Petro Matad Regulatory News (MATD)

Petro Matad Limited

Preliminary results for year ended 31 December 2011

Petro Matad Limited ('Petro Matad' or 'the Company'), the AIM quoted Mongolian oil explorer, announces its audited results for the year ended 31 December 2011.

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to present Petro Matad's Annual Report for the financial year ended 31 December, 2011, and to comment more generally on the events of that year and up to the date of publication - 29 June, 2012.

2011 was a year that ended in disappointment for the Company and its shareholders, and the value of Petro Matad has dropped even further during the first part of 2012. The Directors experienced that sense of disappointment very keenly. While it is proper to reflect somewhat on the past year's challenges with the benefit of hindsight, this report will concentrate more on relaying to shareholders that the Company has taken positive steps to ensure that Petro Matad is better placed to address the exploration risks that are inherent to our business.

Petro Matad operates three Production Sharing Contracts (PSCs) over attractive and extensive exploration areas in the emerging country of Mongolia. Our Company's largest shareholder is the biggest petroleum products importer in Mongolia (Petrovis LLC). In 2008, Petro Matad was the first substantially owned Mongolian company to list on an international stock exchange.

Following a series of fund-raisings, the Company's main focus was the exploration of its most advanced prospect at the time, the Davsan Tolgoi anticline from 2010 through to 2011.

Unfortunately that exploration proved unsuccessful and the Board and management are now concentrating on rebuilding and refocusing the Company so as to better explore the remainder of its vast acreage. The Directors believe that the changes that have been wrought by the Company position it advantageously so as to properly exploit the opportunities that its assets represent.

As part of the process of introducing positive changes to Petro Matad, the Company took advantage of Board and management resignations or retirements and proactively sought to strengthen those and other aspects of the Company. In addition, the Company decided to supplement its own in-house technical team with an independent firm of geoscience consultants, RISC Pty Ltd ("RISC"), to assist in the examination of previous results, assessment of assets and be a part of further planning and programmes.

The Directors believe that with the above initiatives the Company is now in a position to productively explore the sometimes difficult frontier environment in which we operate, and to apply experiences from the past. Additionally, we consider that the individuals we have brought together, when combined with the existing Directors and management and technical teams, have created a Company that is in an excellent position to progress forward.

2011 Drilling Programme on Block XX

During 2011, Petro Matad encountered problems with its log evaluation on certain Davsan Tolgoi wells due to the differing log responses that can occur in formations where the connate water has low salinity. This problem was exacerbated in the case of Davsan Tolgoi, because of the frontier nature of the area and a lack of prior samples on which to base standards. The Company is reviewing its operational logging and analysis procedures to ensure that these take full account of the issues associated with low salinity formations and are as robust as possible in this regard. As a means of calibrating these procedures, the Company plans to revisit the reservoir parameters (including porosity and fluid saturations) that should be derived from the log interpretation of the Davsan Tolgoi wells using the salinities measured from water samples taken from those wells.

Our technical team and consultants, in conjunction with RISC's peer assist programme will conduct a number of specific basin and other studies ahead of the next phase of drilling. The other studies include defining hydrocarbon play fairways and re-processing and interpreting some key seismic lines. The objective of these studies is to provide a more balanced and lower risk exploration drilling campaign for 2013. Accordingly, the Company decided to suspend drilling for the remainder of 2012, whilst the studies are completed and, consequently the drilling and workover rigs have been stood down.

Beyond Davsan Tolgoi

Petro Matad's PSCs in Blocks XX, IV and V with the Government of Mongolia cover over 60,000 square kilometres and encompass nineteen distinct basinal areas spread throughout the blocks. The basins total 18,000 square kilometres in extent. By contrast, drilling by Petro Matad in 2010 and 2011 took place in only one part of one basin and covered approximately 100 square kilometres. While acreage alone is not the sole arbiter of exploration potential, the number of basins and the fact that there has only been drilling in one part of one of these basins illustrates the huge amount of exploration potential in the Company's portfolio.

Block XX

Hydrocarbon maturation mapping using geochemical data combined with structural mapping indicates a significant area of hydrocarbon maturity in the area west of Davsan Tolgoi (West Tolgoi). Significantly this basin area is also on trend with, and adjacent to the basin area in the Tolson Uul oilfield in Block XIX to the north. This mapping has also identified a second smaller area of potential hydrocarbon maturity east of Davsan Tolgoi (East Tolgoi). Both areas contain several structural lead areas and current seismic mapping is being focused on confirming these leads as possible drilling prospects. Finally, even further to the east but still in the general area of Davsan Tolgoi a new type of play has been identified. The Lag Nuur thrust fault play shows promise and is also being subjected to further study with the objective of selecting locations for this play (as well as in West Tolgoi and East Tolgoi) for drilling in 2013.

In 2011, 835 kilometres of seismic lines were acquired in the central and southern parts of Block XX. Interpretation of this seismic data has revealed a number of basin areas with structural features that may, with further evaluation, progress into prospects. One of these basins, the Erdenetsagaan basin appears of particular interest. As in the north of Block XX, hydrocarbon maturity in the central and southern part of Block XX depends on the structural and depositional history of individual basins. Therefore, in addition to prospect generation, basin modelling will be used to assess the potential for hydrocarbon source maturity prior to drilling.

Block V

Prior to Petro Matad's 2010-2011 exploration programmes, petroleum exploration in the Valley of Lakes region of Mongolia, in which both Blocks IV and V lie, was virtually non-existent. Our extensive surface and subsurface sampling programmes have vastly improved the Company's understanding of stratigraphic age and structural development for this part of Mongolia and as a result enhanced our knowledge of the potential of these assets.

In particular, a core hole drilled on Block V in 2011 provided the following data:

• Conclusive evidence that oil has been generated in the Tugrug Basin;

• The presence of good-to-excellent source rocks; and

• Reservoir rocks with good porosity and permeability.

Seismic has also revealed two major basins within Block V. These are the Taatsiin Tsagaan Nuur Basin and the Tugrug Basin, both about 30-35 km wide. At present, the wide grid spacing of the seismic lines precludes accurate precise prospect delineation; however, a number of possible leads have been mapped.

In order to further develop its regional understanding of the block and to better focus its exploration, the Company is undertaking additional studies at this time. The studies are scheduled to be completed over the next three months, with a view to the resultant recommended seismic acquisition taking place over the coming winter months. These studies and field programmes are all designed to generate the first drilling programme on Block V to take place in 2013.

Block IV

There is only a rudimentary 20 to 25 kilometre grid of seismic reconnaissance lines across Block IV. However, while this seismic shows a 3,000 metre thick section of sedimentary rocks with extensive lateral continuity, there appears to be a lack of structural deformation over most of the western part of the block. In the eastern part of the block adjacent to Block V, there is the possibility of some anticlinal folding, but more data is required.

A 1,440 metre stratigraphic core hole was drilled in the Biger Basin (to the west) and is being used to derive regional stratigraphy and oil potential from comparison with regional outcrops.

Oil Shale

Blocks IV and V contain approximately fourteen known occurrences of oil shale at this time. Most have been preliminarily assessed with respect to their association with conventional petroleum exploration.

One, Khoid Ulaan Bulag (KUB) on the southern boundary of Block IV showed early promise of commercial grades of hydrocarbon saturation. As outlined in the 25 May 2012 news release, a programme of extra surface sampling, two drill holes and one seismic line have confirmed that this deposit has the potential to be a large hydrocarbon source at grades that could be considered commercial.

Exploration work and evaluation studies by our consultants continue at KUB, albeit at a reduced level when compared with our conventional hydrocarbon exploration programmes.

The Company's full Financial Statements contain a note to the accounts that sets out the Company's expenditure on its PSCs and details the minimum exploration commitments as set out in the agreements with the Petroleum Authority of Mongolia (PAM). For the period under review the Company has significantly exceeded the minimum commitments on Block XX and has recorded a small shortfall on Blocks IV and V. As exploration on Block XX took priority over Blocks IV and V it is anticipated that the Company will make further shortfalls on IV and V in the current period. The Company is currently revising programmes and budgets that reflect both the current stage of exploration of Blocks IV and V and the current funding environment and will submit these to PAM as part of its annual review process.

Petro Matad has now created a large knowledge base of petroleum systems in Mongolia, with detailed but early stage data of our own PSCs. As detailed elsewhere in this report the Company has modified its modes of operation and appropriately complemented or changed its Board and management so as to more suitably explore these areas. The technical details of our various properties that I summarise above demonstrate ample evidence of the basic attractiveness of Petro Matad's assets.

Management Changes

In January 2012, Mr Mark Zebrowitz was appointed acting Chief Operating Officer, replacing Rodney Graham, whose contract expired. Mr Zebrowitz joined the Company in March 2011 as Drilling Manager and brings 25 years of industry experience to the position.

In April 2012, Dr James Coogan resigned as the Company's Exploration Manager. Chief geophysicist Dr Kurt Constenius has been managing the exploration team until a new Exploration Manager can be appointed. Petro Matad has identified an exceptional and well qualified candidate who is expected to commence in Ulaanbaatar in late July.

Also in April of this year, Mr Clyde Evans retired as Chief Financial Officer and was replaced in mid-April by Mr John Henriksen. Mr Henriksen is an oil industry professional with almost 40 years' experience. He has moved to Ulaanbaatar and is now an integral part of the management team.

The changes that Petro Matad has made at senior management level reflect the Company's positive evolution since the commencement of its review of its 2011 drilling programme. The Company expects that the depth of knowledge and experience that the new appointees will bring to their positions and the management of the company will be significant.

New Financial Advisors

In November 2011, Petro Matad appointed Macquarie Capital (Europe) Limited to act as its joint corporate broker alongside its existing broker, Westhouse Securities Limited. In May 2012, the Company appointed RLM Finsbury as its investor and public relations adviser. The Board recognises the need to develop communication with investors and other stakeholders to ensure that it properly informs of its goals, strategy and activities in a transparent and efficient manner. The appointment of both Macquarie and RLM Finsbury are both positive steps in the development of Petro Matad.

Community Relations; Health and Safety; Environment and Corporate Governance

The Board is aware of the importance of good corporate governance. A Corporate Governance Social Action and Environmental Committee was formed in 2010.

In 2011 the Company also established a Legal and Compliance Division and resourced it with a team of internationally qualified lawyers. This Division is charged with monitoring and advising on corporate governance matters and answers to the CEO.

More details of our commitment to corporate governance can be found within the Company's full Annual Report.

Petro Matad is cognisant of the social impact of our operations and has developed a Social Action Plan to contribute to the social developments of communities impacted by our exploration and drilling activities in Blocks IV, V and XX. We believe that operating openly and transparently in the community is integral to developing and maintaining positive relationships.

Through meaningful engagement with communities we identify opportunities to make contributions that are beneficial to all stakeholders. Company representatives meet frequently with the local authorities and strive to educate the community on oil exploration and our planned activities.

The Company is very proud of our major scholarship programmes operated in co-operation with the PAM. Petro Matad sponsors Mongolian students and oil sector professionals with both international and domestic scholarships.

Petro Matad has been continuously developing an effective Health, Safety and Environment Management System along with its implementation and integration. At the corporate level, policies, guidelines and standards are defined and specific plans and procedures are formulated for each project.

In 2011 Petro Matad achieved a remarkable safety milestone in recording 665,336 worked man-hours without a lost-time-injury for Petro Matad's staff, contractors, sub-contractors, and consultants. This achievement, added to our Total Recordable Injury Frequency Rate, fulfils the overall target set for the Group. The 2011 Health and Safety Plan also focused on safety on the road through Driving Safety Campaigns and regular vehicle inspections. We recorded over 3,000,000km travelled without a major accident.

Petro Matad is committed to conserving and protecting the environment in our areas of operations. The Environmental Policy adopted by Petro Matad underlines the management's commitment to the protection of the environment. This is achieved by the adoption of sound practices such as preventing or minimising disturbances or negative impact on the environment through improved waste management, controlled use of water resources and fuels, spill prevention practices and environmental awareness training for its employees

Mongolia

Mongolia is holding general elections on 28 June, 2012. Additionally, the recent introduction of a Foreign Investment Law has caused concern in some quarters, although the final version would seem to be workable in both the nation's interest and that of reasonable foreign investment. The proof of that will be in the implementation of the law, along with the accompanying regulations and perhaps some post-introduction adjustments.

Finally, there is a national imperative to modernise the current Petroleum Law, which has been operating with little change for 21 years. Petro Matad was the catalyst in forming the Mongolian Petroleum Exploration and Producers Association and together with other companies has been invited to have meaningful input into the process of amending the Petroleum Law. The process continues and we are confident that a sensible and modern law will result, with proper consideration of both the national interest and the promotion and care for the exploration of the country's petroleum resources.

Summary

The current share price causes the Directors and me appreciable concern, particularly when combined with the parlous state of the equity markets in general, the relatively depressed oil price and the widespread uncertainty in the world financial markets.

The Directors and staff have identified the areas we can influence and have applied and will continue to diligently apply ourselves to managing and shaping those elements of our business.

There is no doubt that Petro Matad has meaningful exploration assets. As outlined in this statement, the Company has spent time and resources over the past six months, rebuilding an appropriate and talented team. We have also sought professional outside advice as necessary. All of this has been aimed at ensuring that we are in a position to further examine those assets and assess a technical path forward, accompanied by sensible financing or partnerships to be able to implement those programmes.

We believe that Petro Matad is well placed to continue its exploration activities in Mongolia, although we continue to be watchful and proactive. We have great confidence in the democratic institutions of the nation, and believe Mongolia is on an irreversible road to a free-market economy with all the benefits of a resource rich country.

I look forward to the challenges of the future and I have full faith in the people that have stewardship of the Company on behalf of the shareholders. The Directors, management and staff are all united behind Petro Matad and applying their great talents, experience and work ethic for the Company's good. I wish to thank them for their past work, and look forward to working with them to build an even stronger Petro Matad in the future.

I would like to thank Mme Oyungerel, our Chair. She has always been a supportive pillar of strength and wise advice, and even more so in the past eight months. Finally, I wish to relay my appreciation, along with those of the Directors to our loyal shareholders.

Notes to Editors

Petro Matad is the parent company of a group focussed on oil exploration, as well as future development and production, in Mongolia. The Group holds sole operatorship of three Production Sharing Contracts with the Government of Mongolia. Block XX has an area of 10,340km² in the far eastern part of the country. Blocks IV and V are located in central Mongolia. Block IV covers approximately 29,000km² and Block V approximately 21,150km².

Petro Matad Limited is incorporated in the Isle of Man under company number 1483V. Its registered office is at Victory House, Prospect Hill, Douglas, Isle of Man, IM1 1EQ.

Further information:

Petro Matad Limited

Douglas J. McGay - CEO

+976 11 331099

NOMAD and Joint Broker

Westhouse Securities Limited

Richard Baty / Petre Norton

+44(0)20 7601 6100

Joint Broker

Macquarie Capital (Europe) Limited

Jeffrey Auld / Steve Baldwin / Nicholas Harland

+44(0)20 3037 2000

Investor and Public Relations

RLM Finsbury

James Leviton

+44(0)20 7251 3801

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED31 DECEMBER 2011

STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2011

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2011

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

NOTES TO THE FINANCIAL STATEMENTS 

FOR THE YEAR ENDED 31 DECEMBER 2011

1. CORPORATE INFORMATION

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2011 or 2010. The statutory accounts for the year ended 31 December 2011 have been finalised on the basis of the financial information presented by the directors in this preliminary announcement.

This financial report presents the consolidated results and financial position of Petro Matad Limited and its subsidiaries (together, the "Group").

Petro Matad Limited, a company incorporated in the Isle of Man on 30 August 2007 has five wholly owned subsidiaries, including Capcorp Mongolia LLC and Petro Matad LLC (both incorporated in Mongolia), Central Asian Petroleum Corporation Limited ("Capcorp") and Petromatad Invest Limited (both incorporated in the Cayman Islands), and Petro Matad Services Limited (incorporated in the Isle of Man).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of preparation

The full financial report, on which this preliminary statement is based, complies with Australian Accounting Standards ("AAS") as issued by the Australian Accounting Standards Board ("AASB") and International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board.

This financial report has been prepared on a historical cost basis, except where otherwise stated.

(b) Basis of consolidation

The consolidated financial statements comprise the financial statements of the Group as at 31 December each year.

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Investments in subsidiaries held by Petro Matad Limited are accounted for at cost less any impairment in the separate financial statements of the parent entity. Dividends received from subsidiaries are recorded as a component of other revenues in the separate statement of comprehensive income of the parent entity, and do not impact the recorded cost of the investment.

A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.

(c) Exploration and evaluation expenditure

Exploration and evaluation expenditure incurred by the Group is expensed separately for each area of interest. The Group's policy is to expense all exploration and evaluation costs funded out of its own resources.

(d) Exploration and evaluation assets

Exploration and evaluation assets arising out of business combinations are capitalised as part of deferred exploration and evaluation assets. Subsequent to acquisition exploration expenditure is expensed in accordance with the Company's accounting policy.

(e) Impairment of tangible and intangible assets other than goodwill

At each reporting date, the Group assesses whether there is any indication that tangible and intangible assets may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount for each asset or cash generating unit to determine the extent of the impairment loss (if any). Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset's value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

Impairment review for deferred exploration and evaluation assets are carried out on a project-by-project basis, with each project representing a potential single cash generating unit. An impairment review is undertaken when indicators of impairment arise, typically when one of the following circumstances apply:

·; Unexpected geological occurrences that render the resource uneconomic;

·; Title to asset is compromised;

·; Variations in prices that render the project uneconomic; and

·; Variations in the currency of operation.

(f) Earnings per share

Basic earnings per share is calculated as net profit attributable to owners of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element.

Diluted earnings per share is calculated as net profit attributable to owners of the parent, adjusted for:

·; Costs of servicing equity (other than dividends);

·; The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and

·; Other non-discretionary changes in revenues or expenses during the year that would result from the dilution of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(g) Comparatives figures

Where necessary, comparatives figures have been adjusted to conform to any changes in presentation in the current year.

(h) Significant accounting judgments, estimates and assumptions

In applying the Group's accounting policies management continually evaluates judgments, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgments, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgments, estimates and assumptions.

Any revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both the current and future periods.

The following are the most critical estimates and judgments made by management in applying the accounting policies and have the most significant effect on the amounts recognised in the financial statements.

Share -based payments

The Group measures the cost of equity settled transactions with directors and employees at the fair value of the equity instruments at the date at which they are granted. The fair value is determined using a Black Scholes model. One of the inputs into the valuation model is volatility of the underlying share price which is estimated on the 3.5 year history of the share price and has been estimated in a range from 78 % to 220% depending on the date of the option / award. The share price used in the valuation model is based on the Company's share price at grant date of each option / award. The term of each option issued is 10 years, whereas management have determined that awards will expire on 30 June 2028. To allow for the effects of early exercise, it was assumed that executives and employees would exercise the options / awards at the mid-point after the vesting date, but before expiry date.

3. LOSS PER SHARE

The following reflects the income and share data used in the total operations basic and diluted loss per share computations:

Share options and Performance Share Awards could potentially dilute basic loss per share in the future, however they have been excluded from the calculation of diluted loss per share because they are anti-dilutive for both years presented.

There have been further transactions involving ordinary shares since the reporting date and before the completion of these financial statements, details of these can be found in Note 22 Events after the reporting date of the Full Annual Report.

4. TIMETABLE AND DISTRIBUTION OF ACCOUNTS

The Company's statutory annual report and accounts will be dispatched electronically to shareholders tomorrow and will be posted to shareholders who have elected to receive hard copies of the Annual Report in the next few days. Additional copies of the Annual Report and Accounts may be requested directly from the Company and an electronic copy will be available on the Company's website www.petromatad.com.