Petro Matad Regulatory News (MATD)

29 June 2015

Petro Matad Limited

Final results for year ended 31 December 2014

Petro Matad Limited ("Petro Matad" or "the Company"), the AIM quoted Mongolian oil explorer, announces its audited final results for the year ended 31 December 2014.

Operational Highlights

· Announced farmout agreement for Blocks IV and V with BG Group in April 2015, which became unconditional in June 2015. Farmout consideration in exchange for BG Group earning 78% working interest in the blocks includes: free carry for first $28 million of gross expenditure in Blocks IV and V and cash consideration of $4.55 million (of which $2.75 million has been received).

· Tenders for 2000 kms of 2D seismic acquisition, drilling of two 2000 meter core holes and Airborne Full Tensor Gradiometer (FTG) and High Resolution Aeromagnetics have been issued. These work programmes are to be undertaken in the second half of 2015.

· Two basin opening wildcat exploration wells to be drilled in 2016. The location of the wells will be determined by the results of the work programme undertaken in 2015.

· Discussions with potential partners for Block XX continue.

About Petro Matad Limited

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 the 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.

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Further Information:

Petro Matad Limited

John Henriksen, CFO

+976 11 331099

NOMAD and Broker

Westhouse Securities Limited

Alastair Stratton / Martin Davison

+44 (0)20 7601 6100

Directors' Statement

2014 was a quiet year from the perspective of work programme activities in the field, but it was nevertheless a very active and busy year for the company and its core team of staff. The primary focus was the continuing effort to farmout a working interest share of the Company's acreage, comprising of three Production Sharing Contracts covering some 60,000 square kilometres.

The farmout process, which initially commenced in 2013, finally realised a successful outcome with the conclusion of an agreement with BG Group in April 2015. The agreement enables BG to earn a 78% working interest in Blocks IV and V in West/Central Mongolia, in exchange for a substantial work programme to be carried out at BG's sole cost, as well as the payment of significant cash consideration.

The farmout agreement included two conditions precedent which had to be satisfied before unconditional status could be achieved. The first of these, approval by the Mongolian Government, was obtained on 11 June 2015. The remaining condition precedent was waived by BG Group and consequently the farmout became unconditional on 22 June 2015, when final signed documents were exchanged.

The farmout is a key milestone as for the first time in its history the Company will be undertaking operations with a partner. That the partner is a world class oil and gas producer and explorer enhances the impact of the transaction. The entry of BG Group into Mongolia is a very positive message for exploration in the country in general and the prospectivity of Blocks IV and V in particular.

The planned work programme activities to be undertaken in 2015 and 2016 in Blocks IV and V as a result of the farmout are summarized below.

• Geological field studies. Expeditions are planned to collect additional outcrop data to better understand the evolution of the basins and structures. The fieldwork will be carried out in cooperation with international university research groups, which have been involved in the previous studies in the region.

• Surface Geochemical Survey. The study is aimed at identifying indications of hydrocarbon seeps at surface. To date no geochemical sampling work has been carried out in the region. The survey will be conducted along the new seismic lines that will be acquired in 2015, which will enable the integration of surface seep data with subsurface data to analyse the source of any hydrocarbon seeps.

• 2000 kms of 2D seismic acquisition and processing. The programme has been designed to achieve three main objectives: (1) to infill the existing reconnaissance level and basin definition seismic grids to improve correlation and understanding of the structural and stratigraphic architecture of the petroleum basin systems; (2) to tighten line spacing across previously identified lead and prospect trends such that drillable prospects may be adequately mapped; (3) to expand reconnaissance level and basin definition coverage into unimaged parts of the basin to identify new lead areas, play concepts and improve the resource estimation across a greater basin area.

• Full Tensor Gravimetry (FTG). The survey is designed to provide high-resolution gravity coverage capable of resolving prospect scale structural offsets, which will aid in the correlation between 2D seismic profiles and extrapolate structural networks into frontier areas to delineate future exploration focus areas. This tri-axial gravity measurement is collected and processed in conjunction with high-resolution aero-magnetic surveys and lidar topographic profiles to precisely constrain both lithologic and terrain induced variability in the gravitational field. This will better constrain the subsurface basin structures and correlate structural trends in areas of limited seismic data; and high grade prospective basinal areas in an economical way.

• Core Holes. The two planned 1,500m-2,000m continuous core holes are designed to characterise sedimentologic and stratigraphic properties of the basin fill and inspect the presence/quality of petroleum system elements (source, reservoir, and seal) at the basin margin. These continuous coring operations will be located in a position that will maximise recovery of data within the mechanical limitation of the continuous coring rig. The positions will be tied to deep kitchen areas along specific seismic profiles to improve correlation of sedimentary/stratigraphic architecture, petroleum system packages, and burial history models across the entire basin fill sequence.

• Exploration Wildcat Wells. Two basin centre exploration wildcat wells are planned to be drilled in 2016. To date there have been no exploration wells drilled in the frontier acreage of Blocks IV & V, nor in the surrounding regions. The primary objectives of the wells are to prove the existence of a working petroleum system and play types and ultimately to test the hydrocarbon potential of the structures. The wells will be drilled in optimum locations to allow the full penetration of the stratigraphy to collect data on the source rock and reservoir potential of the basin(s) and to test the hydrocarbon productive potential of the high graded structure(s). The final location of the wells will be determined once the new seismic data has been acquired, processed and interpreted along with the existing geological and geophysical data.

It is worth noting that there are no oil exploration wells and only limited seismic coverage in Central/ Western Mongolia so the planned exploration wells will be the first drilled in this frontier area. The wells will be basin openers that will significantly advance knowledge of, and confidence in, the hydrocarbon potential of the area.

The announcement of 7 April 2015 anticipated that all work programme activities, except one of the exploration wells, would be completed in 2015. The Company now anticipates that both exploration wells will be drilled in 2016, with the remaining work programme activities still being undertaken in 2015. The drilling of both exploration wells in 2016 will provide additional time for the new data arising from this year's work programme to positively influence the location of the wells.

The tender processes for the 2015 programmes commenced in April and contract awards for FTG, core-hole drilling and seismic acquisition are progressing. The tender processes and well design engineering for the 2016 exploration wells are about to commence.

The planned work programme in Blocks IV and V will meet the cumulative PSC commitments in those blocks until the end of the first exploration period in July 2017. Petro Matad will continue to act as operator during this period. BG Group has the option to assume operatorship in any extended PSC term beyond July 2017.

Petro Matad has always taken its health, safety, environment and social action plan responsibilities very seriously. Great care is taken to not negatively impact the communities in proximity to our areas of operation. The Company's record of working with local communities has been exemplary and we fully intend to maintain and even enhance this record. BG Group's commitment to these areas is second to none and their expertise and experience will augment and possibly elevate our own already high standards.

The new Petroleum Law was passed by Parliament in mid-2014, which was a significant step in improving the investment climate for oil exploration in Mongolia, especially as the new law grandfathered the key commercial terms for existing PSC's. This development was instrumental in enabling the farmout to be concluded.

Minimal exploration activity is planned in 2015 in Block XX. Petro Matad's working interest in this PSC remains at 100%. The amount of expenditure in previous years was such that the PSC remains in good standing as cumulative expenditures against cumulative PSC commitments are in surplus. The vast majority of Block XX acreage remains underexplored. Previous reconnaissance and survey activities in the southern portion of the PSC lead us to believe the block has excellent potential. The Company continues to engage in a farmout efforts to try to bring in a proven explorer to assist in future exploration efforts in Block XX.

The structural changes that the Petro Matad Board implemented in 2014 reduced the organisation to a core group of staff that continued the farm-out effort, maintained relations with government and maintained the financial and administrative governance of the Company. The company is currently in process of hiring additional qualified staff to be able to safely, effectively and efficiently meet the requirements and objectives of the planned work programme. The Company's expertise, in conjunction with the secondees to be provided by the BG Group, guarantees that the exploration effort will be properly focused and will increase the probabilities of a successful exploration outcome.

In conclusion, the Board would like to express their great appreciation to our staff, both technical and non-technical, who have worked with enthusiasm and diligence throughout the year, regardless of the challenges that were presented to them. We would also like to express our gratitude to shareholders for their continued support of the Company.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

For the year ended 31 December 2014

The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes.

Consolidated Statement of Financial Position

As at 31 December 2014

The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes.

Consolidated Statement of Cash Flows

For the year ended 31 December 2014

The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2014

The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes.

Notes to the Consolidated Financial Statements

For the year ended 31 December 2014

1. Corporate information

The financial report of Petro Matad Limited (the "Company") for the year ended 31 December 2014 was authorised for issue in accordance with a resolution of the Directors on 29 June 2015.

This financial report presents the consolidated results and financial position of Petro Matad Limited and its subsidiaries (together, the "Group"). The Group's principal activity in the course of the financial year consisted of oil exploration in Mongolia.

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). Its majority shareholder is Petrovis Matad Inc.

Petrovis Matad Inc. is a major shareholder of the Company, currently holding approximately 33% of the shareholding.

2. Summary of significant accounting policies

(a) Basis of preparation

This financial report complies with International Financial Reporting Standards ("IFRS") as adopted by the European Union as issued by the International Accounting Standards Board ("IASB").

This financial report has been prepared on a historical cost basis, except where otherwise stated. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

· Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

· Level 3 inputs are unobservable inputs for the asset or liability.

For the purpose of preparing the consolidated financial statements, the Company is a for-profit entity.

(b) Statement of compliance

This general purpose financial report has been prepared in accordance with the requirements of all applicable IFRS as adopted by the European Union and Interpretations and other authoritative pronouncements of the IASB.

(c) Going concern note

The consolidated entity has incurred a net loss after income tax of $3.940 million (2013: Loss of $7.498 million) and experienced net cash outflows from operating activities of $2.291 million (2013: $6.141 million) for the year ended 31 December 2014.

In addition and as outlined in Note 16(b) the consolidated entity is required to meet minimum exploration commitments in the next 12 months on its PSC's of approximately $7.515 million with further commitments thereafter as disclosed in Note 16(b).

These conditions indicate a material uncertainty that may cast significant doubt over the company and the consolidated entity's ability to continue as going concerns.

The ability of the company and the consolidated entity to continue as going concerns is principally dependent upon raising additional equity and/or further varying and/or deferring PSC commitment expenditures and / or securing farm-out agreements to fund minimum exploration commitments.

In April 2015, the company successfully entered into a farm-out agreement with BG International Limited on Blocks IV and V, which gives access to additional funding necessary to meet the minimum expenditure requirements until the end of the first exploration term in July 2017 under the PSC contracts with the government. The necessary government approval in relation to this transaction has been obtained and all the conditions precedent have been satisfied and as such part funding to the extent of $2.75 million under the farm-out arrangement has now been received.

In relation to Block XX, the consolidated entity will have to arrange for alternative sources of funding to fund the future exploration expenditure commitments of $21.8 million due by July 2017. The Company has engaged in discussions for possible farm-out arrangements of its interest in this Block to potential investors, which would take on part or all of the amount of the exploration spend on this Block as part of the arrangement. In the absence of a farm-out being concluded, the Company will engage with PAM (Petroleum Authority Mongolia) to reschedule current PSC term expenditure commitments. The Company has not formally initiated such discussions with PAM and does not intend to do so until the results of the current farm-out process are known and the fact that the current term for Block XX expires in July 2017.

The directors have prepared a cash flow forecast, which indicates that the consolidated entity will have sufficient cash flows to meet their working capital requirements (excluding minimum exploration commitments) for the 12 month period from the date of signing the financial report.

The directors are satisfied that they will achieve successful outcomes in relation to the matters set out above and therefore the going concern basis of preparation is appropriate. The financial report has therefore been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

Should the company and the consolidated entity be unable to achieve the matters referred to above, there is a material uncertainty whether the company and the consolidated entity will be able to continue as going concerns and, therefore, whether they will realise their assets and discharge their liabilities in the normal course of business and at amounts stated in the financial report.

The financial report does not include adjustments relating to the recoverability and classification of recorded asset amounts, or to the amounts and classification of liabilities that might be necessary should the company and the consolidated entity not continue as going concerns.

(d) Application of new and revised Accounting Standards

Standards and Interpretations adopted in the current year

The consolidated entity has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board that are relevant to their operations and are effective for the current financial reporting period beginning 1 January 2014.

The following new and revised Standards and Interpretations have been adopted in the current period:

· IFRS 10 'Consolidated Financial Statements'

· IFRS 11 'Joint Arrangements'

· IFRS 12 ' Disclosures of Interests in Other Entities'

· IAS 27 ' Separate Financial Statements'

· IAS 27 ' Investments in Associates and Joint Ventures'

· Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities

· Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting

· Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets

· Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities

· IFRIC 21 Levies

The impact of the adoption of the above standards and interpretations did not have a material impact for the group.

Standards and Interpretations in issue not yet adopted

At the date of authorisation of the financial statements, following International Financial Reporting Standards and Interpretations have recently been issued or amended but are not yet effective and have not been adopted by the consolidated entity for the year ended 31 December 2014:

The impact of these recently issued or amended standards and interpretations are currently being assessed by the consolidated entity and impact is not expected to be material.

(e) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. Control is achieved when the Company:

· has power over the investee;

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

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.

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.

(f) Foreign currency translation

Functional and presentation currency

Both the functional and presentation currency of Petro Matad Limited is United States Dollars ("USD"). The Cayman Island subsidiaries functional currency is USD. The Mongolian subsidiaries' functional currency is Mongolian Tugrugs ("MNT") which is then translated to the presentation currency, USD.

Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Exchange differences are recognised in profit or loss in the period in which they arise except for:

· Exchange differences on transactions entered into to hedge certain foreign currency risks; and

· Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal on the net investment.

Translation of subsidiaries' functional currency to presentation currency

The results of the Mongolian subsidiaries are translated into USD (presentation currency) as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at the reporting date.

Exchange differences resulting from the translation are recognised in other comprehensive income and accumulated in the foreign currency translation reserve in equity.

On consolidation, exchange differences arising from the translation of the net investment in Mongolian subsidiaries are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. If a Mongolian subsidiary was sold, the proportionate share of exchange difference would be transferred out of equity and recognised in profit and loss.

(g) Cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(h) Trade and other receivables

Trade receivables, which generally have 30-60 day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less an allowance for impairment.

Collectability of trade receivables is reviewed on an ongoing basis. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. Objective evidence of impairment includes financial difficulties of the debtor, default payments or debts more than 60 days overdue. The amount of the impairment loss is the amount by which the receivable carrying value exceeds the present value of the estimated future cash flows, discounted at the original effective interest rate.

(i) Plant and equipment

Plant and equipment is stated at historical cost less accumulated depreciation and any impairment in value.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset and is currently estimated to be an average of 6.5 years.

The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

(j) 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.

(k) 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.

(l) 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 asset 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 assets (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 impairment loss is treated as a revaluation increase.

(l) Impairment of tangible and intangible assets other than goodwill (continued)

Impairment review for deferred exploration and evaluation assets are carried out on a project-by-project basis, which each project representing a 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; or

· Variations in the currency of operation.

(m) Trade and other payables

Trade and other payables are initially recognised at fair value. After initial recognition, trade and other payables are carried at amortised cost and due to their short term nature are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

(n) Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

Gains and losses are recognised in the profit and loss when the liabilities are derecognised.

The component parts of compound financial instruments are classified as financial liabilities and equity in accordance with the substance of the contractual arrangement. The fair value of the liability portion of a convertible note is determined using a market interest rate for an equivalent non-convertible note. The remainder of the proceeds is allocated to the conversion option. If the conversion option meets the definition of an equity instrument, this amount is recognised and included in shareholders' equity and is not subsequently remeasured.

(o) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. If the effect of the time-value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

(p) Leases

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.

Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit and loss.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as the lease income.

Operating lease payments are recognised as an expense in profit or loss on a straight-line basis over the lease term.

(q) Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or Options are shown in equity as a deduction, net of tax, from the proceeds.

(r) Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific criteria must also be met before revenue is recognised:

Interest revenue

Revenue is recognised on an accrual basis using the effective interest method.

(s) Share-based payment transactions

The Group provides to certain key management personnel share-based payments, whereby they render services in exchange for rights over shares ("equity-settled transactions").

The cost of these equity-settled transactions is measured by reference to the fair value at the date at which they are granted. The fair value is determined by use of the Black Scholes model.

In determining the fair value of the equity-settled transactions, vesting conditions that are not market conditions are not taken into account.

The cost of equity-settled transactions is recognised as an expense on a straight-line basis, together with a corresponding increase in equity, over the period in which they vest.

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects:

· the extent to which the vesting period has expired; and

· the number of awards that, in the opinion of the Directors of the Group, will ultimately vest.

This opinion is formed based on the best available information at the reporting date. The impact of the revision of original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.

Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

(t) Income tax

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the year. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior years is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) that affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the year

Current and deferred tax is recognised as an expense or income in the profit or loss, except when it relates to items credited or debited directly to equity/other comprehensive income, in which case the deferred tax is also recognised directly in equity/other comprehensive income, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill.

(u) 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 conversion of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(v) 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 4.5 year history of the share price and has been estimated in a range from 78% to 220% depending on the date of the grant.

Recovery of the exploration and evaluation assets

The ultimate recoupment of the exploration and evaluation assets is dependent upon successful development and commercial exploitation or alternatively the sale of the respective areas of interest at an amount at least equal to book value. At the point that it is determined that any capitalised exploration and evaluation expenditure is not recoverable, it is written off.

Going Concern

The Group assesses the going concern of the Group on a regular basis, reviewing their cash flow requirements, commitments and status of PSC requirements and funding arrangements. Refer to Note 2 (c) for further details.

3. Operating segments

Operating segments have been identified on the basis of internal reports of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance.

The chief operating decision maker has been identified as the Board of Directors. On a regular basis, the Board receives financial information on a consolidated basis similar to the financial statements presented in the financial report, to manage and allocate their resources. Based on the information provided to the Board of Directors, the Group has one operating segment and geographical segment, being Mongolia; as such no separate disclosure has been provided.

4. Revenues and expenses

(a) Revenue

(b) Employee benefits expense

Included in employee benefits expense are the following:

(c) Exploration and evaluation expenditure

Exploration and evaluation expenditure relates to the following PSCs:

(d) Other expenses

Included in other expenses are the following:

5. Income tax

Income tax recognised in the statement of profit or loss:

(i) The tax rate used in the above reconciliation is the corporate tax rate of 10% payable by Mongolian corporate entities on taxable profits up to 3 billion MNT under Mongolian tax law.

(ii) Petromatad Invest Limited and Capcorp are exempt of Mongolian corporate tax on profits derived from the sale of oil under their PSCs once production commences and are subject to Cayman Islands income tax at a rate of 0%. As a consequence, no provision for Mongolian corporate tax or Cayman Islands current tax or deferred tax has been made in the Company's accounts in relation to them.

Petro Matad Limited is subject to Isle of Man income tax at a rate of 0%. As a consequence, no provision for Isle of Man current tax or deferred tax has been made in the Company's accounts.

6. Loss per share

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

Share Options and Conditional 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.

7. Cash and cash equivalents

Cash at bank and in hand earns interest at fixed and floating rates based on prevailing bank rates, and the fair value of the above cash and cash equivalents is $895,000 (2013: $3,308,000) due to the short-term nature of the instruments.

Reconciliation from the net loss after tax to the net cash flows from operations:

Non-cash investing and financing activities

There were no non-cash investing or financing activities undertaken in the financial year or prior year, other than the exercise of Options and Conditional Share Awards of $0.180 million (2013: $1.179 million).

8. Trade and other receivables

All amounts are recoverable and are not considered past due or impaired.

9. Prepayments and other assets

Other current assets are mainly comprised of consumables, including casing, mud and drilling materials purchased for Block XX.

10. Exploration and evaluation assets

The exploration and evaluation asset arose following the initial acquisition in February 2007 of 50% of Petromatad Invest Limited, together with acquisition on 12 November 2007 of the remaining 50% not already held by the Group, for a consideration of 23,340,000 ordinary shares credited as fully paid up and with an estimated fair value of $0.50 per share, taking into account assets and liabilities acquired on acquisition. This relates to the exploration and evaluation of PSC Block XX.

The ultimate recoupment of exploration and evaluation expenditure is dependent upon successful development and commercial exploitation or alternatively the sale of the respective areas of interest at an amount at least equal to book value.

Management have reviewed for impairment indicators on Block XX and no impairment has been noted.

11. Property, plant and equipment

Reconciliation of carrying amounts at the beginning and end of the year:

12. Trade and other payables (current)

Trade payables are non-interest bearing and are normally settled within 60 day terms.

13. Issued capital

Movements in ordinary shares on issue:

(a) On 25 January 2013, pursuant to the Group's Plan, 500,000 shares were awarded to a former Director exercising Conditional Share Awards with an exercise price per share of $0.01.

(b) On 22 July 2013, Petrovis signed an Equity Subscription Agreement with the Company that resulted in issuance of 90,612,540 ordinary shares to Petrovis and concert parties at a subscription price of GBP0.0356 per share.

(c) On 22 July 2013, pursuant to the Group's Plan, 671,550 shares were awarded to Directors and employees exercising Conditional Share Awards with an exercise price per share of $0.01.

(d) On 27 November 2013, pursuant to the Group's Plan, 1,380,788 shares were awarded to a Director and an employee exercising Conditional Share Awards with an exercise price per share of $0.01.

(e) On 3 October 2014, pursuant to the Group's Plan, 146,400 shares were awarded to former employees exercising Conditional Share Awards with an exercise price per share of $0.01.

14. Reserves

A detailed breakdown of the reserves of the Group is as follows:

Nature and purpose of reserves

Merger reserve

The merger reserve arose from the Company's acquisition of Capcorp on 12 November 2007. This transaction is outside the scope of IFRS 3 'Business Combinations' and as such Directors have elected to use UK Accounting Standards FRS 6 'Acquisitions and Mergers'. The difference, if any, between the nominal value of the shares issued plus the fair value of any other consideration, and the nominal value of the shares received in exchange are recorded as a movement on other reserves in the consolidated financial statements.

Equity benefits reserve

The equity benefits reserve is used to record the value of Options and Conditional Share Awards provided to employees and Directors as part of their remuneration, pursuant to the Group's Long Term Equity Incentive Plan (referred to as "Plan" or "Group's Plan"). Refer to Note 15 for further details of these plans.

Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries.

15. Share based payments

(a) Long Term Equity Incentive Plan

The Group provides long term incentives to employees (including Executive Directors), Non-Executive Directors and consultants through the Group's Long Term Equity Incentive Plan (referred to as "Plan" or "Group's Plan") based on the achievement of certain performance criteria. The Plan provides for share awards in the form of Options and Conditional Share Awards. The incentives are awarded at the discretion of the Board, or in the case of Executive Directors, the Remuneration Committee of the Board, who determine the level of award and appropriate vesting, service and performance conditions taking into account market practice and the need to recruit and retain the best people.

Options may be exercised, subject only to continuing service, during such period as the Board may determine. Options have a term of 10 years.

Conditional Share Awards shall vest subject to continuing service and appropriate and challenging service and performance conditions determined by the Remuneration Committee relating to the overall performance of the Group.

Conditional Share Awards based on performance conditions will vest on achievement of the following performance conditions:

· 25% vest on the first discovery of oil on a commercial scale, estimated by management as being by 30 September 2016;

· 25% vest on the first production of oil on a commercial scale, estimated by management as being by 30 June 2017; and

· 50% vest on the Company achieving the sale of 1 million barrels of oil, estimated by management as being by 30 June 2019.

Other Conditional Share Awards have service conditions tied to employment continuity and are available for vesting in three equal annual instalments on various dates.

(b) Option pricing model

The fair value of Options granted is estimated as at the date of grant using the Black Scholes model, taking into account the terms and conditions upon which the Options were granted.

The following Table summarizes Options granted during 2013, along with relevant details in relation to grant. No options have been issued during 2014.

Options granted above are exercisable as follows:

· 33% one year after grant date

· 33% two years after grant date

· 34% three years after grant date

(c) Movement in Share Options

(d) Share Options Contractual Life

The weighted average remaining contractual life of outstanding share Options is 6.3 years (2013: 6.9 years).

(e) Conditional share awards pricing model

The fair value of Conditional Share Awards granted is estimated as at the date of grant using the Black Scholes model, taking into account the terms and conditions upon which the Awards were granted.

The following Table summarizes Conditional Share Awards granted during 2013 and 2014, along with relevant details in relation to each grant.

Items (1): Conditional Share Awards will vest on achievement of the following performance conditions: (Note: these dates are based on a farmout being successfully concluded in near future, otherwise they will need to be revised)

· 25% vest on the first discovery of oil on a commercial scale, estimated by management as being by 30 September 2016;

· 25% vest on the first production of oil on a commercial scale, estimated by management as being by 30 June 2017; and

· 50% vest on the company achieving the sale of 1 million barrels of oil, estimated by management as being by 30 June 2019.

Items (2): Conditional Share Awards vested on 1 October 2014.

(f) Movement in Conditional share awards

(g) Conditional Share Awards Contractual Life

The weighted average remaining contractual life of outstanding Conditional awards is 13.5 years (2013: 14.5 years).

16. Commitments and contingencies

(a) Operating lease commitments

Operating leases relate to premises used by the Group in its operations, generally with terms between 2 and 5 years. Some of the operating leases contain options to extend for further periods and an adjustment to bring the lease payments into line with market rates prevailing at that time. The leases do not contain an option to purchase the leased property.

The Group has committed to office lease in Mongolia in the amounts of $27,000 as at 31 December 2014.

(b) Exploration expenditure commitments

Petromatad Invest Limited and Capcorp have minimum spending obligations, under the terms of their PSCs on Blocks IV, V and XX with PAM.

The amounts set out below do not include general and administrative expenses.

Prior year expenditure over and above minimum exploration work obligations may be used to reduce the following year's obligation.

Due to the prior focus on Block XX, cumulative expenditures for Blocks IV and V are currently below the minimum PSC commitment at the end of 31 December 2014 by $22.5 million. Under the new petroleum law, the initial exploration term has been extended from five to eight years, without any additional expenditure commitments required to be made; the Company therefore has the years 2015 - 2017 to fulfil the shortfall at the end of 2014. Accordingly, the deficit at end of 31 December 2014 has been allocated over the final three years (2015-2017) of the initial exploration period for the Blocks IV and V PSCs. Further, the relevant authorities have agreed to defer the fulfilling of PSC fee payments until July 2015.

The successful completion of the farm-out of a portion of the Company's Blocks IV and V interests will result in sufficient expenditures in those blocks to fully satisfy all outstanding commitments over the remaining initial exploration term of the PSCs, which runs until July 2017. The majority of the expenditure in the Blocks will occur in 2015 and 2016.

(b) Exploration expenditure commitments (continued)

In relation to Block XX, expenditure in prior years has significantly exceeded minimum PSC commitments and the Company has the option to reduce its spending in Block XX until June 2015. Beyond June 2015, the company will have to arrange for alternative sources of funding (ie capital raising and/or and farm-out arrangements) to fund the future exploration expenditure commitments of $21.8 million due by July 2017.

In event that the Company is unable to complete a successful farm-out or agree a moratorium with the relevant authorities for Blocks, the Company would have an obligation to pay the underspent amount of its minimum obligation commitments at the end of the PSC contract period.

Petromatad Invest Limited and Capcorp can voluntarily relinquish their rights under the PSCs, if the minimum work obligations are completed.

(c) Contingencies

There are no contingencies outstanding at the year end.

17. Related party disclosures

The immediate parent and ultimate controlling party of the consolidated entity is Petro Matad Limited.

The consolidated financial statements include the financial statements of Petro Matad Limited and the subsidiaries listed in the following table: