KEA.L Regulatory News (KEA)

Kea Petroleum plc

("Kea" or the "Group")

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MAY 2014

Kea Petroleum plc (AIM: KEA), the oil and gas exploration company focused on New Zealand, is pleased to announce its Preliminary Results for the year ended 31 May 2014.

Highlights

· Revenue increased to £2,087,000 (2013: £829,000) as a result of sales of hydrocarbons associated with the production from both Puka 1 and Puka 2

· Farm-out agreement signed with MEO Australia in April 2014

· Exciting potential for the new limestone prospect, Shannon

· In discussion with potential industry partners to farm out Mauku

· Management team strengthened following the appointment of Ian Brown as Managing Director, former Chief Operating Officer of New Zealand Energy Corp

· Net loss of £4.86 million (2013: net loss of £8.41 million)

Kea's Chairman, Ian Gowrie-Smith, said:

"It has been a challenging period for Kea but the Board remains confident of an exciting year ahead. The philosophy and strategy of the Company has been to balance our exploration portfolio between cheaper lower risk, lower reward wells and the high risk, high reward plays. Our goal is to try and maximise the return to our shareholders by mitigating risks through farm-ins and farm-outs as well as bringing the best possible talent on board to assess opportunities and to manage our operations.

"As to the future, we can't afford not to drill the new Shannon structure: it's too exciting and too prospective, and MEO and ourselves are finalising drill target and funding discussions. It's worth shareholders supporting because success here would lead to a whole new and different chapter for the Company."

This release has been approved by non-executive director Peter Mikkelsen FGS, AAPG, who has consented to the inclusion of the technical information in this release in the form and context in which it appears.

For further information please contact:

Notes to Editors:

Kea Petroleum is an AIM listed oil and gas company with interests in three petroleum exploration permits in the Taranaki Basin of New Zealand. Kea listed on the London AIM market in February 2010.

CHAIRMAN'S STATEMENT

Dear Shareholders,

In the February Chairman's Statement I said that it had been challenging times and that has certainly continued to be the case. The recent failure of Puka-3 to be a commercial discovery was a great blow to the company and I know to all shareholders. It was particularly frustrating in view of the progress the company had made in all other respects in the intervening period. Production problems were fixed and production subsequently has been at a stable level; management had been streamlined; a farm-out partner for Puka, MEO New Zealand Limited ("MEO") was found on favourable terms and funding obtained to enable the drilling of Puka-3 and all operations to continue.

Puka

Unfortunately, the discovery that the oil /water contact at the Puka field was 30 metres higher than expected has likely reduced the total potential reserves significantly and we are currently reviewing the remaining Mt Messenger prospects within the permit. It would be fair to say that the experience of all the current players in the Taranaki Basin, who are endeavouring to make commercial sense out of Mt Messenger plays, has been a struggle. However there is a silver lining to all this.

As a result of all the drilling and 2D and 3D seismic we have carried out on the permit and particularly the Douglas well, together with the 3D, MEO and ourselves have become excited about the prospect of a newly mapped structure, called Shannon, directly underneath the Puka field. The Shannon structure is a not a sand reservoir like the Mt Messenger in Puka. Instead it is limestone and is the same as in the Waihapa oil field immediately west of Puka, that has produced 23.6 million barrels of oil ("MMbbl") to date. Fractured limestone reservoirs such as Waihapa have the characteristics of very high flow rates. Wells brought into production at Waihapa have had initial flow rates from between 1,000 barrels of oil per day ("bopd") to 10,000bopd. Current analysis indicates that the Shannon structure is approximately half the size of Waihapa and has a P50 of 10MMbbl, far greater than expectations of the Mt Messenger reservoir.

Kea drilled the Douglas well some two years ago into the limestone, but never completed testing it. Douglas intersected oil shows in the top 15 metres of the limestone, which may indicate a potential oil column just before it punctured a huge volume of underlying water. Recent structural interpretation suggests the limestone intersected there is some 350 metres low, compared to the crest of the structure under the Puka production site.

As previously advised, Kea was particularly pleased to have entered into a farm-out agreement with MEO. This farm-out agreement has meant a great deal to the company, as it incorporated not only the drilling of Puka-3 but also work over of Puka-2 well and installation of permanent pipework at the well site. Additionally, we have found access to MEO's pool of talent useful in helping to define both the Puka Mt Messenger field as well as the Shannon prospect.

Mauku 

On 10 October 2014, New Zealand Petroleum & Minerals (NZP&M), the government oil and gas regulatory agency, approved a new committed stage of the work programme in respect of Petroleum Exploration Permit 381204. The permit is located part on shore and part off shore in North Taranaki.

Kea drilled Mauku-1 on PEP381204 during Q2 2013. Mauku-1 intersected good quality Mangahewa "C" sands (161m net thickness) in a sub-thrust target. However, the sands were water wet.

Remapping of the seismic data, using 123km of new pre-stack depth migration 2D post Mauku-1, shows the well was drilled significantly down-dip of a 20 km2 structural closure at Mangahewa level and shows a larger closure at mid-Cretaceous Taniwha formation level. The new work programme, comprising 15km of 2D land-based seismic reflection data, will extend the data coverage over the 20 km2 structural closure at Mangahewa level. This will help to define a better well location. Kea is in discussion with potential industry partners to farm-out the Mauku prospect.

We are pleased to have come to an agreement with NZP&M that eliminates the need to commit to, and finance, the drilling of Mauku-2 during the coming 12 months and replaces it with a relatively inexpensive seismic programme.

Mercury

The Company continues to have discussion with NZP&M regarding the ongoing commitments and work programme on this permit.

Management

During the year Richard Parkes left the company after working out his 6 months' notice.

We were very fortunate that Ian Brown, former Chief Operating Officer of New Zealand Energy Corp. ("NZEC"), a New Zealand resident, was able to pick up the role of MD and the transition has gone smoothly. NZEC is Kea's immediate neighbour to the Puka permit and Ian's experience, as well as local connections, in dealing with the challenges of Mt Messenger deposits and Puka in particular, has proved invaluable. 

Our Finance Director, Peter Wright, has agreed to extend his initial two year stay in New Zealand in order to ensure that the Company has continuity at managerial level.

Funding

Despite the stock market's negative initial reaction to the financial funding arrangements that we have with Darwin, the company has been well served by them. Funding through the traditional placings and rights issues remains closed, essentially for the whole sector. Ironically, the comfort that Kea is funded from this relationship with Darwin, despite its dilutive downside, appears to be a bigger positive than the fear of how companies such as ours might otherwise get funding in the future.

The Past and the Future

Undoubtedly being an investor in oil and gas exploration and production is risky and challenging. The recent failure of Puka-3 was a bitter and unexpected blow, to the company, our farm-in partner, to myself and the larger shareholders and in particular, to the legions of shareholders and share traders who risked alongside us hoping and expecting success.

However, the philosophy and strategy of Kea has been to balance our exploration portfolio between cheaper lower risk, lower reward wells and the high risk, high reward plays. It is only in targeted, high reward success that shareholders can hope to get the kind of return they deserve for the risks associated with owning small, speculative oil and gas explorers. Since listing in 2010, Kea has been involved in the drilling of 9 wells (8 as operator), has acquired 146km of onshore 2D seismic data, 100km2 of offshore 3D seismic data, 50km2 of onshore 3D seismic data, reprocessed over 1,800km of old 2D seismic data and constructed a production station on the Puka site capable of handling up to 800 bopd.

Our goal is to try and maximise the return to our shareholders by mitigating risks through farm-ins and farm-outs, as well as bringing the best possible talent on board to assess opportunities and to manage our operations. I feel Kea has succeeded in doing both and has been consistent in pursuit of its strategy.

Looking back, Kea has been involved in the farm-out of three of our wells covering both high and lower reward prospects.

· Beluga-1 exploration well, with a target of 500 billion cubic feet ("Bcf") of gas and 20MMbbl of condensate, in which Kea retained 100% interest in the permit and offloaded 100% of the cost;

· Mauku-1 exploration well with target of 485Bcf gas and 27MMbbl of condensate, in which Kea retained 100% interest in the permit and offloaded 50% of the cost;

· Puka-3 appraisal well, targeting thicker Mt Messenger sands, in which Kea retained a 70% interest in the permit and offloaded 80% of the cost.

Although the above wells were unfortunately unsuccessful, we have to be careful in defining the words "failure" and "unsuccessful", because each well teaches us an enormous amount about the prospectivity of further drilling. In the case of Beluga, it downgraded the future potential of that licence and area. In the case of Mauku, it has been the opposite in that it has provided us with a sign post to where we are more likely to make a discovery. In the case of Puka-3, whilst it has diminished the reserve potential of the Puka field, it has also highlighted the remaining Mt Messenger targets. Finally, in the case of Douglas-1, along with the 3D seismic, we now have a sign post to a whole new, potentially large deposit, the Shannon prospect, derisked from a pure exploration play.

In terms of management skills in identifying probable locations for hydrocarbon accumulations, I can't fault the talent we have and my special thanks to the current and past team.

As to the future, we can't afford not to drill the new Shannon structure: it's too exciting and too prospective, and MEO and ourselves are finalising drill target and funding discussions. It's worth shareholders supporting this effort, because success here would lead to a whole new and different chapter for the company. 

Ian Gowrie-Smith

Chairman

31 October 2014

OPERATIONAL REVIEW

Over the past year Kea has continued with its exploration program on the Company's New Zealand Petroleum Exploration Permits (PEPs) and has also continued testing of two wells located at the Puka well site in Taranaki. The Puka-1 and -2 discoveries continue to provide cash flow for Kea as the company transitions from being purely exploration focused to being a business based on both exploration and production.

The major activities for the year were:

· Installation of gas generators on Puka site to utilise gas for onsite power

· Farm-out of PEP51153 licence to MEO New Zealand Pty Ltd

· Replacement of downhole pump in Puka-2

· Reprocessing of offshore 3D seismic for Mercury area

· Installation of permanent pipework at Puka site and drilling of Puka-3 (subsequent events)

These activities are discussed in more detail below by licence area.

PEP51153

PEP51153 is located onshore in Taranaki, New Zealand and contains the Puka discoveries and the suspended Douglas well.

Puka-1 was been completed in Mt Messenger Formation reservoir sands, and was first flow tested in August 2012. Analysis of the initial flow and downhole data confirmed that the discovery was of commercial size. Flow testing has continued under natural reservoir pressure. Following an initial period of decline, flow appears to have stabilised at a rate of about 55bopd. However it is expected that at some unknown future time, reservoir pressures will drop to a point where artificial lift will be required to continue oil production.

Puka-2 testing commenced in late March 2013, and has continued with a short break while a replacement downhole pump was installed. Over 47,000bbl's and 388 Million Cubic Feet of Gas (MMCF) have been produced on test to May 31 2014 from Puka-1 and Puka-2. Oil production has been consistent at around the 110bopd since production at Puka-2 was brought back online in June 2014.

Temporary rental production facilities at Puka have been replaced with permanent equipment to reduce operating costs. Significant savings have been made by replacing the diesel generators with gas fired generators.

The majority of gas produced to date has been flared, however a study of gas utilisation options, including a gas pipeline to a nearby processing station, as well as electricity generation onsite for sale into the grid has been commissioned. This work is being carried out by a Wellington based energy consulting company.

Puka-3 was spudded from the Puka well site pad on 22 July 2014. The well reached total depth (TD) of 2,200m on 13 August 2014, and a comprehensive logging programme was carried out by Schlumberger, with final results not available to management until 16 August 2014. At that point, the decision was made to plug and abandon the well.

The high quality Puka 3D seismic survey data, recorded in December 2012, has been further reprocessed by MEO, with subsequent improved imaging of the main hydrocarbon reservoir horizons. The data continues to be used as one of the key data sets that guides the location of future drilling targets.

PEP 381204

Following the drilling of Mauku-1, post well studies have been undertaken. These include remapping of the seismic data, and 123km new PSDM data that shows the well was drilled significantly down dip of a 20 km2 structural closure a Mangahewa level, and a larger closure at mid-Cretaceous Taniwha Formation level.

Management have estimated the recoverable resource potential in this part of the permit is in the 63 to 700Bcf range, with a P50 estimate of 215Bcf. The associated condensate resource potential is 3.8 to 42 MMbbl, with a P50 of 12.9 MMbbl. A larger resource at multi-Trillion cubic foot size could be present at Taniwha level.

To advance further exploration in this permit, including drilling a well into the updip structure north of Mauku-1, Kea has entered into confidentiality agreements with various potential farm-in partners.

PEP52333

Interpretation of the high quality 3D seismic data acquired over the permit in the previous year has been interpreted by the Kea geology and geophysics team in Wellington.

One of the prospects, Mercury, that is being worked up to a drill ready target is a large 3-way dip and fault closed prospect. The reservoir comprises a relict early Miocene proximal basin-floor sandstone, with onshore correlative sands. There is a proven hydrocarbon source present, and there were live oil and gas shows in the Miocene sections of offset wells.

Management have estimated an original oil in place prospective resource potential of 108 - 688 MMbbl (P90 - P10). The company is actively promoting the opportunity to interested farm-in participants.

Ian Brown

Managing Director - New Zealand

31 October 2014

FINANCIAL REVIEW

The Group's loss for the year was £3,819,000 of which £1,571,000 comprised the write-offs of the exploration permit PEP52333. This represents a decrease of £5,532,000 over the previous losses. Cash balances as at 31 May 2014 were £823,000. Net administrative expense for the year decreased by £870,000. The Company embarked on numerous cost-cutting measures throughout the period under review. This has seen combined employee and Board levels drop from 17 to 10 with associated savings over the period. The costs of the London office continue to be offset by the sub-letting of the office space. Operational cost saving was achieved with the installation of gas generators on the Puka site to replace diesel generators, the in-house servicing of the wax cutting unit and prudent site management to reduce well downtime. The installation of the permanent pipework in July 2014 has further reduced the monthly operational costs.

During the year the company impaired exploration and evaluation expenditure by an amount of £1,571,000 which were for all costs in licences PEP52333, PEP381204 and PEP51155 as the latter was relinquished during the period and at year end there was no certainty regarding further exploration in either PEP52333 or PEP381204. No impairment was made against PEP 51153 (Puka) as a result of the prospectivity of the deeper Shannon play. A depletion charge, of £281,000, based on the Depletion policy in note i was charged against Production & Development and included in the cost of sales calculation. The company also allocated an amount of £649,000 to Production and development assets (note 7B) and £632,000 to Plant & Equipment.

Revenue for the period increased by £1,258,000 to £2,087,000 as a result of sales of hydrocarbons associated with production from both Puka 1 and Puka 2.

In January 2014 the Company entered into the first of three deals concluded with Darwin Strategic Limited ("Darwin") for the issue of £1,200,000 of Convertible Loan Notes and an Equity Financing Facility of up to £5,000,000. Under this deal the following shares were issued:

· January 2,823,529 shares;

· February 39,204,437 shares;

· April 10,240,785 shares;

· May 11,805,463 shares.

In May 2014 the Company entered into a further agreement with Darwin for £2,000,000 of Convertible Loan notes. Under the May deal £400,000 of the January CLN's fell away and the EFF agreement was cancelled.

Under the new deal the following shares were issued:

· May 3,589,743 shares.

In total the Company issued 67,663,957 shares to Darwin in the period in settlement of Convertible loan notes and fees and received £720,000 under the first agreement and a further £900,000 under the new agreement in funding for the year under review.

 In addition in May 2,295,908 shares were issued to Directors at 1.95p in lieu of salary of £44,770 that had been on hold since October 2013, 3,680,198 shares were issued to Gresham Limited in settlement of an outstanding invoice of £69,923 and 4,000,000 shares were issued to Ardel Trust for the benefit of Ian Brown under the Overseas Employee Share Benefit Trust scheme.

The exchange movement for the year showed a loss of £1,044,000 arising primarily on the company's NZD balances and assets. The year end exchange rate of NZ$1.9714/£ was significantly higher than the rate at the start of the year (NZ$1.8946/£), averaging around NZ$1.9571/£ through the year.

In December 2013 the company agreed a bank facility, based on sales and stock delivered, in order to allow better management of cashflows from the sale of hydrocarbons. During the period under review the company used this facility three times. Kea is currently assessing this facility to ensure that it is providing a suitable level of cover.

Peter Wright

Finance Director

31 October 2014

KEA PETROLEUM PLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The loss for the year and total comprehensive loss for the year are 100% attributable to equity

shareholders of the parent undertaking.

KEA PETROLEUM PLC

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements were approved by the Board of Directors on 31 October 2014

Peter Wright

Finance Director

KEA PETROLEUM PLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

KEA PETROLEUM PLC

CONSOLIDATED STATEMENT OF CASHFLOWS

KEA PETROLEUM PLC

BASIS OF PREPARATION AND ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

The Group financial statements consolidate those of the Company and of its subsidiary undertakings; the Group financial statements have been prepared in accordance with IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union at 31 May 2014. The accounting policies and presentation followed in the preparation of these final results have been consistently applied to all periods in these financial statements.

Audit Information

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. The consolidated statement of financial position at 31 May 2014 and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement and associated notes for the year then ended have been extracted from the Group's statutory financial statements for the year ended 31 May 2014 upon which the auditor's opinion is unqualified, except for an emphasis of matter paragraph regarding going concern which is further explained below, and does not include any statement under Section 498 (2) or (3) of the Companies Act 2006.

Going concern

The Group has incurred a loss of £3,819,000 for the year ended 31 May 2014. In common with other junior exploration companies, the Group is reliant on raising further funds periodically through equity finance, including share options and warrants, or possibly debt facilities to achieve its long term objectives.

The directors have prepared operating cashflow forecasts and projections which assume a minimum level of expenditure to conform with the requirements of the Group's exploration licences for the 12 months from the date of signing these financial statements, which show a funding shortfall in 2015. The directors are in discussions with a potential investor to secure additional funding that would cover the shortfall, but an agreement has not yet been signed. If the Group is unable to secure this funding and cannot find alternative sources of financial support, the Group may cease to be a going concern. In these circumstances adjustments may be required to reflect the position that assets may not be realised at the amounts currently disclosed in the Statement of Financial Position, and additional liabilities may be incurred. In addition, the Group's operating cashflow forecasts and projections include certain assumptions in relation to the level of future production and consequent revenues from the Puka Wells, which can vary due to possible fluctuations in both the oil price and foreign exchange rates.

The directors have concluded that the combination of these circumstances represents a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern. Nevertheless after making enquiries, and considering the uncertainties described above, the directors have an expectation that the Group will have access to adequate resources to continue in operational existence for the foreseeable future and for these reasons, they continue to adopt the going concern basis in preparing the annual report and Group financial statements.

Notes to the financial statements

1. Revenue and segmental reporting 

In the opinion of the Directors, the Group's single operating segment is the exploration for hydrocarbons, comprising oil and gas. An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses and whose results are regularly reviewed by the Board of Directors. The Board of Directors reviews operating results by reference to the core principle of geographic location. The Group currently has oil and gas exploration in one market, New Zealand, and it has a head office and associated corporate expenses in the UK.

Revenue of £2,087,000 (2013:£829,000) has been earned through the sale of oil to Shell Todd Oil Services Limited, in New Zealand, during the period.

The following table provides a breakdown of the Group's capital expenditure based on the area of

operation:

The following table provides a breakdown of the Groups total segment non current assets based on

the area of operation:

2. Loss before taxation

3. Employee numbers and costs

Included in the figure of £546,000 are costs of £325,000 (2013: £230,000) relating to time spent by the CEO and other

employees that have been capitalised against specific projects.

The total directors' emoluments for the year were £522,000 (2013:£750,000). In addition directors' total pension

contributions for the year were £12,000 (2013: £12,000). The emoluments of the highest paid director were £257,000 (2013: £303,000).

4. Net Finance Expense / Income

5. Taxation

There is no income tax expense due to losses incurred in the year. The tax assessed for the year differs from the standard rate of corporation tax as applied in the respective trading domains where the Group operates.

The group has tax losses unrecognised carried forward in the UK of £1,472,000 (2013: £800,000) and New Zealand of £13,318,000 (2013: £10,843,000). The movement in relation to New Zealand includes the prior year adjustment in relation to the unrecognised tax losses and the impact of movement in foreign exchange rates.

The Group has a deferred tax asset of £4,024,000 (2013: £3,220,000) which is unrecognised. Deferred tax assets are recognised for all deductible differences, carry forward on unused tax credits and unused tax losses, to the extent that the likelihood of sufficient future taxable profits being generated within the Group satisfies the definition of "probable". The benefit of unused tax losses has been recognised to the extent that the Group has deferred tax liabilities.

6. Loss per share

The diluted loss per share does not differ from the basic loss per share as the exercise of share options would have the effect of reducing the loss per share and is therefore not dilutive. The weighted average number of shares used in calculating the basic earnings per share has been adjusted to remove the shares in issue held by the Employee Benefit Trusts.

7. Oil and gas exploration assets

The write-off/impairment of unsuccessful expenditure relates to a full provision against all expenditure previously capitalised in relation to the Mauku-1 well (permit PEP382104), permit PEP51155 and permit PEP52333. The write-off of all expenditure relating to PEP51155 was due to the permit being relinquished during the period. All costs associated with PEP381204 and PEP52333 have been impaired, as at year end there was no certainty further exploration operations will be carried out in these permits.

B. Intangible Development & Production Assets Capitalised

All of the Group's operating expenses and other assets and liabilities are derived from the exploration

and evaluation of hydrocarbon resources, unless stated otherwise in these financial statements.

8. Property, plant and equipment

9. Stock

10. Trade and other receivables

11. Trade and other payables

12. Borrowings and derivative financial instruments

13. Share capital

The market price of the ordinary shares at 31 May 2014 was 1.68p and the range during the year was 0.9p to 5.62p.

Of the warrants issued at 31 May 2014, 423,731 were held by members of the concert party or by related parties.

14. Other reserves

In October 2009, the Company acquired the entire issued share capital of the recently incorporated KPHL by way of a share for share exchange with the then shareholders of KPHL. The difference between the nominal value of the shares issued by Kea Petroleum to the shareholders of KPHL and the nominal value of the shares of KPHL taken in exchange has been credited to a merger reserve on consolidation.

In January and May of this year the Company issued warrants to Darwin as part of an equity fund raise. The shares were issued at a 25% and a 21% premium to market price respectively and a reclassification was made from Deferred Facility Fees to Warrants liability to represent fair value for the warrants issued.

15. Share based payments

The Group has an unapproved share option plan for the benefit of employees, as well as the JSOP and the OESBT. Details of the number of share options and the weighted average exercise price (WAEP) outstanding during the period are as follows:

The fair value of options granted has been arrived at using a Binomial model. The assumptions inherent in the use of this model are as follows:

§ The option life is assumed to be at the end of the allowed period.

§ No variables change during the life of the option (e.g. dividend yield).

§ Expected volatility was determined by calculating the weighted average share price movement of 4 comparable companies. Expected life was based on the contractual life of the options, adjusted, based on management's best estimate, for the effects of exercise restrictions and behavioural considerations.

OESBT / JSOP Model

No shares were subscribed for under the JSOP during the year.

For the purposes of the OESBT, the employee benefit trust which has subscribed for 4,000,000 new shares in the Company at a price of 2.0p per share, being the closing mid-market price on 22 May 2014, which has been funded by a loan from the Company.

The Group recognised total expenses of £365,139 (2013:£619,125) related to equity-settled share based payment transactions during the year. A corresponding credit has been made to the share option reserve. Further details of share based payments are set out in the Remuneration Report.

16. Financial instruments and risk management

Risk management

The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern whilst maximising the return to stakeholders through the effective management of liquid resources raised through share issues. The principal risks faced by the Group resulting from financial instruments are liquidity risk, foreign currency risk and, to a certain extent, interest rate risk. The directors review and agree policies for managing each of these risks and they are summarised below.

Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other members. The Group will also seek to minimise the cost of capital and attempt to optimise the capital structure. Currently no dividends are paid to shareholders and capital for further development of the Group's products is achieved by share issues and by the exercise of outstanding warrants (note 12). Warrants are issued, at times, as part of the equity fund raisings as an incentive for investors to take part in a capital issue.

The current share price is under 0.5p and the Directors are not sure what level of share price would support the exercise of warrants either at 5p or at 10p. The Group does not carry significant debt.

Categories of financial instrument

Foreign currency risk

The cash balances carried within the Group comprise the following foreign currency holdings:

The Group operates within the UK and New Zealand. All transactions are denominated in Sterling, NZ Dollars or US dollars. As such the Company is exposed to transaction foreign exchange risk. The mix of currencies and terms of trade are such that the directors believe that the Company's exposure is minimal and consequently they do not specifically seek to hedge that exposure. Funds are periodically transferred overseas to meet local costs when required.

The table below demonstrates the sensitivity of the Group's consolidated loss before tax to reasonably possible changes in the value of the US dollar and the NZ Dollar with respect to Sterling, all other variables held constant. The sensitivity analysis includes only the US dollar and NZ Dollar because the effect of other currencies is not significant. The sensitivities reflect only those changes in consolidated loss before tax that arise from translation of the value of US dollar and NZ dollars denominated financial assets and liabilities.

Interest rate risk

The Group finances its operations through equity fundraising and therefore does not carry significant borrowings. Interest rate risk is therefore considered to be immaterial. The Group's cash balances and short term deposits are held at floating interest rates based on LIBOR and are reviewed to ensure maximum benefit is obtained from these resources. Risk is additionally reduced by ensuring two or more banks are used for deposits.

Liquidity risk

The Group is dependent on equity fundraising through private placing which the directors regard as the most cost effective method of fundraising. The directors monitor cash flow on a daily basis and at monthly board meetings in the context of their expectations for the business to ensure sufficient liquidity is available to meet foreseeable needs.

Credit risks

The Group does not have any perceived credit risks on its trade and other receivables.

17. Convertible Loan notes

In January 2014 the Company entered into an agreement with Darwin Strategic Limited ("Darwin") whereby Darwin was able to conditionally subscribe to a total of £1.2 million worth of convertible loan notes (Agreement A) in 6 tranches of £200,000 for which Darwin were subject to pay £180,000 for each. Each tranche expires 18 months from date of the Agreement A. Agreement A was terminated in May 2014, by which point Darwin had subscribed to 4 tranches of notes totalling £800,000. This resulted in a loss of £163,000 being recognised in the income statement. A new agreement (Agreement B) replaced Agreement A and allowed Darwin to conditionally subscribe for an additional £2.0 million in Convertible loan notes in tranches of £1.0million, £550,000 and £450,000, all subject to a 10% discount. Each of the tranches under Agreement B expire 12 months from the date of this agreement.

At 31 May the value of the convertible loan notes were analysed as follows:

The table below represents the assumptions used in determining the fair value of the convertible loan notes issued under Agreement B and the warrants issued under Agreements A & B.

18. Capital commitments

As at signing date the Group had no capital expenditure commitments. The terms of the petroleum exploration permits which the Group holds require it to carry out certain exploration activities within specified time frames. The actual costs of these activities are dependent on a number of factors including the scope of the work and whether farm-out or similar arrangements are entered into with other parties. Estimated commitments for the minimum exploration work program obligations are as follows:

Within 1 year

· £750,000 15km seismic commitment on PEP381204;

· £250,000 7km seismic commitment and other work on PEP51153

19. Subsidiary companies consolidated in these accounts and associates

20. Operating lease commitments

At the balance sheet date, non-cancellable outstanding operating lease rentals are payable as follows:

The UK lease is on the property at 5-8 The Sanctuary in London and rental and service charge are payable in advance on a quarterly basis. The lease expires in July 2016. The NZ leases are on properties in Wellington and New Plymouth. The Wellington lease expires in Jan 2016. The New Plymouth lease expires in Feb 2019, with the option of a break in Feb 2015.

21. Contingent liabilities

The Group is defending claims brought against Kea Petroleum Holdings Limited and two operating subsidiaries by NRG Drilling Limited. Kea has taken legal advice and accordingly considers that it has strong defences to the claims and will vigorously defend them. An unfavourable outcome to the litigation could have a material adverse effect on the Company's financial position.

22. Related party transactions

During the period Ventutec Limited, a company in which DJ Lees is a director, charged an amount of £331 (2013: £5,035) for web based services. The balance outstanding at year end was £278.

23. Events after the balance sheet date

In June 2014 the Company paid NZ$1,000,000 to the Joint Venture agreed with MEO.

In June 2014 the replacement pump was installed in Puka-2 and production restarted.

In June 2014 at a general meeting the Company was granted authority to issue 393,770,617 shares

In June 2014 the Company issued 40,638,392 shares to Darwin under the Convertible Loan Note ("CLN") agreement.

In July 2014 the Company issued 35,747,309 shares to Darwin under the CLN agreement.

In July 2014 the Company issued a further 38,401,396 shares to Darwin under the CLN agreement.

In August 2014 the Company, along with MEO, plugged and abandoned the Puka-3 well after finding non-commercial quantities of oil.

In September 2014 the Company issued 50,000,000 shares to Darwin under the CLN agreement.

In October 2014 a change of work conditions on licence area PEP381204 was granted and Section A of licence PEP51153 was surrendered.