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Ithaca Energy Inc. First Quarter 2014 Financial Results


May 13, 2014 - CALGARY, AB

Ithaca Energy Inc. (TSX: IAE) (LSE: IAE) ("Ithaca" or the "Company") announces its financial results for the three months ended March 31 2014.

Financial Results

  • Cashflow from operations of $43.7 million (Q1 2013: $34.8 million), resulting in cashflow per share of $0.13 (Q1 2013: $0.13)
  • Profit after tax increased by approximately 370% in Q1 2014 to $16.4 million (Q1 2013: $3.5 million), equating to earnings per share of $0.05 (Q1 2013: $0.01)
  • Q1-2014 average realised oil price of $108/bbl (Q1 2013: $106/bbl)
  • Net drawn debt of $478.2 million at 31 March 2014 (December 31, 2013: $348.5 million), excluding the Company's Norwegian tax rebate facility. Additionally, $45 million was advanced under the $70 million Shell oil sales agreement
  • UK tax allowances pool of $1,174 million at 31 March 2014. Norwegian tax receivable of $77.8 million
  • Approximately 3.0 million barrels of oil production hedged over the next 2 years at a weighted average price of around $100/bbl (approximately 70% swaps / 30% puts)
  • Secured floor price of £ 0.58/therm (~$10/MMbtu) for approximately 200 million therms (20 billion cubic feet) of gas sales over gas years 2015 and 2016

Production & Operations
Average production in Q1-2014 was 9,222 barrels of oil equivalent per day ("boepd"), 95% oil, in line with forecast performance given shutdowns on the Cook and Beatrice fields during the quarter. Average production in April 2014 was approximately 11,200 boepd stepping up to more than 14,000 boepd to date in May.

The increasing production trend is being driven by execution of the 2014 production enhancement programme, which is progressing well. The Fionn sidetrack has recently been completed and production from the field has recommenced. The host platform works required to enable the start-up of electrical submersible pumps ("ESPs") on the Causeway and Fionn fields are substantially complete. Drilling of the planned infill well on the Don Southwest field commenced in late April 2014, with the well expected to be brought online in the third quarter of the year.

Total 2014 production guidance remains unchanged in the range of 11,000 to 13,000 boepd, approximately 95% oil. The anticipated schedule of 2014 production enhancement projects means that volumes are forecast to be weighted towards the second half of the year.

The Company was awarded the "Don NE" licence (40%, non-operated) that lies adjacent to its existing Dons field position by the Department of Energy and Climate Change during the quarter. Submission of a "Phase I" Field Development Plan is planned for later this year to enable an early production well to be drilled on the licence from the existing Don Southwest facilities potentially as early as the end of 2014.

Greater Stella Area Development Update
As previously announced on 9 May 2014, Petrofac is forecasting that the FPF-1 floating production facility will be ready for sail-away from the Remontowa yard in Poland to the Stella field in spring 2015. This schedule is anticipated to result in first hydrocarbons from the GSA hub in mid-2015. Ithaca is working with Petrofac to expedite the remaining construction and commissioning works on the FPF-1.

Graham Forbes, Chief Financial Officer, commented:
"Earnings of $16 million represent satisfactory financial results for the first quarter, with the Company on-track to deliver the anticipated step-up in operating cashflows over the coming months as the various 2014 production enhancement projects are completed."

Notes
In accordance with AIM Guidelines, John Horsburgh, BSc (Hons) Geophysics (Edinburgh), MSc Petroleum Geology (Aberdeen) and Subsurface Manager at Ithaca is the qualified person that has reviewed the technical information contained in this press release. Mr Horsburgh has over 15 years operating experience in the upstream oil and gas industry.

References herein to barrels of oil equivalent ("boe") are derived by converting gas to oil in the ratio of six thousand cubic feet ("Mcf") of gas to one barrel ("bbl") of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 Mcf: 1 bbl, utilising a conversion ratio at 6 Mcf: 1 bbl may be misleading as an indication of value.

About Ithaca Energy
Ithaca Energy Inc. (TSX: IAE) (LSE: IAE) is a North Sea oil and gas operator focused on the delivery of lower risk growth through the appraisal and development of UK undeveloped discoveries, the exploitation of its existing UK producing asset portfolio and a Norwegian exploration and appraisal business targeting the generation of discoveries capable of monetisation prior to development. Ithaca's strategy is centred on generating sustainable long term shareholder value by building a highly profitable 25kboe/d North Sea oil and gas company. For further information please consult the Company's website www.ithacaenergy.com.

Not for Distribution to U.S. Newswire Services or for Dissemination in the United States

Forward-looking statements
Some of the statements and information in this press release are forward-looking. Forward-looking statements and forward-looking information (collectively, "forward-looking statements") are based on the Company's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, drilling, construction times, well completion times, risks associated with operations, future capital expenditures, continued availability of financing for future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. When used in this press release, the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could", "target" and similar expressions, and the negatives thereof, whether used in connection with operational activities, drilling plans, production forecasts, budgetary figures, potential developments or otherwise, are intended to identify forward-looking statements. Such statements are not promises or guarantees, and are subject to known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward-looking statements and are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements included in this press release should not be unduly relied upon. These forward-looking statements speak only as of the date of this press release. Ithaca Energy Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based except as required by applicable securities laws.

This press release contains non-International Financial Reporting Standards ("IFRS") industry benchmarks and terms, such as "cashflow from operations". "Cashflow from operations" does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Company uses this measure to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Company considers Cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities.

Additional information on these and other factors that could affect Ithaca's operations and financial results are included in the Company's Management's Discussion and Analysis for the quarter ended March 31, 2014, and the Company's Annual Information Form for the year ended December 31, 2013 and in reports which are on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

HIGHLIGHTS FIRST QUARTER 2014
Strong quarterly results taking into account anticipated production levels

  • Q1 2014 cashflow from operations increased approximately 26% to $43.7 million (Q1 2013: $34.8 million) - cashflow per share $0.13 (Q1 2013: $0.13)
  • Q1 2014 profit after tax increased approximately 370% to $16.4 million (Q1 2013: $3.5 million) - earnings per share $0.05 (Q1 2013: $0.01)
  • Q1 2014 average realised oil price of $108/bbl (Q1 2013: $106/bbl)
  • Net drawn debt of $478.2 million at March 31, 2014 (December 31, 2013: $348.5 million), excluding the Norwegian tax rebate facility. Additionally, $45 million was advanced under the $70 million Shell oil sales agreement
  • UK tax allowances pool of $1,174 million at March 31, 2014. Norwegian tax receivable of $77.8 million
  • Approximately 3.0 million barrels of oil production hedged over the next 2 years at a weighted average price of around $100/bbl (approximately 70% swaps / 30% puts)
  • Secured floor price of £ 0.58/therm (~$10/MMbtu) for approximately 200 million therms (20 billion cubic feet) of gas sales over gas years 2015 and 2016

Operations on-track to achieve 2014 production guidance of 11-13kboe/d

  • Average production in Q1-2014 was 9,222 barrels of oil equivalent per day ("boepd"), 95% oil, in line with forecast performance given shutdowns on the Cook and Beatrice fields during the quarter.
  • The core activities on the 2014 production enhancement programme are progressing well. The Fionn sidetrack has recently been completed and production from the field has recommenced. The host platform works required to enable the start-up of electrical submersible pumps ("ESPs") on the Causeway and Fionn fields are substantially complete. Drilling of the planned infill well on the Don Southwest field commenced in late April.
  • Total 2014 production guidance remains unchanged in the range of 11,000 to 13,000 boepd, approximately 95% oil. The anticipated schedule of 2014 production enhancement activities means that volumes are forecast to be weighted towards the second half of the year.

Continued progress on the GSA development

  • Continued progress has been made on the Greater Stella Area ("GSA") development since the start of 2014. Strong flow test results were achieved on the second Stella development well and drilling is on-going on the third well, with the clean-up flow test results for the well expected around late June 2014. The first of the 2014 subsea infrastructure installation campaigns was also completed in April, involving tie-in of the first two development wells at the Stella Main Drill Centre.
  • Progress has also been made on the "FPF-1" floating production facility modification works being completed by Petrofac Facilities Management Limited ("Petrofac"), however the overall topsides construction programme has advanced more slowly than planned. As previously announced, Petrofac is forecasting the vessel to be ready for sail-away from the Remontowa yard in Poland to the Stella field in spring 2015. This schedule is anticipated to result in first hydrocarbons from the Stella field in mid-2015.

Don NE licence award - securing Dons Area upside

  • The Company was awarded the "Don NE" licence (40%, non-operated) that lies adjacent to its existing Dons field position by the Department of Energy and Climate Change ("DECC"). Submission of a "Phase I" Field Development Plan ("FDP") is planned for later this year to enable an early production well to be drilled on the licence from the existing Don Southwest facilities.
  • Restructuring of the former Valiant Norwegian portfolio has largely been completed with the Company exiting the Barents Sea via a licence swap with Tullow Norge AS. Following execution of a farm-in agreement with TOTAL E&P Norge AS, an oil discovery close to existing infrastructure being was made on the "Trell" prospect in the Norwegian North Sea.



SUMMARY STATEMENT OF INCOME
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Q1 2014 Q1 2013 %
Average Brent Oil Price $/bbl 108 113 -4%
Average Realised Oil Price(1) $/bbl 108 106 2%
Revenue M$ 99.6 59.8 67%
Cost of Sales - excluding DD&A M$ (53.5) (27.0) 98%
G&A etc M$ (3.7) (1.9) 95%
Realised Derivatives Gain / (Loss) M$ 1.3 3.9 -67%
Cashflow From Operations M$ 43.7 34.8 26%
DD&A M$ (32.5) (19.5) 67%
Unrealised Derivatives Gain/(Loss) M$ 2.7 (11.1) -124%
Other Non-Cash Costs M$ (9.3) (1.9) 389%
Profit Before Tax M$ 4.6 2.3 100%
Deferred Tax Credit / (Charge) M$ 11.8 1.2 883%
Profit After Tax M$ 16.4 3.5 369%
Earnings Per Share $/Sh. 0.05 0.01 400%
Cashflow Per Share $/Sh. 0.13 0.13 -
(1) Average realized price before hedging



 SUMMARY BALANCE SHEET---------------------------------------------------------------------------- M$ Q1 2014 Q4 2013Cash & Equivalents 39 63Other Current Assets 387 375PP&E 1,573 1,481Other Non-Current Assets 59 59Total Assets 2,058 1,979Current Liabilities (412) (485)Bank Debt (569) (432)Asset Retirement Obligations (175) (172)Deferred Tax Liabilities (15) (10)Other Non-Current Liabilities (9) (26)Total Liabilities (1,180) (1,125) Net Assets 878 854Share Capital 547 536Other Reserves 16 19Surplus / (Deficit) 315 299Shareholders' Equity 868 854 

CORPORATE STRATEGY
Ithaca Energy Inc. ("Ithaca" or the "Company") is a North Sea oil and gas operator focused on the delivery of lower risk growth through the appraisal and development of UK undeveloped discoveries, the exploitation of its existing UK producing asset portfolio and a Norwegian exploration and appraisal business centred on the generation of discoveries capable of monetisation prior to development.

The Company has a solid and diversified UK producing asset base generating significant cashflow from operations.

Ithaca's goal is to generate sustainable long term shareholder value by building a highly profitable 25kboepd North Sea oil and gas company.

Execution of the Company's strategy is focused on the following core activities:

  • Maximising cashflow and production from the existing asset base.
  • Delivery of lower risk development led growth through the appraisal of undeveloped discoveries.
  • Delivering first hydrocarbons from the Ithaca operated GSA development.
  • Monetising proven Norwegian asset reserves derived from exploration and appraisal drilling prior to the development phase.
  • Continuing to grow and diversify the cashflow base by securing new producing, development and appraisal assets through targeted acquisitions and licence round participation.
  • Maintaining financial strength and a clean balance sheet, supported by lower cost debt leverage.

PRODUCTION & OPERATIONS UPDATE

Operations remain on-track to achieve 2014 production guidance of 11-13kboe/d

PRODUCTION
Average production in Q1-2014 was 9,222 barrels of oil equivalent per day ("boepd"), 95% oil. This represents a 50% increase on the same quarter in 2013 (Q1-2013: 6,148 boepd ), driven by the additional assets resulting from the Valiant Petroleum plc ("Valiant") acquisition (transaction completed on April 19, 2013).

Production during the quarter was in line with forecast performance given the previously announced unplanned Cook field shutdown in January / February and a planned shutdown of the Beatrice Area facilities to complete certain inspection and maintenance works.

Total 2014 production guidance remains unchanged in the range of 11,000 to 13,000 boepd, approximately 95% oil. The anticipated schedule of 2014 production enhancement activities means that volumes are forecast to be weighted towards the second half of the year.

The core activities in the 2014 production enhancement programme are progressing well.

  • The Fionn sidetrack has recently been completed and production from the field recommenced in early May. The initial performance of the well is in line with expectations.
  • The Taqa-operated host platform works required to enable the start-up of electrical submersible pumps ("ESPs") on the Causeway and Fionn fields are substantially complete. The modifications also being undertaken to enable start-up of water injection on the Causeway field are advancing and scheduled to be finished around mid-year.
  • Drilling of the planned infill well on the Don Southwest field commenced in late April and initial production from the well is forecast for the third quarter.
  • The Athena co-venturers have awarded a contract to Diamond Offshore Drilling (UK) Limited for use of the Ocean Princess semi-submersible rig for the planned "P4" workover to replace the ESP package in the well. The rig is anticipated on location in the third quarter of the year, once it has completed its scheduled work programmes for prior clients.

GREATER STELLA AREA DEVELOPMENT UPDATE
Continued progress has been made on execution of the three core GSA development work programmes since the start of 2014.

FPF-1 construction activities progressing - main pre-assembled unit heavy lifts completed

FPF-1 MODIFICATION WORKS
The key focus of the remaining FPF-1 modification works being completed by Petrofac is on the construction and commissioning of the processing plant that is being installed on the vessel, along with the refurbishment and fit out of the existing accommodation module.

Construction activities on the main deck of the FPF-1 have been advancing and are currently centred on fit-out of the main pre-assembled units that were lifted on to the vessel in the first quarter of the year along with preparation for the installation of additional equipment packages. A number of key pieces of equipment have recently been installed on the main deck, including the three gas turbine generators. In addition, installation of the four additional buoyancy blisters being added to the columns of the FPF-1 is at an advanced stage of completion.

As previously highlighted, completion of the FPF-1 modifications programme is the key development activity dictating the overall schedule for first hydrocarbons from the GSA hub. While progress has been made on the modifications programme over recent months, the topsides construction programme has advanced more slowly than planned. As a consequence, Petrofac is forecasting for the vessel to be ready for sail-away from the Remontowa yard in Poland to the Stella field in spring 2015. This schedule is anticipated to result in first hydrocarbons from the GSA hub in mid-2015.

Ithaca is working with Petrofac to expedite the remaining construction and commissioning works on the FPF-1.

Drilling operations on-going on the third Stella development well

DRILLING PROGRAMME
The second Stella development well, "A2", was completed in January 2014. The reservoir quality encountered by the well was in line with previous appraisal wells drilled on the field and the horizontal reservoir section of the well intersected a net reservoir interval of 2,514 feet (81% net pay). The well flowed at a maximum rate of 10,442 boepd (70% oil) on a 44/64-inch choke, with the full production potential of the well limited by the capacity of the well test equipment on the drilling rig. When combined with the corresponding results for the "A1" development well, this substantially de-risks the initial production forecast for the field.

In March 2014 the Ensco 100 jack-up drilling rig was moved from the Main Drill Centre location, from where the first two Stella development wells were drilled, to the Northern Drill Centre from where the third and fourth wells will be drilled. Drilling operations on the third well, "B1", commenced in March 2014 and are scheduled to be completed around late June.

Initial 2014 subsea campaign completed in April - well tie-ins at the Main Drill Centre

SUBSEA INFRASTRUCTURE WORKS
The key outstanding workscopes to be completed during 2014 involve the tie-in of the wells, installation of the vessel mooring spread, the mid-water arch over which the risers and umbilicals are laid, the Single Point Loading ("SPL") oil export facilities and the dynamic flexible risers and umbilicals that will connect the riser bases to the FPF-1.

The 2014 programme is to be completed over several offshore campaigns, culminating in the hook-up of the FPF-1 and risers upon the arrival of the vessel on location. The first campaign was completed in April 2014, with the first two development wells tied in to the Main Drill Centre. The next scheduled activity is installation of the FPF-1 mooring piles in June 2014.

CORPORATE ACTIVITIES

Don NE licence award - Phase I FDP submission planned for 2014

DON NE LICENCE AWARD
Ithaca (40% working interest) and EnQuest (60%, Operator) were awarded a licence by the DECC in March 2014 covering the majority of the former Don NE field acreage that lies adjacent to the producing Don Southwest field in which both companies have corresponding working interest levels.

The Don NE field was previously operated by BP and ceased production in 2005. BP and its co-venturers are currently in the process of decommissioning the wells in the northern part of the Don NE licence and as such, DECC has at this time awarded a new licence over the southern area of the field.

Submission of a Phase I FDP is planned for later in 2014 to enable a production well to be drilled on the southern part of the field from the existing Don Southwest facilities, potentially as early as this year. The envisaged drilling location is in an area of the field where a previous appraisal well was drilled and tested in 1982. Depending on the production performance of the well, the drilling of further production and water injections wells in this part of the field would represent a potential Phase II development plan.

Given the ability of the co-venturers to produce wells on the Don NE field via the existing Don Southwest field infrastructure, this represents crystallisation of a valuable upside that has stemmed from the acquisition of the Valiant assets. Moreover, any development activity is expected to benefit from application of the Small Field Allowance, which shelters field revenues of up to approximately $240 million (100%) from payment of the 32% Supplementary Tax charge.

28th UK OFFSHORE LICENSING ROUND
Several licence applications were made as part of the 28th UK Offshore Licensing Round in April 2014. It is anticipated that the DECC will announce the results of the Round in late 2014.

PORTFOLIO MANAGEMENT & DRILLING
Restructuring of former Valiant Norwegian portfolio largely completed

The following previously reported licence management and drilling activities were completed in Q1-2014.

  • Restructuring of the former Valiant Norwegian portfolio was largely completed in January 2014 with the Company exiting the Barents Sea by swapping its position in the "Langlitinden" well for a licence interest in the Norwegian North Sea with Tullow Norge AS, on which a well is scheduled to be drilled on the "Lupus" prospect in mid-2014. As part of the portfolio restructuring, the Norvarg licence in the Barents Sea is also to be relinquished. Despite the considerable extent of the discovery and presence of mobile gas in the Kobe formation, the reservoir properties and lack of infrastructure in the area means that Norvarg is considered non-commercial at this time.
  • Ithaca and Dyas UK Limited ("Dyas") entered into an agreement with North Sea Energy Limited ("NSE") to remove NSE from the Jacky joint venture in March 2014. As a result, Ithaca increased its interest in the Jacky field from 47.5% to 52.5% and is putting in place a cost sharing agreement with Dyas to share all costs 50/50 (excluding decommissioning and related costs).
  • As previously noted, it is anticipated that 2014 will be the last year of production from the Beatrice and Jacky fields. Under the terms of the Beatrice facilities lease agreement executed with Talisman in 2008, Ithaca is able to re-transfer the facilities to Talisman for decommissioning. Preparation for the re-transfer is underway.

DRILLING ACTIVITY

  • Handcross (UK): Following completion of the successful Handcross exploration well farm-out programme in 2013, which resulted in Ithaca achieving a full carry for its share of the well cost, the commitment well transferred as part of the Valiant acquisition was drilled on the prospect in early 2014. No hydrocarbons were encountered by the well in the target formation.
  • Trell (Norway): A farm-in executed with TOTAL E&P Norge AS resulted in an oil discovery close to existing infrastructure being made on the "Trell" prospect in February 2014. The joint venture is currently working on updating the subsurface model to incorporate the well data and assess the potential recoverable volumes and development options for the discovery.

Q1 2014 RESULTS OF OPERATIONS

REVENUE

Revenue up 67% on Q1-2013

Revenue increased by $39.8 million from Q1 2013 to $99.6 million (Q1 2013: $59.8 million). This was primarily driven by an increase in oil sales volumes coupled with a small realised oil price increase.

Oil sales volumes increased primarily due to the inclusion of sales from the Dons and Causeway fields following the acquisition of Valiant, partially offset by lower volumes from the Beatrice and Jacky fields.

The decrease in gas sales in Q1 2014 compared to Q1 2013 was due to a combination of lower sales volumes, primarily driven by the shut-in of Topaz for the quarter, and a slightly lower realised price per boe.

There was a small increase in average realized oil prices from $106.32/bbl in Q1 2013 to $108.23/bbl in Q1 2014. The average Brent price for the quarter ended 31 March 2014 was $108.211/bbl compared to $112.569 for Q1 2013. The Company's realized oil prices do not strictly follow the Brent price pattern given the various oil sales contracts in place, with some fields sold at a discount or premium to Brent. This increase in realized oil price was partially offset by a realized hedging loss of $3.04/bbl in the quarter.

 Average Realised Price Q1 2014 Q1 2013Oil Pre-Hedging $/bbl 108 106Oil Post-Hedging $/bbl 105 114Gas $/boe 45 47 

COST OF SALES

 Q1 2014 Q1 2013 $'000 $'000Operating Expenditure 41,264 23,227DD&A 32,465 19,498Movement in Oil & Gas Inventory 11,861 3,576Oil purchases 418 157Total 86,008 46,458 

Cost of sales increased in Q1 2014 to $86.0 million (Q1 2013: $46.5 million) due to higher production volumes resulting in increases in operating costs and depletion, depreciation and amortization ("DD&A") and movement in oil and gas inventory.

Operating costs increased in the quarter to $41.3 million (Q1 2013: $23.2 million) primarily due to the inclusion of costs for the Dons and Causeway fields acquired from Valiant.

Operating costs increased to $49.72/boe in the quarter (Q1 2013: $41.98) mainly as a result of planned shutdowns in the period on Beatrice and Jacky and weather related downtime on Athena and Cook, coupled with cyclical production on Causeway. Operating costs for the full year are expected to average around $40/boe as production increases as a result of the ongoing production enhancement activities.

DD&A expense for the quarter increased to $32.5 million (Q1 2013: $19.5 million). This was primarily due to higher production volumes in Q1 2014 with the addition of the Dons and Causeway fields. The blended rate for the quarter has increased to $39.00/boe (Q1 2013: $35.06/boe).

As the below "Changes in Accounting Policies" section outlines, the adoption of IFRS and accounting for acquisitions as business combinations has led to increased DD&A rates, representing the majority of the rate increase. It should be noted that this increase in DD&A and hence Cost of Sales is offset by a credit in the Deferred Tax charged through the Income Statement.

An oil and gas inventory movement of $11.9 million was charged to cost of sales in Q1 2014 (Q1 2013 charge of $3.6 million). Movements in oil inventory arise due to differences between barrels produced and sold with production being recorded as a credit to movement in oil inventory through cost of sales until oil has been sold. In Q1 2014 more barrels of oil were sold (893k bbls) than produced (789k bbls), mainly as a result of the timing of Cook and Dons field liftings and Athena shuttle tankers.

 Oil Gas TotalMovement in Operating Oil & Gas Inventory kbbls kboe kboeOpening inventory 193 8 201Production 789 41 830Liftings / sales (893) (46) (939)Transfers/other* 5 - 5Closing volumes 94 3 97* Due to long term inventory transfers and terminal quality adjustments etc 

ADMINISTRATION & EXPLORATION & EVALUATION EXPENSES

 $'000 Q1 2014 Q1 2013General & Administration ("G&A") 3,270 2,476Share Based Payments 429 295Total Administration Expenses 3,699 2,771Exploration & Evaluation ("E&E") 2,008 312Impairment 2,895 -Total 8,602 3,083 

Total administrative expenses increased in the quarter to $3.7 million (Q1 2013: $2.8 million) primarily due to an increase in general and administrative expenses as a result of the continued growth of the Company. Around $1.6 million of the G&A cost relates to the costs of the Norwegian office, however, approximately half is recovered as a cash tax refund from the Norwegian government - the credit is recorded under Taxation. Share based payment expenses increased as a result of a tranche of options being granted during the quarter (no grant in Q1 2013), as well as being dependent on cost distribution based on the timewriting profile during any period.

Exploration and evaluation expenses of $2.0 million were recorded in the quarter (Q1 2013: $0.3 million) associated with the relinquishment of licences transferred as part of the Valiant acquisition in April 2013, including $0.7 million relating to Norway.

The impairment charge above represents further costs of a capital nature recognised in the quarter on Beatrice and Jacky, both of which were fully written down at December 31, 2013 in anticipation of their handback to Talisman.

FOREIGN EXCHANGE & FINANCIAL INSTRUMENTS

A foreign exchange loss of $0.4 million was recorded in Q1 2014 (Q1 2013: $0.6 million gain). The majority of the Company's revenue is US dollar driven while expenditures are incurred in British pounds, US dollars and Euros. General volatility in the USD:GBP exchange rate is the primary driver behind the foreign exchange gains and losses, particularly on the revaluation of non USD bank accounts and working capital balances (USD:GBP at January 1, 2014: 1.65. USD:GBP at March 31, 2014: 1.66 with fluctuations between 1.62 and 1.68 during the quarter).

The Company recorded an overall $4.0 million gain on financial instruments for the quarter ended March 31, 2014 (Q1 2013: $7.2 million loss). A $1.3 million cash gain was realised in respect of instruments which expired during the quarter - comprising a $2.7 million realised loss on commodity hedges and a $4.0 million realised gain on foreign exchange instruments.

Also contributing to the gain was the revaluation of instruments at March 31, 2014 which relates to instruments still held at the quarter end. This $2.7 million non-cash revaluation primarily related to an upward revaluation of commodity hedges, due to an increase in value of oil swaps and put options based on the movement in the Brent oil forward curve from the year end and the implied volatility at the end of the reporting period, offset by the expiry of foreign exchange hedges. The Company does not apply hedge accounting, which can therefore lead to volatility in the results due to the impact of revaluing the financial instruments at each reporting period end. The Brent spot price closed at $106 at March 31, 2014, a reduction from $110 at December 31, 2013, resulting in a mark-to-market gain on commodity hedges which were entered into to ensure prices of over $100/bbl were obtained.

BUSINESS COMBINATIONS

NEGATIVE GOODWILL
If the cost of an acquisition is more than the fair value of net assets acquired, the difference is recognised on the balance sheet as goodwill. Conversely, if the cost of an acquisition is less than the fair value of the assets acquired, the difference is recognised as negative goodwill in the statement of income. As a result of business combination accounting $0.9 million of negative goodwill was recognised in Q1 2013 in relation to the Cook acquisition from Noble ($0 million in Q1 2014).

GAIN ON FARM-OUT
Following completion of the committed Handcross well during the quarter, an additional gain of $2.2 million has been recognised in the income statement as a result of the farm-out programme.

FINANCE COSTS

Finance costs increased to $6.3 million in Q1 2014 (Q1 2013: $2.3 million). This rise primarily reflects interest and fees incurred in relation to the Company's increased debt financing facilities and the drawdowns therefrom. Accretion costs have also increased $0.8 million compared to Q1 2013 due to higher decommissioning liabilities as at March 31, 2014 as a result of inclusion of the former Valiant decommissioning liabilities.

TAXATION

No UK tax anticipated to be payable in the mid-term
A tax credit of $11.8 million was recognized in the quarter ended March 31, 2014 (Q1 2013: $1.2 million credit). $10.5 million is a non-cash credit relating to UK taxation and is a product of adjustments to the tax charge primarily relating to: UK Ring Fence Expenditure Supplement and share based payments. As noted in the Cost Of Sales section the deferred tax credit is increased by the use of accounting for acquisitions as business combinations.

The remaining $1.3 million credit is due to Norwegian tax refunds, which have been generated as a result of exploration related expenditure, incurred by Ithaca's Norwegian operations during Q1 2014. Norwegian tax refunds totalling $77.8 million recognised on the balance sheet relate to Norwegian capital expenditure.

As a result of the above factors, profit after tax increased to $16.4 million (Q1 2013: $3.5 million).

No tax is expected to be paid in the mid-term future relating to upstream oil and gas activities as a result of the $1,174 million of UK tax losses available to the Company.

CAPITAL INVESTMENTS

Capital additions to development and production ("D&P") assets totalled $108m in Q1 2014. These relate primarily to the execution of the GSA development, and the drilling of the Fionn sidetrack well during the quarter.

Capital expenditure on E&E assets in Q1 2014 was $23.2 million, offset by a $1.8million release of the acquired E&E liability, resulting in a net addition of $21.4 million. Expenditure was primarily focused on the Trell exploration and appraisal well in Norway as well as UK pre-development projects.

LIQUIDITY AND CAPITAL RESOURCES

Significant investment in development projects

 Increase /$'000 Q1 2014 Q4 2013 (Decrease)Cash & Cash Equivalents 51,456 75,633 (24,177)Trade & Other Receivables 355,138 335,877 19,261Inventory 17,582 21,632 (4,050)Other Current Assets 2,572 5,102 (2,530)Trade & Other Payables (397,228) (472,396) 75,168Net Working Capital* 29,520 (34,152) 63,672*Working capital being total current assets less trade and other payables 

As at March 31, 2014, Ithaca had a net debit working capital balance of $29.5 million including a free cash balance of $39.1 million ($12.3 million restricted cash). Available cash has been, and is currently, invested in money market deposit accounts with BNP Paribas. Management has received confirmation from the financial institution that these funds are available on demand.

Cash and cash equivalents decreased as a result of continued cash investment in the ongoing Stella field development and the Fionn sidetrack well, offset by drawings from bank facilities in the quarter. Other working capital movements are driven by the timing of receipts and payments of balances.

A significant proportion of Ithaca's accounts receivable balance is with customers and co-venturers in the oil and gas industry and is subject to normal joint venture/ industry credit risks. The Company assesses partners' credit worthiness before entering into joint venture agreements. The Company regularly monitors all customer receivable balances outstanding in excess of 90 days. As at March 31, 2014 substantially all of the accounts receivable is current, being defined as less than 90 days. In the past, the Company has not experienced credit loss in the collection of accounts receivable.

Trade and Other Payables have returned to normal levels having been untypically high at year end. Cash advances of $45 million under the Shell oil sales agreements are included within Trade & Other payables.

At March 31, 2014, Ithaca had two UK loan facilities available, being the $610 million RBL Facility and the $100 million corporate debt facility. At the quarter end, the Company had unused UK credit facilities totalling approximately $197 million (Q4 2013: $300 million), with approximately $513 million drawn under the Facility.

Additionally, the Company also has a Norwegian tax refund facility (the "Norwegian Facility") of NOK 450 million (~$75 million), under which approximately $67 million was drawn as at March 31, 2014.

During the quarter ended March 31, 2014 there was a cash outflow from operating, investing and financing activities of approximately $24 million (Q1 2013 inflow of $34.8 million).

Cashflow from operations
Cash generated from operating activities was $44 million primarily due to cash generated from Cook, Athena, Dons, Causeway, Beatrice, Jacky, Anglia, and Broom operations.

Cashflow from financing activities
Cash generated from financing activities was $139 million primarily due to the drawdown of the existing debt facilities in the quarter.

Cashflow from investing activities
Costs incurred in investing activities were $127 million with approximately $240 million cash used in investing activities as a result of the release of working capital built up at the end of Q4 2013. The main components of capital expenditure related to the GSA development and the drilling of the Fionn sidetrack well.

The Company continues to be fully funded, with more than sufficient financial resources to cover its anticipated future commitments from its existing cash balance, debt facilities and forecast cashflow from operations. No unusual trends or fluctuations are expected outside the ordinary course of business.

COMMITMENTS

 $'000 1 Year 2-5 Years 5+ YearsOffice Leases 935 2,662 -Other Operating Leases 12,319 2,250 -Exploration Licence Fees 696 - -Engineering 106,224 893 -Rig Commitments 48,664 - -Total 168,840 5,805 - 

The engineering financial commitments relate to the Company's share of committed capital expenditure on the GSA development, as well as ongoing capital expenditure on existing producing fields. Rig commitments reflect rig hire costs committed in relation to the anticipated Stella wells as well as committed rig hire costs relating to the upcoming Don Southwest well. As stated above, these commitments are expected to be funded through the Company's existing cash balance, forecast cashflow from operations and its undrawn debt facility.

 FINANCIAL INSTRUMENTS----------------------------------------------------------------------------All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Company has classified each financial instrument into one of these categories:----------------------------------------------------------------------------Financial Instrument Ithaca Classification Subsequent Measurement CategoryHeld-for-trading Cash, cash equivalents, Fair Value with changes restricted cash, recognised in net income derivatives, commodity hedges, long-term liability----------------------------------------------------------------------------Held-to-maturity - Amortised cost using effective interest rate method.---------------------------------------------------Loans and Receivables Accounts receivable---------------------------------------------------Other financial Accounts payable, Transaction costs liabilities operating bank loans, (directly attributable to accrued liabilities acquisition or issue of financial asset/liability) are adjusted to fair value initially recognised. These costs are also expensed using the effective interest rate method and recorded within interest expense.----------------------------------------------------------------------------The classification of all financial instruments is the same at inception and at March 31, 2014. The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of comprehensive income. $'000 Q1 2014 Q1 2013Revaluation Forex Forward Contracts (4,171) (2,055)Revaluation of Other Long Term Liability 23 57Revaluation of Commodity Hedges 6,949 (9,067)Revaluation of Interest Rate Swaps (123) -----------------------------------------------------------------------------Total Revaluation Gain / (Loss) 2,678 (11,065)----------------------------------------------------------------------------Realised Gain / (Loss) on Commodity Hedges (2,674) 4,186Realised Gain / (Loss) on Forex Forward Contracts 4,028 (293)Realised Loss on Interest Rate swaps (70) -----------------------------------------------------------------------------Total Realised Gain 1,284 3,893----------------------------------------------------------------------------Total Gain / (Loss) on Financial Instruments 3,962 (7,172)---------------------------------------------------------------------------- 

The following table summarises the commodity hedges in place at the end of the quarter.

Oil Hedging

  • 2.7 million barrels of oil production over the next 2 years hedged at $100/bbl (70% swaps / 30% puts). This hedging underpins approximately $270 million of revenue while retaining oil price upside on over a third of the hedged volume.

Gas Hedging

  • Secured floor price of £ 0.58/therm (~$10/MMBTU) for approximately 200 million therms (20 Bcf) of gas sales over gas year's 2015 and 2016. This hedging underpins approximately $200 million of revenue (net of all hedging costs) while retaining full upside to rising gas prices beyond £ 0.63/therm.

 Derivative Term Volume bbl Average Price $/bblOil Swaps April 2014 - March 2016 1,963,581 100Put Options April 2014 - March 2016 762,800 100 Average PriceDerivative Term Volume Therms p/thermGas Swaps April 2014 - December 2014 1,210,000 67Gas Puts October 2015 - June 2017 187,300,000 64 

Post quarter end, further oil swaps were entered into for approximately 0.3 million barrels of production for the period to Q1 2016 at a weighted average price of $100/bbl.

The Company also enters into interest rate swaps as a measure of hedging its exposure to interest rate risks on the loan facilities. The below summaries the interest rate financial instruments in place at the end of the period.

 Derivative Interest rate swap Term Dec 15 Value $200 million Rate 0.44% QUARTERLY RESULTS SUMMARY---------------------------------------------------------------------------- Restated(1) 31 Mar 31 Dec 30 Sep 30 Jun 31 Mar 31 Dec 30 Sep 30 Jun$'000 2014 2013 2013 2013 2013 2012 2012 2012Revenue 96,600 111,696 114,112 128,360 59,769 52,566 41,579 35,779Profit After Tax 16,365 44,242 43,145 53,827 3,472 45,347 4,894 30,238 Earnings per share "EPS" - Basic(2) 0.05 0.14 0.14 0.18 0.01 0.17 0.02 0.12EPS - Diluted(2) 0.05 0.13 0.13 0.17 0.01 0.17 0.02 0.11Common shares outstanding (000) 326,195 323,634 317,366 317,366 259,953 259,920 259,346 259,346 (1)Q2-13 and Q3-13 restated to account for adjustment to Valiant acquisition accounting(2)Based on weighted average number of shares The most significant factors to have affected the Company's results during the above quarters, other than transactions such as the Valiant acquisition, are fluctuations in underlying commodity prices and movement in production volumes. The Company has utilized forward sales contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the exposure to price volatility. These contracts can cause volatility in profit after tax as a result of unrealized gains and losses due to movements in the oil price and USD: GBP exchange rate. 

OUTSTANDING SHARE INFORMATION

The Company's common shares are traded on the Toronto Stock Exchange ("TSX") in Canada under the symbol "IAE" and on the Alternative Investment Market ("AIM") in the United Kingdom under the symbol "IAE".

As at March 31, 2014 Ithaca had 328,148,621 common shares outstanding along with 17,243,566 options outstanding to employees and directors to acquire common shares.

In Q1 2014, the Company's Board of Directors granted 7,165,000 options at a weighted average exercise price of C$2.71. Each of the options granted may be exercised over a period of four years from the grant date. One third of the options will vest at the end of each of the first, second and third years from the effective date of grant.

Due to the exercise and listing of option shares following the end of Q1-2014, as at May 9, 2014, Ithaca had 328,398,620 common shares outstanding along with 16,993,567 options outstanding to employees and directors to acquire common shares.

 March 31, 2014Common Shares Outstanding 328,148,621Share Price(1) $2.49 / ShareTotal Market Capitalisation $817,090,066(1) Represents the TSX close price (CAD$2.75) on March 31, 2014. US$:CAD$0.9039 on March 31, 2014 

CONSOLIDATION

The consolidated financial statements of the Company and the financial data contained in this management's discussion and analysis ("MD&A") are prepared in accordance with IFRS.

The consolidated financial statements include the accounts of Ithaca and its wholly-owned subsidiaries, listed below, and its associates FPU Services Limited ("FPU") and FPF-1 Limited ("FPF-1").

Wholly owned subsidiaries:

  • Ithaca Energy (Holdings) Limited ("Ithaca Holdings"),
  • Ithaca Energy (UK) Limited ("Ithaca UK"),
  • Ithaca Minerals North Sea Limited ("Ithaca Minerals")
  • Ithaca Energy Holdings (UK) Limited ("Ithaca Holdings UK")
  • Ithaca Petroleum Limited (formerly Valiant Petroleum plc)
  • Ithaca Causeway Limited (formerly Valiant Causeway Limited)
  • Ithaca Exploration Limited (formerly Valiant Exploration Limited)
  • Ithaca Alpha (NI) Limited (formerly Valiant Alpha (NI) Limited
  • Ithaca Gamma Limited (formerly Valiant Gamma Limited)
  • Ithaca Epsilon Limited (formerly Valiant Epsilon Limited)
  • Ithaca Delta Limited (formerly Valiant Delta Limited)
  • Ithaca North Sea Limited (formerly Valiant North Sea Limited)
  • Ithaca Petroleum Holdings AS (formerly Valiant Petroleum Holdings AS)
  • Ithaca Petroleum Norge AS (formerly Valiant Petroleum Norge AS)
  • Ithaca Technology AS (formerly Valiant Technology AS)
  • Ithaca AS (formerly Querqus AS)
  • Ithaca Petroleum EHF (formerly Valiant Petroleum EHF)

The consolidated financial statements include, from April 19, 2013 only (being the acquisition date), the consolidated financial statements of the Valiant group of companies.

All inter-company transactions and balances have been eliminated on consolidation. A significant portion of the Company's North Sea oil and gas activities are carried out jointly with others. The consolidated financial statements reflect only the Company's proportionate interest in such activities.

CRITICAL ACCOUNTING ESTIMATES

Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid The reader in assessing the critical accounting policies and practices of the Company and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.

The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.

Capitalized costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved and probable reserves are depreciated on a unit-of-production basis, by asset, using estimated proved and probable reserves as adjusted for production.

A review is carried out each reporting date for any indication that the carrying value of the Company's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with IAS 36. The Company's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Statement of Income.

Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized in the Statement of Income. Impairment losses relating to goodwill cannot be reversed in future periods.

Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. In periods following recognition, the liability and associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred.

All financial instruments are initially recognized at fair value on the balance sheet. The Company's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument.

In order to recognize share based payment expense, the Company estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time.

The determination of the Company's income and other tax liabilities / assets requires interpretation of complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded on the financial statements.

The accrual method of accounting will require management to incorporate certain estimates of revenues, production costs and other costs as at a specific reporting date. In addition, the Company must estimate capital expenditures on capital projects that are in progress or recently completed where actual costs have not been received as of the reporting date.

CONTROL ENVIRONMENT

Ithaca has established disclosure controls, procedures and corporate policies so that its consolidated financial results are presented accurately, fairly and on a timely basis. The Chief Executive Officer and Chief Financial Officer have designed, or have caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company's financial statements in accordance with IFRS with no material weaknesses identified.

Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of December 31, 2013, there were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

CHANGES IN ACCOUNTING POLICIES

On January 1, 2011, the Company adopted IFRS using a transition date of January 1, 2010. The financial statements for the year ended December 31, 2013, including required comparative information, have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB").

The Company elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®.

One impact of accounting for acquisitions as business combinations is the recognition of asset values, upon which the DD&A rate is calculated as pre-tax fair values and the recognition of a deferred tax liability on estimated future cash flows. With current tax rates at 62% this increases the DD&A charge for such assets. An offsetting reduction is recognised in the deferred tax charged through the consolidated statement of income.

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). There are no new IFRSs of IFRICs that are effective for the first time for this interim period that would be expected to have a material impact on the Corporation.

ADDITIONAL INFORMATION

Non-IFRS Measures

'Cashflow from operations' referred to in this MD&A is not prescribed by IFRS. This non-IFRS financial measure does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Company uses this measure to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Company considers Cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities.

'Net working capital' referred to in this MD&A is not prescribed by IFRS. Net working capital includes total current assets less trade & other payables. Net working capital may not be comparable to other similarly titled measures of other companies, and accordingly Net working capital may not be comparable to measures used by other companies.

Off Balance Sheet Arrangements

The Company has certain lease agreements and rig commitments which were entered into in the normal course of operations, all of which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at March 31, 2014.

Related Party Transactions

A director of the Company is a partner of Burstall Winger Zammit LLP who acts as counsel for the Company. The amount of fees paid to Burstall Winger Zammit LLP in Q1 2014 was $0.1 million (Q1 2013: $0.1 million). These transactions are in the normal course of business and are conducted on normal commercial terms with consideration comparable to those charged by third parties.

As at March 31, 2014 the Company had a loan receivable from FPF-1 Ltd, an associate of the Company, for $31.6 million (December 31, 2013: 31.6 million) as a result of the completion of the GSA transactions.

BOE Presentation

The calculation of boe is based on a conversion rate of six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 mcf: 1 bbl, utilizing a conversion ratio at 6 mcf: 1 bbl may be misleading as an indication of value.

Well Test Results

Certain well test results disclosed in this MD&A represent short-term results, which may not necessarily be indicative of long-term well performance or ultimate hydrocarbon recovery there from.

RISKS AND UNCERTAINTIES

The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints, lack of pipeline capacity or lack of markets. The Company is dependent upon the production rates and oil price to fund the current development program.

For additional detail regarding the Company's risks and uncertainties, refer to the Company's Annual Information Form dated March 28, 2014, (the "AIF") filed on SEDAR at www.sedar.com.

 --------------------------------------------------------------- RISK MITIGATIONS ---------------------------------------------------------------Commodity The Company's performance is In order to mitigate the risk Price significantly impacted by of fluctuations in oil and gas Volatility prevailing oil and natural gas prices, the Company routinely prices, which are primarily executes commodity price driven by supply and demand as derivatives, predominantly in well as economic and political relation to oil production, as factors. a means of establishing a floor in realised prices. ---------------------------------------------------------------Foreign The Company is exposed to Given the proportion of Exchange financial risks including development capital expenditure Risk financial market volatility and and operating costs incurred in fluctuation in various foreign currencies other than the US exchange rates. Dollar, the Company routinely executes hedges to mitigate foreign exchange rate risk on committed expenditure and / or draws debt in GB Sterling to settle Sterling costs which will be repaid from surplus Sterling generated revenues derived from Stella gas sales. ---------------------------------------------------------------Interest The Company is exposed to In order to mitigate the Rate Risk fluctuation in interest rates, fluctuations in interest rates, particularly in relation to the the Company routinely reviews debt facilities entered into. cost exposures as a result of varying rates and assesses the need to lock in interest rates. ---------------------------------------------------------------Debt The Company is exposed to The Company believes that there Facility borrowing risks relating to are no circumstances at present Risk drawdown of its debt facilities that result in its failure to (the "Facilities"). The ability meet the financial tests and it to drawdown the Facilities is can therefore draw down upon based on the Company meeting its Facilities. certain covenants including coverage ratio tests, liquidity The Company routinely produces tests and development funding detailed cashflow forecasts to tes

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