Management Resource Solutions Regulatory News (MRS)

1 Sep 2005 07:01

Melrose Resources PLC01 September 2005 FOR IMMEDIATE RELEASE 1 SEPTEMBER 2005 MELROSE RESOURCES PLC Interim Results for the six months ended 30 June 2005 Melrose Resources plc, the oil and gas exploration and production company withinterests in Bulgaria, Egypt, France and USA, today announces its interimresults for the six months ended 30 June 2005: HIGHLIGHTS Financial Highlights • 231% increase in turnover to US$47.3 million (2004: US$14.3 million); • 268% increase in EBITDA to US$36.8 million (2004: US$10.0 million); • 653% increase in profits after taxation to US$17.7 million (2004: US$2.4 million); • 574% increase in EPS to 22.9 cents per share (2004: 3.4 cents per share); Operational Highlights • 301% increase in production to 13.8 Bcfe (2004: 13.4 Bcfe): - average daily production of 76.2 MMcfepd (2004: 18.9 MMcfepd); • significant El Tamad oil discovery in Nile Delta; • exploration licences secured in core areas: - 6 year extension to El Mansoura Concession, Egypt; - new South East El Mansoura Concession, Egypt, awarded in Q1 2005; • Galata gas field compression project in progress. Commenting on this, Robert Adair, Chairman, said: "These are excellent results with good growth in all the key performanceparameters. The next few months should prove very interesting with the drillingprogramme about to start in Bulgaria and, in Egypt, I am particularly excitedabout the El Tamad oil discovery and the good number of analogous prospects. Wehope to test some of these prospects, which appear larger than El Tamad, overthe next few months." For further information please contact: Melrose Resources plcRobert Adair, Chairman 0184 553 7037David Curry, Chief Executive 0131 221 3360Munro Sutherland, Finance Director 0131 221 3360Chris Thomas, Corporate Development Director 0207 462 1603 Buchanan Communications Ben Willey 0207 466 5000 or visit www.melroseresources.com Chairman's statement In the first half of 2005 Melrose has achieved a further increase in productionand in profitability. We are well positioned for further growth in shareholdervalue. Egypt In Egypt, an active drilling programme has balanced our objectives of increasingproduction and adding reserves through exploration and appraisal drilling. Threedrilling rigs were engaged on the El Mansoura Concession for the whole periodwith a total of 11 wells drilled. Gross field production rose from 51 MMcfepd atthe start of the period to approximately 75 MMcfepd in June. This was slightlyless than planned but at the end of the period additional production equivalentto approximately 45 MMcfepd had been established through drilling and waswaiting to go on production. One of the drilling rigs has been farmed-out sinceJuly and two rigs are active currently. The third rig is expected to returnbefore the end of the year and a fourth rig has been sourced to allow a step-upin activity in the first half of 2006. The 3-D seismic acquisition crew was alsofarmed-out to another operator in March while the results of the recent dataacquisition were evaluated. The crew is expected to return during October andfurther acquisition will be concentrated in the south of the concession in thearea of the El Tamad oil discovery and on the new South East El MansouraConcession. In April the Egyptian Parliament confirmed a six-year extension, in twothree-year extension periods, to the term of the El Mansoura ExplorationConcession from June 2006 to June 2012, without a requirement for furtherrelinquishment from the existing concession area. This extension is veryimportant as it allows us more time for evaluation of drilling results andinterpretation of our large new seismic database while planning further drillingactivity. Subsequently, in June, the award of the South East El MansouraConcession was confirmed and the documentation signed. This area is believed tocontain the extension of the plays we have encountered successfully in the ElMansoura Concession. The outstanding drilling result of the period has been the El Tamad No.1 oildiscovery in the Sidi Salim formation in the southern part of the Concession,the first black oil discovery in the Nile Delta. This well tested at a rate inexcess of 2,000 bopd and we hope to establish oil production by year-end. Thestructure is being appraised by the El Tamad No.2 appraisal well, which is beingdrilled down-dip from the No.1 location. El Tamad lies on a trend of Sidi Salimpinch-out traps, some potentially large, which arcs north-east through thesouthern area of the concession and also extends south into the South East ElMansoura Concession. This play provides an exciting new focus for ourexploration programme, particularly as oil and condensate production in Egyptreceives the full benefit of the current higher oil price. Elsewhere, the South Batra No. 21 production well confirmed the Abu Madipotential but also encountered good gas shows in the deeper and over-pressuredSidi Salim formation. The shallow Pliocene horizon continues to provide us witha good exploration success rate. Bulgaria Production performance from the Galata field has been impressive. Production inthe first half totalled 9.5 Bcf which is an average of 52.4 MMcfpd. The projectto install field compression, which will allow us to maintain production levelsand extend field life, is well advanced. The compressor was delivered to theprocess facilities in August and is expected to be operational in October. The planned drilling programme in Bulgaria is scheduled to commence shortly withthe spudding of an appraisal well on a structure immediately to the east of theGalata field. If this finder well is successful, a production well will bedrilled from the Galata platform to allow production of the reserves through theexisting Galata facilities. An exploration well is scheduled for September inthe southern area of the Block Kaliakra 99 exploration concession, to the southof the Galata field. This well will test a higher-risk stratigraphic target inthe Eocene/Oligocene formation. Interpretation of the new 3-D seismic over BlockKaliakra 99 has yielded encouraging results with some larger prospectsidentified in the channel and fan systems which extend south and east from theBlitznazi fault. Interpretation and evaluation work has started on the Emine and ResovskaConcessions. Additional seismic data over the concessions have been purchasedand are being re-processed. The newly-acquired data will be integrated with ourexisting data-base as part of our overall shelf area review. Three prospects onResovska have been identified and evaluated in detail using the existing 2-Ddata. We will consider whether to acquire additional 3-D data prior to drilling.Our evaluation of Emine and Resovska will continue in conjunction with theKaliakra 99 seismic evaluation over the next six months and plans are being madefor an active drilling programme in 2006. A jack-up rig has been located and asemi-submersible drilling rig is also being contracted to allow drilling in thedeeper water areas in the east of the concessions. USA In the USA, we drilled 7 new wells on the Jalmat Unit in the first half of theyear with consistently good results. We had planned to drill 10 new wells in thefirst half of the year, but the tight rig market prevented us achieving thisobjective. We have also continued with the implementation of the waterfloodprojects on the Jalmat, Artesia and Turner Gregory fields. We now have twoactive injection programmes on the Jalmat and Artesia fields and we expect toinitiate two further waterfloods in the Artesia and Turner Gregory fieldsshortly, after resolving some minor regulatory issues. We have two drillingrigs contracted during the second half of this year, to drill 15 new wells, andwe are looking to contract a third rig. We are trying to accelerate the drillingprogramme to take advantage of current high oil prices as attainment ofproduction in the USA of 3,000 boepd by the end of 2007 is an important aim forthe Group. France We are currently carrying out a detailed evaluation of the 2001 TGS seismic dataover the concession area. Additional older seismic data have been purchased andafter re-processing will be integrated to assist in interpretation. Depthconversion in the post-salt sequence is being re-evaluated in conjunction withthis evaluation of the seismic data. We have also initiated basin modellingstudies with particular interest in the potential for hydrocarbon source in thedeep Rhone Basin. All of these studies will be integrated and reviewed prior toany farm-out effort. The initial work is supporting our belief that theconcession area may hold exciting exploration opportunities. Results for the six months ended 30 June 2005 The results for the period have been prepared under International FinancialReporting Standards ("IFRS"). The results have also been prepared for the firsttime in US dollars which is the functional currency of the Group. The mainimpact of the adoption of IFRS on the financial results are the inclusion inoverhead costs of an expense calculated on the basis of the fair value ofemployee share options which have been granted since 7 November 2002 (IFRS 2 -Share-Based Payment) and the inclusion of a deferred tax asset in relation toall outstanding employee share options (IAS 12 - Income Taxes). The financialeffect of these changes on the previously reported profit after tax is shownbelow. In the six months ended 30 June 2005 the Group benefited from greatly increasedproduction and higher oil prices. The results show a profit before taxation of$22,757,000 (six months ended 30 June 2004, profit of $6,022,000). Profit aftertaxation was $17,727,000 (six months ended 30 June 2004, profit of $2,353,000).The results for the period include a profit on the disposal of a minorityshareholding in Renova Energy plc ("Renova") of $3,752,000. The results alsoinclude a profit of $3,699,000 which arises from the booking at market value atthe period-end of an option over certain shareholdings in Renova. Net daily production in the six months ended 30 June 2005 averaged 76.2 MMcfepd(12,703 boepd) which compares with 47.9 MMcfepd (7,986 boepd) during the wholeof last year. Production was split 1,096 Mcfpd and 766 bopd in the USA, 17,072Mcfpd and 166 bcpd in Egypt and 52,453 Mcfpd in Bulgaria. Average net productionin the same period in 2004 was 1,036 Mcfpd and 588 bopd in the USA, 10,935 Mcfpdand 72 bcpd in Egypt and 2,957 Mcfpd in Bulgaria. Average prices receivedduring the period were $48.65 per barrel and $3.06 per Mcf compared with $33.54and $2.79 in 2004. EBITDA for the period was $36.8 million (2004, $10.0 million). Capitalexpenditure during the period amounted to $31.5 million (six months ended 30June 2004, $27.4 million). Capital expenditures were split between Egypt - $18.1million, Bulgaria - $6.9 million, USA - $5.5 million and France - $1.0 million. Outlook Current gross production in Egypt is approximately 72 MMcfepd and is expected torise to over 100 MMcfepd by the year-end. This will give net production forMelrose of over 23 MMcfepd. Production from the Galata field is currently around45 MMcfpd and is expected to rise to the winter level of approximately 60 MMcfpdin the fourth quarter. In the USA, current production of approximately 1,000boepd is slightly lower than planned due to unavailability of drilling rigs.Fifteen development wells are planned before the end of the year and this shouldresult in a steady increase in production rates and we hope to be on target byyear end. Drilling activity in Egypt in the second half will again be a combination ofappraisal and development drilling, mainly in the South Batra and South Mansouraareas, with exploration drilling to both Pliocene and Miocene targets. Theappraisal of the El Tamad discovery and further exploration in the Sidi Salimtrend will be important. The majority of capital expenditures in Egypt are nowbeing funded from cash flow. In Bulgaria the results of the autumn drillingprogramme will be significant and an active exploration drilling programme isbeing planned for 2006. The completion of a share placing in May realised approximately $7.4 million forMelrose while the sale of shares in Renova in June and the subsequent repaymentby Renova of a loan from Melrose realised a total of approximately $7.5 millionfor Melrose. Group capital expenditures are being funded by a combination ofthese receipts, cash flow from operations and Group debt facilities. All of theassets in our portfolio are performing well and offer promise for the future andI continue to be excited about the potential for the Group. Robert F M AdairChairman31 August 2005 Consolidated income statement 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 restated restated $000 $000 $000 Unaudited Unaudited Unaudited Note Revenue 4 47,282 14,272 59,069 Production costs (6,184) (2,165) (5,924)Depletion (17,249) (2,854) (21,146)Decommissioning charge (553) (53) (600) Cost of sales (23,986) (5,072) (27,670) Gross profit 23,296 9,200 31,399 Administrative expenses (4,327) (2,146) (4,793) Profit from operations 18,969 7,054 26,606 Financing income 7,686 163 457Financing costs (3,898) (1,195) (7,702) 3,788 (1,032) (7,245) Profit before taxation 22,757 6,022 19,361 Taxation 5 (5,030) (3,669) (5,649) Profit for the period 17,727 2,353 13,712 Earnings per share (cents) 6 23.2 3.5 19.2 Diluted earnings per share (cents) 6 22.9 3.4 18.6 Note: All activities are continuing activities. Consolidated balance sheet 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 restated restated $000 $000 $000 Unaudited Unaudited Unaudited NoteNon-current assetsProperty, plant and equipment 204,004 173,547 201,637Intangible assets 33,322 13,592 18,390Investments 3,602 - -Deferred tax 10,280 8,649 10,501Long-term receivables - 2,750 2,919 251,208 198,538 233,447 Current assetsTrade and other receivables 22,744 11,448 19,361Cash and cash equivalents 20,288 5,266 4,237 43,032 16,714 23,598 Total assets 294,240 215,252 257,045 Current liabilitiesTrade and other payables (11,457) (7,742) (9,486)Bank and other loans (16,500) (27,604) - (27,957) (35,346) (9,486) Non-current liabilitiesBank loans (77,500) (56,116) (85,000)Deferred tax liability (2,470) (887) (1,444)Long-term provisions (7,711) (7,013) (7,401) (87,681) (64,016) (93,845) Total liabilities (115,638) (99,362) (103,331) Net assets 178,602 115,890 153,714 EquityShare capital 7 14,074 12,287 13,606Share premium 7 8,576 105,019 617Special reserve 7 111,244 - 111,244Other reserves 7 (508) (40) (161)Retained earnings 7 45,216 (1,376) 28,408 Total equity 178,602 115,890 153,714 Consolidated cash flow statement 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 restated restated $000 $000 $000 Unaudited Unaudited Unaudited Cash flows from operating activitiesProfit for the period 17,727 2,353 13,712Adjustments for:Depreciation 55 35 103Depletion and decommissioning charge 17,801 2,907 21,746Foreign exchange losses 698 57 34Financial income (7,686) (163) (457)Financial expenses 3,898 1,195 7,702Equity-settled share-based payment expenses 197 133 350Income tax expense 5,030 3,669 5,649 Operating profit before changes in working capital 37,720 10,186 48,839 Increase in trade and other receivables (1,342) (2,209) (10,570)Decrease in trade and other payables (1,725) (12,558) (11,454) Cash generated from operations 34,653 (4,581) 26,815 Income taxes paid (3,497) (2,657) (5,456) Net cash inflow/outflow from operating activities 31,156 (7,238) 21,359 Cash flows from investing activitiesProceeds from sale of property, plant and equipment - 1,673 1,869Proceeds from sale of investment 3,863 - -Interest received 221 163 457Acquisition of property, plant and equipment andintangible assets (31,503) (27,428) (80,446) Net cash outflow from investing activities (27,419) (25,592) (78,120) Cash flows from financing activitiesProceeds from the issue of share capital 8,427 19,757 46,042Interest paid (3,678) (1,108) (7,478)Borrowings raised 9,000 13,356 65,710Repayment of borrowings - - (49,367)Dividends paid (1,435) - - Net cash inflow from financing activities 12,314 32,005 54,907 Net increase/(decrease) in cash and cash equivalents 16,051 (825) (1,854)Cash and cash equivalents at start of period 4,237 6,091 6,091 Cash and cash equivalents at end of period 20,288 5,266 4,237 Consolidated statement of recognised income and expense 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 restated restated $000 $000 $000 Unaudited Unaudited Unaudited Losses on cashflow hedges (23) - (13)Exchange differences on translation of nonfunctionalcurrency entities (521) (240) (578)Profit for the period 17,727 2,353 13,712 Total recognised income and expense for the 17,183 2,113 13,121period Notes to the interim accounts 1 General information Melrose Resources plc (the "Company") is a company registered in England. Thisinterim report contains the financial information of the Company and itssubsidiaries (together referred to as the "Group") for the six month periodended 30 June 2005. The interim report was authorised for issue by the directors on 31 August 2005. 2 Accounting policies - basis of preparation From January 1 2005, the Group has adopted International Financial ReportingStandards ("IFRS") in the preparation of its consolidated financial statements.Information on the impact on accounting policies and financial results resultingfrom the conversion from UK Generally Accepted Accounting Practice ("UK GAAP")to IFRS is provided later in this report. The financial information is prepared on the historical cost basis except forderivative financial instruments which are stated at fair value and is presentedin United States Dollars ("$"), rounded to the nearest thousand. The comparative figures for the financial year ended 31 December 2004 are notthe Company's statutory accounts for that financial year. Those accounts, whichwere prepared under UK GAAP, have been reported on by the Company's auditors anddelivered to the registrar of companies. The report of the auditors wasunqualified and did not contain statements under section 237(2) or (3) of theCompanies Act 1985. 3 Production costs This amount comprises all direct and indirect costs of production. 4 Segmental reporting The Group has a single class of business which is oil and gas exploration,development and production. Geographical area 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 restated restated $000 $000 $000 RevenueBulgaria 26,567 1,321 30,803Middle East 13,189 8,427 17,595USA 7,526 4,524 10,671Total 47,282 14,272 59,069 Profit from operationsBulgaria 9,003 341 11,862Middle East 8,659 6,639 13,396USA 3,339 1,794 3,749 Common costs (2,032) (1,720) (2,401) Group profit from operations 18,969 7,054 26,606 5 Taxation The taxation charge for the period has been estimated from the expected taxableresults of the Group after taking into account losses brought forward and otheravailable reliefs and takes into account overseas taxes deducted at source underthe terms of the production sharing agreements. 6 Earnings per share 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 Restated Restated $000 $000 $000 Profit for the period attributable toordinaryshareholders (basic and diluted) 17,727 2,353 13,712 cents cents cents Basic earnings per share 23.2 3.5 19.2Diluted earnings per share 22.9 3.4 18.6 The weighted average number of ordinary shares used in the calculation of basicand diluted earnings per share for each period were calculated as follows: 6 months ended 6 months ended 12 months ended 30 June 2005 30 June 2004 31 December 2004 No. of shares No. of shares No. of shares Issued ordinary shares at start of period 76,021,672 62,596,485 62,596,485Shares issued during the period 2,533,704 6,250,000 13,425,187 Shares in issue at end of period 78,555,376 68,846,485 76,021,672 Weighted average number of ordinaryshares at end of period 76,477,107 67,438,518 71,514,417Effect of share options in issue 819,753 2,555,318 2,154,736Weighted average number of ordinaryshare at end of period - for dilutedearningsper share 77,296,860 69,993,836 73,669,153 7 Consolidated statement of changes in equity Share Share Special Other Retained Total capital premium reserve reserve reserve equity $000 $000 $000 $000 $000 $000 Balance at 1 January 2004As previously reported 11,133 86,416 - (8,685) 2,161 91,025Effect of adopting IFRS 1 - - - 8,685 (8,685) -Effect of adopting IFRS 2 - - - 67 (67) -Effect of adopting IAS 12 - - - - 873 873 Balance as at 1 January 2004(restated) 11,133 86,416 - 67 (5,718) 91,898 Issue of share capital 1,154 18,603 - - - 19,757Total recognised income and expense - - - (240) 2,353 2,113Equity-settled transactions, net of tax - - - 133 1,989 2,122 Balance as at 30 June 2004 12,287 105,019 - (40) (1,376) 115,890 Issue of share capital 1,319 24,966 - - - 26,285Transfer to/from special reserve (129,368) 111,244 - 18,124 -Total recognised income and expense - - - (338) 11,359 11,021Equity-settled transactions, net of tax - - - 217 301 518 Balance as at 31 December 2004 13,606 617 111,244 (161) 28,408 153,714 Issue of share capital 468 7,959 - - - 8,427Total recognised income and expense - - - (544) 17,727 17,183Equity-settled transactions, net of tax - - - 197 506 703Distribution to shareholders - - - - (1,425) (1,425) Balance as at 30 June 2005 14,074 8,576 111,244 (508) 45,216 178,602 International Financial Reporting Standards (IFRS) From 1 January 2005, the Group has adopted International Financial ReportingStandards ("IFRS") in the preparation of its consolidated financial statements. Functional Currency The currency in which the Group primarily generates and expends cash is USdollars and, therefore, in accordance with IAS 21 - The Effects of Changes inForeign Exchange Rates the Group has adopted US dollars as its functional andreporting currency. Financial impact The main items contributing to the change in financial information compared withthat reported under UK GAAP for the year ended 31 December 2004 are: • the inclusion of an expense based on the fair value ofemployee share options which have been granted after 7 November 2002 (IFRS 2 -Share-Based Payment) • the inclusion of a deferred tax asset in relation to alloutstanding employee share options (IAS 12 - Income Taxes) • the inclusion of the cash flow hedge on the balance sheet(IAS 39 - Financial Instruments: Recognition and Measurement) • the reversal of the proposed dividend as at 31 December2004 which under IAS 10 - Events after the Balance Sheet Date is included as atransfer in equity following approval by the shareholders in the period ended 30June 2005. The financial effect of these changes on the profit after tax reported for theperiod ended 30 June 2004 and 31 December 2004 are as follows: 6 months ended 12 months ended 30 June 2004 31 December 2004 $000 $000 Profit after tax under UK GAAP (refer below) 2,455 14,215 Effect of transition to IFRS:Adoption of IFRS 2 - Share-based Payment (133) (350)Adoption of IAS 12 - Income Taxes 31 (153) Profit after tax under IFRS 2,353 13,712 The impact of the adoption of IFRS on the income tax charge reflected in incomeand expenditure and in equity are summarised below: 6 months ended 12 months ended 30 June 2004 31 December 2004 $000 $000 Income tax expense on a comparable basis under UK GAAP 3,700 5,327Movements on income statement:(Increase)/decrease in deferred tax asset arising on share (31) 322optionsIncome tax expense per IFRS 3,669 5,649Movements in reserves:Increase in deferred tax asset arising on share options (1,989) (2,289) Total income tax reflected in equity 1,680 3,360 The main impact of the adoption of IFRS in relation to tax is the recognition ofdeferred tax on all timing differences such as the tax benefit associated withemployee share options awarded before 7 November 2002 which were not recognisedin the deferred tax balance under UK GAAP. 1 Accounting policies - basis of preparation This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRS in issue that either areendorsed by the EU and effective (or available for early adoption) at 30 June2005 or are expected to be endorsed and effective (or available for earlyadoption) at 31 December 2005, the Group's first annual reporting date at whichit is required to use IFRS. Based on these adopted and unadopted IFRS, thedirectors have made assumptions about the accounting policies expected to beapplied, which are as set out below, when the first annual IFRS financialstatements are prepared for the year ending 31 December 2005. The adopted IFRS that will be effective (or available for early adoption) in theannual financial statements for year ending 31 December 2005 are still subjectto change and to additional interpretations and therefore cannot be determinedwith certainty. Accordingly, the accounting policies for the annual period willbe determined finally only when the annual financial statements are prepared forthe year ending 31 December 2005. As required by IFRS 1, the impact of the transition from UK GAAP to IFRS isexplained below. The accounting policies set out below in note 2 have been applied consistentlyto all periods presented in this interim financial information and in preparingan opening IFRS balance sheet at 1 January 2004 for the purposes of thetransition to IFRS. 2 Group accounting policies The Basis of Preparation of the interim financial information is stated in note1. The significant accounting policies of the Group which have already alteredas a result of the adoption of IFRS are set out below. (a) Intangible assets All pre-acquisition expenditures relating to oil & gas assets are taken directlyto the profit and loss account. Under UK GAAP, all abortive project expenditureswere expensed by the Group but any pre-acquisition costs relating to a licenceor asset acquisition were carried as part of the acquisition costs. Inaccordance with IFRS 6 - Intangible Assets these pre-acquisition costs are nowexpensed. (b) Employee benefit The share option schemes allow certain employees within the Group to acquireshares of the Company. Share options granted before 7 November 2002 No expense is recognised in respect of these options. The shares are recognisedwhen the options are exercised and the proceeds received allocated between sharecapital and share premium. Share options granted after 7 November 2002 and vested after 1 January 2005 IFRS 2 - Share-Based Payments is effective in respect of options granted after 7November 2002 and which have not vested before 1 January 2005. There were nooptions granted after 7 November 2002 which had vested before 1 January 2005.The fair value is measured at grant date and spread over the period during whichthe employee becomes unconditionally entitled to the options. The fair valuesof the options granted have been calculated using Monte Carlo models which takeinto account the terms and conditions upon which the options were granted. The amount recognised as an expense will be adjusted to reflect the actualnumber of share options that vest. Non-market vesting conditions are includedin assumptions about the number of options that will be expected to becomeexercisable. The estimates of the number of options that are expected to becomeexercisable are reviewed at each balance sheet date. The impact of the revisionof original estimates, if any, is recognised in the income statement and acorresponding adjustment to equity. When the options are exercised the proceeds received, net of any directlyattributable transactions costs, will be credited to share capital (nominalvalue) and share premium (the balance). (c) Income tax Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustments to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Thefollowing temporary differences are not provided for: the initial recognition ofassets or liabilities that affect neither accounting nor taxable profit anddifferences relating to investments in subsidiaries to the extent that they willprobably not reverse in the foreseeable future. The amount of deferred taxprovided is based on the expected manner of realisation or settlement of thecarrying amount of assets and liabilities, using tax rates enacted orsubstantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture profits will be available against which the asset can be utilised.Deferred tax assets are reduced to the extent that it is no longer probable thatthe related benefit will be realised. 3 Explanation of transition to IFRS These interim financial statements have been prepared under IFRS. The accounting policies set out in note 2 have been applied in preparing theconsolidated financial statements for the six month period ended 30 June 2005,the comparative information for the six month period ended 30 June 2004 and forthe year ended 31 December 2004 and in the preparation of an opening IFRSbalance sheet at 1 January 2004 (the Group's date of transition). In preparing its opening IFRS balance sheet and the comparative financialinformation for the six months ended 30 June 2004 and for the year ended 31December 2004 the Group has adjusted amounts reported previously in financialstatements prepared in accordance with UK GAAP. An explanation of how the transition from UK GAAP to IFRS has affected theGroup's financial position, financial performance and cash flows is set out inthe following tables. Reconciliation of equity as at 1 January 2004 UK GAAP UK GAAP IFRS 1 IFRS 2 IAS 12 IFRS £000 $000 $000 $000 $000 $000 Non-current assetsProperty, plant & equipment 82,397 146,542 146,542Intangible assets 6,264 11,141 11,141Deferred tax 2,832 5,037 1,259 873 7,169Long-term receivables 1,687 3,000 3,000 93,180 165,720 167,852 Current assetsTrade & other receivables 5,946 10,576 (1,259) 9,317Cash & cash equivalents 3,425 6,091 6,091 9,371 16,667 15,408 Total assets 102,551 182,387 183,260 Current liabilities (15,148) (26,941) (26,941) Non-current liabilities (36,222) (64,421) (64,421) Total liabilities (51,370) (91,362) (91,362) Net assets 51,181 91,025 - - 873 91,898 EquityShare capital 6,260 11,133 11,133Share premium account 48,589 86,416 86,416Other reserves (5,091) (8,685) 8,685 67 67Retained earnings 1,423 2,161 (8,685) (67) 873 (5,718) Total equity 51,181 91,025 - - 873 91,898 Reconciliation of equity as at 30 June 2004 UK UK IFRS 1 IFRS 2 IAS 12 IFRS GAAP GAAP £000 $000 $000 $000 $000 $000 Non-current assetsProperty, plant & equipment 95,970 173,547 173,547Intangible assets 7,520 13,592 13,592Deferred tax 2,865 5,180 576 2,893 8,649Long-term receivables 1,522 2,750 2,750 107,877 195,069 198,538 Current assetsTrade & other receivables 6,652 12,024 (576) 11,448Cash & cash equivalents 2,914 5,266 5,266 9,566 17,290 16,714 Total assets 117,443 212,359 215,252 Current liabilities (19,556) (35,346) (35,346) Non-current liabilities (35,419) (64,016) (64,016) Total liabilities (54,975) (99,362) (99,362) Net assets 62,468 112,997 - - 2,893 115,890 EquityShare capital 6,885 12,287 12,287Share premium account 58,663 105,019 105,019Other reserves (5,847) (8,925) 8,685 200 (40)Retained earnings 2,767 4,616 (8,685) (200) 2,893 (1,376) Total equity 62,468 112,997 - - 2,893 115,890 Reconciliation of equity as UK UK IFRS 1 IFRS 2 IAS 12 IAS 39 IAS 10 IFRSat 31 December 2004 GAAP GAAP £000 $000 $000 $000 $000 $000 $000 $000 Non-current assetsProperty, plant & equipment 104,417 201,637 201,637Intangible assets 9,545 18,390 18,390Deferred tax 3,041 5,859 1,801 2,841 10,501Long-term receivables 1,515 2,919 2,919 118,518 228,805 233,447 Current assetsTrade & other receivables 10,984 21,162 (1,801) 19,361Cash & cash equivalents 2,199 4,237 4,237 13,183 25,399 23,598 Total assets 131,701 254,204 257,045 Current liabilities (5,672) (10,929) (21) 1,464 (9,486) Non-current liabilities (48,714) (93,853) 8 (93,845) Total liabilities (54,386) (104,782) (103,331) Net assets 77,315 149,422 - - 2,841 (13) 1,464 153,714 EquityShare capital 7,602 13,606 13,606Share premium account 320 617 617Special reserve 61,801 111,244 111,244Other reserves (10,893) (9,321) 8,685 417 (13) 71 (161)Retained earnings 18,485 33,276 (8,685) (417) 2,841 1,393 28,408 Total equity 77,315 149,422 - - 2,841 (13) 1,464 153,714 IFRS 1 - First-time Adoption of International Financial Reporting Standards Elimination of other reserves IFRS 1 allows the inclusion of "other reserves" in "retained reserves" on theopening balance sheet at the date of transition. Under UK GAAP all revaluationand translation reserves were shown separately on the face of the balance sheet.Goodwill written off to reserves under UK GAAP prior to 1998 has not beenreinstated and is not included in determining any subsequent profit or loss ondisposal. The amount of $1,295,000 has been transferred from other reserves toretained reserves as at 1 January 2004. IAS 1 - Presentation of Financial Statements Deferred tax asset balances IFRS requires deferred tax asset balances to be shown as a separate line item onthe face of the balance sheet within non-current assets. Under UK GAAP deferredtax asset balances were included within current assets under the heading "Debtors" and split between amounts falling due after more than one year andamounts falling due within one year. IFRS 2 - Share-based Payment The Group applied IFRS 2 to its employee share option schemes at 1 January 2004except for the share options granted before 7 November 2002. The Group previously accounted for these share-based payment arrangements atintrinsic value under UK GAAP. The adoption of IFRS 2 is equity-neutral for equity-settled transactions. A taxdeduction for the consumption of employee services received as consideration forshare options granted will be obtained when the share options are exercised.This has been taken into account in the tax calculations. The expense is derived based on the fair-value of the options granted spreadover the vesting period of the option. The transfer to the share option reservefor the year ended 31 December 2004 is $350,000 and for the period ended 30 June2004 $133,000, both of which were recognised in the income statement. An amountof $67,000 in respect of the charges prior to the transition date of 1 January2004 was taken directly to reserves. IAS 12 - Income taxes In accordance with IAS 12 - Income Taxes, the deferred tax asset in respect ofthese share options is re-estimated at each period end to take account ofchanges in the intrinsic value of the Company's share price and those shareoptions which have been exercised in the period. The deferred tax asset relating to share options granted before 7 November 2002was increased by $1,825,000 in the period ended 30 June 2004 and by $1,600,000in the year ended 31 December 2004. The deferred tax asset relating to share options granted after 7 November 2002was increased by $198,000 in the period ended 30 June 2004 and by $368,000 inthe year ended 31 December 2004. The Group granted share options before 7 November 2002 and some of these vestedbefore 1 January 2005. As at 1 January 2004, the Group's date of transition toIFRS, a deferred tax asset arose in respect of the share options granted before7 November 2002 which had not been exercised by 1 January 2004. This deferredtax asset of $873,000 has been recognised in equity as at 1 January 2004. No deferred tax asset was recognised in respect of these unexercised shareoptions in the consolidation financial statements prepared in accordance with UKGAAP. IAS 39 - Financial Instruments: Recognition and Measurement The Group has a cash flow hedge as at 31 December 2004 which is reflected in thebalance sheet. IAS 10 - Events after the Balance Sheet Date In accordance with IAS 10, the dividend proposed as at 31 December 2004 wasreversed in the financial statements for that period and is included in thetransfer in equity following approval by the shareholders in the period ended 30June 2005. Reconciliation of profit for the period ended 30 June 2004 UK UK IFRS 2 IAS 12 IFRS GAAP GAAP £000 $000 $000 $000 $000 Revenue 7,896 14,272 14,272Cost of sales (2,806) (5,072) (5,072)Gross profit 5,090 9,200 9,200 Administrative expenses (1,131) (2,013) (133) (2,146) Operating profit before financing costs 3,959 7,187 7,054 Interest receivable 90 163 163Financing costs (658) (1,195) (1,195)Net financing costs (568) (1,032) (1,032) Profit before taxation 3,391 6,155 6,022 Taxation (2,047) (3,700) 31 (3,669) Profit for the period 1,344 2,455 (133) 31 2,353 Reconciliation of profit for the year ended 31 December 2004 UK GAAP UK GAAP IFRS 2 IAS 12 IFRS £000 $000 $000 $000 $000 Revenue 30,660 59,069 59,069Cost of sales 14,362 (27,670) (27,670)Gross profit 16,298 31,399 31,399 Administrative expenses (2,148) (4,443) (350) (4,793) Operating profit before financing costs 14,150 26,956 26,606 Interest receivable 248 288 457Financing costs (4,043) (7,702) (7,702)Net financing costs (3,795) (7,414) (7,245) Profit before taxation 10,355 19,542 19,361 Taxation (2,677) (5,327) 322 (5,649) Profit for the period 7,678 14,215 (350) 322 13,712 Explanation of material adjustments to the cash flow statement for the sixmonths ended 30 June 2004 and for the year ended 31 December 2004 The main adjustment to the cash flow statement as a result of the transition toIFRS is the inclusion of income taxes paid of $2,657,000 for the six monthsended 30 June 2004 and $5,456,000 for the year ended 31 December 2004 in the netcash inflow from operating activities. These amounts were included as aseparate category of cash outflow in the cash flow statements reported for thoseperiods in accordance with UK GAAP. Glossary bbl barrel of oil or condensateBcf billion cubic feet of gasbcpd barrel of condensate per dayboe barrel of oil equivalentboepd barrel of oil equivalent per daybopd barrel of oil or condensate per dayEBITDA earnings before interest, taxation, depletion, depreciation and amortisationMbbl thousand barrels of oil or condensateMboe thousand barrels of oil equivalentMcf thousand cubic feet of gasMMbbl million barrels of oil or condensateMMboe million barrels of oil equivalentMMcf million cubic feet of gasMMcfpd million cubic feet of gas per dayMMcfepd million cubic feet of gas equivalent per day This information is provided by RNS The company news service from the London Stock Exchange