SALV.L Regulatory News (SALV)

3Legs Resources plc

Interim Results

for the six months ended 30 June 2014

3Legs Resources plc ("3Legs" or the "Company" and, together with its subsidiaries, the "Group"), an independent oil and gas group focusing on the exploration and development of unconventional oil and gas resources, announces its Interim Results for the six months ended 30 June 2014.

Operational highlights

· Two further vertical wells, Lublewo LEP-1 and Slawoszyno LEP-1, drilled and logged on the Lebork and Karwia concessions respectively; cores taken from the Lublewo LEP-1 well.

· Lublewo LEP-1ST1H lateral well drilled as a sidetrack to the Lublewo LEP-1 well, with a 1,500m lateral section.

· A 25-stage hydraulic fracture stimulation of the Lublewo LEP-1ST1H lateral well was successfully executed, incorporating learnings to date, and the well was put on long term test.

· Over the period from 8 August to 17 September, the Lublewo LEP-1ST1H well produced at an average rate of 396 mscf/d natural gas and 157 b/d of light oil.

· The well produced higher amounts of oil than anticipated, whereas natural gas production was lower than had been hoped.

· On the basis of the information then available to it and reviewed with Netherland, Sewell & Associates, the Company did not feel confident that the flow rates from this well were likely to improve to a level that it would consider commercially viable.

· The Company is in discussions in relation to its three eastern Baltic Basin concessions, which are owned 100%.

Corporate highlights

· The Company had a one-time option to cease participation in activity on its three western Baltic Basin concessions once its net share of expenditure reached US$19 million; this limit was reached by the end of August 2014.

· The Company concluded that it would be in the best interests of its shareholders to exercise this option, thereby capping its financial liability in relation to the three concessions; it gave notice to exercise this option on 17 September 2014.

· In the absence of a suitable alternative course of action, the Company proposes without delay to return its remaining funds to shareholders, net of costs, and put itself into a solvent liquidation.

· Including surplus cash calls currently in the process of being refunded by the joint venture vehicle Lane Energy Poland Sp. z o.o., the Company has cash resources of approximately £17 million as 30 September 2014, equivalent to 20 pence a share.

· The Company is in addition pursuing a separate claim against ConocoPhillips for the return of its 30% share of a working capital surplus accumulated in the joint venture vehicle, valued at $1.64 million net.

· The Company plans to hold a first EGM in November 2014 to approve an immediate return of not less than £15.5 million cash to shareholders, equivalent to not less than 18 pence a share.

· It is intended that a second and final EGM will then be held in the first quarter of 2015 to place the Group into members' voluntary liquidation, to be followed by a final distribution to be made at the conclusion of the liquidation.

· All officers, employees and consultants of the Group have now been issued with notice to terminate their contracts.

· Alexander Fraser has agreed to join the Board of the Company to work with the Chairman and Chief Executive Officer to execute a timely and efficient return of cash and liquidation of the Group.

For further information contact:

Chairman's and Chief Executive Officer's review

Introduction

As we announced on 17 September, the Group has exercised its one-time option to withdraw from its principal project, the exploration and appraisal of its three western Baltic Basin concessions where it has been working with ConocoPhillips since 2009. This decision followed the conclusion of the first 40 days of testing of the Lublewo LEP-1ST1H horizontal well, which commenced on 8 August. Over that period, the well had flowed at rates which we considered were not commercially viable, and accordingly we concluded that we could not justify further investment in these concessions.

We have considered the options open to the Company and have concluded that a return of our remaining cash resources, net of wind-up costs, to shareholders followed by an orderly liquidation of our business would be in the best interests of our shareholders. Further details are set out at the end of this review.

Operational review

Western Baltic Basin concessions

The Group has been working with ConocoPhillips on our three western Baltic Basin concessions since 2009, and the Group and ConocoPhillips have now drilled a total of seven wells (four vertical wells and three lateral wells) on these concessions. 3Legs initially acted as operator of the concessions until September 2012, when ConocoPhillips exercised its option to acquire a 70% interest in these concessions and became operator at the same time.

Within these three concessions we focused our activity on the high-graded area located in the northern part of the concessions which, we considered, offered the best prospect of success by reason of the depth and thickness of our primary shale horizon, the Sasino shale. All of our wells encountered hydrocarbons and we flared gas from five of the seven wells, as planned.

2014 operations to date

In the period since 1 January 2014 we concluded the drilling of two vertical exploration wells, Lublewo LEP-1 and Slawoszyno LEP-1. These were followed by the drilling, stimulation and testing of a lateral well, Lublewo LEP-1ST1H, our third lateral well, and seventh well in all, drilled on our western concessions.

The first of the two vertical wells, Lublewo LEP-1, was drilled in January 2014 to 2,924 metres true vertical depth into the Middle Cambrian interval. Some 141 metres of full-diameter 4-inch core were recovered from the well over the Lower Silurian, Ordovician, and Cambrian intervals, and an extensive suite of logs was also run at total depth. Drilling of the Slawoszyno LEP-1 vertical well, the second well in our 2013/14 drilling programme, was completed in March 2014. The well was drilled to 2,819 metres true vertical depth, also into the Middle Cambrian interval, and an extensive suite of logs was run on the well over the Lower Silurian, Ordovician, and Upper Cambrian intervals.

Following a review of the data gathered from the two vertical wells, and of additional 2D seismic recently acquired in the area of the Lublewo well, we agreed with ConocoPhillips to select the Lublewo LEP-1 well as the location for the planned long lateral well, to be drilled by way of a side-track from the existing Lublewo LEP-1 well.

Lublewo LEP-1ST1H lateral well

Drilling of the Lublewo LEP-1ST1H lateral well was successfully completed in April 2014. The well was drilled with a lateral section measuring approximately 1,500 metres, and strong gas shows were recorded throughout the section during the drilling operation.

The lateral section was successfully placed within our primary target zone, the Sasino shale, for its entire length. In this, we were considerably assisted by the new 2D seismic data acquired earlier in the year, as well as by the excellent quality of the core and log data recovered from the Lublewo LEP-1 vertical well. The combination of all of this data enabled us clearly to identify our target horizon at this location and to plan and execute the well path in our desired azimuth (direction). The use of a synthetic non-aqueous mud system, recycled from the two earlier vertical wells, also mitigated any negative impact of the drilling mud on the surrounding formation, and helped to achieve a clean well-bore throughout the length of the lateral section.

A multi-stage stimulation of the Lublewo LEP-1ST1H lateral well was successfully completed in July 2014. The programme comprised 25 stages and was executed across 1,469 metres out of the available 1,495 metres of lateral section. This compares with the Lebien LE-2H well, the last lateral well drilled by 3Legs which also targeted the Sasino shale horizon, where a 1,000 metre lateral section was stimulated in 2011 with a 13-stage programme. Some 7.7 million lbs of high quality white sand were placed over the 25 stages of the stimulation of the Lublewo LEP-1ST1H well, which compares with 2.9 million lbs of sand used in the Lebien LE-2H well in 2011.

The well was opened on 6 August and commenced flowing oil and gas on 8 August. Over the period from 8 August to 17 September, excluding some down time, the well flowed at an average rate of 396 mscf/d natural gas and 157 b/d of light oil. Some 26.0% of the total amount of frac fluid originally injected had been recovered by 17 September. The well has produced higher amounts of oil than anticipated, whereas natural gas production has been lower than had been hoped. While it had been hoped that early hydrocarbon production rates might improve substantially as the well continued to flow back frac fluid, this did not appear to be occurring.

We engaged the services of Netherland Sewell & Associates ('NSAI') to assist in reviewing the production and pressure data from the well and to model likely well performance outcomes. NSAI also performed extensive analysis on core, log and production data taken from other wells drilled by 3Legs and ConocoPhillips on our western Baltic Basin concessions, to assist in modelling the likely future performance of the Lublewo LEP1-ST1H well. On the basis of the information available to us and reviewed with NSAI, we did not feel confident that the flow rates from the well were likely to improve to a level which we would consider commercially viable.

In our opinion, the Lublewo LEP1-ST1H lateral well was successfully drilled and stimulated, in all material respects, in such a way as to maximise the production potential of the Sasino horizon at the Lublewo location, which is itself firmly situated within our high-graded area. We do not believe, based on current information, that a significantly better result could be achieved from testing the Sasino formation in a different part of our western Baltic Basin concessions.

Seismic acquisition

The planned acquisition of 67 km of 2D seismic data on our Lebork concession was completed in January 2014, following the grant of Ministry of Environment approval, and the new data were then processed and interpreted. The data were used to assist in the placement of the Lublewo LEP-1ST1H lateral well.

Eastern Baltic Basin concessions

We continue to investigate options for our three eastern Baltic Basin concessions, where we hold a 100% interest and we have to date drilled one well, the Legowo LE-1 vertical well drilled in 2011. This well was decommissioned in 2013 and the location was reinstated and returned to the landowner earlier this year. The cost of this work was funded in full by ConocoPhillips under the terms of the Joint Evaluation Agreement signed in 2009. We do not forecast any material residual financial exposure of the Group in respect of this well; and if any such exposure were to arise we expect that it would be covered by existing well insurance.

We are engaged in discussions with potential industry partners regarding the funding of a programme of further activity on our eastern Baltic Basin concessions. If these discussions are not concluded within our available timeframe, then we will surrender these concessions.

Financial review

Investment in our oil and gas assets over the six months ended 30 June 2014 increased by £6.3 million to £32.2 million, as compared to an increase of £3.7 million over the same period in 2012. This additional investment represented our share of costs incurred in connection with exploration and appraisal activities on our western Baltic Basin concessions, in particular the 2013/14 drilling programme. Cash and cash equivalents at 30 June 2014 amounted to £17.9 million, compared to £26.8 million at 31 December 2013. This movement reflected investments in our oil and gas assets of £6.3 million, a loss of £1.5 million and movements in working capital over the period.

We recorded a loss before exchange rate movements of £1.3 million for the six months ended 30 June 2014, as compared to a loss of £1.5 million for the same period in 2013. After a foreign exchange loss of £0.2 million over the period, as compared to a foreign exchange gain of £1.5 million for the same period in 2013, we recorded a loss of £1.5 million for the six months ended 30 June 2014, against a profit of £0.0 million for the six months ended 30 June 2013.

During the period under review, the Group changed its accounting policy relating to the recognition of foreign exchange gains and losses on intercompany loan transactions, so that foreign exchange gains and losses arising from the re-statement of loan balances are now considered to form part of the Group's investment in its subsidiary entities. The comparative financial information for the year ended 31 December 2013 and the period ended 30 June 2013 have been restated to reflect the new accounting policy.

Administrative expenses declined to £0.7 million for the six months ended 30 June 2014, against £1.3 million for the six months ended 30 June 2013, and included share-based payments of £0.1 million (£0.2 million for the six months ended 30 June 2013).

Corporate review

Option exercise

Under the arrangement reached with ConocoPhillips in connection with the 2013/14 drilling programme, 3Legs agreed a one-time option to cease participation in activity on its three western Baltic Basin concessions once its net share of expenditure under the programme reached a limit of US$19 million, on or before 31 December 2014. This limit had been reached by the end of August 2014.

The advantage to 3Legs of exercising this option was that it would be discharged from liability to participate in expenditure on future activities on the three concessions, including both the cost of the remainder of the 2013/14 work programme over the $19 million net limit, and the cost of end-of-life decommissioning of six existing wells drilled on the concessions by the Company and ConocoPhillips.

In view of the results to date of the Lublewo LEP1-ST1H well, which we considered to be at sub-commercial levels, and the further time needed to complete the remainder of the testing phase on the well when the prospects of a more successful outcome appeared remote, we concluded that it would be in the best interests of our shareholders to exercise our option to withdraw from the three western Baltic Basin concessions, thereby capping our financial liability in relation to these operations. This decision was also consistent with statements which we made to shareholders when the 2013/14 programme was announced.

The Company therefore exercised its option to withdraw on 17 September, which was the latest date for exercise of the option. Its equity interest in the three concessions is now in the process of being transferred to ConocoPhillips for no consideration, in accordance with the terms of the option arrangement. Following completion of the transfer of our equity interest, we will have no further financial exposure in respect of our western Baltic Basin concessions.

Use of capital to date

The Group originally raised £58.1 million, net of expenses, on its initial public offering on AIM in June 2011 to finance shale exploration in Poland and elsewhere. Subsequently, we committed to limit our geographical focus to Poland, and to seek where possible to monetise our assets outside our Baltic Basin concessions.

In addition, the Group held £1.1 million of cash resources immediately prior to its IPO, and generated a further £0.6 million of revenue over the period since then. As a result, the net cash resources utilised by the Group over the period from 30 June 2011 to 30 September 2014 amounted to £42.7 million. Using these cash resources, the Group has contributed its net share of three vertical and three lateral wells drilled with ConocoPhillips on its western Baltic Basin concessions, together with four seismic surveys (two 2D and two 3D). The Group has also funded 100% of three lines of 2D and one 3D seismic survey on its southern Poland concessions.

Wind-up of activities and return of capital

In view of the termination of all of our existing activities, and in the absence of a suitable alternative course of action, the Group proposes to return its remaining funds, net of wind-up costs, to shareholders and put itself into a solvent liquidation.

Including sums currently being refunded by the joint venture vehicle Lane Energy Poland Sp. z o.o., the Company has cash resources of approximately £17 million as 30 September 2014, equivalent to 20 pence per share. In addition, we are pursuing a separate claim against ConocoPhillips for the return of our 30% share of a working capital surplus accumulated in the joint venture vehicle since September 2012. The value of this claim is $1.64 million net.

Notice of termination has been given to all officers, employees and consultants of the Group. All notice periods are six months or less. Office premises in London and Warsaw are held on short term lease arrangements and so can be easily terminated or extended as may be required for the orderly wind-up of the Group's activities.

We expect that an extraordinary general meeting to approve the return of the bulk of our funds to shareholders will be held in November 2014, when approval will be sought to return not less than £15.5 million, equivalent to not less than 18 pence per share. We anticipate that a second EGM will then be held in the first quarter of 2015 in order to place the Group into members' voluntary liquidation. A final distribution will be made following conclusion of the members' voluntary liquidation.

Terms for the appointment of a liquidator for a members' voluntary liquidation are being discussed. The Group comprises companies incorporated in several jurisdictions, which will have implications for the time and cost involved in completing the liquidation process. Based on discussions with our advisers, we estimate that Group's remaining cash resources of approximately £1.5 million will be sufficient to cover the costs of winding up the Group's activities, liquidation costs and contingency. All efforts will be made to secure a final distribution at the earliest opportunity.

Alexander Fraser has agreed to join the Board of the Company to assist in implementing an orderly wind-up of our activities and distribution of cash in as timely and efficient a manner as possible. Further announcements and a shareholders' circular to convene an EGM will be published in due course.

Conclusion

It is obviously a matter of considerable regret that our drilling programme on our Baltic Basin concessions has not yielded more positive results. We do however feel that the successful exploration and appraisal of these concessions was a prize worth aiming for and one which we have pursued as diligently as possible in the circumstances, with the backing of the majority of our shareholders. Like all investment in exploration, this was a high-risk activity where the possibility of a total write-off of investment could never be excluded. Other companies have the ability to diversify exploration risk by spreading their investment across a range of projects, but this option was not open to 3Legs.

We sincerely thank our shareholders for their steadfast support over the period and for their readiness to invest in this challenging, but potentially highly significant, frontier exploration play.

30 September 2014

Consolidated Income Statement

For the six months ended 30 June 2014

Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2014

Consolidated Balance Sheet

As at 30 June 2014

Consolidated Cash Flow Statement

For the six months ended 30 June 2014

Consolidated Statement of Changes in Equity

As at 30 June 2014

Notes to the Interim Financial Statements

For the six months ended 30 June 2014

1 General information

3Legs Resources plc (the 'Company') is incorporated in the Isle of Man, British Isles under the Isle of Man Companies Act 2006. The address of the registered office is Commerce House, 1 Bowring Road, Ramsey, Isle of Man, British Isles, IM8 2LQ.

The nature of the Group's operations and its principal activities are the exploration, evaluation and development of oil and gas targets, primarily from unconventional resource plays.

2 Basis of preparation

The consolidated interim financial information has been prepared using policies based on International Financial Reporting Standards ('IFRSs') as issued by the International Accounting Standards Board (the 'IASB') and as adopted by the European Union (the 'EU').

These policies and practices are consistent with those adopted in the Group's financial statements for the year ended 31 December 2013 and are also consistent with those which will be adopted in the Group's financial statements for the year ended 31 December 2014.

During the period ended 30 June 2014 3Legs Resources plc changed its accounting policy for the recognition of foreign exchange gains and losses on group intercompany loan transactions. In previous periods the Group recognised the foreign exchange gains and losses on translation of intercompany loans as an expense through the income statement. However under the amended policy, the exchange gains and losses arising from the re-statement of loan balances are considered to form part of the Group's investment in its subsidiary entities. These exchange adjustments on investment in subsidiaries are now treated accordingly within the foreign currency translation reserves upon the balance sheet. Management consider that this policy provides more relevant information and is more appropriate to the nature of the Group's structure, which results in non-realised foreign exchange adjustments on group loans in each accounting period.

The consolidated interim financial information is unaudited and does not constitute statutory accounts as defined by section 434 of the Companies Act 2006, and should be read in conjunction with the Group's financial statements for the year ended 31 December 2013. In the opinion of the Directors the consolidated interim financial information for the period represents fairly the financial position, results from operation and cash flows for the period in conformity with generally accepted accounting principles consistently applied.

The consolidated interim financial information incorporates unaudited comparative information for the period ended 30 June 2013, which has been represented in respect of the consolidated income statement to improve the clarity of information presented therein. Comparative figures for the financial year ended 2013 have been extracted from the financial statements for that period which carried an unqualified audit report.

The consolidated interim financial information has been prepared in accordance with IAS34 Interim Financial Reporting.

During the first six months of the current financial year there have been no related party transactions that materially affect the financial position or performance of the Group and there have been no changes in the related party transactions described in the last annual financial statements.

The principal risks and uncertainties of the Group have not changed since the last annual financial statements where a detailed explanation of such risks and uncertainties can be found.

3 Dividends

The Directors do not recommend the payment of a dividend for the period.

4 Restatement

As discussed in note 2, during the period the Group changed its accounting policy relating to the recognition of foreign exchange gains and losses on intercompany loan transactions. In previous periods the Group recognised the foreign exchange gains and losses on translation of intercompany loans as an expense through the income statement. However under the amended policy, the exchange gains and losses arising from the re-statement of loan balances are considered to form part of the Group's investment in its subsidiary entities.

As a result, the comparative financial information for the year ended 31 December 2013, and the period ended 30 June 2013 have been restated with the adjustments made to the opening balances.

A summary of the adjustments made to restate the prior periods is as follows:

5 (Loss)/ profit per Ordinary Share

Basic (loss)/ profit per Ordinary Share is calculated by dividing the net (loss)/ profit for the period attributable to Ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the period. The weighted average number of Ordinary Shares outstanding during the period and for the prior periods presented has been adjusted in accordance with IAS 33 Earnings per share.

The calculation of the basic and diluted (loss)/ profit per share is based on the following data:

Options and share rights with an exercise price greater than the average 3Legs Resources plc share price over the period have not been included as these are considered not dilutive.

6 Investment accounted for using the equity method

7 Share capital

Authorised and issued equity share capital

The Company has one class of Ordinary Shares which carry no right to fixed income.

8 Notes to the cash flow statement

9 Events after the balance sheet date

Following the exercise on 17 September 2014 of its one-time option to withdraw from its western Baltic Basin concessions, the Group announced on 30 September 2014 its intention, in the absence of a suitable alternative course of action, to return its remaining funds to shareholders and put itself into a solvent liquidation.