Frontera Resources Regulatory News (FRR)

26 Sep 2007 07:02

Frontera Resources Corporation26 September 2007 FRONTERA RESOURCES CORPORATION Houston, Texas, U.S.A. - 26 September 2007 INTERIM RESULTS AND OPERATIONS REVIEW Frontera Resources Corporation (London Stock Exchange, AIM Market - Symbol:FRR), an independent oil and gas exploration and production company, todayannounces interim results for the six months ended 30 June 2007 and provides areview and update of its operations in Block 12, Georgia. Highlights For Six Months Ended June 30th Corporate • $67 million raised through a private placement of convertible unsecured notes due May 2012. • Revenues for the first six months of 2007 up $1.1 million to $1.9 million for the same period last year. • Net loss of $7.5 million, or $0.11 per share on a fully-diluted basis. • Strong financial position for forward development program. Taribani Field Unit • Completed well designs and procurement for three well program in 2007: Dino #2, Taribani #45 and Taribani South #1. • Completed design for extensive 20 well, 36-month Zone 9 development program at the Taribani Field Unit. • Completed drilling contract and mobilized dedicated rig to Taribani Field. • Commenced construction of T-#45 drillsite location. Basin Edge Play Unit "C" Prospect • Completed well design and procurement for Lloyd #1 well. • Completed drilling contract for second dedicated rig. • Commenced construction of new road and new drill site location for Lloyd #1 well. • Continued advanced analysis of 3D seismic survey to identify potential reservoir objectives on the basis of seismic attributes. "B" Prospect • Completed interpretation and mapping of "B" Prospect data. Mirzaani Field Area Production Unit • Revenues from crude oil sales were $1.9 million, an increase of $1.1 million from $0.8 million during the same period last year. • Mirzaani Field study concluded with recommendations for conducting new drilling in undeveloped areas of the field. • Existing well candidates analyzed to high-grade for radial drilling operations during Q4 2007. • Multiple well locations identified for new drilling in Q4 of 2007. Mirzaani Field Area Exploration Unit • Conducted integrated analysis of 105 kilometer 2D seismic data acquired in 2005 at the Mirzaani Deep Prospect with nearby 170 kilometer 2D seismic data acquired in 2006 at the Basin Edge "B" Prospect to reveal important new understanding of common hydrocarbon sourcing hypotheses for both prospects. • Farmout effort commenced in order to accelerate testing of the Mirzaani Deep Prospect in parallel with ongoing operations in other business units. Steve C. Nicandros, President and Chief Executive Officer, commented: "We continue to make steady progress towards our stated objectives throughoutall of our operations. In particular, important advancements have been made inpursuit of our drilling programs at the Taribani Field Unit, the Basin Edge PlayUnit and the Mirzaani Field Area Production Unit. We remain very encouraged bythis progress and we look forward to seeing the results of these drillingprograms in the months ahead. "Underlying our operational advancements since the beginning of 2007, importantprogress was also achieved in terms of ensuring our ability to pursue plannedwork programs with a strong financial position. The completion of an importantprivate placement earlier this year has provided us with the ability to continueto design and execute our programs. To this end, our half-year financialresults reflect the ongoing investment profile necessary to evaluate and evolveour portfolio of undeveloped fields and exploration opportunities with the goalof generating significant production and revenue in the near future." Enquiries: Frontera Resources CorporationLiz WilliamsonVice President, Investor Relations and Corporate Communications(713) 585-3216lwilliamson@fronteraresources.com Brunswick Group LLPPatrick Handley / Mark Antelme+44 207 4045959 Notes to editors: 1. Frontera Resources Corporation is an independent Houston, Texas,U.S.A.-based international oil and gas exploration and production company whosestrategy is to identify opportunities and operate in emerging markets around theworld. Frontera has operated in Georgia since 1997 where it holds a 100 percentworking interest in a production sharing agreement with the government ofGeorgia. This gives Frontera the exclusive right to explore for, develop andproduce oil and gas from a 5,060 square kilometer area in eastern Georgia knownas Block 12. 2. The reserve information herein was determined by the independentconsulting firm of Netherland, Sewell & Associates in accordance with thepetroleum resource definitions adopted by the Society of Petroleum Engineers(SPE), World Petroleum Council (WPC) and the American Association of PetroleumGeologists (AAPG) in 2000. 3. This release contains certain forward-looking statements, including,without limitation, expectations, beliefs, plans and objectives regarding thepotential transactions, potential drilling schedule and ventures discussed inthis release, as well as reserves, future drilling, development and production.Among the important factors that could cause actual results to differ materiallyfrom those indicated by such forward-looking statements are future explorationand development results, availability and performance of needed equipment andpersonnel, seismic data, fluctuations in oil and gas prices, weather conditions,general economic conditions and the political situation in Georgia andneighboring countries. There is no assurance that Frontera's expectations willbe realized, and actual results may differ materially from those expressed inthe forward-looking statements. OPERATIONS REVIEW Taribani Field Unit The Taribani Field is a large, undeveloped oil field covering an area ofapproximately 80 square kilometers with productive horizons situated in Mioceneand Pliocene age reservoirs. These reservoirs are situated at depths between2,200 meters and 3,500 meters. The independent consulting firm of Netherland,Sewell & Associates has assigned 118 million barrels of P3 reserves from Zones9, 14, 15 and 19 within the field. Additionally, Netherland, Sewell & Associateshas assigned as much as 36 million barrels of unrisked resource potentialassociated with five deeper horizons in the field. Frontera committed to developing Zone 9 as a consequence of drilling operationsat the Dino #2 well in 2006, when it began work to determine whether sustainablecommercial production could be established from four undeveloped oil bearinghorizons in the Taribani Field. As expected, during the drilling of the Dino #2well, the Pliocene age oil-bearing reservoir interval, Zone 9, was encounteredfrom 2,300 meters to 2,311 meters. In addition, a previously unmapped oilbearing reservoir interval was encountered above Zone 9 from 2,275 meters to2,285 meters. Historically, twelve wells had evidence of oil when perforated inZone 9, with the best well, #23, exceeding 700 BOPD during initial production. During the first half of 2007, Frontera completed design of a thirty-six month,20-well development program for Zone 9, which represents approximately 17percent of the identified reserves within the Taribani Field. In addition, welldesigns, procurement and mobilization of a dedicated rig was completed for athree well program in 2007, beginning with the re-entry and re-completion of theDino #2 well and followed by two new development wells this year. Eight newwells are contemplated for 2008. Of the two new wells that are scheduled for drilling in 2007, one (TaribaniSouth #1) will be drilled at a location approximately 900 feet up-dip on theTaribani Field structure from wells that encountered the lowest known oil in thefield at this horizon. This location has been identified as a result ofprocessing, interpreting and integrating approximately 40 kilometers of new 2Dseismic data, acquired in late 2005, into the existing 3D mapping of the field.The new data revealed the Taribani Field to be a larger structure thanpreviously thought and confirmed important new drilling locations high on thestructure. Frontera has designed solutions to address possible formation sediment flowissues associated with oil production from Zone 9, including the drilling ofconventional vertical wells with the addition of frac-pac completions. Sedimentcontrol will come from the application of packing technology, where screens areinstalled and gravel is pumped into the well as a slurry to trap the reservoirformation sediment before it can enter the well and cause obstruction. During the month of September, initial Zone 9 re-completion operations at theDino #2 well were successfully completed and the next Zone 9 development wellwill commence shortly at the Taribani #45 location. This well will takeapproximately fifty days to reach total depth and complete in Zone 9. Whendrilling is complete, specialized equipment will be mobilized to apply frac-paccompletions to this well and the Dino #2 well. A third well, the Taribani South#1, is also scheduled to commence in the fourth quarter of this year. Basin Edge Play Unit Frontera's Basin Edge Play Unit is located along the northern border of Block 12and represents one of the newest and potentially most prolific exploration playsin the oil rich geological province of the Upper Kura Basin. Frontera's objectives within the Basin Edge Play Unit remain focused oncommercially accessing the unrisked resource potential estimated by theindependent consulting firm of Netherland, Sewell and Associates to be in excessof one billion barrels of oil within two major prospects ("B" and "C"). Of thistotal, prior to the acquisition of new seismic data, the "C" Prospect wasestimated to contain as much as 500 million barrels of recoverable oil.Frontera's primary reservoir targets are located in the Cretaceous age carbonaterocks, with secondary reservoir targets in the Miocene and Pliocene age clasticrocks as well as Jurassic carbonates. "C" Prospect: During the first half of 2007, activities in anticipation of thecommencement of drilling operations at the Basin Edge Play Unit "C" Prospectprogressed well. Final well design, procurement and contracting of a dedicatedrig were completed. In addition, work commenced on the construction of theLloyd #1 drillsite as well as 6.5 kilometers of new road leading to it. Sincethe beginning of July, the Lapidoth Ideco Super 7-11/II drilling rig -comprising some 90+ truck loads of equipment - was mobilized to the new locationand drilling operations commenced on September 17th. Designed to evaluate multiple horizons, this well will target completion inprimary reservoir objectives at a total depth of approximately 2,700 meters. TheLloyd #1 well is expected to take approximately 50 days to reach total depth. During the first half of 2007, ongoing analysis of 3D seismic data related tothe "C" Prospect continued to confirm that the prospect has a structural heightof approximately 1,000 meters and, most significantly, the primary targetCretaceous reservoirs have been identified on the basis of seismic attributes atdepths that could occur from 2,000 meters to 3,700 meters. Further analysisutilizing amplitude with offset technology (AVO) in the processing of the 3Dseismic data also continues to suggest the possible presence of hydrocarbonswithin structural closure. "B" Prospect: During the first half of 2007, Frontera completed interpretationand prospect mapping of approximately 170 kilometers of 2D seismic data over asecond large prospect within the Basin Edge Play Unit, known as the "B"Prospect. Further interpretation of this data is ongoing to include theintegration of the results of new geologic field work in order to further refinecurrent mapping of the prospect. Mirzaani Field Area Production Unit The Mirzaani Field Area Production Unit is comprised of three underdeveloped andundeveloped, shallow Pliocene-age fields with targeted normal pressurereservoirs situated between 400 meters and 1,500 meters deep. One of thesefields, the Mirzaani Field, currently produces at nominal production levelssufficient to yield annual revenues of approximately $2 million per year.Frontera is currently pursuing work programs designed to develop untappedportions of this field to increase production and book additional reserves. During the first half of 2007, production operations continued with revenues of$1.9 million, an increase of $1.1 million from $0.8 million during the sameperiod last year due to timing of crude oil sales. In addition, two new wellswere designed to be drilled in 2007 and procurement was completed for theseoperations. Each well will target existing, undeveloped field reservoirobjectives situated at approximately 1,200 meters in depth. Five existing wellswere also selected for re-entry/radial drilling operations. Mirzaani Field Area Exploration Unit The Mirzaani Field Area Exploration Unit is an area of new prospectivitysituated beneath the existing shallow, Pliocene-age fields. Last year, thecompany completed interpretation of 105 kilometers of 2D seismic data acquiredin 2005 to further delineate previously mapped prospects beneath the MirzaaniField, including a primary focus on the Mirzaani Deep Prospect. This prospect isbelieved to contain Miocene-age, Sarmatian reservoirs similar to those found inthe nearby Taribani Field, situated at depths of approximately 2,500 meters. During the first half of 2007, in order to accelerate testing of the MirzaaniDeep Prospect in parallel with ongoing operations in other business units, aneffort commenced to seek a farmout partner with which to undertake new drillingoperations at this important prospect within the next twelve months. Block 12 Area-Wide Field/Prospect Inventory Development Unit During the first half of 2007 and through the third quarter, technical workprogressed within Frontera's Block 12 Area-Wide Field/Prospect InventoryDevelopment Unit. This unit is focused on evolving and prioritizing thecompany's extensive inventory of prospects within Block 12, including 19identified prospects and leads and five undeveloped fields. FIRST HALF 2007 FINANCIAL REVIEW For the six months ending 30 June 2007, Frontera incurred a net loss of $7.5million, or $0.11 per share on a fully-diluted basis. This loss compares to anet loss of $5.0 million, or $0.09 per share for the first six months of 2006.The increase in the net loss reported is due primarily to higher operatingexpenses and lower other income in the first half of 2007. Below is acomparison of the six-month periods ending 30 June for 2006 and 2007. Revenues from crude oil sales during the first six months of 2007 were $1.9million, an increase of $1.1 million from $0.8 million during the same periodlast year. The increase in revenues was related to timing of crude oil sales,as crude oil produced in the last half of 2006 was not sold until January of2007. Operating expenses were $9.3 million during the first six months of 2007, anincrease of $2.7 million from $6.6 million in 2006. In the first half of 2007,we incurred a $1.2 million non-cash charge related to the expensing of stockoptions in accordance with provisions of SFAS 123R as compared to $1.6 millionlast year. Field operating and project costs increased by $1.8 million this yeardue to additional costs associated with the ramp-up of our work programs inGeorgia. General and administrative expenses also increased by $0.9 million in2007 as a result of personnel added in the second half of 2006 to support thedrilling program in Georgia. Other expenses of $0.1 million were incurred during the first six months of 2007as compared to other income of $0.8 million in 2006. The decrease in otherincome was largely attributable to additional interest expense of $0.8 millionas a result of completing a $67.0 million convertible note offering in May ofthis year. Looking forward, the company has a strong cash position with over $75 million incash and marketable securities as of 30 June. These cash balances will besufficient to carry out our work programs in Block 12 through the end of thisyear and into 2008. Frontera Resources Corporation and SubsidiariesCondensed Consolidated Financial StatementsSix Months Ended June 30, 2007 Page(s) Condensed Consolidated Financial Statements (Unaudited) Balance Sheets.................................................................1 Statements of Operations.......................................................2 Statement of Stockholders' Equity..............................................3 Statements of Cash Flows.......................................................4 Notes to Financial Statements................................................5-9 June 30, December 31, 2007 2006 AssetsCurrent assets Cash and cash equivalents $ 18,408,701 $ 9,927,181 Restricted cash 15,072,562 - Short-term investments 41,925,011 14,823,000 Accounts receivable 160,934 139,107 Inventory 6,148,201 3,124,858 Prepaid expenses and other current assets 4,957,081 267,720 Total current assets 86,672,490 28,281,866 Property and equipment, net 942,142 1,081,213Oil and gas properties, full cost method Properties being depleted 23,750,981 23,750,981 Properties not subject to depletion 29,000,290 27,631,505 52,751,271 51,382,486Less: Accumulated depletion (21,281,707) (21,107,707) Net oil and gas properties 31,469,564 30,274,779Other assets 1,887,169 - Total assets $ 120,971,365 $ 59,637,858Liabilities and Stockholders' EquityCurrent liabilities Accounts payable $ 312,372 $ 566,396 Accrued liabilities 1,633,111 518,004 Current maturities of notes payable-vendor 3,450,941 3,450,941 Current maturities of notes payable-related party - 51,097 Total current liabilities 5,396,424 4,586,438Convertible notes payable 66,900,000 -Other long-term liabilities 40,175 41,669 Total liabilities 72,336,599 4,628,107Commitments and contingenciesStockholders' equity Common stock 2,820 2,818 Additional paid-in capital 150,780,400 149,499,177 Common stock warrants 1,266 1,266 Treasury stock, at cost (567,832) (567,832) Accumulated deficit (101,581,888) (94,050,228) Accumulated other comprehensive income - 124,550 Total stockholders' equity 48,634,766 55,009,751 Total liabilities and stockholders' equity $ 120,971,365 $ 59,637,858 Six Months Ended June 30, 2007 2006 Revenue - crude oil sales $ 1,878,540 $ 758,630Operating expensesField operating and project costs 2,436,564 646,918General and administrative 6,440,049 5,486,744Depreciation, depletion and amortization 400,921 464,693 Total operating expenses 9,277,534 6,598,355 Loss from operations (7,398,994) (5,839,725)Other income (expense)Forgiveness of debt - 11,732Interest income 819,447 926,381Interest expense (984,424) (144,779)Other, net 32,311 10,524 Total other income (expense) (132,666) 803,858 Net loss $ (7,531,660) $ (5,035,867)Loss per shareBasic and diluted $ (0.11) $ (0.09) Number of shares used in calculating loss per shareBasic and diluted 70,384,190 58,856,834 Accumulated Additional Common Other Total Common Paid-in Stock Treasury Accumulated Comprehensive Stockholders' Stock Capital Warrants Stock Deficit Income Equity Balances at December 31, 2006 $ 2,818 $ 149,499,177 $ 1,266 $ (567,832) $ (94,050,228) $ 124,550 $ 55,009,751 Conversion of convertible debt 2 99,998 - - - - 100,000Compensation expense-common stock - 1,181,225 - - - - 1,181,225optionsUnrealized gain on marketable - - - - - 53,420 53,420securitiesReclassification adjustment forgains on marketable securities included in net income - - - - - (177,970) (177,970)Net loss - - - - (7,531,660) - (7,531,660)Total comprehensive loss for the - - - - - - (7,656,210)yearBalances at June 30, 2007 $ 2,820 $ 150,780,400 $ 1,266 $ (567,832) $(101,581,888) $ - $ 48,634,766 Six Months Ended June 30, 2007 2006 Cash flows from operating activitiesNet loss $ (7,531,660) $ (5,035,867)Adjustments to reconcile net loss to net cash used in operating activities Depreciation, depletion and amortization 400,921 464,693 Debt issuance cost amortization 48,126 - Stock based compensation 1,181,225 1,578,692 Forgiveness of debt - (11,732)Changes in operating assets and liabilities: Accounts receivable (21,827) (48,360) Inventory (3,023,343) (193,612) Prepaid expenses and other current assets (4,689,361) 101,495 Accounts payable (254,024) (580,400) Accrued liabilities 1,115,107 (1,214,511) Other long-term liabilities (1,494) - Net cash used in operating activities (12,776,330) (4,939,602)Cash flows from investing activitiesInvestment in oil and gas properties (1,368,785) (13,006,611)Investment in property and equipment (87,850) (110,388)Restricted cash (5,000,000) 250,000Restricted short-term investments - (1,475,000)Net redemption (purchase) of short-term investments (27,226,561) 22,036,510 Net cash provided by (used in) investing activities (33,683,196) 7,694,511Cash flows from financing activitiesRepayments of borrowings (51,097) -Proceeds from convertible debt 66,500,000 -Restricted cash (10,072,562) -Exercise of common stock warrants - 3,071,452Debt issuance costs (1,435,295) -Exercise of common stock options - 525,000 Net cash provided by financing activities 54,941,046 3,596,452 Net increase in cash and cash equivalents 8,481,520 6,351,361Cash and cash equivalentsBeginning of year 9,927,181 19,586,747End of period $ 18,408,701 $ 25,938,108 Supplemental disclosure of noncash investing and financing activities Notes payable used to exercise common stock warrants $ - $ 212,174Noncash debt issuance costs 500,000 -Conversion of debt to common stock 100,000 - 1. Nature of Operations Frontera Resources Corporation, a Delaware corporation, and its subsidiaries(collectively "Frontera" or the "Company") are engaged in the development of oiland gas projects in emerging marketplaces. Frontera was founded in 1996 and isheadquartered in Houston, Texas. The Company emphasizes development of reservesin known hydrocarbon-bearing basins, and is attracted to exploitation projectsthat have significant exploration upside. Beginning in 2002, the Company hasfocused substantially all of its efforts on the exploration and development ofoilfields within the Republic of Georgia ("Georgia"), a member of the FormerSoviet Union. In June 1997, the Company entered into a 25 year production sharing agreementwith the Ministry of Fuel and Energy of Georgia and State Company Georgian Oil("Georgian Oil"), which gives the Company the exclusive right to explore,develop and produce crude oil in a 5500 square kilometer area in eastern Georgiaknown as Block 12, hereafter referred to as the "Block 12 PSA". The Block 12PSA can be extended if commercial production remains viable upon its expirationin June 2022. Under the terms of the Block 12 PSA, the Company is entitled to conductexploration and production activities and is entitled to recover its cumulativecosts and expenses from the crude oil produced from Block 12. Followingrecovery of cumulative costs and expenses from Block 12 production, theremaining crude oil sales, referred to as Profit Oil, are allocated betweenGeorgian Oil and Frontera in the proportion of 51% and 49%, respectively. Under the terms of the Block 12 PSA, Frontera is exempt from all taxes imposedby the government of Georgia, and any taxes imposed on the Company shall be paidby Georgian Oil on behalf of the Company from Georgian Oil's 51% share of ProfitOil. Taxes are defined by the Block 12 PSA to mean all levies, duties,payments, fees, taxes or contributions payable to or imposed by any governmentagency, subdivision, municipal or local authorities within the Government ofGeorgia. 2. Basis of Presentation and Summary of Significant Accounting Policies The condensed consolidated balance sheet of the Company at December 31, 2006 wasderived from the Company's audited consolidated financial statements as of thatdate. The condensed consolidated balance sheet at June 30, 2007, the condensedconsolidated statements of operations for the six month periods ended June 30,2007 and 2006, the condensed consolidated statement of changes in stockholders'equity for the six month period ended June 30, 2007, and the condensedconsolidated statements of cash flows for the six month periods ended June 30,2007 and 2006 were prepared by the Company. In the opinion of Company management, all adjustments, consisting of normalrecurring adjustments, necessary to state fairly the consolidated financialposition, results of operations and cash flows were recorded. The results ofoperations for the six month period ended June 30, 2007 are not necessarilyindicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financialstatements presented in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted. Theaccompanying condensed consolidated financial statements should be read inconjunction with the financial statements and notes thereto contained in theCompany's consolidated financial statements for the year ended December 31,2006. Certain amounts in the unaudited condensed consolidated financial statementshave been reclassified in the prior period to conform with current periodpresentation. Reclassifications have no impact on the Company's financialposition, results of operations, or cash flows. For a description of the Company's accounting policies, refer to Note 2 of the2006 Consolidated Financial Statements. Restricted Cash At June 30, 2007 the Company had approximately $15,072,000 of restricted cash.Restricted cash in the amount of $5,000,000 serves as collateral for a$5,000,000 line of credit that is used from time to time to support letters ofcredit that provide financial assurance that the Company will fulfill itsobligations with respect to service contracts with certain vendors. Theremaining $10,072,000 is a portion of the proceeds from the $67,000,000convertible debt issuance in May 2007, plus related earned interest, which isbeing held in escrow until the Company's stock price meets certain agreedbenchmarks. Assuming no event of default has occurred, $5,000,000 will bereleased from escrow after the stock price of the shares of common stock hasexceeded the conversion price for 20 consecutive trading days; the balance ofthe escrow account will be released when the stock price of the shares exceedstwo times the conversion price for twenty consecutive trading days. See Note 5for further discussion of the convertible notes terms. At December 31, 2006,the Company had no cash equivalents restricted as to use or availability. Short-Term Investments Short-term investments consist of Municipal Short Term Auction Rate Securities("M-STARS") and corporate bonds both of which represent funds available forcurrent operations. In accordance with the Statement of Financial AccountingStandards No. 115, Accounting for Certain Investments in Debt and EquitySecurities ("SFAS No. 115"), these M-STARS are classified as available-for-saleand are carried at cost or par value, which approximates the fair market value.These securities have stated maturities beyond three months but are priced andtraded as short-term instruments due to the liquidity provided through theinterest rate mechanism of 7 to 35 days. At June 30, 2007, short-term investments consist of investments in M-STARS withan estimated fair value of $41,925,011, with no unrealized holding gains orlosses. At December 31, 2006, short-term investments consisted of investmentsin corporate bonds with an estimated fair value of $14,823,000 and netunrealized holding gains in the amount of $124,550 which have been included inaccumulated other comprehensive income. 3. Inventory Inventory consists primarily of materials to be used in the Company's foreignoilfield operations and crude oil held in stock tanks. Inventory is valuedusing the first-in, first-out method and is stated at the lower of cost ormarket. Inventory consists of the following: June 30, December 31, 2007 2006 Materials and supplies $ 5,540,050 $ 1,405,610Crude oil 608,151 1,719,248 $ 6,148,201 $ 3,124,858 4. Notes Payable Line of Credit During 2006 the Company established a $10,000,000 line of credit with acommercial bank by agreeing to collateralize $15,000,000 of cash and marketablesecurities. The line was primarily set up to support letters of credit issuedby the Company from time to time in support of its oil and gas operations.During 2007, the line was retired and replaced with a $5,000,000 line of creditcollateralized by $5,000,000 of cash and cash equivalents. The line isprimarily used to support letters of credit issued by the Company from time totime in support of its oil and gas operations. Notes Payable-Related Party Effective December 31, 2001, the Company raised $500,394 through the issuance ofa rights offering consisting of 6% notes payable plus warrants which entitledthe holders to purchase an aggregate of 15,637,329 shares of common stock of theCompany at an exercise price of $0.032 per share. During 2006 the notes becamedue and were retired in full with the exception of one note holder as theCompany was awaiting fund transfer instructions. This note holder was paid infull in early January 2007. Notes payable-related party outstanding as of June30, 2007 and December 31, 2006 was $0 and $51,097, respectively. During the first six months of 2006, warrant holders exercised warrants topurchase 8,863,279 common shares for approximately $71,452. Notes Payable-Vendor Effective October 1, 2004, the Company converted a $3,450,941 account payable toSaipem S.p.A. ("Saipem") into a note payable for the same amount. Under theterms of the Saipem note payable agreement, the Company agreed to pay Saipemquarterly interest-only payments until September 30, 2007, the maturity date, atwhich date the note is due in full. The note bears interest at 5% per annum.Notes payable-vendor outstanding as of June 30, 2007 and December 31, 2006 was$3,450,941. During the first six months of 2006, warrants were exercised to purchase3,000,000 common shares for $3,000,000 related to a prior senior note. 5. Convertible Notes During May 2007, the Company raised $67.0 million through a private placement ofconvertible unsecured notes due May 2012. The notes were issued at par and willbear interest at 10%, payable quarterly in arrears in cash or in kind at theCompany's discretion. The notes are convertible into common shares at aconversion price of $1.67 per share. The conversion price will be reset to$1.30 per share if the stock price is at or below $1.30 per share for 10 out ofany 20 consecutive trading days at any time in the 12 months following theclosing date. The notes will be automatically converted into common shares atthe conversion price if the stock price exceeds two times the conversion pricefor at least 20 consecutive trading days. As part of the closing of the notes,debt issuance costs of approximately $1.9 million were incurred, of whichapproximately $1.4 million was paid in cash and $0.5 million was allocated asadditional convertible notes outstanding. During June 2007, noteholders holding $100,000 of convertible notes elected toconvert their notes into 59,880 common shares. For the six months ended June 30, interest payments were $951,848 in 2007 and$185,616 in 2006. 6. Income Taxes The Company has incurred losses since inception and, therefore, has not beenrequired to pay federal income taxes. In accordance with applicable generallyaccepted accounting principles, the Company estimates for each interim reportingperiod the effective tax rate expected for the full fiscal year and uses thatestimated rate in providing income taxes on a current year to date basis. TheCompany has established a valuation allowance that is primarily attributable toU.S. federal deferred tax assets. Management believes enough uncertainty existsregarding the realization of the deferred items and has recorded a fullvaluation allowance. On January 1, 2007, the Company adopted the provisions of FASB InterpretationNo. 48 ("FIN48"), Accounting for Uncertainty in Income Taxes. The Company hasdetermined that no uncertain tax positions exist where the Company would berequired to make additional tax payments. As a result, the Company has notrecorded any additional liabilities for any unrecognized tax benefits as of June 30, 2007. The Company and its subsidiaries file income tax returns in the USfederal jurisdiction. Tax years 2002 to present remain open for these taxingauthorities. The Company's accounting policy is to recognize penalties andinterest related to unrecognized tax benefits as income tax expense. TheCompany does not have an accrued liability for the payment of penalties andinterest at June 30, 2007. For the six months ended June 30, 2007 and 2006, no income tax payments weremade. 7. Commitments and Contingencies SOCAR Arbitration In June 1998, Frontera Resources Azerbaijan Corporation, an indirect whollyowned subsidiary of the Company, entered into a production sharing agreementwith SOCAR, the State Oil Company of Azerbaijan Republic, hereafter referred toas the "Azerbaijan PSA". The Azerbaijan PSA covered onshore oilfields in anarea of Azerbaijan known as the K&K Block. The Company and an operating partnerundertook an exploration and development program on the K&K Block. TheCompany's relationship with SOCAR deteriorated as a result of several disputesunder the Azerbaijan PSA and the Company was unsuccessful at reaching asettlement with SOCAR. In January 2006, Frontera Resources Azerbaijan Corporation was awardedapproximately $1.2 million plus interest from 2000 until payment is made inconnection with its binding arbitration case with SOCAR. The arbitral panelfound that the halting of exports of crude oil from the Kursangi & Karabagli oilfields in the Azerbaijan Republic was in violation of the Agreement onRehabilitation, Exploration, Development and Production Sharing between SOCAR,Frontera, Delta/Hess and SOCAR Oil Affiliate. The arbitration panel rejectedall other claims and counterclaims between the parties. Frontera initiatedarbitration against SOCAR in October 2003 related to claims resulting fromSOCAR's halting of exports from the onshore Kursangi & Karabagli oilfields inthe Azerbaijan Republic during the fourth quarter of 2000. The arbitration washeld in Sweden and is binding on the parties under the rules of UNCITRAL, theUnited Nations Commission on International Trade Law. SOCAR has refused to pay the award and instead filed litigation in Svea Court ofAppeals, in Stockholm, Sweden, seeking an order annulling the award. TheCompany has moved to dismiss SOCAR's Swedish lawsuit on procedural grounds, andthe Svea Court of Appeals recently ruled in the Company's favor on a majority ofthe counts. Final disposition is expected in 2008. As a result of SOCAR'srefusal to pay the award, the Company commenced an action in the United StatesDistrict Court for the Southern District of New York in February 2006, seekingto confirm the award and convert it to a judgment in accordance with applicablelaw. SOCAR has opposed this proceeding. In March 2007, the New York Courtgranted SOCAR's Motion to Dismiss, and the Company appealed that decision inJuly 2007. GAC Arbitration On June 22, 2007, Frontera was served a notice of arbitration and claim by GACEnergy Company ("GAC"). GAC was a partner with Frontera on Block 12 from 2002-2004 and then reassigned its interest in Block 12 to Frontera when GAC failed tomeet its financial and work program commitments. The notice of arbitration andclaim was seeking to prove that GAC did not default on their obligations andshould be awarded a 25% working interest in Block 12, a 12.5% ownership interestin the Block 12 operating company, and a proportionate share of the revenue fromoil sales from July 2002 to August 2003. Frontera considers this claim to bewithout merit. Frontera has engaged counsel and intends to vigorously defenditself against this claim. 8. Stockholders' Equity Preferred Stock The Company has the authority to issue up to 10,000,000 shares, par value$.00001, of serial preferred stock. No preferred stock is outstanding at June30, 2007 and December 31, 2006. The Board of Directors may designate andauthorize the issuance of such shares with such voting power and in such classesand series, and with such designation, preferences and relative participation,optional, or other special rights, qualifications, limitations, or restrictionsas deemed appropriate by the Company's Board of Directors. Common Stock As of June 30, 2007 and December 31, 2006 the Company is authorized to issue200,000,000 shares of common stock, par value $.00004 per share. As of June 30,2007 and December 31, 2006, the Company had 70,443,408 and 70,383,528,respectively, of common shares issued and outstanding. At June 30, 2007 andDecember 31, 2006, there are an additional 12,165,000 and 11,310,000 shares,respectively, of common stock reserved for the exercise of existing options andwarrants. Treasury Stock At June 30, 2007 and December 31, 2006, the Company had 5,739,855 shares oftreasury stock, all held as common shares. For the six months ended June 30, the Company recognized stock-basedcompensation expense related to common stock options of approximately $1.2million in 2007 and $1.6 million in 2006. Stock-based compensation expense isreflected in general and administrative expense in the consolidated statementsof operations. This information is provided by RNS The company news service from the London Stock Exchange