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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Irvine Energy | LSE:IVE | London | Ordinary Share | GB00B0R2Q661 | ORD 0.1P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 0.41 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
TIDMIVE RNS Number : 8535U Irvine Energy PLC 30 June 2009 Irvine Energy PLC / Index: AIM / Epic: IVE / Sector: Oil & Gas 30 June 2009 Irvine Energy PLC ('Irvine' or the 'Company') Audited results for the year ended 31 December 2008 Irvine Energy plc, the AIM listed oil and gas exploration and production company, announces its results for the year ended 31 December 2008. Chairman's Statement As our shareholders will already be aware, Irvine Energy PLC ("Irvine" or "the Company") has had a difficult year in which the problems associated with disappointing exploration results and operational issues, have been exacerbated by the deterioration in the Exploration and Production ("E&P") credit and broader markets. The Board has spent the last months trying to resolve the issues with its partners and has been focussing on generating some value from its assets. To this end, the Board is pursuing discussions in an attempt to either sell some of the acreage or complete the acquisition of additional assets and raise further finance with the intention of securing the future of the Company. Metro and GasRock Despite some early successes and a strong initial working relationship, in the second half of the period, relations with Irvine's operators Metro Energy Inc. ("Metro") deteriorated. They claimed approximately US$3.8 million from the Company's wholly owned subsidiaries, Wattle Energy Corporation ("Wattle") and Pinon Energy LLC ("Pinon"), in respect of seismic acquisition, joint interest billings and management fees which the Company disputed and asked Metro to substantiate. As a result Metro has withheld revenues from Irvine and has now commenced proceedings against Wattle, Halcyon Nominees (USA) Inc ("Halycyon") and GasRock Capital LLC ("GasRock") (the provider of Irvine's debt finance) in which it claims: (1) US$2,756,570 in respect of expenditure incurred in connection with the seismic programme undertaken in accordance with the Agreement for Oil and Gas Lease Development and Exploration Programme Agreement between Metro, Kanco Energy Inc and Wattle together with interest; (2) US$180,314 in respect of furnished labour, material, machinery and supplies in accordance with the Kansas Exploration and Development Agreement between Metro and Wattle together with interest; and (3) US$542,448 in respect of material and equipment sold or furnished, work or labour performed and services rendered together with interest. . Each of Halcyon, Wattle and GasRock has filed responses to Metro's claim. There is a case management conference in respect of the proceedings on 13 July 2009, although the Board of Irvine is continuing to seek a negotiated solution to the claims. As previously reported, the Company's wholly owned subsidiaries, Wattle and Pinon (together "the Borrowers"), entered into the GasRock credit agreement on 28 May 2008 and Irvine Plc guaranteed those borrowings. In November 2008, GasRock advised Wattle and Pinon that it would exercise its discretion not to make any further advances under the credit facility until the dispute with Metro and various concerns about the exploration programme had been resolved. GasRock issued a notice of default, dated 27 January 2009, to Wattle and Pinon calling for repayment of the outstanding balance of the moneys owed to it under the credit agreement. It also issued a notice to the Company claiming payment of the same amount in accordance with the terms of the guarantee. As of 31 March 2009, the outstanding balance of the moneys owed by the Borrowers to GasRock was US$5.507 million (31 December 2008: US$6.12 million). Following extensive negotiations by the Board, on 19 March 2009, Irvine and GasRock entered into a release of guarantee whereby GasRock released Irvine Plc from its obligations under the guarantee in consideration of Irvine Plc paying GBP370,000 to GasRock. The consideration has been paid to GasRock and, accordingly, the Company has been released from the guarantee. In addition, the Company agreed to grant, and subsequently granted, GasRock an option to subscribe for 100 million ordinary shares in the Company at 0.1 pence per share. With a lack of income to generate cash, the Board has evaluated various options in order to raise funds by divesting non-core and core assets. However, in spite of this, the environment for the sale of such assets has been and continues to be poor and, at this stage, it has been unable to conclude such a transaction. Although the Company continues to pursue this course of action, the directors do not expect the environment to materially change in the short term. The outcome of the debt due to GasRock and Metro's claims against the Company's US subsidiaries, Wattle and Pinon, is uncertain at the date of this Report. There is a significant risk that the resolution of these claims will result in a net asset deficiency in the US subsidiaries. At the date of this Report, GasRock has not taken any further action to enforce its security. GasRock and the Company have been discussing various proposals involving Chapter 7 and Chapter 11 of United States Bankruptcy Code. Under these proposals, there is a significant risk that the Company will not retain an interest in any of its US oil and gas assets. However, the Directors believe, based on professional advice, that the liabilities of the US subsidiaries are ring-fenced in those companies and that the Company's loss will be limited to the amount invested. As previously mentioned, the Company is currently engaged in advanced discussions with third parties regarding the acquisition of additional assets and the raising of further finance. However, at this stage, it is premature to comment further on these discussions and the directors express no opinion on the likelihood of a successful outcome and caution shareholders against drawing any premature inferences. Operations summary The Company still hold extensive and potentially prospective acreage in both Oklahoma and Kansas and particularly believes that potential exists under our acreage in both the Woodford and Caney shales based on other Woodford results in the area. However, exploration results during the period were disappointing and whilst hydrocarbons have frequently been encountered, the drilling has generated results that are below the Directors' expectations. On the positive side, the Company obtained encouraging results from the Priegel No. 3-10 well where we believe we have identified an excellent development opportunity in Booch channel sands. However, operations have effectively ceased pending resolution of the dispute with Metro and the restructuring of the Company's finances. On 1 September 2008, Aaron Close resigned as managing director of Irvine to pursue other opportunities and I have taken control as interim executive Chairman. Financials The loss of the Group after taxation amounted to GBP2.574 million (2007: GBP0.850 million). The loss for the Company after taxation amounted to GBP16.037 million (2007: GBP0.594 million). The Group's cash position at 31 December 2008 was GBP0.488 million (2007: GBP1.204 million). Outlook In the short term, the principal objectives of the directors are to conclude additional financed acquisitions and to reach a commercial arrangement with Metro and GasRock. At this stage, it is difficult to forecast whether the Company will realise these objectives and I reiterate that the directors express no opinion on the likelihood of a successful outcome and caution shareholders against drawing any premature inferences. If the Company is able to achieve either of these objectives then it will resume operations. On 30 January 2009, the Company requested a suspension of trading of its shares on AIM, pending clarification of the Company's financial position and discussions with GasRock. There remains a significant degree of uncertainty over the financial position of the Company and as such, the shares shall remain suspended until further notice. Shareholders should be aware that, pursuant to AIM Rule 41, the London Stock Exchange will cancel the admission of the Company's shares from the AIM Market once they have been suspended from trading for six months. Douglas Manner Chairman 30 June 2009 OPERATIONS REPORT Production Summary For the year ended 31 December 2008, the Group produced an average net rate of 294 mcfe/d (thousand cubic feet per day). There was an average producing well count of 22 during the year. Net production declined from 350 mcfe/d in January to 209 mcfe/d by the end of the year. The primary cause of the production drop was the watering out of the Patriot No. 1-15 during 2008. 2008 Drilling Results The drilling results in 2008 were well below expectations. Five wells targeting conventional sands were drilled in Oklahoma in 2008. Four of these were drilled for deeper zones, the Cromwell, Jefferson and Gilcrease. Hydrocarbons were found in all cases, but the completions yielded rates that were not sufficiently economic to drill and complete the wells. A fifth well, the Priegel No. 3-10, was drilled for a shallow Booch channel sand and was completed as a high water-cut oil well. Although the oil rates were low in this well, the results were nevertheless encouraging due to the fact that this well was on the thin edge of the channel and seismic data indicated that it thickened significantly in an offset position. It is believed that an excellent development opportunity exists for this channel sand. Two additional wells were drilled in Oklahoma for the Woodford shale. The Farrow No. 1-24 was a vertical completion in the Woodford and although not producing at economic rates, the data supported drilling a horizontal well in the shale. Therefore, the Jones No. 1-5H was drilled horizontally in the Woodford in June. Only two of the four frac stages were successful and the well performance has been disappointing. Although Irvine's first attempt in the shale failed to produce economic results, Irvine remains confident that the potential exists under our acreage in both the Woodford and Caney shales based on other Woodford results in the area. In Kansas, five wells were drilled targeting shallow oil sands on structural highs identified by the seismic data acquired in 2007. Four wells were drilled based on the Rock seismic data and one on the Ayers data. Two wells, the Rock No. 1-29 and 1-30 found no hydrocarbons. The other three wells, the Rock 1-5, 1-32 and the Ayers 1-20 found hydrocarbons, but ultimately produced uneconomic oil rates with very high water volumes. The Irvine strategy called for a number of additional wells in this area in order to play out the statistical nature of the play. However, due to capital constraints, no additional drilling has occurred. As announced on 11 November, GasRock exercised its discretion not to make any further advances under the debt facility. As a result, the drilling activity was put on hold. Niobrara Development The Niobrara field was brought into production in April 2008 after a number of logistical issues including salt water disposal permitting and equipment delays had been resolved. After production commenced, it became apparent that the compressor in the field was improperly sized and had to be replaced and subsequent to that a significant pipeline leak was discovered close to the sales metre, thereby placing previous production reports in question. Initially, 18 wells were brought into production resulting in a total of only 75 to 100 mcfd and large water volumes. Once the infrastructure issues were addressed, it was anticipated that the water production would begin to drop off and that gas production would steadily increase over time. However, this did not occur. At this stage, it appears that during the two years prior to Irvine's acquisition of the field, the wells sat with the reservoir exposed to completion fluid, thereby creating permanent reservoir damage in the Niobrara in which the relative permeability to gas production couldn't be restored. In order to develop the proved gas reserves in place, the field would have to be re-drilled. At this stage, capital constraints preclude this course of action. Seismic Programme The seismic programme in the Rock, Ayers and Udall areas in Kansas which was started in 2007 was completed in 2008. The total 3D data base is now up to 55 square miles in Kansas. The seismic programme has generated large cost overruns, and has been the source of dispute between Irvine and the operator Metro. The parties are continuing to discuss these matters with a view to negotiating a solution. Land Expiries and Impairment At its peak, Irvine accumulated approximately 112,000 net acres in Oklahoma and Kansas. A large portion of the acreage was leased in 2006 and early 2007 with three year terms. Although a small portion includes currently producing wells, and will, therefore, be held by production, a significant portion of the acreage has either expired or will be expiring over the next 12 months. In order to renew the expiring leases, Irvine will need to pay to the relevant lessors additional lease bonuses for extension rights. It was Irvine's intention to sell the non-core land to help support the retention of the core properties. Due to the significant change in oil and gas prices and the downturn in capital spending in the industry, there is little demand for new leases at this time. Notwithstanding the lease expiry, production issues and unfavourable market conditions, no impairment of the Group's oil and gas assets has been recognised at this time, as the Group is not currently able to market its assets due to the ongoing dispute, and forced sale is unlikely to realise sufficient funds to clear the amounts due to GasRock. In light of the inherent uncertainty and the absence of comparable transactions, the directors are unable to conclude with sufficient certainty on the value of the Group's oil and gas assets. Douglas Manner Chairman 30 June 2009 Directors' Report The Directors present their report together with the financial statements for the Group and the Company for the year ended 31 December 2008. Company Formation The Company was incorporated on 6 September 2005 as a public limited company with the registration number 5555175. The Company is domiciled in the United Kingdom. The Company is the ultimate parent undertaking for the group. Principal Activities The principal activities of the Company and its subsidiaries are the evaluation and development of on-shore oil and gas projects in North America. Results and Dividends The loss of the Group after taxation amounted to GBP2.574 million (2007: GBP0.850 million). The loss for the Company after taxation amounted to GBP16.037 million (2007: GBP0.594 million). The Directors do not propose the payment of a dividend. Directors and Directors Interests The Directors of the Group and the Company during the period were: +------------------------+---------------------+---------------------+ | | Date of Appointment | Date of Resignation | +------------------------+---------------------+---------------------+ | Michael Frayne | 7 October 2005 | - | +------------------------+---------------------+---------------------+ | Anthony Samaha | 16 September 2005 | - | +------------------------+---------------------+---------------------+ | Ross Warner | 16 September 2005 | - | +------------------------+---------------------+---------------------+ | Douglas Manner | 1 February 2007 | - | +------------------------+---------------------+---------------------+ | Aaron Close | 1 February 2007 | 1 September 2008 | +------------------------+---------------------+---------------------+ The interests of the Directors in the ordinary share capital of the Company during the period were: +------------------------+------------+-------------+------------+------------+ | | Number of ordinary | Number of Options | | | shares | | +------------------------+--------------------------+-------------------------+ | | 31 Dec. | 31 Dec. | 31 Dec. | 31 Dec. | | | 2008 | 2007 | 2008 | 2007 | +------------------------+------------+-------------+------------+------------+ | Michael Frayne1 | 63,345,238 | 59,345,238 | 5,000,000 | 5,000,000 | +------------------------+------------+-------------+------------+------------+ | Anthony Samaha2 | 7,000,000 | 3,000,000 | 5,000,000 | 5,000,000 | +------------------------+------------+-------------+------------+------------+ | Ross Warner3 | 5,000,000 | 1,000,000 | 5,000,000 | 5,000,000 | +------------------------+------------+-------------+------------+------------+ | Douglas Manner | - | - | 10,000,000 | 10,000,000 | +------------------------+------------+-------------+------------+------------+ | Aaron Close | - | - | 10,000,000 | 10,000,000 | +------------------------+------------+-------------+------------+------------+ Shares are held by: 1. Adelise Services Ltd. The interest is a beneficial interest. 2. Reabold Ltd. The interest is a non-beneficial interest. 3. Bournemead International Ltd. The interest is a beneficial interest. Douglas Manner Chairman Mr Manner has over 25 years engineering experience in the oil and gas industry, principally in the North American region as well as extensive corporate experience serving on the Boards of numerous oil and gas exploration firms. He was previously Chief Executive Officer ('CEO') of Westside Energy Corporation ('Westside'), an American Stock Exchange listed shale gas energy company with 65,000 acres in the Barnett Shale area in Northern Texas and production of 3 million cubic feet gas per day. Previously, Mr Manner has held senior positions in oil & gas companies including, COO of Kosmos Energy LLC, a private company exploring for oil and gas in offshore West Africa, COO of White Stone Energy, a Houston based oil and gas advisory firm, Chairman and CEO of Mission Resources and COO of Gulf Canada Resources Ltd responsible for both international and domestic activities. He spent 16 years with Ryder Scott Petroleum engineers having started his career at Amoco Production Company. Michael Frayne Non-Executive Director Michael Frayne is a qualified chartered accountant and geologist with over 15 years' experience in the resource sector. Michael has been responsible for sourcing significant resource and energy projects around the world and successfully establishing several UK and Australian listed companies with these projects. Michael was previously the joint managing director of Asia Energy plc. Ross Warner Non-Executive Director Ross Warner holds a Bachelor of Laws degree from the University of Western Australia and a Master of Laws degree from the University of Melbourne. Ross has approximately 10 years' experience working in law firms including Mallesons Stephen Jaques in Australia and Clifford Chance in the UK. His principal area of practice was advising venture capital funds in relation to management buy-outs and related transactions. Ross is a non-executive director of AIM listed Uranium Resources Plc. Anthony Samaha Non-Executive Director Mr Samaha holds Bachelor of Commerce and Bachelor of Economics degrees. He is an Associate of the Institute of Chartered Accountants of Australia and an Associate of the Financial Services Institute of Australasia. Mr Samaha has over 18 years experience in providing accounting and corporate advice in a diverse range of industry sectors, including resource development. He is a director of AIM quoted resources companies Braemore Resources Plc and Altona Energy Plc. Business review and future developments A review of the business and the future development of the Group is presented in the Chairman's Statement on pages 3 and 4 and in the Operations Report on pages 5 to 6. Key performance indicators The Group has three project areas, Kansas, Oklahoma and Niobrara. A key objective has been to increase the Group's reserves through successful implementation of drilling programmes and the raising of production across the portfolio. The Group was successful in establishing an independent reserve and resources audit from Netherland, Sewell & Associates, Inc. ("NSAI") with respect to its Niobrara and Oklahoma Projects, as announced in April 2008. The Group also successfully identified drilling targets and established an independent contingent gas resource by NSAI in respect to the Hartshorne coalbed methane project in Oklahoma. In addition the Group identified a number of oil development locations to drill out the Booch sandstone channel in Oklahoma. The Group was unsuccessful in its drilling programmes and programme for increasing production in its three project areas, as reviewed in the Operations Report. The financial results for the Group are set out in page 7 of the Directors' Report and were significantly below management's expectations for the reporting period. These financial results reflect the unsuccessful drilling programmes, disappointing production levels, and 3-D seismic cost over-runs, which contributed to the financial distress of the Group, together with the significant decline in oil and gas prices and global credit market difficulties. The Group cash at 31 December 2009 was GBP0.488 million. Business risks and uncertainties The Group is subject to the risks arising from specific commercial disputes and operational matters, which are described more fully in the Chairman's Statement. Reference is made to the Going Concern note, in particular to the position of the Group's US subsidiaries. The Group's business is subject to risks inherent in oil and gas exploration, development and production operations, as well as reliance on a third party operator. In addition, there are risks associated with the jurisdictions where the Group operates. The Company has identified certain risks pertinent to its business including: volatility of future oil and gas prices, exploration and reserve risks, drilling and operating risks, costs and availability of materials and services, loss of or unfavourable changes to production sharing and foreign currency risk. Financial instruments Details of the use of financial instruments by the Company and its subsidiary undertakings as well as description of risks inherent in the use of these financial instruments and the ways the Group seeks to mitigate those risks are provided in Notes 2 and 10 to the Financial Statements. Substantial shareholdings On 24 June 2009 the following were registered as being interested in 3% or more of the Company's ordinary share capital: +-------------------------------------------------+-------------+-------------+ | | Ordinary | Percentage | | | shares of | of issued | | | GBP0.001 | share | | | each | capital | +-------------------------------------------------+-------------+-------------+ | Canaccord Nominees Limited | 79,961,904 | 7.71% | +-------------------------------------------------+-------------+-------------+ | Barclayshare Nominees Ltd | 76,575,854 | 7.38% | +-------------------------------------------------+-------------+-------------+ | TD Waterhouse Nominees (Europe) Ltd | 64,458,714 | 6.21% | +-------------------------------------------------+-------------+-------------+ | HSDL Nominees Ltd | 43,274,062 | 4.17% | +-------------------------------------------------+-------------+-------------+ | L R Nominees Ltd | 38,451,825 | 3.71% | +-------------------------------------------------+-------------+-------------+ | HSDL Nominees Ltd (2) | 37,710,424 | 3.63% | +-------------------------------------------------+-------------+-------------+ | Pershing Nominees Limited | 37,472,141 | 3.61% | +-------------------------------------------------+-------------+-------------+ | Pershing Nominees Limited (2) | 32,800,000 | 3.16% | +-------------------------------------------------+-------------+-------------+ Share Capital Information relating to shares issued during the period is given in Note 18 to the Financial Statements. Charitable and Political Donations During the period there were no charitable or political donations. Payment of Suppliers The Company's and Group's policy is to settle terms of payment with suppliers when agreeing terms of business, to ensure that suppliers are aware of the terms of payment and to abide by them. It is usual for suppliers to be paid within 28 days of receipt of invoice. Post Balance Sheet Events At the date these financial statements were approved, being 30 June 2009, the Directors were not aware of any significant post balance sheet events other than those set out in Note 23 to the Financial Statements. Going Concern The Group financial statements are subject to significant uncertainties as detailed in the notes to the financial statements. As a result, the Group's US subsidiaries do not have sufficient liquid resources to meet their current obligations and may possibly be liquidated. The financial statements do not include the adjustments required to present the financial statements on a break up basis, the prevalent uncertainties prohibit a reliable estimation of recoverable values of the US subsidiaries. After taking appropriate professional advice, the Directors believe that the liabilities of the subsidiaries are ring fenced in these entities. In the event that the Directors' of the Company are not able to successfully conclude a work out of the debts and liabilities of the US subsidiaries, the Company may become an investment shell. Negotiations are in progress to acquire further assets and raise capital. The Company has sufficient cash to meet it's current obligations as at the year end and to fund activities at the current "burn rate", but will need to raise further equity funds within the next 12 months in order to fund any potential transaction. The Directors are confident about raising sufficient funds for the Company to be a going concern, and therefore the financial statements of the Company are prepared on a going concern basis. Auditors The auditors, BDO Stoy Hayward LLP, have indicated their willingness to continue in office and a resolution that they be reappointed will be proposed at the annual general meeting. Remuneration The Company remunerates the Directors at a level commensurate with the size of the Company and the experience of its Directors. The Remuneration Committee has reviewed the Directors' remuneration and believes it upholds the objectives of the Company with regard to this issue. Details of directors' emoluments and of payments made for professional services rendered are set out in Note 8 to the Financial Statements. Corporate Governance The Directors are committed to maintaining high standards of corporate governance. The Directors have established procedures, so far as is practicable given the Company's size, to comply with the Combined Code as modified by the recommendations of the Quoted Companies Alliance. The Company has adopted and operates a share dealing code for Directors and senior employees on substantially the same terms as the Model Code appended to the Listing Rules of the UKLA. The financial risk management policies and objectives are set out in detail in Note 2 which accompanies the audited Financial Statements. The Board The Board meets regularly throughout the year. To enable the Board to perform its duties, each of the Directors has full access to all relevant information and to the services of the Company Secretary. If necessary the non-executive Directors may take independent professional advice at the Company's expense. The Board currently includes three non-executive Directors. The Board has delegated specific responsibilities to the committees described below. The Audit Committee The audit committee comprises Anthony Samaha (Chairman) and Ross Warner, and met twice during the period ended 31 December 2008. The committee reviews the Company's annual and interim Financial Statements before submission to the Board for approval. The committee also reviews regular reports from management and the external auditors on accounting and internal control matters. When appropriate, the committee monitors the progress of action taken in relation to such matters. The committee also recommends the appointment of, and reviews the fees of, the external auditors. The Remuneration Committee The remuneration committee is made up of Anthony Samaha (Chairman) and Michael Frayne, and met once during the period ended 31 December 2008. It is responsible for reviewing the performance of the Executive Directors and for setting the scale and structure of their remuneration, paying due regard to the interests of shareholders as a whole and the performance of the Company. Control Procedures The Board has approved financial budgets and cash forecasts. In addition, it has implemented procedures to ensure compliance with accounting standards and effective reporting. Provision of Information to Auditors As far as the Directors are aware, there is no relevant audit information of which the Company's auditors are unaware. Each Director has taken appropriate steps to ensure that they are aware of such relevant information, and that the Company's auditors are aware of that information. Annual General Meeting This report and Financial Statements will be presented to shareholders for their approval at the Company's Annual General Meeting ("AGM"). The Notice of the AGM will be distributed to shareholders together with the Annual Report. By order of the Board Anthony Samaha Director 30 June 2009 Statement of Directors' Responsibilities Directors' responsibilities The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets of the company, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a Directors' Report which complies with the requirements of the Companies Act 1985. The Directors are responsible for preparing the annual report and the financial statements in accordance with the Companies Act 1985. The Directors are also required to prepare financial statements for the group in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs) and the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. The Directors have chosen to prepare Financial Statements for the Company in accordance with IFRSs International Accounting Standard 1 requires that Financial Statements present fairly for each financial year the Company's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRSs. A fair presentation also requires the Directors to: * consistently select and apply appropriate accounting policies; * present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and * provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance. Financial Statements are published on the group's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of Financial Statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Group's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the Financial Statements contained therein. Independent Auditors Report to the Shareholders of Irvine Energy plc We have audited the Consolidated and Company financial statements of Irvine Energy plc for the period ended 31 December 2008, which comprise the Consolidated Income Statement, the Consolidated and Company Balance Sheets, the Consolidated and Company Cash Flow Statements, the Consolidated and Company Statements of Changes in Equity, and the related notes. These financial statements have been prepared under the accounting policies set out therein. Respective Responsibilities of Directors and Auditors The Directors' responsibilities for preparing the Annual Report, and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the Statement of Directors' Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and have been properly prepared in accordance with the Companies Act 1985, and whether the information given in the directors' report is consistent with those financial statements. We also report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors' remuneration and other transactions is not disclosed. We read the Chairman's Statement, Operations Report, Directors' Report, and Statement of Directors' Responsibility and consider the implications for our report if we become aware of any apparent misstatements within it. Our report has been prepared pursuant to the requirements of the Companies Act 1985 and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of the Companies Act 1985 or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability. Basis of Audit Opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's and Company's circumstances, consistently applied and adequately disclosed. We planned our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. However, there are multiple material uncertainties affecting the financial statements, which are discussed below: Claims made by Metro Energy Inc ("Metro"), the operator of the Group's US licences As detailed in note 11 to the financial statements, the Group have received claims from the operator of its assets amounting to approximately US$3.8m. The claims, which are disputed by management, relate to seismic acquisition, joint interest billings, and management fees. Management have requested that Metro substantiate the claims and provide supporting documentation. Management have initiated a detailed review of these claims which indicates a significant amount cannot currently be substantiated. Furthermore, the amounts claimed include expenditure that had not been appropriately approved by the Board of Irvine Energy Plc. The unresolved status of the dispute and the potential impact on intangible assets and trade payables (the amount has been fully provided) means we are unable to conclude with sufficient assurance over these balances and on any potential adjustments required in the financial statements. Carrying values of intangible and tangible fixed assets The Directors have acknowledged that there are indicators of impairment at the balance sheet date, and have considered the carrying value of the assets. However, in light of the inherent uncertainty regarding the assumptions supporting both the value in use and market value, the Directors are unable to conclude with sufficient certainty on the value of the Group's intangible and tangible assets and therefore have not impaired these assets in the financial statements. The Group is not currently able to market these assets to third parties and a forced sale is unlikely to realise sufficient funds to clear the outstanding amounts due to GasRock Capital LLC ("GasRock", the secured creditor). As a result of the material uncertainty surrounding the assumptions used in the assessment of the carrying value of assets, the evidence available to us was limited and we were unable to obtain sufficient appropriate evidence to conclude on the appropriateness of the carrying value of the Group's intangible and tangible assets, and on any potential adjustments required in the financial statements. Going Concern The Group financial statements are subject to significant uncertainties as detailed in the notes to the financial statements. As a result, the Group's US subsidiaries do not have sufficient liquid resources to meet their current obligations and may possibly be liquidated. The Company and GasRock (the secured creditor) have been discussing various proposals involving Chapter 7 and Chapter 11 of United States Bankruptcy Code. Under these proposals, there is a significant risk that the Group will not retain an interest in any of its US oil and gas assets. The circumstances discussed above represent a material uncertainty that casts significant doubt upon the Group's ability to continue as a going concern. The financial statements do not include the adjustments required to present the financial statements on a break up basis. As a result of these multiple uncertainties and the limitation in scope over the carrying value of intangible and tangible fixed assets, we are unable to form an opinion on the consolidated financial statements. In forming our opinion we also evaluate the overall adequacy of the presentation of information in the financial statements. Opinion: disclaimer of view given on the consolidated financial statements Because of the possible effect of the multiple material uncertainties and limitation in scope referred to above, we are unable to form an opinion as to whether: * the financial statements give a true and fair view, in accordance with International Financial Reporting Standards, of the state of the Group's affairs as at 31 December 2008 and of its loss for the year then ended; and * the financial statements have been properly prepared in accordance with the Companies Act 1985. In respect solely of the limitation on our work referred to above: * we have not obtained all the information and explanations that we considered necessary for the purposes of our audit; and * we were unable to determine whether proper accounting records have been maintained. Notwithstanding our disclaimer of view given on the financial statements, in our opinion, the information given in the directors' report is consistent with the financial statements. ` Opinion on the Company financial statements In our opinion: * the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the parent company's affairs as at 31 December 2008; * the Parent company financial statements have been properly prepared in accordance with the Companies Act 1985;and * the information given in the directors' report is consistent with the Parent company financial statements. BDO Stoy Hayward LLP Chartered Accountants and Registered Auditors 55 Baker Street London 30 June 2009 CONSOLIDATED Income Statement For the period 1 January 2008 to 31 December 2008 +----------------------------------------------+----------+---------+-----------+ | | | 2008 | 2007 | +----------------------------------------------+----------+---------+-----------+ | | Notes | GBP'000 | GBP'000 | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Revenue | | 330 | - | | | | | | +----------------------------------------------+----------+---------+-----------+ | Cost of sales | | (1,005) | - | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Gross Loss | | (675) | - | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Other administration expenses | | (1,697) | (799) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Share based payments expense | 19 | - | (120) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Total administrative expenses | 4 | (1,697) | (919) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Interest income | 5 | 31 | 69 | | Other income | 10 | 92 | - | | Interest expense | | (325) | - | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Loss before taxation | | (2,574) | (850) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Income tax expense | 6 | - | - | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Loss for the period | | (2,574) | (850) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ | Loss per share expressed in pence per share | | | | +----------------------------------------------+----------+---------+-----------+ | - Basic and diluted | 9 | (0.34) | (0.20) | +----------------------------------------------+----------+---------+-----------+ | | | | | +----------------------------------------------+----------+---------+-----------+ All amounts above relate to continuing operations. CONSOLIDATED Balance Sheet As at 31 December 2008 +----------------------------------------------+-----+---------+----------+----------+ | | Notes | 2008 | 2007 | | | | GBP'000 | GBP'000 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | Assets | | | | +----------------------------------------------+---------------+----------+----------+ | Non-current assets | | | | +----------------------------------------------+---------------+----------+----------+ | Intangible assets | 11 | 19,345 | 9,693 | +----------------------------------------------+---------------+----------+----------+ | Property, plant & equipment | 14 | 4,260 | 916 | +----------------------------------------------+---------------+----------+----------+ | Total non-current assets | | 23,605 | 10,609 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | Current assets | | | | +----------------------------------------------+---------------+----------+----------+ | Cash and cash equivalents | 10 | 488 | 1,204 | +----------------------------------------------+---------------+----------+----------+ | Other receivables | 15 | 680 | 2,670 | +----------------------------------------------+---------------+----------+----------+ | Total current assets | | 1,168 | 3,874 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | TOTAL ASSETS | | 24,773 | 14,483 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | Liabilities | | | | +----------------------------------------------+---------------+----------+----------+ | Current liabilities | | | | +----------------------------------------------+---------------+----------+----------+ | Trade and other payables | 16 | (2,965) | (536) | +----------------------------------------------+---------------+----------+----------+ | Financial liabilities | 17 | (4,257) | - | +----------------------------------------------+---------------+----------+----------+ | Total current liabilities | | (7,222) | (536) | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | TOTAL LIABILITIES | | (7,222) | (536) | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | Net current assets/(liabilities) | | (6,054) | 3,338 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | NET ASSETS | | 17,551 | 13,947 | +----------------------------------------------+---------------+----------+----------+ | | | | | +----------------------------------------------+---------------+----------+----------+ | SHAREHOLDERS EQUITY | | | | +----------------------------------------------------+---------+----------+----------+ | Share capital | 18 | 1,037 | 704 | +----------------------------------------------+---------------+----------+----------+ | Share premium | | 14,168 | 12,226 | +----------------------------------------------+---------------+----------+----------+ | Merger reserve | 25 | 2,120 | 2,120 | +----------------------------------------------+---------------+----------+----------+ | Share-based payments reserve | 25 | 186 | 186 | +----------------------------------------------+---------------+----------+----------+ | Foreign exchange reserve | 25 | 3,710 | (193) | +----------------------------------------------+---------------+----------+----------+ | Retained earnings | 25 | (3,670) | (1,096) | +----------------------------------------------+---------------+----------+----------+ | Total equity | | 17,551 | 13,947 | +----------------------------------------------+-----+---------+----------+----------+ COMPANY Balance Sheet As at 31 December 2008 +-----------------------------------------------+-----+--------+----------+----------+ | | Notes | 2008 | 2007 | | | | GBP'000 | GBP'000 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | Assets | | | | +-----------------------------------------------------+--------+----------+----------+ | Non-current assets | | | | +-----------------------------------------------------+--------+----------+----------+ | Investment in subsidiaries | 12 | - | 2,419 | +-----------------------------------------------------+--------+----------+----------+ | Loans to subsidiaries | 13 | - | 8,253 | +-----------------------------------------------------+--------+----------+----------+ | Property, plant & equipment | 14 | 8 | 14 | +-----------------------------------------------------+--------+----------+----------+ | Total non-current assets | | 8 | 10,686 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | Current assets | | | | +-----------------------------------------------------+--------+----------+----------+ | Cash and cash equivalents | 10 | 118 | 1,181 | +-----------------------------------------------------+--------+----------+----------+ | Other receivables | 15 | 601 | 2,649 | +-----------------------------------------------------+--------+----------+----------+ | Total current assets | | 719 | 3,830 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | TOTAL ASSETS | | 727 | 14,516 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | Liabilities | | | | +-----------------------------------------------------+--------+----------+----------+ | Current liabilities | | | | +-----------------------------------------------------+--------+----------+----------+ | Other payables | 16 | (92) | (119) | +-----------------------------------------------------+--------+----------+----------+ | Total current liabilities | | (92) | (119) | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | TOTAL LIABILITIES | | (92) | (119) | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | Net current assets | | 627 | 3,711 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | NET ASSETS | | 635 | 14,397 | +-----------------------------------------------------+--------+----------+----------+ | | | | | +-----------------------------------------------------+--------+----------+----------+ | SHAREHOLDERS EQUITY | | | | +-----------------------------------------------+--------------+----------+----------+ | Share capital | 18 | 1,037 | 704 | +-----------------------------------------------------+--------+----------+----------+ | Share premium | | 14,168 | 12,226 | +-----------------------------------------------------+--------+----------+----------+ | Merger reserve | 25 | 2,120 | 2,120 | +-----------------------------------------------------+--------+----------+----------+ | Share-based payments reserves | 25 | 186 | 186 | +-----------------------------------------------------+--------+----------+----------+ | Retained earnings | 25 | (16,876) | (839) | +-----------------------------------------------------+--------+----------+----------+ | Total equity | | 635 | 14,397 | +-----------------------------------------------+-----+--------+----------+----------+ CONSOLIDATED Cash Flow Statement For the period 1 January to 31 December 2008 +----------------------------------------------+----------+----------+----------+ | | | 2008 | 2007 | +----------------------------------------------+----------+----------+----------+ | | Notes | GBP'000 | GBP'000 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from operating activities | | | | +----------------------------------------------+----------+----------+----------+ | Loss for the period | | (2,574) | (850) | | Adjustments for; | | | | +----------------------------------------------+----------+----------+----------+ | Interest income | | (31) | (69) | +----------------------------------------------+----------+----------+----------+ | Interest expense | | 325 | - | +----------------------------------------------+----------+----------+----------+ | Depreciation and amortisation | | 12 | 9 | +----------------------------------------------+----------+----------+----------+ | Foreign exchange | | (151) | 38 | +----------------------------------------------+----------+----------+----------+ | Share based payment | 19 | - | 120 | +----------------------------------------------+----------+----------+----------+ | Cash flow from operating activities before | | (2,419) | (752) | | changes in working capital | | | | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | (Increase)/decrease in trade and other | | (62) | 85 | | receivables | | | | +----------------------------------------------+----------+----------+----------+ | (Increase)/decrease in other assets | | - | - | +----------------------------------------------+----------+----------+----------+ | Increase/(decrease) in trade and other | | 2,429 | 72 | | payables | | | | +----------------------------------------------+----------+----------+----------+ | Net cash used in operating activities | | (52) | (595) | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from investing activities | | | | +----------------------------------------------+----------+----------+----------+ | Interest received | | 31 | 65 | +----------------------------------------------+----------+----------+----------+ | Interest paid | | (325) | - | +----------------------------------------------+----------+----------+----------+ | Net cash generated from investing activities | | (294) | 65 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from investing activities | | | | +----------------------------------------------+----------+----------+----------+ | Payments to acquire intangible assets | | (5,999) | (4,303) | +----------------------------------------------+----------+----------+----------+ | Payments to acquire property, plant and | | (3,011) | (25) | | equipment | | | | +----------------------------------------------+----------+----------+----------+ | Net cash used in investing activities | | (9,010) | (4,328) | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from financing activities | | | | +----------------------------------------------+----------+----------+----------+ | Issue of ordinary share capital | | 4,442 | 3,403 | +----------------------------------------------+----------+----------+----------+ | Costs relating to issue of equity | | (115) | (38) | +----------------------------------------------+----------+----------+----------+ | Proceeds from borrowings | | 4,257 | - | +----------------------------------------------+----------+----------+----------+ | Net cash generated from financing activities | | 8,584 | 3,365 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Net (decrease)/increase in cash and cash | | (772) | (1,493) | | equivalents in the period | | | | +----------------------------------------------+----------+----------+----------+ | Cash and cash equivalents at beginning of | 10 | 1,204 | 2,697 | | period | | | | +----------------------------------------------+----------+----------+----------+ | Exchange gains/(losses) on cash and cash | | 56 | - | | equivalents | | | | +----------------------------------------------+----------+----------+----------+ | Cash and cash equivalents at end of period | 10 | 488 | 1,204 | +----------------------------------------------+----------+----------+----------+ COMPANY Cash Flow Statement For the period 1 January to 31 December 2008 +----------------------------------------------+----------+----------+----------+ | | | 2008 | 2007 | +----------------------------------------------+----------+----------+----------+ | | Notes | GBP'000 | GBP'000 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from operating activities | | | | +----------------------------------------------+----------+----------+----------+ | Loss for the period | | (16,037) | (594) | +----------------------------------------------+----------+----------+----------+ | Adjustments for: | | | | +----------------------------------------------+----------+----------+----------+ | Interest income | | (31) | (69) | +----------------------------------------------+----------+----------+----------+ | Depreciation | | 6 | 6 | +----------------------------------------------+----------+----------+----------+ | Provision for impairment of loans to | | 13,093 | - | | subsidiary companies | | | | +----------------------------------------------+----------+----------+----------+ | Write-down of investments | | 2,419 | - | +----------------------------------------------+----------+----------+----------+ | Share based payment | 19 | - | 120 | +----------------------------------------------+----------+----------+----------+ | Cash flow from operating activities before | | (550) | (537) | | changes in working capital | | | | +----------------------------------------------+----------+----------+----------+ | (Increase)/decrease in trade and other | | (4) | 106 | | receivables | | | | +----------------------------------------------+----------+----------+----------+ | Increase/(decrease) in trade and other | | (27) | 27 | | payables | | | | +----------------------------------------------+----------+----------+----------+ | Net cash used in operating activities | | (581) | (404) | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from investing activities | | | | +----------------------------------------------+----------+----------+----------+ | Interest received | | 31 | 65 | +----------------------------------------------+----------+----------+----------+ | Net cash generated from investing activities | | 31 | 65 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from investing activities | | | | +----------------------------------------------+----------+----------+----------+ | Advances to related parties | | (4,840) | (4,542) | +----------------------------------------------+----------+----------+----------+ | Net cash used in investing activities | | (4,840) | (4,542) | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Cash flows from financing activities | | | | +----------------------------------------------+----------+----------+----------+ | Issue of ordinary share capital | | 4,442 | 3,403 | +----------------------------------------------+----------+----------+----------+ | Costs relating to issue of equity | | (115) | (38) | +----------------------------------------------+----------+----------+----------+ | Net cash generated from financing activities | | 4,327 | 3,365 | +----------------------------------------------+----------+----------+----------+ | | | | | +----------------------------------------------+----------+----------+----------+ | Net (decrease)/increase in cash and cash | | (1,063) | (1,516) | | equivalents in the period | | | | +----------------------------------------------+----------+----------+----------+ | Cash and cash equivalents at beginning of | 10 | 1,181 | 2,697 | | period | | | | +----------------------------------------------+----------+----------+----------+ | Cash and cash equivalents at end of period | 10 | 118 | 1,181 | +----------------------------------------------+----------+----------+----------+ Consolidated Statement of Changes in Equity For the period 1 January 2008 to 31 December 2008 +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | Share | Share | Foreign | Merger | Share | Retained | Total | | | capital | premium | currency | Reserve | based | earnings | equity | | | | reserve | translation | | payment | | | | | | | reserve | | reserve | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | As at 1 | 704 | 12,226 | (193) | 2,120 | 186 | (1,096) | 13,947 | | January 2008 | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Exchange | - | - | 3,903 | - | - | - | 3,903 | | differences on | | | | | | | | | translation of | | | | | | | | | foreign | | | | | | | | | operations and | | | | | | | | | total net | | | | | | | | | expenses | | | | | | | | | recognised | | | | | | | | | directly in | | | | | | | | | equity | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Loss for the | | - | - | - | - | (2,574) | (2,574) | | period | | | | | | | | | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Total | - | - | 3,903 | - | - | (2,574) | 1,329 | | recognised | | | | | | | | | income and | | | | | | | | | expense for | | | | | | | | | the period | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Issue of share | 333 | 2,057 | - | - | - | - | 2,390 | | capital | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Cost of issue | - | (115) | - | - | - | - | (115) | | of share | | | | | | | | | capital | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | 333 | 1,942 | - | - | - | - | 2,275 | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | As at 31 | 1,037 | 14,168 | 3,710 | 2,120 | 186 | (3,670) | 17,551 | | December 2008 | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ Refer to Note 25 for definitions of equity reserves. Consolidated Statement of Changes in Equity For the period 1 January to 31 December 2007 +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | Share | Share | Foreign | Merger | Share | Retained | Total | | | capital | premium | currency | Reserve | based | earnings | equity | | | | reserve | translation | | payment | | | | | | | reserve | | reserve | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | As at 1 | 404 | 6,504 | (171) | 2,720 | 66 | (246) | 9,277 | | January 2007 | | | | | | | | | Balance as | | | | | | | | | previously | | | | | | | | | reported | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Correction of | - | - | - | (600) | - | - | (600) | | prior period | | | | | | | | | adjustment | | | | | | | | | (Note 24) | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Balance as | 404 | 6,504 | (171) | 2,120 | 66 | (246) | 8,677 | | restated | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Exchange | - | - | (22) | - | - | - | (22) | | differences on | | | | | | | | | translation of | | | | | | | | | foreign | | | | | | | | | operations and | | | | | | | | | total net | | | | | | | | | expenses | | | | | | | | | recognised | | | | | | | | | directly in | | | | | | | | | equity | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Loss for the | - | - | - | - | - | (850) | (850) | | period | | | | | | | | | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Total | - | - | (22) | - | - | (850) | (872) | | recognised | | | | | | | | | income and | | | | | | | | | expense for | | | | | | | | | the period | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Issue of share | 300 | 5,890 | - | - | - | - | 6,190 | | capital | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Cost of issue | - | (168) | - | - | - | - | (168) | | of share | | | | | | | | | capital | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | Recognition of | - | - | - | - | 120 | - | 120 | | share based | | | | | | | | | payments | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | 300 | 5,722 | - | - | 120 | - | 6,142 | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | As at 31 | 704 | 12,226 | (193) | 2,120 | 186 | (1,096) | 13,947 | | December 2007 | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ | | | | | | | | | +----------------+---------+---------+-------------+---------+---------+----------+---------+ Refer to Note 25 for definitions of equity reserves CoMPANY Statements of Changes in Equity +----------------------+---------+---------+---------+---------+----------+----------+ | | Share | Share | | Share | Retained | Total | | | capital | premium | Merger | based | earnings | equity | | | | reserve | Reserve | payment | | | | | | | | reserve | | | +----------------------+---------+---------+---------+---------+----------+----------+ | | GBP000 | GBP000 | GBP000 | GBP000 | GBP000 | GBP000 | +----------------------+---------+---------+---------+---------+----------+----------+ | As at 1 January 2008 | 704 | 12,226 | 2,120 | 186 | (839) | 14,397 | +----------------------+---------+---------+---------+---------+----------+----------+ | | | | | | | | | Loss for the period | - | - | - | - | (16,037) | (16,037) | +----------------------+---------+---------+---------+---------+----------+----------+ | Total recognised | - | - | - | - | (16,037) | (16,037) | | income and expense | | | | | | | | for the period | | | | | | | +----------------------+---------+---------+---------+---------+----------+----------+ | | 333 | 2,057 | - | - | - | 2,390 | | Issue of share | | | | | | | | capital | | | | | | | +----------------------+---------+---------+---------+---------+----------+----------+ | | - | (115) | - | - | - | (115) | | Cost of issue of | | | | | | | | share capital | | | | | | | +----------------------+---------+---------+---------+---------+----------+----------+ | | 333 | 1,942 | | | | 2,275 | +----------------------+---------+---------+---------+---------+----------+----------+ | As at 31 December | 1,037 | 14,168 | 2,120 | 186 | (16,876) | 635 | | 2008 | | | | | | | +----------------------+---------+---------+---------+---------+----------+----------+ +----------------+---------+---------+---------+---------+----------+---------+ | | Share | Share | Merger | Share | Retained | Total | | | capital | premium | Reserve | based | earnings | equity | | | | reserve | | payment | | | | | | | | reserve | | | +----------------+---------+---------+---------+---------+----------+---------+ | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +----------------+---------+---------+---------+---------+----------+---------+ | As at 1 | | | | | | | | January 2007 | | | | | | | | | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Balance as | 404 | 6,504 | 2,720 | 66 | (245) | 9,449 | | previously | | | | | | | | reported | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Correction of | - | - | (600) | - | - | (600) | | prior period | | | | | | | | adjustment | | | | | | | | (Note 24) | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Balance as | 404 | 6,504 | 2,120 | 66 | (245) | 8,849 | | restated | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Loss for the | - | - | - | - | (594) | (594) | | period | | | | | | | | | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Total | - | - | - | - | (594) | (594) | | recognised | | | | | | | | income and | | | | | | | | expense for | | | | | | | | the period | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Issue of share | 300 | 5,890 | - | - | - | 6,190 | | capital | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Cost of issue | - | (168) | - | - | - | (168) | | of share | | | | | | | | capital | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | Recognition of | - | - | - | 120 | - | 120 | | share | | | | | | | | based payments | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ | | 300 | 5,722 | - | 120 | - | 6,142 | +----------------+---------+---------+---------+---------+----------+---------+ | As at 31 | 704 | 12,226 | 2,120 | 186 | (839) | 14,397 | | December 2007 | | | | | | | +----------------+---------+---------+---------+---------+----------+---------+ Refer to Note 25 for definitions of equity reserves. NOTES TO THE FINANCIAL STATEMENTS For the 12 month period to 31 December 2008 1. Accounting Policies The principal accounting policies are summarised below. They have all been applied consistently throughout the period. Basis of preparation The Consolidated and Company financial statements have been prepared in accordance with International Financial Reporting Standards and IFRIC interpretations issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The company has taken advantage of the exemption allowed under section 230 of the Companies Act 1985 and has not presented its own income statement in these financial statements. The Group loss for the year is GBP2.574m (2007: loss of GBP0.850m). The loss for the Company for the year is GBP16.037m (2007: loss of GBP0.594m). Going Concern The Group financial statements are subject to significant uncertainties as detailed in the notes to the financial statements. As a result, the Group's US subsidiaries do not have sufficient liquid resources to meet their current obligations and may possibly be liquidated. The financial statements do not include the adjustments required to present the financial statements on a break up basis, the prevalent uncertainties prohibit a reliable estimation of recoverable values of the US subsidiaries. After taking appropriate professional advice, the Directors believe that the liabilities of the subsidiaries are ring fenced in these entities. In the event that the Directors of the Company are not able to successfully conclude a work out of the debts and liabilities of the US subsidiaries, the Company may become an investment shell. Negotiations are in progress to acquire further assets and raise capital. The Company has sufficient cash to meet it's current obligations as at the year end and to fund activities at the current "burn rate", but will need to raise further equity funds within the next 12 months in order to fund any potential transaction. The Directors are confident about raising sufficient funds for the Company to be a going concern, and therefore the financial statements of the Company are prepared on a going concern basis. Change in Accounting Policy * New standards, amendments to published standards and interpretations to existing standards effective on 1 January 2008 adopted by the group. +-------------------------+------------------------------------+---------------+ | New and revised | Standard | Effective for | | standards effective for | | annual | | 31 December 2008 | | periods | | year-ends | | beginning on | | | | or after | +-------------------------+------------------------------------+---------------+ | Interpretations | IFRIC 11 - IFRS 2 Group and | 1 March 2007 | | | Treasury Share Transactions | 1 January | | | IFRIC 12 - Service Concession | 2008 | | | Arrangements | 1 January | | | IFRIC 14 - IAS 19 The Limit on a | 2008 | | | Defined Benefit Asset, Minimum | | | | Funding Requirements and their | | | | Interaction | | | | | | +-------------------------+------------------------------------+---------------+ b. New standards, amendments to published standards and interpretations to existing standards in issue at 31 December 2008 but not yet effective, that will be applicable to the group in the future. +-------------------------+------------------------------------+---------------+ | New and revised | Standard | Effective for | | standards issued but | | annual | | not effective for 31 | | periods | | December 2008 year-ends | | beginning on | | | | or after | +-------------------------+------------------------------------+---------------+ | New Standard | IFRS 8 - Operating Segments | 1 January | | | | 2009 | +-------------------------+------------------------------------+---------------+ | Amendment | IFRS 3* - Business Combinations | 1 July 2009 | | | IFRS 2 - Share-based Payment - | 1 January | | | Vesting Conditions and | 2009 | | | Cancellations | 1 January | | | IAS 1 - Presentation of Financial | 2009 | | | Statements - A revised Approach | 1 January | | | IAS 23 - Borrowing Costs | 2009 | | | IAS 27 - Consolidated and Separate | 1 July 2009 | | | Financial Statements | 1 January | | | IAS 32 and 1* - Puttable Financial | 2009 | | | Instruments and Obligations | 1 July 2008 | | | Arising on Liquidation | 30 June 2009 | | | IAS 39 and IFRS 7 - | 1 July 2009 | | | Reclassification of Financial | 1 January | | | Instruments | 2010 | | | IFRIC 9 and IAS 39* - Embedded | 1 January | | | Derivatives | 2010 | | | IAS 39 Financial Instruments: | | | | Recognition and Measurement: | | | | Eligible Hedged Items* | | | | Improvements to IFRSs* | | | | IFRS 2 - Group Cash-settled | | | | Share-based Payment Transactions | | | | | | +-------------------------+------------------------------------+---------------+ | Interpretations | IFRIC 13 - Customer Loyalty | 1 July 2008 | | | Programmes | 1 January | | | IFRIC 15* - Agreements for the | 2009 | | | Construction of Real Estate | 1 October | | | IFRIC 16 - Hedges of a Net | 2008 | | | Investment in a Foreign Operation | 1 July 2009 | | | IFRIC 17 - Distributions of | 1 July 2009 | | | Non-cash Assets to Owners* | | | | IFRIC 18 - Transfer of Assets from | | | | Customers* | | +-------------------------+------------------------------------+---------------+ Items marked * had not yet been endorsed by the European Union at the date that these financial statements were approved and authorised for issue by the Board. The standards listed above that are not yet effective are not expected to have a significant impact on the Group. Basis of consolidation The consolidated financial information incorporates the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. The Group consists of all 100% owned subsidiaries. Intercompany transactions and balances between group companies are therefore eliminated in full. Business Combinations The consolidated financial statements incorporate the results of the business combinations using the purchase method. In the consolidated balance sheet, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. The results of acquired operations are included in the consolidated income statement from the date on which control is obtained. The merger reserve relates to the utilisation of the provisions in section 131 for merger relief in the Companies Act 1985. This relief arose on the acquisition of subsidiaries in a share for share exchange in the period ended 31 December 2006. The Company's Investments in Subsidiaries In its separate financial statements the Company recognises its investments in subsidiaries at cost, less any impairment for permanent diminution in value. The cost of acquisition includes directly attributable professional fees and other expenses incurred in connection with the acquisition. Revenue The Group had turnover of GBP330,000 during the period based on returns provided by the operator. Revenue arises from sales of oil and gas to third parties. Revenue is recognised at the point of delivery to the purchaser, which is normally on delivery into pipelines. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Foreign currencies Transactions entered into by group entities in currency other than the currency of the primary economic environment in which they operate (the "functional" currency) are recorded at rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. On consolidation, the results of the overseas operations are translated into Pounds Sterling at average rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations are translated at the rate ruling at the balance sheet date. Exchange differences arising on translating the opening net assets at open rate and the results of overseas operations at actual rate are recognised directly in equity (the "foreign currency translation reserve") Cash and cash equivalents Cash consists of cash on hand and cash held on current account or on short term deposits with an original maturity of 3 months or less at variable interest rates. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above. There is no significant difference between the carrying value and fair value of cash and cash equivalents. Financial assets The group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The only financial assets currently held by the group are classified as loans and receivables. The group's accounting policy for each category is as follows: Loans and receivables: These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the income statement. On confirmation that the receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. The Group's loans and receivables comprise trade and other receivables and cash and cash equivalents in the balance sheet. There is no significant difference between the carrying value and fair value of receivables. Cash and cash equivalents includes cash in hand and other short term highly liquid investments with a maturity of 3 months or less. Any interest earned is accrued monthly and classified as interest. Short term deposits comprise deposits made for varying periods of between one day and three months. Trade and other receivables are initially measured at fair value and subsequently at amortised cost (using the effective interest rate) less allowance for impairment. Fair value through profit or loss: The group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss. Financial liabilities The group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was assumed. These are either fair value through profit or loss and other financial liabilities. At present, the Group does not have any liabilities classified as fair value through profit or loss. The group's accounting policy for the other financial liabilities category is as follows: Other financial liabilities: Other financial liabilities include the following items: Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. All interest and other borrowing costs incurred in connection with the above are expensed as incurred and reported as part of financing costs in the income statement. Intangible assets - Oil and gas exploration and evaluation assets The Group applies the full cost method of accounting for Exploration and Evaluation ("E&E") costs, where costs of exploring for and evaluating oil and gas properties are accumulated and capitalised by reference to appropriate cost pools. Such cost pools are based on geographic areas and are not larger than a segment. The Group currently has two cost pools being the Kansas, USA, region and the Oklahoma, USA region. E&E costs are capitalised until the results of the projects are known. The E&E costs may include costs of licence acquisition, technical services and studies, seismic acquisition, exploration drilling and testing. E&E costs include an allocation of salary costs as determined by management on a time apportionment based on level of effort expended on each cost pool. Tangible assets acquired for use in E&E activities are classified as property, plant and equipment. Intangible E&E assets related to each exploration lease/prospect are not depreciated and are carried forward until the existence (or otherwise) of commercial reserves has been determined. The Group's definition of commercial reserves for such purpose is proven and probable reserves on an entitlement basis. If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a cost pool basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets within property, plant and equipment. Such assets are amortised on a unit of production basis over the life of the commercial reserves of the pool to which they relate. Intangible E&E assets that relate to E&E activities that are determined not to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets at cost, subject to meeting a pool-wide impairment test as set out below. E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. Where the E&E assets concerned fall within the scope of an established full cost pool, the E&E assets are tested for impairment together with all development and production assets associated with that cost pool, as a single cash generating unit. The aggregate carrying value is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any established cost pool, there will generally be no commercial reserves and the E&E assets concerned will generally be written off in full. Any impairment loss is recognised in the income statement as additional depreciation and separately disclosed. Further commentary on the consideration of carrying value of E&E assets is included in Note 11. Oil and gas assets - Development and production Development and production assets, representing evaluated leases, are accumulated on a field-by-field basis and represent the cost of developing the commercial reserves discovered and bringing them into production, together with the E&E expenditures incurred in finding commercial reserves transferred from intangible E&E assets as outlined above. The net book values of producing assets are depreciated on a field-by-field basis using the unit of production method by reference to the ratio of production in the period to the related commercial reserves o the field, taking into account estimated future development expenditures necessary to bring those reserves into production. An impairment test is performed whenever events and circumstances arising during the development or production phase indicate that the carrying value of a development or production asset may exceed its recoverable amount. The aggregate carrying value is compared against the expected recoverable amount of the cash generating unit, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. The cash generating unit applied for impairment test purposes is generally the field, except that a number of field interest may be grouped as a single cash generating unit where the cash flows of each field are interdependent. Impairment of non-financial assets Non-financial assets and identifiable intangibles, other than oil and gas assets, are reviewed for impairment each reporting date and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected discounted future cash flow from the use of the assets and their eventual disposition is less than the carrying amount of the assets, an impairment loss is recognised and measured using the higher of the asset's fair value less costs to sell and the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the rises specific to the asset for which the estimates of future cash flows have not been adjusted. Property, Plant and Equipment other than oil and gas assets Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided on all plant and equipment to write off the cost less estimated residual value of each asset over its expected useful economic life on a straight-line basis at the following annual rates: Plant and Equipment - between 25% and 33% The estimated useful lives, residual values and depreciation methods are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Taxation Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised except for differences arising on investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of the deferred tax assets is restricted to those instances where it is probable that the taxable profit will be available against which the difference can be utilised. Deferred tax is also based on rates enacted or substantively enacted at the balance sheet date and expected to apply when the related deferred tax asset is realised or liability settled. Share-based payments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The equity-settled share-based payments are expensed over a straight line basis over the vesting period based on the group's estimate of shares that will eventually vest. The fair value is determined using a Black-Scholes model. Where equity instruments are granted to persons other than employees, the income statement is charged with the fair value of goods and services received, except where it is in respect to costs associated with the issue of securities, in which case it is charged to the share premium account. Decommissioning A provision for decommissioning is to be recognised if, due to the environmental impact of the operations of the Group, an obligation arises as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash-flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The extent to which a decommissioning provision is required in respect of potential obligations depends, inter alia, on the legal requirements at the time of decommissioning, the cost and timing of any necessary decommissioning works, and the discount rate to be applied to such costs. Other Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where there is a substantial modification of the terms of an existing liability it is accounted for as an extinguishment of the old financial instrument and recognition of a new financial instrument. Segment Reporting A business segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group of related products or services and that is subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of an enterprise that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments. 2. Financial Instruments - Risk Management The financial instruments grouped together by class and category are as follows: Group: +-------------------------+-------------------------+-------------------------+ | | Loans and Receivables | +-------------------------+---------------------------------------------------+ | | 2008 | 2007 | +-------------------------+-------------------------+-------------------------+ | Current financial | GBP'000 | GBP'000 | | assets | | | +-------------------------+-------------------------+-------------------------+ | Trade and other | 638 | 2,630 | | receivables | | | +-------------------------+-------------------------+-------------------------+ | Cash and cash | 488 | 1,204 | | equivalents | | | +-------------------------+-------------------------+-------------------------+ | Total | 1,126 | 3,834 | +-------------------------+-------------------------+-------------------------+ +-------------------------+-------------------------+-------------------------+ | | Financial Liabilities Measured at Amortised Cost | +-------------------------+---------------------------------------------------+ | | 2008 | 2007 | +-------------------------+-------------------------+-------------------------+ | Current financial | GBP'000 | GBP'000 | | liabilities | | | +-------------------------+-------------------------+-------------------------+ | Trade and other | 2,965 | 536 | | payables | | | +-------------------------+-------------------------+-------------------------+ | Financial liabilities | 4,257 | - | +-------------------------+-------------------------+-------------------------+ | Total | 7,222 | 536 | +-------------------------+-------------------------+-------------------------+ Company +-------------------------+-------------------------+-------------------------+ | | Loans and Receivables | +-------------------------+---------------------------------------------------+ | | 2008 | 2007 | +-------------------------+-------------------------+-------------------------+ | Current financial | GBP'000 | GBP'000 | | assets | | | +-------------------------+-------------------------+-------------------------+ | Trade and other | 567 | 2,623 | | receivables | | | +-------------------------+-------------------------+-------------------------+ | Cash and cash | 118 | 1,181 | | equivalents | | | +-------------------------+-------------------------+-------------------------+ | Total | 685 | 3,804 | +-------------------------+-------------------------+-------------------------+ +-------------------------+-------------------------+-------------------------+ | | Financial Liabilities Measured at Amortised Cost | +-------------------------+---------------------------------------------------+ | | 2008 | 2007 | +-------------------------+-------------------------+-------------------------+ | Current financial | GBP'000 | GBP'000 | | liabilities | | | +-------------------------+-------------------------+-------------------------+ | Trade and other | 92 | 119 | | payables | | | +-------------------------+-------------------------+-------------------------+ | Financial liabilities | - | - | +-------------------------+-------------------------+-------------------------+ | Total | 92 | 119 | +-------------------------+-------------------------+-------------------------+ Carrying value of the financial assets in the balance sheet is equal to the maximum exposure to credit risk. The group is exposed through its operations to the following financial risks: * Foreign exchange risk * Interest rate risk * Liquidity risk * Credit risk In common with all other businesses, the group is exposed to risks that arise from its use of financial instruments. This note describes the group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. References in this note to the Group are also applicable to the Company, unless explicit differences arise between the Group and Company risks, which are therefore stated. There have been no substantive changes in the group's exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows: - trade receivables - cash at bank - trade and other payables - loans with related parties General objectives, policies and processes The Board has overall responsibility for the determination of the group's risk management objectives and policies. The Board receives monthly reports from the group Financial Controller through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. Management review the Group and Company's exposure to currency risk, interest rate risk, liquidity risk and credit risk on a regular basis and consider that through this review they manage the exposure of the Group and Company. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below. No formal policies have been put in place in order to hedge the Group and Company's activities to the exposure to currency risk or interest risk. Foreign exchange risk Foreign exchange risk arises because the Group has operations located in the United States of America whose functional currency is not the same as the functional currency in which the Head Company operates and raises finance. The Group's net assets arising from such overseas operations are exposed to currency risk resulting in gains or losses on retranslation into sterling. Only in exceptional circumstances will the Group consider hedging its net investments in overseas operations as generally it does not consider that the reduction in foreign currency exposure warrants the cash flow risk created from such hedging techniques. The Group's policy is, where possible, to allow group entities to settle liabilities denominated in their functional currency (primarily US dollar or pound sterling) with the cash generated from their own operations in that currency. Where Group entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them) cash already denominated in that currency will, where possible, be transferred from elsewhere within the Group. At the balance sheet date the Group had trade and other payables of GBP2,873,000 (2007: GBP536,000) denominated in US dollars and financial liabilities of GBP4,257,000 (2007: GBPnil). Refer note 16 in respect of trade and other payables and note 17 in respect of financial liabilities. Interest Rate Risk The Group and Company manage the interest rate risk associated with the Group cash assets by ensuring that interest rates are as favourable as possible, whether this is through investment in floating or fixed interest rate deposits, whilst managing the access the Group requires to the funds for working capital purposes. Liquidity risk Liquidity risk arises from the Group's management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the group will encounter difficulty in meeting its financial obligations as they fall due. Short term payables are classified as those payables that are due within 30 days. The Board receives cash flow projections as well as information regarding cash balances. Capital Disclosures The Group considers its capital to comprise its ordinary share capital, share premium and accumulated retained losses as well as the reserves (consisting of share based payments reserve, foreign currency translation reserve and merger reserve). The Group's objectives when maintaining capital is: - to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders. The Company meets its capital needs by equity financing. The Group sets the amount of capital it requires in proportion to risk. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. Credit Risk Cash is the only significant concentration of risk. This risk is managed by only banking with reputable financial institutions. Critical Accounting Estimates and Judgements The Company and Group make certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed throughout this report in the relevant notes to the financial statements. The key estimates and judgements relate to: * Asset carrying values * Contingent liabilities * Going concern presentation 3. Revenue and Segment Analysis The Group had operating revenue during the period of GBP330,000 (2007: nil) based on returns from operators. The Group operates in one business segment, the exploration for oil and gas. The Group has material interests in two geographical segments, the United States of America and the United Kingdom. The Group assets are substantially attributable to the exploration for oil and gas activities in the United States of America. The parent Company operates a head office based in the United Kingdom which incurs certain administration costs. These two geographic segments are presented on a consolidated basis in the table below. +------------------------------------+------------+------------+------------+ | Geographic Segments | United | United | Total | | | Kingdom | States of | | | | | America | | +------------------------------------+------------+------------+------------+ | Year ended 31 December 2008 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+------------+------------+------------+ | Profit / (loss) from operations | (526) | (2,079) | (2,605) | | before tax and finance income | | | | +------------------------------------+------------+------------+------------+ | Interest income | 31 | - | 31 | +------------------------------------+------------+------------+------------+ | Profit / (loss) before tax | (495) | (2,079) | (2,574) | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Other segment information: | | | | +------------------------------------+------------+------------+------------+ | Segment assets | | | | +------------------------------------+------------+------------+------------+ | Tangible oil and gas assets | - | 4,221 | 4,221 | +------------------------------------+------------+------------+------------+ | Intangible oil and gas assets | - | 19,345 | 19,345 | +------------------------------------+------------+------------+------------+ | Other tangible and non-current | 8 | 31 | 39 | | assets | | | | +------------------------------------+------------+------------+------------+ | Current assets | 719 | 449 | 1,168 | +------------------------------------+------------+------------+------------+ | Total assets | 727 | 24,046 | 24,773 | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Capital expenditure | | | | +------------------------------------+------------+------------+------------+ | Oil and gas assets | - | 8,993 | 8,993 | +------------------------------------+------------+------------+------------+ | Other tangible assets | - | 17 | 17 | +------------------------------------+------------+------------+------------+ | Total capital expenditure | - | 9,010 | 9,010 | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Liabilities | | | | +------------------------------------+------------+------------+------------+ | Liabilities | | | | +------------------------------------+------------+------------+------------+ | Trade and other payables | (92) | (2,873) | (2,965) | +------------------------------------+------------+------------+------------+ | Other financial liabilities | | (4,257) | (4,257) | +------------------------------------+------------+------------+------------+ | Total liabilities | (92) | (7,130) | (7,222) | +------------------------------------+------------+------------+------------+ +------------------------------------+------------+------------+------------+ | Geographic Segments | United | United | Total | | | Kingdom | States of | | | | | America | | +------------------------------------+------------+------------+------------+ | Year ended 31 December 2007 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+------------+------------+------------+ | Profit / (loss) from operations | (663) | (256) | (919) | | before tax and finance income | | | | +------------------------------------+------------+------------+------------+ | Interest income | 69 | - | 69 | +------------------------------------+------------+------------+------------+ | Profit / (loss) before tax | (594) | (256) | (850) | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Other segment information: | | | | +------------------------------------+------------+------------+------------+ | Segment assets | | | | +------------------------------------+------------+------------+------------+ | Tangible oil and gas assets | - | 882 | 882 | +------------------------------------+------------+------------+------------+ | Intangible oil and gas assets | - | 9,693 | 9,693 | +------------------------------------+------------+------------+------------+ | Other tangible and non-current | 14 | 20 | 34 | | assets | | | | +------------------------------------+------------+------------+------------+ | Current assets | 3,830 | 44 | 3,874 | +------------------------------------+------------+------------+------------+ | Total assets | 3,844 | 10,639 | 14,483 | +------------------------------------+------------+------------+------------+ +------------------------------------+------------+------------+------------+ | Geographic Segments | United | United | Total | | | Kingdom | States of | | | | | America | | +------------------------------------+------------+------------+------------+ | Year ended 31 December 2007 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+------------+------------+------------+ | Other segment information: | | | | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Capital expenditure | | | | +------------------------------------+------------+------------+------------+ | Oil and gas assets | - | 4,610 | 4,610 | +------------------------------------+------------+------------+------------+ | Other tangible assets | 2 | 23 | 25 | +------------------------------------+------------+------------+------------+ | Total capital expenditure | 2 | 4,633 | 4,635 | +------------------------------------+------------+------------+------------+ | | | | | +------------------------------------+------------+------------+------------+ | Liabilities | | | | +------------------------------------+------------+------------+------------+ | Liabilities | - | (417) | (417) | +------------------------------------+------------+------------+------------+ | Head Office | (119) | - | (119) | +------------------------------------+------------+------------+------------+ | Total liabilities | (119) | (417) | (536) | +------------------------------------+------------+------------+------------+ The Company does not show its results on a segmented basis as it operates in one geographic segment and one business segment only. 4. Loss from Operations This has been arrived at after charging/(crediting): +------------------------+-------------------------------+-------------------------+-------------------------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +--------------------------------------------------------+-------------------------+-------------------------+ | Staff costs (note 7) | | 431 | 182 | +------------------------+-------------------------------+-------------------------+-------------------------+ | Share based payments | | - | 120 | | expense | | | | +------------------------+-------------------------------+-------------------------+-------------------------+ | Auditors' remuneration | - Group audit services - BDO | 25 | 20 | +------------------------+-------------------------------+-------------------------+-------------------------+ | | - Group audit services - | - | 7 | | | Chapman Davis | | | +------------------------+-------------------------------+-------------------------+-------------------------+ | | - Subsidiary audit services - | - | 5 | | | BDO | | | +------------------------+-------------------------------+-------------------------+-------------------------+ | Depreciation (note 14) | 12 | 9 | +--------------------------------------------------------+-------------------------+-------------------------+ | Foreign exchange differences | - | 13 | +------------------------+-------------------------------+-------------------------+-------------------------+ 5. Interest Income +-------------------------------------------------------+---------+-------------------------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+---------+-------------------------+ | Bank interest received / receivable | 31 | 69 | +-------------------------------------------------------+---------+-------------------------+ | Other interest receivable | - | - | +-------------------------------------------------------+---------+-------------------------+ | Total interest income | 31 | 69 | +-------------------------------------------------------+---------+-------------------------+ 6. Taxation +-------------------------------------------------------+------------------------------+------------------------------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+------------------------------+------------------------------+ | Current year taxation | | | +-------------------------------------------------------+------------------------------+------------------------------+ | UK corporation tax at 28% on results for the current | - | - | | period | | | | (30% rate used in comparative period) | | | +-------------------------------------------------------+------------------------------+------------------------------+ | | | | +-------------------------------------------------------+------------------------------+------------------------------+ | Factors affecting the tax charge for the period | | | +-------------------------------------------------------+------------------------------+------------------------------+ | Loss on ordinary activities before tax | (2,574) | (850) | +-------------------------------------------------------+------------------------------+------------------------------+ | | | | +-------------------------------------------------------+------------------------------+------------------------------+ | Loss on ordinary activities at the UK standard rate | (734) | (255) | | of 28.5% (2007:30%) | | | +-------------------------------------------------------+------------------------------+------------------------------+ | Effects of: | | | +-------------------------------------------------------+------------------------------+------------------------------+ | Non deductible expenses | 79 | 54 | +-------------------------------------------------------+------------------------------+------------------------------+ | Future tax benefit not brought to account | 655 | 201 | +-------------------------------------------------------+------------------------------+------------------------------+ | Total tax charge for period | - | - | +-------------------------------------------------------+------------------------------+------------------------------+ No deferred tax asset has been recognised because there is insufficient evidence of the timing of suitable future profits against which the losses can be recovered and the losses may be restricted to trades that generated the losses. The value of the deferred tax asset that is unrecognised in the accounts GBP0.996m (2007: GBP0.236m). 7. Staff Costs (including Directors) +-------------------------------------------------------+---------+-------------------------+ | Consolidated | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+---------+-------------------------+ | Salaries | 627 | 174 | +-------------------------------------------------------+---------+-------------------------+ | Share based payments | - | 120 | +-------------------------------------------------------+---------+-------------------------+ | Social security costs | 48 | 8 | +-------------------------------------------------------+---------+-------------------------+ | Total | 675 | 302 | +-------------------------------------------------------+---------+-------------------------+ The Consolidated Group had an average monthly number of employees of 7 employees during the period ended 31 December 2008 (2007: 6 employees). Three employees are non-executive directors based in the UK and the other employees, including executives are based in the US, and are engaged in administration and technical evaluation. GBP244,000 of Group staff costs have been capitalised as part of exploration assets. +-------------------------------------------------------+---------+-------------------------+ | Company | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+---------+-------------------------+ | Salaries | 118 | 109 | +-------------------------------------------------------+---------+-------------------------+ | Share based payments | - | 120 | +-------------------------------------------------------+---------+-------------------------+ | Social security costs | 8 | 8 | +-------------------------------------------------------+---------+-------------------------+ | Total | 126 | 237 | +-------------------------------------------------------+---------+-------------------------+ The Company had 3 employees during the period ended 31 December 2008 (2007: 3 employees). All employees are non-executive directors of the Company. 8. Directors' and Key Management Personnel Emoluments +---------------------------------------+------------+-------------+-----------+ | | GBP'000 | GBP'000 | GBP'000 | | | Total | Share-based | | | | Emoluments | | | +---------------------------------------+------------+-------------+-----------+ | 2008 | Directors | Payments | Total | | | Fees | | | +---------------------------------------+------------+-------------+-----------+ | Non-Executive Directors: | | | | +---------------------------------------+------------+-------------+-----------+ | Michael Frayne1 | 46 | - | 46 | +---------------------------------------+------------+-------------+-----------+ | Anthony Samaha | 36 | - | 36 | +---------------------------------------+------------+-------------+-----------+ | Ross Warner | 36 | - | 36 | +---------------------------------------+------------+-------------+-----------+ | Executive Directors | | | | +---------------------------------------+------------+-------------+-----------+ | Aaron Close | 143 | - | 143 | +---------------------------------------+------------+-------------+-----------+ | Doug Manner | 70 | - | 70 | +---------------------------------------+------------+-------------+-----------+ | Executive Officers | | | | +---------------------------------------+------------+-------------+-----------+ | Charles Bingle | 146 | - | 146 | +---------------------------------------+------------+-------------+-----------+ | Sean Austin | 43 | - | 43 | +---------------------------------------+------------+-------------+-----------+ | Total | 520 | - | 520 | +---------------------------------------+------------+-------------+-----------+ +------------------------------------+------------+-------------+----------+ | | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+------------+-------------+----------+ | 2007 | Total | Share-based | Total | | | Emoluments | Payments | | | | Directors | | | | | Fees | | | +------------------------------------+------------+-------------+----------+ | Non-Executive Directors: | | | | +------------------------------------+------------+-------------+----------+ | Michael Frayne2 | 36 | - | 36 | +------------------------------------+------------+-------------+----------+ | Anthony Samaha | 37 | - | 37 | +------------------------------------+------------+-------------+----------+ | Ross Warner | 36 | - | 36 | +------------------------------------+------------+-------------+----------+ | Executive Directors | | | | +------------------------------------+------------+-------------+----------+ | Aaron Close | 113 | 40 | 153 | +------------------------------------+------------+-------------+----------+ | Doug Manner | 50 | 40 | 90 | +------------------------------------+------------+-------------+----------+ | Executive Officer | | | | +------------------------------------+------------+-------------+----------+ | Charles Bingle | 97 | 40 | 137 | +------------------------------------+------------+-------------+----------+ | Total | 369 | 120 | 489 | +------------------------------------+------------+-------------+----------+ 1. Services provided by Equatorial Palm Oil Plc and Adelise Services Ltd 2. Services provided by Adelise Services Ltd No pension benefits are provided for any Director (2007: GBPnil). No share options were exercised by the Directors in this period or in the comparative period. 9. Loss Per Share The basic loss per share is derived by dividing the loss for the period attributable to ordinary shareholders by the weighted average number of shares in issue. As inclusion of the potential ordinary shares would result in a decrease in the loss per share they are considered to be anti-dilutive, as such the basic and diluted loss per share are the same. +-------------------------------------------------+-------------+------------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------+-------------+------------+ | Loss for the period | (2,574) | (850) | +-------------------------------------------------+-------------+------------+ | Weighted average number of Ordinary shares of | 766.94 | 431.44 | | GBP0.001 in issue | million | million | +-------------------------------------------------+-------------+------------+ | Loss per share - basic expressed in pence | (0.34)p | (0.20)p | +-------------------------------------------------+-------------+------------+ Refer to the 110 million contingent share issue disclosed in Note 18 for potential future share issues that may dilute the loss per share. 10. Financial Instruments The Group's financial instruments comprise cash and items arising directly from its operation such as receivables, trade payables, and borrowings. In addition, the Group has put options for the sale of gas in the US with a value of GBP0.07m (2007: nil). The Company's financial instruments comprise the investments in subsidiaries, other receivables and payables (as disclosed in note 2), and loans to subsidiaries. Further information on loans to subsidiaries is included in note 13. The Group seeks to obtain a favourable interest rate on its cash balances through the use of bank treasury deposits. At the period end the Group had a cash balance of GBP0.488m (2007: GBP1.2 million), made up as follows: +-------------------------------------------------------+----------+----------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+----------+----------+ | British pounds | 118 | 1,181 | +-------------------------------------------------------+----------+----------+ | US dollars | 370 | 23 | +-------------------------------------------------------+----------+----------+ | Total | 488 | 1,204 | +-------------------------------------------------------+----------+----------+ At the period end the Company had a cash balance of GBP0.118m (2007: GBP1.18m), made up as follows: +-------------------------------------------------------+----------+----------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+----------+----------+ | British pounds | 118 | 1,181 | +-------------------------------------------------------+----------+----------+ | Total | 118 | 1,181 | +-------------------------------------------------------+----------+----------+ There is no material difference between the book value and fair value of the Group's or Company's cash. The Group has four overseas subsidiaries which operate in the United States of America and whose expenditure is primarily denominated in US dollars. Foreign exchange risk is inherent in the Group's activities and is accepted as such. Refer to Note 2 for detailed commentary on the foreign exchange risk of the Group. The majority of parent Company expenses are denominated in British pounds. Finance income and expense +-------------------------------------------------------+----------+----------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+----------+----------+ | | | | +-------------------------------------------------------+----------+----------+ | Interest income on financial assets classified as | 31 | 69 | | loans and receivables | | | +-------------------------------------------------------+----------+----------+ | Total finance income | 31 | 69 | +-------------------------------------------------------+----------+----------+ | | | | +-------------------------------------------------------+----------+----------+ | Interest expense on financial liabilities measured at | (325) | - | | amortised cost | | | +-------------------------------------------------------+----------+----------+ | Net finance income/(expense) | (294) | 69 | +-------------------------------------------------------+----------+----------+ There has been no impairment of financial assets or liabilities in the current or comparative periods. 11. Intangible Assets Oil and gas exploration and evaluation assets +-------------------------------------------------------+----------+----------+ | | Group | Group | +-------------------------------------------------------+----------+----------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+----------+----------+ | Cost | | | +-------------------------------------------------------+----------+----------+ | Opening Carrying Value | 9,693 | 5,963 | +-------------------------------------------------------+----------+----------+ | Additions | 5,999 | 4,672 | +-------------------------------------------------------+----------+----------+ | Currency translation adjustment | 3,653 | (60) | +-------------------------------------------------------+----------+----------+ | Assets transferred to property, plant & equipment | - | (882) | +-------------------------------------------------------+----------+----------+ | Carrying Value at 31 December | 19,345 | 9,693 | +-------------------------------------------------------+----------+----------+ Additions represent GBP2.3m (US$4.6m) of new licences acquired, and approximately GBP3.7m (US$5.9) of exploration work performed on the Group's oil and gas leases in the US. Included in exploration additions is GBP2.7m (US$3.8m) representing amounts invoiced by Metro, in their capacity as operator of the licences in the US, that are disputed. The Group have asked Metro to substantiate these cash calls with supporting documentation. Management have initiated a detailed independent review of these charges which indicates that significant amounts cannot currently be substantiated. Furthermore, the amounts claimed includes expenditure that had not been appropriately approved by the Board of Irvine. This process is ongoing. Metro continues to withhold revenues payable to the Group pending the resolution of this dispute. GasRock have a legal charge over these licences. GasRock served notice on the Group, dated 27 January 2009, that it was in default on the loan facility. GasRock has not taken further action in relation to enforcing it's security, however, given current market conditions it is unlikely that any disposal proceeds would be sufficient to settle the amounts due to GasRock. There is a risk that the Group will not retain an interest in any of its US oil and gas assets. There is no provision for impairment in the financial statements as at 31 December 2008 as the Group is not currently able to market its assets due to the ongoing dispute and forced sale is unlikely to realise sufficient funds to clear the amounts due to GasRock. In light of the inherent uncertainty and the absence of comparable transactions, the directors are unable to conclude with sufficient certainty on the value of the Group's oil and gas assets. 12. Investments +-------------------------------------------------------+----------+----------+ | | Company | Company | +-------------------------------------------------------+----------+----------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------------+----------+----------+ | Cost | | | +-------------------------------------------------------+----------+----------+ | Investment in subsidiaries: | | | +-------------------------------------------------------+----------+----------+ | Opening Balance | 2,419 | 2,419 | +-------------------------------------------------------+----------+----------+ | Impairment of subsidiary investments | (2,419) | - | +-------------------------------------------------------+----------+----------+ | At 31 December | - | 2,419 | +-------------------------------------------------------+----------+----------+ The directors have impaired the total carrying value of the Company's investment in its subsidiaries as at 31 December 2008. Metro, the Operator of the assets owned by Wattle and Pinon, has claimed approximately US$3.8m from Wattle and Pinon in respect of seismic acquisition, joint interest billings, and management fees. Wattle and Pinon have asked Metro to substantiate its claim and this process is ongoing. There is significant uncertainty regarding the resolution of the claims. The Group's US subsidiaries do not have sufficient liquid resources to meet their current obligations. GasRock issued a notice of default under the Credit Agreement after the year end. The Group and GasRock are in discussions with third parties regarding the provision of further debt and the raising of further equity. However, as noted elsewhere in this report, GasRock has not reached a conclusion as to the course of action it wants to take in relation to enforcing its security over the oil and assets. As a result of the above factors, the directors have impaired the total carrying value of the investments in subsidiaries. Details of the Company's Subsidiaries at 31 December 2008 are as follows: +-------------------------------+--------------+-------------+----------------+ | Company | Country | Proportion | Nature of | | | of | held | business | | | Registration | | | +-------------------------------+--------------+-------------+----------------+ | Direct | | | | +-------------------------------+--------------+-------------+----------------+ | Wattle Energy Inc | USA | 100% | Oil & gas | | | | | exploration | +-------------------------------+--------------+-------------+----------------+ | Irvine Energy (USA) Inc | USA | 100% | Oil & gas | | | | | exploration | +-------------------------------+--------------+-------------+----------------+ | Halcyon Investment Co Pty Ltd | Australia | 100% | Holding | | | | | Company | +-------------------------------+--------------+-------------+----------------+ | Indirect | | | | +-------------------------------+--------------+-------------+----------------+ | Via Halcyon Investment Co Pty | | | | | Ltd | | | | +-------------------------------+--------------+-------------+----------------+ | Halcyon Nominees Pty Ltd | Australia | 100% | Holding | | | | | Company | +-------------------------------+--------------+-------------+----------------+ | Halcyon Nominees (USA) Inc | USA | 100% | Oil & gas | | | | | exploration | +-------------------------------+--------------+-------------+----------------+ | Via Wattle Energy Corporation | | | | +-------------------------------+--------------+-------------+----------------+ | Pinon Energy LLC | USA | 100% | Oil & gas | | | | | exploration | +-------------------------------+--------------+-------------+----------------+ 13. Loans to Subsidiaries - Company +------------------------------------------------------+----------+----------+ | | Company | Company | | | 2008 | 2007 | | | GBP'000 | GBP'000 | +------------------------------------------------------+----------+----------+ | Wattle | 6,739 | 3,490 | +------------------------------------------------------+----------+----------+ | Pinon Energy | 5,176 | 1,639 | +------------------------------------------------------+----------+----------+ | Irvine Energy USA | 1,177 | 461 | +------------------------------------------------------+----------+----------+ | Halcyon Group | - | 2,663 | +------------------------------------------------------+----------+----------+ | Impairment of subsidiary loans | (13,092) | - | +------------------------------------------------------+----------+----------+ | Total | - | 8,253 | +------------------------------------------------------+----------+----------+ The loans to subsidiaries are interest free and have no fixed repayment date. They are denominated in US Dollars and are repayable on demand. The Group's US subsidiaries do not have sufficient liquid resources to meet their current obligations. The Group is in discussions with third parties regarding the provision of further debt and the raising of further equity. The outcome of these discussions is uncertain. Claims of US$3.8m have been made against Wattle and Pinon, as disclosed in Note 12. Therefore, the directors do not consider the loans made to subsidiaries to be recoverable and, as a result, have impaired the total amount of the Company's loans to its subsidiaries as at 31 December 2008. 14. Property, Plant and Equipment +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | | Group | Group | Group | Group | Company | Company | | | Evaluated | Evaluated | Plant & | Plant & | Plant & | Plant & | | | Leases | Leases | Equipment | Equipment | Equipment | Equipment | | | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Cost | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Cost at 1 January | 338 | - | 589 | 20 | 22 | 20 | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Additions | 2,994 | - | 17 | 25 | - | 2 | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Currency | 345 | | | | | | | translation | | | | | | | | adjustment | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Transferred from | - | 338 | - | 544 | - | - | | intangible assets | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | At 31 December | 3,677 | 338 | 606 | 589 | 22 | 22 | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Depreciation | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Accumulated | - | - | (11) | (2) | (8) | (2) | | depreciation at 1 | | | | | | | | January | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Charge for the | - | - | (12) | (9) | (6) | (6) | | period | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | At 31 December | - | - | (23) | (11) | (14) | (8) | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | Carrying Value | | | | | | | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ | At 31 December | 3,677 | 338 | 583 | 578 | 8 | 14 | +---------------------+-----------+-----------+-----------+-----------+-----------+-----------+ GasRock have a legal charge over these licences. GasRock served notice on the Group, dated 27 January 2009, that it was in default on the loan facility. GasRock has not taken further action in relation to enforcing it's security, however, given current market conditions it is unlikely that any disposal proceeds would be sufficient to settle the amounts due to GasRock. There is a risk that the Group will not retain an interest in any of its US oil and gas assets. There is no provision for impairment in the financial statements as at 31 December 2008 as the Group is not currently able to market its assets due to the ongoing dispute and forced sale is unlikely to realise sufficient funds to clear the amounts due to GasRock. In light of the inherent uncertainty and the absence of comparable transactions, the directors are unable to conclude with sufficient certainty on the value of the Group's oil and gas assets. 15. Other Receivables +------------------------------------+----------+----------+----------+----------+ | | Group | Group | Company | Company | | | 2008 | 2007 | 2008 | 2007 | | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+----------+----------+----------+----------+ | Placement cash receivable | 567 | 2,619 | 567 | 2,619 | +------------------------------------+----------+----------+----------+----------+ | Other receivables | 71 | 11 | - | 4 | +------------------------------------+----------+----------+----------+----------+ | VAT receivable | 18 | 14 | 18 | 14 | +------------------------------------+----------+----------+----------+----------+ | Prepayments | 24 | 26 | 16 | 12 | +------------------------------------+----------+----------+----------+----------+ | | 680 | 2,670 | 601 | 2,649 | +------------------------------------+----------+----------+----------+----------+ Included within Other Receivables is an amount of GBP567,000 in respect of amounts due for share capital issued at the year end. 16. Trade and Other Payables +------------------------------------+----------+----------+----------+----------+ | | Group | Group | Company | Company | | | 2008 | 2007 | 2008 | 2007 | | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+----------+----------+----------+----------+ | Trade payables and accruals | 2,927 | 469 | 54 | 71 | +------------------------------------+----------+----------+----------+----------+ | Non-trade payables | 38 | 67 | 38 | 48 | +------------------------------------+----------+----------+----------+----------+ | | 2,965 | 536 | 92 | 119 | +------------------------------------+----------+----------+----------+----------+ Included in trade payables is GBP2.7 million (US$3.8m) representing amounts invoiced by Metro in their capacity as operator of the licences in the US, that are disputed. The Group have asked Metro to substantiate these cash calls with supporting documentation. Management have initiated a detailed independent review of these charges which indicates that significant amounts cannot currently be substantiated. Furthermore, the amounts claimed include expenditure that had not been appropriately approved by the Board of Irvine Plc. This process is ongoing. Metro continues to withhold revenues payable to Group pending the resolution of this dispute. 17. Financial liabilities +------------------------------------+----------+----------+----------+----------+ | | Group | Group | Company | Company | | | 2008 | 2007 | 2008 | 2007 | | | GBP'000 | GBP'000 | GBP'000 | GBP'000 | +------------------------------------+----------+----------+----------+----------+ | GasRock loan note | 4,257 | - | - | - | +------------------------------------+----------+----------+----------+----------+ | | 4,257 | - | - | - | +------------------------------------+----------+----------+----------+----------+ On 28 May 2008, the Company's wholly owned subsidiaries Wattle and Pinon entered into a credit agreement with GasRock. During the period to 31 December 2008, GBP4,257,000 was drawn under this facility. Subsequent to the year end GasRock issued a notice of default, dated 27 January 2009, demanding repayment of the outstanding monies owed. It also issued a notice to the Company claiming payment of the same amount in accordance with the terms of the guarantee. Following extensive negotiations by the Board, on 19 March 2009, Irvine Plc and GasRock entered into a release of guarantee whereby GasRock released Irvine Plc from its obligations under the guarantee in consideration of Irvine Plc paying GBP370,000 to GasRock. The consideration has been paid to GasRock and, accordingly, the Company has been released from the guarantee. In addition, the Company agreed to grant, and subsequently granted, GasRock an option to subscribe for 100 million ordinary shares in the Company at 0.1 pence per share. At the date of this Report, GasRock has not taken any further action to enforce its security. GasRock and the Company have been discussing various proposals involving Chapter 7 and Chapter 11 of United States Bankruptcy Code. Under these proposals, there is a significant risk that the Company will not retain an interest in any of its US oil and gas assets. However, the Directors believe, based on professional advice, that the liabilities of the US subsidiaries are ring fenced in those companies and that the Company's loss will be limited to the amount invested. 18. Share Capital +----------------------------------------------+----------+----------+ | | 2008 | 2007 | +----------------------------------------------+----------+----------+ | Authorised | GBP'000 | GBP'000 | +----------------------------------------------+----------+----------+ | 2,000,000,000 Ordinary shares of 0.10p each | 2,000 | 1,000 | +----------------------------------------------+----------+----------+ An Ordinary resolution was passed at the Annual General Meeting, held on 31 July 2008, to increase the authorised share capital of the company from 1,000,000,000 ordinary shares of 0.10p each to 2,000,000,000 ordinary shares of 0.10p each. +-------------------+---------------------------------+---------------+----------+ | Called up, allotted, issued and fully paid | Number of | Nominal | | | shares | | | | | value | | | | GBP'000 | +-----------------------------------------------------+---------------+----------+ | As at 1 January | | 704,674,846 | 704 | | 2008 | | | | +-------------------+---------------------------------+---------------+----------+ | 22 May 2008 | Placing at a price of 2.00p per | 34,000,000 | 34 | | | share | | | +-------------------+---------------------------------+---------------+----------+ | 24 July 2008 | Placing at a price of 2.00p per | 55,000,000 | 55 | | | share | | | +-------------------+---------------------------------+---------------+----------+ | 5 December 2008 | Placing at a price of 0.25p per | 244,000,000 | 244 | | | share | | | +-------------------+---------------------------------+---------------+----------+ | | | | | +-------------------+---------------------------------+---------------+----------+ | As at 31 December 2008 | 1,037,674,846 | 1,037 | +-------------------+---------------------------------+---------------+----------+ Contingent share issues Pursuant to the terms of the acquisition of Wattle and the Halcyon Group up to an additional 110 million Irvine ordinary shares are to be issued upon achievement of two performance milestones. Under the first performance milestone, an additional 72.5 million Irvine ordinary shares will be issued upon acquisition of leases covering a total of 100,000 acres within the AMI, and the weighted average price of Irvine shares over any subsequent consecutive 20 trading days being 6 pence or greater. Under the second performance milestone, an additional 37.5 million Irvine ordinary shares will be issued upon acquisition of leases covering a total of 150,000 acres within the AMI, and the weighted average price of Irvine shares being 8 pence or greater over any 20 consecutive trading days after achievement of the first performance milestone. The shares issued in the year rank pari passu with the existing share capital. Share Options During the period, no options to subscribe for ordinary shares in the Company were issued. (2007: 27,500,000) As at 31 December 2008 the options in issue were: +---------------+----------------------+-------------------+-------------------+ | Exercise | Expiry Date | Options in Issue | Options in Issue | | Price | | 31 December 2008 | 31 December 2007 | +---------------+----------------------+-------------------+-------------------+ | 3.0p | 23 December 2010 | 3,000,000 | 3,000,000 | +---------------+----------------------+-------------------+-------------------+ | 3.5p | 1 November 2011 | 15,000,000 | 15,000,000 | +---------------+----------------------+-------------------+-------------------+ | 3.5p | 1 February 2012 | 10,000,000 | 10,000,000 | +---------------+----------------------+-------------------+-------------------+ | 6.0p | 1 February 2012 | 10,000,000 | 10,000,000 | +---------------+----------------------+-------------------+-------------------+ | 3.5p | 20 April 2012 | 5,000,000 | 5,000,000 | +---------------+----------------------+-------------------+-------------------+ | 6.0p | 20 April 2012 | 2,500,000 | 2,500,000 | +---------------+----------------------+-------------------+-------------------+ | | | 45,500,000 | 45,500,000 | +---------------+----------------------+-------------------+-------------------+ No options lapsed or were cancelled and no options were exercised during the period. 19. Share Based Payments Director Options Under IFRS 2 'Share Based Payments', the Company determines the fair value of options issued to Directors and Employees as remuneration and recognises the amount as an expense in the income statement with a corresponding increase in equity. +--------------+-----------+------------+----------+----------+----------+----------+ | Name | Date | Number | Exercise | Expiry | Fair | Fair | | | Granted | | Price | Date | Value | Value | | | | | | | Grant | Grant | | | | | | | Date | Date | | | | | | | per | Total | | | | | | | Option | GBP'000 | +--------------+-----------+------------+----------+----------+----------+----------+ | Michael | 1 Nov | 5,000,000 | 3.5p | 1 Nov | 0.3p | 15 | | Frayne | 2006 | | | 2011 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Anthony | 1 Nov | 5,000,000 | 3.5p | 1 Nov | 0.3p | 15 | | Samaha | 2006 | | | 2011 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Ross Warner | 1 Nov | 5,000,000 | 3.5p | 1 Nov | 0.3p | 15 | | | 2006 | | | 2011 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Aaron Close | 1 Feb | 5,000,000 | 3.5p | 1 Feb | 0.5p | 25 | | | 2007 | | | 2012 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Aaron Close | 1 Feb | 5,000,000 | 6.0p | 1 Feb | 0.3p | 15 | | | 2007 | | | 2012 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Douglas | 1 Feb | 5,000,000 | 3.5p | 1 Feb | 0.5p | 25 | | Manner | 2007 | | | 2012 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Douglas | 1 Feb | 5,000,000 | 6.0p | 1 Feb | 0.3p | 15 | | Manner | 2007 | | | 2012 | | | +--------------+-----------+------------+----------+----------+----------+----------+ | Total | | 35,000,000 | | | | 125 | +--------------+-----------+------------+----------+----------+----------+----------+ There were no share options granted during the period. Therefore, the fair value of the options granted to Directors during the period was nil (2007: GBP80,000). The assessed fair value at the grant date was determined using the Black-Scholes Model that takes into account the exercise price, the term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The key inputs applied to the Black-Scholes Model for options granted in 2007 included: the closing share price on 1 February 2007 of 2.5p; risk-free interest rate of 5.18%; and expected volatility of 0.40. In assessing the fair value of the options, a discount of 40% has been applied to the theoretical value calculated by the Black-Scholes Model to take into account the lack of marketability of the options and the inherent limitations of the Black-Scholes Model. The term length of the options has been set at 5 years and the dividend yield has been set at 0 as no dividends are expected until profits are made. For options granted in 2006, the key inputs applied to the Black-Scholes Model included: the closing share price on 1 November 2006 of 2.0p; risk-free interest rate of 4.68%; and expected volatility of 0.40. In assessing the fair value of the options, a discount of 40% has been applied to the theoretical value calculated by the Black-Scholes Model to take into account the lack of marketability of the options and the inherent limitations of the Black-Scholes Model. Options to Executive Officers The Company did not grant any options to Executive Officers during the period (2007: 5,000,000 options issued at GBP40,000). +--------------+-----------+-----------+----------+------------+----------+----------+ | Name | Date | Number | Exercise | Expiry | Fair | Fair | | | Granted | | Price | Date | Value | Value | | | | | | | Grant | Grant | | | | | | | Date | Date | | | | | | | per | Total | | | | | | | Option | GBP'000 | +--------------+-----------+-----------+----------+------------+----------+----------+ | Charles | 20 April | 5,000,000 | 3.5p | 20 April | 0.6p | 30 | | Bingle | 2007 | | | 2012 | | | +--------------+-----------+-----------+----------+------------+----------+----------+ | Charles | 20 April | 2,500,000 | 6.0p | 20 April | 0.4p | 10 | | Bingle | 2007 | | | 2012 | | | +--------------+-----------+-----------+----------+------------+----------+----------+ | Total | | 7,500,000 | | | | 40 | +--------------+-----------+-----------+----------+------------+----------+----------+ The fair value of the options granted to Executive Officers during the prior period was GBP40,000. The assessed fair value at the grant date was determined using the Black-Scholes Model that takes into account the exercise price, the term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The key inputs applied to the Black-Scholes Model included: the closing share price on 10 April 2007 of 2.9p; risk-free interest rate of 5.22%; and expected volatility of 0.40. In assessing the fair value of the options, a discount of 40% has been applied to the theoretical value calculated by the Black-Scholes Model to take into account the lack of marketability of the options and the inherent limitations of the Black-Scholes Model. The term length of the options has been set at 5 years and the dividend yield has been set at 0 as no dividends are expected until profits are made. 20. Capital Commitments The Company and Group had no capital commitments at 31 December 2008. 21. Disputes and contingent liabilities Metro, operator of the Group's US assets, has claimed approximately US$3.8m in respect of seismic acquisition, joint interest billings and management fees. Metro have been requested to substantiate its claim and this process is ongoing. The amount claimed includes invoiced or cash called material amounts that did not currently have sufficient evidential support or approval. The amounts claimed have been capitalised and included in trade and other payables. Resolution of the dispute may result in the claim being different to the amounts recognised in the financial statements. The outcome of Metro's claims against the Company's US subsidiaries, Wattle and Pinon, and the course of action to be taken by GasRock in respect of enforcing its security over the assets is uncertain at the date of this Report. There is a significant risk that the resolution of these claims will result in a net asset deficiency in the US subsidiaries. At the date of this Report, GasRock has not taken any further action to enforce its security. GasRock and the Company have been discussing various proposals involving Chapter 7 and Chapter 11 of United States Bankruptcy Code. Under these proposals, there is a significant risk that the Company will not retain an interest in any of its US oil and gas assets. However, the Directors believe, based on professional advice, that the liabilities of the US subsidiaries are ring fenced in those companies and that the Company's loss will be limited to the amount invested. 22. Related Party Transactions There were no related party transactions during the period other than those disclosed in Note 7, Note 8 and those disclosed below. Irvine Energy Plc makes payments for serviced office facilities and administrative support to Equatorial Palm Oil plc ("EPO") who shares common board members with Irvine Energy plc. These payments are all on arms' length terms and amount to GBP69,359 for the financial period. There were no amounts outstanding to EPO at the year end in respect of these services. Michael Frayne provided consulting services to Irvine Energy Plc which was charged through EPO. These payments were determined on arm's length terms and came to an amount of GBP35,531 for the financial period. There were no amounts outstanding to EPO at the year end in respect of these services. For details of loans to subsidiaries see Note 13. For details of investments in subsidiaries see Note 12. 23. Post Balance Date Events On 30 January 2009, the Company announced that GasRock had issued a notice of default to Irvine in accordance with the credit agreement dated 28 May 2008 requiring Irvine to pay the outstanding balance of the loan which was approximately US$5.6 million at that date. The Company's shares were suspended from trading on AIM, and remain so, pending clarification of the Company's financial position and discussions with GasRock. On 24 March 2009, the Company entered into an agreement with GasRock which releases Irvine Plc from its guarantee of the obligations of its wholly owned subsidiaries, Wattle and Pinon under the credit agreement dated 28 May 2008. The release has been given in consideration of the Company paying GBP370,000 to GasRock. In addition, the Company has agreed to grant GasRock an option ('Option') within two months of 24 March 2009 to subscribe for 100 million ordinary shares in the Company for 0.1 pence per share. Following the General Meeting on 15 May 2009, the Company was able to issue the Option to GasRock completing the release of Irvine from the obligations of Wattle and Pinon. 24. Operating Lease Commitments The total value of minimum lease payments are due as follows: +-------------------------------------------------+-------------+------------+ | | 2008 | 2007 | | | GBP'000 | GBP'000 | +-------------------------------------------------+-------------+------------+ | Not later than one year | 43 | 30 | +-------------------------------------------------+-------------+------------+ | Later than one year and not later than five | 22 | 90 | | years | | | +-------------------------------------------------+-------------+------------+ | Later than five years | - | 15 | +-------------------------------------------------+-------------+------------+ | Total Lease Commitment | 65 | 135 | +-------------------------------------------------+-------------+------------+ This lease is held by Irvine Energy (USA) Inc for the lease of business premises in Texas, with no recourse to the Company. 25. Reserves The following describes the nature and purpose of each reserve within Shareholders Equity. +------------------+---------------------------------------------------------+ | Share capital | Amount subscribed for share capital at nominal value. | +------------------+---------------------------------------------------------+ | Share premium | Amount subscribed for share capital in excess of | | | nominal value | +------------------+---------------------------------------------------------+ | Merger reserve | Value of shares issued in exchange for shares in | | | acquired subsidiary less the nominal value. | +------------------+---------------------------------------------------------+ | Share based | Value of equity settled share based payments that | | payment reserve | were allocated to directors and brokers (per IFRS 2) | +------------------+---------------------------------------------------------+ | Foreign currency | Differences arising on translating the opening net | | translation | assets at open rate and the results of overseas | | reserve | operations at actual rate recognised directly in equity | +------------------+---------------------------------------------------------+ | Retained | Cumulative net gains and losses recognised in the | | earnings | consolidated income statement. | +------------------+---------------------------------------------------------+ A full version of the Company's Report and Accounts can be found at www.irvineenergy.com. * * ENDS * * For further information please visit http://www.irvineenergy.com or contact: +---------+------------+-----------+ | Doug | Irvine | Tel: | | Manner | Energy | +44 | | | plc | (0) 20 | | | | 7766 7500 | +---------+------------+-----------+ | Tim | Evolution | Tel: | | Redfern | Securities | +44 | | | | (0) 20 | | | | 7071 4300 | +---------+------------+-----------+ | Adam | Evolution | Tel: | | James | Securities | +44 | | | | (0) 20 | | | | 7071 4300 | +---------+------------+-----------+ | Hugo | St | Tel: | | de | Brides | +44 | | Salis | Media | (0) 20 | | | & | 7236 1177 | | | Finance | | +---------+------------+-----------+ This information is provided by RNS The company news service from the London Stock Exchange END FR FMMRTMMMJBLL
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