Cloudbreak Regulatory News (CDL)

30 May 2006 17:24

Cardinal Resources plc30 May 2006 CARDINAL RESOURCES PLC ANNOUNCES PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005 LONDON - Tuesday, 30th May 2006 The Directors of Cardinal Resources plc (AIM:CDL) ("Cardinal" or "the Company")today announce the preliminary results of the Company for the year ended 31December 2005. HIGHLIGHTS • Admitted to the London Stock Exchange's Alternative Investment Market (AIM) inApril 2005 raising $20 million for growth Proved and probable reserves increased over 75% to 32.5 MMBOE from 18.4 MMBOEat the time of admission to AIM, largely as a result of the acquisition of RudisDrilling Company • Average daily production at 31 December was up 72% year-on-year to 1,154barrels of oil equivalent • Rudis Drilling Company was acquired in October 2005 for $14.8 million, or$0.85 per BOE, increasing reserves by 17.6 MMBOE and boosting the number ofowned and operated licence areas held by the Company • $38 million financing was secured in December 2005 from Silver Point Capital(SPC) to assist in reinstating Cardinal's net profit interest in theRudivsko-Chernovozavodske (RC) Field back up to 45% and to provide additionalworking capital for Cardinal's field development programme • Aggressive work programme started on the Rudis assets to increase current year-end production of 1,154 boepd by 2,500 to 3,000 boepd by the end of 2007 with the initiation of drilling on seven new development wells and seven workovers • Gas prices increased 45% to $2.38/Mcf at 2005 year-end from $1.64/Mcf at theend of 2004 • Group turnover increased 52% to $4.6 million, including the Company's share ofjoint venture turnover at the Bytkiv Field • Gross profit increased to $1.4 million (2004: $0.4 million) Robert J. Bensh, Chairman and Chief Executive of Cardinal, said: "The year 2005was one of exceptional achievements and continuing challenges for the Company. "While we are proud of our accomplishments and the value we have created bynearly doubling our reserves and production since the IPO, developing ouroperating position in Ukraine, enhancing the strength of our board and raisingthe capital necessary to develop our assets, our accomplishments in 2005 arenothing more than milestones as we focus and stay disciplined towards achievingour longer-term goal of becoming a major independent company operating inUkraine's upstream oil and gas sector." Chairman's Statement, Operational and Financial Reviews and Summarised FinancialStatements follow. For further information please contact: Cardinal Resources Parkgreen CommunicationsKate Spiro Justine Howarth / Victoria Thomas+44 (0) 20 7936 5258 +44 (0) 20 7493 3713kspiro@cardinal-uk.com victoria.thomas@parkgreenmedia.com ### CHAIRMAN'S STATEMENTThe year 2005 was one of exceptional achievements and continuing challenges forCardinal Resources. The Company's achievements include: • Recapitalizing the business with $58 million in new capital from listing onLondon's AIM market and completing financings with Silver Point Capital; • Concluding the acquisition and reorganisation of Carpatsky Petroleum; • Completing the acquisition and integration of Rudis Drilling Company; • Continuing to solidify our relationships with key contacts in Ukraine; • Expanding our experienced upstream management team with additional technicalprofessionals in Ukraine; and • Embarking on a comprehensive business strategy to develop long-term value forour stakeholders. While we are proud of our accomplishments in 2005, they are nothing more thanmilestones towards our longer-term goal of creating a leading presence inUkraine's upstream oil and gas sector. Cardinal has a unique opportunity toaggregate a portfolio of geographically concentrated development and explorationassets at an attractive price. We believe the resulting company may be adesirable strategic acquisition target in the region for another industryplayer. The continuing challenge for the global energy industry in today's operatingenvironment is characterized by sustained increases in global demand, tightsupply and a dynamic geopolitical situation. Significantly higher commodityprices have generated unprecedented revenues and earnings for oil and gascompanies. In response, and in an effort to impact per share growth, companieshave repurchased shares, increased dividends and accelerated the productioncycle with decreasing margins. The near-term effort to boost share prices hasbeen at the expense of continuing value creation, by failing to replacereserves. Within this context, Cardinal has focused its long-term growth strategy awayfrom reserve risk to above ground risk, where Cardinal's challenges includeaccess to proved oil and gas resources, barriers to the free-flow of capitalinvestment to develop those resources and the further development ofinfrastructure to link in supplies to Ukraine's highly developed pipelinesystem. We see Cardinal overcoming these challenges by applying moderntechnology and experience to develop assets, continuing to build on strongrelationships with the Ukrainian business community and political leaders tointegrate Cardinal into the local market, and beginning development offacilities to incorporate production into the main network. In this environment,and in Ukraine where Cardinal operates, the advantage will go to companies thatdemonstrate sustained and high quality operating performance, apply newtechnology in ways that drive results, manage risk and create partnerships toaccess resources and enable the cost-efficient execution of projects. These areall core capabilities of Cardinal. Our vision and goals would be mere words on paper without a focused businessstrategy that is easily understood, agreed upon and followed by management, yetwith enough flexibility to encourage independent thought and individualempowerment to create value. Cardinal's guiding principles in executing its corporate strategy include: • Pursue Strategic Acquisitions. Acquire new licence areas, drilling prospectsand producing properties under the Company's operational and financial controlthat have significant development and exploration potential. Increase holdingsin fields and basins in which we already own an interest. • Develop Existing Properties with Modern Technology. Increase proved reservesand production through the cost efficient use of advanced technologies. • Manage Property Portfolio. Divest higher cost, less productive properties withlimited development potential, focusing on core portfolio assets withsignificant potential to increase proved reserves and production. • Apply Operational and Financial Control. Manage the capital expenditureprogramme and enhance the cost efficiency and quality control of assets byoperating properties and allowing for immediate monetization of the assetportfolio. • Pursue and Develop Strategic Relationships. Develop partnerships and alliancesthat reduce the political and potential operating risks of working in anemerging market. • Maintain Financial Flexibility. Manage the capital structure to maintainoptimum financial resources to continue to exploit existing assets which wecontrol and operate, and make opportunistic acquisitions. • Align Directors, Management and Employees with Shareholders. Ensure that theinterests of all Cardinal employees are in line with those of the Company'sshareholders in order to create and maximize per share growth. • Benefit from the Transactional Nature of Our Industry. Assemble ageographically concentrated, property and licence diverse, development andexploration asset portfolio aggregated at an attractive price that will beviewed as a strategic acquisition by another company. With the validation of our strategy for growth ahead of us, the near-termresults are promising, with the acquisition of Rudis, the increase in ownershipand operational control of the Bilousivsko-Chornukhinska (BC) licence area andthe continuing negotiations with Ukrnafta to reinstate Carpatsky PetroleumInc.'s net profit interest in the Rudivsko-Chernovozavodske (RC) Field from14.9% to 45%. Specifically, for 2006 and 2007, we have planned a capital and exploratoryspending programme in the Rudis properties of $25 to $42 million - dependentupon the number of wells drilled, the extent of modern equipment utilised andthe availability of finance - to drill seven new wells and complete sevenworkovers, predominantly on licence areas that we own or control operations. Our2006 drilling programme remains heavily weighted toward the exploitation of ourgrowing inventory of development projects. Higher production, coupled with theincreasing gas prices in Ukraine, position us to deliver solid results again in2006. We will also pursue opportunities to work with various local entities in Ukrainewhere Cardinal can leverage its operating expertise to further develop andenhance current and potential partnerships while increasing production, reservesand revenues. Finally, we will actively participate in licence tenders inUkraine if it enhances our acreage position in the country. Our success in 2005, and the primary contributor to our future success, is thepeople of Cardinal. Their dedication, resourcefulness and sheer ingenuity weredemonstrated throughout the year. It is our people who developed our strategies,built our partnerships, instituted new technologies and applied best practicesto our projects, ensured that we operate safely and ethically and managed thebusiness risks. In so doing, they delivered the performance results in 2005 ofwhich we can all be proud. Robert J. BenshChairman and Chief Executive Officer30 May 2006 OPERATIONAL REVIEWCardinal holds interests in four fields and three licence areas in Ukraine. Oneof the licences, Bilousivsko-Chornukhinska (BC), is 100% owned by the Companyand the remaining licences and all fields are held through agreements with twoUkrainian state-controlled entities, Ukrnafta and Ukrgazvydobuvannya (Ukrgaz). Acquisition of Rudis Drilling Company-------------------------------------In October 2005 Cardinal completed the acquisition of Rudis Drilling Company(Rudis). The transaction included the purchase of three licence areas:Bilousivsko-Chornukhinska (BC), North Yablunivska (NY) and Dubrivska (DB), and a50% working interest in a Joint Activity Agreement (JAA) with Ukrgaz, asubsidiary of Naftogaz Ukraine, which covered certain wells in such licences andtwo other fields. All licence areas are located approximately 40 kilometres fromCardinal's Rudivsko-Chernovozavodske (RC) Field in Eastern Ukraine. The Rudisacquisition and subsequent well swap with Ukrgaz in January 2006 added 17.6MMBOE to Cardinal's reserves, increasing the total figure by over 75% to 32.5MMBOE at 31 December 2005. Production in the Rudis properties at year-end was672 boepd. The Rudis assets hold considerable strategic importance to Cardinal as theyprovide operating control over a number of key drilling and well workoverlocations and one full licence area, the BC licence. In the BC and NY licenceareas Cardinal intends to complete seven workovers and initiate drilling onseven of eleven identified development locations by the end of 2007, increasingproduction by approximately 2,500 to 3,000 boepd. The forecasted capitalinvestment to develop these locations ranges from $25 to $42 million, dependantupon the number of wells drilled, the extent of modern equipment utilised andthe availability of finance. Bilousivsko-Chornukhinska (BC) Licence AreaCardinal has a 100% interest in and operates the BC licence. One workover, Well#13, announced at the time of the Rudis acquisition, was completed in early2006. Cardinal intends to complete a further four workovers on the licence bythe end of 2007. Work is currently underway to drill Well #3 located on the BClicence; it is expected to spud in June and complete in the second quarter of2007. Preparation for the drilling of a further three wells on the licence isalso expected to commence by the end of 2007. A gas processing and gathering facility for the BC licence area is in theprocess of being designed and construction is expected to begin in the secondhalf of 2006. Operations and gas sales are expected to commence in the firsthalf of 2007. Meanwhile the gas from the two producing BC Wells #13 and #110will continue to be flared to permit condensate production. North Yablunivska (NY) Licence AreaCardinal holds a 100% working and net profit interest in the NY licence area.However, four wells on the area (Wells #4, #201, #203 and #300) are covered byJAA #429 and Cardinal's interest in each such well is therefore 50%. Cardinalintends to begin preparations for drilling two wells independent of the JAA onthis licence area by the end of 2007. JAA #429Three wells, located in the Bilskie and Kulickykhin Fields, are producing underJoint Activity Agreement 429 with Ukrgaz. NY Well #203, which used to produceintermittently, is currently being worked over using an Ukrgaz rig. Followingits completion it is anticipated that the same rig will be used to work over theNY #300 and NY #201 wells in sequence. The location for drilling Well NY #4 iscurrently being prepared and the rig is expected to be on site by June. Dubrivska (DB) Licence AreaAn exploratory well is currently drilling on the Dubrivska licence. It is at atotal depth of 3,806 metres and in late May was being evaluated. Equipment---------The wells to be drilled on the BC and NY licences will be drilled withlocally-sourced Uralmash rigs upgraded using certain modern equipment andsupplies. The Company believes these changes will provide for faster drillingtimes and result in better downhole conditions and production completions. Rudivsko-Chernovozavodske (RC) Field------------------------------------The RC Field is a large gas field with 1.5 Tcf originally in place situated inthe Dnieper-Donets basin in Eastern Ukraine. Cardinal has an interest in thefield through a JAA with Ukrnafta, Ukraine's state-controlled oil and gascompany. Ukrnafta owns and operates the 20-year production licence. A total of 40 wells have been drilled on the RC Field, nine of which are withinthe JAA. Cardinal recognizes significant potential in this field to introducemodern drilling and completion techniques to not only enhance production ofexisting wells but also to drill new wells with higher production rates andlonger production lives. Under its JAA with Ukrnafta Cardinal has completed one unplanned workover sincethe Company's admission to AIM (Well #114) which is now back on production. Atotal of five wells within the JAA were producing 365 boepd net to Cardinal atthe end of December 2005. Production has trailed 2005 internal projections dueto the unforeseen problems encountered in the workover and consequent downtimeon Well #102, which has led to subsequent delays in working over Wells #100 and#109, and in prolonged discussions regarding the reinstatement of the Company'sfull 45% interest in the field. The workover on Well #102 has been temporarilysuspended and it is expected that, apart from the four wells Ukrnafta iscurrently drilling outside of the JAA, no further wells will be drilled in thefield in 2006. Reinstatement of 45% Net Profit Interest----------------------------------------Cardinal's net profit interest in the RC Field was diluted from 45% down to14.9% due to historical under-funding of the JAA capital account prior toadmission to AIM. It is Cardinal's intention to reinstate its interest in thefield by settling the unpaid balance of the JAA account and paying theadditional costs associated with four new wells currently being drilled byUkrnafta. The $38 million financing secured in December was negotiated primarilyfor this purpose. Cardinal expects discussions with Ukrnafta and its primaryshareholders regarding the reinstatement and purchase of shares in the fourwells currently drilling will resume after a Parliamentary coalition has beenformed in Ukraine. Bytkiv-Babchenske (Bytkiv) Field--------------------------------Bytkiv is a large oil field located in the Western part of Ukraine in theCarpathian fold belt. Bytkiv's licence is owned by UkrCarpatOil - a jointventure (JV) between Cardinal and Ukrnafta. Bytkiv is a good candidate for infill drilling, gas lift enhancement, modern rodpumps and water flood pressure maintenance. 12 wells were producing 117 boepdnet to Cardinal at 2005 year-end. The workover on Well #1004 was completed in2005, and in March 2006 a previously shut-in Well, #506, was returned toproduction. A further workover on #524 is currently in progress. In addition, a further nine wells have been scheduled to be worked over by theend of 2008, and a total of 12 new wells to be drilled. However, the economicsfor drilling new wells has diminished significantly recently due to theexpiration of Bytkiv's royalty-free status and a significant increase in taxeson oil, both of which have a marked impact on the Bytkiv licence operations.UkrCarpatOil will therefore focus primarily on low cost, high return workovers.Cardinal is currently in discussions with Ukrnafta to decide whether thedrilling of Well #1007 will proceed as planned. Sales and Gas Prices--------------------Gas accounts for 85% of Cardinal's total production, and the Company istherefore highly leveraged towards movements in Ukrainian gas prices. Cardinalsells its gas from the RC Field into the domestic market at monthly auctions.The buyers at these auctions are industrial consumers and gas traders.Production of oil from the Bytkiv Field is sold to a local refinery owned byUkrnafta. Cardinal sells all of the Rudis gas and condensate from JAA #429 andthe BC licence to the local market. Since December 2004, Cardinal's average gas realizations, inclusive of VAT, haverisen by more than 80% to $2.99/Mcf in March 2006. This trend is expected tocontinue as prices trend more in line with Europe where prices are currentlyfour times higher than in Ukraine. The Ukrainian gas price forecasts prepared byScott Pickford in its recent reserve report show a more conservativeprogression, as indicated below: Time Period Forecast Average Price for Period/Mcf 2006 $2.602007 $2.672008 to 2020 $3.402021 to 2030 $4.52 Source: Scott Pickford, 31 December 2005 FINANCIAL REVIEW Turnover--------Group turnover for the year was up by 52% to $4.6 million, including theCompany's share of joint venture turnover at the Bytkiv Field. Oil, condensateand gas sales volume increased by 15%, reflecting production gains from theRudis Drilling Company assets acquired in October 2005 but offset by delays inthe work programmes at the Bytkiv and RC Fields, and temporary production lossesfrom two unscheduled workovers. All production was sold locally to industrialand agricultural customers at an average price of $39.09 per barrel for oil andcondensate and $2.30/Mcf for gas. Gas sales represented 54.5% of total revenuesin 2005. Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)-----------------------------------------------------------------------EBITDA for the year was a loss of $6.7 million. Excluding non-recurring costsEBITDA was a loss of $4.7 million, compared to a loss of $3.7 million in 2004.Gross profit was $1.4 million, up from $0.4 million in 2004, in spite of anincrease in unit operating costs in 2005 due to higher production taxes andrentals. General & Administration (G&A) expenses, including non-recurringreorganisation expenses related to the acquisition of Carpatsky and share issuecosts expensed, amounted to $9.5 million. Excluding such one-time costs, other G&A increased by $2.1 million to $7.5 million. The Company's share of operatingprofit from the Bytkiv joint venture increased to $956,000 from a loss of$167,000 in 2004. EBITDA was calculated as follows: 2005 2004 $'000 $'000 Operating Loss (8,060) (5,787)Depreciation/Depletion Charge 196 1,316Share of Joint Venture 1,173 63-------------------------------------------------------------EBITDA (including non-recurring costs)(6,691) (4,408)Non-recurring costs 1,976 698--------------------------------------------------------------EBITDA (excluding non-recurring costs)(4,715) (3,710) Consolidated Balance Sheet--------------------------The Company continued to invest in acquiring new producing assets, fielddevelopment activities and expanding its capital structure. Cash at bank and inhand increased more than ten-fold to $24 million as a result of the proceedsfrom the AIM listing and the initial funding under the $38 million Silver Pointfacility. In addition, $14.1 million of the Silver Point financing remainsundrawn as of year-end. Fixed Assets increased to $19.0 million from $2.6 million in 2004, primarily asa result of the Rudis acquisition. Total Liabilities increased to $25.3 millionwith the initial funding under the Silver Point facility. Financing Activities---------------------In recapitalizing the Company during the year we have provided financialflexibility to execute our strategy of exploiting the undeveloped potential ofour existing assets, as well as continuing to grow through acquisitions. In April 2005, the Company issued 33,000,000 new ordinary shares at asubscription price of £0.32 per share via its admission to trading on the LondonStock Exchange's Alternative Investment Market (AIM). Gross proceeds amounted to£10.6 million ($19.8 million). The new issue was well subscribed by bothEuropean and US institutional investors. In December, the Company completed and partially funded a $38 million two-yearbridge facility with Silver Point to provide funding for the deferred cashportion of the Rudis acquisition, financing fees, the RC Field equityreinstatement, development activities at the RC Field and Rudis fields andgeneral corporate purposes. The coupon rate is 15% per annum in the first sixmonths, rising to 20% per annum and then another 1% per annum for every quarterthereafter until maturity, payable quarterly in cash or with payment-in-kindnotes. The issue included warrants with a term of five years to subscribe forapproximately 32.2% of Cardinal Resources Finance Limited, a recently formed UK intermediate holding company owned by Cardinal under which Cardinal's assets are held. Silver Point also has warrants to approximately 4.4 million Cardinalordinary shares. Subject to any necessary shareholder and regulatory approvals required, it is intended that the $38 million facility will be replaced with afive year senior PIK note facility at a lower interest rate of 15% per annumwith warrants to 80 million shares in Cardinal Resources plc at an exercise price of £0.275 per share, a 49% premium to the share price at the time the agreement was made. The Cardinal Resources plc warrants would replace all existing warrants held by Silver Point. Share Capital-------------Called up share capital at the beginning of 2005 stood at 15,933,325 issuedshares. During the course of 2005 further issues were made to facilitate theacquisition of Carpatsky, the Initial Public Offering and the acquisition ofRudis Drilling Company from Hares Group Ltd. Total shares issued at 31 December2005 were 114,554,109. ### Consolidated Profit and Loss Account Year ended Year ended 31 December 31 December Continuing Acquired 2005 2004 $'000 $'000 $'000 $'000 ----------------------- ----- -------- --- ------- --- --------- --- ---------TurnoverGroup and share of jointventure 3,796 791 4,587 3,024Less: share of jointventure turnover (1,556 ) - (1,556 ) (1,429 )----------------------- ----- -------- --- ------- --- --------- --- --------- 2,240 791 3,031 1,595Cost of admission to AIM (937 ) (658 ) (1,595 ) (1,220 )----------------------- ----- -------- --- ------- --- --------- --- ---------Gross profit 1,303 133 1,436 375Share issue costs (467 ) - (467 ) -Reorganisation expenses (1,509 ) - (1,509 ) (698)Other general andadministrative expenses (7,506 ) (14 ) (7,520 ) (5,464 )----------------------- ----- -------- --- ------- --- --------- --- ---------Total general andadministrative expenses (9,482 ) (14 ) (9,496 ) (6,162 )----------------------- ----- -------- --- ------- --- --------- --- ---------Operating (loss)/profit (8,179 ) 119 (8,060 ) (5,787 )Share of operatingprofit/(loss) of jointVenture 1,173 63Interest receivable 96 45Interest payable (221 ) 495----------------------- ----- -------- --- ------- --- --------- --- ---------Loss on ordinary activitiesbefore taxation (7,012 ) (5,184 )Taxation on profit onordinary activities (473 ) (409 )------------------------ --- -------- --- ------- --- --------- --- ---------Loss on ordinaryactivitiestransferred to reserves (7,485 ) (5,593 )------------------------ --- -------- --- ------- --- --------- --- ---------Basic and diluted loss pershare ($) (0.09 ) (0.11 )------------------------ --- -------- --- ------- --- --------- --- ---------There were no recognised gains and losses other than the loss for the year. All transactions arise from continuing operations. Consolidated Balance Sheet As at As at 31 December 31 December 2005 2004 $'000 $'000Fixed assetsIntangible assets 1,587 -Tangible assets 16,345 2,604--------------------------------- ---------- ---- --------- 17,932 2,604InvestmentsJoint venturesShare of gross assets 2,428 1,881Share of gross liabilities (1,171 ) (1,580 )--------------------------------- ---------- ---- --------- 1,257 301----------------------------------------- ---------- ---- --------- 19,189 2,905----------------------------------------- ---------- ---- ---------Current assetsStocks 160 15Debtors 1,543 3,453Cash at bank and in hand 23,995 2,185 25,698 5,653Creditors: amounts falling due within oneyear (5,045 ) (4,634 )--------------------------------- ---------- ---- ---------Net current assets 20,653 1,019--------------------------------- ---------- ---- ---------Total assets less current liabilities 39,842 3,924Creditors: amounts falling due after morethan one year (19,233 ) (1,220 )Provision for liabilities (897 ) (144 )--------------------------------- ---------- ---- --------- 19,712 2,560 --------------------------------- ---------- ---- ---------Capital and reservesCalled up share capital 42,165 5,825Share premium account 2,968 960Reverse acquisition reserve (1,278 ) (1,278 )Shares to be issued - 14,209Other reserves 1,829 1,331Profit and loss account (25,972 ) (18,487 )--------------------------------- ---------- ---- ---------Total shareholders' funds 19,712 2,560--------------------------------- ---------- ---- --------- The financial statements were approved by the Board of Directors on 30 May 2006. Robert J. BenshDirector Consolidated Cashflow Statement Year ended Year ended 31 December 31 December 2005 2004 $'000 $'000Net cash outflow from operating activities (5,905 ) (7,064 )Returns on investments and servicing offinanceInterest received 96 45Interest paid (220 ) (146 )-------------------------------- ----------- --- ---------Net cash outflow from returns on investmentsandServicing of finance (124 ) (101 )Taxation (256 ) (179 )Capital expenditure and financial investmentPurchase of intangible fixed assets (1,131 ) -Purchase of tangible fixed assets (380 ) (156 )-------------------------------- ----------- --- ---------Net cash outflow from capital expenditure andfinancialInvestment (1,511 ) (156 )AcquisitionsCash paid for purchase of subsidiaryundertaking (6,000 ) -Net cash from purchase of subsidiaryundertaking 723 9,500-------------------------------- ----------- --- ---------Net cash (outflow)/inflow from acquisitions (5,277 ) 9,500FinancingRepayment of borrowings - (175 )Silverpoint Loan advance 23,900 -Costs of loan arrangement (4,817 ) -Share and warrant issues 20,341 -Costs of admission to AIM (4,541 ) --------------------------------- ----------- --- ---------Net cash inflow/(outflow) from financing 34,883 (175 )-------------------------------- ----------- --- ---------Increase in cash 21,810 1,825-------------------------------- ----------- --- --------- The accompanying accounting policies and notes form an integral part of thesefinancial statements. ### PRINCIPAL ACCOUNTING POLICIES Basis of preparation--------------------The financial statements have been prepared under the historical cost conventionand in accordance with applicable accounting standards except for the adoptionof reverse acquisition accounting described within which constitutes a true andfair override departure from UK Accounting Standards. The financial statementsare also prepared under the Statement of Recommended Practice for "Accountingfor Oil and Gas Exploration, Development, Production and DecommissioningActivities" issued June 2001 (the "SORP"). The principal accounting policies of the Group are set out below. The policieshave remained unchanged from the previous year apart from the adoption of FRS 21"Events after the balance sheet date" and FRS 25 "Financial Instruments:Disclosure and Presentation". These changes are described in more detail below. Changes in accounting policies------------------------------In preparing the financial statements for the current year, the Group hasadopted the following Financial Reporting Standards: FRS 21 'Events after the Balance Sheet date (IAS 10)'The adoption of FRS 21 has had no impact on the Group during the year. FRS 25 'Financial Instruments: Disclosure and Presentation (IAS 32)'The Group took out a loan in the year from Silver Point Capital. In prior yearsthe company had no financial instruments other than this so no adjustment tocomparatives was required. The Silver Point loan included warrants which werevalued at $498,000 and have been separated from the loan and included in equity. Financial instruments---------------------Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the entityafter deducting all of its financial liabilities. Where the contractual obligations of financial instruments (including sharecapital) are equivalent to a similar debt instrument, those financialinstruments are classed as financial liabilities. Financial liabilities arepresented as such in the balance sheet. Finance costs and gains or lossesrelating to financial liabilities are included in the profit and loss account.Finance costs are calculated so as to produce a constant rate of return on theoutstanding liability. Where the contractual terms of share capital do not have any terms meeting thedefinition of a financial liability then this is classed as an equityinstrument. Dividends and distributions relating to equity instruments aredebited direct to equity. Compound financial instruments------------------------------Compound financial instruments comprise both a liability and an equitycomponent. At date of issue, the fair value of the liability component isestimated using the prevailing market interest rate for a similar debtinstrument without the equity feature. The liability component is accounted foras a financial liability. The residual is the difference between the net proceeds of issue and theliability component (at time of issue). The residual is the equity component,which is accounted for as an equity instrument. The interest expense on the liability component is calculated by applying theeffective interest rate for the liability component of the instrument. Thedifference between any repayments and the interest expense is deducted from thecarrying amount of the liability in the balance sheet. Basis of consolidation----------------------The Group financial statements consolidate those of the Company and itssubsidiary undertakings made up to 31 December 2005. Acquisitions ofsubsidiaries are dealt with by the acquisition method of accounting except forthe reverse takeover transaction of Carpatsky by the Company in 2004 andcompleted in April 2005, which was fully explained in the Group's 2004 AnnualReport and Financial Statements. Joint ventures--------------A joint venture is an entity in which the Group holds a long-term interest andwhich is jointly controlled by the Group and one or more other venturers under acontractual arrangement. The result of the joint venture is accounted for usingthe gross equity method of accounting and includes the Group's proportion ofoperating profit or loss, interest, tax and net assets. The Group's interest in UkrCarpatOil Limited has been accounted for as a jointventure. Joint arrangements that are not entitiesThe Group has certain contractual arrangements with other entities to engage injoint activities that do not create a separate legal entity carrying on a tradeor business of its own. The Group includes its share of assets, liabilities andcash flows in such joint arrangements, measured in accordance with the terms ofeach arrangement, which is usually pro rata to the Group's risk interest in thejoint arrangement. The Group's interests in its Joint Activity Agreements with Ukrnafta andUkrgazvydobuvannya have been accounted for as joint arrangements that are notentities. Turnover--------Turnover represents sales of oil and gas and is recorded exclusive of indirecttaxes and duties. Revenue recognitionSales of oil and gas are recorded in the period in which the title to theproduct transfers to the customer. Produced but unsold products are recorded asstocks until sold. The Company records revenue based on oil, gas and condensate prices which areset at monthly auctions in Ukraine. Petroleum and natural gas properties------------------------------------Full cost methodCardinal follows the "full cost" method of accounting for the costs associatedwith exploration, appraisal, development and production of oil and gas reserves. The costs of acquisition of property, geological and geophysical costs, costs offield production facilities, pipelines and plants and equipment are classifiedas tangible fixed assets if they relate to proved and probable oil and gasproperties. Proceeds from sales of oil and gas properties are credited to thefull cost pool with no gain or loss recognised unless such adjustments wouldsignificantly alter the related cost centre's rate of depletion. DepletionProducing oil and gas assets are depleted by pool on a unit of production methodin the proportion of actual production for the period to the total remainingcommercial reserves. The total remaining commercial reserves are those estimatedat the end of the period, plus production during the period. For depletionpurposes only, the cost base includes the cost of capital assets and anticipatedfuture development expenditures. For depletion purposes, relative volumes of petroleum and natural gas productionand reserves are converted at the energy equivalent conversion rate of sixthousand cubic feet of natural gas to one barrel of crude oil. Oil and gas reservesIn respect of the Group's oil and gas reserves, the terms "Proven Reserves"and "Probable Reserves" are the estimated quantities of crude oil, natural gasand natural gas liquids which geological, geophysical and engineering datademonstrate with a specified degree of certainty to be recoverable in futureyears from known reservoirs and which are considered commercially producible forthe period for which a licence is held. Proven Reserves are considered to haveat least a 90% chance of being recovered. Probable Reserves are considered tohave at least a 50% chance of being recovered. Decommissioning costsWhere there is a material liability for the removal of production facilities andsite restoration at the end of the production life for a field, the Companyrecognises the provision when the obligation to decommission arises. Acorresponding tangible fixed asset of an amount equivalent to the provision isalso created. Foreign currencies------------------In view of the international nature of the Group's activities and due to thefact that more of the Group's revenues are denominated in US dollars than in anyother single currency, the consolidated financial statements are reported in USdollars. The Group's functional currency is primarily the US dollar. Thereporting currency of the Group is also the US dollar. Transactions in foreign currencies are translated into US dollars at theexchange rate ruling at the date of the transaction. Monetary assets andliabilities in foreign currencies are translated at the rates of exchange rulingat the balance sheet date. The financial statements of foreign subsidiaries,joint ventures and joint arrangements that are not entities are translated atthe rate of exchange ruling at the balance sheet date. The exchange differencesarising from the retranslation of the opening net investment in subsidiaries andjoint ventures are taken directly to reserves. Tangible fixed assets and depreciation--------------------------------------Tangible fixed assets are stated at cost or valuation, net of depreciation andany provision for impairment. Depreciation is calculated to write down the costof all tangible fixed assets by equal annual instalments over their estimateduseful economic lives which range between three and seven years. Computer Equipment depreciated over 3 years. Leasehold Improvements and Office Furniture depreciated over 5 years. Motor Vehicles depreciated over 7 years. Oil & Gas Assets depreciated on a 'units of production' basis followingstatement of recommended practise for Oil & Gas Activities. Intangible assets-----------------Pre-licence acquisition and work in progress on individual assets and wells heldoutside a cost pool remain undepreciated pending determination subject to therebeing no evidence of impairment. When an acquisition has taken place or thedrilling creates a producing asset then these costs will be transferred to theappropriate cost pool within tangible fixed assets. Stocks------Stocks comprise oil, gas and condensate in tanks, pipelines and storagefacilities and materials, all of which are stated at the lower of cost or netrealisable value. Deferred taxation-----------------Deferred tax is recognised on all timing differences where the transactions orevents that give the Group an obligation to pay more tax in the future, or aright to pay less tax in the future, have occurred by the balance sheet date.Deferred tax assets are recognised when it is more likely than not that theywill be recovered. Deferred tax is measured using rates of tax that have beenenacted or substantively enacted by the balance date. Operating leases----------------Payments made under operating leases are charged to the profit and loss accounton a straight line basis over the lease term. ### NOTES TO THE FINANCIAL STATEMENTS 1 Turnover Turnover represents amounts invoiced in respect of sales of oil and gas,exclusive of indirect taxes and excise duties. An analysis of turnover is presented below: Year ended Year ended 31 December 31 December 2005 2004 $'000 $'000Oil sales 1,374 1,296Gas sales 2,500 1,484Condensate sales 713 244------------------------------ ------------ --- -----------Group turnover 4,587 3,024------------------------------ ------------ --- -----------Share of joint ventures' turnoverGas sales/oil sales (1,556 ) (1,296)Condensate sales - (133)------------------------------ ------------ --- ----------- (1,556 ) (1,429)------------------------------ ------------ --- -----------Net turnover 3,031 1,595------------------------------ ------------ --- ----------- Turnover was wholly attributable to the Group's primary activities, all of whicharise in Ukraine. 2 Loss per share The basic and diluted loss per share is based on equity losses of $7,017,000(2004: $5,593,000) and 83,200,895 (2004: 50,836,727) ordinary shares at 20peach, being the average number of shares in issue during the year. The optionsand warrants in issue are not dilutive. 3 Fixed asset investments GroupJoint Ventures Total fixed asset investments comprise: Year ended Year ended 31 December 31 December 2005 2004 $'000 $'000Interests in joint ventures 1,257 301 At 31 December 2005 and 2004 the Group had interests in the following jointventures: Joint venture Country of Class of share Proportion Nature of incorporation capital held held business UkrCarpatOil Ukraine Capital 45% Oil productionLimited contribution UkrCarpatOil Limited is a joint venture for operations at the Bytkiv Fieldbetween Carpatsky Petroleum Corporation ("CPC") and Ukrnafta. The Company hasa 45% interest in UkrCarpatOil Limited through its ownership of Carpatsky andCPC. As UkrCarpatOil Limited is a limited liability company registered underUkrainian law, it does not issue shares and the shareholders' (known as"participants") ownership and voting interests are directly proportional totheir respective portion of capital contribution subscribed. The authorised fundof UkrCarpatOil Limited is UAH 12,220, with Ukrnafta holding a 55% participationinterest and CPC holding a 45% participation interest. Share of net assets $'000CostAt 1 January 2005 1,208Share of profit 956------------------------------------------ ---------At 31 December 2005 2,164------------------------------------------ ---------Amounts written offAt 1 January 2005 907------------------------------------------ ---------At 31 December 2005 907------------------------------------------ ---------Net book amount at 31 December 2005 1,257------------------------------------------ ---------Net book amount at 31 December 2004 301------------------------------------------ --------- The Group's share of the results, assets and liabilities of UkrCarpatOil Limitedwas: 31 December 31 December 2005 2004 $'000 $'000 Turnover 1,556 1,429Profit before tax 1,173 63Taxation (217) (230)Profit/(loss) after tax 956 (167)Fixed assets 518 940Current assets 1,910 941Liabilities due within one year 1,171 1,580------------------------------------ -------- -------- Joint ArrangementsThe Group also conducts its operations through two joint activity agreements("JAA"). One is between CPC and Ukrnafta covering development of the RC Field.The second JAA is between Rudis and Ukrgazvydobuvannya (Ukrgaz) and coversdevelopment of two licence areas and a further two fields. CPC and Rudis haveaccounted for their interests in the JAAs as joint activities that are not anentity in line with Financial Reporting Standard 9 based on their relativeownership percentages in the JAAs. The RC Field JAA was entered into by CPC with Ukrnafta in 1995 to undertake thejoint development of the RC Field. The RC Field JAA contemplates both partiesowning a 50% working interest in the project venture based on equal capitalcontributions, with Ukrnafta receiving an additional 10% net profit interest(i.e. the Group would have a 45% net profit interest if both parties hadcontributed an equal 50% to the joint account). Under the JAA, the workinginterest of each party is based on the capital contributions computed on aquarterly basis. The Group's share of net profit is calculated as 90% of itscapital contributions to the JAA at the end of each quarter. Due to CPC'sinability to meet capital commitments under the JAA during the period from 2001to 2003, its working interest and net profits interest were reduced on adilutive basis to a 16.57% working interest and 14.91% net profit interest inthe JAA, in both 2005 and 2004. The Rudis JAA was entered into by Rudis with Ukrgaz in 2004 to undertake thejoint development of certain wells in two licence areas owned 100% by Rudis (BCArea and NY Area), exploration on the DB licence area and for reworking ofcertain wells in two more fields owned by Ukrgaz. The Rudis JAA was amended inJanuary 2006 to provide that the wells on the BC licence area are exclusivelyowned and operated by Rudis. In addition, the amendment provided that certainwells were removed from the Rudis JAA and others from the NY licence were added.Under the Rudis JAA the parties each own a 50% working and net profit interest.It was envisaged that profit obtained from certain of the workovers wouldprovide finance for the exploration of the DB licence and for drillingdevelopment wells on some of the other licences. To the extent that the profitsare insufficient, the parties have the right to make cash contributions. Rudisis required to pay 100% of any shortfall to the JAA account, netted against anyproceeds from production. 4 Creditors: Amounts falling due within one year Group Group As at As at 31 December 31 December 2005 2004 $'000 $'000 Trade creditors 1,699 2,030Social security and other taxes 61 244Amounts owed to joint ventures and jointarrangements 304 321Other creditors 618 -Accruals 2,363 2,039------------------------- --------- -------- 5,045 4,634------------------------- --------- -------- Amounts owed to related parties represent amounts due to the Group's partner inits joint venture and joint activity agreement, Ukrnafta. 5 Creditors: Amounts falling due after more than one year Group Group As at As at 31 December 31 December 2005 2004 $'000 $'000 Gross bank borrowings 1-2 years 23,900 -Less: costs of raising bank borrowing (4,817 ) ----------------------------- --------- --- -------- 19,083 -Other creditors 150 1,220---------------------------- --------- --- -------- 19,233 1,220---------------------------- --------- --- -------- Silver Point Capital - bank borrowings Pre-Bridge LoanOn 1 December 2005, the Group closed on an $8 million financing, the firsttranche of $38 million in bridge financing from Silver Point Capital (SPC) Thisenabled the Group to pay the $5 million cash consideration due under the RudisDrilling acquisition, with the remaining cash used for transaction expenses andgeneral corporate purposes. Under the terms of the financing agreement, theGroup issued $8 million in Payment-in-Kind (PIK) Notes to SPC. The PIKNotes carried a coupon of 15% with quarterly interest payable in cash or byissue of further PIK Notes (on the same terms) at the Group's option. As part ofthis financing, the Group also issued to SPC warrants to subscribe at aprice of £0.275 for 4,389,875 new Company ordinary shares for a period of 5years. The PIK Notes had a 6 month term. On 23 December 2005, the PIK Notes wererefinanced by the issue of the new PIK Notes in the second tranche of the $38million financing (see below). The transaction fees amounted to $1,769,125 withnet cash to the Group of $6,230,875. Bridge LoanOn 23 December 2005, the Group closed on a $38 million bridge financing facilitywith SPC. At the closing, $23.9 million was funded, whileanother $14.1 million remains committed but unfunded. The amounts funded underthe Bridge facility were used to (i) refinance the $8 million in (PIK) Notesissued on 1 December 2005 by the Group to SPC; (ii) settle fees andexpenses relating to the transaction; and (iii) provide for general corporateand capital expenditure purposes. The committed funds ($14.1m) and a portion ofthe funding are intended for the Group to (a) reinstate its net profit interestin the RC Field back up to 45% by settling its outstanding balance in the JAAcapital account with Ukrnafta; and (b) reinstate its 45% interest in fourdevelopment wells in the RC Field currently being drilled by Ukrnafta. In thefinancing transaction, the Group issued $38 million in two-year Bridge PIK Notesto SPC, which carry a coupon of 15% with quarterly interest payable incash or by issue of further PIK Notes (on the same terms), at the Group'soption. In addition, the Group formed a new wholly-owned UK intermediate holdingcompany, Cardinal Resources Finance Limited. Cardinal Finance issued to SPC warrants to subscribe for approximately 32.2% of Cardinal Finance, beforeadjustment to take account of inter-company balances, (at a price equivalent to£0.275 if such shares had been issued at the parent company level) for a periodof five years. The Group has the right to redeem the notes in full after oneyear, subject to an early redemption fee, unless refinanced by SPC orits affiliates. Subject to shareholder and UK regulatory approval, it is intended that the $38million Bridge PIK Notes will be refinanced with SPC, by an issue offive-year Senior PIK Notes and that the Cardinal Finance warrants will becancelled and reissued as warrants in the Company upon issuance of the SeniorNotes. If the Senior PIK Notes are not issued before 23 June 2006, interestpayments on the Bridge PIK Notes will rise from 15% to 20% p.a. and then another1% p.a. for every quarter thereafter until maturity. The $8 million PIK Notes,issued on 1 December 2005, were refinanced in this new two-year facility butSPC retained the 4,389,875 Company warrants issued in conjunction withthe pre-bridge loan. All bank borrowings are secured by a fixed and floating charge over all theCompany's assets. 6 Acquisitions On 27 October 2005, the Group completed the acquisition of Raget CommercialLimited (a Cyprus company) from a subsidiary of the Hares Group Limited. Raget'ssole asset is the ownership of Rudis Drilling Company, a Ukrainian limitedliability company ("Rudis"). Under the acquisition, with direct ownership ofRudis, the Group became owner of three oil and gas licences - Dubrivska (DB),Bilousivsko-Chornukhinska (BC) and North Yablunivska (NY) - and a 50% workinginterest in a Joint Activity Agreement (JAA) with JSC Ukrgazvydobuvannya, asubsidiary of Naftogaz Ukraine. The consideration paid by the Group for Ragetwas $6,000,000 in cash and issuance to Hares of 21,949,364 ordinary shares ofthe Company (at a deemed price of £0.22 per share); for a total transactionvalue of $14,836,814. At closing, $1,000,000 of the cash was paid and theremaining amount of $5,000,000 was paid on 2 December 2005. In this transaction,Hares Group had the right to appoint a non-executive member to the Company'sBoard of Directors and Mr. Misbah Al Droubi was selected to fill this seat.According to Scott Pickford, the Rudis acquisition added 17.6 MMBOE as of 31December 2005 to the Company's then existing reserves of 18.4 MMBOE. 12 Rudisemployees joined the Group in Ukraine. Following the closing of the Rudistransaction, the Company had 114,554,109 ordinary shares outstanding, of which19.2% is held by Hares Group Ltd. The fair value of net assets acquired is set out in the following table. Book value Fair value Fair value adjustment $'000 $'000 $'000Intangible assets 456 456------------------------ ------- --- --------- --------Tangible assets 1905 11,972 13,877------------------------ ------- --- --------- --------Debtors 478 - 478------------------------ ------- --- --------- --------Cash at bank 723 - 723------------------------ ------- --- --------- --------Total assets 3,562 11,972 15,534------------------------ ------- --- --------- --------Creditors 699 - 699------------------------ ------- --- --------- --------Provisions (2 ) - (2)------------------------ ------- --- --------- --------Total liabilities 697 - 697------------------------ ------- --- --------- --------Fair value of net assetsacquired 2,865 11,972 14,837------------------------ ------- --- --------- --------Satisfied by:Cash 6,000Shares 8,837------------------------ ------- --- --------- -------- 14,837 ------------------------ ------- --- --------- -------- The above fair values are provisional. The Company does not have the information on the operating results of Rudisprior to its acquisition. Rudis made the following contributions to, and utilisations of, Group cash flowduring the year: 2005 $'000 Net cash inflow from operating activities 145Decrease in cash 423-------------------------------------------- ------- PUBLICATION OF NON-STATUTORY ACCOUNTSThe financial information set out in this preliminary announcement does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. The summarised balance sheet at 31 December 2005 and the summarised profit andloss account, summarised cash flow statement and associated notes for the yearthen ended have been extracted from the Group's 2005 statutory financialstatements upon which the auditors opinion is unqualified and does not includeany statement under Section 237 of the Companies Act 1985. Those financialstatements have not yet been delivered to the registrar of companies. ###Glossary of Terms-----------------Bbl Barrel of oilBoepd Barrels of oil equivalent per dayBcf Billion cubic feet of gasBcfe Billion cubic feet of gas equivalentFarm-In A "farm-in" occurs when a leasehold interest in an oil & gas property, along with the burden of developing the property, is transferred from one working interest owner to another and the transferee agrees to assume the development burden in return for the leasehold interest in the property. The transferor will usually retain some type of interest in the property, normally an overriding royalty interest.JAA Joint activity agreementJV Joint ventureMBOE Thousand barrels of oil equivalentMMbbl Million barrels of oilMMBOE Million barrels of oil equivalentMcf Thousand cubic feet of gasMMcf Million cubic feet of gasMMcfed Million cubic feet of gas equivalent per dayNPI or Net Profit Interest The right and interest, expressed as a percentage, of the NPI owner to receive a share of the oil and gas produced (or the income attributable to such production) after satisfaction of all government extraction and licence related taxes and fees.Proved (P1) Those oil or gas reserves considered to have at least a 90% chance of being recovered.Probable (P2) Those oil or gas reserves considered to have at least a 50% chance of being recovered.Tcf Trillion cubic feet of gasWI or Working Interest The right and interest, expressed as a percentage, of the WI owner to participate in operations to explore for, develop and produce oil and gas reserves; and obligates such owner to meet its share of the costs and expenses of such exploration, development and production operations.Workover The process of performing major maintenance or remedial treatment on an existing oil or gas well, which may include the removal and replacement of the production tubing string after production from the well has been stopped and a workover rig has been placed on location. 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