RPT.L Regulatory News (RPT)

17 June 2011

REGAL PETROLEUM PLC

2010 RESULTS

Regal Petroleum plc ('Regal', 'the Company' or 'the Group'), the AIM-listed (RPT) oil and gas exploration and production group, today announces its audited results for the year ended 31 December 2010.

Principal Developments

Developments in 2010

·; The Company remains subject to a suspension order received by the Company in May 2010 by the Ukrainian Ministry of Environmental Protection in relation to its operations on its gas and condensate fields in Ukraine.Both fields remain shut-in;

·; In September 2010, the Company announced a strategic review of reservoir performance and its business plans. The review concluded that development of the Company's Ukrainian assets would require further technical studies, including the testing of alternative technologies for well completion;

·; Discussions with Saipem with regard to the utilisation of the drilling rigs operated by Saipem concluded with settlement agreements in December 2010, whereby its long term drilling contracts were terminated;

·; During 2010, the Company completed four wells and worked over MEX-103, MEX-106 and SV-58; and

·; The Group recorded a loss for the year of $40.6 million (2009: loss of $9.8 million), which includes an impairment charge on its exploration portfolio of $15.3 million and the cost of settling its Saipem obligations of $18.7 million.

Post year end events

·; The Company received an offer from Energees Management Limited (part of the Smart Holding Group) to acquire the entire issued share capital of Regal for a cash consideration of 24 pence per share in December 2010. On 6 February, Energees increased its offer to 38 pence per share and simultaneously scaled this back to a partial offer for a majority holding of the issued share capital of the Company. On 4 March 2011, Energees increased partial cash offer closed at 54% of Regal's issued share capital;

·; On 29 September 2010, the Company entered into a conditional sale and purchase agreement with Chevron for the sale of the Barlad concession to Chevron for a cash consideration of $25 million (excluding VAT and before taxes). The Company successfully concluded this sale on 14 February 2011; and

·; Regal entered into a sale and purchase agreement with Apache in January 2011 for the sale of its interest in the East Ras Budran, Egypt concession for a consideration of $1.1 million.

The Annual Report and Accounts for 2010, together with the Notice of Annual General Meeting, will be posted to shareholders and published on the Company's website in due course but in any event no later than 30 June 2011.

For further information, please contact:

In accordance with the rules of the AIM market of the London Stock Exchange, Ronan McElroy, PhD Geology, SPE, Chief Technologist of Regal Petroleum plc, is the qualified person that has reviewed the technical information contained in this press release.

Definitions

Chairman's Statement

The 2010 results, presented here, reflect an extremely difficult period for the Company. Despite early indications of a resolution to some of the technical challenges faced on the first two new development wells in the Ukraine, the Company experienced further setbacks in the third quarter following some disappointing results from subsequent drilling and work-overs on its Ukrainian production licences. The resulting shortfall in anticipated production, coupled with the suspension order issued by the Ukrainian Ministry of Environmental Protection, meant revenue and operational cash flows fell significantly below expectations.

Clearly, from an operational perspective, developing the Ukrainian field was proving more difficult than had initially been thought. Consequently, in September 2010, the Company announced a strategic review of reservoir performance and its business plans, including exploring and pursuing ways to strengthen its cash position by reducing costs and contractual exposures whilst optimising production. The review concluded that development of the Company's Ukrainian assets would require further technical studies, including the testing of alternative technologies for well completion, such as hydraulic fracturing, following which the impact, if any, on the Company's estimated reserves and the investment capital required to fund future development could be determined. Since this plan did not envisage further drilling in the short term and assumed that future wells would initially focus on the shallower B-Sand reservoirs, the Company decided to finalise its discussions with Saipem SpA ("Saipem") with regard to both the utilisation of the drilling rigs operated by Saipem and to the various other arrangements between Saipem and Regal. This concluded with settlement agreements in December 2010, whereby its long term drilling contracts were terminated and these other arrangements settled in order to stem the Company's largest contractual exposures. Financial settlement with Saipem, under these agreements, was reached in February 2011 using the majority of the proceeds from the sale of the Company's Barlad concession in Romania to Chevron Exploration and Production BV ("Chevron"). This sale had been agreed in September 2010, subject to satisfaction of a number of conditions precedent, which were fully discharged by February 2011.

The Company remains subject to a suspension order issued by the Ukrainian Ministry of Environmental Protection in relation to its operations at the Mekhediviska-Golotvshinska ("MEX-GOL") and Svyrydivske ("SV") gas and condensate fields. In light of court rulings against Regal in the fourth quarter of 2010, as announced on 17 November and 1 December 2010, the Company shut-in and suspended its operations at these fields. Both fields remain shut-in and the continuing loss of production and revenues further exacerbates the Company's financial position.

On 25 November 2010, the Company announced it had received a number of approaches in relation to a potential offer for the Company and, as part of its strategic review, entered into negotiations with several parties regarding potential corporate options. This resulted in the Company receiving an offer from Energees Management Limited ("Energees"; part of the Smart Holding Group "Smart") to acquire the entire issued and to be issued share capital of Regal for a cash consideration of 24 pence per share in December 2010. The Board of Directors of Regal recommended the Energees offer to shareholders, having taken into consideration the technical difficulties associated with bringing the wells to sustainable commercial production rates; the uncertainty in the outcomes of further reservoir appraisal and the potential impact, if any, on the reserves estimate; the loss of operational revenue as a result of the suspension order and uncertainty as to when production may be allowed to resume; the additional capital requirements for further appraisal and field development; and the ongoing legal and political risks surrounding the Ukrainian operations.

Whilst subject to the offer from Energees, Regal received an alternative approach from Heamoor / Geo-Alliance Oil-Gas Public Limited ("Geo-Alliance") with regard to, inter alia, a possible reverse takeover by Regal of Geo-Alliance. Considerable effort was expended in attempting to bring this proposal to shareholders as a formal offer. However, on 6 February 2011, Energees increased its offer to 38 pence per share and simultaneously scaled this back to a partial offer for a majority holding of the issued share capital of the Company. The Energees increased partial cash offer was announced by Energees on the condition that Regal terminate its discussions with Geo-Alliance.

Given the risks associated with completion of the reverse takeover proposed by Geo-Alliance and in the light of a significantly increased firm offer by Energees, your Board recommended that shareholders accept the increased partial cash offer. This concluded with the announcement on 4 March 2011, that the Energees increased partial cash offer was closed at 54% of Regal's shares.

Board Changes

In addition to welcoming Dr Alastair Graham to the Board as a non-executive director following his appointment in January 2010 and as announced in last year's Annual Report, I also have pleasure in welcoming Mr Alexey Timofeyev and Mr Alexey Pertin as non-executive directors on 28 March and 1 April 2011, respectively, and Mr Denis Rudev as an executive director on 1 April 2011. In accordance with the Relationship Agreement, announced on 3 March 2011, Energees Investments Limited and JSC Smart Holding UA ("JSC Smart") are entitled to nominate three appointees to the Board.

Mr Pertin is currently a director of Energees Investments Ltd and Energees and is the Chief Executive Officer of JSC Smart. Mr Timofeyev is currently First Deputy Chief Executive Officer for Corporate Development and Asset Management at JSC Smart. Mr Rudev is currently a director of Energees and First Deputy Chief Executive Officer for Finance of JSC Smart.

On 29 September 2010, Mr David Greer stepped down as Chief Executive Officer and Director of the Company, leaving myself to act as Chief Executive Officer until a replacement is appointed.

On 21 April 2011, Mr Harry Verkuil resigned as Chief Operating Officer and Director of the Company with immediate effect to pursue other business opportunities. The Company would like to record its appreciation of David Greer's and Harry Verkuil's contribution to the Company since their appointment in November 2007 and January 2008, respectively.

Outlook

As stated at the time of making its offer to acquire its interest in Regal, Smart has an established long-term strategy to become one of the leading diversified natural resources holding companies in Ukraine. In completing the partial acquisition of Regal and becoming the Company's major shareholder, Smart is progressing this strategy. The Company's Directors believe that Regal now has a considerably strengthened position in Ukraine.

Regal will have access to a strong management team, who are believed to be well placed to address the legal issues facing the Company, particularly in relation to the suspension order issued by the Ministry of Environmental Protection.

Smart recognises that in order to develop the Regal business, investment of further capital will be required. While Smart management has made no firm decision on the form of such investment, it is anticipated that further investment to fund Regal's capital expenditure programme would take the form of shareholder loans. Smart has stated its intention to inject such further capital to enable the Company to continue work on the MEX-GOL and SV fields and to explore other options to acquire assets and grow production in Ukraine. In addition, the parent company of Energees has confirmed that they will provide financial support to Regal for at least the next twelve months while decisions are made as to the optimal longer term financing structure.

Regal believes that the experience of the Smart Holding Group as a whole, and its established track record of operating in Ukraine's natural resources sector, as well as its management with oil and gas expertise, will facilitate the efficient development of the Regal business. Smart and Regal are already exploring ways in which the operational expenses of Regal can be reduced.

The Board very much welcomes Smart's active involvement and support in helping the Company grow its operations and in fulfilling these ambitions.

Keith Henry

Chairman

History and Status of Discussions with Ministry of Environmental Protection

As announced on 28 June 2010, the Company received an order on 21 May 2010, but dated 30 March 2010, signed by the Ukrainian Minister of Environmental Protection identifying certain matters requiring rectification in relation to Regal's compliance with certain legislation in Ukraine relating to its operations at its MEX-GOL and SV gas and condensate fields (the "Ministry Order"). The Ministry Order also required a suspension of operations whilst such matters were rectified. On 2 July 2010, the Company received notification of an injunction order made by the District Administrative Court of Kiev suspending the Ministry Order pending a further hearing of the action in the District Administrative Court of Kiev. This action, challenging the Ministry Order, was brought by OJSC Ukrzakordongeologia (the Company's sole gas customer under a long term gas offtake agreement) against the Ministry of Environmental Protection. On 9 August 2010, the District Administrative Court of Kiev ruled that Regal should be substituted as the claimant in the action brought by OJSC Ukrzakordongeologia. On 11 October 2010, the District Administrative Court of Kiev found in favour of the Ministry of Environmental Protection in the action. On 18 October 2010, the Company filed an appeal of this ruling. A hearing of this appeal was held on 1 December 2010 in the Administrative Court of Appeal in Kiev, at which the Court ruled in favour of the Ministry of Environmental Protection. The Company's MEX-GOL and SV fields in Ukraine were shut in on 17 November 2010. A further hearing of the legal proceedings was held on 7 June 2011. As at the time of writing, no decision has been forthcoming following this hearing.

During the period since it received notice of the Ministry Order on 21 May 2010, the Company has engaged in dialogue with the Ukrainian Government and the Ministry of Environmental Protection regarding the Ministry Order with a view to fully resolving the issues raised by the Ministry Order following the Ministry's own standard legislative procedures. During this period the Company has provided certain clarifications and, where appropriate, implemented required actions. On 8 October 2010, the Ministry of Environmental Protection carried out further inspections of the Company's operations, which resulted in written confirmation that all matters referable to the Ministry Order had been rectified and eliminated. However, despite receiving such confirmation and despite the expectation, therefore, that this would lead to the matter being resolved expeditiously, to date the Company has not received a definitive timeframe from the Ukrainian Authorities to bring this matter to a conclusion.

Following the partial acquisition of Regal by Energees, additional support has been provided in attempting to address the issues raised in the Ministry Order.

Review of Operations

Health, Safety, Environment and Security

Regal is committed to maintaining the highest standards of Health, Safety, Environment and Security (HSES) and the effective management of these areas is an intrinsic element of the overall business ethos. Through strict enforcement of the Company's HSES Management System, together with regular management meetings, training and the appointment of dedicated safety professionals, the Company strives to ensure that the impact of its business activities on its staff, contractors and the environment is as low as is reasonably practicable. Regal reports safety and environmental performance in accordance with the Association of Oil and Gas Producers (OGP) guidelines.

Asset overview

Ukraine

The Ukrainian licences are the Company's primary assets. A large gas and condensate field, comprising a series of stratigraphically trapped, paleo-deltaic sand reservoirs, extends under two neighbouring production licences over a combined area of 269 km², approximately 200 km east of Kiev. These licences are known as the MEX-GOL and SV fields (100% Regal owned) and the interests are operated and managed by the Company as one field.

The field is located, geologically, towards the middle of the Dnieper-Donets sedimentary basin which extends across most of north-east Ukraine. The vast majority of Ukrainian gas and condensate production lies within this basin. The reservoir comprises a series of gently dipping Carboniferous sandstones of Visean Age ("B-Sands") interbedded with shales that form stratigraphic traps at around 4,700 metres below the surface, with a gross thickness between 800 metres and 1,000 metres. Analysis suggests that these deposits range from fluvial to deltaic in origin. Below these reservoirs is a thick sequence of shale above deeper, similar, sandstones which are encountered at a depth of around 5,800 metres. These are of Tournasian Age ("T-Sands") and also sandstones from the older Devonian Period ("D-Sands").

The field was originally discovered in the 1960s during the Soviet era, with wells being drilled sporadically over the years since then, by State companies, prior to Regal's involvement. Only limited investment had been made in developing the assets by these companies resulting in limited production. Between 2000 and 2004, the former Regal/Chernihivnaftagasgeologia (CNGG) joint venture drilled two development/appraisal wells, MEX-102 and SV-52, and successfully completed three work-overs on Soviet era wells. The Ukrainian Government declared the fields commercial in December 2003 and 20 year production licences (MEX-GOL and SV) were awarded to Regal in July 2004.

Over 20 wells had been drilled into the B-Sands prior to 2004, with five extending just into the upper T-Sands. Following the acquisition of 3D seismic data and its interpretation in 2008, the lateral extent of the B- and T-Sands was defined and underlying D-Sands became apparent. Deep, new-generation wells using top-drive rigs were spud in 2009 with a drilling programme designed to target production from the B-Sands reservoirs, and also to appraise the deeper T and D-Sands deposits. This programme continued into 2010, but in so doing, the development of these deposits proved to be far more technically challenging than initially thought.

In May 2010, an updated reserves report, prepared by Ryder Scott, was published revealing estimated 2P reserves of 151 MMboe.

Production

Following the suspension of production on 17 November 2010, the MEX-GOL and SV fields have been shut-in. The Company's average production in the calendar year up to this date was 256,940 m³/d (9.07 MMcf/d) of gas and 53.5 m³/d of condensate, which equates to a combined total oil equivalent of 1,942 boepd. This represents an approximate 58% increase compared with the average production in 2009 which was 163,982 m³/d (5.79 MMcf/d) of gas and 42.5 m³/d of condensate, which equated to a combined total oil equivalent of 1,232 boepd.

Operations

For the field development Regal contracted two new top-drive 2,000 hp Lewco rigs from Saipem SpA in 2008 on a five year contractual basis and the first of the new-generation deep gas and condensate production wells, MEX-106 and SV-58, were completed in 2009. During 2010, the Company completed a further four wells and worked over MEX-106 and SV-58 following initially disappointing test rates. MEX-103, being the last well drilled using the previously deployed rigs, was also worked over.

The plan had been to drill all wells to produce from the B-Sand target reservoirs and also to appraise the deeper T- and D-Sand potential. MEX-106 and SV-58 were drilled to over 6,000m depth. However, as a result of operational complexities and difficulties, with the resulting cost implications, a decision was taken during the drilling of SV-61 and SV-66 to curtail these wells and focus on production from the shallower B-Sand reservoirs (depth range 4,800 to 5,300m). The two further wells, MEX-120 and SV-69, were redesigned and only drilled to the B-Sand.

MEX-106 Well

This was the first of Regal's new generation wells and was drilled to a depth of 6,020 metres in 2009 initially producing a stable rate of approximately 75,000 m³/d (2.6 MMcf/d) of gas and 12 m³/d (75 boepd) of condensate (521 boepd in aggregate) from the B-Sand. Production continued at these approximate levels into 2010. However, a mechanical obstruction ("fish") at 5,201 metres prevented testing of the T-Sand. A field operation using coiled tubing during 2010 recovered a total of 8m of the "fish", leaving a residual 3m section still lodged. Despite a subsequent work-over intervention, MEX-106 tested no gas from the D-Sands although logging confirmed a gas contribution from the T-Sands.

SV-58 Well

The initial rate of production from SV-58, in January 2010, was less than 10,000 m³/d. As a result of a number of additional well interventions in which the abrasive jet perforation technique was trialled, stabilised production was achieved by 1 April 2010, with 114,320 m³/d gas and 20 m³/d condensate (800 boepd). All production was from the B-Sands.

SV-61 Well

A work-over intervention on SV-61 was conducted in order to investigate and repair a number of mechanical issues identified in the well, which are believed to have prevented the well from producing. The lifting of this well using coiled tubing was put on hold following the suspension of production from the field on 17 November 2010.

SV-66 Well

The well was initially tested on 4 June 2010 at a maximum rate of 445,800 m³/d of gas and 6.2 m³/d of condensate (2,821 boepd) with a flowing tubing head pressure of 2,058 psi on a 19.5mm choke. The well appeared to stabilise at around 221,760m³/d of gas and 1.4 m³/d of condensate (1,392 boepd) at 2,400 psi., but then quickly declined further. A coiled-tubing intervention to remove an obstruction at the base of the production tubing was completed in September 2010 and production, entirely from the B-Sands, was tested on 26 September 2010 at a rate of 39,140 m³/d gas and 0.3 m³/d condensate (246 boepd).

SV-69 Well

The well reached planned depth of 5,420 metres on 29 September 2010. Gas shows were observed whilst drilling through the B21, Lower B22 and B23 B-sand intervals, and a gamma-ray log confirmed the presence of the target sands within the B21 sequence. However, whilst pulling out of the hole to run the full open-hole log suite, the bottom hole assembly became stuck. Several attempts were made to retrieve the assembly, but, owing to hole stability problems and equipment failures, these attempts were unsuccessful. Accordingly the well was plugged back for a side track at a later stage and suspended.

MEX-120 Well

The well was completed in the B-Sand sequence (B-22 and B-23 reservoirs) and, after testing, was hooked up to the gas processing plant. Production rates have shown a decreasing trend that was struggling to stabilise; a well test on 22 September 2010 recorded a flow of 10,700 m³/d gas and 0.6 m³/d condensate (78 boepd).

All drilling, workover and further work ceased following the suspension of operations on 17 November 2010. Clearly, the results up to this point were mixed and, for the most part, disappointing. Against the backdrop of Regal's licences in Ukraine being challenged, Regal initiated a strategic review. The review concluded that the development of the Company's Ukrainian asset required further technical studies to evaluate the reservoir potential and any impact on the Company's reserves estimate, as well as to determine how much investment capital would be required to fund future development. In the event that the proposed technical studies and the subsequent trials of alternative completion technologies, such as hydraulic fracturing, were to prove unsuccessful in improving well productivity, Regal considers it likely that its current published reserves would be revised downwards, both in terms of quantum and category. In the meantime, the Ryder Scott 2P estimate remains the Company's best assessment of commercial reserves.

Romania

During 2010, Regal held two exploration licences in Romania - Barlad (100%) and Suceava (50%). In the Barlad block, 104.7 km of 2D seismic was acquired between November 2009 and early January 2010 and the RBNE-1 well was drilled in August 2010, to further appraise the 2007 RBN-4 discovery. The well was drilled to a total depth of 980 metres and penetrated the two sandstone targets. Despite encouraging gas shows during drilling, the well did not flow gas on test.

Approval was secured from the Government of Romania to extend the concession agreement by 2½ years from 1 September 2010 until 1 March 2013. On 29 September 2010, the Company entered into a conditional sale and purchase agreement with Chevron for the sale of the Barlad concession to Chevron for a cash consideration of $25 million (excluding VAT and before taxes). The Company successfully concluded this sale on 14 February 2011.

The Suceava partnership, in which Regal holds a non-operated 50% interest, drilled well Climauti-1 in the Suceava Block in June 2010. The well was a gas discovery in Sarmatian reservoirs at around 460m and it is estimated should yield approximately 2 bcf gross of recoverable gas reserves. The well was tied into the Bilca gas plant and came on stream on 4 March 2011 with a daily production rate of 30,000 m³/day. This asset is also intended for divestment.

Egypt

The Company holds a 25% non-operated interest in the East Ras Budran concession in the Gulf of Suez, Egypt through a joint venture with Apache East Ras Budran Corporation LDC ("Apache") as operator. Exploration and appraisal work has continued at the concession although the overall level of activity and financial exposure has been relatively low this year with the only exception a well planned toward the end of 2010. This concession is not considered to be a core asset. Apache indicated a desire for a 100% ownership of the concession and as a result Regal entered into a sale and purchase agreement with Apache in January 2011 under which Regal agreed to the sale of its interest in the East Ras Budran concession for a consideration of $1.1 million subject to working capital adjustments under the joint venture between Regal and Apache, which will result in net receipts to Regal of approximately $0.6 million at closing of the sale.

The sale and purchase agreement is subject to approval from the Egyptian Government, but owing to the regional political events in early 2011, such approval is still awaited.

Finance Review

Overview

Regal's main assets are its production licences in the Ukraine. The economic basis for the business plan that has been pursued over the last three years has been focussed on bringing modern technology into the country. This was intended to enable rapid drilling of production wells to the point at which operational cash flows would ultimately sustain continued development capital expenditure whilst delivering a return on the investment. However, during 2010 it became apparent that the field was geologically and technically more challenging than had been anticipated. This meant that anticipated revenue from production was both below expectations and delivered later than planned. It also meant that the time spent attempting to rectify the operational issues resulted in higher than anticipated drilling costs.

Given these technical challenges, which were compounded by the regulatory difficulties faced by the Company, the key financial objective as the year developed was to ensure not only the survival of Regal whilst resolving these matters, but also to secure the basis for the Company's subsequent future funding and growth.

The suspension of operations in Ukraine on 17 November 2010, resulting in the stemming of operational cash flow, exacerbated the need to find a resolution. This included reviewing the balance sheet in order to mitigate, where possible, significant liabilities and to realise value from assets held so as to provide liquidity and ensure a stronger financial position during this period. Consequently, Regal entered into the settlement with Saipem for the curtailment of its long term contractual liabilities with regard to the two rigs; it agreed the disposal of the Company's Barlad concession in Romania to Chevron; it negotiated to sell its East Ras Budran concession in Egypt to Apache; it reduced staff and operational overheads; and commenced disposal of certain high-value items of stock that would no longer be utilised.

On 25 November 2010 the Company announced that it had received a number of approaches in relation to a potential offer for the Company and as part of its strategic review entered into negotiations with several parties regarding potential corporate options. This resulted in the offer in December 2010 by Energees and subsequently the increased partial cash offer by Energees which was announced on 7 February 2011. On 4 March 2011, it was announced that the Energees increased partial cash offer was closed in respect of 54% of Regal's shares not owned by Energees or persons acting in concert with Energees. With the support of Smart, the Directors believe that Regal now stands in a strengthened position. However, until such time as the Ministry Order is lifted and the Company can resume production, there is a significant uncertainty with regard to the value and future of its Ukrainian licences. The audit opinion, whilst not qualified, therefore contains emphasis of matter paragraphs in relation to the current status of legal proceedings in Ukraine and the resultant potential impact on the financial position of the Company.

Operational Performance

Operational revenue is derived from Ukrainian gas and condensate sales. Despite the issues outlined above and the production having been shut in since 17 November 2010, revenue for 2010, at $29.0 million, is up 46% on the previous year. Whilst this is partly a result of higher sales prices (gas averaged $256/Mm³ and condensate $74/bbl), gas and condensate sale volumes were up 38% and 14%, respectively, on 2009. This is reflected in the cash generated from operating activities which, at $13.0 million, is almost double that of the previous year. However, owing to the circumstances that arose during the year and other decisions taken, a number of large, one-off charges were made to the income statement resulting in an operating loss for the period of $32.9 million, compared to $9.1 million for 2009. The more significant of these charges are detailed below.

Cost of sales includes a charge of $3.7 million for the write down of inventory following the decision to terminate the drilling contract with Saipem. This reflects the fact that certain inventory items were specific to the drilling rigs that had been utilised.

Impairments on the intangible fixed assets carrying value of the Suceava (Romania) and East Ras Budran (Egypt) concessions, totalling $15.3 million, reflect the actual or likely realisable values on their disposal. Conversely, the pre-tax gain of $13.3 million made on the disposal to Chevron of the Barlad (Romania) concession has not been included and will be taken to the income statement in 2011, as the transaction became unconditional after the balance sheet date, although the related assets and liabilities are classified as held for sale in the balance sheet.

Termination of the drilling contracts resulted in a settlement of $8.1 million and a further charge of $11.9 million was made for the release of all other liabilities and securities to Saipem. After taking into consideration associated purchase tax recoverable of $1.3 million, this resulted in a net charge of $18.7 million included within administration expenses.

Finance charges for the year include a $4.2 million expense (2009: $nil) required in order to record certain long term purchase tax balances recoverable from the Ukraine Government at their net present value.

Capital expenditure in 2010 totalled $86.5 million, of which $82.7 million was incurred in Ukraine. The vast majority of the latter related to drilling and work-overs, including associated overheads and support. Capital expenditure in Romania of $3.5 million included $1.5 million for the drilling of the RBNE-1 well on the Barlad concession prior to approval of its licence extension and onward sale to Chevron.

Cash and cash equivalents totalling $23.3 million was held on 31 December 2010, but included $13.1 million of restricted cash held as security against letters of credit. Cash held on 16 June 2011 totalled $13.8 million, of which $12.6 million was free of encumbrances. Regal manages its treasury function by forecasting its short and longer term cash flows by currency. These are then used to determine estimated functional need, by currency denomination, and deposits are held accordingly. Such deposits are placed on varying term deposits so as to optimise interest income, although interest rates achievable from major banks of high quality credit rating have been markedly poorer in the wake of the financial crisis. The foreign exchange loss of $2.3 million arises predominantly from the translation of items held in foreign currencies to the US $ reporting currency of the financial statements.

If the Ministry Order in the Ukraine is not lifted, the Company is likely to require additional sources of finance within the next 12 months in order to be able to continue trading. However, the Company has obtained a letter of support from Energees Investments Limited, the ultimate controlling party of the Company. This letter includes an irrevocable undertaking that Energees Investments Limited will provide such financial support as the Company and its subsidiaries may require in order to enable them to meet their liabilities for a period of not less than 12 months from the date of approval of the 2010 financial statements.

Regal Petroleum plc

Consolidated Income Statement

for the year ended 31 December 2010

The income statement has been prepared on the basis that all operations are continuing operations.

Regal Petroleum plc

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2010

Regal Petroleum plc

Consolidated Balance Sheet

at 31 December 2010

Regal Petroleum plc

Consolidated Cash Flow Statement

for the year ended 31 December 2010

Regal Petroleum plc

Notes forming part of the financial information

for the year ended 31 December 2010

1. Statutory Accounts

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2010 or 2009, but is derived from those accounts. The Auditors' Report on the 2010 accounts was unqualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006, but included an emphasis of matter in relation to the current status of legal proceedings in respect of the Group's licences in Ukraine, as discussed further in note 2(b). The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's annual general meeting.

2. Basis of preparation

The financial information has been prepared in accordance with International Financial Reporting Standards (IFRS) and the accounting policies applied are consistent with those adopted and disclosed in the Group's annual financial statements for the year ended 31 December 2009.

While the financial information included in this preliminary announcement has been prepared in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to distribute the full financial statements that comply with IFRS in June 2011.

(a) Going Concern

The financial statements have been prepared in accordance with the going concern basis of accounting. The use of this basis of accounting takes into consideration the Group's current and forecast financing position and the provision of a letter of support from Energees Investments Limited, the ultimate controlling party of the Group. The directors' also understand that, whatever the outcome of the legal proceedings referred to in the History and Status of Discussions with Ministry of Environmental Protection section of this announcement, the Smart Holdings Group (a fellow subsidiary of Energees Investments Limited) have stated that they have embarked on a long term strategy to become a leading diversified natural resources company in the Ukraine and the directors understand that it is intended for Regal to become a platform within this strategy.

(b) Critical Accounting Estimates and Assumptions - Recoverability of Exploration, Development and Production assets in Ukraine

The Group is currently involved in legal proceedings in respect of its licence interests in the Ukraine. On 21 May 2010, the Group received an order, dated 30 March 2010, signed by the Minister of Environmental Protection identifying certain matters requiring rectification in relation to Regal's compliance with certain legislation in Ukraine relating to its operations at its Mekhediviska Golotvshinska (MEX-GOL) and Svyrydivske (SV) gas and condensate fields in Ukraine which are valid until 2024, and requiring a suspension of operations whilst such matters were rectified (the "Ministry Order"). A summary of developments which have occurred subsequent to the receipt of the Ministry Order is included in the History and Status of Discussions with Ministry of Environmental Protection section of this announcement.

As of the date of this announcement, Regal continues to challenge in the Ukraine Courts the validity of the original Ministry Order. However, there is significant uncertainty as to the ultimate outcome of these legal proceedings.

The directors have considered the implications of IAS 36 "Impairment of assets" and have concluded that recognition of an impairment charge is not currently appropriate on the basis that the directors believe that, notwithstanding the significant uncertainties referred to above, the issues surrounding the Ministry Order should ultimately be resolved and the suspension lifted. However, the ultimate outcome is uncertain and, if the Courts in Ukraine do not resolve in the Company's favour, the Group would be required to impair the value of its exploration, development and production assets in Ukraine. The carrying value of the Group's Exploration, Development and Production assets in Ukraine in respect of these licences at 31 December 2010 was $229.2 million and there is a related purchase tax receivable of $20.9 million (of which $2.8 million is classified as due in less than one year and the remaining $18.1 million is classified as due in more than one year). Any impairment of these assets would also require adjustments to be made to the related deferred tax liability position of the Group, at a tax rate of 27%.

Even if the Ministry Order is ultimately lifted, the Group may be subject to material fines and penalties for all or some of the period it continued to produce gas and condensate while the Ministry Order was in place. The directors have considered the implications of IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" and have concluded that the recognition of a provision for this matter is not appropriate on the basis that no reliable estimate can be made as to the amount of the fines and penalties, if any, that may ultimately be imposed. In reaching this conclusion, the directors have taken into consideration both the significant uncertainty surrounding the validity of the original Ministry Order and independent legal advice which indicates that there is no mechanism specified in Ukraine law for determining the amount of damages to be applied in such cases.

3. Segmental Information

The Group's only class of business activity is oil and gas exploration, development and production. The Group's primary operating segments are geographical, and are located in Ukraine, Romania and Egypt, with its head office in the United Kingdom. These geographical regions are the basis on which the Group reports its segment information, and are consistent with the primary segments reported in the prior year under IAS 14.

* including $11.9 million to release the Company from obligations and liabilities between Saipem and Regal.

** including assets held for sale of $11.2 million.

There are no inter-segment sales within the Group and all products are sold in the geographical region they are produced in. The Group's gas sales of $21,086,000 (2009: $14,589,000) are with one single external party with which the Group has an agreement. Total of revenue generated from operating and interest revenue is $29,447,000 (2009: $20,811,000).

4. Reconciliation of Operating Loss to Operating Cash Flow

5. Post Balance Sheet Events

On 29 September 2010, the Company entered into a conditional sale and purchase agreement with Chevron Romania Exploration and Production BV ("Chevron") for the sale to Chevron of Regal's 100% owned Barlad concession in Romania for a cash consideration of $25.0 million. The sale was completed on 14 February 2011, with sales proceeds net of tax received of $23.0 million.

On 10 December 2010 the boards of Regal and Energees Investments Limited announced that they had reached an agreement on the terms of a recommended cash offer to be made by Energees Management Limited to the shareholders of the Company. On 6 February 2011 Energees Investments Limited and Regal announced the terms of an increased, recommended partial offer of 38 pence to be made by Energees Management Limited. The transaction was declared closed on 4 March 2011 and the Company is now 54% owned by Energees Management Limited, which in turn is 100% owned by Energees Investments Limited. Energees Investments Limited is a company which is jointly controlled by Mr V Novinskiy and Mr A Klyamko.

On 27 January 2011, the company entered into a conditional sale and purchase agreement with Apache East Ras Budran Corporation LDC ("Apache") in respect of its 25% non-operated interest in the East Ras Budran Concession (the "Concession") in Egypt. Apache is currently Regal's partner in the Concession, holding the remaining 75% interest and acting as operator of the concession. The consideration payable under the sale agreement is $1,100,000, subject to working capital adjustments under the current joint venture between Regal and Apache, which will result in net receipts to Regal of $649,402 at closing of the sale. The sale agreement is subject to Egyptian Government approval of the transaction, which is expected to take some months to obtain due to recent political developments in that country. Closing of the sale will take place immediately after Egyptian Governmental approval is granted.

There have been developments subsequent to 31 December 2010 in relation to the Ministry Order in Ukraine. Further details are provided in History and Status of Discussions with Ministry of Environmental Protection section.