in the period (Q3 2012: $45/boe) mainly as a result of the inclusion of the lower cost Dons and Causeway fields acquired from Valiant. Unit operating costs were not reduced further in the quarter because of the planned Causeway area maintenance shutdown and the unplanned shutdown on Cook for infield flowline integrity inspection as noted above.

DD&A for the quarter increased to $42.3 million (Q3 2012: $14.6 million). This was primarily due to higher production volumes in Q3 2013 as a result of the addition of the Dons and Causeway fields together with the additional acquired interest in the Cook field. The blended DD&A rate for the quarter increased to $38/boe (Q3 2012: $31/boe). The blended DD&A rate in Q3 2012 was unusually low due to the production mix, however the primary driver for the increase has been "business combination" accounting for transactions.

As the below "Changes in Accounting Policies" section outlines, the adoption of international financial reporting standards ("IFRS") and accounting for acquisitions as business combinations has led to increased DD&A rates. It should be noted that this increase in DD&A, and hence Cost of Sales, is offset by a credit in the Deferred Tax charged through the Statement of Income.

An oil and gas inventory movement of $6.9 million was credited to cost of sales in Q3 2013 (Q3 2012 credit of $8.4 million). Movements in oil inventory arise due to differences between barrels produced and sold, with production being recorded as a credit to movement in oil inventory through cost of sales until the oil has been sold. In Q3 2013 fewer barrels of oil were sold (988k bbls) than produced (1,049k bbls), mainly as a result of the timing of Cook, Causeway and Dons field liftings.

Nine Months Ended September 30, 2013

Cost of sales increased in Q3 YTD 2013 to $227.2 million (Q3 YTD 2012: $83.1 million) due to increases in operating costs, DD&A and movement in oil and gas inventory.

Operating costs increased in the period to $108.3 million (Q3 YTD 2012: $52.0 million) primarily due to the inclusion of costs for the Dons and Causeway fields acquired from Valiant, plus increased Athena costs (only part period in 2012) and the additional interest acquired in the Cook field as noted above.

DD&A for the period increased to $103.1 million (Q3 YTD 2012: $39.0 million). This was primarily due to higher production volumes in Q3 YTD 2013 with the addition of the Dons and Causeway fields, together with a full period of production from the Athena field and the additional interest in the Cook field.

An oil and gas inventory movement of $14.8 million was charged to cost of sales in Q3 YTD 2013 (Q3 YTD 2012: credit of $8.0 million). In Q3 YTD 2013 more barrels of oil were sold (2,730k bbls) than produced (2,584k bbls), as a result of the timing of liftings.

ADMINISTRATION & EXPLORATION & EVALUATION EXPENSES

Three Months Ended September 30, 2013

Total administrative expenses increased in the quarter to $1.5 million (Q3 2012: $0.5 million) primarily due to an increase in general and administrative expenses as a result of the continued growth of the Company, including the associated costs of an enlarged Ithaca group post the Valiant acquisition. Share based payment expenses increased as a result of options being granted towards the end of 2012 (none end 2011), therefore higher amortisation expense has been reflected through Q3 2013.

Exploration and evaluation expenses of $0.5 million were recorded in the quarter (Q3 2012: $0.1 million) primarily due to the expensing of previously capitalised costs relating to areas where exploration and evaluation activities have ceased.

Nine Months Ended September 30, 2013

Total administrative expenses increased in the period to $7.6 million (Q3 YTD 2012: $3.0 million) primarily associated with an increase in general and administrative expenses as a result of the associated costs of an enlarged Ithaca group post the Valiant acquisition as well as higher levels of corporate activity, particularly in the first quarter of the year.

FOREIGN EXCHANGE & FINANCIAL INSTRUMENTS

Three Months Ended September 30, 2013

A foreign exchange gain of $2.2 million was recorded in Q3 2013 (Q3 2012: $0.7 million gain). The majority of the Company's revenue is US dollar driven while operating expenditures are primarily incurred in British pounds. As such, general volatility in the USD:GBP exchange rate is the driver behind the foreign exchange gains and losses, particularly on the revaluation of the GBP bank accounts (USD:GBP 1.52 at the start of the quarter rising to USD:GBPP 1.61 at the end of the quarter, fluctuating between 1.49 and 1.61 during the period). This volatility was partially offset by the foreign exchange hedges and resultant gains described below.

The Company recorded a $15.8 million loss on financial instruments for the quarter ended September 30, 2013 (Q3 2012: $12.0 million loss). The loss was predominantly due to a $3.7 million realised loss on commodity hedges together with a $22.9 million decrease in the value of oil swaps and put options, due to a reduction in the Brent oil forward curve, partially offset by a $9.7 million gain on the revaluation of foreign exchange instruments. In addition, the Company realised a gain of $1.2 million on foreign exchange instruments.

The Company continues to limit exposure to fluctuations in foreign currencies with forward contracts to hedge a further £65 million and €25 million of capital expenditure on the GSA development at rates of $1.52: £1.00 and $1.29: €1.00.

Nine Months Ended September 30, 2013

A foreign exchange gain of $0.1 million was recorded in Q3 YTD 2013 (Q3 YTD 2012: $0.9 million gain). As above, general volatility in the USD:GBP exchange rate was the main driver behind the foreign exchange loss in Q3 YTD 2013 (USD:GBP at January 1, 2013: 1.62. USD:GBP at September 30, 2013: 1.61 with fluctuations between 1.48 and 1.64 during the period).

The Company recorded a $5.5 million loss on financial instruments for the nine months ended September 30, 2013 (Q3 YTD 2012: $6.6 million gain). This was primarily driven by a $25.4 million downwards revaluation of commodity hedges due to a reduction in value of oil swaps and put options

partially offset by a $9.9 million realised gain on commodity hedges (including a $6 million settlement on the swaption conversion), a $8.3 million gain on the revaluation of foreign exchange instruments together with a $1.8 million realised gain on foreign exchange instruments.

BUSINESS COMBINATIONS

NEGATIVE GOODWILL

If the cost of an acquisition is more than the fair value of net assets acquired, the difference is recognised on the balance sheet as goodwill. Conversely, if the cost of an acquisition is less than the fair value of the assets acquired, the difference is recognised as negative goodwill in the statement of income. As a result of business combination accounting for the Valiant acquisition, $55.0 million of negative goodwill was recognised in Q3 YTD 2013, including $7 million in Q3 2013 relating to the true-up of working capital balances on acquisition. In addition, $0.9 million negative goodwill was recognised in Q1 2013 in relation to the Cook acquisition representing negative goodwill of $55.9 million in the nine month period ended September 30, 2013.

EXPLORATION OBLIGATION

As part of the Valiant acquisition accounting, a liability was created to cover committed exploration expenditure. On the farm-out of Handcross to Euroil Exploration Limited, a subsidiary of Edison International SpA, $22.3 million of this liability was released and credited to the statement of income to reflect the fact that Ithaca will no longer be liable for these costs.

TAXATION

No UK tax anticipated to be payable in the mid-term

Three Months Ended September 30, 2013

A tax credit of $8.2 million was recognised in the quarter ended September 30, 2013 (Q3 2012: $2.9 million credit). This is a product of adjustments to the tax charge primarily relating to the UK Ring Fence Expenditure Supplement, share based payments and the release of exploration obligations. As noted in the Cost Of Sales section the deferred tax credit is increased by the use of accounting for acquisitions as business combinations. 

In addition, Norwegian tax refunds totalling $88 million relating to Norwegian capital expenditure are recognised on the balance sheet.

As a result of the above factors, profit after tax increased to $54.1 million (Q3 2012: $4.9 million).

Nine Months Ended September 30, 2013

A tax charge of $7.5 million was recognised in the nine months ended September 30, 2013 (Q3 YTD 2012: $10.6 million credit). This is a product of adjustments to the tax charge primarily relating to the UK Ring Fence Expenditure Supplement, share based payments and the release of exploration obligations.

As a result of the above factors, profit after tax decreased from $117.3 million to $109.8 million (Q3 YTD 2012: $48.1 million).

No taxes are expected to be paid in the mid-term relating to upstream oil and gas activities as a result of the $993 million UK tax allowances pool available to the Company.

CAPITAL INVESTMENTS

Capital expenditure driven by significant investment in development projects and the acquisition of Valiant

$608 million of the total $886 million capital additions to D&P assets in Q3 YTD 2013 was attributable to the fair value on acquisition of the Valiant producing fields resulting from business combination accounting (the total acquisition cost being $293.6 million). A further $105 million relates to non-cash additions to decommissioning liabilities relating to Valiant acquired assets and the Stella field. The remaining D&P additions of $173 million relate primarily to the acquisition of the additional interest in the Cook field and execution of the GSA development, with the main areas of expenditure being on the manufacture and fabrication of subsea infrastructure and execution of the FPF-1 modification works (as described above).

Capital expenditure on E&E assets in Q3 YTD 2013 was $49.7 million, offset by a $28.7 million release of the acquired E&E liability, resulting in a net addition of $21 million. Expenditure was primarily focused

on the Norvarg and Storbarden exploration and appraisal wells in Norway as well as UK development projects. As part of the Valiant acquisition accounting, a liability was created to cover the committed exploration spend along with a corresponding asset for the associated Norwegian tax credit receivable. This liability is released as the spend is incurred, essentially result ing in a nil asset value within PP&E.

LIQUIDITY AND CAPITAL RESOURCES

As at September 30, 2013, Ithaca had a positive net working capital balance of $34.5 million including a cash balance of $77.2 million. Available cash has been, and is currently, invested in money market deposit accounts with BNP Paribas ("BNPP"). Management has received confirmation from the financial institution that these funds are available on demand.

Cash and cash equivalents increased as a result of bank debt drawings towards the end of the quarter offsetting the continued cash investment in the ongoing Stella field development. The funds were drawn for substantial payments due for imminent release post September 30, 2013 on the Stella development. Other working capital movements are driven by the timing of receipts and payments of balances.

A significant proportion of Ithaca's accounts receivable balance is with customers in the oil and gas industry and is subject to normal joint venture/industry credit risks. The Company assesses partners' credit worthiness before entering into joint venture agreements. The Company regularly monitors all customer receivable balances outstanding in excess of 90 days. As at September 30, 2013, substantially all of the accounts receivable is current, being defined as less than 90 days. In the past, the Company has not experienced credit loss in the collection of accounts receivable.

At September 30, 2013, Ithaca had three loan facilities being a $430 million senior borrowing base facility (the "Facility"), an additional bridge credit facility (the "Bridge Facility") of $350 million (to facilitate the Valiant acquisition) together with a Norwegian debt facility (the "Norwegian Facility") of NOK 450 million (~$75 million). At quarter end, the Company had unused credit facilities totalling approximately $421 million (Q4 2012: $430 million). Approximately $434 million was drawn down under the facilities at September 30, 2013, being $50 million drawn under the Facility, $350 million drawn under the Bridge Facility and $34 million drawn under the Norwegian Facility.

During the quarter ended September 30, 2013, there was a net cash inflow of approximately $46.7 million (Q3 2012: outflow of $55.0 million).

Cashflow from Operations

Cash generated from operating activities in Q3 2013 was $77.8 million primarily due to cash generated from Athena, Beatrice, Jacky, Anglia, Cook and Broom operations, augmented in Q3 2013 primarily due to the inclusion of Dons and Causeway operations.

Cashflow from Financing Activities

Cash generated from financing activities in Q3 2013 was $52.1 million primarily due to additional draw down of the existing debt facility in Q3 2013 ($58 million).

Cashflow from Investing Activities

Cash used in investing activities in Q3 2013 was $139.3 million primarily due to further capital expenditure on the GSA development, including modification of the FPF-1 and subsea infrastructure fabrication works as noted above.

The Company continues to be fully funded, with more than sufficient financial resources to cover its anticipated future commitments from its existing cash balance, debt facilities and forecast cashflow from operations. No unusual trends or fluctuations are expected outside the ordinary course of business.

COMMITMENTS

The engineering financial commitments relate to committed capital expenditure on the GSA development, as well as ongoing capital expenditure on existing producing fields. Rig commitments reflect rig hire costs committed in relation to the anticipated Stella wells. As stated above, these commitments are expected to be funded through the Company's existing cash balance, forecast cashflow from operations and its debt facilities.

FINANCIAL INSTRUMENTS

All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Company has classified each financial instrument into one of these categories:

The classification of all financial instruments is the same at inception and at September 30, 2013.

The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of comprehensive income.

The following table summarises the commodity hedges in place at the end of the quarter.

The table below summarises the foreign exchange financial instruments in place at the end of Q3 2013.

SUMMARY OF QUARTERLY RESULTS

The most significant factors to have affected the Company's results during the above quarters, other than transactions such as the Valiant acquisition, are fluctuation in underlying commodity prices and movement in production volumes. The Company has utilised forward sales contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the exposure to price volatility. These contracts can cause volatility in profit after tax as a result of unrealised gains and losses due to movements in the oil price and USD : GBP exchange rate.

OUTSTANDING SHARE INFORMATION

The Company's common shares are traded on the Toronto Stock Exchange ("TSX") in Canada under the symbol "IAE" and on the Alternative Investment Market ("AIM") in the UK under the symbol "IAE".

As at September 30, 2013, Ithaca had 317,365,658 common shares outstanding along with 19,314,630 options outstanding to employees and directors to acquire common shares.

No options were granted by the Board of Directors in the quarter ended September 30, 2013.

Due to the exercise and listing of option shares following the end of Q3-2013, as at November 8, 2013, Ithaca had 322,233,620 common shares outstanding along with 14,446,668 options outstanding to employees and directors to acquire common shares. 

(1) Represents the TSX close price (CAD$2.53 on last trading day of September, 2013. US$:CAD$ 0.97 on September 30, 2013

CONSOLIDATION

The consolidated financial statements of the Company and the financial data contained in this management's discussion and analysis ("MD&A") are prepared in accordance with IFRS.

The consolidated financial statements include the accounts of Ithaca and its wholly-owned subsidiaries Ithaca Energy (Holdings) Limited ("Ithaca Holdings"), Ithaca Energy (UK) Limited ("Ithaca UK"), Ithaca Minerals North Sea Limited ("Ithaca Minerals") and Ithaca Energy Holdings (UK) Limited ("Ithaca Holdings UK") and its associates FPU Services Limited ("FPU") and FPF-1 Limited ("FPF-1").

The consolidated financial statements also include, from April 19 2013 only (being the acquisition date) the Valiant group of companies, comprising the following companies:

· Ithaca Petroleum Limited (formerly Valiant Petroleum plc)

· Ithaca Causeway Limited (formerly Valiant Causeway Limited)

· Ithaca Exploration Limited (formerly Valiant Exploration Limited)

· Ithaca Alpha (NI) Limited (formerly Valiant Alpha (NI) Limited

· Ithaca Gamma Limited (formerly Valiant Gamma Limited)

· Ithaca Epsilon Limited (formerly Valiant Epsilon Limited)

· Ithaca Delta Limited (formerly Valiant Delta Limited)

· Ithaca Petroleum Holdings AS (formerly Valiant Petroleum Holdings AS)

· Ithaca Petroleum Norge AS (formerly Valiant Petroleum Norge AS)

· Ithaca Technology AS (formerly Valiant Technology AS)

· Ithaca AS (formerly Querqus AS)

· Ithaca Petroleum EHF (formerly Valiant Petroleum EHF)

All inter-company transactions and balances have been eliminated on consolidation. A significant portion of the Company's North Sea oil and gas activities are carried out jointly with others. The consolidated financial statements reflect only the Company's proportionate interest in such activities.

CRITICAL ACCOUNTING ESTIMATES

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the reader in assessing the critical accounting policies and practices of the Company and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.

The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Company might realise different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.

Capitalised costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved and probable reserves are depreciated on a unit-of-production basis, by asset, using estimated proved and probable reserves as adjusted for production.

A review is carried out each reporting date for any indication that the carrying value of the Company's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with IAS 36. The Company's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Statement of Income.

Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the Statement of Income. Impairment losses relating to goodwill cannot be reversed in future periods.

Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. In periods following recognition, the liability and associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred.

All financial instruments, other than those designated as effective hedging instruments, are initially recognised at fair value on the balance sheet. The Company's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument.

In order to recognise share based payment expense, the Company estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time.

The determination of the Company's income and other tax liabilities / assets requires interpretation of complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded on the financial statements.

The accrual method of accounting will require management to incorporate certain estimates of revenues, production costs and other costs as at a specific reporting date. In addition, the Company must estimate capital expenditures on capital projects that are in progress or recently completed where actual costs have not been received as of the reporting date.

CONTROL ENVIRONMENT

Ithaca has established disclosure controls, procedures and corporate policies so that its consolidated financial results are presented accurately, fairly and on a timely basis. The Chief Executive Officer and Chief Financial Officer have designed, or have caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company's financial statements in accordance with IFRS with no material weaknesses identified.

Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of September 30, 2013, there were no changes in Ithaca's internal control over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CHANGES IN ACCOUNTING POLICIES

On January 1, 2011, the Company adopted IFRS using a transition date of January 1, 2010. The financial statements for the quarter ended September 30, 2013, including required comparative information, have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB").

The Company elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3(R). 

One impact of accounting for acquisitions as business combinations is the recognition of asset values, upon which the DD&A rate is calculated as pre-tax fair values and the recognition of a deferred tax liability on estimated future cash flows. With current tax rates at 62% this increases the DD&A charge for such assets. An offsetting reduction is recognised in the deferred tax charged through the consolidated statement of income.

In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after 1 January 2013. There has been no material impact from the adoption of the new and amended standards on the Company's financial statements.

ADDITIONAL INFORMATION

Non-IFRS Measures

'Cashflow from operations' referred to in this MD&A is not prescribed by IFRS. This non-IFRS financial measure does not have any standardised meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Company uses this measure to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Company considers Cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities.

'EBITDAX' referred to in this MD&A is not prescribed by IFRS. EDITDAX is defined as earnings before interest, taxes, Depreciation, Amortization and Exploration costs. EBITDAX is a supplemental non-GAAP financial measure that is not recognized under IFRS and does not have a standardized meaning prescribed by IFRS. EBITDAX should not be considered as an alternative to, or more meaningful than, net profit and comprehensive income or cash flows from operating activities as determined in accordance with IFRS or as an indicator of operating performance or liquidity. The computations of EBITDAX may not be comparable to other similarly titled measures of other companies, and accordingly EBITDAX may not be comparable to measures used by other companies. 

'Netbacks' referred to in this MD&A is not prescribed by IFRS. Netbacks are calculated on a per unit basis as oil, gas and natural gas liquids revenues less royalties and transportation and operating costs. Management believes that Netback is a useful supplemental measure as it provides an indication of the results generated by the principal business activities. Netbacks may not be comparable to other similarly titled measures of other companies, and accordingly Netbacks may not be comparable to measures used by other companies.

Off Balance Sheet Arrangements

The Company has certain lease agreements and rig commitments which were entered into in the normal course of operations, all of which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at September 30, 2013.

Related Party Transactions

A director of the Company is a partner of Burstall Winger LLP who acts as counsel for the Company. The amount of fees paid to Burstall Winger LLP in Q3 2013 was $0.3 million (Q3 2012: $0.1 million). These transactions are in the normal course of business and are conducted on normal commercial terms with consideration comparable to those charged by third parties.

As at September 30, 2013 the Company had a loan receivable from FPF-1 Ltd, an associate of the Company, for $26.3 million (Q3 2012: $21.6 million) as a result of the completion of the GSA transactions in 2012.

BOE Presentation

The calculation of boe is based on a conversion rate of six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 mcf: 1 bbl, utilising a conversion ratio at 6 mcf: 1 bbl may be misleading as an indication of value.

Well Test Results

Certain well test results disclosed in this MD&A represent short-term results, which may not necessarily be indicative of long-term well performance or ultimate hydrocarbon recovery there from.

RISKS AND UNCERTAINTIES

The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints, lack of pipeline capacity or lack of markets. The Company is dependent upon the production rates and oil price to fund the current development program.

For additional detail regarding the Company's risks and uncertainties, refer to the Company's Annual Information Form dated March 25, 2013, (the "AIF") filed on SEDAR at www.sedar.com.

RISK

MITIGATIONS

Commodity Price Volatility

The Company's performance is significantly impacted by prevailing oil and natural gas prices, which are primarily driven by supply and demand as well as economic and political factors.

In order to mitigate the risk of fluctuations in oil and gas prices, the Company routinely executes commodity price derivatives, predominantly in relation to oil production, as a means of establishing a floor in realised prices.

Foreign Exchange Risk

The Company is exposed to financial risks including financial market volatility and fluctuation in various foreign exchange rates.

Given the increasing proportion of development capital expenditure and operating costs incurred in currencies other than the United States dollar, the Company routinely executes hedges to mitigate foreign exchange rate risk on committed expenditure.

Interest Rate Risk

The Company is exposed to fluctuation in interest rates, particularly in relation to the debt facilities entered into.

In order to mitigate the fluctuations in interest rates, the Company routinely reviews cost exposures as a result of varying rates and assesses the need to lock in interest rates.

Debt Facility Risk

The Company is exposed to borrowing risks relating to drawdown of its debt facilities (the "Facilities"). The ability to drawdown the Facilities is based on the Company meeting certain covenants including coverage ratio tests, liquidity tests and development funding tests which are determined by a detailed economic model of the Company. There can be no assurance that the Company will satisfy such tests in the future in order to have access to the full amount of the Facilities.

The Facilities includes covenants which restrict, among other things, the Company's ability to incur additional debt or dispose of assets.

As is standard to a credit facility, the Company's and Ithaca Energy (UK) Limited's ("Ithaca UK") assets have been pledged as collateral and are subject to foreclosure in the event the Company or Ithaca UK defaults.

The Company believes that there are no circumstances at present that result in its failure to meet the financial tests and it can therefore draw down upon its Facilities.

The Company routinely produces detailed cashflow forecasts to monitor its compliance with the financial tests and liquidity requirements of the Facilities.

Financing Risk

To the extent cashflow from operations and the Facilities' resources are ever deemed not adequate to fund Ithaca's cash requirements, external financing may be required. Lack of timely access to such additional financing, or access on unfavourable terms, could limit the future growth of the business of Ithaca. To the extent that external sources of capital, including public and private markets, become limited or unavailable, Ithaca's ability to make the necessary capital investments to maintain or expand its current business and to make necessary principal payments under the Facilities may be impaired.

A failure to access adequate capital to continue its expenditure program may require that the Company meet any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development programs.

The Company has established a fully funded business plan and routinely monitors its detailed cashflow forecasts and liquidity requirements to maintain its funding requirements. The Company believes that there are no circumstances at present that would lead to selected divestment, delays to existing programs or a default relating to the Facility.

Third Party Credit Risk

The Company is and may in the future be exposed to third party credit risk through its contractual arrangements with its current and future joint venture partners, marketers of its petroleum production and other parties. The Company extends unsecured credit to these parties, and therefore, the collection of any receivables may be affected by changes in the economic environment or other conditions.

The Company believes this risk is mitigated by the financial position of the parties. All of the Company's oil production from the Beatrice, Jacky and Athena fields is sold to BP Oil International Limited. Oil production from Cook, Broom, Causeway, Fionn and Dons is sold to Shell Trading International Ltd. Anglia and Topaz gas production is sold through contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd. and Esso Exploration & Production UK Ltd. The Company has not experienced any material credit loss in the collection of accounts receivable to date.

The joint venture partners in those assets operated by the Company are largely well financed international companies. Where appropriate, a cash call process has been implemented with the GSA partners to cover high levels of anticipated capital expenditure thereby reducing any third party credit risk.

Property Risk

The Company's properties will be generally held in the form of licenses, concessions, permits and regulatory consents ("Authorisations"). The Company's activities are dependent upon the grant and maintenance of appropriate Authorisations, which may not be granted; may be made subject to limitations which, if not met, will result in the termination or withdrawal of the Authorisation; or may be otherwise withdrawn. Also, in the majority of its licenses, the Company is often a joint interest-holder with another third party over which it has no control. An Authorisation may be revoked by the relevant regulatory authority if the other interest-holder is no longer deemed to be financially credible.

There can be no assurance that any of the obligations required to maintain each Authorisation will be met. Although the Company believes that the Authorisations will be renewed following expiry or granted (as the case may be), there can be no assurance that such

The Company has routine ongoing communications with the UK oil and gas regulatory body, the Department of Energy and Climate Change ("DECC"). Regular communication allows all parties to an Authorisation to be fully informed as to the status of any Authorisation and ensures the Company remains updated regarding fulfilment of any applicable requirements.

authorisations will be renewed or granted or as to the terms of such renewals or grants. The termination or expiration of the Company's Authorisations may have a material adverse effect on the Company's results of operations and business.

The areas covered by the Authorisations are or may be subject to agreements with the proprietors of the land. If such agreements are terminated, found void or otherwise challenged, the Company may suffer significant damage through the loss of opportunity to identify and extract oil or gas.

Operational Risk

The Company is subject to the risks associated with owning oil and natural gas properties, including environmental risks associated with air, land and water. All of the Company's operations are conducted offshore in the United Kingdom Continental Shelf; as such Ithaca is exposed to operational risk associated with weather delays that can result in a material delay in project execution. Third parties operate some of the assets in which the Company has interests. As a result, the Company may have limited ability to exercise influence over the operations of these assets and their associated costs. The success and timing of these activities may be outside the Company's control.

There are numerous uncertainties in estimating the Company's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital. 

The Company acts at all times as a reasonable and prudent operator. The Company takes out market insurance to mitigate many of these operational, construction and environmental risks.

The Company uses the services of Sproule International Limited ("Sproule") to independently assess the Company's reserves on an annual basis.

Competition Risk

In all areas of the Company's business, there is competition with entities that may have greater technical and financial resources. 

The Company places appropriate emphasis on ensuring it attracts and retains high quality resources to enable it to maintain its competitive position.

FORWARD-LOOKING INFORMATION

This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and forward-looking information which are based on the Company's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could", "scheduled", "targeted", "approximately" and similar expressions are intended to identify forward-looking statements and forward-looking information. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. The Company believes that the expectations reflected in those forward-looking statements and information are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this MD&A and any documents incorporated by reference herein should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of this MD&A and any documents incorporated by reference herein and the Company does not undertake any obligation to publicly update or revise any forward-looking statements or information, except as required by applicable laws.

In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking statements and information pertaining to the following:

• the quality of and future net revenues from the Company's reserves;

• oil, natural gas liquids ("NGLs") and natural gas production levels;

• commodity prices, foreign currency exchange rates and interest rates;

• capital expenditure programs and other expenditures;

• the sale, farming in, farming out or development of certain exploration properties using third party resources;

• supply and demand for oil, NGLs and natural gas;

• the Company's ability to raise capital;

• the continued availability of the RBL Facility and the $100 million corporate facility;

• the Company's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom;

• the realisation of anticipated benefits from acquisitions and dispositions;

• the Company's ability to continually add to its reserves;

• schedules and timing of certain projects and the Company's strategy for growth;

• the Company's future operating and financial results;

• the ability of the Company to optimise operations and reduce operational expenditures;

• treatment under governmental and other regulatory regimes and tax, environmental and other laws;

• production rates;

• targeted production levels; and

• timing and cost of the development of the Company's reserves.

With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference herein, the Company has made assumptions regarding, among other things:

• Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required;

• access to third party hosts and associated pipelines can be negotiated and accessed within the expected timeframe;

• FDP approval and operational construction and development is obtained within expected timeframes;

• the Company's development plan for the Stella and Harrier discoveries will be implemented as planned;

• the effect of the Valiant acquisition on Ithaca;

• reserves volumes assigned to Ithaca's properties;

• ability to recover reserves volumes assigned to Ithaca's properties;

• revenues do not decrease below anticipated levels and operating costs do not increase significantly above anticipated levels;

• future oil, NGLs and natural gas production levels from Ithaca's properties and the prices obtained from the sales of such production;

• the level of future capital expenditure required to exploit and develop reserves;

• Ithaca's ability to obtain financing on acceptable terms, in particular, the Company's ability to access the Facility;

• the continued ability of the Company to collect from third parties who Ithaca has provided credit to;

• Ithaca's reliance on partners and their ability to meet commitments under relevant agreements; and

• the state of the debt and equity markets in the current economic environment.

The Company's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of assumptions proving inaccurate and of both known and unknown risks, including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the documents incorporated by reference herein, and those set forth below:

• risks associated with the exploration for and development of oil and natural gas reserves in the North Sea;

• risks associated with offshore development and production including transport facilities;

• operational risks and liabilities that are not covered by insurance;

• volatility in market prices for oil, NGLs and natural gas;

• the ability of the Company to fund its substantial capital requirements and operations;

• risks associated with ensuring title to the Company's properties;

• changes in environmental, health and safety or other legislation applicable to the Company's operations, and the Company's ability to comply with current and future environmental, health and safety and other laws;

• the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Company's exploration and development drilling and estimated decline rates;

• the Company's success at acquisition, exploration, exploitation and development of reserves;

• risks associated with realisation of anticipated benefits of acquisitions;

• risks related to changes to government policy with regard to offshore drilling;

• the ability of the Company to obtain and maintain all of its required permits and licenses;

• competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel;

• changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide;

• actions by governmental or regulatory authorities including changes in income tax laws or changes in tax laws, royalty rates and incentive programs relating to the oil and gas industry including any increase in UK taxes;

• adverse regulatory rulings, orders and decisions; and

• risks associated with the nature of the common shares.

Additional Reader Advisories

The information in this MD&A is provided as of November 8, 2013. The Q3 2013 results have been compared to the results of the comparative period in 2012. This MD&A should be read in conjunction with the Company's unaudited consolidated financial statements as at September 30, 2013 and 2012 and with the Company's audited consolidated financial statements as at December 31, 2012 together with the accompanying notes and MD&A, and AIF for the 2012 fiscal year. Copies of these documents are available without charge from Ithaca or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com.

Consolidated Statement of Income

For the three and nine months ended 30 September 2013 and 2012

(unaudited)

Three months ended 30

Sept

Nine months ended 30

Sept

Note

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Revenue

4

114,112

41,579

302,241

117,912

Cost of sales

5

(77,291)

(27,096)

(227,198)

(83,082)

Gross Profit

36,821

14,483

75,043

34,830

Exploration and evaluation expenses

10

(509)

(112)

(953)

(191)

Administrative expenses

(1,518)

(524)

(7,956)

(2,967)

Non-recurring Valiant acquisition costs

-

-

(10,235)

-

Total Administrative expenses

6

(1,518)

(524)

(17,831)

(2,967)

Operating Profit

34,794

13,847

56,259

31,672

Foreign exchange

2,212

748

137

851

(Loss)/gain on financial instruments

24

(15,814)

(11,989)

(5,472)

6,621

Release of exploration obligation

15

22,649

-

22,649

205

Negative goodwill

7,033

-

55,912

-

Profit Before Interest and Tax

50,874

2,606

129,485

39,349

Finance costs

7

(4,956)

(697)

(12,233)

(2,068)

Interest income

3

61

45

195

Profit Before Tax

45,921

1,970

117,297

37,476

Taxation

22

8,183

2,924

(7,492)

10,575

Profit After Tax

54,104

4,894

109,805

48,051

Earnings per share

Basic

21

0.17

0.02

0.37

0.19

Diluted

21

0.17

0.02

0.37

0.18

Consolidated Statement of Financial Position

(unaudited)

Note

30 September

2013

US$'000

31 December

2012

US$'000

ASSETS

Current assets

Cash and cash equivalents

73,770

31,374

Restricted cash

8

3,426

2

Accounts receivable

212,905

159,195

Norwegian tax receivable

87,517

-

Deposits, prepaid expenses and other

25,255

14,754

Inventory

9

28,106

15,878

Derivative financial instruments

25

12,150

8,251

443,129

229,454

Non current assets

Long-term receivable

27

26,346

21,551

Investment in associate

13

18,337

18,337

Exploration and evaluation assets

10

67,416

47,390

Property, plant & equipment

11

1,398,401

615,788

Goodwill

12

985

985

Other non-current assets

8,126

-

1,519,611

704,051

Total assets

1,962,740

933,505

LIABILITIES AND EQUITY

Current liabilities

Trade and other payables

408,604

205,635

Exploration obligations

15

21,485

-

430,089

205,635

Non current liabilities

Bank debt

14

426,574

-

Decommissioning liabilities

16

160,014

52,834

Other long term liabilities

17

2,955

3,018

Contingent consideration

18

4,000

4,000

Derivative financial instruments

25

8,253

-

Deferred tax liability

22

119,152

62,370

720,948

122,222

Net Assets

811,703

605,648

Equity attributable to equity holders

Share capital

19

524,908

431,318

Share based payment reserve

20

23,000

20,340

Retained earnings

263,795

153,990

Shareholders' Equity

811,703

605,648

The financial statements were approved by the Board of Directors on 8 November 2013 and signed on its behalf by:

"Jay Zammit"

Director

"John Summers"

Director

Consolidated Statement of Changes in Equity

(unaudited)

Share Capital

Share Based

Payment

Reserve

Retained Earnings

Total

US$'000

US$'000

US$'000

US$'000

Balance, 1 Jan 2012

429,502

17,318

60,591

507,411

Net income for the period

-

-

48,051

48,051

Total comprehensive income

429,502

17,318

108,642

555,462

Share based payment

-

2,399

-

2,399

Options exercised

250

(107)

-

143

Balance, 30 September 2012

429,752

19,610

108,642

558,004

Balance, 1 Jan 2013

431,318

20,340

153,990

605,648

Net income for the period

-

-

109,805

109,805

Total comprehensive income

431,318

20,340

263,795

715,453

Shares issued

93,005

-

-

93,005

Share based payment

-

2,917

-

2,917

Options exercised

585

(257)

-

328

Balance, 30 September 2013

524,908

23,000

263,795

811,703

Consolidated Statement of Cash Flow

For the three and nine months ended 30 September 2013 and 2012

(unaudited)

Three months ended 30 Sept

Nine months ended 30 Sept

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

CASH PROVIDED BY (USED IN):

Operating activities

Profit Before Tax

45,921

1,970

117,297

37,476

Adjustments for:

Depletion, depreciation and amortisation

42,279

14,563

103,144

39,040

Exploration and evaluation expenses

509

112

953

191

Share based payment

203

62

864

401

Loan fee amortisation

592

-

1,777

494

Revaluation of financial instruments

13,312

12,927

17,074

(5,201)

Revaluation of contingent consideration

-

-

-

1,295

Movement in goodwill

(7,033)

-

(48,878)

-

Gain on disposal

-

-

-

(205)

Gain on exploration obligation release

(22,321)

-

(22,321)

-

Accretion

1,375

453

2,965

1,272

Bank interest & charges

2,949

-

7,405

-

Valiant acquisition fees

-

-

5,032

-

Cashflow from operations

77,786

30,087

185,312

74,763

Changes in inventory, debtors and creditors relating to operating activities

(7,925)

(7,255)

12,917

3,092

Net cash from operating activities

69,861

22,832

198,229

77,855

Investing activities

Acquisition of Valiant

-

-

(200,636)

-

Cash acquired on acquisition of Valiant

-

-

11,611

-

Valiant acquisition fees

-

-

(5,032)

-

Acquisition of Cook

-

-

(33,370)

-

Capital expenditure

(139,304)

(60,456)

(196,943)

(114,745)

Investment in associate

-

-

-

(18,337)

Loan to associate

-

-

-

(21,551)

Proceeds on disposal

-

-

-

44,878

Settlement of contingent consideration

-

-

-

(15,700)

Changes in debtors and creditors relating to investing activities

63,136

(15,409)

(22,133)

15,444

Net cash used in investing activities

(76,168)

(75,865)

(446,503)

(110,011)

Financing activities

Proceeds from issuance of shares

-

-

328

143

(Increase) / decrease in restricted cash

-

(340)

(3,226)

(4,049)

Derivatives

(3,249)

(2,485)

(12,876)

(2,485)

Loan repayment

-

-

(115,000)

-

Loan draw down

58,123

-

434,041

-

Bank interest & charges

(2,816)

-

(8,321)

-

Net cash from/used in financing activities

52,058

(2,825)

294,946

(6,391)

Currency translation differences relating to cash

928

816

(4,276)

(155)

Increase / (decrease) in cash and cash equiv.

46,679

(55,042)

42,396

(38,702)

Cash and cash equivalents, beginning of period

27,091

111,885

31,374

95,545

Cash and cash equivalents, end of period

73,770

56,843

73,770

56,843

Three months ended 30 Sept

Nine months ended 30 Sept

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Oil sales

111,289

38,227

292,506

107,328

Gas sales

2,007

2,040

7,231

6,620

Condensate sales

56

98

328

405

Other income

760

1,214

2,176

3,559

114,112

41,579

302,241

117,912

Three months ended 30 Sept

Nine months ended 30 Sept

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Operating costs

(41,893)

(20,903)

(108,275)

(52,031)

Oil purchases

(34)

-

(981)

-

Movement in oil and gas inventory

6,915

8,370

(14,798)

7,989

Depletion, depreciation and amortisation

(42,279)

(14,563)

(103,144)

(39,040)

(77,291)

(27,096)

(227,198)

(83,082)

Three months ended 30 Sept

Nine months ended 30 Sept

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

General & administrative

(1,315)

(462)

(6,731)

(2,566)

Non-recurring Valiant acquisition related costs

-

-

(10,235)

-

Share based payment

(203)

(62)

(865)

(401)

(1,518)

(524)

(17,831)

(2,967)

Three months ended 30 Sept

Nine months ended 30 Sept

2013

US$'000

2012

US$'000

2013

US$'000

2012

US$'000

Accretion

(1,375)

(453)

(2,965)

(1,272)

Bank charges

(2,949)

(219)

(7,409)

(264)

Non-operated asset finance fees

(40)

(25)

(82)

(38)

Loan fee amortisation

(592)

-

(1,777)

(494)

(4,956)

(697)

(12,233)

(2,068)

30 Sept

2013

US$'000

31 Dec

2012

US$'000

Security

3,426

2

3,426

2

30 Sept

2013

US$'000

31 Dec

2012

US$'000

Crude oil inventory

27,891

15,865

Materials inventory

215

13

28,106

15,878

US$'000

At 1 January 2012

22,689

Additions

38,188

Write offs/relinquishments

(4,261)

Disposals

(9,226)

At 31 December 2012

47,390

Additions

20,979

Write offs/relinquishments

(953)

At 30 September 2013

67,416

Development & Production

Oil and Gas Assets

US$'000

Other fixed

assets

US$'000

Total

US$'000

Cost

At 1 January 2012

623,549

2,292

625,841

Additions

139,383

133

139,516

Disposals

(37,912)

-

(37,912)

At 31 December 2012

725,020

2,425

727,445

Additions

885,046

711

885,757

At 30 September 2013

1,610,066

3,136

1,613,202

DD&A

At 1 January 2012

(53,988)

(1,497)

(55,485)

Charge for the period

(55,770)

(402)

(56,172)

At 31 December 2012

(109,758)

(1,899)

(111,657)

Charge for the period

(102,852)

(292)

(103,144)

At 30 September 2013

(212,610)

(2,191)

(214,801)

NBV at 1 January 2012

569,561

795

570,356

NBV at 1 January 2013

615,262

526

615,788

NBV at 30 September 2013

1,397,456

945

1,398,401

US$'000

Cost

At 1 January 2012, 31 December 2012 & 30 September 2013

985

30 Sept

2013

US$'000

31 Dec

2012

US$'000

Investment in FPF-1 and FPU services

18,337

18,337

30 Sept

2013

US$'000

31 Dec

2012

US$'000

Exploration obligations

21,485

-