NAUT.L Regulatory News (NAUT)

19 Apr 2007 07:02

Global Energy Development PLC19 April 2007 For immediate release 19 April 2007 GLOBAL ENERGY DEVELOPMENT PLC AUDITED FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 Global Energy Development PLC ("Global" or the "Company"), the Latin Americafocused petroleum exploration and production company (LSE-AIM: "GED"), announcesits audited final results for the year ended 31 December 2006. Financial Highlights: • Turnover up 10.5% to $21,053,000 (2005: $19,045,000); • Gross profit up 23.2% to $11,509,000 (2005: $9,344,000); • Profit on ordinary activities before tax up 7.3% to $5,170,000 (2005 (restated): $4,817,000); • Average operating netback per barrel of $38.77 (2005: $30.03); and • Capital expenditure in 2006 of $15,166,000 (2005 (restated): $17,890,000). Operational Highlights: • Improvement in all reserve categories in 2006; • Independently audited proved plus probable reserves net to the Company increased 11.1% to 19.4 million barrels of oil equivalent (2005: 17.5 million barrels of oil equivalent); • 582% proved plus probable reserve replacement rate in 2006 (2005: 332%); • Successful initial drilling programme in Rio Verde contract area in 2006; • Positive well test result from the Luna Llena contract area drilling programme in early 2007; and • Discussions ongoing with a number of notable potential partners for several different projects held by the Company. For further information: Global Energy Development PLCCatherine Miles, Company Secretary +44 (0) 20 7763 7177 www.globalenergyplc.com +44 (0) 79 0991 8034 Notes to Editors: Global has been listed on AIM, a market operated by the London Stock Exchange,since March 2002 (LSE-AIM: "GED"). The Company held as at 19 April 2007, eightcontracts in the countries of Colombia and Peru and an exclusive option over acontract in Panama. The Company's balanced portfolio of contracts comprises a base of production,developmental drilling and workover opportunities and several high-potentialexploration projects. Proven and probable oil and gas reserves are estimated quantities ofcommercially producible hydrocarbons which the existing geological, geophysicaland engineering data show to be recoverable in future years from knownreservoirs. The proved reserves reported by Ryder Scott Company, LP ("RyderScott"), independent petroleum consultants, conform to the definition approvedby the Society of Petroleum Engineers ("SPE") and the World Petroleum Congress("WPC"). The probable and possible reserves reported by Ryder Scott conform todefinitions of probable and possible reserves approved by the SPE/WPC using thedeterministic methodology. The information contained within this announcement has been reviewed by RyderScott. In addition, the information contained within this announcement has beenreviewed by Mr. Stephen Voss, the Company's Managing Director. Mr. Voss has been a Member of SPE-AIME (Society of Petroleum Engineers-American Institute of Mine Engineers) for 36 years and is a Registered Petroleum Engineer in Texas. Chairman's Statement 2006 presented both successes and challenges for the Company. These challenges,both Company specific and industry-wide, did not alter the continued growth inthe fundamentals of the Company. The industry continues to suffer fromshortages ranging from personnel to the well documented lack of rig availabilitybut the Company was still able to undertake selected drilling in the year, addto the senior management team, deliver improved financials in every category andmaterially build on its reserves. The Company offers considerable asset value through a large and diverseportfolio of acreage focused in Latin America that features strong historicaldata from previous activity by many international oil companies over the pastfew decades. This strategy of following in the footprint of the 'majors' and the yearly auditperformed on the Company's portfolio by independent petroleum consultants givesthe management every confidence in the current and future value of the Company. In 2006 the Company was able to increase its reserves in every category throughactivity undertaken during the year. In addition, the Company was able tocontrol costs and maintain margins on its producing operations despite continuedescalating industry costs. The Company's countries of focus remain verycompelling with good prospectivity, highly favourable contract terms andincreasingly low political and economic risk. 2006 saw elections held inColombia and Peru with both outcomes perceived as beneficial to the investmentcommunity and offering continued stability. The Company began 2007 with a two well drilling programme with the second welldelivering positive test results and providing an encouraging outlook for theColombian Luna Llena Exploration and Production Concession contract. Thisprogramme plus efforts to advance other areas of the portfolio should help theunderlying value of the Company to continue to be realised at a greater pace. Mikel Faulkner Executive Chairman 19 April 2007 Managing Director's Review Financials Turnover for the year ended 31 December 2006 was $21,053,000, an uplift of 10.5%against the prior year (year ended 31 December 2005: $19,045,000), with grossprofit 23.2% higher at $11,509,000 (year ended 31 December 2005: $9,344,000). Operating profit, after administrative expenses, stock options expense and otherincome, was 16.4% higher at $5,628,000 (year ended 31 December 2005 (restated):$4,835,000). Profit on ordinary activities before taxation was 7.3% higher at$5,170,000 (year ended 31 December 2005 (restated): $4,817,000) with net incometo the Company of $4,185,000 (year ended 31 December 2005 (restated):$4,102,000). These financial results continue the solid upward trend since the Company'sshares were admitted to trading on AIM in 2002 ("Admission") and were achievedon production during 2006 of 401,298 barrels of oil net to the Company and salesof 399,000 barrels of oil (year ended 31 December 2005: production of 451,000barrels of oil net to the Company), and influenced by the prevailinghistorically high oil prices during 2006. Net cash inflow from operatingactivities for the year was $10,738,000 (year ended 31 December 2005 (restated):$4,597,000). The average price for West Texas Intermediate ("WTI") in 2006 was$66.23 per barrel and the Company averaged an operating netback per barrel ofoil of $38.77 for the year. This compares with an average WTI price in 2005 of$56.56 per barrel and an average operating netback per barrel for the Company of$30.03. This demonstrates that the Company was able to control costs andmaintain gross margins despite continued escalating costs in 2006 within theindustry. Capital expenditure for the year, funded out of cash flow fromproduction and cash available, totalled $15,166,000 (2005 (restated):$17,890,000), this being slightly lower than anticipated due to the lack of rigequipment causing the Company to delay drilling some wells until 2007. Reserve Report The independent petroleum consultants Ryder Scott Company, LP ("Ryder Scott")have prepared a Reserve Report on the Company's portfolio of contracts annuallysince Admission. All three categories of the 2006 Reserve Report, namely theproved, probable and possible reserves, showed a material improvement over theprior year. Ryder Scott reported that as at 31 December 2006, proved reservesnet to the Company totalled 5.5 million barrels of oil equivalent, an uplift of10.1% against the prior year (as at 31 December 2005: 5.0 million barrels of oilequivalent). Proved plus probable ("2P") reserves net to the Company totalled19.4 million barrels of oil equivalent, an uplift of 11.1% against the prioryear (as at 31 December 2005: 17.5 million barrels of oil equivalent). Provedplus probable plus possible ("3P") reserves net to the Company totalled 81.8million barrels of oil equivalent, an uplift of 21.1% against the prior year (asat 31 December 2005: 67.5 million barrels of oil equivalent). This growth in reserves was in addition to production in 2006 detailed above.In 2006 the Company achieved a 582% proved plus probable reserve replacementrate (2005: 332%). Operations The Company was hampered by delays in 2006 as were numerous others in theindustry. Unforeseen adverse weather conditions and issues in securing equipmentand drilling rigs were the primary causes of these delays and resulted in theplanned 2006 drilling programme largely being deferred to 2007. As aconsequence the expected uplift in production for 2006 against 2005 was notrealised. However, it is worth noting that it was purely delays in timing andnot unsuccessful drilling efforts that caused production growth to stall in2006. Production net to the Company in the second half of 2006 was up 33% compared tothe first half of 2006 and this was largely due to the Company successfullydrilling and placing on production the Tilodiran 2 well within the Colombian RioVerde contract which has averaged production of approximately 700 barrels of oilper day ("bopd") since the end of July 2006 with a low rate of decline. TheTilodiran 2 well came on to production approximately three months later than themanagement had originally planned due to delays and this was by far the largestcomponent of 2006 production shortfall. Whilst 2006 was characterised by slowness of planned drilling, good progress wasmade elsewhere which has strengthened the Company considerably and laid thefoundations for increased activity in 2007 and beyond. New contracts weresigned in the country of Colombia, other potential contracts were evaluated andprogressed, seismic was acquired and processed, key personnel were added, asubsidiary office established and a rig was contracted in August 2006 and thenmobilised early in 2007 for a drilling programme within the Colombian Luna Llenacontract area. Two new contracts were signed during 2006, one being the Colombian Los Saucescontract which is contiguous with the northern boundary of the Rio Verdecontract which contains the Tilodiran 2 well as detailed above. It is hopedthat this contract area will prove to be an extension of the producing Tilodiranfield and will also offer relatively predictable drilling with high dailyproduction rates. Due to these characteristics, the Rio Verde and Los Saucescontracts will be a principal area of focus for the Company in the second halfof 2007 and 2008 as they should provide strong cash flow. At the end of 2006new 2D seismic was acquired over both these contract areas and subsequentlyprocessed and it is the Company's intention to commence a multi-well drillingprogramme on these two contract areas as soon as possible after the currentnegotiations to secure the necessary heavy drilling rig are concluded. Heavydrilling rigs capable of drilling to the 16,000 feet depth necessary for theplanned wells remain in short supply with this situation set to continue atleast for the short to medium term. The other new contract signed in 2006 was the Colombian Caracoli contract.Geological and geophysical activities undertaken in 2006 largely indicated theabsence of hydrocarbons and as such the Company took the decision to relinquishthis contract. The Company avoided substantial capital expenditures as a resultof the early termination of this contract and the pre-allotted 2007 capitalexpenditure on this contract can now be allocated to other projects. As mentioned above, the Company successfully secured a drilling rig for itsColombia Luna Llena contract area drilling programme in August 2006. A rig forthis area was easier to secure owing to the shallowness of the proposed wells.After a month's delay due to adverse weather conditions in the Llanos Basin,well location construction was initiated in December 2006 and the rig mobilisedin January 2007. The first well, Luna Llena 1, was spudded in February 2007 andtested fresh formation water, albeit with small traces of hydrocarbons, and wassuspended pending results from the next well, Luna Llena 2. The Luna Llena 2well was spudded in March 2007 and drilled directionally to a total depth of2,980 feet to reach the 'El Miedo' sandstone in the upper Carbonera C3formation. Oil shows and oil stained cuttings were recovered in the drillingprocess from the upper C3 'El Miedo' sandstone. Using nuclear and resistivitymeasurement devices the 'El Miedo' sandstone was determined by the management tobe a high porosity reservoir consisting of clean, well developed sands andfavourable calculated oil saturation. The oil saturation calculations and otherfield data indicated the 'El Miedo' reservoir has the potential to flow a highpercentage of oil. Due to the highly positive data collected, the Company isnow looking to appoint an independent technical consultant to estimate thereserves associated with the Luna Llena area which will be used to design afield development programme. Two of the Company's other Colombian contract areas, Bolivar and Bocachico, werethe subject of ongoing improved recovery project designs in 2006 with theseplanning efforts continuing into 2007 as the Company works with a number ofservice companies to implement a cost-effective development plan leading tofuture drilling activity in these reserve-rich fields. Outside of Colombia, the Block 95 contract in Peru was subject to micro-magneticacquisition and analysis during 2006 in addition to environmental planpreparation. In Panama, the pending Garachine contract has been subject tolengthy, detailed contract negotiations which are now very near conclusion withthe Panamanian government publicly indicating the contract is very close tobeing signed. The Company is pursuing a unitisation procedure with Ecopetrol, a Colombianstate-owned oil company, in relation to production from the Cajaro 1 and LosHatos 1 wells within two of its contract areas. In November 2004, Ecopetroltook a 50% working interest in the Cajaro 1 well through a commercialitydeclaration. The Company soon thereafter advised Ecopetrol that the Carajo 1well was producing from both the Cajaro 1 commercial area and the abutting LosHatos contract held by the Company through a concession contract with theNational Hydrocarbons Agency of Colombia ("ANH"). As a result, the Company'smanagement believes that under Colombian law the Cajaro 1 commercial area andthe Los Hatos 1 field are subject to unitisation. Ecopetrol agrees that thefield should be unitised but has not agreed to the location of the fault givingrise to the unitisation proceedings. Ecopetrol and the Company have agreed toappoint a technical expert to rule on the formation in order to determine theproper partner division of the field. In accordance with the agreement forunitisation, the Company has recorded a receivable related to corresponding 'overlift' of production by Ecoptrol and has valued the receivable according toconservative outside technical consultants estimations. The proceedings aredeemed to be within the normal course of business and could be resolved withinthe next year with the management positive on the outcome. The Company currently owns 100% of all its contract areas and is seekingpartners for some of its exploration and/or exploitation projects in order toexpedite progress on these areas and realise their value more quickly. Discussions are ongoing with a number of suitable and highly notable partnersfor several of these projects. The Company also made further advances during 2006 in the appraisal of what themanagement believe to be a significant natural gas developmental opportunitywithin the Bolivar and Buturama contracts located in the Magdalena River Valley.Ryder Scott has fully assessed the areas and the scope of the opportunitiesappears to be significant and should be attractive to potential partners. In order to properly support, control and oversee the current and futureactivity of the Company, a number of key personnel were recruited in 2006,particularly in Bogota, Colombia, and a new subsidiary office opened in Lima,Peru, at the beginning of 2006. Notable was the addition of Francisco Suarez asdirector of Exploitation in August 2006. Francisco has over 19 years experiencewith Halliburton, predominately in Latin America, and is now responsible formanaging drilling and production operations, overseeing engineering studies andinterfacing with service companies to ensure utilisation of latest applicabletechnologies. Conclusion 2007 has begun very encouragingly with increased reserves and the positive welltest result of the Luna Llena 2 well on the Colombian Luna Llena contract. TheLuna Llena 2 well importantly demonstrated the main field reservoir, the 'ElMiedo' sandstone, to be of high quality and a productive and attractivedevelopmental opportunity for the Company. The Luna Llena contract adds to thedevelopmental opportunities defined in 2006 through the successful drilling ofTilodiran 2 on the Colombian Rio Verde contract area. The Company has many highly attractive projects under its control and throughongoing activity and partnering efforts the management believes that during 2007further value will be realised. Stephen Voss Managing Director 19 April 2007 Group Profit and Loss Accountfor the year ended 31 December 2006 Note (Restated) 2006 2005 $000 $000Turnover 2 21,053 19,045Cost of sales 3 (9,544) (9,701) Gross profit 11,509 9,344Stock Options expense 3 (312) (267)Administrative expenses - other (5,769) (4,418)Total Administrative expenses (6,081) (4,685)Other Income 200 176 Operating profit 4 5,628 4,835Interest receivable 152 79Interest payable 5 (610) (97) Profit on ordinary activities before taxation 5,170 4,817Taxation on profit from ordinary activities 6 (985) (715) Profit on ordinary activities after taxation 4,185 4,102 Retained profit for the year 18 4,185 4,102Earnings per ordinary share- Basic 7 $0.12 $0.13- Diluted 7 $0.11 $0.12 There are no recognized gains and losses other than the profit for the year. All amounts relate to continuing operations. The notes contained within this announcement form an integral part of thesefinancial statements. Group Balance Sheetat 31 December 2006 Note (Restated) 2006 2005 $000 $000Fixed assetsIntangible assets 8 3,514 2,049Tangible assets 9 79,598 69,873 83,112 71,922 Current assetsStocks 11 752 451Debtors 12 4,681 5,697Short term deposit 893 548Cash at bank and in hand 6,955 7,664 13,281 14,360Creditors: amounts falling due within one year 13 (3,728) (3,772) Net current assets 9,553 10,588 Total assets less current liabilities 92,665 82,510 Convertible loan notes 14 (15,425) (10,482)Provision for liabilities 15 (625) (575) Net assets 76,615 71,453 Capital and reservesCalled-up share capital 16 539 537Other reserve 17 1,825 1,314Capital reserve 17 210,844 210,844Share premium account 17 26,440 26,288Profit and loss account 17 (163,033) (167,530)Shareholders' funds 76,615 71,453 The notes contained within this announcement form an integral part of thesefinancial statements. Company Balance Sheetat 31 December 2006 Note (Restated) 2006 2005 $000 $000Fixed assetsTangible assets 9 402 326Investments in Subsidiaries 10 34,539 29,820 34,941 30,146 Current assetsDebtors 12 229 922Short term deposit 100 -Cash at bank and in hand 5,217 7,105 5,546 8,027Creditors: amounts falling due within one year 13 (10,665) (9,985) Net current (liabilities) (5,119) (1,958) Total assets less current liabilities 29,822 28,188 Convertible loan notes 14 (15,425) (10,482)Net assets 14,397 17,706 Capital and reservesCalled-up share capital 16 539 537Other reserve 17 1,825 1,314Share premium account 17 26,440 26,288Profit and loss account 17 (14,407) (10,433)Shareholders' funds 14,397 17,706 The notes contained within this announcement form an integral part of thesefinancial statements. Group Cash Flow Statementyear ended 31 December 2006 Note (Restated) 2006 2005 $000 $000Net cash inflow from operating activities 19 10,738 4,597 Returns on investment and servicing of financeInterest received 152 79Interest paid (304) (43) (153) 36 Taxation (985) (715)Capital expenditure and financial investmentExpenditure on tangible fixed assets (13,700) (17,062)Expenditure on intangible assets (1,465) (828) Net cash outflow before financing and management of liquid (5,565) (13,972)resources Management of liquid resourcesIncrease in short term deposit (345) (548) FinancingIssue of share capital - 7,677Convertible loan notes issued (net of issue costs) 5,201 11,875(Decrease) / Increase in cash 20 (709) 5,032 Cash at beginning of year 7,664 2,632Cash at end of year 21 6,955 7,664 Notes to the Financial Statements 1. Accounting policies The financial information set out above does not constitute the Company'sstatutory accounts for the period ended 31 December 2006 or 2005. The statutoryaccounts for 2006 will be delivered to the Registrar of companies, following theCompany's annual general meeting. The auditors have reported on those accounts;their report was unqualified and did not contain statements under section 237(2)or (3) of the Companies Act 1985. Copies of the annual report and accounts will be posted to all shareholders.Further copies will be available from the Company's head office from the date ofposting. Basis of preparation The financial statements have been prepared under the historical cost conventionand are in accordance with applicable accounting standards and the Statement ofRecommended Practice "Accounting for Oil and Gas Exploration, Development andDecommissioning Activities" (the SORP). The financial statements are presented in United States dollars as this is theprincipal currency in which the Group's activities are conducted. The following principal accounting policies have been applied and remainunchanged, except as noted, from the previous year: Basis of consolidation The consolidated financial statements incorporate the results of Global EnergyDevelopment PLC and all of its subsidiary undertakings as at 31 December 2006using the merger method of accounting. Under section 230(4) of the Companies Act 1985, the Company is exempt from therequirement to present its own profit and loss account. Changes in the Accounting Policies There have been no changes in accounting policies adopted during the year apartfrom the adoption of FRS 20 "Share Based Payments." In accordance with therequirements of the standard, the prior period results have been re-stated toreflect the valuation of options granted subsequent to 7 November 2002. Optionsprior to that date were excluded as permitted by the standard. Merger accounting Where merger accounting is used, the investment is recorded in the Company'sbalance sheet at the nominal value of the shares issued together with the fairvalue of any additional consideration paid. In the Group financial statements, merged subsidiary undertakings are treated asif they had always been a member of the Group. The results of such a subsidiaryare included for the whole period in the year it joins the Group. Thecorresponding figures for the previous year include its results for that period,the assets and liabilities at the previous balance sheet date and the sharesissued by the Company as consideration as if they had always been in issue. Anydifference between the nominal value of the shares acquired by the Company andthose issued by the Company to acquire them is taken to reserves. Fixed assets (a) Intangible assets The Group follows the "full cost" method of accounting for the costs associatedwith certain new areas of exploration interest. These costs are assessed forrecoverability on at least an annual basis or when there has been an indicationthat impairment in value may have occurred, such as a relinquishment of theacreage. 1. Accounting policies (continued) Impairment of unevaluated prospects is assessed based on management's intentionwith regard to future exploration and development of individually significantproperties and the ability of the Group to obtain funds to finance suchexploration and development. When it is determined that such costs will be recouped through successfuldevelopment and exploitation or alternatively by sale of the interest,expenditure will be transferred to tangible assets and depleted over theexpected productive life of the asset. Whenever a project is not consideredviable, the associated exploration expenditure is transferred to the relevanttangible cost pool. Where there are no development and producing assets withinthe cost pool, the transferred exploration expenditure is charged directly tothe profit and loss account. (b) Oil and gas properties, and facilities and pipelines The Group follows the "full cost" method of accounting for the costs associatedwith exploration, appraisal, development and production of oil and gas reserves.The Group's evaluated oil and gas assets are held in a separately designatedgeographical cost pool, which is Latin America. The costs of acquisition of aproperty (including rights and concessions), geological and geophysical costs,cost of field production facilities, pipelines and plant and equipment areclassified as tangible fixed assets if they relate to proved and probable oiland gas properties. All costs associated with property acquisition, exploration and development arecapitalized regardless of whether they result in commercial discoveries or not.Proceeds from the disposal of oil and gas assets are credited to the cost pools.Producing oil and gas assets are depleted by pool on a unit of production methodin the proportion of actual production for the period to the total remainingcommercial reserves. Reserves are those estimated at the end of the period plusproduction during the period. For depletion purposes only, the cost baseincludes costs of capital assets and anticipated future development expenditureexpected to be incurred to access these reserves. Interest costs directly attributable to the development cost of an asset arecapitalized in accordance with FRS15. (c) Other tangible fixed assets Other tangible fixed assets are depreciated on a straight-line basis so as towrite off the cost less any estimated residual value of each asset evenly overits estimated useful economic life as follows: • Office equipment and other - between 5 to 7 years. (d) Impairment of fixed assets The carrying value of fixed assets is reviewed for impairment in the periodswhen events or changes in circumstances indicate that the carrying value may notbe recoverable. An impairment loss is provided for in the current period profitand loss account when the carrying value of the assets exceeds their estimatedrecoverable amount. The estimated recoverable amount is defined as the higher ofthe net realizable value and the value in use. The value in use is determined byreference to estimated future discounted cash flows. Decommissioning provision Provision for decommissioning of oil and gas production facilities is recognizedin the accounts on commencement of field development on the basis of costsestimated at the balance sheet date in accordance with the local conditions andrequirements. Such provision represents the Company's share of the estimatedliability for costs, which will be incurred in removing production platforms andfacilities at the end of the commercial production from the field. 1. Accounting policies (continued) Where the time value of money is material, the provision made in the financialstatements is for the present value of the estimated future costs. Acorresponding tangible fixed asset is also created for the amount equal to theprovision when it is first made in the financial statements. Any change in thevalue of estimated expenditure is reflected as an adjustment to the provisionand fixed asset. This asset is subsequently depreciated as part of oil and gasassets in accordance with the depreciation policy applied to such assets. Where the provision is discounted, the carrying value of the provision increaseseach year to reflect the passage of time. This increase is recognized as anannual debit to the current year profit and loss account and is included withininterest expense. Investments Fixed asset investments in subsidiaries included in the accounts at cost lessprovision for impairment. Stocks Stocks, which comprise oil in tanks and pipelines as well as materials, arestated at the lower of cost or net realizable value. Foreign currencies (a) Company Transactions in foreign currencies are recorded at the rate ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the rate of exchange ruling at the balance sheetdate. All differences are taken to the profit and loss account. (b) Group The accounts of the overseas subsidiary undertakings and Group's operationsconducted through a foreign branch are translated at the rate of exchange rulingat the balance sheet date. All translation differences are taken to the profitand loss account. Foreign exchange rates utilized Colombian Peruvian British Pound Peso Nuevo Sol SterlingForeign currency units to $1.00 US dollar 2,238.79 3.19 0.5104 Turnover Turnover represents the amounts invoiced by the Group to third parties in theordinary course of business, in respect of the Group's crude oil production, andis stated net of royalties and applicable taxes. Turnover is recognized ondelivery of products. Pension costs The Group contributes to a defined contribution scheme. Contributions arecharged to the profit and loss account as they become payable. Leasing commitments Rentals payable under operating leases are charged in the profit and lossaccount on a straight-line basis over the lease term. Deferred tax Deferred tax is recognized in respect of all timing differences that haveoriginated but not reversed at the balance sheet date where transactions orevents have occurred at that date that will result in an obligation to pay more,or a right to pay less or to receive more, tax, with the following exceptions: 1. Accounting policies (continued) • provision is made for deferred tax that would arise on remittance of theretained earnings of overseas subsidiaries, associates and joint ventures onlyto the extent that, at the balance sheet date, dividends have been accrued asreceivable; and • deferred tax assets are recognized only to the extent that the Directorsconsider that it is more likely than not that there will be suitable taxableprofits from which the future reversal of the underlying timing differences canbe deducted. Deferred tax is measured on an undiscounted basis at the tax rates that areexpected to apply in the periods in which timing differences reverse, based onthe tax rates and laws enacted or substantively enacted at the balance sheetdate. Convertible debt In accordance with FRS25, the Company has classified the convertible debt inissue as a compound financial instrument. Accordingly, the Company presents theliability and equity component separately on the balance sheet. Theclassification of the liability and equity component is not reversed as a resultof a change in the likelihood that the conversion option will be exercised. Nogain or loss arises from initially recognizing the components of the instrumentseparately. Interest on the debt element of the loan is accreted over the termof the loan. Costs associated with raising of debt are set off against the grossvalue of monies received. Share-based payments In accordance with FRS20: "Share-based payments", the Group reflects theeconomic cost of awarding shares and share options to employees by recording anexpense in the profit and loss account equal to the fair value of the benefitawarded. The expense is recognized in the profit and loss account over thevesting period of the award. Financial instruments In relation to the disclosures made in the notes to the financial statements,short term debtors and creditors are not treated as financial assets orfinancial liabilities except for the currency disclosures and the Group does notcurrently hold or issue derivative financial instruments for trading purposes. Liquid resources Cash, for the purpose of the cash flow statement, comprises cash in hand anddeposit repayable on demand, less overdrafts payable on demand. Finance costs Finance costs directly attributable to the construction of assets have beencapitalized in accordance with FRS15. Where the conditions of FRS15 do not applyfinance costs are charged to the profit and loss account in accordance withFRS4. 2. Turnover and segmental analysis Turnover, profit on ordinary activities before taxation and net assets areattributable to one continuing activity, which is oil production in LatinAmerica. 3. Cost of sales and operating expenses (Restated) 2006 2005 $000 $000Production costs 5,569 5,396Depletion of oil properties 3,737 3,618Depreciation of other tangible fixed assets 238 687Total cost of sales 9,544 9,701Stock options expense 312 267Other general and administrative expenses 5,769 4,418Total cost of sales and administration expenses 15,625 14,386 In 2005, the unwinding of the discount factor related to the decommissioning provision described in Note 1(d)was included as a cost of sales within the profit and loss account, and in accordance with the described policyhas been reclassed to interest expense for consistency resulting in a reduction of 2005 cost of sales in theamount of $54,000. The charge relating to the Stock option expense reflects the adoption of FRS20 "Share Based Payments" in 2006and reflects the cost of awarding shares and share options to employees. The expense charged to the profit andloss account has been calculated using the Black-Scholes model and the assumptions set out in Note 21. Inaccordance with the standard, a prior year adjustment has been made. The charge to the profit and loss accountwas $312,514 (2005: $267,420). 4. Operating profit (Restated) 2006 2005This is stated after charging / (crediting): $000 $000Audit services - Group 184 104Other services pursuant to legislation - non audit 27 65Operating lease expense 278 253Exchange (gains)/losses (271) 121 The Company audit fee for the year is $139,720 (2005: $84,550). 5. Interest payable and similar charges 2006 2005 $000 $000Unwinding of discount on decommissioning liability 49 54Other interest payable 382 43Interest accretion on loan notes 179 - 610 97 6. Taxation on profit on ordinary activities The taxation charge is made up as follows: 2006 2005 $000 $000UK corporation tax - - Foreign taxPresumptive income tax for the year - Colombia 985 715Total tax 985 715 The tax assessed on the profit on ordinary activities for the year is lower thanthe standard rate of taxation in the UK. The differences are explained below. 6. Taxation on profit on ordinary activities (continued) 2006 (Restated) $000 2005 $000Profit on ordinary activities before taxes 5,170 4,817 Profit on ordinary activities multiplied by standard rate of corporation 1,551 1,445tax in the UK of 30% (2005: 30%) Effects of:Asset based tax rates on overseas earnings (see below) (566) (730)Total tax 985 715 Global pays taxes in Colombia through its branch office of the subsidiary Harkende Colombia, Ltd. The current tax included represents the tax payable underColombian legislation called Presumptive Income Tax (PIT). The PIT calculationis based upon a 38.5% tax rate on presumptive income equivalent to 6% of theprevious year's taxable net assets. The 2006 income tax provision is for$984,561 (2005: $715,000). Factors affecting future taxes payable and deferred taxes No provision has been made for a deferred tax asset arising on Colombian taxlosses carried forward of $20,000,000 (2005: $97,000,000) as it is unlikelythere will be sufficient taxable profits from which the asset can be recovered.These carried forward losses will expire in 2007. Also, forthe same reason no deferred tax asset has been recognized in relation to the UKtax losses. The UK losses do not expire. 7. Earnings per share The calculation of basic and diluted earnings per ordinary share is based on thenet income for the year of $ 4,185,438 (restated 2005: $4,101,843). The weightedaverage number of shares used in calculating basic earnings per share in 2006 is35,235,430 (2005: 31,647,889). A reconciliation of the weighted average number of shares used in determiningthe basic earnings per share figures to the diluted earnings per share figuresis given below. Weighted Average Profit Number Of2006 2006 Shares Per Share $000 2006 2006Basic 4,185 35,235,430 $0.1188Potential shares on conversion of loan and 3,579,476exercise of optionsDiluted 4,185 38,814,906 $0.1078 8. Intangible assets Company Group $000 $000CostsPeruAt 1 January 2006 - 1,522Additions - 1,299At 31 December 2006 - 2,821 PanamaAt 1 January 2006 - 527Additions - 166At 31 December 2006 - 693 Total intangible costsAt 31 December 2006 - 3,514At 31 December 2005 - 2,049 The above assets relate to certain new areas of exploration interest. 9. Tangible fixed assets Group Oil and gas Facilities Office Total properties and equipment $000 pipelines and other $000 $000 $000 Cost:At 1 January 2006 197,057 18,114 1,486 216,657Additions 11,171 2,289 241 13,701Transfers (14,209) 14,209 - -At 31 December 2006 194,019 34,612 1,727 230,358 Depreciation:At 1 January 2006 (139,972) (5,843) (969) (146,784)Provided during the year (3,043) (696) (237) (3,976)Transfers 2,016 (2,078) 62 -At 31 December 2006 (140,999) (8,617) (1,144) (150,760) Net book value at 31 December 2006 53,020 25,995 583 79,598Net book value at 31 December 2005 57,085 12,271 517 69,873 Included in the cost of tangible fixed assets is $434,774 (2005: $87,427) inrespect of capitalized financing costs. The amount of financing costscapitalized in the period is $347,347 (2005: $87,427). Depreciation for the yearon these assets is $8,784 (2005: $14,234). Net book value for capitalizedfinancing costs is $411,756 (2005: $73,193). Detailed analyses of tangible assets classifications recorded in prior years forColombia resulted in reclassification of asset values ($14,208,852) and relateddepreciation ($2,077,185) from Oil and Gas Properties to the other categories oftangible fixed assets. Overall, profit after tax was not impacted. 9. Tangible fixed assets (continued) Company Office Equipment and Other $000Cost:At 1 January 2006 830Additions 274At 31 December 2006 1,104 Depreciation:At 1 January 2006 (504)Provided during the year (198)At 31 December 2006 (702) Net book value at 31 December 2006 402Net book value at 31 December 2005 326 10. Group investments Company 2006 ($000)Costs:At 1 January 2006 29,820Additions 4,719At 31 December 2006 34,539 All additions related to further investment in subsidiary undertakings. Group The group's subsidiaries at 31 December 2006 are listed below:Held directly Country of Class of Proportion incorporation share held by the capital company heldHarken de Colombia Cayman Islands Ordinary 100%Harken de Colombia Holdings, Ltd. Cayman Islands Ordinary 100%Harken de Colombia II, Ltd. Cayman Islands Ordinary 100%Harken de Colombia III, Ltd. Cayman Islands Ordinary 100%Harken South America, Ltd. Cayman Islands Ordinary 100%Harken de Peru Holdings, Ltd. Cayman Islands Ordinary 100%Harken del Peru Limitada Cayman Islands Ordinary 100%Harken de Panama Holdings, Ltd. British Virgin Ordinary 100% IslandsHarken de Panama, Ltd. British Virgin Ordinary 100% IslandsGlobal Energy Management Resources United States Ordinary 100% The following branches are included in the subsidiaries listed above: Harken de Colombia Ltd. Colombian Branch Indirect 100% holdingHarken de Colombia II, Ltd. Colombian Branch Indirect 100% holdingHarken del Peru Limitada Peruvian Branch Indirect 100% holdingHarken de Panama, Ltd. Panamanian Indirect 100% Branch holding All of the above companies and branches are engaged in oil and gas exploration. 11. Stocks 2006 2005 $000 $000Crude stock 167 71Yard stock 585 380 752 451 Stocks include oil in tanks and pipelines located in Colombia, and yard stock,which includes casing, tubing and other materials for the operation of theproduction facilities and for exploratory drilling. Stocks are stated at thelower of cost or net realizable value. 12. Debtors: amounts falling due within one year Company Company Group Group 2006 2005 2006 2005 $000 $000 $000 $000Trade debtors - - 3,899 3,049Other debtors - 695 221 2,102 Prepayments and accrued income 229 227 561 546 229 922 4,681 5,697 13. Creditors: falling due within one year Company Company Group Group 2006 2005 2006 2005 $000 $000 $000 $000Bank Overdraft - - - Trade Creditors 475 - 3,419 2,536Taxation and social security - - 309 212Other Creditors 55 - - -Amount owed to subsidiary undertakings 9,782 9,783 - -Accruals and deferred income 353 202 - 1,024 10,665 9,985 3,728 3,772 14. Convertible loan notes Company Company Group Group 2006 2005 2006 2005 $000 $000 $000 $000Balance bought forward 10,482 - 10,482 -Convertible loan notes issued 5,201 12,500 15,425 12,500Proportion classed as equity (512) (1,314) (512) (1,314)Costs of raising finance (292) (704) (292) (704)Accretion expense 546 - 546 -Balance carried forward 15,425 10,482 15,425 10,482 On 8 December 2006, the Group entered into a fixed-rate loan agreement for$11,903,000 in convertible notes. Unless previously redeemed, converted orpurchased and cancelled, the notes are repayable in full on 8 December 2012. Ifthe Company redeems the loan notes prior to 8 December 2009, an early redemptionpenalty of 8% on the outstanding balance is payable. A portion of the previous loan notes from the loan agreement entered into on 27October 2005 ("2005 loan notes") was partly extinguished ($6,702,000) andre-invested in the new convertible notes. A balance of $5,798,000 in 2005 loannotes remains outstanding. The group raised an additional $5,201,000 in cashfrom this financing transaction. 14. Convertible loan notes (continued) All loan notes incur an interest charge of 5% per annum for the three years to08 December 2009, 6% per annum for the two years to 8 December 2011 andthereafter an interest rate of 7%. Interest is payable quarterly. The effectiveinterest rate is therefore 5.85%. Holders of the loan notes issued in 2006 have the right to convert theoutstanding amount (or part thereof) into ordinary shares at a fixed exchangerate of $1.90:£1 and at a fixed price of 179p at any time. Holders of the 2005loan notes have the right to convert the outstanding amount (or part thereof)into ordinary shares at a fixed exchange rate of $1.78:£1 and at a fixed priceof 305.8p at any time. The loan notes are not secured against any assets of anyGroup company. In accordance with the provisions of FRS25, the Company has determined theconvertible loan note issue to be a compound financial instrument requiring aproportion of the loan to be classified as equity. The reclassified elementrepresents the difference between the fair value of a similar liability with noequity conversion option and the fair value of the existing loan in currentterms. Accordingly, an amount of $512,000 (2005:$1,314,000) has beenreclassified to equity in the year. Total costs incurred in raising the loanamounts were $324,981 (2005: $703,547). Of these amounts $32,498 (2005: $78,503)has been reclassified to equity. The remainder has been debited against thecarrying value of the notes. Accreted interest will be charged to the profit andloss account over the life of the notes. The effective interest rate is 5.96%. 15. Provisions for Liabilities Decommissioning Provision $000At 1 January 2006 575Unwinding of discount factor 50At 31 December 2006 625 The decommissioning provision relates to the future costs of decommissioning ofthe Group's oil and gas assets expected to be incurred over the next 14 yearsaccording to the estimates provided by the field operators. The provision hasbeen estimated at current prices and discounted using a discount rate of 10% perannum. 16. Share Capital 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Number Number $000 $000AuthorizedOrdinary shares of 1p each 75,000,000 75,000,000 1,163 1,163 Allotted, called up and fully paidOrdinary shares of 1p each 35,328,428 35,235,430 539 537 During the year, a total of 92,998 shares were issued under the terms of theGroup's share option scheme. Under the rules of the share option scheme optionholders can elect to settle the exercise value by foregoing further options ofequivalent market value. During the year 155,000 options were forgone for the92,998 shares issued under the terms of the share options scheme. The Group did not receive any consideration in respect of the issue of sharesbecause all exercise of options during the year were cashless. 16. Share Capital (continued) Number Consideration Share Share of Shares Capital Premium $000 $000 $000 Balance brought forward as at 1 January 2006 35,235,430 7,679 537 26,288Issue of options 92,998 - 2 151Balanced carried forward as at 31 December 35,328,428 7,679 539 26,4392006 At 31 December 2006, the following share options were outstanding in respect ofthe ordinary shares: Year of grant Number Of Issued Lapsed Exercised Number Start Date End Date Price Shares in year in year Of per Shares Share2002 2,967,636 - (32,440) (20,000) 2,915,196 31.1.2002 31.1.2012 50.0p2002 30,000 - - - 30,000 8.8.2002 12.8.2012 54.5p2004 780,000 - - (105,000) 675,000 3.12.2004 3.12.2014 151.1p2005 270,000 - - (30,000) 240,000 8.12.2005 8.12.2015 265.1p2006 - 325,000 - - 325,000 13.9.2006 13.9.2016 174.5pTotal 4,047,636 325,000 (32,440) (155,000) 4,185,196 The Company's share price at 31 December 2006 was 123.5p. The highest and lowestshare prices during the year were 300.0p and 118.5p respectively. The fair values of awards granted under the Group's Option Schemes have beencalculated using a variation of the binomial option pricing model that takesinto account factors specific to share incentive plans such as the vestingperiods, the expected dividend yield on the Company's shares and expectedexercise of share options. The following principal assumptions were used in thevaluation: Grant date 3 Dec 2004 8 Dec 2005 13 Sep 2006Share price at date of grant 1.51p 2.651p 1.745pExercise price 1.51p 2.651p 1.745pVolatility 36.73% 33.02% 40.68%Option Life 3 Dec 2014 8 Dec 2015 13 Sep 2016Dividend Yield 0% 0% 0%Risk-Free investment rate 4.645% 4.226% 4.568%Employee Turnover 3.7 years 3.3 years 4.3 years Volatility has been based on a Volatility Cone calculation model using thehistoric share price two years prior to each grant date and assigning aprobability weighting. Volatilities were selected between the median and the75th percentile calculations. Based on above assumptions the fair values of the options granted are estimatedto be: Grant date 3 Dec 2004 8 Dec 2005 13 Sep 2006Fair value 51p 76p 66p Expense arising from share-based payments: Based on the above fair values and the Company's expectations of employeeturnover, the expense arising from equity-settled share options and share awardsmade to employees was $465,916 for the period (2005: $267,420). There were noother share-based payment transactions. 17. Movement on reserves Capital Share (Restated) OtherGroup Reserve Premium Profit and Reserve Account Account Loss Account Account $000 $000 $000 $000At 1 January 2005 as previously stated 210,844 18,740 (171,899) -Placement of new share capital - 7,548 - -Equity proportion of convertible loan note - - - 1,314Prior year adjustment in respect of Stock - - 286 -Option ExpenseProfit for the year - - 4,083 -At 1 January 2006 as restated 210,844 26,288 (167,530) 1,314Equity proportion of convertible loan note - - - 512Exercise of options - 152 - -Stock Option Expense - - 312 -Profit for the year - - 4,185 -At 31 December 2006 210,844 26,440 (163,033) 1,826 Company Capital Share (Restated) Other Reserve Premium Profit and Reserve Account Account Loss Account Account $000 $000 $000 $000At 1 January 2005 as previously stated - 18,740 (7,170) -Prior year adjustment in respect of Stock - - 286 -Option ExpensePlacement of new share capital 7,548Equity proportion of convertible loan note - - - 1,314Loss for the year - - (3,549) -At 1 January 2006 as restated - 26,288 (10,433) 1,314Equity proportion of convertible loan note - - - 512Exercise of options - 152 - -Stock Option Expense - - 312 -Loss for the year - - (4,287) -At 31 December 2006 - 26,440 (14,408) 1,826 18. Reconciliation of movements on shareholders' funds (Restated) (Restated) Company Company Group Group 2006 2005 2006 2005 $000 $000 $000 $000Total recognized gains and losses (4,281) (3,549) 4,185 4,083Equity portion of convertible loan notes 512 1,314 512 1,314New share capital subscribed less issue 154 7,679 153 7,679costsStock Options Expense 312 286 312 286Total movements during the year (3,308) 5,730 5,162 13,362Shareholders' funds at 1 January 17,706 11,976 71,453 58,091Shareholders' funds at 31 December 14,397 17,706 76,615 71,453 19. Reconciliation of operating profit to net cash flows (Restated) 2006 2005 $000 $000Reconciliation of operating profit to net cash inflow from operatingactivitiesOperating profit 5,628 4,835Depreciation 3,975 4,286Decrease / (Increase) in debtors 1,016 (3,433)(Decrease) in creditors (44) (1,334)(Increase) in stock (301) (43)Other non-cash items 152 -Stock option expense 312 286Net cash inflow from operating activities 10,738 4,597 20. Reconciliation of net cash outflow to movements in net funds 2006 2005 $000 $000(Decrease) / Increase in cash in the year (709) 5,032 Movement in debt resulting from cash flows (709) 5,032Issue of convertible loan notes (5,201) (12,500)Non-cash movements 450 -Opening net funds (4,836) 2,632Closing net (debt) (10,296) (4,836) In 2006, all short term deposits were reclassified to a separate category withinthe balance sheet. In order to maintain consistency, short term depositstotaling $548,000 at 31 December 2005 were reclassified for comparison purposesand all cash flow statements and notes were restated accordingly. 21. Analysis of net funds At 1 At 31 January Net Cash Non-cash December 2006 Flow movements 2006 $000 $000 $000 $000 Cash at bank and in hand 7,664 (709) - 6,955 7,664 (709) - 6,955 Debt due after one year (12,500) (5,201) 450 (17,251)Total (4,836) (5,910) 450 (10,296) This information is provided by RNS The company news service from the London Stock Exchange