Trinity Regulatory News (TRIN)

Trinity Exploration & Production plc

(the "Company" or "Trinity"; AIM:TRIN)

Interim Results

30th September 2014

Trinity, the leading independent E&P company focused on Trinidad & Tobago, is pleased to present its interim results for the six months ended 30 June 2014.

Financial highlights

· Revenues of USD 62.3 million (H1 2013: USD 54.5 million)

· EBITDA before exploration write-off and exceptional items of USD 12.5 million (H1 2013: USD 15.8 million)

· Operating profit before exploration costs write-off and exceptional items of USD 3.8 million (H1 2013 : USD 9.5 million)

· Cash inflow/(outflow) from operating activities USD 4.4 million (H1 2013 : USD (19.4) million)

· Net Loss After Tax of USD 22.9 million (H1 2013: profit of USD 53.6 million)

· Cash balance at period end of USD 9.6 million (H1 2013: 57.4 million) with USD 20.0 million in undrawn credit facilities

Operating highlights

· Net production of 3,795 boepd (H1 2013 : 3,524 boepd)

· TGAL development planning commenced; Field Development Plan ("FDP") submission targeted for Q1 2015

· Reprocessed Galeota seismic data delivered at end Q2. Remapping of Trintes, TGAL, and Galeota exploration prospects and leads under way

Strategic highlights

· Post period end: strategic acquisition of 80% operated interest in shallow water Blocks 1a and 1b, with net undeveloped gas resources of 215 Bcf, for consideration of USD 23.0 million

Outlook

Key priorities for the Company are to:

· Progress TGAL discovery to FDP (Field Development Plan) approval

· Secure a gas sales agreement for Blocks 1a and 1b

· Fast track Block 1a and 1b to FDP

· High grade existing development well prospects to recommence drilling activities

FDP work has begun for both TGAL and Blocks 1a and 1b and discussions are ongoing with potential buyers for Blocks 1a and 1b gas. Trinity is pleased with progress to date on these initiatives and will make further announcements at the appropriate stage.

Given the drilling challenges to date at Trintes, the Company is taking every step to ensure future wells are delivered on time and on budget. Third party assurance work is underway to assess whether the rig upgrades are adequate, while well design work is being updated following successful horizontal drilling by the adjacent operator. Trinity is unlikely to recommence drilling at Trintes during 2014 until this work is completed.

Joel "Monty" Pemberton, Chief Executive Officer of Trinity, commented:

"Trinity has delivered strategic progress in the first half of 2014, despite operational setbacks on the B-9X well. Even so, our base production remains strong and the Company is positioned for growth.

Trinity's portfolio has been enhanced with the acquisition of Blocks 1a and 1b, which adds a high quality greenfield gas development project in a developed gas market (current daily production of 4 bcf/d) that is currently short on natural gas. This acquisition diversifies our asset portfolio, future revenue stream and is a transformational acquisition for Trinity which is in line with our strategy.

Additionally, we have spent the period strengthening our operating capabilities to ensure we have the technical skills and experience to effectively manage our development projects. Craig McCallum's appointment as Chief Operating Officer is a significant step forward in this regard.

Finally, Trinity is progressing industry sourced solutions to strengthen its balance sheet and ensure the business is adequately funded to develop and grow the existing portfolio."

Enquiries

About Trinity

Trinity is the largest independent E&P company focused on Trinidad and Tobago. Trinity operates assets onshore and offshore on both the West and East coasts. Trinity's portfolio includes current production, significant near-term production growth opportunities from low risk developments and multiple exploration prospects with the potential to deliver meaningful reserves/resources growth. The Company operates all of its licences and has 2P reserves of 48 mmbbl. Trinity is listed on the AIM market of the London Stock Exchange under the ticker TRIN.LN.

OPERATIONS REVIEW

Onshore operations

Average H1 2014 net production for onshore was 2,088 bopd (H1 2013: 1,997 bopd). The increase in production volumes resulted from the five wells which were drilled and completed in H2 2013. Trinity suspended drilling operations during the first half of 2014 while discussions were ongoing with Petrotrin regarding upgrading the Company's licenses to improve efficiency, reduce operating costs and assess enhanced oil recovery opportunities on the combined acreage. External approvals have been secured for six new infill wells with an additional six infill well locations currently going through an approval process.

West Coast operations

Average H1 2014 net production from the West Coast assets was 580 boepd (H1 2013: 452 boepd). Increased workover and recompletion activity on the PGB block led to the positive increase in production volumes compared to previous period. Whilst at the same time there was a focus on remedial work following production challenges at the ABM-151 well and the MP-8 platform and gas lift optimisation at the Brighton field.

East Coast operations

Average H1 2014 net production from the Trintes field was 1,127 bopd (H1 2013: 1,075 bopd). The incremental production is attributable to the conversion of the Trintes field from a joint operating agreement to an overriding royalty agreement in H2 2013, which meant Trinity benefitted from 100% of the production volumes as opposed to 65%. Production during Q2 2014 was impacted by the failure of the D-9 electric submersible pump ("ESP") which contributed to a loss of 230 bopd. The D-9 ESP was replaced in late June 2014 and production restored to its previous level.

The B-9X infill well was drilled during H1 2014. The production test from the O-sand indicated that the completion interval was gas bearing. Technical work is being conducted to evaluate the full potential of the lower O-sand oil lobe and evaluate options for testing this interval. To accelerate production from the B-9X well, the O-sand interval has been temporarily isolated to allow a completion in the M-sand. The B-9X well encountered 85 feet of net oil sand in the M-sand and the original water contact for the fault block. The estimated initial production ("IP") rate for the M-sand completion is 75 to 130 bopd, however, due to encountering the original water contact in the fault block, the potential exists for a higher IP rate.

Exploration update

The Trinity operated El Dorado-1 exploration well was spudded on 6 December 2013, and reached total depth ("TD") on 5 February 2014 utilising the WS-152 jackup rig. The primary objective of the well was to test an undrilled fault block on the west flank of the Trinity operated Brighton field. 

The well was drilled to a total depth of 6,174 feet measured depth ("MD") and intersected a shallow gas sand in the Pliocene section and marginal thin bedded oil pay in the Miocene section. In aggregate approximately 13 feet of net oil sands and 32 feet of net gas sands were encountered, however these were not deemed commercial and the well was plugged and abandoned with USD 17.5 million in costs written off during the period.

FINANCIAL REVIEW

Income Statement Analysis

Trinity's financial results for the first half of 2014 showed a Total Comprehensive Loss of USD 22.8 million (H1 2013: Income USD 54.1 million) on gross revenues of USD 62.3 million (H1 2013: USD 54.5 million). 

Operating Revenues

Operating revenues of USD 62.3 million (H1 2013: USD 54.5 million). This increase was mainly attributable to (i) increased production, (ii) oil prices and (iii) increased crude oil sales volume on the East Coast.

· Production

o The group's average production for the six month period was 3,795 boepd (H1 2013: 3,524 boepd) with 55% (2,088 bopd) sold onshore, 15% (580 boepd) attributable to the West Coast and 30% (1,127 bopd) from the East Coast

· Crude oil prices

o Trinity benefitted from high oil prices during the first half of 2014, with an average WTI realised price of USD 93.0 (H1 2013: USD 91.2)

Operating Expenses

· Operating expenses of USD 58.5 million (H1 2013: USD 45.0 million) comprised of the following:

o Royalties of USD 20.7 million (H1 2013: USD 16.7 million) increased due to higher oil prices

o Production costs of USD 18.7 million (H1 2013: USD 17.4 million). The group experienced higher than anticipated operating costs on the East Coast

o Depreciation, depletion and amortisation charges of USD 8.7 million (H1 2013: USD 6.3 million) were higher as a result of development wells drilled in H2 2013 transferred from work in progress into completed and increasing the depreciable asset pool in 2014

o General and administrative (G&A) expenditure of USD 10.4 million (H1 2013: USD 4.6 million). The variance reported in H1 2014 compared to H1 2013 is a result of a full half year's reporting (H1 2013 reported only the post-acquisition reporting period of 4.5 months) as well as higher related to a publicly listed company

Operating Profit

Operating profit for the period amounted to USD 3.8 million (H1 2013: USD 9.5 million).

Exploration costs write off

The El Dorado-1 exploration well was written off in full to the amount of USD 17.5 million.

Net Finance Costs

Finance costs for the period totalled USD 2.3 million (H1 2013: USD 1.0 million) of which USD 1.7 million (H1 2013: USD 0.6 million) related to interest expense on loan facilities from Citibank (Trinidad & Tobago) Limited.

In addition, USD 0.6 million (H1 2013: USD 0.4 million) related to the unwinding of the discount rate on the decommissioning provision.

Taxation

For the first half of 2014 taxes amounted to USD 7.0 million (H1 2013: USD 7.2 million) which comprised of:

· Production taxes which amounted to USD 10.3 million (H1 2013: USD 6.8 million)

o PPT: USD 3.2 million (H1 2013: USD 3.0 million)

o SPT: USD 7.1 million (H1 2013: USD 3.8 million)

· Deferred tax credit of USD 4.0 million (H1 2013: 0.5 million) and corporation tax of USD 0.7 million (H1 2013: USD nil)

Total Comprehensive Income

Trinity recorded a Total Comprehensive Loss of USD 22.8 million (H1 2013: Income USD 54.1 million) for the period ending 30 June 2014. Adjusted for exceptional items and exploration write off Trinity recorded Total Comprehensive Loss of USD 5.3 million (H1 2013: Income USD 1.8 million).

Cash Flow Analysis

Initial Cash Position

Trinity started the year with an initial cash balance of USD 25.1 million (2013 USD 22.7 million).

Cash from Operating Activities

For the period ending 30 June 2014, Trinity generated/(utilised) USD 4.4 million (H1 2013: USD (19.4) million) of cash from operating activities.

Changes in Working Capital

During the period Trinity experienced working capital outflows of USD 8.4 million (H1 2013: USD 30.6 million) which was substantially affected by payments for exploration drilling activities, but compensated by VAT collection. Significant changes are outlined in the table below.

Trinity paid taxes of USD 4.7 million (USD 4.0 million relates to production taxes for 2013) in the first half of 2014 (H1 2013: USD 15.5 million of which USD 10.1 million related to production taxes for 2012).

Investing Activities

For the first half of 2014, Trinity incurred capital expenditures of USD 21.3 million (H1 2013: USD 24.3 million) comprising exploration and evaluation costs of USD 8.5 million (H1 2013: USD 0.9 million), drilling costs of USD 10.2 million (H1 2013: USD 16.0 million) and infrastructure costs of USD 2.6 million (H1 2013: USD 7.4 million).

Financing Activities

· On 22 January 2014, Trinity made an initial USD 5.0 million drawdown of the Citibank (Trinidad & Tobago) USD 25.0 million loan facility. On 4 August 2014, Trinity drew down the remaining balance of USD 20.0 million to fund the acquisition of Block 1a/1b, fully drawing down the debt facility

· Trinity made principal repayments totaling USD 2.0 million on its Citibank (Trinidad & Tobago) Limited USD 20.0 million loan facility during H1 2014

Closing Cash Balance

Trinity's cash balances at 30 June 2014 were USD 9.6 million (H1 2013: USD 57.4 million).

Bruce Dingwall Joel "Monty" Pemberton

Executive Chairman Chief Executive Officer

Statement of Directors' Responsibility

The directors' confirm that this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

· the management report, which is incorporated into the directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· material related party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

A list of the current Directors is maintained on the Trinity Exploration & Production plc website www.trinityexploration.com

By order of the Board

Joel Pemberton

Chief Executive Officer

Independent review report to Trinity Exploration & Production plc

Introduction

We have been engaged by the company to review the condensed consolidated interim financial statements in the half-yearly financial report for the six months ended 30 June 2014, which comprises the consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated cash flow statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules for Companies which require that the financial information must be presented and prepared in a form consistent with that which will be adopted in the company's annual financial statements.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of the AIM Rules for Companies and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the AIM Rules for Companies.

PricewaterhouseCoopers LLPChartered Accountants

Aberdeen

30th September 2014

The maintenance and integrity of the Trinity Exploration & Production plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Trinity Exploration & Production plc

Condensed Consolidated Interim Financial Statements

For the period ended 30 June 2014

Notes to the Condensed Consolidated Financial Statements for the period ended 30 June 2014

1 Background and Accounting Policies

Background

Trinity Exploration & Production plc ("Trinity") was incorporated and registered in England and Wales on 21 February 2011 as Bayfield Energy Holdings plc ("Bayfield") and traded on the Alternative Investment Market ("AIM"), a market operated by London Stock Exchange plc. On 14 February 2013, Bayfield was acquired by Trinity Exploration & Production (UK) Limited ("TEPL"), a company incorporated in Scotland, through a reverse acquisition. On February 2013, the enlarged group was re-admitted to trading on AIM and Bayfield changed its name to Trinity Exploration & Production plc. Trinity ("the Company") and its subsidiaries (together "the Group") are involved in the exploration, development and production of oil and gas reserves in Trinidad and South Africa.

Basis of PreparationThese condensed interim financial statements for the six months ended 30 June 2014 have been prepared in accordance with IAS 34, 'Interim financial reporting', as adopted by the European Union, on a going concern basis. The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2013, which have been prepared in accordance with IFRSs as adopted by the European Union.The results for the six months ended 30 June 2014 and 30 June 2013 are unaudited and do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2013 were approved by the board of directors and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. 

Accounting policiesThe accounting policies adopted are consistent with those of the previous financial year, as set out in the consolidated financial statements for the year ended 31 December 2013, except for income taxes in the interim periods which are accrued using the tax rate that would be applicable to the expected total annual profit and loss.

There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2014 that would be expected to have a material impact on the group.

EstimatesThe preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.In preparing these condensed interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2013. 

Business combination

The acquisition of subsidiaries is accounted for using the purchase method.

Identifying the acquirer in a business combination is based on the concept of 'control'. However in certain circumstances the positions may be reversed and it is the legal subsidiary entity's shareholders who effectively control the combined group even though the other party is the legal parent. IFRS 3 requires, in a business combination effected through an exchange of equity interests, all relevant facts and circumstances be considered to determine which of the combining entities has the power to govern the financial and operating policies of the other entity. These combinations are commonly referred to as 'reverse acquisitions'.

Business combination (Continued)

For each business combination, the cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Transaction costs are expensed directly to the Income Statement. The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date. Where the Group has acquired assets held in a subsidiary undertaking that does meet the definition of a business combination, purchase consideration is allocated to the net assets acquired and the interests of non-controlling shareholders are initially measured at their proportionate share of the acquiree's net assets.

2 Financial risk management

Financial risk factors

The group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the group's annual financial statements for 2013, which can be found at www.trinityexploration.com. There have been no changes in the risk management department or in any risk management policies since the year end.

Liquidity risk

Compared to year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities, except the net increase in borrowings of $3.0 million.

3 Operating segment information

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the steering committee that makes strategic decisions. Management have considered the requirements of IFRS 8, in regard to the determination of operating segments, and concluded that the Group has only one significant operating segment being the production, development and exploration and extraction of hydrocarbons.

All revenue is generated from sales to one customer in Trinidad & Tobago The Petroleum Company of Trinidad & Tobago (PETROTRIN). All non-current assets of the Group are located in Trinidad & Tobago except for $1.2million, (June 2013: $1.1 million), (December 2013: $1.2 million) located in South Africa.

4 Exceptional Items

Items that are material either because of their size, their nature, or that are non-recurring are considered as exceptional items and are presented within the line items to which they best relate. During the current period, exceptional items as detailed below have been included in the Statement of Comprehensive Income. An analysis of the amounts presented as exceptional items in these financial statements are highlighted below.

5 Taxation

6 Property, Plant and Equipment

6 Property, Plant and Equipment (Continued)

7 Intangible assets

Exploration and evaluation assets are tested for impairment (in accordance with the criteria set out in IFRS 6: Exploration for and Evaluation of Mineral Resources) whenever facts and circumstances indicate impairment. An impairment loss is recognised for the amount by which the exploration and evaluation assets' carrying amount exceed their recoverable amount. The recoverable amount is the higher of the exploration and evaluations assets' fair value less costs to sell and their value in use. For the purposes of assessing impairment, the exploration and evaluation assets subject to testing are grouped with existing cash generating units (CGUs) of related production fields located in the same geographical region. The geographical region is the same as that used for reserves reporting purposes.

The following indicators are evaluated to determine whether these assets should be tested for impairment:

· The period for which the Group has the right to explore in the specific area.

· Whether substantive expenditure on further exploration and evaluation in the specific area is budgeted or planned.

· Whether exploration and evaluation in the specific area have not led to the discovery of commercially viable quantities and the Company has decided to discontinue such activities in the specific area.

Whether sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

7 Intangible assets (Continued)

1 The group has chosen to separately disclose the exploration cost write off of the El Dorado 1 exploration well below the operating profit line as it provides an unobstructed view of the group's operating profit performance and comparability with prior periods. The presentation allows the viewer to understand the impact on the group's profitability from an operational and also an exploration view point.

8 Share capital

On 14 February 2013 TEPL acquired Bayfield through a reverse acquisition. Bayfield issued 25,652,041 ordinary shares to the shareholders of TEPL which gave a 55% controlling interest in the combined entity. Bayfield changed its name to Trinity. On the same date a total of 47,500,000 shares were issued at GBP 1.20 and the Company was readmitted to AIM.

9 Borrowings and Loans

Movements in borrowings are analysed as follows:

9 Borrowings and Loans (Continued)

Citibank (Trinidad & Tobago) Limited Loan 1

The current and non-current portion lending represents amounts due to Citibank (Trinidad & Tobago) Limited.

The key terms of the loan are as follows:

· Principal amount $20,000,000

· Maturity date 20 December 2017

· Interest rate three month US Libor plus 600 basis points per annum

· Debenture over the fixed and floating assets of Trinity Exploration and Production (Trinidad & Tobago) Limited and its subsidiaries.

· Principal repayment in equal quarterly instalments commenced on 20 March 2013 and ending on 20 December 2017

· Interest payable monthly in arrears commenced on 20 March 2013

Financial covenants:

· The Group/Company was in compliance with its covenants throughout the period

· Minimum debt service coverage 1.4:1

· Maximum total debt to EBITDA 2.75:1

· Minimum EBITDA to Interest Expense 1.5:1

Citibank (Trinidad & Tobago) Limited Loan 2

The Group has on 17 August 2013 negotiated a floating rate medium term facility of $25.0 million with Citi Bank (Trinidad and Tobago) Limited from which $5.0 million has been drawn and $20.0 million remains at 30 June 2014.

The key terms of the loan are as follows:

· Tenor four years from closing date.

· Interest rate is set at US LIBOR for a period of three months plus 575 bps per annum.

· Principal repayment is quarterly in amounts to be determined beginning three months after the end of the availability period (20 August 2014).

· Multiple drawdowns permitted within the availability period.

Financial covenants:

· The Group/Company was in compliance with its covenants throughout the period

· Minimum debt service coverage 1.4:1

· Maximum total debt to EBITDA-Operating taxes 3.0:1

· Minimum EBITDA-Operating taxes to Interest Expense 1.5:1

Analysis of net debt

10 Provisions and Other Liabilities

11 Business Combination

a) Summary of acquisition

On 14 February 2013, Trinity Exploration & Production (UK) Limited (formerly Trinity Exploration & Production Limited) ("TEPL") acquired Bayfield Energy Holdings plc ("Bayfield") by way of a reverse acquisition.

Whilst Bayfield became the legal parent of the group on that date, the shareholders of TEPL obtained control of Bayfield and the transaction was deemed a reverse acquisition. In order to execute the transaction Bayfield issued 25,652,041 ordinary shares, representing 55% of its share capital, to the shareholders of TEPL in exchange for 100% (34,182 shares) of the share capital of TEPL. Bayfield changed its name to Trinity Exploration & Production plc and was readmitted to trading on AIM on 14 February 2013.

The acquisition represented a strategic fit for TEPL as it has allowed TEPL to acquire production and reserves in a hydrocarbon basin which it previously had no exposure to whilst simultaneously providing an opportunity to recapitalize the company through the issue of new shares.

 Details of the fair value of the assets and liabilities acquired are as follows:

b) Purchase consideration

The purchase consideration is calculated as the fair value of all equity instruments of Bayfield (21,647,945 ordinary shares) prior to the acquisition, based on a share price of GBP 1.20 which was the value of placing shares traded on the day of the admission and the acquisition being unconditional. An exchange rate of USD: GBP is used, being $1.56 on the date of the acquisition.

11 Business Combination (Continued)

c) Assets and liabilities acquired

Recognised amounts of identified assets acquired and liabilities assumed:

At the acquisition date, all contractual cash flows are expected to be collected. The decommissioning liability was increased by $8.9 million and is in respect of decommissioning of wells and platform which is expected at the end of the field life when production ceases. An impairment loss of $11.1 million was recognised on exploration and evaluation assets in respect of costs which did not relate to exploration and evaluation activity with a further reallocation of $1.9 million to property, plant and equipment. There was an impairment of $1.0 million within property, plant and equipment for a rig which was in a state of disrepair and unusable at the acquisition date.

In undertaking the acquisition, costs of $2.3 million were incurred and have been expensed to the consolidated statement of comprehensive income as an exceptional item (note 4).

The acquisition of Bayfield by TEPL resulted in a gain or bargain purchase as defined within IFRS 3, specifically paragraphs 32 and 34. The reason that the net assets acquired were greater than the consideration transferred was due to the Bayfield group experiencing liquidity issues and from a going concern perspective the group was distressed. This was the result of lower than expected cash flows as the underlying production growth was slower than expected and an inability to secure any additional funding. This eventually led to the Bayfield group agreeing to be acquired by TEPL. The negative goodwill recognised represents the gain where the aggregate fair value of the identifiable assets and liabilities at the acquisition date exceeded the fair value of the consideration transferred. In accordance with IFRS, the gain has been recognised immediately within the consolidated statement of comprehensive income as an exceptional item (note 4).

12 Related party transactions

The following transactions were carried out with the Group's related parties during the six months to 30 June 2014. These transactions comprised sales and purchase of goods and services in the ordinary course of business.

The receivables from related parties arise mainly from sale transactions and are due one month after the date of sales. The receivables are unsecured and bear no interest. No provisions are held against receivables from related parties.

The payables to related parties arise mainly from purchase transactions and are due one month after the date of purchase. The payables bear no interest. There were no other related party transactions in the period.

13 Earnings Per Share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of ordinary shares adjusted to assume the conversion of all dilutive potential ordinary shares.