19 Mar 2009 07:03
| Immediate Release | 19 March 2009 |
Hardy Oil and Gas plc
("Hardy" or "the Company" or "the Group")
Preliminary Results
for the year ended 31 December 2008
Hardy Oil and Gas plc (LSE : HDY), the oil and gas exploration and production company with interests predominantly in India, today announces its Preliminary Results for the year ended 31 December 2008.
*All financial amounts in US dollars unless otherwise stated.
Operational Highlights
2008
Two gas discoveries (Dhirubhai 39 and 41) on the D3 exploration block
Acquired additional 1,165 km2 of 3D seismic data on the GS-01 block
Added the onshore petroleum exploration licence AS-OON-2000/1 located in Assam (10% PI) in partnership with Reliance
Farmed out 20% working interest in Oza to fund the field development programme
Hardy's net participating interest average daily production for FY 2008 was 458 stbd (FY 2007: 747 stbd)
2009 to date
Commenced 3D seismic acquisition programme for D3 exploration block
D3 appraisal programme submitted to DGH for review
PY3-PD4 re-entry - the well was completed as a producer with a gas lift valve for future production once gas lift and compression facilities are installed
Commenced 2D seismic acquisition programme for Assam exploration block
Financial Highlights
Profit before taxation of $12.4 million* (2007: $10.6 million*)
Cash flow from operations $1.6 million† (2007: $2.6 million†)
Capital expenditure of $31.6 million (2007: $32.1 million)
Cash and short term investments at 31 December 2008 of $30.1 million (2007: $31.9 million)
† Before charges in non-cash working capital
* Including gain from sale of investment
Outlook
D3: Drilling of third exploration well on the D3 block expected in H2 2009 and completion of 3D seismic acquisition programme on the D3 block in H1 2009
Technical review: Publication of a third party technical review updating the Company's D9, D3 and Assam exploration block potential, is anticipated by the end of Q209
D9: The joint venture budget has provided for the drilling of one well in the 2009 calendar year.
Commenting on the results, Mr E.P. Mortimer, Chairman of Hardy said:
"Commitment to our strategy of organic growth through exploration of our India assets produced encouraging results in 2008. The potential represented by our D3 discoveries is a major contributor to significantly de-risking Hardy's growth potential from its exploration blocks in the Krishna Godavari basin."
For further information please contact
Hardy Oil and Gas plc 020 7471 9850
Sastry Karra (Chief Executive)
Yogeshwar Sharma (Chief Operating Officer)
Dinesh Dattani (Finance Director)
Arden Partners plc 020 7398 1600
Richard Day
Matthew Armitt
Buchanan Communications 020 7466 5000
Mark Edwards
Ben Willey
Ben Romney
CHAIRMAN AND CHIEF EXECUTIVE'S STATEMENT
Overview
The current economic downturn, and fall in oil prices, presents a challenging outlook for the upstream oil and gas industry. Despite these conditions we are pleased to recognise 2008 as another positive year for Hardy. We anticipate 2009 to be an important year for Hardy, with further drilling planned on our Krishna Godavari basin exploration blocks.
The Group achieved several major milestones through the year with positive exploration results, expansion of our board and the move of our share listing to the Main Market. Commitment to our strategy and stated goals of organic growth through exploration of our India assets, produced encouraging results in 2008. Of particular note are the Dhirubhai 39 and 41 gas discoveries on the Company's D3 block in the KG basin, and the recent submission of an appraisal programme for the D3 discoveries. The discoveries have reduced the overall geological risk of the block, and are an encouraging start to a six well exploration programme.
Key Financial Results
During 2008 the Company increased revenues due to higher oil prices (despite reduced production), derived positive cash flow from operations (before non-cash working capital changes), and realised a significant infusion of capital through liquidation of its investment in HOEC, resulting in another profitable year. The Company completed the year with cash and short term investments of approximately $30 million and no long term debt.
Revenue (after profit oil) for the year ended 31 December 2008 amounted to $17.3 million compared with $11.8 million for 2007. Sales oil of 179,524 stb was realised for the year ended 31 December 2008 (2007: 232,870 stb); the average price realised was $104.44 per stb (2007: $66.65 per stb).
The Company liquidated its entire holding in HOEC during 2008 and 2007, realising cash proceeds of $41.4 million and a pre-tax gain of $13.0 million and $10.2 million for 2008 and 2007 respectively.
Profit before taxation amounted to $12.4 million in 2008 compared to $10.6 million in 2007. The Company's fully diluted earnings per share amounted to $0.11 in 2008 (2007: $0.13).
Cash flow from operating activities (before changes in non-cash working capital) amounted to $1.6 million in 2008 compared to $2.6 million in 2007.
Total capital expenditure amounted to $31.6 million (2007: $32.1 million), principally on the drilling of four wells on the D3 and GS-01 blocks, the acquisition of 3D seismic data and partial drilling of a development well on the PY-3 field, which was completed in February 2009.
The Company has adequate resources to enable it to undertake its planned work programme over the next twelve months. The Company also has the ability to raise additional capital, if required, to fund its ongoing work programmes.
Operational Overview
We completed the majority of our planned programme for 2008. Our activity was focused on our exploration blocks in India with the drilling of four exploration wells and the acquisition of over 1,100 km2 of additional 3D seismic on one of our exploration blocks in India.
India (Operated)
PY-3 - The field's production for 2008 was 0.93 MMstb of oil (2007: 1.51 MMstb). Hardy is the operator and holds an 18% participating interest. The daily net average production on a participating interest basis was 458 stbd (2007: 747 stbd). The fall in production is attributed to the suspension of well PD-3-RL (which was converted into a water injector), natural decline, and shut-in of the field for unplanned maintenance. The gross average daily production of the field for January and February of 2009 was 2,846 stbd and 2,797 stbd respectively. Hardy anticipates PY-3's gross daily production for 2009 to average 3,000 stbd.
The drilling of an additional lateral well, via the re-entry of the producing PY-3-PD4 well was completed in February 2009. With the assistance of nitrogen lift, the well flowed at 700 stbd of oil with 30% water-cut, however, the well was unable to be reactivated as a self flowing well. The well has been completed as a producer with a gas lift valve to allow for future production when gas lift compression facilities are installed on the FPU.
CY-OS/2 - The Company submitted a proposal to revise the appraisal programme, for the CY-OS/2 block's Ganesha gas discovery, to reduce three firm and two contingent wells to one firm and one contingent well. The revised work programme was approved by the CY-OS/2 Operating Committee and reviewed by the Management Committee in October 2008. The CY-OS/2 joint venture is working with the Ministry of Petroleum and Natural Gas of the Government of India for an extension of the exploration licence to January 2012 to establish commerciality.
India - (Non-operated)
Results on our non-operated exploration assets have been encouraging as we continue to pursue our strategy of de-risking this portfolio.
KG Basin - The Company's two key exploration assets are located in the Krishna Godavari basin, a prolific proven hydrocarbon province, with world class discoveries since the introduction of India's New Exploration Licensing Policy. Subsequent substantial private sector capital investment in offshore field development and onshore infrastructure is facilitating further exploration and development. The Reliance operated D6 block is a current example with production expected to reach 80 MMcmd by 2010, effectively doubling India's domestic natural gas production capacity. Continued investment in the basin promises to unlock the substantial resource potential of this prolific basin.
D3 - Exploration drilling commenced on this block in 2008 and we were pleased to announce two successive gas discoveries on the block, with encouraging initial testing results including an observed flow rate of 38.1 MMscfd from the KDVD3-A1 well (Dhirubhai 39). An appraisal programme for the Dhirubhai 39 and 41 discoveries has been approved by the Operating Committee and is under consideration by the Directorate General of Hydrocarbons.
The operator recently commenced the final 3D seismic acquisition programme on the block. Upon completion the entire block will be covered by 3D seismic data. The block was acquired with 210 km2 of which the first two well locations were selected. In 2007 the operator acquired 1,900 km2 of 3D seismic.
D3 is an important block within Hardy's asset portfolio, representing a significant proportion of Hardy's overall resource potential. The drilling of the third well on the block is expected in the second half of 2009 with further drilling expected in 2010.
D9 - Due to the industry-wide shortage of drilling ships capable of operating in water depths greater than 2,000 m, delays have been experienced on the D9 exploration licence. An ultra deepwater drill ship, Deepwater Expedition, arrived in Indian waters in August 2008 and is currently operating on the adjacent D6 block. Reliance has issued an authority for expenditure and the joint venture has provided for the drilling of one well in the 2009 calendar year. Timing will continue to be dependent on Reliance's scheduled operations and commitments.
GS-01 - Results on the GS-01 block were disappointing for 2008 with two wells (M1 and S1 being plugged and abandoned. However, the GS-01 Management Committee reviewed and adopted an appraisal programme for the GS01-B1 gas and condensate discovery (Dhirubhai - 33). With an effective term through to May 2010, the appraisal area comprises 5,890 km2. The GS-01 joint venture will be making a decision on further appraisal drilling, after completion of a planned geological and geophysical review, in a few months time.
Assam - Early in 2008, the company was issued (jointly with Reliance) the onshore petroleum exploration licence AS-ONN-2000/1 in Assam. We are delighted with the Company's continued partnership with Reliance. This is the fourth block that Hardy holds in partnership with Reliance and the Company's only onshore asset in India. A 2D seismic acquisition programme commenced prior to the end of 2008 and is expected to be complete in the first half of 2009.
Upon reflection of the developments on our non-operated blocks, the Company has commissioned Gaffney, Cline & Associates Ltd to complete a technical review of our KG basin exploration blocks D3 and D9 and the recently added Assam block.
Nigeria
Oza - In April 2008, the Company entered into an agreement to farm-out a 20 per cent interest in the Oza block to a local Nigerian company, which has agreed to assume Hardy's financial obligations in the funding of the Oza field initial development programme. The Company retains a 20% working interest in the block.
Atala - Securing the necessary drilling equipment for the planned re-entry and testing of Atala-1 continues to be challenging. We will continue to work closely with the operator to source the necessary equipment.
Corporate
On 20 February 2008, the Company's shares began trading on the London Stock Exchange's market for listed securities ('Main Market'). The decision to admit Hardy's shares to the Main Market was taken to increase the Company's profile and liquidity of its Ordinary Shares while increasing access to capital to fund its future exploration and development expenditures.
With our commitment to continually enhance our corporate governance practices, on 24 October 2008, the Company was pleased to appoint Mr Ian Bruce FCA as an independent non-executive director. His strong financial background and extensive industry experience are a valuable and timely addition to our Board as we experience a challenging economic environment.
We also made a number of changes to the composition of the Board committees. Mr Pradip Shah has been appointed to chair the remuneration committee; and Mr Ian Bruce has been appointed to the audit committee; and Mr Mortimer and Mr Karra are no longer members of the audit and remuneration committee respectively.
2009 Programme
In 2009, the Company will continue to focus on organic growth as our primary strategy to create shareholder value. The majority of our activity will be focused on enhancing development plans for 2010 and non-operated exploration and we are looking forward to an active 2009 with the following plan of work:
| Block | Activity | Timing 2009 |
| D3 | Complete acquisition of 1,150 km2 of 3D seismic Drilling of third exploration well | 1st Quarter 2nd Half |
| D9 | Drilling of one exploration well | During the year |
| GS-01 | Contingent appraisal well for Dhuribhai 33 gas discovery | TBD |
| Assam | Complete acquisition of 450 lkm of 2D seismic | 2nd Quarter |
| CY-OS/2 | Finalisation of extension for appraisal of Ganesha gas discovery | 3rd Quarter |
| PY-3 | Production / Geoscience and Engineering studies | Ongoing |
| Oza | Commencement of field tie-in | 3rd Quarter |
| Atala | Re-entry and testing of Atala-1 | TBD |
The Company has commissioned a third party technical report for our KG basin blocks (D9 and D3) and the recently added Assam block. The report is expected to be completed by the end of the second quarter of 2009.
Current Trading and Outlook
The global economic downturn and lower oil prices preset adverse conditions for the industry, and Hardy, in the coming year. We are able to defer non-committed capital projects to 2010 and are implementing measures with a focus on cash conservation through 2009 whilst maintaining high impact activities. Our conservative strategy will focus capital expenditure on high impact operations, such as exploration drilling on our two KG basin assets D3 and D9.
In 2009 the KG basin will mark a significant step forward in reducing India's dependence on foreign energy supply to meet the needs of its growing economy. With approximately 40 MMscmd, from the Reliance operated D6 block off the east coast of India, expected in the second quarter and ramping up to 80 MMscmd by 2010 effectively doubling the country's domestic gas production capacity.
The appraisal programme for the Company's D3 block, also in the KG basin, has been submitted to the joint venture Management Committee for consideration.
With the main D6 gas field producing, we anticipate the operator's focus, and more importantly the ultra-deepwater drill ship "Deepwater Expedition", to become available to commence exploration drilling on several other, Reliance operated, deep water blocks in the KG basin. We will be watching with great anticipation the commencement of the first exploration well on the Company's D9 block where we carry significant resource potential.
With the KG basin activity in mind, we have commissioned a technical review, by Gaffney, Cline & Associates Ltd, for our D3, D9 and Assam exploration blocks, and we look forward to publishing the results by the end of the second quarter of 2009.
The Board looks to the balance of 2009 with a renewed focus on activities that have the potential to significantly de-risk our exploration portfolio in the KG basin in India. We are confident that cash conservation and disciplined investment will see our company through this challenging economic environment. We are optimistic of the potential of the Company's asset portfolio and anticipate that exploration drilling will be the catalyst for a step change in shareholder value through 2010. The Company is well positioned to see itself through the key exploration activities.
FINANCIAL REVIEW
During 2008, the Company has increased revenues, derived positive cash flow from operations (before changes in non cash working capital) and realised a significant infusion of capital through liquidation of its investment in HOEC. The Company completed the year with cash and short term investments of approximately $30 million and no long term debt.
Key Performance Indicators
| Year ended 31 December | ||
| 2008 | 2007 | |
| Production (barrels of oil per day - net entitlement basis) | 397 | 573 |
| Average realised price per barrel - $ | 104.44 | 66.65 |
| Average cost per barrel - $ | 54.91 | 21.19 |
| Revenue (thousands of $) | 17,306 | 11,830 |
| Net profit (thousands of $) | 7,472 | 8,316 |
| Cash flow from operations* (thousands of $) | 1,568 | 2,588 |
| Diluted earnings per share - $ | 0.11 | 0.13 |
| Wells drilled | 4 | 2 |
*Before change in non-cash working capital
Operating Results
| (Thousands of dollars, unless otherwise indicated) | Year ended 31 December | |
| 2008 | 2007 | |
| Production (barrels of oil per day) | ||
| Gross field | 2,542 | 4,150 |
| Participating interest | 458 | 747 |
| Net entitlement interest | 397 | 573 |
| Sales (barrels of oil per day) | ||
| Gross field | 2,725 | 3,547 |
| Participating interest | 491 | 638 |
| Average realised price per barrel - $ | 104.44 | 66.65 |
Production, Sales and Revenue
The Company operates the PY-3 field in the Cauvery Basin with an 18 per cent participating interest. Actual gross field production for the year ended 31 December 2008 amounted to 2,542 stbd compared with 4,150 stbd for 2007. The decrease in production is due to the conversion of PY3-3 as a water injection well together with the shutdown of the field for 42 days due to equipment failure and renewal of a jumper hose.
Hardy's net entitlement interest in production is after the Government of India's share of profit oil of $ 2.3 million (2007 - $ 4.3 million).
Revenue from oil sales (after profit oil) increased from $11.3 million in 2007 to $ 16.4 million in 2008. The average price realised per barrel increased significantly from $66.65 during 2007 to $104.44 per barrel. Average daily sales amounted to 491 barrels of oil per day compared with 638 barrels of oil per day reflecting lower production volumes, offset by partial liquidation of inventory at year end. Other revenue increased from $0.6 million to $0.8 million reflecting additional overhead recovery.
Cost of Sales
Cost of sales for 2007 increased from $5.8 million in 2007 to $9.2 million in 2008. This reflects the full year impact of higher costs of operating the PY-3 field. The contract for the floating processing and storage systems was renegotiated effective July 2007, resulting in a substantial increase in day rates. The contract expires in July 2009 with renewal expected to result in a substantial reduction in day rates in the future.
Gross Profit
Gross profit increased from $6.1 million in 2007 to $8.1 million in 2008. The increase arises principally from higher revenues as a result of higher average crude price in 2008 offset by a substantial increase in operating cost of running the PY-3 field.
Administrative Expenses
Administrative expenses increased from $6.9 million in 2007 to $9.7 million in 2008. The increase principally results from exchange losses on cash, short term investments and site restoration deposits of $2.4 million, and cost of the move of the listing of the Company's shares to the Main Market of the London Stock Exchange.
Operating Loss
The Company is reporting an operating loss of $1.7 million in 2008 compared with $0.8 million in 2007.
Gain on Sale of Investment
In December 2007 and during 2008, the Company sold 3,010,000 and 8,086,156 shares for net cash consideration of $12.5 million and $28.9 million respectively. As a result, the Company recorded a pre-tax gain on sale of its investment in HOEC of $13.0 million in 2008 and $10.2 million in 2007.
Interest and investment Income
Investment and other income in 2008 amounted to $1.3 million compared with $1.4 million in 2007.
Finance Costs
Finance costs principally include the cost of providing bank guarantees to the Government of India required in accordance with the provisions of Production Sharing Contracts and are based on the agreed annual work programme on blocks in India.
Profit before taxation
Profit before taxation increased from $12.4 million in 2008 compared with $10.6 million in 2007.
Taxation
Current taxes amounted to $1.6 million reflecting the liability for Minimum Alternate Tax in India of $0.8 million, and current taxes on short term capital gains on the sale of HOEC shares of $0.8 million on the shares that were purchased under the rights issue in January 2008 that were disposed in May and August 2008.
Most of the provision for taxation is with respect to deferred income taxes since the Company's capital expenditure programme is sufficient to shield the Company from a large portion of current tax liabilities.
Tax rate, as a percentage of pre-tax income amounted to 40.2 per cent in 2008 compared to 21.8 per cent in 2007. This increase is mainly on account of short term capital gains tax of $0.8 million paid on sale of HOEC shares in 2008 as well as the impact of Minimum Alternate Tax in India. In 2007, the tax provision was reduced as a result of the benefit arising from carry forward capital losses of earlier years against capital gain on sale of HOEC shares.
Net Profit
As a result, net profit declined from $8.3 million in 2007 to $7.5 million in 2008.
Cash Flow from Operating Activities
The Company's cash flow from operating activities, before changes in non-cash working capital, amounted to $1.6 million in 2008. This compares with $2.6 million for 2007. The decline principally results from higher operating costs and general and administrative costs in 2008 compared to 2007.
Capital Expenditure
Capital expenditure amounted to $31.6 million during 2008, compared to $32.1 million incurred during 2007. Capital expenditure amounting to $14.1 million was incurred on the GS-01 block with the drilling of two exploration wells and the acquisition of 1,166 km2 of 3D seismic data. Approximately $7.6 million was incurred in the drilling of two successful exploration wells on the D3 block in the Krishna Godavari basin. As part of the Ganesha appraisal programme, the Company incurred $1.8 million on the CY-OS/2 block, on a number of geological and geophysical studies including reprocessing of the 3D seismic data covering the block to improve subsurface understanding. Minimal expenditure was incurred on the D-9 block and $0.6 million was spent on the Oza operations in Nigeria.
Investment in HOEC
In early January 2008, HOEC completed a rights offering with Hardy participating in the rights offering to the extent of its pro rata share of 8.5 per cent investing an additional $13.2 million.
During 2007, the Company made a strategic decision to liquidate its investment in HOEC. As a result, during December 2007 and during 2008, the Company sold 3,010,000 and 8,086,156 shares for net cash consideration of $12.5 million and $28.9 million respectively. Aggregate proceeds of $41.4 million were received in 2008.
Site Restoration Deposits
These represent deposits for site restoration for the PY-3 field. At 31 December 2008, the Company had invested $3.2 million in site restoration deposits.
Finance Costs
Finance costs essentially represent the cost of bank guarantees provided to the Government of India in connection with annual work programmes in India.
Cash and Short Term Investments
The Company's cash and short term investments declined from $31.2 million at the end of 2007 to $30.1 million at the end of 2008. The Company's capital expenditures were principally funded by proceeds from the liquidation of HOEC holdings during 2008.
During 2008, the Company commenced investing its surplus funds in HSBC Sterling and US Dollar Liquidity Funds that invest in a diversified portfolio of money market instruments that seek to provide security of capital, a competitive return and same day liquidity. At 31 December 2008, the Company had invested £2,881,445 and $17,795,890 in Sterling and US Dollar Liquidity Funds with an average underlying maturity of 21 and 20 days respectively.
Summary Balance Sheet
Hardy has continued to grow during 2008. Its non-current assets have increased from $121.4 million at the end of 2007 to $135.8 million at the end of 2008. This results largely from the capital expenditure programme on exploration, principally on the drilling of wells and seismic acquisition on GS-01 and D3 blocks.
Current assets represent the Group's cash and short term investments, trade and other receivables and inventory. At the end of 2008, of the $38.0 million of current assets, $30.1 million are represented by cash and short term investments.
Current liabilities are principally trade and other accounts payable. The level of current liabilities is $13.8 million at the end of 2008 compared with $9.9 million in 2007 reflecting the impact of the re-entry operations on the PD-4 well in the PY-3 field that were in progress.
The Company issued minimal equity during 2008 of $0.3 million upon exercise of stock options. Consequently, the Company's net assets remained at approximately the same level in 2008 as in 2007 of $144 million.
Liquidity and Capital Resources
Hardy has been funding its cash requirements from internally generated cash flows and equity capital, principally from institutional investors, in each of the years 2005, 2006 and 2007. The Company continues to be an emerging company with limited cash flows and significant exploration assets, and as a result has been principally relying upon equity capital markets to build and grow its asset base.
At 31 December 2008, the Company had cash resources of approximately $30.1 million that were available to meet future capital expenditures and to fund operating deficiencies. The Company does not have any long term debt.
The Company's present 2009 planned work programme includes drilling of a well on block D-9, one well on block D3, the acquisition of seismic on block D3 and Assam and ongoing planning and studies on remaining blocks in India and the tie-in of Oza to bring it into production.
The Company has adequate resources to enable it to undertake its planned work programme over the next twelve months. The Company also has the ability to raise additional capital, if required, to fund its ongoing work programmes.
Dividends
The Company has limited internally generated cash flows and has a planned capital expenditure programme. In the circumstances, the Board of Directors has chosen to reinvest cash flows and does not recommend the payment of a dividend in the foreseeable future.
HARDY OIL AND GAS plc
Consolidated Income Statement
For the year ended 31 December 2008
| 2008 | 2007 | ||
| Notes | US$ | US$ | |
| Revenue | 2 | 17,306,042 | 11,829,554 |
| Cost of sales | |||
| Production costs | (7,523,972) | (4,216,138) | |
| Depletion | (1,521,919) | (1,344,101) | |
| Decommissioning charge | (151,174) | (217,397) | |
| Gross profit | 8,108,977 | 6,051,918 | |
| Administrative expenses | (9,847,526) | (6,865,187) | |
| Operating loss | (1,738,549) | (813,269) | |
| Gain on sale of investment | 12,953,064 | 10,243,729 | |
| Interest and investment income | 1,320,189 | 1,381,121 | |
| Finance costs | (91,204) | (180,400) | |
| Profit before taxation | 12,443,500 | 10,631,181 | |
| Tax on profit | (4,971,144) | (2,315,203) | |
| Profit attributable to the equity shareholders of the parent company | 7,472,356 | 8,315,978 | |
| Earnings per share | |||
| Basic | 4 | 0.12 | 0.14 |
| Diluted | 4 | 0.11 | 0.13 |
HARDY OIL AND GAS plc
Consolidated Statement of Changes in Equity
For the year ended 31 December 2008
| 2008 | 2007 | ||
| Notes | US$ | US$ | |
| Beginning of year | 143,995,825 | 91,401,836 | |
| Profit for the year | 7,472,356 | 8,315,978 | |
| Available for sale investments: | |||
| Unrealised valuation gain | - | 3,514,603 | |
| Transferred to profit on sale from other reserves | (12,354,477) | - | |
| Deferred tax on valuation gain released on sale of investment | 3,441,945 | - | |
| Deferred tax liability on unrealised valuation gain | - | (966,780) | |
| Total recognised (losses) / gains | (1,440,176) | 10,863,801 | |
| New shares issued | 250,944 | 40,168,691 | |
| Share based payments | 1,425,280 | 1,561,497 | |
| End of year | 144,231,873 | 143,995,825 |
HARDY OIL AND GAS plc
Consolidated Balance Sheet
As at 31 December 2008
| Notes | 2008 | 2007 | |
| US$ | US$ | ||
| Assets | |||
| Non-current assets | |||
| Intangible assets - exploration | 124,013,261 | 99,284,534 | |
| Intangible assets - others | 111,640 | 246,572 | |
| Property, plant and equipment | 8,477,099 | 3,375,463 | |
| Investments | - | 15,092,311 | |
| Site restoration deposit | 3,211,830 | 3,369,820 | |
| 135,813,830 | 121,368,700 | ||
| Current assets | |||
| Inventory | 3,736,437 | 2,703,915 | |
| Trade and other receivables | 4,087,719 | 14,525,440 | |
| Short term investments | 22,010,291 | - | |
| Cash and cash equivalents | 8,139,314 | 31,157,048 | |
| 37,973,761 | 48,386,403 | ||
| Total assets | 173,787,591 | 169,755,103 | |
| Liabilities | |||
| Current liabilities | |||
| Trade and other payables | (13,758,099) | (9,857,909) | |
| Non-current liabilities | |||
| Provision for decommissioning | (4,500,000) | (4,500,000) | |
| Provision for deferred tax | (11,297,619) | (11,401,369) | |
| (15,797,619) | (15,901,369) | ||
| Total liabilities | (29,555,718) | (25,759,278) | |
| Net assets | 144,231,873 | 143,995,825 | |
| Equity | |||
| Called-up share capital | 6 | 623,210 | 622,625 |
| Share premium | 93,351,938 | 93,101,579 | |
| Shares to be issued | 3,926,870 | 2,501,590 | |
| Other reserves | - | 8,912,532 | |
| Retained earnings | 46,329,855 | 38,857,499 | |
| Total equity attributable to equity holders of the parent | 144,231,873 | 143,995,825 |
HARDY OIL AND GAS plc
Consolidated Statement of Cash flows
For the year ended 31 December 2008
| 2008 | 2007 | ||
| Notes | US$ | US$ | |
| Operating activities | |||
| Cash flow from operating activities | 3 | 2,065,776 | (1,844,914) |
| Taxation paid | (1,373,117) | 63,235 | |
| Net cash from (used in) operating activities | 692,659 | (1,781,679) | |
| Investing activities | |||
| Expenditure on intangible assets -exploration | (24,728,727) | (32,068,253) | |
| Expenditure of property, plant and equipment | (6,802,348) | 5,856 | |
| Purchase of intangible assets - others | (3,841) | (147,297) | |
| Purchase of other fixed assets | (117,097) | (38,753) | |
| Purchase of investment | (13,184,387) | - | |
| Sale of investment | 41,378,216 | - | |
| Site restoration deposit | 157,990 | (585,160) | |
| Short term investment | (22,010,291) | - | |
| Net cash (used in) investing activities | (25,310,485) | (32,833,607) | |
| Financing activities | |||
| Interest and investment income | 1,520,555 | 1,293,104 | |
| Finance costs | (91,204) | (180,400) | |
| Issue of shares | 170,741 | 40,168,691 | |
| Net cash from financing activities | 1,600,092 | 41,281,395 | |
| Net (decrease) increase in cash and cash equivalents | (23,017,734) | 6,666,109 | |
| Cash and cash equivalents at the beginning of the year | 31,157,048 | 24,490,939 | |
| Cash and cash equivalents at the end of the year | 8,139,314 | 31,157,048 |
HARDY OIL AND GAS plc
Notes to Consolidated Financial Statements
For the year ended 31 December 2008
Accounting Policies
The following accounting policies have been applied in preparation of consolidated financial statements of Hardy Oil and Gas plc ("Hardy" or the "Group").
a. Basis of preparation
Hardy prepares its financial statements on a historical cost basis except as otherwise stated. Investment in a publicly traded company is restated at fair value.
b.Going concern
The Group has a history of profitable operations and has successfully raised financing in the past to provide funding for its ongoing exploration and development programs and to augment its working capital. Having regard to the Group's existing working capital position and its ability to raise potential financing, if required, the Directors are of the opinion that the Group has adequate resources to enable it to undertake its planned work programme of exploration, appraisal and development activities over the next twelve months.
c. Accounting standards
Hardy prepares its financial statements in accordance with applicable International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board as adopted by the European Union.
As at the date of approval of these financial statements, the following standards and interpretations were in issue but not yet effective:
IFRS 3 (revised) Consolidated financial statements
IFRS 8 Operating segments
IFRIC 13 Customer loyalty programmes
IFRIC 15 Agreements for the construction of real estate
IFRIC 16 Hedges of a net investment in a foreign operation
IFRIC 17 Distribution of non-cash assets to owners
IFRIC 18 Transfer of assets from customers
IAS 1 (revised) Presentation of financial statements
IAS 23 (revised) Borrowing costs
IAS 27 (revised) Consolidated and separate financial statements
The Directors do not anticipate that the adoption of these standards and interpretations in future reporting periods will have a material impact on the Group's results.
d. Basis of consolidation
The consolidated financial statements include the results of Hardy Oil and Gas plc and its subsidiary undertakings. The consolidated income statement and consolidated cash flow statements include the results and cash flows of subsidiary undertakings up to the date of disposal.
The group conducts the majority of its exploration, development and production through unincorporated joint arrangements with other companies.
The consolidated financial statements reflect the group's share of production and costs attributable to its participating interests under the proportional consolidation method.
e. Revenue and other income
Revenue represents the sale value of the group's share of oil which excludes the profit oil sold and paid to the Government as a part of profit sharing in the year, tariff, and income from technical services to third parties if any. Revenues are recognised when crude oil has been lifted and title has been passed to the buyer or when services are rendered.
f.Oil and gas assets
i). Exploration and evaluation assets
Hardy follows the full cost method of accounting for its oil and gas assets. Under this method, all expenditures incurred in connection with and directly attributable to the acquisition, exploration and appraisal having regard to the requirements of IFRS 6 "Exploration for and Evaluation of Mineral Resources" are accumulated and capitalised in two geographical cost pools, which are not larger than a segment: India and Nigeria.
The capitalised exploration and evaluation costs are classified as Intangible assets - exploration which includes the license acquisition, exploration and appraisal costs relating either to unevaluated properties or properties awaiting further evaluation but do not include costs incurred prior to having obtained legal right to explore an area, which are expensed directly to the income statement as they are incurred.
Intangible exploration and evaluation cost relating to each license or block remain capitalised pending a determination of whether or not commercial reserves exists. Commercial reserves are defined as proven and probable on a net entitlement basis.
When a decision to develop these properties is taken or there is evidence of impairment, the costs are transferred to the cost pools within development/producing assets when the commercial reserves attributable to the underlying asset have been established.
ii).Oil and gas development and producing assets
Development and production assets are accumulated on a field by field basis. These comprise of the cost of developing commercial reserves discovered to put them on production and the exploration and evaluation costs transferred from intangible exploration and evaluation assets, as stated in policy above. In addition, interest payable and exchange differences incurred on borrowings directly attributable to development projects, if any, and assets in the production phase, as well as cost of recognising provision for future restoration and decommissioning, are capitalised.
iii). Decommissioning
At the end of the producing life of a field, costs are incurred in removing and decommissioning facilities, plugging and abandoning wells. Future decommissioning costs are estimated and stated at an amount representing the costs which would be incurred should decommissioning occur at the balance sheet date and the estimates are reassessed each year. The provision is assessed at prices ruling at the balance sheet date and, accordingly, it is not appropriate to discount this provision. The decommissioning asset is included within the property, plant and equipment with the cost of the related assets installed and is adjusted for any revision to the decommissioning costs and the provision thereof. The amortisation of the asset, calculated on a unit of production basis based on proved and probable reserves, is shown as "Decommissioning charge" in the income statement.
iv). Disposal of assets
Proceeds from any disposal of assets are credited against the specific capitalised costs included in the relevant cost pool and any loss or gain on disposal is recognised in the income statement. Gain or loss arising on disposal of a subsidiary is recorded in the income statement.
g. Depletion and impairment
i). Depletion
The net book values of the producing assets are depreciated on a field by field basis using the unit of production method, based on proved and probable reserves taking into consideration future development expenditures necessary to bring the reserves into production. Hardy periodically obtains an independent third party assessment of reserves which is used as a basis for computing depletion.
ii). Impairment
Exploration assets are reviewed regularly for indications of impairment, if any, where circumstances indicate that the carrying value might not be recoverable. In such circumstances, if the exploration asset has a corresponding development / producing cost pool, then the exploration costs are transferred to the cost pool and depleted on unit of production. In cases where no such development/producing cost pool exists, the impairment of exploration costs is recognised in the income statement. Impairment reviews on development / producing oil and gas assets for each field are carried out on each year by comparing the net book value of the cost pool with the associated discounted future cash flows. If there is any impairment in a field representing a material component of the cost pool, an impairment test is carried out for the cost pool as a whole. If the net book value of the cost pool is higher, then the difference is recognised in the income statement as impairment.
h.Property, plant and equipment
Property, plant and equipment other than oil and gas assets are measured at cost and depreciated over their expected useful economic lives as follows:
| Annual Rate (%) | Depreciation Method | |
| Leasehold improvements | over lease period | Straight line |
| Furniture and fixtures | 20% | Straight line |
| Information technology and computers | 33% | Straight line |
| Other equipment | 20% | Straight line |
i).Intangible assets
Intangible assets other than oil and gas assets are measured at cost and depreciated over their expected useful economic lives as follows:
| Annual Rate (%) | Depreciation Method | |
| Computer software | 33 % | Straight line |
j. Investments
Investments in publicly traded securities are treated as available for sale are recognised at fair values based upon the quoted market prices on the balance sheet date. Unrealised gains and losses are recognised under equity - other reserves. On disposal of an investment, the cumulative gain or loss is recognised in the income statement.
k. Short term investments
Short term investments are regarded as "financial assets at fair value through profit or loss" and are carried at fair value. In practice, the nature of these investments is such that the fair value equates to the value of initial outlay and therefore in normal circumstances no fair value gain or loss is recognised in the income statement.
I. Inventory
Inventory of crude oil is valued at the lower of average cost and market value. Average cost is determined based on actual production cost for the year. Inventories of drilling stores are recorded at cost including taxes duties and freight. Provision is made for obsolete or defective items where appropriate based on technical evaluation.
m. Financial instruments
Financial assets and financial liabilities are recognised at fair value in the group's balance sheet based on the contractual provisions of the instrument.
Trade receivables do not carry any interest and are stated at their nominal value as reduced by necessary provisions for estimated irrecoverable amounts.
Trade payables are not interest bearing and are stated at their nominal value.
n.Equity
Equity instruments issued by Hardy and the group are recorded at net proceeds after direct issue costs.
o.Taxation
The tax expense represents the sum of current tax and deferred tax.
Current tax is based on the taxable profit of the year. Taxable profit differs from net profit as reported in the income statement as it excludes certain items of income or expenses that are taxable or deductible in years other than the current year, and it further excludes items that are never taxable or deductible. The current tax liability is calculated using the tax rates that have been enacted or subsequently enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the liability method.
Deferred income tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred income tax liabilities are recognised for all temporary differences except in respect of taxable temporary differences associated with investment in subsidiaries, associates and interest in joint ventures where the timing of the reversal of the temporary differences can be controlled and it is possible that the temporary differences will not reverse in the foreseeable future.
Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date, where transactions or events have occurred at that date that will result in an obligation to pay more or a right to pay less or to receive more tax.
Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which temporary differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
p. Foreign currencies
Hardy maintains its accounts and the accounts of its subsidiary undertakings in US dollars. Foreign currency transactions are accounted for at the exchange rate prevailing on the date of the transaction. At the year end, all foreign currency assets are restated at the closing rate at the balance sheet date. Exchange difference arising out of actual payments / realisations and from the year end restatement are reflected in the income statement.
Rates of exchanges are as follows:
| 31 December 2008 | 31 December 2007 | |
| £ to US$ | 1.4626 | 1.9828 |
| US$ to Indian Rupees | 48.52 | 39.420 |
q.Estimation uncertainty
i). Decommissioning
The liability for decommissioning is based on estimates of the costs of decommissioning that will arise at some point in future. Significant changes in costs as a result of technical advancements can result in material change to this provision.
ii). Depletion
Depletion calculations are based on the best estimate of commercial reserves existing as at the balance sheet date. The determination of commercial reserves is based on assumptions which include those relating to the future price of crude oil, capital expenditure plans and the cost of production. Any changes in these assumptions could result in a material change in the depletion charge or the carrying value of associated assets.
r. Leasing commitments
Rental charges or charter hire charges payable under operating leases are charged to the income statement as part of production cost over the lease term.
s. Share based payments
Hardy issues share options to directors and employees, which are measured at fair value at the date of grant. The fair value of the equity settled options determined at the grant date is expensed on a straight line basis over the vesting period based on the actual number of shares vested in the accounting period. In performing the valuation of these options, only conditions other than the market conditions are taken into account. Fair value is derived by use of the binomial model. The expected life used in the model is based on management estimates and considers non-transferability, exercise restrictions and behavioural considerations.
2. Revenue and other income
| 2008 US$ | 2007 US$ | |||
| India | UK | India | UK | |
| Oil sales | 18,748,999 | - | 15,531,311 | - |
| Profit oil to government | (2,311,862) | - | (4,268,322) | - |
| Other income | - | 868,905 | - | 566,565 |
| 16,437,137 | 868,905 | 11,262,989 | 566,565 | |
The directors do not consider there to be more than one class of business or geographic segment for the purposes of reporting. The Group is engaged in one business activity, the production of and exploration for oil and gas. The revenue, segment result and assets of the geographic segments, other than India, are nil or less than 10% of the total for all segments. 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 CY-OS-90/1-India and the revenue by destination is not materially different from the revenue by origin.
In the contract area CY-OS-90/1, an un-recovered development cost of US$ 2,868,277 is carried as at 31 December 2008. As a consequence, no profit oil is payable to Government of India until such cost is fully recovered from future revenue from this contract area.
3. Reconciliation of operating profit to operating cash flows
| 2008 US$ | 2007 US$ | |
| Operating loss | (1,738,549) | (813,269) |
| Depletion and depreciation | 1,805,408 | 1,622,030 |
| Decommissioning charge | 151,174 | 217,397 |
| Share based payments charges | 1,429,736 | 1,561,497 |
| 1,647,769 | 2,587,655 | |
| (Increase )/decrease in inventory | (1,032,522) | 25,849 |
| (Increase)/ decrease in trade and other receivables | (2,676,392) | 2,720,211 |
| Increase /(decrease) in trade and other payables | 4,126,921 | (7,178,629) |
| Net cash inflow/(outflow) from operating activities | 2,065,776 | (1,844,914) |
The decrease in trade and other receivables reported above for 2007 for the Group excludes an amount of US$ 12,502,931 due from the sale of investment in Hindustan Oil Exploration Company ('HOEC") during the year 2007.
4.Earnings per share
Earnings per share are calculated on a profit of US$ 7,472,356 for the year 2008 (2007: US$ 8,315,978) on a weighted average of 62,287,526 ordinary shares for the year 2008 (2007: 60,117,416).
The diluted earnings per share are calculated on a profit of US$ 7,472,356 for the year 2008 (2007: US$ 8,315,978) on a weighted average of 66,994,627 ordinary shares for the year (2007: 64,469,515). The weighted average shares are calculated after giving impact to dilutive potential ordinary shares of 4,302,101 relating to share options after excluding 405,000 options wherein the strike price exceeds the average market price of the shares of the company for 2008 (2007: 4,352,099).
5.Members of the Group
The group comprises the parent company - Hardy Oil and Gas plc - and the following subsidiary companies, all of which are wholly owned:
Hardy Exploration & Production (India) incorporated under the Laws of State of Delaware, United States of America.
Hardy Oil (Africa) Limited registered under the laws of the Isle of Man.
Hardy Oil Nigeria Limited, owned by Hardy Oil (Africa) Limited, registered under the laws of Nigeria.
All members of the group are engaged in the business of exploration and production of oil and gas and all are included in the consolidation.
6.Share Capital
| Number $0.01 Ordinary Shares "000" | US$ | |
| Authorised ordinary shares | ||
| At 1 January 2007 | 200,000 | 2,000,000 |
| At 1 January 2008 | 200,000 | 2,000,000 |
| At 31 December 2008 | 200,000 | 2,000,000 |
| Allotted, issued and fully paid ordinary shares | ||
| At 1 January 2007 | 57,252,994 | 572,530 |
| Share options exercised during the year | 45,001 | 450 |
| Shares issued during the year | 4,964,540 | 49,645 |
| At 1 January 2008 | 62,262,535 | 622,625 |
| Share options exercised during the year | 38,330 | 383 |
| Shares issued during the year | 20,182 | 202 |
| At 31 December 2008 | 62,321,047 | 623,210 |
Ordinary shares issued are with equal voting and other rights with no guarantee on dividend or other payments.
DEFINITIONS & GLOSSARY OF TERMS:
| AFE | authority for expenditure |
| AIM | the market of that name operated by the London Stock Exchange |
| Assam block | licence AS-ONN-2000/1 |
| Bayelsa | Bayelsa Oil Company Limited |
| Board | the Board of Directors of Hardy Oil and Gas plc |
| the Company | Hardy Oil and Gas plc |
| CPCL | Chennai Petroleum Company Limited, formerly known as Madras Refinery Limited |
| D3 | licence KG-DWN-2003/1 awarded in NELP V |
| D9 | licence KG-DWN-2001/1 awarded in NELP III |
| Deepwater Expedition | Operated by Transocean Inc the Deepwater Expedition is a self-propelled dynamically positioned drillship capable of drilling in water depths up to 10,000 feet |
| DGH | Directorate General of Hydrocarbons |
| Dhirubhai 33 | gas discovery on GS-01-B1 well |
| Dhirubhai 39 | gas discovery on KGV-D3-A1 well |
| Dhirubhai 41 | gas discovery on KGV-D3-B1 well |
| DPR | Nigerian Department of petroleum Resources |
| Emerald | Emerald Energy Resources Limited |
| FCA | Financial Chartered Accountant |
| FDP | field development plan |
| FEED | front end engineering study |
| FSO | floating Storage and offloading vessel |
| GAIL | Gas Authority of India Limited |
| Ganesha | gas discovery on Fan-A1 well located in CY-OS/2 |
| GCA | Gaffney, Cline & Associates Ltd. |
| Group | the Company and its subsidiaries |
| GS-01 | licence GS-OSN-2000/1 awarded under NELP II |
| GXT ION | GX Technology Corporation |
| H2 | second half of the year |
| Hardy | Hardy Oil and Gas plc |
| HEPI | Hardy Exploration & Production (India) Inc. |
| HOEC | Hindustan Oil Exploration Company Limited |
| HON | Hardy Oil Nigeria Limited |
| IFRS | International Financial Reporting Standards |
| IPO | initial public offering |
| KG basin | Krishna Godavari sedimentary basin comprising an area on the southeast India continental shelf |
| London Stock Exchange | London Stock Exchange plc |
| Main Market | Official List of the London Stock Exchange's market for listed securities |
| Management Committee | as per India PSC's the management committee comprises representatives of each participating interest holder, DGH and the Ministry of Petroleum and Natural Gas of India |
| Millenium | Millenium Oil and Gas Company Limited |
| MOU | memorandum of understanding |
| NELP | New Exploration Licensing Policy of the Ministry of Petroleum and Natural Gas of India |
| Operating Committee | as per India PSC's operating committee's comprise representatives of the various participating interest holders in the licence |
| OML | Oil mining licence |
| Ordinary Shares | the ordinary share of US$ 0.01 each in the capital of the Company |
| PSC | production sharing contract |
| PY-3 | licence CY-OS-90/1 |
| Reliance | Reliance Industries Limited |
| SPDC | Shell Petroleum Development Company of Nigeria |
| UK | United Kingdom |
| Glossary of terms: | |
| $ | United States dollars |
| 2D/3D | two dimensional/three dimensional |
| 2P | proven plus probable |
| API° | American Petroleum Institute gravity |
| AVO | amplitude variations with offset |
| BOP | blow-out preventer |
| bwpd | barrels of water per day |
| Contingent Resources | those quantities of petroleum estimates, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to on or more contingencies |
| Prospective Resources | Prospective Resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations. |
| DST | drill stem test |
| DWT | dead weight tonne |
| FDP | field development plan |
| GIIP | gas initially in place |
| GOR | gas to oil ratio |
| km | kilometre |
| km2 | kilometre squared |
| lkm | line kilometre |
| m | metre |
| MDRT | measured depth from the rotary table |
| MDT | modular formation dynamics tester |
| MMscfd | million standard cubic feet per day |
| MMscmd | million standard cubic metres per day |
| MMstbd | million stock tank barrels per day |
| PSDM | pre-stack depth migration |
| psi | pounds per square week |
| scf | standard cubic feet |
| scfd | standard cubic feet per day |
| SPM | single point mooring |
| stb | stock tank barrel |
| stbd | stock tank barrel per day |
| TCF | trillion cubic feet |
| TVD | total vertical depth |
| TVDRT | total vertical depth from rotary table |