HDY.L Regulatory News (HDY)

2 Apr 2007 07:03

Hardy Oil & Gas plc02 April 2007 For immediate release 2 April 2007 Hardy Oil and Gas plc ("Hardy" or the "Company") Preliminary Results for the year ended 31 December 2006 Hardy Oil and Gas plc (AIM : HDY), the oil and gas exploration and productioncompany with interests in India and Nigeria, today announces its PreliminaryResults for the year ended 31 December 2006. *All financial figures represented in US dollars unless otherwise stated. Operational Highlights • PY-3; Hardy operated, core area STOIIP upgraded to 155MMbbl from 113MMbbl based on interpretation and analysis of new 3D seismic data and better production performance • PY-3; Oil production from the PY-3 field averaged 5,811bbld in 2006 compared with 5,541bbld in 2005 while water injection averaged to 6,678bwpd in 2006 compared with 5,800bwpd in 2005 • CY-OS/2; Drilled 2 exploration wells in CY-OS/2 block and declared discovery in the second well • GS-01; Drilled one exploratory well in GS-OSN-2000/1 block. Recorded significant hydrocarbon carbon shows during drilling. The well was logged but not tested. The PSC Phase-I was extended by 22 months to July 2008 • D9; 3D seismic interpreted and 6 possible well locations identified on the D9 block, of which one is expected to be drilled in 2007 • D3; Received all 2D & 3D seismic data from previous operator, in the D3 block - 6 prospects have been high-graded based on existing data Financial Highlights • Turnover of $21.3m (2005: $17.6m) • Profit before tax $10.3m (2005: $8.5m) • Operating cash flow $23.9m (2005: $11.0m) • Capital expenditure $54.4m (2005: $7.2m) • Net funds $27.3m (2005: $31.2m) 2007 Outlook • Participation in a minimum of two exploration wells offshore India • Submit appraisal program to Directorate General of Hydrocarbons ("DGH") for CY-OS/2 to establish commerciality of the block • Further appraisal of Fan-A discovery (CY-OS/2) • Development of operations in Nigeria Commenting on the results, Paul Mortimer, Chairman of Hardy said: "2006 was another successful year for Hardy. The Company was firmly focused onexecuting the drilling operations for the Hardy operated CY-OS/2 block. Theannouncement of the discovery of hydrocarbons is encouraging and furtherappraisal work will continue to hold the Company's focus into 2007. Lookingforward, 2007 promises to be an important year in the development of Hardy as wecontinue to execute the drilling phase of our exploration programme." For further information please contact: Hardy Oil and Gas plc 020 7471 9850Sastry Karra, Chief ExecutiveYogeshwar Sharma, Managing Director Buchanan Communications 020 7466 5000Mark EdwardsBen Willey CHAIRMAN'S STATEMENT I am delighted to report on another active year for Hardy, marked by recordfinancial performance and the drilling of three offshore exploration wells. Theresults are a testament to the continued commitment and dedication of Hardy'smanagement team to execute the Company's exploration programme. The Company'sannouncement of a discovery on its Fan A prospect in the CY-OS/2 block marked anencouraging start to 2007. Overall financial performance was strong due to continued robust oil prices andconsistent production from the PY-3 field. Increased revenue from operationsoffset higher than expected exploration expenditure. Capital expenditure wasover $50m for the year, of which, the two exploration wells drilled on CY-OS/2comprised the majority of this expenditure. Progress in Nigeria has been slower than expected, with current instability inthe Niger delta compounding the shortage of equipment and personnel. Progress inreaching working agreements with local communities, of the Oza block, has beenencouraging but we have decided to defer production testing until the secondhalf of 2007, after the completion of Nigeria's Federal elections. The Company continued to work closely with Reliance Industries Limited ("RIL"),the operator of three of Hardy's exploration blocks in India. RIL plans to drillat least one well on the D9 block in the second half of this year. The recentcommencement of drilling of the second GS-01 well is also an encouraging startto an active 2007 programme. Financial Results Total entitlement production for 2006 of 0.38million barrels ("MMbbls") of oilwas slightly higher than 2005 (0.36MMbbls). The increase is due to total uptimeimproving to 99.78% compared with 91.64% in 2005. The Company has again realised record operating profits and operating cash flowof $8.2m and $23.9m respectively (2005: $8.0m and $11.0m). These results weresignificantly strengthened due to higher oil prices and sustained production.The volume weighted average for the Company's crude sales for the year was$64.82 per barrel compared with a price of $52.82 per barrel for 2005. Hardy recorded profit before tax of $10.3m on turnover of $21.3m compared with aprofit before tax of $8.5m on turnover of $17.6m for 2005. Management The Board has agreed to the following changes of senior managementresponsibilities from 1 April 2007: Yogeshwar Sharma, whilst remaining a main board director of Hardy Oil and Gasplc, with responsibility of finance, also assumes responsibility for Groupoperations as President and CEO of Hardy Exploration & Production (India) Inc("HEPI") and will be spending more time at the office in Chennai, India. Sastry Karra steps down as President and CEO of HEPI but continues in hisposition as CEO of Hardy Oil and Gas plc and will be based in London, UK. Current Trading and Outlook Looking forward to 2007, Hardy will remain focused on managing the Company'sportfolio of offshore exploration acreage in India and its development acreagein Nigeria. As announced on 05 March 2007, the second (non-operated) exploration well on theGS-OSN-2000/1 ("GS-01") block in the Saurashtra Basin has now commenceddrilling. Hardy has a 10% participating interest and RIL is the operator.Results from this well are not expected before May 2007. Hardy's first well in the prospective Krishna-Godavari ("KG") Basin is expectedto spud in the third quarter of 2007. The D9 well will be operated by RIL, anexperienced and successful operator in the KG Basin. All stakeholders will beclosely monitoring the progress of this programme. Assessment of the D3 block will continue with the shooting of additional 3-Dseismic over the block. The acquisition phase began in March 2007. Acquisitionand processing is expected to continue through the year with drilling operationsnot expected to commence until 2008. Hardy's operated assets (PY-3 & CY-OS/2) will demand management's full focusduring 2007. Further analysis and interpretation of the Fan A-1 discovery,through an appraisal programme comprising further drilling and seismicreprocessing, will be required to determine the commerciality of the discovery.Execution of the PY-3 drilling programme will face challenges of securing longlead items and equipment. Cash flow from PY-3 is expected to be lower in 2007due to higher profit oil to the Government of India ("GOI") (2006: 25%, 2007:40%). Until Phase III is completed, the field's production will continue tofollow its natural decline. The key challenges for the Company in 2007 are escalating exploration anddevelopment costs, the continued shortage of offshore drilling equipment, andretention and recruitment of experienced operational and technical personnel.The Board believes that Hardy is well positioned to meet these challenges. Welook forward to an exciting year ahead and the continued support of ourshareholders. E.P. Mortimer Chairman, 02 April 2007 OPERATIONAL REVIEW Hardy concentrates its activities principally in India and Nigeria. TheCompany's growth strategy is to focus on increasing production, continuingexploration of its existing asset portfolio, along with acquisition of newassets. Principal License Interests; India Ref Field Interest OperatorCY-OS-90/1 PY-3 Cauvery Offshore 18% HardyCY-OS/2 CY-OS/2 Cauvery Offshore 75% HardyGS-OSN-2000/1 GS-01 Saurashtra Offshore 10% RelianceKG-DWN- 2001/1 D9 Krishna Godavari 10% RelianceKG-DWN-2003/1 D3 Krishna Godavari 10% Reliance NigeriaOZA Onshore field 40% MilleniumAtala Onshore field 20% Bayelsa CAUVERY BASIN - Eastern India DEVELOPMENT & PRODUCTION The PY-3 field is located off the east coast of India approximately 80km south of Pondicherry in the Cauvery Basin. The basin developed in the late Jurassic / early Cretaceous period and straddles the present-day east coast of India. In water depths of 40 to 200m the Production Sharing Contract ("PSC") licence covers 81km2, and is the deepest producing offshore field in India, producing high quality light crude (49 degrees API)" Hardy is the Operator of the PY-3 field, and is party to a PSC together with Oiland Natural Gas Corporation ("ONGC"), TATA Petrodyne Limited ("TPL") andHindustan Oil Exploration Company Limited ("HOEC"). Operations employ a floatingproduction unit ("FPO") called the Tahara, a Floating Storage and OffloadingUnit ("FSO") called the Endeavour, and four sub-sea wellheads, comprising threeproducing wells, two vertical and one lateral, and a water injection well.Operation of the facilities is contracted out to Aban Offshore Limited ("Aban").The operating contract is due to expire in the second quarter of 2007.Negotiations for an extension of this agreement are ongoing. PY-3 field production averaged 5,811bbld in 2006 compared with 5,541bbld in2005, primarily due to higher production facilities uptime performance of 99.78%compared with 91.64% in 2005. The water injection averaged 6,678bwpd for thecurrent year compared with 5,800bwpd in 2005. Higher injection rates wereachieved in 2006 by modifying the water injection pump to achieve higherinjection pressure. PY-3 field production during 2007 was 2.12MMbbls comparedwith 2.02MMbbls in 2006, Hardy is the operator and holds an 18.0% participatinginterest. The Company is planning for a third phase development ("Phase III") on the PY-3field based on the interpretation of the acquired 3D seismic data. Phase IIIcomprises of the drilling of two wells (one producer and one water injection),various subsea gathering lines, and additional water injection facilities. ThePY-3 participating interest holders are favourable to this proposal and havetentatively approved a budget of $97m for Phase III. EXPLORATION The CY-OS/2 block is located in the Cauvery basin and encompasses an area of880km2. The block is currently in the third exploration phase. Hardy was grantedan extension for the CY-OS/2 block on 24 May 2005 for a further period of 22months up to 23 March 2007. As operator, Hardy holds a 75% participatinginterest in the Block in partnership with Gail (India) Limited ("GAIL") holdingthe remaining 25% interest. In the event that a discovery is declaredcommercial, ONGC has an option to assume a 30% interest in the block. During the year, Hardy completed its committed work programme by drilling twoexploration wells (Fan E-1 & Fan A-1) on the block. As of 31 December 2006,Hardy had invested $47.75m for its share of the drilling and testing of the twowells. Fan E-1 well This well was targeted at an Eocene Fan play located just to the south of thePY-1 gas field. The well encounter oil shows over an approximately 15m thickweathered and fractured zone within the basement. However, this zone did notflow on test and it was concluded that the oil had migrated through thislocality due to the lack of a trapping mechanism. Fan A-1 and A-1 (ST) wells The Fan A-1 well was drilled to test two potential targets within theCretaceous. These targets had been identified as high amplitude packages on therecently acquired 3D seismic. The well encountered over 50m of net sand in theshallower target 1 (2,888m) and log data indicated the presence of hydrocarbonsand a gas sample was recovered by the modular dynamic test ("MDT") tool. Afurther study is required to determine whether the saturation levels seen inthis interval are potentially commercial. Whilst drilling the section between the two prognosed targets the well took asignificant kick requiring the mud weight to be increased from 10.5ppg to13.2ppg in order to stabilise the well. The reason for this kick was thepresence of a thin highly overpressured gas bearing sand that has beensubsequently tested giving an initial flow-rate of 10.2mmscfd. This hassubsequently been certified as a discovery by DGH. Target 2 was encountered at a depth of 3,759m and comprised roughly 35m of netsand (subdivided into 2 distinct units) both of which displayed oil shows alongwith significant associated gas during drilling. The logs indicated that thiszone is oil bearing and as a result, a full drill-stem-test ("DST") was carriedout. The flow during this test was of fresh water with continuous gas. It wasrecognised, however, that the cement bond around the hole was inadequate,resulting in the perforated horizon not being isolated from the surroundingformations. It was also recognised that the hole had been subject to thepresence of heavy mud over an extended time period leading to severe formationdamage. Due to the poor condition of the hole for testing of target 2, the decision wastaken to initiate an appraisal sidetrack operation. Fan A-1 (ST) The sidetrack well kicked-off at a depth of 2,760m from the original hole on anazimuth of 3260 intercepting the target 2 pay zone at a distance of 350m fromthe original hole. The sidetrack well drilled through the target 1 package again proving a similaralthough slightly thicker package than in the original hole. The well alsoencountered the thin sand that gave the kick in the original well. The maintarget 2 pay zone was found at a slightly structurally elevated position butmore significantly was now found to be comprised of one continuous sand ofaround 45m in thickness. Again this interval displayed oil shows in the drillingcuttings together with high levels of associated gas. Cased hole logs togetherwith the logging while drilling ("LWD") log suite were sufficient to confirm thepresence of hydrocarbons. Target 2 was tested but as in the comparative test in the original well the flowwas dominated by fresh water and gas. Hardy believes that the source of thefresh water is the overpressurised shales overlying the reservoir. The Companyis undertaking further studies to investigate this phenomenon. The Board is encouraged by the positive results of the recent drilling as it hasestablished the presence of a hydrocarbon source, trap, and reservoir, whichwarrant further appraisal and drilling to establish commerciality. In light ofthis discovery, the Company has submitted an appraisal programme to DGH forapproval. GUJARAT- SAURASHTRA BASIN - Western India The GS-OSN-2000/1 ("GS-01") block is located off the west coast of India in theGujarat-Saurashtra basin. In water depths varying between 80 and 150m the blockencompasses an area of 8,841km2. Hardy holds a 10% participating interest andthe operator is RIL. The PSC was awarded in 2001 under the India NELP II terms.Five exploration wells are committed to phase one of the PSC. In 2006 the A-1 well was drilled to a depth of 4,300m and encounteredhydrocarbons while drilling in the lowermost section of the well. The well waslogged but could not be fully tested due to a combination of higher thanexpected pressures and temperatures, and other operational issues. In March 2007 the Company announced that RIL had commenced drilling the secondwell on the GS-01 block. The exploratory well GS01-B1 is being drilled in awater depth of 79m with the semi-submersible Rig "Actinia". Drilling is expectedto continue in to the second quarter. The well is targeted to drill toapproximately 3,700m to explore carbonates of Middle and Lower Miocene, UpperOligocene, and the Eocene Bassein and Panna formations. The total depth ("TD")may be revised based on the actual data. The well is located 80km north west ofthe giant Bombay High oil field. KRISHNA GODAVARI (KG) BASIN - Eastern India The Company has a 10% participating interest in two blocks in the prospective KGbasin named KG-DWN-2001/1 ("D9"), and KG-DWN-2003/1 ("D3"). Located in the Bayof Bengal the KG basin has been host to a number of world class oil and gasdiscoveries over the past three years. Most notably the Dhirubai gas fielddiscovery, directly adjacent to D9, is scheduled to start gas production in2009. The D9 block encompasses 11,850km2, and is in water depths of 2,300 to 3,100m.RIL is the operator for the block and Hardy holds a 10% participating interestin these blocks. The block is in the first exploration phase which has acommitment to drill four exploration wells. 3440km2 of 3D seismic data has been acquired over the block, which has now been processed and interpreted, and four prospects have been identified for drilling. At least one exploration well is planned for the third quarter of 2007. There are two substantial asymmetric anticlinal structural trends, with axesrunning south-west to north-east across the north-western corner of the block.These structures appear to form closures, at all levels from the Eocene to thePliocene, so the possibility exists that they could contain multiple stackedreservoirs. The D3 block encompasses an area of 3,288km2, in water depths of 400 to 2,000m.On 18 September 2006 Hardy entered into a PSC with the GOI for the blockKG-DWN-2003/1, wherein Hardy holds 10% and RIL holds 90%. This block hasapproximately 300km2 of 3D seismic data, which is being reprocessed. In additionRIL has initiated operations to acquire further 3,000km2 of 3D seismic data,covering the entire block. Acquisition of data has commenced and will take mostof the first half of 2007 to complete. Several leads on the block have been identified from the current 3D data and weexpect RIL to continue assessment and development of additional prospects withthe 2007 acquisition programme. As yet, no drilling locations have been proposedfor D3 in 2007. NIGER DELTA - Nigeria The Company holds working interests in two development blocks in Nigeria,through its subsidiary Hardy Oil Nigeria Limited ("HON") and is working astechnical partner with the local operators. Located within the Niger Delta, theOZA block is onshore and the Atala block in mangrove swamp. These blocks wereparts of the Nigerian Government's marginal field initiative. The Oza block comprises 20km2 and has three existing wells, and is operated byMillenium Oil and Gas Company Ltd ("MOGCL"). Hardy holds a 40% interest in theblock. The field has produced approximately 1MMbbl to date. As technical partner, Hardy has designed and procured an early productionfacility for conducting production tests of the existing wells, facilitated thedesign of a proposed pipeline to a nearby Shell Petroleum Development Company ofNigeria Limited ("SPDC") flow station, and collaborated with MOGCL on governmentand community presentations. The Atala block is located in the creeks of the Niger Delta, encompassingapproximately 34km2, and has one existing well. The block is operated by BayelsaOil Company Limited ("BOCL"). Hardy as technical partner holds a 20% interest inthe block. The planned appraisal programme will require the re-entry of the existing welland the drilling of a further well, which will require the use of a swamp bargedrilling rig. The operator BOCL has been working with a consortium of otherswamp marginal field operators in securing a rig. Future activity will becontingent on securing an appropriate rig for this prospective area. INDIRECT INTEREST On 01 June 2006 Hardy announced that the London Court of InternationalArbitration ("LCIA") did not uphold its defence of pre-emption rights relatingto the Hindustan Oil Exploration Company Limited ("HOEC") shares as Hardy wasdeemed not to be a party to the shareholder agreement. The result has not had adirect impact on Hardy, and the Company maintains its 8.5% interest. HOEC'sprimary assets are a 21% participating interest in PY-3 and 100% participatinginterest in PY-1 (a gas discovery adjacent to PY-3 and ring fenced by the CY-OS/2 exploration licence). In October 2006 HOEC raised approximately $33m (Rs.1,490m) via a public rightsissue in which Hardy took up its pro-rata entitlement, at a cost of $2.81m(Rs.127m). As of 30 March 2007 the quoted market value of Hardy's holdings was$10.6m. COMPANY RESERVES Hardy's 2P reserves for the PY-3 field, on an entitlement basis, were 2,950Mbblsas of 31 December 2006. This represents a reduction of 308Mbbls from 2005. Thetable below shows reserves information at the end of 2006 on an entitlement anddirect participating interest basis. Oil and gas reservesNet commercial 2P reserves Direct Participating Net Entitlement Interest basis basis Mbbls MbblsAs at 1 January 2006- Commercial developed reserves 2,341 1,918 - Commercial undeveloped 1,890 1,340 4,231 3,258 Production in period (381) (308) At 31 December 2006- Commercial developed reserves 1,960 1,610 - Commercial undeveloped 1,890 1,340 3,850 2,950 Contingent resources (Net)Assets Interest Best Type estimate MMBOEPY-3 18.0% 1.9 OilOZA 40.0% 2.4 OilCY-OS/2 (Fan-A) 52.5% 10.5 Oil & Gas BOE gas conversion 8:1 FINANCIAL REVIEW Hardy has had a successful year achieving many new milestones. Strong oil pricesand production within expectations has resulted in increases across all keyperformance metrics including turnover, operating profitability, cash flow, netprofit and earnings per share. Profit and loss Turnover: Hardy's participating interest share of production for 2006 was0.38MMbbls compared with 0.36MMbbls in 2005. On an entitlement basis, afteradjusting the profit oil to the GOI, the net production was 0.31MMbbls in 2006compared with 0.29MMbbls in 2005. Turnover for the period was $21.32m compared with $17.57m for the previous year.The average price realized per barrel during the year was $64.82 per bbl (2005:$52.82 per bbl). The increase in price realised and a slight increase inproduction accounted for a further $2.70m increase. Technical services andoverhead recovery accounted for a $1.05m increase in turnover. An insuranceclaim of $1.00m was received for business interruption caused by an operationalaccident in the year 2002. This was accounted for as other operating income. Gross profit: The Group's gross profit for the year was $12.94m (2005:$12.71m).The cost of sales including depletion per barrel was $22.01 for the year 2006(2005: $13.37/bbl). The increase in cost was mainly attributable to an increasein depletion. The Groups depletion charge, on a net entitlement basis, was$17.46/bbl comparing with $5.61/bbl for 2005. This increase in depletion ismainly due to the capitalization of unsuccessful exploration wells in the Indiacost pool. Profit oil paid to the GOI for PY-3 field increased from $3.98m for 2005 to$4.71m in 2006. The increase is attributable to the increase in oil salesrevenue. Profit for the year: Administrative expenses for the year were $5.70m comparedto $4.69m in 2005. The increase is mainly due to the additional legal costassociated with pursuing a claim under the shareholders agreement with HOEC,wherein Hardy holds 8.5% of the company's issued share capital. An additionalcharge of $0.60m was recognised under the adoption of FRS20 (towards share basedpayments to directors and employees). Profit for the year was $7.99m (2005: $5.44m) and is derived after crediting$1.00m as other operating income on account of business interruption claimreceived during the year for an accident occurred in 2002. The deferred taxcharge for the year was $2.72m (2005: $2.78m) and no provision was made forcurrent tax charges. Balance Sheet The exploratory expenditure for the year was $51.03m primarily attributable todrilling operations in the block CY-OS/2, GS-OSN-2000/1. During the year $0.15mwas capitalised as development expenditure and other fixed assets accounted for$0.43m. The Group also revised upwards the cost estimate for abandonment of theproducing asset PY-3. Consequently, the Group increased its decommissioningprovision to $4.50m (2005: $1.86m), representing an increase of $2.64m. TheGroup's net assets, as of 31 December 2006, were $83.16m with no outstandinglong term loan obligations. Cashflow The Operating cashflow of the Group was $23.94m which includes a reduction inworking capital of $13.57m and an advance tax payment of $0.14m. Interest incomeduring the year was $2.22m compared with $0.49m in 2005. Capital expenditure: Cash outflow for the capital expenditure during the yearwas $54.39m which includes $51.04m towards exploration expenditure. There was anexpenditure of $2.78m on the acquisition of 1,664,423 additional equity sharesin HOEC by subscribing to the company's rights issue. Net Funds: In 2006, the Group has a net cash-outflow of $31.27m before financingcompared to cash inflow of $3.24m in 2005. The Group raised an additional sum of$24.53m in February 2006 by the placing an additional 5.20m additional equityshares to meet its on going exploration expenditure. At the end of the year theGroup had no outstanding debt and the net funds were $27.28m. Comparative statistical summary of 2005 and 2006 Year 2006 Year % Increase/ (decrease) 2005Production in MMbbl 0.38 0.36 5Average price realized per barrel ($/ 64.56 52.82 22bbl)Average cost of production per barrel 22.01 13.37 65($/bbl)Turnover - excluding profit oil sold 21.32 17.57 21($m)Operating profit ($m) 8.24 8.02 3Profit before tax ($m) 10.25 8.55 20Profit after tax ($m) 7.99 5.44 47Operating cashflow ($m) 23.94 11.04 117Net funds ($m) 27.28 31.23 (13) HARDY OIL AND GAS plcGroup Profit and Loss AccountFor the year ended 31 December 2006 Notes 2006 2005 Restated $ $ 2 21,316,935 17,574,440 Turnover -continuing operations Cost of sales Production costs (2,973,200) (2,951,270)(Decrease) in stock (25,886) (296,340)Depletion (5,072,414) (1,562,933)Decommissioning charge (304,899) (57,779) 12,940,536 12,706,118 Gross ProfitOther operating income 3 1,000,000 - Administrative expensesOther (4,301,846) (3,763,947)Exceptional item 4 (1,398,570) (925,038) Operating Profit 5 8,240,120 8,017,133 Income from other fixed asset investments 151,289 165,570Interest receivable and similar income 8 2,137,665 724,526Interest payable and similar charges 9 (275,428) (361,204) 10,253,646 8,546,025 Profit on ordinary activities beforetaxation Tax on profit on ordinary activities-current 10 462,945 (318,894)-deferred 10 (2,723,138) (2,782,158) (2,260,193) (3,101,052) Profit for the financial year 7,993,453 5,444,973 Earning per ordinary share- basic 12 0.14 0.11 12 0.13 0.11 Earning per ordinary share- diluted The notes on pages 16 to 31 form an integral part of these financialstatements. Statement of Total Recognised Gains/ Losses Group Group 2006 2005 Restated $ $ Profit/(loss) for the financial year 7,993,453 5,444,973Prior year adjustment as explained in note (l) (219,792) - 7,773,661 - Total gain recognised since last annual report Reconciliation of Movements in Shareholders' FundsFor the year ended 31 December 2006 Group Group Company Company 2006 2005 2006 2005 Restated Restated $ $ $ $ Profit/(loss) for the financialyear 7,993,453 5,444,973 283,578 (1,573,428)New share capital subscribed 24,527,092 20,772,691 24,527,092 20,772,691Shares to be issued 687,459 252,634 687,459 252,634Opening shareholders' funds 49,948,317 23,478,019 26,603,688 7,151,791 Closing shareholders' funds 83,156,321 49,948,317 52,101,817 26,603,688 HARDY OIL AND GAS plc Balance Sheets As at 31 December 2006 Group Group Company Company Notes 2006 2005 2006 2005 Restated RestatedFixed assets $ $ $ $Intangible assets 12 33,788,334 9,547,305 - -Tangible assets 13 35,770,629 11,395,296 243,441 289,724Investments 14 4,997,036 2,218,122 31,651,267 6,121,434 74,555,999 23,160,723 31,894,708 6,411,158Current assetsStocks 16 2,729,764 349,929 - -Deferred tax asset 10 - 745,000 790,801 -Debtors 17 4,637,062 4,343,755 251,931 1,207,705Cash at bank and in hand 27,275,599 31,234,376 19,318,159 19,359,627 34,642,425 36,673,060 20,360,891 20,567,332Creditors: amounts 18 (16,809,807) (5,267,588) (153,782) (374,802)falling due within one yearNet current assets 17,832,618 31,405,472 20,201,109 20,192,530 Total assets lesscurrent liabilities 92,388,617 54,566,195 52,101,817 26,603,688Creditors: amounts - - - -falling due after morethan one yearProvisions for 19 (4,500,000) (1,863,720) - -liabilitiesDeferred tax liability 10(a) (4,732,296) (2,754,158) - -Net assets 83,156,321 49,948,317 52,101,817 26,603,688 Capital and reservesCalled-up share capital 21 572,530 520,467 572,530 520,467Share premium 23 52,982,983 28,507,954 52,982,983 28,507,954Shares to be issued 22 940,093 252,634 940,093 252,634Profit and loss account 28,660,715 20,667,262 (2,393,789) (2,677,367)Equity shareholders' 83,156,321 49,948,317 52,101,817 26,603,688funds The accounts were approved by the board of directors on 02April 2007 and signed on its behalf by: Yogeshwar Sharma Paul Mortimer Managing Director Chairman The notes on pages 16 to 31 form an integral part of these financial statements. HARDY OIL AND GAS plcGroup Cash Flow StatementFor the year ended 31 December 2006 Notes 2006 2005 $ $ Net cash inflow from operating activities 24 23,942,864 11,044,390 Returns on investments and servicing offinanceIncome from other fixed asset investments 151,289 165,570Interest received 2,224,783 487,432Interest paid (275,428) (304,954) Net cash inflow from return on investmentsand servicing of finance 2,100,644 348,048 Taxation paid (143,280) (972,329) Capital expenditure and financial investmentExpenditure on exploration assets (51,034,004) (7,735,427)Expenditure on development/producing assets (148,215) 1,014,104Purchase of other fixed assets (424,964) (458,012)Purchase of listed securities (2,778,914) - Net cash outflow from capital expenditure andfinancial investment (54,386,097) (7,179,335) Management of liquid resourcesCash placed on deposit with state Bank of (2,784,660) -India for site restoration fund Net cash (outflow) inflow before financing (31,270,529) 3,240,774 FinancingIssue of shares 24,527,092 20,772,691Repayment of bank loan - (1,861,251) 24,527,092 18,911,440 (Decrease) increase in cash for the year 25 (6,743,437) 22,152,214 1. Accounting Policies The following accounting policies have been applied in preparation ofconsolidated financial statements of Hardy Oil and Gas plc. a) Accounting convention The accounts are prepared under the historical cost convention. b) Accounting standards The Group prepares its accounts in accordance with the accounting standards ofUnited Kingdom and in accordance with the Statement of Recommended Practice("SORP") issued by the Oil Industry Accounting Committee, United Kingdom;Accounting for Oil and Gas Exploration, Development, Production andDecommissioning Activities. Basis of Consolidation The consolidated accounts include the results of Hardy Oil and Gas plc, and itssubsidiary undertakings. The consolidated profit and loss account and cashflowstatement include the results and cashflows of subsidiary undertakings up to thedate of disposal. No separate Company profit and loss account is presented. The Group conducts the majority of its exploration, development and productionthrough unincorporated joint arrangements with other companies. The accountsreflect the Group's share of production and costs attributable to itsparticipating interests under the proportional consolidation method. Turnover Turnover represents the sale value of the Group's share of oil (excluding profitoil share of Government) sold in the year, tariff, and the income from technicalservices to third parties if any. Fixed assets Hardy follows the full cost method of accounting for oil and gas assets. Underthis method, all expenditure incurred in connection with and directlyattributable to the acquisition, exploration, appraisal and development of oiland gas assets, interest payable and exchange differences incurred on borrowingsdirectly attributable to development projects if any is capitalised in twogeographical cost pools: India and Nigeria. Exploration assets comprise the pre-license, license acquisition, explorationand appraisal costs relating either to unevaluated properties or propertiesawaiting further evaluation. When a decision to develop these properties hasbeen taken or there is evidence of impairment, the costs are transferred asdevelopment cost to the cost pools within 'Development/producing assets' whenthe commercial reserves attributable to the underlying asset have beenestablished. Further expenditure on fixed assets in the production phase is capitalised wherefuture economic benefit is enhanced. In case of any disposal of oil and gas assets, net proceeds from any suchdisposal are credited against the previously capitalised costs. In the case ofdisposal of subsidiary undertaking, net proceeds represent the net book value ofthe assets sold together with the gain or loss arising on disposal of thatsubsidiary. Depletion, impairment and depreciation Depletion The Group depletes expenditure on oil and gas production and development on aunit of production basis, based on proved and probable reserves. Further, theCompany periodically obtains an independent third party assessment of reservesand this assessment is used as a basis for computing depletion. 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 pooland are written off on a unit of production basis through the depletion charge.In cases, where no such development/producing cost pool exists, the impairmentof exploration costs is charged to the profit and loss account. Impairmentreviews on development / producing oil and gas assets are carried out for eachcost pool on each year by comparing the net book value of the pool with theassociated discounted future cash flows. If the net book value is higher, thenthe difference is written off to the profit and loss account as impairment. Depreciation Fixed assets, other than oil and gas assets, are depreciated over their expecteduseful economic lives as follows: Annual Rate (%) Depreciation Method Leasehold improvements over lease period straight lineFurniture and fixtures 20% straight lineIT and Computers 33% straight lineOther Equipments 20% straight line Decommissioning At the end of the producing life of a field, costs are to be incurred in theremoving and decommissioning facilities, and the plugging and abandoning ofexisting wells. Decommissioning costs are estimated and stated at an amountrepresenting the costs, which would be incurred should decommissioning occur atthe balance sheet date and the estimates are reassessed each year. The provisionis assessed at prices ruling at the balance sheet date an, according, it is notappropriate to discount this provision. The decommissioning asset is includedwithin fixed assets with the cost of the related assets installed. Theamortisation of the asset, calculated on a unit of production basis based onproved and probable reserves, is shown as "Decommissioning charge" in the profitand loss account. Foreign currencies Hardy maintains the accounts of the Company and all subsidiary undertakings inUS dollars. Foreign currency transactions are accounted for at the exchange rateruling on the date of the transaction. At the year end all foreign currencyassets are restated at the average of the buying and the selling exchange ratesprevailing at the balance sheet date. Exchange difference arising out of actualpayments / realisations and from the year end restatement referred to above isdealt in the profit and loss account. Rate of exchanges were as follows: 31 December 31 December 2006 2005 £ to $ 1.9658 1.7191$ to Indian Rupees (Rs) 44.1700 45.1300 Deferred taxation Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents have occurred at that date that will result in an obligation to pay moreor a right to pay less or to receive more tax. Deferred tax assets are recognized only to the extent that the directorsconsider that it is more likely than not there will be suitable taxable profitsfrom which the future reversal of the underlying timing differences can bededucted. Deferred tax is measured on an undiscounted basis at the tax rates that areexpected to apply in the periods in which timing differences reverse, based ontax rates and laws enacted or substantively enacted at the balance sheet date. Leasing commitments Rental charges or charter hire charges payable under operating leases arecharged to the profit & loss account as part of production expenses over thelease term. Share based payments Hardy issues share options to directors and employees, which are measured atfair value at the date of grant. The fair value of the equity settled optionsdetermined at the grant date is expensed on a straight line basis over thevesting period based on the actual number of shares vested in the accountingperiod. In performing the valuation of these options, only conditions other thanthe market conditions were taken into account. Fair value is measured by use ofa binomial model and the assumed expected life of the share options is based onestimates of management considering non-transferability, exercise restrictions,and expected behavioural considerations. Change in accounting policy Hardy has applied the provisions of FRS20 (share based payments) for the firsttime in the accounts for the year ended 31 December 2006. The effect of thischange in policy in line with FRS20 has decreased the profit before tax in thecurrent year by $595,762 and in the year ended 31 December 2005 by $267,471. Theadjustment of $267,471 in 2005, has a net impact of $219,792 after adjusting fora gain in exchange, of $14,837, and change in the deferred tax asset of $32,842.The 2005 comparatives have been restated and regrouped wherever necessary. Thereis no effect of net assets arising from this change in policy as the charge forthe share based payments and the associated movements are taken as "Shares to beIssued" under the equity reserves. 2 Turnover and Segmental Analysis 2006 2005 Turnover $ $ India London India LondonContinuing Operations - Oil sales 24,731,952 - 21,308,877 -- Profit oil to government (4,714,128) - (3,983,854) -- Other income 154 1,298,957 2,641 246,776 20,017,978 1,298,957 17,327,664 246,776 The directors do not consider there to be more than one class of business orgeographic segment as the turnover in other geographic segments are less than10% of the total turnover. Other income relates to technical services to thirdparties, overhead recovery from joint venture operations and miscellaneousreceipts if any. Turnover arises from sale of oil produced from the contractarea CY-OS-90/1-India (PY-3) and the turnover by destination is not materiallydifferent from the turnover by origin. 3 Other operating income Other operating income relates to the insurance claim on business interruptionreceived in 2006. The claim relates to an accident occurred in November 2002.This income has been accounted based on the acceptance of the claim by theunderwriters and receipt of payment. 4 Exceptional item Administrative costs include an exceptional cost of $1,398,570 (2005: $925,038)relating to a dispute between Hardy and HOEC and others referred to LCIA foradjudication on certain rights and obligation for Hardy's 8.5% equityshareholding in HOEC. 5 Operating Profit Operating profit is stated after charging: 2006 2005 $ $ Depreciation 249,788 82,393Depletion 5,072,414 1,562,933Decommissioning 304,899 57,779Operating lease costs - plant & machinery 1,803,478 1,887,686- land & buildings 292,881 162,450External Auditors' remunerationFees payable to the Company's auditor for theaudit of the Company's annual accounts 64,871 34,081Other services pursuant to legislation 1,401 209,730 Exchange (gain) or loss (99,952) 578,990 The Group has a policy in place for the award of non-audit work to the auditors,which requires approval of the audit committee. 6 Staff Costs 2006 2005 $ $ Wages and salaries 2,363,687 1,956,093 Social security costs 144,493 93,662 Other pension costs 16,958 9,410 Share based payments 408,191 202,791 2,933,329 2,261,956 Staffs costs include executive director's salaries, fees, benefits and sharebased payments are shown gross before amounts recharged to joint ventures The weighted average monthly number of employees, including executive directorsand individuals employed by the Group working on joint venture operations are asfollows: 2006 2005 Management and administration 22 18 Operations 26 26 48 44 7 Directors' emoluments Details of remunerations are set out in as follows: 2006 2005 $ $ Directors' emoluments 659,132 813,503 Highest Paid 481,596 359,099 8 Interest receivable and similar income 2006 2005 $ $Bank interest 2,137,665 724,526Other interest - - 2,137,665 724,526 9 Interest payable and similar charges 2006 2005 $ $Bank guarantee charges 267,985 361,204Other finance charges 7,443 - 275,428 361,204 10 Taxation a) Analysis of taxation charge in year 2006 2005 $ $Current tax chargeUK Corporation Tax - - Foreign TaxIndiaMinimum Alternate Tax on profits for the year - 497,894Previous year provision reversed (482,000) (179,000) (482,000) 318,894 Foreign taxUSA 19,055Alternate Minimum Tax on profits for the year - - - - Total current tax charge (462,945) 318,894 Deferred tax charges 2,723,138 2,782,158 Tax on profit on ordinary activities 2,260,193 3,101,052 2006 2005 $ $Deferred tax charge: Origination and reversal of timing difference 2,723,138 2,782,158 Deferred tax charges 2,723,138 2,782,158 Deferred tax analysis - Group only 2006 2005 $ $ Differences between accumulated depletion, (17,648,883) (4,183,000)depreciation and amortization and capitalallowances Other timing differences 1,451,218 591,842 Tax losses 11,465,369 1,582,000 Deferred tax (liability)/asset (4,732,296) (2,009,158) Disclosed as: Deferred tax (liability) (4,732,296) (2,754,158) Deferred tax asset - 745,000 b) Factors affecting tax charge for year 2006 2005 $ $Profit on ordinary activities before tax 10,253,646 8,546,025 Profit on ordinary activities before tax 3,076,094 2,563,808 multiplied by the rate of tax in UK of 30% Mineral extraction and research allowances in (3,076,094) (2,563,808)excess of depreciation and utilisation of taxlosses Effects of non taxable income - - Foreign tax on overseas income - current year - 318,894 - reversal of previous year provisions (462,945) - c) The Indian operation of the Group is subject to a tax rate of 41.82 % whichis higher than UK and US corporate tax rates. Due to the existence of taxtreaties the Group is entitled to receive credit for the taxes paid in India.Based on the current expenditure plans, the Group anticipates that the taxallowances will continue to exceed the depletion charge of each year though thetiming of related tax relief is uncertain. 11 Earnings per share The earning per share is calculated on a profit of $7,836,923 (2005: $5,444,973)on a weighted average of 56,695,898 ordinary shares (2005: 47,871,777). The diluted earning per share is calculated on a profit of $7,836,923 (2005:$5,444,973) on a weighted average of 59,367,997 ordinary shares (2005:50,588,876). The weighted average shares are arrived after giving impact todilutive potential ordinary shares of 2,672,099 (2005: 2,717,099) relating toshare options. 12 Intangible assets Oil and gas exploration assets Group India Nigeria Total $ $ $Costs and net book value At 1 January 2006 8,451,479 1,095,826 9,547,305 Additions 50,430,702 603,302 51,034,004 Deletions- transfer to tangible (26,792,975) - (26,792,975)asset At 31 December 2006 32,089,206 1,699,128 33,788,334 At 31 December 2005 8,451,479 1,095,826 9,547,305 13 Tangible assets Oil and gas assets represent interest in producing oil and gas assets fallingunder the Indian cost pool. There is no oil and gas tangible assets currently inthe Nigerian cost pool. Other tangible assets consist of office furniture,computers, workstations and office equipment. Oil and gas development / producing assets Group Oil and gas Other fixed Total assets $ assets $ $ At 1 January 2006 10,949,216 446,080 11,395,296Additions 2,784,495 424,964 3,209,459 Transfer from intangible 26,792,975 - 26,792,975assetDisposals - (1,683) (1,683) At 31 December 2006 60,408,540 2,873,984 63,282,524 Depletion, depreciationand amortisationAt 1 January 2006 19,881,854 2,004,623 21,886,477Charge for the year 5,377,313 249,788 5,627,101Disposals - (1,683) (1,683) At 31 December 2006 25,259,167 2,252,728 27,511,895 Net book value at 31 35,149,373 621,256 35,770,629December 2006 Net book value at 31 10,949,216 446,080 11,395,296December 2005 Company Cost Other assets $At 1 January 2006 400,580Additions 52,438Disposals -At 31 December 2006 453,018 DepreciationAt 1 January 2006 110,856Charge for the year 98,721Disposals -At 31 December 2006 209,577Net book value at 31 December 2006 243,441Net book value at 31 December 2005 289,724 14 Investments Summary of investments Group Group Company Company 2006 2005 2006 2005 $ $ $ $ Shares in subsidiary - - 4,131,231 3,903,312companies Loans to subsidiaries - - 22,523,000 - Other investments 4,997,036 2,218,122 4,997,036 2,218,122 4,997,036 2,218,122 31,651,267 6,121,434 Other investments represents investment in 6,657,694 equity shares of an Indiancompany Hindustan Oil Exploration Company Limited listed on the National StockExchange and the Bombay Stock Exchange in India which includes the allotment of1,664,423 shares under the rights issue in 2006 at a price of Rs76 per share.The market value of the shares as on 31 December 2006 is $13.84m based onRs91.80 per share quoted at National Stock Exchange on 30 December 2006converted at an exchange rate of one $ is equal to Rs44.17. (2005: $17.97m at aprice of Rs167 per share at an exchange rate of 1$ = Rs45.13). 15 Subsidiary companies Hardy Exploration & Production (India) Inc, a wholly owned subsidiaryincorporated under the Laws of State of Delaware, United States of America. Hardy Oil (Africa) Limited, a wholly owned subsidiary registered under the lawsof Isle of Man. Hardy Oil Nigeria Limited, a wholly owned subsidiary of Hardy Oil (Africa)Limited registered under the laws of Nigeria. The above subsidiaries are included in the Group consolidation. 16 Stocks Group Group Company Company 2006 $ 2005 $ 2006 $ 2005 $ Crude oil 154,529 180,415 - -Drilling and production stores & 2,575,235 169,514 - -spares 2,729,764 349,929 - - 17 Debtors Group 2006 Group 2005 Company Company $ $ 2006 $ 2005 $ Trade debtors 2,363,197 2,308,459 - -Owed by subsidiary - - - 960,726undertakingsOther debtors 931,640 486,548 247,277 178,901Advance tax paid in India 985,659 379,435 - -Prepayments and accrued 356,566 1,169,313 4,654 68,078income 4,637,062 4,343,755 251,931 1,207,705 18 Creditors - amounts falling due within one year Group Group Company Company 2006 2005 2006 2005 $ $ $ $ Trade creditors 4,377,641 2,279,086 57,098 148,244Other creditors 1,853,415 1,036,705 - 65,000Accruals 10,578,751 1,951,797 96,684 161,558 16,809,807 5,267,588 153,782 374,802 19 Provisions Provisions for liabilities Decommissioning Group Company $ $ At 1 January 2006 1,863,720 - Additional cost for decommissioning 2,636,280 - At 31 December 2006 4,500,000 - The provision has been made by estimating the decommissioning cost at thecurrent prices with the existing technology. Decommissioning costs are expectedto be incurred between 2016 and 2020. 20 Financial instruments Hardy financing its operations through a mixture of retained earnings,additional equity and bank borrowings if required. Finance requirements such asequity, debt and project finance are reviewed by the board when substantialfunds are required for acquisition, exploration and development of projects. Hardy's principal financial instruments are cash and short term deposits andthese instruments are only for the purpose of meeting its requirement foroperations. Hardy takes exemption under FRS 13 for short term debtors andcreditors and therefore exempted for numerical disclosures except foreigncurrency risk disclosures. Hardy's main risks arising from financial instruments are foreign currency riskand liquidity risk. Hardy's policy of managing the foreign currency risk andliquidity risk are as follows: Foreign currency risk The Group reports are in US dollars and the majority of its business isconducted in US dollars. All revenues from oil sales are received in $ and allcosts except a small portion towards expenses at London office are incurred in$. In case of currency exposure other than $, a portion of the cash is kept indeposit in other currency to meet its payments in other currencies. No forwardexchange contracts were entered during the year. Liquidity risk The Group deposits the surplus cash on short term deposits ensuring sufficientliquidity to meet the Group's expenditure requirements. The Company has nooutstanding loan obligations at the end of the year. a) Maturity of financial liabilities The financial liabilities and its maturity as at 31 December 2006 are asfollows: Group Group 2006 2005 $In more than two years but not more than five - -year In more than five years 4,500,000 1,863,720 The Group does not have any fixed maturity and interest bearing financialliabilities as at 31 December 2006. b) Interest rate risk profile of financial assets The interest rate risk of the financial assets of the Group as at 31 December2006 is as follows: Floating Financial Total rate asset - no Fixed rate interest is Financial Financial earned asset $ asset $ $ $ US Dollars 16,239,782 5,662,138 1,108,124 23,010,044Pound Sterling - 243,566 44,472 288,038Indian Rupees 3,178,646 - 784,649 3,963,295Nigerian Naira - - 14,222 14,222 19,418,428 5,905,704 1,951,467 27,275,599 Financial assets include cash, deposits, short term investments if any and thefloating interest rates are based on base rate of Bank of England. The interest rate risk of the financial assets of the Group as at 31 December2005 was as follows: Fixed rate Floating Financial Total Financial rate asset - no interest is asset Financial earned asset $ $ $ $ US Dollars 14,413,128 7,216,626 1,603,707 23,233,461Pound Sterling 3,529,203 361,883 31,081 3,922,167Indian Rupees 3,959,270 - 116,112 4,075,382Nigerian Naira - - 3,366 3,366 21,901,601 7,578,509 1,754,266 31,234,376 Financial assets include cash, deposits, short term investments if any and thefloating interest rates are based on base rate of Bank of England. c) Currency exposures The currency exposures of the foreign currency monetary assets of the Group yearended 31 December 2006 is as follows: Indian Pound Nigerian Total Rupees Sterling Naira $ $ $ $ $ 3,963,295 288,038 14,222 4,265,555 An amount of $99,952 was recognized as foreign exchange gain for the year 2006. The currency exposures of the foreign currency assets of the Group year ended 31December 2005 was as follows: Indian Pound Nigerian Total Rupees $ Sterling Naira $ $ $ $ 4,075,382 3,922,167 3,366 8,000,915 An amount of $578,990 was recognized as foreign exchange loss for the year 2005. d) Fair values of financial assets and financial liabilities Fair values of Hardy's financial assets and liabilities excluding short termdebtors and creditors are compared as follows: Book value Fair value Book value Fair value 31 December 31 December 31 December 31 December 2006 2006 2005 2005 Primary financial instruments $ $ $ $Provisions for (4,500,000) (4,500,000) (1,863,720) (1,863,720)decommissioningFixed asset 4,997,036 13,836,910 2,218,122 17,968,252investmentsCash and short 27,275,599 27,275,599 31,234,376 31,234,376term deposits 27,772,635 36,612,509 31,588,778 47,338,908 21 Share Capital Number $0.01 Ordinary Shares $ "000"Authorised ordinary shares At 1 January 2006 200,000 2,000,000At 31 December 2006 200,000 2,000,000 $0.01 Ordinary Shares $Allotted, issued and fully paid ordinary shares At 1 January 2006 52,046,667 520,467 Share options converted 1,667 16Shares issued 5,204,660 52,047 At 31 December 2006 57,252,994 572,530 22 Share based payments Share options have been granted to subscribe for ordinary shares, which areexercisable between 2006 and 2015 at prices range from £1.44 to £3.38. At 31December 2006, there were 2,807,099 options are outstanding. The Company has an unapproved share option scheme for the directors andemployees of the Group. Options are exercisable at the quoted market price ofthe Company's shares on the date of grant. The option vest in three equalportions on the first, second and third anniversary of the grant, providing theoption holder is still employed by the Company. If the options are not exercisedwithin a period of 10 years from the date of grant the options stand expired. Details of the share options outstanding during the year are as follows: 2006 2005 Number of Weighted Number of Weighted options average options average price £ price £ Outstanding - the beginning of 2,717,099 1.60 - -the periodGranted during the period 135,000 3.09 2,717,099 1.60Forfeited during the period 43,333 1.60 - -Exercised during the period 1,667 1.44 - -Outstanding at the end of the 2,807,099 1.68 2,717,099 1.60periodExercisable at the end of the 890,699 1.60 - -period The aggregate of the estimated fair values of the options granted outstanding ason 31 December 2006 is $1,824,215. The inputs into the binomial model forcomputation of value of options are as follows: Share price at date of grant varies from £ 1.44 to £3.38Option exercise price at date of grant varies from £ 1.44 to £3.38Expected volatility 8.00%Expected life from grant date 6 yearsRisk free rate 4.15%Expected dividend Nil Expected volatility was determined by calculating the historical volatility ofthe Company's weighted average share price over the period. The expected lifeused has been adjusted based on management's best estimate for the effects ofnon-transferability, exercise restrictions and behavioral considerations. The Group has recognized an expense of $595,762 (2005: $267,471) towards equitysettled share based payments. Equity shares to be issued are revalued at theexchange rate as on 31 December 2006 and the value of shares to be issued as at31 December 2006 is $940,093 (2005: $252,634). 23 Reserves Group Share Shares Profit & Loss Account Premium to be issued $ $ $ At 1 January 2006 (restated) 28,507,954 252,634 20,667,262Share options exercised 4,418 - -Issue of shares 25,542,863 - -Issue expenses (1,072,252) - -Shares to be issued - 687,459 -Retained profit for the year - - 7,836,923 At 31 December 2006 52,982,983 940,093 28,504,185 Company Share Shares Profit & Loss Account Premium to be issued $ $ $At 1 January 2006 (restated) 28,507,954 252,634 (2,677,367)Issue of shares 25,542,863 -Share options exercised 4,418 -Issue expenses (1,072,252) -Shares to be issued - 687,459 -Retained profit for the year - 127,048 At 31 December 2006 52,982,983 940,093 (2,550,319) 24 Reconciliation of operating profit to operating cash flows 2006 2005 $ $ Operating profit 8,240,120 8,017,133Depletion and depreciation 5,322,202 1,645,326Decommissioning charge 304,899 57,779(Increase) / decrease in stocks (2,379,835) 296,340Decrease / (increase) in debtors 225,800 (986,329)Increase in creditors 11,542,219 1,761,507Share based payments charges 687,459 252,634 Net cash inflow from operating activities 23,942,864 11,044,390 25 Net funds a) Analysis of net funds At At 1, January Non 31 December 2006 Cashflows cashflows 2006 $ $ $ $ Cash at bank 31,234,376 (6,743,437) - 24,490,939 Deposit with State Bankof India for siterestoration - 2,784,660 - 2,784,660 31,234,376 (3,958,777) - 27,275,599 Bank guarantees for $1,232,350 were issued to GOI for the block GS-OSN-2000/1and the guarantee was obtained by placing a fixed deposit of Rs17,402,343($393,986) in the bank with the interest rate of 6.75%. This has been includedin cash at bank above. b) Reconciliation of net cash flow to movement in net funds 2006 2005 $ $Increase in cash in the year (6,743,437) 22,152,214 Deposit with State Bank of India for site 2,784,660 -restoration Cash inflow from drawdown of debt financing - 1,861,251 Change in net funds resulting from - (56,250)non-cashflows Net Funds as at 1 January 2006 31,234,376 7,277,161 Net funds at 31 December 2006 27,275,599 31,234,376 26 Other non- cancellable financial commitments Annual commitments under non-cancellable operating leases are as follows: Group Group Company Company 2006 2005 2006 2005 $ $ $ $Land and buildings,expiring within:One year 282,856 203,477 188,070 79,204Two to five years 783,579 141,341 752,280 79,204After five years 89,333 - 89,333 - Other operating leases,expiring within:One year 1,007,136 1,767,330 - -Two to five years - 1,007,136 - -After five years - - - - Other operating lease commitments represent Hardy's share of operating lease forfloating production system entered into by unincorporated joint venture for itsparticipating interest. This information is provided by RNS The company news service from the London Stock Exchange