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CALGARY,
ALBERTA--(Marketwire - Aug. 28, 2009) -
THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE
SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
Heritage Oil Plc, ("Heritage" or the "Company"),
(TSX:HOC)(LSE:HOIL), an independent upstream exploration and production
company, announces the publication of its interim results for the six
months ended 30 June 2009.
Operational Highlights
- Discovery of the Miran West field in the Kurdistan Region of Iraq,
("Kurdistan")
- Second test at the Miran West-1 well, Miran Block, Kurdistan,
completed with a flow rate of 3,640 bopd recorded from a single upper
reservoir interval
- Miran West-1 has been suspended as a future producer with an
anticipated producing rate of 8,000-10,000 bopd
- Discovery of the world-class Buffalo-Giraffe field in Block 1, Uganda
- Kingfisher-3A well in Block 3A, Uganda, encountered oil in the three
main reservoirs
- 2D seismic collected over the Kimbiji and Kisangire licence areas in
Tanzania
- Announced the proposed acquisition of Genel Energy International
Limited ("Genel") which would create a leading Anglo-Turkish
oil company
Financial Highlights
- Successful placing of 25.4 million new shares raised gross proceeds
of $216.8 million (Pounds Sterling 132 million)
- Sale of holdings in Oman realised cash of $28.4 million
- Back costs of $6.7 million were received as the third party back-in
rights for 25% were exercised on the Miran Block
- Net average production for the six months ended 30 June 2009 of 231
bopd
Outlook
- High-impact six well exploration and appraisal programme to commence
on Block 1, Uganda, in the fourth quarter
- Miran West-2 well in Kurdistan to commence drilling in the fourth
quarter
- Completion of the proposed acquisition of Genel
Proposed Acquisition of Genel
Discussions between Heritage and Genel are continuing, with the terms
of an implementation agreement being finalised and the required
prospectus and circular also being prepared.
Heritage has recently been made aware of an investigation by the
Financial Services Authority ("FSA") that could potentially
affect the ability of certain members of Genel's operational management
team to assume their proposed roles in the combined entity. Heritage
understands that relevant members of the Genel team are assisting the
FSA with a view to bringing this matter to a swift conclusion. Heritage
will update the market on these issues when it is in a position to do
so.
Elections took place in Kurdistan at
the end of July and a new government is in the process of being formed.
Heritage and Genel continue to monitor progress on the formation of the
new government and await the subsequent formal approval of the proposed
transaction, together with an understanding of the pricing and payment
mechanism which is to be established for international sales from Kurdistan.
Heritage intends to make available to shareholders, as soon as
practicable, the prospectus and circular which describe the proposed
acquisition and will include the relevant Mineral Experts' Reports for
the key assets of both Heritage and Genel. Management anticipate
meeting with shareholders and analysts once these have been
distributed. Completion of the Proposed Acquisition remains subject to
various conditions, which are covered in more detail in the financial
review.
Upcoming Exploration Activity
In the fourth quarter of 2009 Heritage will embark on further
exploration drilling in Block 1, Uganda, targeting the Buffalo-East,
Crocodile and Leopard prospects. The tendering process for the drilling
rig and rig services has begun and Heritage expects contracts to be
awarded in September 2009 when site preparation will also begin. In
addition, appraisal drilling on existing discoveries will also be
pursued in the block. Appraisal drilling on the Miran Block, in
Kurdistan, is also scheduled to start in the fourth quarter with the
Miran West-2 well.
Tony Buckingham, Chief Executive Officer, commented:
"The first half of 2009 has been an active time operationally with
drilling successes in Uganda and Kurdistan and corporately with the
proposed acquisition of Genel and a successful placing. The remainder
of 2009 will see the start of a high-impact drilling programme in Block
1, Uganda, coupled with appraisal drilling on the Miran Block in the
Kurdistan Region of Iraq. We have a strong balance sheet and many
opportunities to continue creating shareholder value."
Heritage's 2009 interim report is available on its website at www.heritageoilplc.com
Notes to Editors
- Heritage is listed on the Main Market of the London Stock Exchange
and is a constituent of the FTSE 250 Index. The trading symbol is HOIL.
Heritage has a further listing on the Toronto Stock Exchange (TSX:HOC).
- Heritage is an independent upstream exploration and production
company engaged in the exploration for, and the development, production
and acquisition of, oil and gas in its core areas of Africa, the Middle
East and Russia.
- Heritage has a producing property in Russia and exploration projects
in Uganda, the Kurdistan Region of Iraq, the Democratic Republic of
Congo, Malta, Pakistan, Tanzania and Mali.
- All dollars are US$ unless otherwise stated.
- For further information please refer to our website, www.heritageoilplc.com
If you would prefer to receive press releases via email please contact
Lindsay Carpenter (lindsay@chfir.com) and specify "Heritage press releases" in the subject
line.
Chairman's and Chief Executive Officer's Review
We are pleased to announce that numerous initiatives being pursued
continue to show substantial progress. We have strengthened our balance
sheet through an equity issue in June 2009 raising gross proceeds of
$216.8 million (Pounds Sterling 132 million). Support for the Company
was demonstrated by the placing price being at a 2.9% premium to the
previous closing price, which is exceptional in the current financial
markets. We have continued to make major discoveries in both our core
areas of Uganda and the Kurdistan Region of Iraq
("Kurdistan") and are in the process of finalising a
transaction to create a leading Anglo-Turkish oil company with
attractive production and excellent growth prospects. We remain
resolute in our aim to generate growth in shareholder value through our
portfolio of assets. The remainder of 2009 has the potential to see the
Company become one of the largest exploration and production companies
listed on the Main Market of the London Stock Exchange with expectations
of becoming a member of the FTSE100 Index.
Operational Overview - Exploration
Uganda
Since the beginning of 2006, there have been 27 wells drilled in the
Albert Basin, with 26 of these wells encountering hydrocarbons. Heritage
has drilled six wells with a 100% success rate in our operated Blocks 1
and 3A. In excess of 700 million barrels of gross resources have so far
been proved up and there remain many prospects yet to be drilled in
this prolific basin. The commercial threshold for development of this
basin has been comfortably exceeded and we are in discussions with the
government of Uganda for an early phased development for the
commercialisation of this basin.
Block 1
This year began with the transformational Giraffe discovery which concluded
the initial multi-well exploration programme in Block 1 that commenced
in September 2008. Pressure data from this significant discovery
indicated that it is structurally connected to the Buffalo discovery
forming the world-class Buffalo-Giraffe field, with gross recoverable
resources estimated to be over 350 million barrels. The success of this
multi-well programme lowered the risk of many other analogous prospects
in Block 1. In
the fourth quarter of 2009 Heritage will embark on further exploration
drilling in Block 1 targeting the Buffalo-East, Crocodile and Leopard
prospects. The tendering process for the drilling rig and rig services
has begun and Heritage expects contracts to be awarded in September
2009 when site preparation will also begin. In addition, appraisal
drilling on existing discoveries will also be pursued in the block.
Block 3A
Appraisal drilling on the Kingfisher structure concluded in February
2009 with the completion of the Kingfisher-3A sidetrack, which
intersected all three Kingfisher reservoir intervals present in the
Kingfisher-1A and 2 wells. The three Kingfisher wells have all been
suspended as future producers. Management believes that successful
drilling of the Kingfisher field has lowered the exploration risk of
other targets identified within Block 3A which are to be explored in a
lake drilling programme scheduled to commence in 2010.
Commercial Development
Heritage is discussing potential options with the government of Uganda
for fast-track development and commencement of early production. Options
include the possibility of utilising the existing railway network in
East Africa for a phased development with the potential for first
production in 2011. An export pipeline to the coast is also being
considered as well as a scheme to service local markets. A number of
parties have approached Heritage with a view to financing large scale
infrastructure programmes in Uganda and these discussions are ongoing.
Kurdistan
Heritage commenced drilling the Miran West-1 well in December 2008,
just fifteen months after signing the licence - demonstrating both the
operational efficiency of the Company and our commitment to the region.
Initial testing operations were completed in May 2009 and the
structure, with a gross oil bearing interval of 710 metres, is
estimated to have oil-in-place of between 2.3 and 4.2 billion barrels
based on fracture porosity alone. Excellent recoveries of between 50%
and 70% are expected due to the highly fractured nature of the
reservoirs and the lack of associated gas. Initial Miran West-1
drilling operations were designed to cope with the potential for high
reservoir pressures and this resulted in the loss of drilling fluid and
lost circulation material in these highly permeable fractured
reservoirs, whereby initial testing operations were severely
constrained.
A further test was completed in August 2009 during which the Miran
West-1 well flowed at a maximum rate of 3,640 bopd from a single upper
reservoir interval. The test rate was restricted by surface equipment
capacity. However, data gathered from the test indicates a rate of
8,000 to 10,000 bopd would be achievable when it is placed on
production. Tests on two other deeper reservoir intervals in the well
were unsuccessful because of damage and contamination sustained during
drilling. Consequently, the remedial measures undertaken during
retesting operations were no more effective than during initial
testing.
We are very encouraged by this result in a well where the lower
formations were badly damaged through drilling. Miran West-1 was the
first wildcat exploration well ever drilled on this licence covering
two structures which together total approximately 320 square
kilometres. We have gathered important information which will be
invaluable in advancing our forward programmes on this significant
discovery beginning with the Miran West-2 appraisal well, which is
planned to spud in the fourth quarter.
Fast-track development of the Miran field is planned to commence by the
middle of 2010. Two licence operators in Kurdistan began exporting
crude oil on 1 June 2009 via the Iraq-Turkey main export pipeline to
the Mediterranean port of Ceyhan.
Tanzania
Acquisition of 207
kilometres of 2D seismic in the onshore portion
of the Kimbiji licence area concluded in January 2009. This completed
our initial Tanzania seismic acquisition programme which began in the
fourth quarter of 2008 with the acquisition of 198 kilometres
of 2D seismic in the Kisangire licence area. This data is in the
process of being interpreted and will be used as the basis for planning
a multi-well drilling programme. Earlier this year we obtained an
extension to the initial exploration period for the Kisangire licence
for eighteen months to December 2010.
Operational Overview - Production
Russia
As previously disclosed, the Zapadno Chumpasskoye field was shut-in
from December 2008 through February 2009 following a temporary
reduction in the domestic oil price in Russia. Daily production
recommenced at a level of approximately 150 bopd in March and has since
increased to a current level of approximately 450 bopd. Production
during the first half of the year averaged 231 bopd as local markets
returned to normal following unfavourable market conditions in the
early part of the year. Measures are under way to increase production
by working-over an existing well and undertaking a fracture stimulation
programme. Production is expected to average 500 bopd for the remainder
of the year.
Corporate Activity
In April 2009, $28.4 million was realised through the sale of Eagle
Energy (Oman) Limited ("Eagle Energy"). We believe that
greater value will be created using this cash to accelerate other work
programmes within our portfolio.
In April 2009, Heritage announced that Genel Energy International
Limited ("Genel") had been nominated by the Kurdistan
Regional Government ("KRG") as the Third Party partner in the
Miran Block under the terms of the production sharing contract. Heritage
remains operator with a 75% working interest. Additionally, it was
announced that the KRG and Heritage would not build a mini-refinery in
Kurdistan. Heritage agreed to pay the KRG $35 million from future
production revenue from the Miran field instead.
On 9 June 2009, Heritage announced that it had entered into a
non-binding Memorandum of Understanding ("MoU") with Genel
Enerji A.S to acquire the entire share capital of Genel. An update
issued at the beginning of August stated that it had been agreed in
principle that Heritage will issue 286.3 million Ordinary Shares
(representing approximately 50% of the voting rights of Heritage as
enlarged by the Proposed Acquisition (the "Enlarged Group"))
in consideration for acquiring the entire share capital of Genel.
Discussions between Heritage and Genel are continuing, with the terms
of an implementation agreement being finalised and the required
prospectus and circular also being prepared.
Heritage has recently been made aware of an investigation by the
Financial Services Authority ("FSA") that could potentially
affect the ability of certain members of Genel's operational management
team to assume their proposed roles in the combined entity. Heritage
understands that relevant members of the Genel team are assisting the
FSA with a view to bringing this matter to a swift conclusion. Heritage
will update the market on these issues when it is in a position to do
so.
Elections took place in Kurdistan at the end of July and a new
government is in the process of being formed. Heritage and Genel
continue to monitor progress on the formation of the new government and
await the subsequent formal approval of the proposed transaction,
together with an understanding of the pricing and payment mechanism
which is to be established for international sales from Kurdistan.
Heritage intends to make available to shareholders, as soon as
practicable, the prospectus and circular which describe the proposed
acquisition and will include the relevant Mineral Experts' Reports for
the key assets of both Heritage and Genel. Management anticipate
meeting with shareholders and analysts once these have been
distributed. Completion of the Proposed Acquisition remains subject to
various conditions which are covered in more detail in the financial
review.
On 15 June 2009, Heritage announced the successful placing of 25.4 million
new shares at 520 pence which represented a 2.9% premium to the
previous closing price. The proceeds of the placing will support plans
to accelerate development of our core areas, and our general work
programmes.
Financial Results
Heritage's net production decreased by 38% to an average of 231 bopd in
the first six months of this year compared to the same period last
year. This decrease resulted from the shut-in of production from
December 2008 through February 2009 due to unfavourable Russian domestic
market conditions. Production is expected to average 500 bopd for the
remainder of the year. Following the disposal of the Oman operations,
production and revenue are currently only generated from the Zapadno
Chumpasskoye field in Russia.
Heritage's net loss from continuing operations in the first half of
2009 was $12.1 million, compared to $17.0 million in the first half of
2008. The adjusted net loss from continuing operations in the first
half of 2009 was $8.3 million compared to $12.7 million in the first
half of 2008 excluding certain non-cash items (share-based compensation
expense, gain on derivative financial liability, impairment of
investment in unlisted securities, foreign exchange gains/losses and
unrealised gain/loss on revaluation of Afren plc warrants) and one-off
reorganization costs.
Cash capital expenditures of $60.9 million were incurred in the first
half of 2009 ($56.3 million in 2008), principally on drilling
programmes in Uganda and Kurdistan and a seismic acquisition programme
in Tanzania.
At 30 June 2009, Heritage had a working capital surplus of $236
million, including cash and cash equivalents of $255.4 million. Heritage
had net cash of $95.5 million (cash and cash equivalents less total
liabilities) and nil gearing (net debt as a percentage of total
shareholders' equity) at 30 June 2009 compared with net debt of $121.1
million (excess of total liabilities over cash and cash equivalents)
and gearing of 64% at 31 December 2008.
Strategy
The Group intends to continue to accelerate the development of its core
areas and generate additional growth in shareholder value by focusing
on high-impact international plays offering multiple targets with the
potential to discover substantial hydrocarbon reserves. The Group's
growth strategy is to acquire and invest in exploration and early
development opportunities throughout the world, with a particular
emphasis on its core areas of Africa and the Middle East.
Heritage has developed a highly effective network of influential
industry, political and institutional relationships which enable the
Group's experienced management and technical teams to gain access to a
wide variety of oil and gas business opportunities.
Corporate Social Responsibility
Heritage remains committed to developing its corporate social
responsibility strategy. We recognise the need to engage with local
stakeholders from an early stage and their needs and requirements guide
our community projects. Heritage is involved in many community projects
as we firmly believe these are fundamental in building trust within the
areas where we operate.
In early 2009 Heritage sponsored the UAE Charity Challenge to raise
funds for worthy causes including supporting malaria control
interventions near Lake Albert, Uganda. Malaria is the leading cause of
illness and death in Uganda and the most efficient way of preventing
malaria is through the use of Long Life Insecticide treated Nets
(LLIN). These mosquito nets have a special insecticide repellent that
can last for up to six years making them very effective and low
maintenance.
In the vicinity of Block 3A only 10% of the households in the Buhuka
parish owned a LLIN. To help protect the residents from malaria, the
UAE charity, supported by Heritage, funded a LLIN distribution
programme. This was carried out by the Malaria Consortium and achieved
a 100% coverage across the villages in the catchment area. Heritage
also provided all the logistical support to the LLIN distribution
programme including trucking from Entebbe to Lake Albert, boats to
access remote villages and flights for Malaria Consortium personnel.
Additionally in the first half of 2009 Heritage rebuilt a ferry for the
Uganda Wildlife Authority.
Environmental performance remains a priority for Heritage. During the
first half of the year we have fully restored our drill sites in
Uganda, thus meeting all conditions in our commitment to minimise our
environmental impact.
Outlook
The remainder of 2009 will be an exciting and busy time for the
Heritage team. On the operations side, we will continue with drilling
activity in both Uganda and Kurdistan. We plan to return to Block 1,
Uganda, in the fourth quarter with a high-impact six well programme
targeting the Buffalo-East, Crocodile and Leopard prospects. Each of
these wells is expected to take a month to drill and will provide
regular news flow. Drilling of the Miran West-2 well in Kurdistan is
planned to commence in the fourth quarter, starting our appraisal
programme on this significant discovery.
We also expect to complete the proposed acquisition of Genel and
integration of their production and exploration licences into our
portfolio. This transaction will increase our production and reserve
base immediately and add significant additional exploration prospects
to our Kurdistan holdings.
With production expected to increase, potential resource growth from
our active drilling campaigns and completion of the Genel acquisition,
the growth prospects for Heritage have never looked better.
Michael J. Hibberd Chairman and Non-Executive Director Tony Buckingham Chief Executive Officer
Financial
Review
Selected Operational and Financial Data
Six months Six months Ended Ended 30 June 2009 30 June 2008 Change ---------------------------------------------------------------------------- Production bopd 231 372 (38%) ---------------------------------------------------------------------------- Sales volume bopd 311 364 (15%) Average realised price $/bbl 15.0 29.9 (50%) Petroleum and natural gas revenue $ million 0.8 2.0 (60%) Loss from continuing operations $ million (12.1) (17.0) 29% Loss on disposal of discontinued operations $ million (0.7) - n/a Profit from discontinued operations $ million - 0.5 n/a Net loss $ million (12.8) (16.5) 22% Net loss per share - basic and diluted $ (0.05) (0.07) 29% ---------------------------------------------------------------------------- Total cash capital expenditures - continuing operations $ million (60.9) (56.3) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- As at As at 30 June 2009 31 December 2008 ---------------------------------------------------------------------------- Period end cash balance $ million 255.4 90.6 ----------------------------------------------------------------------------
Performance
Production
Following the disposal of our Oman operations, with effect from 1
January 2009, all production revenue from continuing operations, is
generated from the Zapadno Chumpasskoye field in Russia. Oman has been
classified as discontinued operations following its sale.
Average daily production from continuing operations decreased by 38%
from 372 bopd in the six month period ended 30 June 2008 to 231 bopd in
the six month period ended 30 June 2009. This decrease resulted from
the shut-in of the Zapadno Chumpasskoye crude oil production from
December 2008 through February 2009 due to unfavourable domestic market
conditions in Russia. Crude production recommenced in March and has
been increasing and averaged 441 bopd in June 2009. We expect
production to average 500 bopd for the remainder of the year.
Revenue
Petroleum and natural gas revenue, from continuing operations,
decreased by 60% to $0.8 million, due to both lower volumes of crude
oil sales from the Zapadno Chumpasskoye field in Russia and lower
average realised prices. The average realised price per barrel in the
first half of 2009 of $15.00/bbl was 50% lower than in the first half
of 2008, due to lower average commodity prices in Russia.
Operating Results
Petroleum and natural gas operating costs from continuing operations of
$0.7 million in the six month period ended 30 June 2009 were 23% lower
than in the same period last year, due to lower crude oil production.
Production tax decreased from $1.4 million in the first half of 2008 to
$0.4 million in the first half of 2009, due to lower revenues.
General and administrative expenses decreased from $20.1 million in the
first half of 2008 to $6.4 million in the first half of 2009. This is
principally due to a one-off expense of $9.6 million relating to the corporate
reorganisation and subsequent listing on the London Stock Exchange
incurred in the first half of 2008 and lower non-cash share-based
compensation expenses. Share-based compensation expenses in the first
half of 2009 were lower than in the first half of 2008 as the fair
value of a number of stock options issued previously had been fully
recognised by the end of 2008.
Excluding non-cash share-based compensation, one-off corporate
reorganisation and subsequent listing expenses, general and administrative
expenses decreased from $6.1 million in the first half of 2008 to $5.0
million in the first half of 2009. This decrease is partly due to the
pound sterling being weaker against the US dollar in the first half of
2009 compared to the prior year period.
Depletion, depreciation and amortisation expenses decreased by 28% to
$0.8 million in the first half of 2009, primarily due to decreased
production volumes.
Exploration expenditures expensed and not capitalised decreased by 91%
from $0.3 million in the first half of 2008 to $0.03 million in the
first half of 2009. Exploration expenditures in the first half of 2008
principally related to activities in Tanzania ($0.2 million) and Russia
($0.1 million).
Interest income of $0.1 million in the first half of 2009 was $1.9
million lower than in the same period in 2008 as a result of lower
average cash balances and reduced interest rates in 2009. Cash and cash
equivalents are typically held in interest bearing treasury accounts.
Convertible bonds are separated into equity, liability and derivative
liability components (being the bondholders' conversion option of the
host bond contract and the bondholders' put option) and each component
is recognised separately. The Company had the right to redeem, in whole
or part, the bonds for cash at any time on or before 16 February 2008,
at 150% of par value (the "Company call option").
Due to significant volatility that movements in the Company's share
price created in the income statement under its previous treatment, the
Company has reassessed its accounting policy in respect of its
convertible debt. The Company previously assessed the debt/equity
classification of each component of a compound financial instrument
only on issue or where there was a change in contractual terms. However
an alternative policy is to make this assessment throughout the life of
the instrument and, in particular, to treat changes in effective terms,
such as the lapsing of the Company call option, in the same way as
changes in contractual terms, i.e. as requiring reassessment. The
Company has decided to change accounting policy from the former option
to the latter believing that the latter option better reflects the
commercial terms of the financial instruments currently operative. Prior
period results have been restated to reflect the new policy.
On the basis of the changed policy, on expiry of the Company call
option in February 2008, the bondholders' conversion option has been
reclassified from a liability classification (with all changes in fair
value being reflected in the income statement) to an equity
classification. Consequently, the $30.6 million fair value of the
bondholders' conversion option has been transferred to equity at that
date with no subsequent income statement impact; a gain of $6.1 million
was recognised up to that date.
At 30 June 2009, the carrying value of investments in unlisted
securities (shares of SeaDragon Offshore Limited
("SeaDragon") was written down to nil following the
completion of a financial reorganisation by SeaDragon which has
resulted in a reduction in the carrying value as it is not possible to
determine the extent to which the cost of the investment will be
recoverable in the foreseeable future. This resulted is an impairment
write-down of $2.4 million recognised in the income statement during
the six month period ended 30 June 2009.
Other finance costs decreased from $6.9 million in the first half of
2008 to $2.5 million in the first half of 2009, primarily due to
bondholders exercising their conversion rights in respect of $27.9
million of bonds in the first half of 2009 thereby losing the right to
earn any interest. Additionally, the level of interest costs
capitalised was higher in the first half of 2009 compared to the same
period last year due to the higher cumulative amount of capital
expenditures financed from interest bearing borrowings.
Foreign exchange losses of $0.7 million were incurred in the first half
of 2009 (first half of 2008 - $1.8 million gains), because of an
intercompany US dollar denominated loan provided to the Russian
subsidiary used to develop the Zapadno Chumpasskoye field. The
revaluation of this loan in Russian roubles (the functional currency of
the Russian subsidiary) created the foreign exchange losses due to the
weakening of the Russian rouble against the US dollar during the first
half of 2009. In
accordance with Heritage's accounting policy, the revaluation loss was
recognised in the financial statements of the Russian subsidiary in
Russian roubles and on consolidation, the revaluation losses were
translated into US dollars and included in the statement of
comprehensive income.
Heritage recognised an unrealised gain on the fair value of its
investment in Afren plc ("Afren") warrants of $0.7 million in
the first half of 2009, compared to a $1.9 million gain in the first
half of 2008. Heritage holds 1,500,000 warrants in Afren, received as
partial consideration from the sale of Heritage Congo in 2006.
Heritage's net loss from continuing operations in the first half of
2009 was $12.1 million, compared to $17.0 million in the first half of
2008. The adjusted net loss from continuing operations in the first
half of 2009 was $8.3 million compared to $12.7 million in the first
half of 2008 excluding certain non-cash items (share-based compensation
expense, gain on derivative financial liability, impairment of
investment in unlisted securities, foreign exchange gains/losses and
unrealised gain/loss on revaluation of Afren warrants) and the one-off
reorganisation costs.
On 7 April 2009, the Company completed the sale of Eagle Energy (Oman)
Limited ("Eagle Energy"), a wholly-owned subsidiary of
Heritage, to RAK Petroleum Oman Limited for $28 million, plus a working
capital adjustment of $0.4 million, both of which have been received. The
Company acquired Eagle Energy, which holds a 10% interest in Block 8
offshore Oman, in 1996. Block 8 contains the Bukha field, which has
been producing since 1994, and the West Bukha field which commenced
production in February 2009.
The results of operations of Eagle Energy have been classified as
discontinued operations. The loss on disposal of discontinued
operations in Oman was $0.7 million in the first half of 2009.
In the first half of 2009 the basic and diluted loss per share was
$0.05, compared to basic and diluted loss per share of $0.07 in the
first half of 2008.
Cash Flow and Capital Expenditures
Cash used in operating activities of continuing operations was $12.2
million in the first half of 2009 compared to $26.1 million in the
first half of 2008. Total cash capital expenditures for continuing
operations in the first half of 2009 was $60.9 million compared to
$56.3 million in the first half of 2008. The following major work
programmes were undertaken in the first half of 2009:
- In March 2009, Heritage completed drilling of the Miran West-1 well
in the Kurdistan Region of Iraq. The Miran West-1 well reached target
depth of 2,935
metres in March 2009 and initial testing
operations were completed in May 2009;
- In February 2009, Heritage successfully completed drilling the
Kingfisher-3A well in Block 3A, Uganda. The well reached a total
measured depth of 2,712
metres (1,875 metres
true vertical depth) and has been suspended as a future production
well, along with the previously drilled and suspended Kingfisher-1A and
Kingfisher-2 wells; and
- In February 2009, Heritage completed the acquisition of 2D seismic on
the Kimbiji licence area and on the onshore portion of the Kisangire
licence area in Tanzania
Financial Position
Liquidity
Heritage had a net increase in cash and cash equivalents during the
first half of 2009 of $163.5 million. At 30 June 2009, Heritage had a
working capital surplus of $236 million, including cash and cash
equivalents of $255.4 million.
As for most oil and gas exploration companies, Heritage raises
financing for its activities from time to time using a variety of
sources. Based on current plans and knowledge and projected capital
expenditure and operating cash requirements, the Group has sufficient
cash to finance its current plans for at least twelve months from the
date of approval of the financial statements. Sources of funding for
future exploration and development programmes will be derived from,
inter alia, new credit facilities, reinvesting funds from operations,
using existing treasury resources, disposal proceeds from the sale of
non-core assets, such as the sale of the Company's holdings in Oman in
April 2009, farm-outs and, when considered appropriate, issuing debt
and additional equity, such as the share placement in June 2009. Accordingly,
the Group has a number of different sources of finance available and
the Directors are confident that additional finance will be raised as
and when needed. In addition, development of the Group's successful
exploration and infrastructure projects may be financed separately.
Capital Structure
Heritage's financial strategy has been to fund its capital expenditure
programmes and any potential acquisitions by selling non-core assets,
farm-outs, reinvesting funds from operations, using existing treasury
resources, finding new credit facilities and, when considered
appropriate, either issuing unsecured convertible bonds or equity.
On 7 April 2009, the Company completed the sale of Eagle Energy, a
wholly-owned subsidiary of Heritage, to RAK Petroleum Oman Limited for
$28 million, plus a working capital adjustment of $0.4 million.
On 18 June 2009, the Company completed the placing of 25,400,000 new
Ordinary Shares at a price of 520 pence per share for gross proceeds of
$216,848,944 (Pounds Sterling 132,080,000) to the Company. Share issue
costs were $11,820,609.
Heritage had net cash of $95.5 million (cash and cash equivalents less
total liabilities) and nil gearing (net debt as a percentage of total
shareholders' equity) at 30 June 2009 compared with net debt of $121.1
million (excess of total liabilities over cash and cash equivalents)
and gearing of 64% at 31 December 2008.
Important Events Since 30 June 2009
On 9 June 2009, Heritage announced that it had entered into a non-binding
Memorandum of Understanding ("MoU") with Genel Enerji A.S to
acquire the entire share capital of Genel. An update issued at the
beginning of August stated that it had been agreed in principle that
Heritage will issue 286.3 million Ordinary Shares (representing
approximately 50% of the voting rights of Heritage as enlarged by the
Proposed Acquisition (the "Enlarged Group")) in consideration
for acquiring the entire share capital of Genel.
Discussions between Heritage and Genel are continuing, with the terms
of an implementation agreement being finalised and the required
prospectus and circular also being prepared.
Heritage has recently been made aware of an investigation by the
Financial Services Authority ("FSA") that could potentially
affect the ability of certain members of Genel's operational management
team to assume their proposed roles in the combined entity. Heritage
understands that relevant members of the Genel team are assisting the
FSA with a view to bringing this matter to a swift conclusion. Heritage
will update the market on these issues when it is in a position to do
so.
Elections took place in Kurdistan at the end of July and a new
government is in the process of being formed. Heritage and Genel
continue to monitor progress on the formation of the new government and
await the subsequent formal approval of the proposed transaction,
together with an understanding of the pricing and payment mechanism
which is to be established for international sales from Kurdistan.
Heritage intends to make available to shareholders, as soon as
practicable, the prospectus and circular which describe the proposed
acquisition and will include the relevant Mineral Experts' Reports for
the key assets of both Heritage and Genel. Management anticipate
meeting with shareholders and analysts once these have been
distributed.
Completion of the Proposed Acquisition remains subject to various
conditions. These include: (i) agreeing definitive legally binding
documentation, including the implementation agreement; (ii) formal
ratification of the Proposed Acquisition by the Ministry of Natural
Resources of the Kurdistan Region of Iraq and the Kurdistan Region Oil
and Gas Council; (iii) the approval of Heritage's shareholders voting
at an Extraordinary General Meeting of the Company; and (iv)
confirmation as to the eligibility of the Enlarged Group to be admitted
to the Official List by the UK Listing Authority ("UKLA") and
the admission of the Ordinary Shares of Heritage, as enlarged, to the
Official List of the UKLA and to trading on the London Stock Exchange.
Primary Risks and Uncertainties Facing the Business
The primary risks and uncertainties facing the business which could
have a material adverse impact on the Group include:
- Exploration and development expenditures and success rates - the
Company has experienced management and technical teams with a
track-record of finding attractive oil discoveries and has a
diversified international portfolio of exploration, development and
production assets;
- Factors associated with operating in developing countries, political
and regulatory instability - the Company maintains close contact with
governments in the areas within which it operates and where appropriate
gets involved in community projects;
- Heritage cannot completely protect itself against title disputes - in
many of the countries in which the Group operates, land title systems
are not developed to the extent found in many industrialised countries.
Notwithstanding potential challenges in the DRC, Kurdistan and Malta,
the Group believes that it has good title to its oil and gas
properties. However, it cannot control or completely protect itself
against the risk of title disputes or challenges and there can be no
assurance that claims or challenges by third parties against the
Group's properties will not be asserted at a future date;
- Oil and gas sales volumes and prices - whilst not under the direct
control of the Company, a material movement could impact on the Group;
- Loss of key employees - remuneration packages are regularly reviewed
to ensure key executives and senior management are properly
remunerated; and
- Generally, it is the Company's policy to conduct and manage its
business in US dollars, which is its reporting currency. Cash balances
in Group subsidiaries are primarily held in US dollars but small
amounts may be held in other currencies in order to meet immediate
operating or administrative expenses or to comply with local currency
regulations
The Board will continue to review its approach to commodity prices,
interest rates and currency fluctuations in light of the Company's
future capital commitments and ongoing obligations. Heritage may use
derivative instruments to mitigate against its exposure to volatility
in oil prices and foreign currency movements. In 2008 and 2009 the
Group did not enter into any hedging arrangements.
Further information on the risks facing the Company are discussed in
the 2008 Annual report issued on 30 April 2009, in the
Directors' Report on pages 47 to 50 and also in note 3 of the financial
statements on pages 64 and 65.
Paul Atherton Chief Financial Officer
Responsibility
Statement of the Directors in Respect of the Interim Report and
Accounts
We confirm that to the best of our knowledge:
- the condensed set of financial statements has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the
EU;
- the interim report and accounts includes a fair review of the
information required by:
a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first six
months of the financial year 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 year; and
b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the Group during that period; and any
changes in the related party transactions described in the last annual
report that could do so.
Approved by the Board and signed on its behalf by
Tony Buckingham Chief Executive Officer 28 August 2009 Paul Atherton Chief Financial Officer 28 August 2009
Independent
Review Report to Heritage Oil Plc
Introduction
We have been engaged by the Company to review the condensed set of
financial statements in the interim report and accounts for the six
months ended 30 June 2009 which comprises the condensed consolidated
income statement, condensed consolidated statement of comprehensive
income, condensed consolidated statement of financial position,
condensed consolidated statement of changes in equity, condensed
consolidated cash flow statement and the related explanatory notes. We
have read the other information contained in the interim report and
accounts and considered whether it contains any apparent misstatements
or material inconsistencies with the information in the condensed set
of financial statements.
This report is made solely to the Company in accordance with the terms
of our engagement to assist the Company in meeting the requirements of
the Disclosure and Transparency Rules ("the DTR") of the UK's
Financial Services Authority ("the UK FSA"). Our review has
been undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our review work,
for this report, or for the conclusions we have reached.
Directors' Responsibilities
The interim report and accounts is the responsibility of, and has been
approved by, the Directors. The Directors are responsible for preparing
the interim report and accounts in accordance with the DTR of the UK
FSA.
As disclosed in note 2, the annual financial statements of the Group
are prepared in accordance with IFRS as adopted by the EU. The
condensed set of financial statements included in this interim report
and accounts has been prepared in accordance with IAS 34 Interim
Financial Reporting as adopted by the EU.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the
condensed set of financial statements in the interim report and
accounts based on our review.
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 UK. 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
interim report and accounts for the six months ended 30 June 2009 is
not prepared, in all material respects, in accordance with IAS 34 as
adopted by the EU and the DTR of the UK FSA.
Jimmy Daboo for and on behalf of KPMG Audit Plc Chartered Accountants 8 Salisbury Square London EC4Y 8BB 28 August 2009 Condensed Consolidated Income Statement Restated(i) Six months Six months Ended Ended 30 June 2009 30 June 2008 ---------------------------------------------------------------------------- $ $ Revenue Petroleum and natural gas 846,629 1,979,842 Expenses Petroleum and natural gas operating (739,893) (964,944) Production tax (378,362) (1,400,664) General and administrative (6,379,304) (20,132,529) Depletion, depreciation and amortisation (751,742) (1,050,336) Exploration expenditures (28,113) (301,253) ---------------------------------------------------------------------------- Operating loss (7,430,785) (21,869,884) ---------------------------------------------------------------------------- Finance income (costs) Interest income 86,987 2,005,905 Gain on derivative financial liability relating to convertible bonds (notes 2 and 7) - 6,098,240 Impairment of investment in available for sale financial assets (note 6) (2,352,825) - Other finance costs (2,501,375) (6,898,888) Foreign exchange (losses)/gains (658,581) 1,834,611 Unrealised gain on other financial assets 743,564 1,857,243 ---------------------------------------------------------------------------- (4,682,230) 4,897,111 ---------------------------------------------------------------------------- Loss from continuing operations (12,113,015) (16,972,773) ---------------------------------------------------------------------------- Loss on disposal of discontinued operations (note 4) (698,763) - Profit from discontinued operations (note 4) - 483,148 ---------------------------------------------------------------------------- (Loss)/profit from discontinued operations (698,763) 483,148 ---------------------------------------------------------------------------- Net loss for the period attributable to owners of the Company (12,811,778) (16,489,625) ---------------------------------------------------------------------------- Net loss per share from continuing operations (0.05) (0.07) Basic and diluted ---------------------------------------------------------------------------- Net (loss)/profit per share from discontinued operations - - Basic and diluted ---------------------------------------------------------------------------- Net loss per share (0.05) (0.07) Basic and diluted ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). The notes are an integral part of these condensed consolidated financial statements. Condensed Consolidated Statement of Comprehensive Income Restated(i) Six months Six months Ended Ended 30 June 2009 30 June 2008 $ $ ---------------------------------------------------------------------------- Loss for the period (12,811,778) (16,489,625) Other comprehensive (loss)/income Exchange differences on translation of foreign operations (1,059,783) 113,120 Net change in fair value of available for sale financial assets transferred to the income statement (168,000) - ---------------------------------------------------------------------------- Other comprehensive (loss)/income, net of income tax (1,227,783) 113,120 ---------------------------------------------------------------------------- Total comprehensive loss for the period (14,039,561) (16,376,505) ---------------------------------------------------------------------------- Attributable to: ---------------------------------------------------------------------------- Owners of the Company (14,039,561) (16,376,505) ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). The notes are an integral part of these condensed consolidated financial statements. Condensed Consolidated Statement of Financial Position 30 June Restated(i) 2009 31 December 2008 ---------------------------------------------------------------------------- $ $ ASSETS Non-current assets Intangible exploration assets (note 5) 245,923,367 211,346,037 Property, plant and equipment (note 5) 60,537,547 88,039,218 Other financial assets (note 6) 851,065 3,330,501 ---------------------------------------------------------------------------- 307,311,979 302,715,756 ---------------------------------------------------------------------------- Current assets Inventories 41,986 395,109 Prepaid expenses 2,558,789 664,759 Trade and other receivables 4,124,807 6,901,511 Cash and cash equivalents 255,407,425 90,620,385 ---------------------------------------------------------------------------- 262,133,007 98,581,764 ---------------------------------------------------------------------------- Total Assets 569,444,986 401,297,520 ---------------------------------------------------------------------------- LIABILITIES Current liabilities Trade and other payables 25,553,696 54,751,768 Borrowings (note 7) 616,473 595,418 ---------------------------------------------------------------------------- 26,170,169 55,347,186 ---------------------------------------------------------------------------- Non-current liabilities Borrowings (note 7) 133,276,286 155,609,982 Provisions 471,793 719,808 ---------------------------------------------------------------------------- 133,748,079 156,329,790 ---------------------------------------------------------------------------- Total Liabilities 159,918,248 211,676,976 ---------------------------------------------------------------------------- Net Assets 409,526,738 189,620,544 ---------------------------------------------------------------------------- SHAREHOLDERS' EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY Share capital (note 8) 455,683,783 218,283,881 Reserves 80,471,429 85,153,359 Retained deficit (126,628,474) (113,816,696) ---------------------------------------------------------------------------- 409,526,738 189,620,544 ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2). The notes are an integral part of these condensed consolidated financial statements. Condensed Consolidated Statement of Changes in Equity Attributable to owners of the company for the six months ended 30 June 2009 Available Foreign for sale Share- currency investments based translation revaluation payments Share Capital reserve reserve reserve ---------------------------------------------------------------------------- $ $ $ $ Balance at 1 January 2009 (as restated(i)) 218,283,881 (220,784) 168,000 54,564,393 Total comprehensive income for the period Loss for the period - - - - Other comprehensive (loss)/income Exchange differences on translation of foreign operations - (1,059,783) - - Net change in fair value of available for sale financial assets transferred to the income statement - - (168,000) - ---------------------------------------------------------------------------- Total other comprehensive loss - (1,059,783) (168,000) - ---------------------------------------------------------------------------- Total comprehensive loss for the period - (1,059,783) (168,000) - ---------------------------------------------------------------------------- Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of shares, net 205,028,335 - - - Issue of shares on conversion of bonds 30,801,620 - - - Share-based payment transactions 1,569,947 - - 1,956,643 ---------------------------------------------------------------------------- Total transactions with owners 237,399,902 - - 1,956,643 ---------------------------------------------------------------------------- Balance at 30 June 2009 455,683,783 (1,280,567) - 56,521,036 ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated as $108,960,420. The notes are an integral part of these condensed consolidated financial statements. Equity portion of Retained convertible deficit debt Total equity ---------------------------------------------------------------------------- $ $ $ Balance at 1 January 2009 (as restated(i)) (113,816,696) 30,641,750 189,620,544 Total comprehensive income for the period Loss for the period (12,811,778) - (12,811,778) Other comprehensive (loss)/income Exchange differences on translation of foreign operations - - (1,059,783) Net change in fair value of available for sale financial assets transferred to the income statement - - (168,000) ---------------------------------------------------------------------------- Total other comprehensive loss - - (1,227,783) ---------------------------------------------------------------------------- Total comprehensive loss for the period (12,811,778) - (14,039,561) ---------------------------------------------------------------------------- Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of shares, net - - 205,028,335 Issue of shares on conversion of bonds - (5,410,790) 25,390,830 Share-based payment transactions - - 3,526,590 ---------------------------------------------------------------------------- Total transactions with owners - (5,410,790) 233,945,755 ---------------------------------------------------------------------------- Balance at 30 June 2009 (126,628,474) 25,230,960 409,526,738 ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). As at 31 December 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated as $108,960,420. The notes are an integral part of these condensed consolidated financial statements. Attributable to owners of the company for the six months ended 30 June 2008 Available Foreign for sale Share- currency investments based translation revaluation payments Share Capital reserve reserve reserve ---------------------------------------------------------------------------- $ $ $ $ Balance at 1 January 2008 217,672,248 430,580 168,000 42,579,779 Total comprehensive income for the period Loss for the period - - - - Other comprehensive (loss)/income Exchange differences on translation of foreign operations - 113,120 - - ---------------------------------------------------------------------------- Total other comprehensive income - 113,120 - - ---------------------------------------------------------------------------- Total comprehensive income/loss for the period - 113,120 - - ---------------------------------------------------------------------------- Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of shares, net 83 - - - Share-based payment transactions 297,112 - - 6,360,655 Recognition of equity portion of convertible bonds - - - - ---------------------------------------------------------------------------- Total transactions with owners 297,195 - - 6,360,655 ---------------------------------------------------------------------------- Balance at 30 June 2008 (as restated(i)) 217,969,443 543,700 168,000 48,940,434 ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). As at 30 June 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated as $108,960,420. The notes are an integral part of these condensed consolidated financial statements. Equity portion of Retained convertible deficit debt Total equity ---------------------------------------------------------------------------- $ $ $ Balance at 1 January 2008 (67,657,170) - 193,193,437 Total comprehensive income for the period Loss for the period (16,489,625) - (16,489,625) Other comprehensive (loss)/income Exchange differences on translation of foreign operations - - 113,120 ---------------------------------------------------------------------------- Total other comprehensive income - - 113,120 ---------------------------------------------------------------------------- Total comprehensive income/loss for the period (16,489,625) - (16,376,505) ---------------------------------------------------------------------------- Transactions with owners, recorded directly in equity Contributions by and distributions to owners Issue of shares, net - - 83 Share-based payment transactions - - 6,657,767 Recognition of equity portion of convertible bonds - 30,641,750 30,641,750 ---------------------------------------------------------------------------- Total transactions with owners - 30,641,750 37,299,600 ---------------------------------------------------------------------------- Balance at 30 June 2008 (as restated(i)) (84,146,795) 30,641,750 214,116,532 ---------------------------------------------------------------------------- (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). As at 30 June 2008, the equity portion of convertible debt was previously stated as nil and retained deficit was previously stated as $108,960,420. The notes are an integral part of these condensed consolidated financial statements. Condensed Consolidated Cash Flow Statement Restated(i) Six months Six months Ended Ended 30 June 2009 30 June 2008 US$ US$ Cash provided by (used in) Operating activities Net loss for the period from continuing operations (12,113,015) (16,972,773) Items not affecting cash Depletion, depreciation and amortisation 751,742 1,050,336 Finance costs - accretion expenses 2,176,301 2,060,811 Foreign exchange gains (1,569,577) (385,876) Share-based compensation 1,329,436 4,521,052 Gain on derivative financial liability - (6,098,240) Gain on other financial assets (743,564) (1,857,243) Impairment of investment in available for sale financial assets 2,352,825 - Increase in trade and other receivables (188,933) (2,023) Increase in prepaid expenses (1,894,030) (210,679) Decrease/(increase) in inventory 287,841 (10,826) Decrease in trade and other payables (2,574,733) (8,172,390) Continuing operations (12,185,707) (26,077,851) Discontinued operations - 596,998 (12,185,707) (25,480,853) Investing activities Exercise of third party back-in rights for Miran (note 5) 6,737,635 - Property, plant and equipment expenditures (698,988) (8,703,142) Intangible exploration expenditures (60,240,024) (47,600,278) Continuing operations (54,201,377) (56,303,420) Discontinued operations Net consideration on disposal 28,198,780 - Property, plant and equipment expenditures and intangible exploration expenditures (4,026,185) (4,006,761) (30,028,782) (60,310,181) Financing activities Shares issued for cash, share placement 216,848,944 171,791 Shares issued for cash, proceeds from exercise of share options 964,934 - Shares issue costs (11,820,609) - Repayment of long-term debt (299,122) (312,862) 205,694,147 (141,071) Increase/(decrease) in cash and cash equivalents 163,479,658 (85,932,105) Cash and cash equivalents - Beginning of period 90,620,385 230,089,323 Foreign exchange gain on cash held in foreign currency 1,307,382 538,056 Cash and cash equivalents - End of period 255,407,425 144,695,274 Non-cash investing and financing activities (note 11) Supplementary information The following have been included within cash flows from continuing operations for the period under operating activity Interest received 139,026 3,152,480 Interest paid 7,135,964 6,876,764 (i) See basis of accounting and presentation and significant accounting policies (note 2) and discontinued operations (note 4). The notes are an integral part of these consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
1. Reporting Entity
Heritage Oil Plc (the "Company") was incorporated under the
Companies (Jersey) Law 1991 (as amended) on 6 February 2008 as Heritage
Oil Limited. On 18 June 2009, the name of the Company was changed to
Heritage Oil Plc. Its primary business activity is the exploration,
development and production of petroleum and natural gas in Africa,
Middle East, Russia and South Asia. The Company was established in
order to implement a corporate reorganisation of Heritage Oil
Corporation ("HOC", the "Corporation").
2. Basis of Accounting and Presentation and Significant Accounting
Policies
These interim consolidated financial statements of the Company as at
and for the six months ended 30 June 2009 include the results of the
Company and all subsidiaries over which the Company exercises control
(together referred as the "Group"). The comparative figures
include the results of HOC and all its subsidiaries.
As for most oil and gas exploration companies, the Company raises
financing for its activities from time to time using a variety of
sources. Based on its current plans and knowledge and its projected
capital expenditure and operating cash requirements, the Group has
sufficient cash to finance its current plans for at least twelve months
from the date of approval of the condensed consolidated financial
statements. Sources of funding for future exploration and development
programmes will be derived from, inter alia, new credit facilities,
reinvesting funds from operations, using existing treasury resources,
disposal proceeds from the sale of non-core assets, such as the sale of
the Company's holdings in Oman in April 2009, farm-outs and, when
considered appropriate, issuing debt and additional equity, such as a
share placement in June 2009. Accordingly the Group has a number of
different sources of finance available and the Directors are confident
that additional finance will be raised as and when needed. In addition,
development of the Group's successful exploration projects may be
financed separately.
After making enquiries, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational
existence for the foreseeable future. Accordingly they continue to
adopt the going concern basis in preparing the interim report and
accounts.
The condensed interim consolidated financial statements have been
prepared in accordance with IAS 34 Interim Financial Reporting as
adopted by the EU. They do not include all information required for
full annual financial statements, and should be read in conjunction
with the consolidated financial statements of the Company and all its
subsidiaries as at the year ended 31 December 2008.
The Company's condensed interim consolidated financial statements are
presented in US dollars, which is the Company's functional and
presentation currency.
The accounting policies applied in the preparation of these condensed
interim consolidated financial statements are consistent with those
applied by the Company and all its subsidiaries in its consolidated
financial statements as at and for the year ended 31 December 2008
(which are prepared in accordance with IFRS as adopted by the EU),
except for the change in accounting policy disclosed below.
The condensed interim consolidated financial statements were approved
by the Board and authorised for issuance on 28 August 2009. The
comparative information at 30 June 2008 and 31 December 2008 is
abridged and therefore not the Company's statutory accounts for those
financial periods.
(i) Presentation of Financial Statements
In 2009, the Group has applied IAS 1 Presentation of Financial
Statements (revised 2007) which has introduced a number of terminology
changes (including titles for the condensed consolidated financial
statements) and has resulted in a number of changes in presentation and
disclosure. The revised standard has had no impact on the reported
results or financial position of the Group.
(ii) Determination and Presentation of Operating Segments
As of January 2009, the Group determines and presents operating segments
based on the information that internally is provided to the CEO, who is
the Group's chief operating decision maker. This change in accounting
policy is due to the adoption of IFRS 8 Operating Segments. Previously
operating segments were determined and presented in accordance with IAS
14 Segment Reporting. The new accounting policy in respect of segment
operating disclosures is presented as follows.
An operating segment is a component of the Group that engages in
business activities from which it may earn revenues and incur expenses,
including revenues and expenses that relate to transactions with any of
the Group's other components. An operating segment's operating results
are reviewed regularly by the CEO and CFO to make decisions about
resources to be allocated to the segment and assess its performance,
and for which discrete financial information is available.
Segment results that are reported to the CEO and CFO include items
directly attributable to a segment as well as those that can be
allocated on a reasonable basis. Unallocated items comprise mainly
corporate assets, corporate offices expenses and liabilities.
Segment capital expenditure is the total cost incurred during the
period to acquire property, plant and equipment, and intangible assets
other than goodwill.
(iii) Borrowings
The Company has changed its accounting policy in relation to the
recognition of equity or financial liabilities arising from the issue
of convertible bonds. Previously the Company made the assessment of
whether the conversion feature is a derivative liability or an equity
instrument on initial recognition only and did not revisit that
assessment, absent any actual change in the contractual terms. It is
now the Company's policy to reassess the classification during the life
of the convertible bond and reclassify between liabilities and equity
when appropriate. In particular, the Company now adopts a policy of
reassessing the initial classification when there has been a change in
the effective terms of the contract. As explained in note 7 it was the
existence of the Company call option that resulted in derivative
treatment for the conversion option in the convertible bond issued on
16 February 2007. Following the expiry of that option the Company has
under this new policy reclassified the conversion option as an equity
instrument from that date. The Company believes this new policy
provides reliable and more relevant information as it bases the
classification of such instruments on the terms that are currently
operative.
In accordance with the requirements of IAS 8 (Accounting Policies,
Changes in Accounting Estimates and Errors) the change has been made
retrospectively and the comparatives have been restated accordingly.
As a result, the loss for continuing operations for the six months
ended 30 June 2008 has been restated to reduce the previously reported
net loss attributable to owners of the company by $41.5 million to
$16.5 million (year to 31 December 2008: increase the loss by $4.9
million to $46.2 million). These adjustments have been taken up in
finance income (costs). In addition, non-current derivative financial
liabilities have been reduced by $72.1 million to nil at 30 June 2008
(at 31 December 2008 - by $25.8 million to nil), and the fair value of
the conversion feature as at 16 February 2008 of $30.6 million has been
transferred to equity through the Statement of Changes in Equity. If
the accounting policy had not changed then an additional loss of $132.5
million would have been recognised in the income statement for the six
months ended 30 June 2009 and a non-current derivative financial
liability of $158.0 million would have been recognised in the statement
of financial position at 30 June 2009. The change in accounting policy
had no impact on the cash flow statement.
3. Operating Segments
The Group has a single class of business which is international
exploration, development and production of petroleum oil and natural
gas. The geographical areas are defined by the Company as operating
segments in accordance with IFRS 8 Operating Segments. The Group
operates in a number of geographical areas based on location of
operations and assets, being Russia, Uganda, Democratic Republic of
Congo ("DRC"), Kurdistan Region of Iraq, Pakistan, Tanzania,
Malta, Mali and Oman (discontinued). The Group reporting segments
comprise each separate geographical area in which it operates.
Six months ended 30 June 2009 Deprecia- tion, depletion Total and External Segment Total lia- Capital amortis- revenue result assets bilities additions ation ---------------------------------------------------------------------------- $ $ $ $ $ $ Russia 846,629 (1,462,238) 47,095,822 490,832 1,549,751 (246,655) Uganda - - 149,993,253 5,477,193 14,518,175 - DRC - - 1,646,778 - 40,013 - Kurdis- tan Region of Iraq - - 66,215,363 8,953,047 14,907,589 - Pakis- tan - - 1,817,157 - 256,828 - Tan- zania - - 17,997,510 478,719 4,697,547 - Mali - - 1,523,937 - 290,931 - Malta - - 9,408,207 15,141 781,475 - Oman -- dis- cont- inued opera- tions - (698,763) - - 500,000 - ---------------------------------------------------------------------------- Total for rep- ort- able seg- ments 846,629 (2,161,001) 295,698,027 15,414,932 37,542,309 (246,655) Corpo- rate - (10,650,777) 273,746,959 144,503,316 315,728 (505,087) Elim- ina- tion of dis- cont- inued opera- tions - 698,763 - - (500,000) - ---------------------------------------------------------------------------- Total from cont- inu- ing opera- tions 846,629 (12,113,015) 569,444,986 159,918,248 37,358,037 (751,742) ---------------------------------------------------------------------------- Six months ended 30 June 2008 (restated(i)) Deprecia- tion, depletion Total and External Segment Total lia- Capital amortis- revenue result assets bilities additions ation ---------------------------------------------------------------------------- $ $ $ $ $ $ Rus- sia 1,979,842 (367,862) 54,322,021 541,825 7,461,629 (550,801) Uganda - - 108,190,951 15,918,855 19,364,009 - DRC - - 1,469,413 - 173,193 - Kurdi- stan Reg- ion of Iraq - - 30,369,188 925,572 28,120,730 - Pakis- tan - - 1,453,476 - 501,069 - Tan- zania - (174,658) 2,630,983 - 2,630,983 - Mali - - 585,060 - 371,914 - Malta - - 7,471,413 - 800,757 - Oman -- dis- cont- inued opera- tions 929,649 483,148 21,054,001 3,708,755 7,385,831 (168,431) ---------------------------------------------------------------------------- Total for rep- ort- able segm- ents 2,909,491 (59,372) 227,546,506 21,095,007 66,810,115 (719,232) Corpo- rate - (16,430,253) 171,714,096 164,049,063 140,035 (499,535) Elim- ina- tion of dis- cont- inued opera- tions (929,649) (483,148) (21,054,001) (3,708,755) (7,385,831) 168,431 ---------------------------------------------------------------------------- Total from cont- inu- ing oper ati- ons 1,979,842 (16,972,773) 378,206,601 181,435,315 59,564,319 (1,050,336) ---------------------------------------------------------------------------- (i)See basis of accounting and presentation and significant accounting polices (note 2).
Oman was classified as discontinued
operations (see note 4). Corporate activities include the financing
activities of the Group and is not an operating segment.
Exploration expenditures in respect of E&E assets relate to pre
licence costs which are expensed in accordance with IFRS 6 Exploration
for and Evaluation of Mineral Resources.
There have been no changes to the basis of segmentation or the
measurement basis for the segment result since 31 December 2008.
4. Discontinued Operations
On 7 April 2009, the Company completed the sale of Eagle Energy (Oman)
Limited ("Eagle Energy"), its Oman segment (see note 3), a
wholly-owned subsidiary of the Company, to RAK Petroleum Oman Limited
for $28 million, plus a working capital adjustment of $0.4 million. Eagle
Energy holds a 10% interest in Block 8, Oman. The segment was not
classified as held for sale or discontinued operations at 31 December
2008 and the comparative income statement has been restated to show the
discontinued operations separately from continued operations.
The effective date of the transaction is 1 January 2009. The cash
consideration of $28 million and a working capital adjustment of $0.4
million have been received. The Company acquired Eagle Energy, which
has a 10% interest in Block 8 offshore Oman, in 1996. Block 8 contains
the Bukha field which has been producing since 1994 and the West Bukha
field which commenced production in February 2009.
The results of operations of Eagle Energy have been classified as
discontinued operations. The following table provides additional
information with respect to the amounts included in profit from
discontinued operations. There were no revenues or costs associated
with Block 8, Oman between 1 January 2009 and 7 April 2009 included in
the condensed consolidated income statement as there were no sales in
that period.
Six months ended 30 June 2008 $ ---------------------------------------------------------------------------- Revenue Petroleum and natural gas 929,649 Expenses Petroleum and natural gas operating (278,071) Depletion, depreciation and amortisation (168,430) ---------------------------------------------------------------------------- (446,501) ---------------------------------------------------------------------------- Operating loss 483,148 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The following table provides additional information with respect to the discontinued operations amounts included in the balance sheet at 7 April 2009. ---------------------------------------------------------------------------- 7 April 2009 $ ---------------------------------------------------------------------------- Assets Non-current assets Intangible exploration assets 1,051,083 Property, plant and equipment 27,448,917 ---------------------------------------------------------------------------- 28,500,000 ---------------------------------------------------------------------------- Current assets Accounts receivable 246,783 Inventories 65,282 ---------------------------------------------------------------------------- 312,065 ---------------------------------------------------------------------------- Total Assets 28,812,065 ---------------------------------------------------------------------------- The loss on disposal of discontinued operations has been derived as follows: 7 April 2009 $ ---------------------------------------------------------------------------- Consideration received, satisfied cash Sales proceeds 28,000,000 Working capital adjustments 390,242 ---------------------------------------------------------------------------- Total disposal consideration 28,390,242 ---------------------------------------------------------------------------- Less: Carrying amount of net assets sold (28,812,065) Other expenses (276,940) ---------------------------------------------------------------------------- Loss on disposal of discontinued operations (698,763) ----------------------------------------------------------------------------
5. Property, Plant and Equipment and
Intangible Exploration Assets
Capital Additions
During the six months ended 30 June 2009 the Group acquired property,
plant and equipment and intangible exploration assets with a cost of
$37,358,037 (six months ended 30 June 2008 - $59,564,319).
Exercise of Third Party Back-in Rights
In April 2009, in
accordance with the option outlined in the PSC in the Kurdistan Region
of Iraq, the Kurdistan Regional Government ("KRG") nominated
a third party participant in the Miran Block. The Company remains the
operator with a 75% working interest in the Miran Block and has
received the pro-rata share of 25% of all past work programme
expenditures and the third party will be responsible for paying its
share of future costs. The transaction was completed upon the receipt
of approximately $6.7 million in costs incurred by the Company to 31
January 2009. No gain/loss resulted from this transaction and
intangible exploration assets reduced by $6.7 million. The KRG and the
Company have agreed to replace the agreement under which they had
agreed in principle (subject to certain conditions which had not been
satisfied) to jointly develop a refinery with an agreement under which
the Company has agreed to make payments of up to $35 million from
future oil and gas sales from the licence.
6. Other Financial Assets
30 June 31 December 2009 2008 $ $ ---------------------------------------------------------------------------- Investment in warrants 851,065 107,501 Investment in unlisted securities -- 3,223,000 ---------------------------------------------------------------------------- 851,065 3,330,501 ----------------------------------------------------------------------------
The investment in Afren plc warrants is
classified as held for trading. The investment in unlisted securities
represents common shares in a private company named SeaDragon Offshore
Limited ("SeaDragon"), which is classified as
available-for-sale.
The Company owns 805,832 of the unlisted shares of SeaDragon,
approximately 15% of the shares outstanding. At 31 December 2008, these
shares were carried at a value of $4 per share, which was valued based
on the most recent private placement of SeaDragon on 26 October 2006.
At 30 June 2009, the carrying value of the investments in the shares of
SeaDragon was written down to nil following completion of a financial
reorganisation by SeaDragon and the Company does not expect that the
cost of the investment will be recoverable in the foreseeable future.
This resulted in an impairment write-down of $2,352,825 (2008 - nil)
recognised in the income statement during the six month period ended 30
June 2009.
7. Borrowings
30 June Restated(i) 2009 31 December 2008 $ $ ---------------------------------------------------------------------------- Non-current borrowings Convertible bonds -- unsecured 118,479,478 141,319,489 Non-current portion of long-term debt 14,796,808 14,290,493 ---------------------------------------------------------------------------- 133,276,286 155,609,982 ---------------------------------------------------------------------------- Long-term debt -- secured 616,473 595,418 Current 14,796,808 14,290,493 ---------------------------------------------------------------------------- Non-current 15,413,281 14,885,911 ---------------------------------------------------------------------------- (i)See basis of accounting and presentation and significant accounting policies (note 2).
On 16 February 2007, the Company raised
$165,000,000 by completing a private placement of convertible bonds.
Issue costs amounted to $6,979,268 resulting in net proceeds of
$158,020,732. The Company issued 1,650, $100,000 unsecured bonds at
par, which have a maturity of five years and one day and an annual
coupon of 8% payable semi-annually on 17 August and 17 February of each
year. Bondholders have the right to convert the bonds into Ordinary
Shares at a price of $4.70 per share at any time. The number of Ordinary
Shares receivable on conversion of the bonds is fixed. The Company had
the right to redeem, in whole or part, the bonds for cash at any time
on or before 16 February 2008, at 150% of par value (the "Company
call option"). This right was not exercised.
The fair value of the host liability component of the bonds (net of
issue costs) was estimated at $140,154,215 on 16 February 2007. The
difference between the $165,000,000 due on maturity and the initial
liability component is accreted using the effective interest rate
method and is recorded as finance costs. As the Company call option
meant that conversion feature could be settled in cash in accordance
with IAS 32 the conversion was treated as a derivative liability. The
fair value of this derivative liability (estimated using the
Black-Scholes option pricing model) was $17,866,517 at 16 February 2007
and subsequent gains and losses have been recorded in finance income
and costs up to the expiry of the Company call option on 17 February
2008. As a result of the expiry of this option, and hence the cash
settlement feature, the Company has reassessed the classification of
the conversion option and determined that it qualifies to be treated as
equity under IAS 32, being an option to convert a fixed amount of cash
for a fixed number of shares. Therefore, the fair value of the
conversion option was reclassified to equity at that date.
Bondholders have a put option requiring the Company to redeem the bonds
at par, plus accrued interest, in the event of a change of control of
the Company or revocation or surrender of the Zapadno Chumpasskoye
Licence in Russia (the "contingent put option"). In the event
of a change of control and redemption of the bonds or exercise of the
conversion rights, a cash payment of up to $19,700 on each $100,000
bond will be made to the bondholder, the amount of which depends upon
the date of redemption and market value of shares at the date of any
change of control event. This contingent put option has been valued
separately.
The fair value of the contingent put option has been estimated as de
minimis by the Company (31 December 2008 - de minimis).
Between 1 January 2009 and 30 June 2009, bondholders with $27.9 million
of bonds gave notice of the exercise of 279 bonds and received 5,936,160
Ordinary Shares. As a result of this conversion, $25,390,830 was
transferred to Share Capital from convertible bonds and accrued
liabilities, and $5,410,790 was transferred from equity portion of
convertible debt to Share Capital.
8. Share Capital
The Company was incorporated under the Companies (Jersey) Law 1991 (as
amended) on 6 February 2008. The Company's authorised share capital is
an unlimited number of Ordinary Shares without par value and one
special voting share with no par value.
Ordinary Shares Six months ended Six months ended 30 June 2009 30 June 2008 Number Amount Number Amount $ $ ----------------------------------------------------------------------- Balance - Beginning of period 251,858,374 215,509,055 254,877,480 217,672,248 Issue of shares 25,400,000 205,028,335 2 83 Exchange of Common Shares for Exchangeable Shares - - (4,431,120) (3,784,296) Exchange of Exchangeable Shares for Ordinary Shares 225,000 192,150 143,000 122,126 Issued on conversion of bonds 5,936,160 30,801,620 - - Issued on exercise of stock options 470,000 1,569,947 73,330 297,112 ----------------------------------------------------------------------- Balance - End of period 283,889,534 453,101,107 250,662,692 214,307,273 ----------------------------------------------------------------------- Special Voting Share Six months ended Six months ended 30 June 2009 30 June 2008 Number Amount Number Amount $ $ ------------------------------------------------------------------- Balance - Beginning of period 1 - - - Issued during the period - - 1 - ------------------------------------------------------------------- Balance - End of period 1 - 1 - ------------------------------------------------------------------- Exchangeable Shares of Heritage Oil Corporation Each Carrying One Voting Right in the Company Six months ended Six months ended 30 June 2009 30 June 2008 ----------------------------------------------------------------------- Number Amount Number Amount $ $ Balance - Beginning of period 3,249,108 2,774,826 - - Exchange of the Common Shares for Exchangeable Shares - - 4,431,120 3,784,296 Exchange of the Exchangeable Shares for Ordinary Shares (225,000) (192,150) (143,000) (122,126) ----------------------------------------------------------------------- Balance - End of period 3,024,108 2,582,676 4,288,120 3,662,170 ----------------------------------------------------------------------- Balance of Ordinary Shares of the Company and Exchangeable Shares of HOC - End of period 286,913,642 455,683,783 254,950,812 217,969,443 -----------------------------------------------------------------------
On 18 June 2009, the Company completed the
placing of 25,400,000 new Ordinary Shares at a price of 520 pence per
share for gross proceeds of $216,848,944 (Pounds Sterling 132,080,000)
to the Company. Share issue costs were $11,820,609.
9. Loss Per Share
The following table summarises the weighted average Ordinary and
Exchangeable Shares:
Six months Six months Ended Ended 30 June 2009 30 June 2008 ---------------------------------------------------------------------------- Weighted average Ordinary and Exchangeable Shares Basic 258,507,387 254,942,099 Diluted 287,660,501 266,484,003 ----------------------------------------------------------------------------
The reconciling item between basic and
diluted weighted average number of Ordinary Shares is the dilutive
effect of stock options. A total of nil shares relating to the LTIP (30
June 2008 - 4,926,429) and 27,680,851 of shares relating to the
convertible bonds (30 June 2008 - 33,617,020) were excluded from the
above calculation, as they were anti-dilutive. However since the
Company has made a loss in each period for the purposes of calculating
diluted loss per share, all potential Ordinary Shares have been treated
as anti-dilutive.
10. Related Party Transactions
During the six months ended 30 June 2009, the Company incurred
transportation costs of $59,175 (30 June 2008 - $49,892) with respect
to the services provided by a company indirectly owned by Mr. Anthony
Buckingham, CEO and a director of the Company.
11. Non-cash Investing and Financing Activities Supplementary
Information
30 June 30 June 2009 2008 $ ------------------------------------------------------------------------- Capitalised portion of share-based compensation (1,232,210) (1,964,931) Non-cash property, plant and equipment and intangible exploration assets additions relating to the capitalized portion of share-based compensation 1,232,210 1,964,931 ------------------------------------------------------------------------
12. Subsequent Events
Conversion of Convertible Bonds
In July 2009, bondholders with $2 million of bonds gave notice of the
exercise of 20 bonds. These bondholders received 425,531 Ordinary
Shares.
Proposed Acquisition of Genel Energy International Limited
On 9 June 2009, Heritage announced that it had entered into a
non-binding Memorandum of Understanding ("MoU") with Genel
Enerji A.S to acquire the entire share capital of Genel. An update
issued at the beginning of August stated that it had been agreed in
principle that Heritage will issue 286.3 million Ordinary Shares
(representing approximately 50% of the voting rights of Heritage as
enlarged by the Proposed Acquisition (the "Enlarged Group"))
in consideration for acquiring the entire share capital of Genel.
Discussions between Heritage and Genel are continuing, with the terms
of an implementation agreement being finalised and the required
prospectus and circular also being prepared.
Elections took place in Kurdistan at the end of July and a new
government is in the process of being formed. Heritage and Genel
continue to monitor progress on the formation of the new government and
await the subsequent formal approval of the proposed transaction, together
with an understanding of the pricing and payment mechanism which is to
be established for international sales from Kurdistan.
Heritage intends to make available to shareholders, as soon as
practicable, the prospectus and circular which describe the proposed
acquisition and will include the relevant Mineral Experts' Reports for
the key assets of both Heritage and Genel. Management anticipate
meeting with shareholders and analysts once these have been
distributed.
Completion of the Proposed Acquisition remains subject to various
conditions. These include: (i) agreeing definitive legally binding
documentation, including the implementation agreement; (ii) formal
ratification of the Proposed Acquisition by the Ministry of Natural
Resources of the Kurdistan Region of Iraq and the Kurdistan Region Oil
and Gas Council; (iii) the approval of Heritage's shareholders voting
at an Extraordinary General Meeting of the Company; and (iv)
confirmation as to the eligibility of the Enlarged Group to be admitted
to the Official List by the UK Listing Authority ("UKLA") and
the admission of the Ordinary Shares of Heritage, as enlarged, to the
Official List of the UKLA and to trading on the London Stock Exchange.
FORWARD-LOOKING INFORMATION:
Except for statements of historical fact, all statements in this news
release - including, without limitation, statements regarding
production estimates and future plans and objectives of Heritage -
constitute forward-looking information that involve various risks and
uncertainties. There can be no assurance that such statements will
prove to be accurate; actual results and future events could differ
materially from those anticipated in such statements. Factors that
could cause actual results to differ materially from anticipated results
include risks and uncertainties such as: risks relating to estimates of
reserves and recoveries; production and operating cost assumptions;
development risks and costs; the risk of commodity price fluctuations;
political and regulatory risks; and other risks and uncertainties as
disclosed under the heading "Risk Factors" in its Prospectus
and elsewhere in Heritage documents filed from time-to-time with the
London Stock Exchange and other regulatory authorities. Further, any
forward-looking information is made only as of a certain date and the
Company undertakes no obligation to update any forward-looking
information or statements to reflect events or circumstances after the
date on which such statement is made or reflect the occurrence of
unanticipated events, except as may be required by applicable
securities laws. New factors emerge from time to time, and it is not
possible for management of the Company to predict all of these factors
and to assess in advance the impact of each such factor on the Company's
business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in
any forward-looking information.
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