HDY.L Regulatory News (HDY)

22 November 2018

Hardy Oil and Gas plc

("Hardy", the "Company" )

Half Year Results for the six months ended 30 September 2018

Hardy Oil and Gas plc (LSE: HDY), the oil and gas exploration and production company focused in India, reports its results for the six months ended 30 September 2018 (H1FY19).

All financial amounts are stated in US dollars unless otherwise indicated.

SUMMARY

CY-OS/2

· The Supreme Court of India (SC), after 48 listings over 24 months, overruled a previous Delhi High Court (HC) order and deemed that India Courts did have jurisdiction to hear the Government of India's (UOI) appeal of the CY-OS/2 international arbitration award (Award).

· In June 2018 the Washington District Court declined to Confirm the CY-OS/2 award reasoning that the restoration of the block was against US public policy and given the two parties did not agree on the methodology of computing the compensation portion of the award it could not be confirmed. Hardy Exploration & Production (India) Inc. (HEPI) had been seeking a lower figure than the UOI had represented. HEPI has not appealed the order.

· HEPI had secured an interim third-party debt order (TPDO) against a $9.0 million guarantee fee due from India Infrastructure Finance Company (UK) Limited (IIFC) to the UOI. Upon appeal, the Court concluded that the debt did not reside in the UK and dismissed the TPDO and awarded costs. IIFC is a UK registered company, borrowing and lending funds within the UK, maintains a business premise in London, and the payment transaction was contracted to be from IIFC's UK bank accounts. HEPI did not appeal the order.

PY-3

· The UOI review, of PY-3 unincorporated joint venture's (uJV) unanimously recommended Revised Full Field Development Plan (RFFDP) and application for an extension of the Production Sharing Contract (PSC), has been ongoing for more than nine months which is beyond the time prescribed within the of UOI's own PSC extension policy.

· An arbitration between HEPI and the PY-3 uJV partners continued through the period. Final written arguments have been submitted and the matter is reserved for judgment.

Financial

· Having considered India's SC ruling, to allow an appeal of the CY-OS/2 award in India courts, the Board has decided to write-down $51.1 million of Intangible Assets associated with CY-OS/2 exploration expenditures. This resulted in a significantly higher total comprehensive loss of $54.1 million for the first half of FY19 compared to a loss of $2.0 million for first half of FY18. General and administrative expenditure included legal expense of $2.1 million compared with $0.8 million in the comparable period in FY18.

· Cash and short-term investments at 30 September 2018 amounted to $5.3 million; Hardy has no debt.

OUTLOOK

· CY-OS/2 - The UOI appeal of the CY-OS/2 arbitration Award is expected to commence shortly in the Delhi HC. Based on past performance of the India Judiciary, the appeal process is expected to take three to five years to conclude. A hearing for the UOI's set-aside application against a UK enforcement order is due to be heard in the first quarter of FY20.

· PY-3 - The UOI's protracted review of the uJV's unanimously agreed revised full field development plan (RFFDP) and extension application has compromised the likelihood that production can recommence prior to the expiry of the PY-3 PSC.

· PY-3 - The arbitration tribunal, overseeing the arbitration between HEPI and the other uJV partners, is expected to issue a decision prior to end 2018.

· GS-01 - It is expected that GS-01 will continue to be mired in a pending dispute over unfinished minimum work programme between the UOI and the Operator (Reliance).

Alasdair Locke, Chairman of Hardy, commented: "Our considerable efforts to enforce the CY-OS/2 Arbitration Award, handed down in 2013, have not produced a meaningful outcome. The UOI has consistently been allowed to adopt strategies to frustrate the enforcement process by the judicial institutions in India, UK and US. Consequently, we are now curtailing funding to the wholly owned Indian subsidiary HEPI and reviewing our strategic objectives for the Group which could include one or more of individual asset sales, a sale of HEPI and a sale of the ongoing CY-OS/2 litigation. I will report back the conclusions of this review to shareholders in due course."

For further information please visit www.hardyoil.com or contact:

OVERVIEW

The Group's strategy has been to be an active participant in the upstream oil and gas industry, realise value from our current India focused portfolio and pursue new opportunities as they arise. The events surrounding the HEPI's attempts to enforce the CY-OS/2 Award has left the Board to conclude that contracts entered into with the UOI do not provide basic protection from unilateral amendment to, deviation from, and termination of agreements.

Activity

Notwithstanding the UOI's documented abuse of legal process, the SC order, allowing the UOI to appeal the CY-OS/2 arbitration Award, is fundamentally flawed. The order made no reference to, or acknowledgement of, HEPI's arguments. The contractual provisions regarding international arbitration were put in place to precisely avoid the sovereign appealing an award within its own judiciary.

We are further disappointed that the UOI has not completed its review of the PY-3 RFFDP and extension application. It is understood that the delay in calling a Management Committee meeting is a deliberate attempt to compromise the health of HEPI. Further it is understood that one of the PY-3 uJV partners has written to the Ministry of Petroleum and Natural Gas (MOPNG) and other uJV partners proposing an alternative development plan thereby reneging on its previous Operating Committee (OC) approvals.

Financial

While the CY-OS/2 award remains valid, having considered that it has been over five years since the tribunal issued the award, the UOI allowed appeal in the Delhi High Court is expected to take a considerable amount of time, the intangible asset associated with the CY-OS/2 block has been written down. This resulted in a significant increase in the consolidated loss of the Group.

As at 30 September 2018, the Company had over $5.3 million of cash and short-term investments with no debt. The Group maintains robust internal control and risk management systems appropriate for a Company of our size and resources. In September 2018 Hardy introduced further cost reduction measures and restrictions on funding to HEPI.

On 10 September 2018, Pradip Shah stepped down as Non-Executive Director of Hardy Oil and Gas plc on medical grounds. On 31 October 2018 T.K. Ananth Kumar stepped down as a Director of Hardy Exploration & Production (India) Inc. Considering the current circumstances of the Company the composition of the Board will be maintained. The non-executive directors of Hardy have voluntarily reduced their director fees to £30,000 per annum each.

Objectives and outlook

HEPI's considerable efforts to enforce the CY-OS/2 Arbitration Award, handed down in 2013, have not produced a meaningful outcome. The UOI has consistently been allowed to adopt strategies to frustrate the enforcement process by the judicial institutions in India, UK and US. Consequently, we are now curtailing funding to the wholly owned Indian subsidiary HEPI and reviewing our strategic objectives for the Group which could include one or more of individual asset sales, a sale of HEPI and a sale of the ongoing CY-OS/2 litigation.

OPERATIONAL REVIEW

The Group's exploration and production assets are based in India and are held through its wholly owned subsidiary, Hardy Exploration & Production (India) Inc. (HEPI)

Health, Safety and Environment

The Group is committed to excellent health and safety practices which are at the forefront in all our activities. Although all offshore activities are currently suspended, maintaining high HSE standards throughout the organisation remains core to all our undertakings. The Group's HSE policy document is regularly reviewed and amended as appropriate.

Block CY-OS/2:

Appraisal (Hardy 75 per cent interest - Operator)

Hardy is the operator of the CY-OS/2 exploration block and holds a 75 per cent participating interest. The block is in the northern part of the Cauvery Basin immediately offshore from Pondicherry, India and covers approximately 859 km2. The Ganesha-1 discovery well was drilled to a depth of 4,089 m and on testing, the well flowed natural gas at a peak rate of 10.7 mmscfd.

The table below summarises the extraordinary actions HEPI has undertaken to enforce its contractual rights provided to it under the CY-OS/2 Production Sharing Contract between HEPI, GAIL and the UOI.

The summary table above illustrates that India's Judicial institution took over five years to determine that the Seat of arbitration was India and not Malaysia.

International Enforcement

USA - On 8 June 2018, Judge Rudolph Contreras denied HEPI's confirmation petition which would have allowed HEPI to enforce the award within the US. He concluded that the restoration of the CY-OS/2 exploration license and post-Award interest was against USA public policy wherein the CY-OS/2 exploration license was within the UOI sovereign boundary and the post interest award interlinked to the former action. He further concluded that the initial Award of compensation was not confirmed as HEPI and the UOI had presented different methodologies for computing the intended magnitude of such. Of note HEPI had represented that the Award provided for compensation to be calculated on a simple interest basis where the UOI had represented that a compounding computation was provided. The result being that HEPI was claiming a significantly smaller amount that that represented by the UOI.

Judge Contreras did note that the UOI appeal in India "…which has been delayed over and over again due to the actions of the Government of India and the Supreme Court". Notwithstanding this fact, Judge Contreras granted, over the course of the proceedings, the UOI time extensions totaling 22 weeks and also took over nine months to issue his order.

HEPI is particularly aggrieved that Judge Contreras used the divergent methodologies as a basis of denial, particularly given that he elected to not convene an oral hearing to clarify. The UOI had formally requested an oral hearing.

UK - On 27 July 2018 Deputy Judge Peter Macdonald-Eggars, of the London Commercial High Court of Justice, discharged an interim third-party debt order (TPDO) that HEPI had secured against a guarantee fee payable from India Infrastructure Finance Company UK Limited (IIFC) to the UOI. Judge Macdonald-Eggars discharged the TPDO accepting the UOI arguments;

· The Debt was not situs in the UK - (IIFC is a UK registered company, the UOI guarantee is for funds borrowed by IIFC, IIFC primary business is in the UK and the guarantee fee was to be made from one UK account to UOI Ministry of Finance.)

· Real risk that payment to HEPI would not discharge IIFC liability to UOI resulting in double payment - (the UOI is the sole shareholder of IIFC, UOI had not issued default notices to IIFC).

· Not accrued but accruing

Further, IIFC and the UOI were awarded substantial costs which fell due in August 2018.

There remains in place an enforcement order which the UOI is currently contesting. A hearing is expected to take place in the first quarter of FY20. In May 2018 HEPI had contested the late filing of the UOI set aside application of the enforcement order. The UOI represented to Justice Moulder that the late filing was an "honest mistake" and had no record of receipt of service. HEPI produced a copy of the British High Commission's service note which clearly outlined purpose and date of service. Justice Moulder accepted the UOI representations and granted their extension of time.

FY19 Objectives - The immediate impact of the SC order was to allow the UOI to have their Section 34 appeal of the Award heard. It is expected that should the HC uphold the Award, the UOI will file a Section 37 appeal and should that fail to overturn the Award the UOI will appeal to the SC which we have seen is prepared to extend the maximum privilege to the UOI. It is therefore expected that the process will take three to five years to conclude.

We will continue to seek the restoration of the CY‑OS/2 block to the joint venture in a timely manner. HEPI believes that it has a strong position as the unanimous international award, passed by three former Chief Justices of India, is well reasoned.

As at 30 September 2018, Hardy's 75 per cent share of the compensation awarded by the Hon'ble Arbitration Tribunal amounted to approximately $71.6 million. The fall in value is attributed to the depreciation of the Indian Rupee.

Block CY-OS 90/1 (PY-3):

Oil Field (Hardy 18 per cent interest - Operator)

Operations - The PY-3 field was shut-in in July 2011. Since then Hardy has been working diligently to establish a consensus amongst stakeholders regarding the optimal development of the field with an objective to recommence production at the earliest opportunity.

PY-3's Production Sharing Contract (PSC) is due to expire in December 2019 and it is eligible for an extension of up to ten years. In December 2017, HEPI had submitted an extension application, in accordance with the UOI PSC Extension Policy No. O-19025/10/2005-ONG-D-V (Part-II) dated 28 March 2016 (Extension Policy). As per the Extension Policy, DGH, the technical regulator wing of the Ministry of Petroleum, UOI had six months and then MOPNG had 3 months to conclude its review of the application. HEPI addressed all queries issued by the regulator however after 10 months, since the application was submitted, an MC meeting has not been called, despite repeated requests from the HEPI to both MOPNG and DGH officials.

The application included, among other requirements, a Revised Full Field Development Plan (RFFDP) that has been unanimously approved by the uJV partners and has been recommended to the Management Committee which includes the UOI. The RFFDP programme envisions;

· Contracting a floating production, storage and offloading vessel or equivalent;

· Recommencing production from an existing well prior to December 2019,

· Drilling one development well in the first half of 2020; and

· A tie-in to the PY-1 gas field infrastructure to export produced gas.

Samson Maritime Limited (Samson) has previously secured an award, amounting to $5.1 million, against HEPI for offshore services provided in the PY-3 field during 2011 and 2012. The full amount of the award is included in current liabilities. Samson has subsequently filed an execution petition with the Madras High Court and secured an attachment order on HEPI's Indian based bank accounts. HEPI has implemented measures to allow it to continue to settle its liabilities in India and is seeking partial relief from the attachment order. On 6 June 2018 the Madras High court issued an order for HEPI to write to the MOPNG to have funds held in the PY-3 Site restoration fund (SRF) to meet the liability to Samson. HEPI has complied with the order yet to date the MOPNG has not formally responded. It is State Bank of India (SBI) and HEPI's view that the funds held in the special scheme between the PY-3 uJV and the UOI and is not a legally attachable asset.

In March 2017, Hardy initiated arbitration with the uJV partners to collect over $10 million associated with expenditures incurred by HEPI in fulfilling its responsibilities as Operator of PY-3, including the amounts due to Samson. The uJV partners have made several counter claims for substantial damages they attribute to alleged Gross Negligence and Wilful Misconduct. In addition, ONGC is claiming reimbursement of Cess and Royalty paid since commencement of production that was in excess of their participating interest. The ONGC claim states that HEPI, as operator, was negligent in not collecting the amounts from TPL and HOEC. We believe that all counter claims are baseless and without merit. Final written arguments have been submitted and the Tribunals' decision is expected to be issued by the end of 2018.

FY19 Objective - The sequence of events for FY19 is to:

· Secure MC approval of RFFDP and Budgets, and of a request to UOI for extension of PSC

· Obtain confirmation of UOI sanctioning of extension

· Initiate tendering process

· Obtain unanimous consent from uJV partners to award contracts (if required secure MC approval of revised estimates)

· Collect cash-calls from all uJV partners prior to entering into contracts with vendors

It is expected that offshore activity could commence within 9 to 12 months of the sanctioning of the RFFDP by the Management Committee. The development plans under consideration would require funding of more than HEPI's current cash resources.

Background - The PY-3 field is located off the east coast of India, 80 km south of Pondicherry in water depths between 40 m and 450 m. The licence covers 81 km2 and produces high quality light crude oil. The field has produced over 24.8 mmbbl and was shut-in in July 2011 due to the expiry of the production facilities' marine classification and absence of approval to extend the contract.

Block GS-OSN-2000/1 (GS-01):

Appraisal (Hardy 10 per cent interest)

Operations - The matter of possible liquidated damages associated with unfinished minimum work programme (UMWP), which has been under consideration since 2009, continued to be deliberated by the UOI and the operator. It is our understanding that this is a common matter for NELP I to NELP VII licences starting from 2005 to 2016, including the HEPI D9 licence which was relinquished in 2012. HEPI and other operators have been working with industry associations to develop a policy to facilitate a resolution. The GS-01 uJV has conveyed to the UOI that this matter needs to be closed out prior to the progression of further activity on the block. The HEPI has previously provided for $0.3 million of liquidated damages which is HEPI's share of the Operator's estimate.

Objective - Finalise the quantum of liquidated damages outstanding prior to concluding discussions with our partner to acquire its participating interest and the Operatorship of the block. Following this, a priority will be to revisit a proposed FDP taking into consideration the prevailing commodity pricing and cost environment.

Background - In 2011, the GS-01 joint venture secured the UOI's agreement for the declaration of commerciality (DOC) proposal for the Dhirubhai 33 discovery GS01-B1 (drilled in 2007) which flow-tested at a rate of 18.6 mmscfd gas with 415 bbld of condensate through a 56/64 inch choke at flowing tubing head pressure of 1,346 psi. The GS-01 licence is in the Gujarat-Saurashtra offshore basin off the west coast of India, north west of the prolific Bombay High oil field, with water depths varying between 80 m and 150 m. The retained discovery area covers 600 km2.

FINANCIAL REVIEW

In the six months ended 30 September 2018, the Group recorded a total comprehensive loss of $54.1 million. As at 30 September 2018 the Company held total cash and short-term investments of $5.3 million with no debt.

Principal Risks and Uncertainties

The underlying risks and uncertainties inherent in Hardy's current business model have been grouped into four categories: strategic, financial, operational and compliance. The Board has identified principal risks and uncertainties for FY20 and established clear policies and responsibilities to mitigate their possible negative impact on the business, a summary of which is provided below:

The Group's cashflow position could fall to a level wherein a funding deficit is likely to arise in certain circumstances. These circumstances could include;

· cash outflow in respect of current liabilities (including Samson Maritime) without commensurate recovery of debts due from uJV partners; and

· the materialisation of contingent liabilities or unprovided for claims by third parties and government authorities.

To a certain extent, the materialisation of the instances listed above can be mitigated by the reduction of overhead and pursuing legal avenues to protect the Group's assets. Further, most liabilities of a material nature are limited to the wholly owned subsidiary Hardy Exploration & Production (India) Inc. and the Group's cash and short-term investments are held within Hardy Oil and Gas plc.

RESPONSIBILITY STATEMENT

Each of the directors of the company confirms that to the best of his or her knowledge:

a. the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

b. the half year report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year);

c. the half year report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein);

On behalf of the Board

Ian MacKenzie,

Chief Executive Officer

22 November 2018

INDEPENDENT REVIEW REPORT TO HARDY OIL AND GAS PLC

Introduction

We have been engaged by the company to review the condensed set of financial statements in the interim financial report for the 6 months ended 30 September 2018 which comprises the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash flows and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company, as a body, in accordance with our instructions. Our review has been undertaken so that we might state to the company those matters we are required to state to them in a review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the opinions we have reached.

Directors' Responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note one, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union. 

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the interim financial report for the 6 months ended 30 September 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Crowe U.K. LLP

Statutory Auditor

Date: 22 November 2018  

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the 6 months ended 30 September 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the 6 months ended 30 September 2018

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

For the 6 months ended 30 September 2018

Approved and authorised for issue by the Board of Directors on 22 November 2018

CONSOLIDATED STATEMENT OF CASH FLOWS

For the 6 months ended 30 September 2018

1. Accounting Policies

These financial statements are for the six months ending 30 September 2018.

i) Basis of measurement

Hardy prepares its financial statements on a historical cost basis except as otherwise stated.

ii) Going Concern

The Group has in the past generated working capital from its production activities and successfully raised finance to provide additional funding for its ongoing exploration and development programmes. The Directors have reviewed the Group's ongoing activities and having regard to the Group's existing working capital position, the Directors are of the opinion that the Group has adequate resources to enable it to undertake its planned activities over the next 12 months from the date of these financial statements (in coming to this opinion the Directors have not included the receipt of any funds from the CY-OS/2 arbitration award).

iii) Basis of preparation

These interim consolidated financial statements are for the six months ended 30 September 2018 and have been prepared in accordance with International Accounting Standard 34 "Interim Financial Statements". The accounting policies applied are consistent with International Financial Reporting Standards (IFRS) adopted for use by the European Union. The accounting policies and methods of computation used in the interim consolidated financial statements are consistent with those used in the Company's Annual Report for 2018 and are expected to be applied for the year ending 31 March 2019.

iv) Cyclicality

The interim results for the six months ended 30 September 2018 are not necessarily indicative of the results to be expected for the financial year 2019. The operations of Hardy Oil and Gas plc (HOGL) are not affected by seasonal variations.

v) Full year comparative information in interim results

The financial information for the year ended 31 March 2018 does not constitute the Company's statutory accounts for that year but is derived from those accounts. Statutory accounts for 2018 are available at the Company's website. The auditors reported on those accounts and their report was unqualified and unmodified.

The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 March 2018.

2. Critical Accounting Estimates and Judgments

The preparation of the Group's financial statements requires the use of estimates and judgements that affect the carrying value of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenditure for the year. These estimates and judgements are made based on management's knowledge of the facts, taking into account historical experiences and expectations of future events that are believed to be reasonable under the particular circumstances. By definition the actual results will most likely differ from the estimates made. The estimates and assumptions that could have a significant risk of causing a material adjustment to the carrying value of assets and liabilities within the next financial year are addressed below:

i) Intangible assets- exploration

Intangible assets comprise of capitalised exploration expenditures associated with a natural gas discovery on the CY-OS/2 exploration licence. The UOI had notified the Group of the relinquishment of the licence to which Hardy and the UOI entered arbitration to resolve the dispute. The arbitration tribunal ruled in favour of HEPI and ordered the reinstatement of the licence. The UOI has subsequently appealed the award at several levels of the Indian judicial system. Full details are disclosed in note 6 to these financial statements. This is regarded as a significant area of judgment and Management having considered that the arbitration tribunal has confirmed that the relinquishment was illegal. The India Supreme Court (SC) have overturned a UOI Division Bench of the High Court of Delhi and has allowed the UOI's appeal to be heard. Having regard for the duration taken since the initial award and the most recent SC ruling it has been adjudged that there is an indication of impairment due to the uncertainties surrounding the judicial process. The CY-OS/2 intangible asset has been fully provided against.

ii) Recoverability of Receivables from PY-3 Joint Venture Partners

Where the Hardy Exploration & Production (India) Inc. (HEPI) is the operator of, or is the largest owner in a field, it recovers a percentage of the costs incurred from its joint arrangement partners in accordance with the levels of participating interests. Partners may either be Indian state-owned companies or private enterprises. Cash calls on partners are usually made in advance of incurring field expenditure. However, a number of these have not been paid, pertaining to period from 2011 to 2018 and HEPI commenced arbitration against the uJV PY-3 partners in FY17 seeking $8.4 million (plus interest). HEPI has legal advice that its claim is valid, and it will continue to pursue this amount by all legal means. Due to the length of time that the amounts have been outstanding a provision has been made against the sums due totalling $5.5 million (31 March 2018: $5.3 million). There is always uncertainty associated with any arbitration process and the amount recovered may therefore materially differ both from that claimed or from the amount recognised. This is regarded as a significant estimate and Management have considered the correspondence between the Group and the Debtors, standing of the individual organisations, and legal advice.

iii) Provisions

The Group records provisions where it considers it has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation and a reliable estimate of the amount thereof can be made. The recording of provisions is an area which requires the exercise of management's judgement relating to the nature, timing and probability of the liability. The Group's balance sheet includes provisions for liquidated damages on minimum work programmes, Indian taxes and contractual disputes.

iv) Decommissioning

The liability for decommissioning is reviewed based on cost estimates which are predominated by the charter hire charges of drill ships and supply boats. Accordingly, the provision made in the books will reflect the risk free discounted estimated future cost for decommissioning. Further details are contained in note 20 (page 70) of the Company's 2018 Annual Report and Accounts.

v) Carrying value of Oil & Gas and Exploration assets

Management has fully provided for the Group's oil and gas assets due to ongoing uncertainty of likelihood of development and the availability of extension at the end of the current Production Sharing Agreement in 2019. If a development was sanctioned the calculation of the recoverable amount would require the estimation of future cash flows. Previously Management's key assumptions and estimates in the impairment models related to: commodity prices that are based on forward commodity price estimates, fiscal structuring specific to individual assets, commercial reserves and the related cost profiles. Should a development plan be approved by all the partners in the PY-3 field and the Government of India (Management Committee) we will review the economic model to determine the appropriate asset value. If circumstances change the total provision recognised in FY16 and FY17 of $5.8 million could be written back. Further details are contained in note 13 and 14 (page 68) of the Company's 2018 Annual Report and Accounts.

3. Segment analysis

The Group is organised into two business units as at end of the year: India and United Kingdom. The India business unit is operated by the wholly owned subsidiary, Hardy Exploration & Production (India) Inc. and Hardy Oil and Gas plc operates in the United Kingdom.

The India business unit focuses on exploration and production of oil and gas assets in India. The United Kingdom business unit is the holding company. Management monitors these business units separately for resource allocation, decision making and performance assessment.

The Group is engaged in one business activity, the exploration, development and production of oil and gas. Other income relates to technical services to third parties, overhead recovery from joint venture operations and miscellaneous receipts, if any. Revenue arises from the sale of oil produced from the contract area PY-3 India and the revenue by destination is not materially different from the revenue by origin.

4. Taxation

While considering deferred tax assets, the Group considers the highest and best use of the losses available and this is considered to be in India. Considering the current uncertainty over the future of the operations and the ongoing review of the strategic objectives of the Group, deferred tax asset on the losses carried forward have not been recognised.

5. Loss per share

Loss per share is calculated on a loss of US$ 54,059,086 for the six months ended 30 September 2018 (September 2017: US$2,037,457) on a weighted average of 36,882,018 Ordinary Shares for the six months ended 30 September 2018 (September 2017: 36,882,018). No diluted loss per share is calculated.

6. Intangible assets

Legal proceedings concerning block CY-OS/2

In March 2009, HEPI was informed by the Government of India (UOI) that the block CY-OS/2, in which HEPI holds a 75 per cent participating interest, was relinquished as HEPI had failed to declare commerciality within the two years from the date of discovery which is applicable to an oil discovery. HEPI disputed this ruling believing that the discovery was a gas discovery and consequently that it was entitled to a period of five years from the date of discovery to declare commerciality. As no agreement was reached the dispute was referred to arbitration under the terms of the PSC.

The arbitrators ruled on 2 February 2013 that the discovery was a gas discovery and consequently that the order for the relinquishment of the block was illegal. The arbitrators have ordered the Government of India to restore the block to HEPI and its partners and to allow them a period of three years from the date of restoration to complete the appraisal programme. In addition, the arbitrators awarded costs of $0.2 million and interest on the exploration expenditure incurred to date. As at 30 September 2018, HEPI's 75 per cent share of the interest awarded is approximately $71.6 million.

On 2 August 2013, the UOI filed an appeal, against the arbitration award, with the High Court (HC) Delhi. On 27 July 2016, the UOI's second appeal to the Delhi HC was dismissed based on jurisdiction. The UOI subsequently filed a Special Leave Petition with the Supreme Court of India (SC) challenging the Delhi HC ruling. On 25 September 2018, the SC overruled the HC ruling and ordered that India Courts did have jurisdiction and that the UOI could recommence its appeal of the Arbitration award. Based on the SC ruling and past performance in the matter it is uncertain how long the judiciary will take to conclude the appeal process. As the UOI is the appellant, impartiality of the India judiciary may not be assured.

In late July 2017, the Group initiated enforcement proceedings in the UK's High Court of Justice. The action has been initiated to maintain the option to enforce the Award in the UK. The primary objective is to conclude the appeal and enforcement process within the Indian judicial system.

While the CY-OS/2 award remains valid, having considered that it has been over five years since the tribunal issued the award and the UOI allowed appeal in the Delhi High Court is expected to take considerable amount of time, the intangible asset associated with the CY-OS/2 block has been provided against.

7. Share capital

The Company has authorised share capital of 200 million US$ 0.01 ordinary shares. Changes in issued and fully paid ordinary shares during the six months ended 30 September 2018 are as follows:

8. Share Options

Changes in outstanding share options during the six months ended 30 September 2018 are summarised below:

Detail regarding the estimated fair value of granted share options has been set out in note 8 (page 66) of the Company's 2018 Annual Report and Accounts.

9. Contingent liabilities

Liquidated Damages

The Group has minimum work commitments in associated with various exploration licences granted by sovereign authorities through joint arrangements. A number of these commitments have not been fulfilled and consequently the Group is liable to pay liquidated damages. When a liquidated damage payment is probable a provision is created based on management's best judgement. In some instances, there may be a high degree of uncertainty. In such instances an additional contingent liability is recognised. Currently a contingent liability estimated at $1.7 million associated with unfinished minimum work programme liquidated damages. Management do not expect this to be resolved in the next twelve months.

Litigation

In the normal course of business the Group may be involved in legal disputes which may give rise to claims. Provision is made in the financial statements for all claims where a cash outflow is considered probable. No separate disclosure is made of the detail of claims as to do so could seriously prejudice the position of the Group.

Others

Disputed claims amounting to approximately $0.4 million by the suppliers to the Group have not been acknowledged as debt.

10. Dividends

The Board of Directors do not recommend the payment of an interim dividend for the period ended 30 September 2018.

11. Approval of interim Consolidated Financial Statements

These interim consolidated financial statements have been approved by the Board of Directors on 22 November 2018.

GLOSSARY OF TERMS

Hardy Oil and Gas plc

16 North Silver Street

Aberdeen, UK AB10 1RL

Tel: +44 (0) 1224 61 2900

Fax: +44 (0) 1224 63 3995

Investors Relations Contact Richard Galvin

IR@hardyoil.com