Petro Matad Regulatory News (MATD)

29 June 2017

Petro Matad Limited

("Petro Matad" or the "Company")

Final results for year ended 31 December 2016

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 2016.

Operational and Financial Highlights

· The net profit after tax for the Group for the 12 months ended 31 December 2016 was $10.90 million (31 December 2015: Loss $0.19 million).

· During the year the Group focused on exploration activities on its Production Sharing Contracts (PSCs) with the Mineral Resources and Petroleum Authority of Mongolia (MRPAM) on Blocks IV, V and XX in Mongolia.

· After year-end:

o In February 2017, reassignment of Blocks IV and V following Shell's affiliate exit; 100% now held by the Group;

o In May 2017, financing agreement with Bergen to provide up to $43.2 million through staged private placements over 15 months, together with a $2 million convertible loan note;

o In May 2017, letter of intent with Sinopec for drilling rig for 2017 drilling campaign; and

o In June 2017, 2-year PSC extensions received from MRPAM for Blocks IV and V.

· As at 31 December 2016 the Group's cash position was $6.48 million (31 December 2015: $5.34 million. Following receipt of the final exit payment from Shell in February 2017 and first financing tranches from Bergen, the Group current cash position is $11.18 million.

No dividends have been paid or are proposed in respect of the year 2016 (2015: Nil).

About Petro Matad

Petro Matad is the parent company of a group focussed on oil exploration, as well as future development and production in Mongolia. At the current time, Petro Matad holds the sole operatorship of three Production Sharing Contracts with the Government of Mongolia. Block XX has an area of 10,340 km² in the far eastern part of the country, and Blocks IV and V have an area of 28,900 km2 and 21,100 km2, respectively, in the west central part of the country.

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

Ridvan Karpuz, CEO +976 70141099 / +976 75751099

Nominated Adviser and Broker

Stockdale Securities Limited +44 (0)20 7601 6100

Richard Johnson / David Coaten

Business Advisory Firm

FTI Consulting

Edward Westropp +44 (0)20 3727 1521 / +44(0) 7920 453 705

Annual Report and Accounts

The Company's statutory annual report and accounts will be dispatched electronically to shareholders today and will be posted shortly to shareholders who have elected to receive hard copies of the Annual Report. Additional copies of the Annual Report may be requested directly from the Company and an electronic copy is available on the Company's website www.petromatadgroup.com .

Annual General Meeting ("AGM")

A notice of the Company's AGM will be distributed in due course and be made available on the Company's website www.petromatadgroup.com.

Directors' Statement

Petro Matad has an extensive onshore licence position (60,500 km2) in three petroleum blocks. Blocks IV and V are in a regionally proven play, with virgin undrilled frontier acreage in West Central Mongolia. The 2016 financial year was a busy and exciting one for the Company, as it brought Petro Matad to a stage of being ready to drill wildcat exploration wells in Blocks IV and V in 2017.

Our 2016 work programme focused on high grading basins and maturing prospects to drillable targets, and building a diversified drilling prospect portfolio in Blocks IV and V. Our objective is to generate significant shareholder value through our upcoming drilling programme. Our exploration strategy is focused on "play-based" exploration by systematically de-risking and high-grading prospective basins with geological and geophysical studies by introducing state of the art exploration techniques. In addition to our wildcat exploration drilling campaign, the Company intends to acquire 300 km2 of 3D seismic in the Tugrug Basin in Block V, where the TSC-1 core hole has already proved a working petroleum system by recovering live oil, to de-risk prospects and to generate drillable targets. This will be the first time 3D seismic will have been acquired in this region and the results are expected to generate additional prospects with higher chances of success for our upcoming drilling campaign in 2018.

As this area of Mongolia has never seen exploration drilling for hydrocarbons, the wells will not only be play and basin openers for our blocks, but also for an entire geographic area of the country.

The exit of Shell's Affiliate from Blocks IV and V (which followed Shell's acquisition of BG Group) did not alter Petro Matad's work programme plans as the exit payments made by Shell funded all planned activities during the year.

Farmout process

In November 2016, the Company embarked on a farmout campaign. The Company is of the view that sharing the risk of frontier exploration is a prudent approach for conserving existing funds and accessing additional funds, which will also allow for a more comprehensive exploration effort to fully explore the Company's vast frontier acreage. Significant interest has been shown by potential partners in the farmout campaign. The farmout process continues and, at the time writing, a number of companies remain engaged in discussions that could result in an agreement. Almost universally, parties that have visited Petro Matad's virtual and physical data rooms have expressed very positive views on the technical aspects and prospectivity of our blocks. However, new country entry is always a substantial hurdle for any potential farmout partner and that is a principal factor resulting in their internal review processes to take significantly longer than for opportunities where they already have a presence in the country.

Financing flexibility

To ensure that Petro Matad is well financed in the event a farmout is not concluded on a timely basis, the Company investigated several financing opportunities and, on 8 May 2017, entered into an agreement with Bergen Asset Management, LLC (Bergen) which, in the Board's view, offered the most attractive package. The agreement provides staged private placements of up to US$43,200,000 worth of new ordinary shares in the Company and a US$2,000,000 convertible instrument. The staged private placements will occur approximately monthly, over a period of up to 15 months, with the value of each tranche ranging between $1.2 million - $3.0 million per month, the precise amounts being subject to mutual agreement. The funding provided by the agreement with Bergen provides the Company with the financial flexibility to enable it to carry out its 2017 and 2018 work programmes. It is important to note that the Bergen facility may be cancelled at any time by the Company and, if appropriate under the circumstances, this would be an option that the Company would consider if or when a farmout is concluded. The funds from each tranche are received prior to the issuance of the new shares for each tranche.

On 15 June 2017, the Company announced that the MRPAM had formally approved an extension of the exploration period for the Blocks IV and V PSCs, for 2 years each, until 29 July 2019. A further two-year extension is provided for in the PSCs, which the Company will be eligible to apply for in early 2019.

With funding secured and the commencement of the drilling programme in the near term, the Company is poised to enter a new and exciting chapter in its history, especially given the exploration potential of our blocks. The following points from the PETEX conference presentation made by Petro Matad in November 2016, reinforces this point.

· With the incorporation of the results of the data acquired during the 2015-2016 exploration work program (including the acquisition of 1660 km of 2D seismic and 11,000 km2 of Full Tensor Gradiometer & High Resolution Aeromagnetic data), the Company has significantly upgraded its prospective basin portfolio. The current data coverage in the Company's acreage has revealed 12 prospective basins and this is likely to increase as further work programme activities, including seismic acquisition, are undertaken in the future. Therefore, excellent potential for discovering material hydrocarbon volumes exists within the Company's acreage.

· Regional petroleum basin modelling and play evaluation work has addressed 6 key basins where the data coverage is currently more complete; these are: Biger, Shal, Baatsagaan, and Baidrag in Block IV; and Taats and Tugrug in Block V. The other basins (which only have sparse data coverage) that make up the remainder of the 12 prospective basins are: Delger, Bayantsagaan, Khangai, Orog, Khovor and Guchin-Us.

· The Company's in-house estimates of undiscovered petroleum resources initially in place, as determined by its exploration team and consultants following the interpretation acquired datasets in Blocks IV and V, show potentially generated hydrocarbons using the play and basin analysis method on the 6 high-graded key basins of circa 90 billion barrels of oil in the Upper Jurassic-Lower Cretaceous play, which is the proven and producing petroleum system in Mongolia. The volume of potentially trapped oil ranges from 9 to 23 billion barrels of Stock Oil Initially in Place (STOIIP), assuming trapping efficiencies of 10% to 25%. Further upside potential exists in the deeper Permian-Jurassic play, which is analogous to the prolific systems in the western Chinese basins. The remaining six other sub-basins and other areas with limited data coverage will be the focus of future new seismic acquisition to determine their prospectivity potential.

· The Company's play and basin focused exploration strategy has enabled the Company to build a portfolio which contains a wide range of exploration opportunities. This diversified basin portfolio approach has provided the framework for a spectrum of leads and prospects with different risk and reward factors, to be developed. The result is that the Company has an extensive drill-ready high impact prospect portfolio for the upcoming 2017 drilling campaign and beyond.

2016 and 2017 Work Programme Summary

The 2D seismic acquisition programme that commenced in 2015 and was completed in 2016 was designed to: 1) improve basin-scale definition over the greater Baatsagaan trend of central Block IV, and 2) elevate data coverage to prospect-scale for drill target definition over two priority areas - the Taatsiin Basin of Block V and the high-graded Baidrag Graben of Block IV.

The first phase of the seismic programme in Block IV was completed in December 2015, with 1085 kms of high quality data being acquired. The results were encouraging and led to the discovery of the attractive Baidrag Graben trend, which was the focus area of the 2016 seismic infill programme in Block IV, which after a winter break was acquired in May 2016. Operations then moved to Block V with seismic acquisition commenced in June 2016 where 256 km of seismic were acquired for targeting and developing leads as well as to pinpoint possible well locations in the Taatsiin Basin.

Since completing the seismic acquisition programme in August 2016, the Company has been primarily focused on interpreting data to develop a leads and prospects portfolio, several which are now drill-ready.

The Company completed its tender processes for a drilling rig and related services and on 31 May 2017, awarded a Letter of Intent (LOI) to Sinopec Mongolia LLC (Sinopec). The formal signing of the drilling contract is expected in the very near future. Sinopec has initiated preparation processes for commencement of rig mobilization.

The key work programme activity that is planned over the remainder of 2017 is to drill two wildcat exploration wells and to acquire approximately 300 square km. of 3D seismic over the Tugrug Basin in Block V. Details on the specific drilling targets will be provided by announcements to the market prior to spudding the wells. The 3D Seismic programme is designed to acquire data over the Tugrug Basin, which is in a remote area 600 km southwest of Ulaanbaatar, in Block V. The main objectives of the 3D survey are to de-risk/high-grade drillable prospects and understand further upside and play potential in the basin. The currently identified leads and prospects in the basin were defined on 2D seismic acquired in 2010, 2011, and 2013.

It should be noted that the Tugrug basin is structurally complex and the 2D interpretation leaves a high level of uncertainty regarding fault linkage and trap definition, which the 3D survey is expected to resolve and further identify the stratigraphic traps which are now proven to be most prolific producing trap styles in similar lacustrine basins. The target formations are in the late Jurassic-early Cretaceous fluvial-lacustrine Mega-Sequence. Drilling of the most optimal prospect is planned in 2018.

In relation to Block XX, in April 2016 the Petroleum Authority of Mongolia provided a one-year moratorium covering the calendar year 2016, which froze the obligations that would have normally been incurred, while at the same time extending the current license period to July 2018. The moratorium has enabled the Company to focus on the Block IV and V work programmes in 2016, while providing additional time to seek interested partners in exploring the highly prospective Block XX acreage.

Governance

During the period, the Company also strengthened the Board with the addition of Tim Bushell as a Non-Executive Director. Tim is a highly experienced public company director in the UK as well as a trained Geo-scientist. Tim's exploration background and capital markets experience will reinforce the Board's commercial and technical expertise as the Company enters an important period in its development.

HSSE

As part of the board's ongoing process of continual improvement the Company's Health Safety Security and Management System (HSSE MS) is now fully structured according to International Association of Oil and Gas Producers (IOGP) guidelines.

All incidents are investigated, recorded and classified according to IOGP guidelines and learnings are shared through the management review process.

The Company is deeply focused on environmental protection. This was evident during the seismic acquisition programmes in 2015 and 2016. To ensure both legal compliance when working near protected areas and to minimise all adverse environmental impacts, detailed environmental and cultural sensitivity field studies by specialist consultants were also commissioned. No environmental complaints were received during any of the Company's field activities.

Community Relations

The Company takes its responsibilities in community engagement and relations very seriously. In advance of any work programme activity being undertaken, the Company obtains approval from MRPAM and then invites them to join Company representatives on trips to local communities to present the planned activities. In addition to meeting local government officials, the socialisation programme will also normally include town hall meetings where questions by local residents are answered. Company representatives will also meet with herders who may be in proximity to planned operations.

In all the various work programmes the Company has undertaken over the years, community support has always been provided and no disruption to work or serious community issues have arisen. This is a record the Company is proud of and works hard to consistently achieve.

Outlook - a busy period moving the business towards exploration drilling.

2017 has already started well with the de-risking of the balance sheet through the equity financing agreement with Bergen, as well as the agreement with Sinopec for a drilling rig. Looking ahead we are anticipating finalising the drilling contract and mobilising the rig out to location on Block V in Q3 2017 and spudding the well in September 2017. Following this first well, we then expect to move directly to drill the second well. Both the wells are fully funded from existing resources and we will be announcing details of the drill targets ahead of the commencement of the campaign.

We look forward to updating shareholders regularly as to our progress with our drilling campaign and other corporate developments.

Conclusion

The Board would like to express their appreciation to our staff, both technical and non-technical, who have worked with enthusiasm and diligence throughout the year. 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 2016

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 2016

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 2016

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 2016

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 2016

1 Corporate information

The financial report of Petro Matad Limited (Company) for the year ended 31 December 2016 was authorised for issue in accordance with a resolution of the Directors on 28 June 2017.

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 (Company) a company incorporated in the Isle of Man on 30 August 2007 has four wholly owned subsidiaries, including Capcorp Mongolia LLC and Petro Matad LLC (both incorporated in Mongolia), as well as Central Asian Petroleum Corporation Limited (Capcorp) and Petromatad Invest Limited (both incorporated in the Cayman Islands). The Company and its subsidiaries are collectively referred to as the "Group". Petro Matad Service Limited, a subsidiary of the Company was dissolved on 1 January 2016, as the company was dormant due to no longer being operationally required.

Petrovis Matad Inc. is a major shareholder of the Company, holding approximately 32.06% of the shareholding at the year end of 2016.

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.

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 related Interpretations and other authoritative pronouncements.

(c) Going concern note

The financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the ordinary course of business.

The Group generated a profit of $10.89 million (2015: $0.19 million loss) and experienced net cash inflows from operating activities of $1.79 million (2015: $4.58 million). In addition, as outlined in note 16(b) the Group is required to meet minimum exploration commitments in the next 12 months on its Petroleum Sharing Contracts ("PSCs") of approximately $8.41m with further commitments of $21.07m thereafter.

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

The ability of the Group to continue as a going concern is principally dependent upon a combination of 1 or more of the following:

· Being able to draw down a minimum of $22.50m from the Bergen Asset Management Placement and Convertible Note agreement.

· Raising additional equity

· Further varying and/or deferring PSC commitment expenditures; and/or

· Securing farm - out agreements to fund minimum exploration commitments.

On 8 May 2017, the Company announced a Private Placement/Convertible Note arrangement with Bergen Asset Management, LLC, which provides staged private placements of up to $43.20 worth of new ordinary shares in the Parent company and a convertible instrument with a nominal value of $2.00m. The staged private placements will occur over a period not exceeding 15-months and the value of each tranche will range between $1.20m - $3.00 m per month, the precise amounts above $1.20m if any being subject to mutual agreement. The funds payable to the Company as a result of this arrangement will enable it to fund an aggressive work program, which will result in meeting all PSC expenditure commitments if $22.5m or more is received over the life of the agreement.

On 14 June 2017, the Company received PSC extension approvals from the Mineral Resource Authority of Mongolia ("MRPAM") for Blocks IV and V. These extensions are for two years to 29 July 2019. A further extension of two years is allowed under the PSCs. The agreed financial commitments for obtaining the extensions are $5m for Block IV and $2m for Block V over the two year extension period not including the existing commitments.

The Block XX PSC term was extended to July 2018 as a result of MRPAM's approval of a one year moratorium in 2016. Although the financial commitment did not increase as a result of the moratorium, the Group is still required to spend an additional $21.30m by the end of the current term in July 2018. The Company is currently in negotiations with MRPAM to substantially reduce this commitment in exchange for agreeing to restate the Block XX PSC in accordance with the new Petroleum Law. The Company is willing to consider this since all the key commercial terms are grandfathered and will not change. The outcome of these negotiations are unknown at this time.

The directors have prepared a cash flow forecast, which indicates that the Group will have sufficient cash flows to meet all commitments and working capital requirements for the 12 month period from the date of signing this 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 Group be unable to achieve the matters referred to above, there is a material uncertainty whether the Group will be able to continue as a going concerns, 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 nor to the amounts and classification of liabilities that might be necessary should the Company and the Group not continue as going concerns.

(d) Application of new and revised Accounting Standards

Standards and Interpretations adopted in the current year

The Group 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 2016.

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

§ Annual Improvements to IFRSs 2010- 2012 Cycle and 2011-2013 Cycle

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, the 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 Group for the year ended 31 December 2016:

The impact of these recently issued or amended standards and interpretations are currently being assessed by the Group 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 six 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 6.0 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.

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

(v) Interest in Joint Operations

Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

A joint operator recognises the following in its financial statements in respect to the joint operation:

· its assets including its share of any jointly held assets;

· its liabilities, including its share of any jointly incurred liabilities;

· its revenue from the sale of its share of the output arising from the joint operation;

· its share of the revenue from the sale of the output by the joint operation; and

· its expenses, including its share of any expenses incurred jointly

The group accounts for the assets, liabilities, revenues and expenses relating to its interest in a Joint operation in accordance with IFRSs applicable to the particular asset, liabilities, revenues and expenses.

(w) 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 10% to 120% 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

* On 28 April 2016, Shell which acquired BG Group, through its affiliate company issued an Exit Notice to Petro Matad's 100% owned subsidiary, Capcorp, exercising the exit option under the Farmout Agreement (FOA) dated 7 April 2015, to withdraw from Blocks IV and V Production Sharing Contracts in West/Central Mongolia. In accordance with provisions of the FOA, Shell's affiliate company was required to pay an exit payment of $10,005,303, which was received by the Company on 9 August 2016, which along with Cash calls paid by Shell's affiliate prior to their exit accounts for the Other Income amount.

On 1 Feb 2017, following the withdrawal of Shell's Affiliate from Mongolia, $5 million was received from the Affiliate, which was in relation to an agreement that such amount would be paid upon receipt of Mongolian government approval for the reassignment of Block IV and V interests back to the Company.

(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:

The prima facie income tax benefit on pre-tax accounting loss from continuing operations reconciles to the income tax expense/(benefit) in the financial statements as follows:

(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 Earnings/(Loss) per share

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

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 $6,479,000 (2015: $5,339,000) due to the short-term nature of the instruments.

Reconciliation from the net gain/(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 (2015: $0.79 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 23 April 2015, pursuant to the Group's Plan, 5,750,946 shares were awarded upon exercise of Conditional Share Awards with an exercise price per share of $0.01 pursuant to the Cash Preservation Scheme.

(b) On 27 July 2015, pursuant to the Group's Plan, 2,256,550 shares were awarded upon exercise of Conditional Share Awards with an exercise price per share of $0.01 pursuant to the Cash Preservation Scheme.

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 ("Plan" or "Group's Plan")

The Group provides long term incentives to employees (including Executive Directors), Non-Executive Directors and consultants through the 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 2017;

· 25% vest on the first production of oil on a commercial scale, estimated by management as being by 30 September 2019; and

· 50% vest on the Company achieving the sale of 1 million barrels of oil, estimated by management as being by 30 September 2020.

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.

No options have been issued during 2015 and 2016.

(c) Movement in Share Options

(d) Share Options Contractual Life

The weighted average remaining contractual life of outstanding share Options is 3.8 years (2015: 5.7 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 2015, along with relevant details in relation to each grant.

No awards have been issued during 2016.

(f) Movement in Conditional share awards

(g) Conditional Share Awards Contractual Life

The weighted average remaining contractual life of outstanding Conditional awards is 11.5 years (2015: 12.5 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.

Due to prepayment of rent, the Group has no commitment for office lease in Mongolia as at 31 December 2016.

(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.

(c) Contingencies

On 5 August 2016, Shell through its Affiliate company announced it would be withdrawing from Blocks IV and V in West/Central Mongolia. As part of the negotiations leading to formal Mongolian Government approval of the reassignment of interest from Shell's Affiliate to Petro Matad's Affiliate, Shell agreed to a payment of US$5 million to be remitted to Petro Matad's Affiliate upon such government approval being received. A condition to the payment by Shell is that the proceeds would be repaid to Shell by Petro Matad in the event a farmout is concluded in future prior to the development of either Block IV or V. There is no certainty that such farmout will be concluded in future in which case funds would not be repaid. The US$5 million payment was received on 1 February 2017.

17 Related party disclosures

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

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

Subsidiary Details

Capcorp Mongolia LLC was acquired on the 14 August 2006, on incorporation of the Company. Capcorp holds 1,000,000 ordinary shares of MNT150 each.

Petromatad Invest Limited was acquired on 12 November 2007. Petro Matad Limited and Capcorp each hold 25,000 shares of $1 each.

Central Asian Petroleum Corporation Limited was acquired on 12 November 2007. Petro Matad Limited holds 43,340,000 ordinary shares of $0.01 each.

Petro Matad LLC is 100% owned by Petromatad Invest Limited. Petromatad Invest Limited holds 15,000 ordinary shares of MNT10,000 each.

Petro Matad Services Limited is 100% owned by Petro Matad Limited. Petro Matad Limited holds 1 ordinary share of $1. Petro Matad Services Limited was dissolved on 1 January 2016.

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

Petrovis Matad Inc. is a major shareholder of the Company, currently holding approximately 32.06% of the shareholding.

18 Key management personnel

(a) Details of Directors

The names of the Company's Directors, having authority and responsibility for planning, directing and controlling the activities of the Group, in office during 2015 and 2016, are as below:

The Directors were in office until the date of this report and for this entire year unless otherwise stated.

Directors

Oyungerel Janchiv Non-Executive Director Resigned as Chairperson 1 August 2015

Enkhmaa Davaanyam Non-Executive Chairperson Appointed as Chairperson 1 August 2015

Philip Arthur Vingoe Non-Executive Director Retired 10 March 2017

Amarzul Tuul Executive Director

John Rene Henriksen Chief Financial Officer

Mehmed Ridvan Karpuz Chief Executive Officer Appointed as CEO 1 October 2015

Timothy Paul Bushell Non-Executive Director Appointed 10 March 2017

(b) Compensation of Directors

(c) Other key management personnel transactions

There were no other key management personnel transactions during the year (2015: Nil).

19 Financial risk management objectives and policies

The Group's principal financial instruments comprise cash and short-term deposits classified as loans and receivables financial assets.

The main purpose of these financial instruments is to raise capital for the Group's operations.

The Group also has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. It is, and has been throughout the year under review, the Group's policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group's financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk.

The Board is responsible for identification and control of financial risks. The Board reviews and agrees policies for managing each of these risks as summarised below.

Risk Exposures and Responses

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument or cash flow associated with the instrument will fluctuate due to changes in market interest rate. Interest rate risk arises from fluctuations in interest bearing financial assets and liabilities that the Group uses. Interest bearing assets comprise cash and cash equivalents which are considered to be short-term liquid assets. It is the Group's policy to settle trade payables within the credit terms allowed and the Group does therefore not incur interest on overdue balances.

The following table sets out the carrying amount of the financial instruments that are exposed to interest rate risk:

Sensitivity Analysis

If the interest rate on cash balances at 31 December 2015 and 2016 weakened/strengthened by 1%, there would be no material impact on profit or loss. There would be no effect on the equity reserves other than those directly related to other comprehensive income movements.

Foreign currency risk

As a result of operations overseas, the Group's Statement of Financial Position can be affected by movements in various exchange rates.

The functional currency of Petro Matad Limited and presentational currency of the Group is deemed to be USD because the future revenue from the sale of oil will be denominated in USD and the costs of the Group are likewise predominately in USD. Some transactions are however dominated in currencies other than USD. These transactions comprise operating costs and capital expenditure in the local currencies of the countries where the Group operates. These currencies have a close relationship to the USD and management believes that changes in the exchange rates will not have a significant effect on the Group's financial statements.

The Group does not use forward currency contracts to eliminate the currency exposures on any individual transactions.

The following significant exchange rates applied during the year:

Sensitivity Analysis

A 5% strengthening/weakening of the MNT against USD at 31 December 2015 and 2016 would not have a material effect on profit and loss or on equity.

Price risk

The Group's exposure to price risk is minimal as the Group is currently not revenue producing other than from interest income.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Group is exposed to credit risk on its cash and cash equivalents and other receivables as set out in Notes 7 and 8 which also represent the maximum exposure to credit risk. The Group only deposits surplus cash with well-established financial institutions of high quality credit standing.

In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts is not significant.

There are no significant concentrations of credit risk within the Group.

Maximum exposure to credit risk at reporting date: