ITHACA ENERGY INC. 
By
TIDMIAE
Ithaca Energy Inc. 2011 Financial Results & Reserves Update
FOR: ITHACA ENERGY INC.
AIM, TSX SYMBOL: IAE
March 29, 2012
Ithaca Energy Inc. 2011 Financial Results & Reserves Update
Earnings US$35.9 million and Record Cash Flow from Operating Activities of US$103.5 Million
Proved and Probable Reserves Increase
LONDON, UNITED KINGDOM and CALGARY, ALBERTA--(Marketwire - March 29, 2012) -
NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES
Ithaca Energy Inc. ("Ithaca" or "the Company") (TSX:IAE)(AIM:IAE) announces its financial results for the
twelve months ended December 31, 2011 and the Company's independently evaluated reserves as of the same date.
HIGHLIGHTS
For the year ended December 31, 2011
Financial
=- Record Cashflow from Operating activities of US$103.5 million (2010:
US$88.9 million)
=- Profit before tax of US$37.1 million (2010 Reported: US$38.0 million,
IFRS adjusted US$58 Million)
=- Major capital investment of over $205 million, including acquisitions
=- Cash US$112.1 million (2010: US$201.9 million), inclusive of US$16.5
million restricted cash, with senior debt facility remaining undrawn
=- UK tax allowances pool of US$325 million (2010 $289 million)
=- Results and comparatives are now reported under International Financial
Reporting Standards ("IFRS")
Reserves
Net Proved and Probable ("2P") reserves assessed by Sproule International Limited increased approx. 9%, from
46.05 mmboe as at December 31, 2010 to 50.25 mmboe as at December 31, 2011. The increase in reserves came
mainly from the acquisitions of an interest in the Cook field and Challenger Minerals (North Sea) Ltd. Smaller
revisions were recorded across other fields including Athena, where Proved plus Probable reserves increased to
26.10 mmboe Gross (5.88 mmboe Net) post drilling and completion of the wells on the field.
=- Net 1P Reserves 26.13 million barrels of oil equivalent ("mmboe") (2010:
22.30 mmboe)
=- Net 2P Reserves 50.25 mmboe (2010: 46.05 mmboe)
=- Net 3P Reserves 87.75 mmboe (2010: 86.12 mmboe)
=- Net 2P Reserves Pre-Tax Net Present Value US$1.085 billion (2010:
US$912.40 million)
Significant developments
=- Successfully completed drilling and major subsea infrastructure work on
the Athena development. Modifications to the BW Athena FPSO were
completed in February 2012 and the vessel is now sailing to the North
Sea. Final pressure testing on the subsea infrastructure is in the
course of being completed and first oil is expected in Q2 2012
=- Sanctioned the development of the Stella and Harrier fields having
secured ownership in the FPF1 Floating Production Unit and substantially
de-risked the project through a series of transactions with Petrofac and
execution of a contract for use of the Ensco 100 drilling rig for the
development drilling campaign
=- Completed two material acquisitions:
-- 28.46% of the Cook Field
-- 100% of Challenger Minerals (North Sea) Ltd
=- Successful appraisal drilling of the Crathes discovery unlocking the
potential for a combined development of the Crathes, Scolty and Torphins
discoveries
=- Graduated from the TSX Venture Exchange to the Toronto Stock Exchange on
November 1 2011
POST YEAR END EVENTS
=- On 21 March 2012 the UK Government increased the Small Field Allowance
("SFA") tax shelter availability from the 32% Supplemental tax charge
for future small developments
-- The size of fields that qualify for full SFA was increased to
include all fields with reserves of under 45 mmboe
-- The tax allowance available to each field has been doubled from
approximately US$120 million to US$240 million
This change brings the Stella field under the SFA tax shelter and doubles the relief expected for all other
developments including Harrier, Hurricane, Carna, Scolty Area (Scolty, Crathes and Torphins) and South West
Heather. In respect of the Greater Stella Area, this amounts to in excess of US$80 million of additional tax
savings net to Ithaca over the expected life of the fields
=- Taken over operatorship of the Carna discovery and increased the
Company's working interest from 16% to 32%
=- Entered into swap options to sell 768,800 bbls of the Company's March
2012 - June 2013 forecast production at an average price of $116.07 per
barrel
=- The Company confirmed that it had received a non-binding proposal to
acquire all of the outstanding shares of the Company and unsolicited
interest from a number of third parties. The Company stated that it
would enter into discussions with all bona fide interested parties with
a view to maximizing shareholder value but that there was no certainty
that an offer would be made for the Company. Discussions continue with
bona fide interested parties.
PRODUCTION Q1 2012
=- With less than 3 days remaining in the first quarter of 2012, the
Company estimates net export production to be approximately 4,200 boepd.
Actual net export production for Q1 will be confirmed in the Q1 results
Iain McKendrick, CEO, commented,
"Material progress has been made over the course of 2011 with the continued growth of the Company. The past
year has been marked by strong financial results and the acceleration of growth though both accretive
acquisitions and the major advancements that have been made on the Company's two key operated developments,
Athena and Stella/Harrier. In the next quarter the Company looks forward to first oil from the Athena field,
the spudding of the Hurricane appraisal well and obtaining government approval for the Stella / Harrier Field
Development Plan."
Notes:
The Company's petroleum and natural gas reserves (the "reserves") were independently evaluated by Sproule
(www.sproule.com) (the "Sproule Report") in accordance with the Canadian Oil and Gas Evaluation Handbook
("COGEH") reserves definitions and evaluation practices and procedures as specified by National Instrument 51-
101 ("NI 51-101"). The evaluation uses Sproule's forecast prices and costs at December 31, 2011.
The Company's Form 51-101 F1 Statement of reserves data for the year ended December 31, 2011 ("Statement of
Reserves Data"), which includes the disclosure and reports relating to reserves data and other oil and gas
information along with the Form 51-101F2 Report on Reserves Data by Sproule and Form 51-101F3 Report of
Management and Directors on Reserves Data and Other Information are contained in the Company's Annual
Information Form for the year ended December 31, 2011 (the "AIF") which is available for review at
www.sedar.com.
In accordance with AIM Guidelines, Hugh Morel, BSc Physics and Geology (Durham), PhD Hydrogeology (London) and
senior petroleum engineer at Ithaca Energy is the qualified person that has reviewed the technical information
contained in this press release. Dr Morel has 30 years operating experience in the upstream oil industry.
The term "boe" may be misleading, particularly if used in isolation. A boe conversion 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.
Further details on the above are provided in the Consolidated Financial Statements, Management's Discussion and
Analysis, and AIF for the year ended December 31, 2011, which have been filed with securities regulatory
authorities in Canada. These documents are available on the System for Electronic Document Analysis and
Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com.
About Ithaca Energy:
Ithaca Energy Inc. and its wholly owned subsidiary Ithaca Energy (UK) Limited ("Ithaca" or "the Company"), is
an oil and gas exploration, development and production company active in the United Kingdom's Continental Shelf
("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early production from the
development of existing discoveries on properties held by Ithaca, to originate and participate in exploration
and appraisal on properties held by Ithaca when capital permits, and to consider other opportunities for growth
as they are identified from time to time by Ithaca.
Not for Distribution to U.S. Newswire Services or for Dissemination in the United States
Reader Advisory
Forward-looking statements
This news release contains certain forward looking statements. The reader is cautioned that all such forward
looking statements involve substantial risks and uncertainties and the assumptions used in their preparation
may not prove to be correct. Ithaca's actual results could differ materially from those expressed in, or
implied by, these forward looking statements and accordingly, the forward looking statements are qualified by
reference to these cautionary statements. The forward looking statements contained herein are made as at the
date of this news release. Ithaca undertakes no obligation to update or publicly revise forward looking
statements or information unless so required by applicable securities laws.
Cenkos Securities plc, which is authorised and regulated in the United Kingdom by the Financial Services
Authority under FSA number 416932, is acting exclusively as Nominated Adviser and Joint Broker to the Company
and is not acting for or advising any other person and accordingly will not be responsible to any person other
than the Company for providing advice in relation to the contents of this announcement. Neither Cenkos
Securities plc nor any of its affiliates owes or accepts any duty, liability or responsibility whatsoever
(whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not
a customer of Cenkos Securities plc in connection with this announcement, any statement contained herein or
otherwise.
This announcement is not intended to, and does not, constitute or form part of any offer, invitation or the
solicitation of an offer to purchase, otherwise acquire, subscribe for, sell or otherwise dispose of, any
securities whether pursuant to this announcement or otherwise.
ITHACA ENERGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2011
The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca
Energy Inc. (the "Corporation" or "Ithaca" or the "Company") for the year ended December 31, 2011. The
information is provided as of March 28, 2012. The 2011 results have been compared to the results of 2010. All
comparative figures for 2010 have been restated to be in accordance with IFRS. This MD&A should be read in
conjunction with the Corporation's consolidated financial statements as at December 31, 2011 and 2010 together
with the accompanying notes, and Annual Information Form ("AIF") for the 2011 fiscal year. These documents and
additional information about Ithaca are available on SEDAR at www.sedar.com.
Certain statements contained in this MD&A, including estimates of reserves, estimates of future cash flows and
estimates of future production as well as other statements about future events or anticipated results, are
forward-looking statements. The forward-looking statements contained herein are based on assumptions and are
subject to known and unknown risks, uncertainties and other factors. Should the underlying assumptions prove
incorrect or should one or more of these risks, uncertainties or factors materialize, actual results may vary
significantly from those expected. See "Forward-Looking Information", below.
All financial data contained herein is presented in accordance with International Financial Reporting Standards
("IFRS") and is expressed in United States dollars ("$"), unless otherwise stated.
BUSINESS OF THE CORPORATION
Ithaca is an oil and gas exploration, development and production company active in the United Kingdom's
Continental Shelf ("UKCS").
Ithaca's strategy is to:
=- Fast track appraisal and development of oil and gas fields
=- Acquire producing fields or undeveloped discoveries that:
-- are not material for larger companies
-- need technical or financial investment
-- no longer fit with an existing company's strategy and business model
=- Use tried and tested development and production technologies
=- Employ in-house technical excellence to generate development and
acquisition opportunities
=- Participate in licensing rounds to gain acreage positions around its
core assets
=- Leverage commercial and operator capability to establish solid equity
positions
=- Prioritise capital investment to accretive projects with early
production and significant cash flow
As of November 1, 2011 the Corporation's common shares have traded on the Toronto Stock Exchange in Canada
under the symbol "IAE" (previously traded on the TSX Venture Exchange). The Corporation's shares continue to
trade on the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol
"IAE".
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 Corporation uses this measure to help evaluate its performance. As an indicator of the
Corporation'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 Corporation
considers cashflow from operations to be a key measure as it demonstrates the Corporation's 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 provided by
operating activities.
BOE PRESENTATION
The calculation of barrels of oil equivalent ("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.
2011 HIGHLIGHTS
Financial
=- Record cashflow from operating activities of $103.5 million
=- Profit before tax of $37.1 million and net earnings of $35.9 million
=- Average realized oil price of $111.46 / bbl
=- Cash of $112 million, inclusive of $16.5 million restricted cash, with
senior debt facility remaining undrawn
=- UK tax allowances pool of $325 million.
=- Major capital investment of over $205 million, including acquisitions
Other significant developments
=- Increase in Sproule evaluated Proven plus Probable Reserves to approx.
50 million boe
=- Successfully completed drilling and major subsea infrastructure
installation work on the Athena development. Modifications to the BW
Athena FPSO were completed in February 2012 and the vessel is now
sailing to the North Sea with first oil expected in Q2 2012
=- Sanctioned the development of the Stella and Harrier fields having
secured ownership in the FPF-1 Floating Production Unit and
substantially de-risked the project through a series of transactions
with Petrofac and execution of a contract for use of the Ensco 100
drilling rig for the development drilling campaign
=- Completed two material acquisitions:
-- 28.46% of the Cook Field
-- 100% of Challenger Minerals (North Sea) Ltd.
=- Export production of 4,370 boepd for 2011 including production from the
effective date of the acquisitions
=- Successful appraisal drilling of the Crathes discovery unlocking the
potential for a combined development of the Crathes, Scolty and Torphins
discoveries
=- Graduated from the TSX Venture Exchange to the Toronto Stock Exchange on
November 1, 2011
KEY PROJECTS UPDATE
Athena
Drilling
The drilling campaign with the Sedco 704 Drilling Unit was successfully completed in October 2011 and all the
wells are ready for first oil.
The water injection well exceeded the net reservoir requirements for water injection to support initial gross
production, showed excellent average porosity across the reservoir section and tests indicated good fluid
mobility in all selected sandstone units tested.
The fourth production well that followed was directionally drilled in the north west of the field and
intersected the top reservoir (Top Scapa A sands). The well encountered a considerable section of oil saturated
net reservoir, with good porosities.
Subsea installation
The subsea installation campaign and installation of the riser equipment at the Athena field location
progressed well in 2011. Some major scheduled milestones for the project were achieved in Q4 2011 with the
installation of the FPSO ("Floating Production Storage and Offload vessel") mooring system, riser base and
subsea manifold. The submerged buoy mooring system and all flowlines were laid and connected. Installation of
the power and control umbilicals and the connection of flexible risers to the riser base and submerged buoy was
completed in after the year end. Final pressure testing of the production system is in the process of being
completed.
BW Athena modifications
The FPSO arrived in Dubai Dry Docks World in January 2011 for modification works to be performed by BW
Offshore.
In Q2 2011 the engineering and modifications associated with the dry dock works required to extend the FPSO by
65 feet and install a turret docking system were completed. In addition to all the modification and
commissioning work carried out on the FPSO and in response to the North Sea incident in 2011 when another North
Sea FPSO suffered a mooring system failure, additional redundancy was introduced to the FPSO's power and
heading control systems. The additional work undertaken on the vessel was focused on ensuring that production
startup is not delayed once the FPSO arrives at the Athena field.
In February 2012 the FPSO departed Dubai Dry Docks World. All FPSO production critical equipment was run and
fully tested prior to the vessel's departure. The FPSO is currently en route to the North Sea.
Upon arrival in the field the FPSO will be hooked up to the pre-installed production system. Hook-up will mark
completion of the development phase and the Company anticipates that the production phase will commence in Q2
2012. Production is anticipated to reach approximately 22,000 barrels of oil per day ("bopd"), approximately
5,000 bopd net to Ithaca (source: Sproule International Limited report for the Evaluation of the P&NG Reserves
of Ithaca Energy UK Limited in the North Sea, with an effective date of December 31, 2011 ).
Greater Stella Area
Significant progress was made on the development of the Greater Stella Area ("GSA") in 2011.
In October 2011 the Corporation concluded its development concept select process for the GSA fields with the
decision to create a production hub based on the deployment of a floating production unit located over the
Stella field. The development concept involves the introduction of Petrofac, a global integrated energy
services company listed on the FTSE 100 in London as a new strategic partner through the granting Petrofac the
right to earn a 20% interest in the Stella / Harrier fields and the transfer of interests in the Hurricane and
Helios discoveries. In addition Petrofac transferred ownership interests in the floating production unit to the
existing co-venturers of Stella/Harrier. This created a fully integrated and aligned partnership for the GSA
hub.
In October 2011, the Corporation also completed the acquisition of Challenger Minerals (North Sea) Ltd
("CMNSL"), subsequently renamed Ithaca Minerals (North Sea) Ltd. ("Ithaca Minerals"), from Transocean Drilling
U.K. Limited for a consideration of $35 million; $25 million payable immediately and $10 million upon approval
of the Stella / Harrier Field Development Plan by the DECC. This transaction increased the Corporation's
interests in the Stella / Harrier fields, gave the Corporation a non-operated interest in the producing Broom
field and access to additional undeveloped North Sea discoveries and exploration prospects, including the
Crathes discovery which was successfully drilled in Q4 2011.
The Corporation also signed an agreement to divest a 25.34% interest in Block 29/10b, which contains the
Hurricane field, to Dyas UK Limited ("Dyas"). The agreement has an effective date of January 1, 2011. In
consideration for the interest, Dyas will pay its pro-rata share of costs incurred since the effective date.
As a result of the various transactions and subject to completion of the transfers and earn ins, the Company
and its GSA co-venturers now have full field interest alignment across Stella / Harrier, Hurricane and Helios
as follows:
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Field Block Ithaca Dyas Petrofac
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Stella / Harrier 30/6a 54.66% 25.34% 20%
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Hurricane 29/10b 54.66% 25.34% 20%
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Helios 29/10d 54.66% 25.34% 20%
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Contract awards
As part of the Petrofac transactions executed in October 2011, a capped incentivized FPF-1 modification
contract was signed.
In November 2011 the Corporation signed a contract with Ensco Offshore UK Limited to provide the jack up
drilling unit 'Ensco 100' for development drilling on the Stella/Harrier fields. The campaign, which will
include the drilling of 5 firm wells and up to 3 options for additional wells, is anticipated to commence on
Stella in late 2012.
A contract was also signed with Awilco Drilling plc in November 2011 to provide a semi-submersible drilling
unit for the drilling of the Hurricane appraisal well and performance of a well test. The drilling unit is
anticipated to arrive on location in mid Q2 2012, later than originally expected due to delays in the drilling
programmes currently being performed for other operators.
A contract was also placed with GE Oil & Gas to manufacture and supply subsea trees and controls systems as an
integrated package for use on the Stella/Harrier fields. A competitive tendering process has also been
undertaken for the procurement and installation of subsea infrastructure. Contract awards are scheduled for Q2
2012.
RESERVES RECONCILIATION
The reconciliation of movement in Sproule evaluated 2P reserves in 2011 is as follows:
2P reserves
mmboe
=------------------------------------------------------------------------
Opening reserves January 1, 2011 46.0
Equity increase Stella/Harrier 1.9
Equity decrease Hurricane -2.2
Purchase Cook & Broom 5.4
Production Producing fields -1.6
Relinquishment Garnet -1.9
Purchase SW Heather, Crathes, Scolty & Torphins 2.7
Closing reserves December 31, 2011 50.3
HIGHLIGHTS SUBSEQUENT TO YEAR END
Corporate events
Ithaca announced on January 23, 2012, that it had received a confidential, non-binding proposal to acquire all
of the outstanding shares of the Company whilst emphasizing that discussions were at a preliminary stage and
there could be no certainty of an offer being made for the Company. Further to this, Ithaca also received
unsolicited interest from a number of third parties. As a result, Ithaca advised that it believed that it is in
the shareholders' best interests that the Company entered into discussions with all bona fide interested
parties with a view to maximizing shareholder value. The process is still ongoing.
Swap options
In February 2012, the Corporation entered into two swap options to sell 768,800 barrels of oil of the
Corporation's March 2012 - June 2013 forecast production at an average price of $116.07 per barrel.
Operatorship of Carna
In March 2012, the Company agreed to take over operatorship and increase its working interest in the Carna
discovery, located in the Southern Gas Basin of the UK North Sea. The transaction with Centrica North Sea Gas
Limited increases the Company's working interest in the Carna discovery from 16% to 32%.
Change to Small Field Allowance
In March 2012, the UK Government increased the Small Field Allowance ("SFA") tax shelter availability from the
32% Supplemental tax charge for small developments. The size of fields that qualify for full SFA was increased
to include all fields with reserves of under 45 mmboe and the tax allowance available to each field has been
doubled from approximately US$120 million to US$240 million.
RESULTS OF OPERATIONS
Note that all comparatives for 2010 are restated in accordance with the transition to IFRS from January 1,
2010.
Revenue
Sales revenue decreased in 2011 to $129.1 million (2010 $135.1 million). This movement comprises a decrease in
oil sales volumes, partially offset by an increase in average realized oil prices. The statement of income for
the year reflects average production of 3,206 boepd including sales from the Cook and Broom acquisitions from
their respective completion dates of August 25, 2011 and October 20, 2011. The additional revenue from the
balance of the production post-effective but pre-completion dates is effectively offset against the capital
cost of the acquisition. Sales from oil inventory add an additional average of 398 boepd to sales volumes for
the year.
Oil sales volumes decreased primarily due to the combination of the expected natural decline in year on year
production from the Jacky field and the operational issues experienced on the J01 well from Q2 2011 through to
the beginning of Q3 2011. This was partially offset by the introduction of Cook and Broom revenue in Q4 2011
(Cook and Broom oil production is recorded as a credit to movement in oil inventory through cost of sales until
oil has been lifted). The Corporation benefited from an increase in average realized oil prices from $80.37 /
bbl in 2010 to $111.46 / bbl in 2011 as the Brent oil price continued to strengthen during the year.
The addition of gas production also contributed to revenue in 2011 (gas production commenced 17 December 2010).
The combined gas sales from the Anglia, Topaz and Cook fields contributed over $12 million to revenue in 2011.
Cost of Sales
Cost of sales increased in 2011 to $95.1 million (2010 $61.1 million) due to increases in both operating costs
and depletion, depreciation and amortization ("DD&A") as well as movement in oil and gas inventory.
Operating costs increased in the period to $48.3 million (2010 $37.8 million) primarily due to the addition of
Anglia, Topaz, Cook and Broom operating costs in 2011.
DD&A expense for the year ended December 31 increased to $31.4 million (2010 $23.3 million). This was due to
the addition of the Anglia, Topaz, Cook and Broom assets as well as significant capital expenditure in the
period. The DD&A expense was also significantly impacted by the treatment of the Anglia, Topaz, Cook and CMNSL
acquisitions as business combinations under IFRS 3 (refer to Changes in Accounting Policy note below for more
details), resulting in higher rates for these fields. This gives a blended DD&A rate of $33.78/boe at December
31, 2011 compared to $20.52/boe in 2010.
An oil and gas inventory movement of $15.4 million was charged to cost of sales in 2011 (2010 $nil) primarily
arising from differences between barrels produced and sold from the Cook field since August 25, 2011.
Administrative expenses and Exploration & Evaluation expenses
Administrative expenses increased in the period to $6.0 million (2010 $5.9 million). The continued growth of
the corporation has resulted in a modest increase in general and administrative overheads with the majority of
the growth in personnel numbers being focused on strengthening the production and development project teams.
Exploration and evaluation expenses of $0.8 million (2010 $1.1 million) were recorded due to the expensing of
previously capitalized costs relating to areas where exploration and evaluation activities have ceased,
partially offset by the release of $2.0 million of associated contingent consideration relating to those
licenses and prospects. The main write offs relate to the relinquishment of the Garnet and Opal licences
reported in Q1 2011.
Foreign exchange and Financial Instruments
A foreign exchange loss of $0.8 million was recorded in 2011 (2010 $0.8 million gain). The majority of the
Corporation's revenue is US dollar driven whilst costs are primarily British pounds based. As such, general
volatility in the USD:GBP exchange rate was the driver behind the foreign exchange loss in 2011 (USD:GBP at
January 1 2011: 1.5500. USD:GBP at December 31, 2011: 1.5453 with fluctuations between 1.5270 and 1.6744 during
the year). Greater volatility was mitigated by active currency management as described in the Risks and
Uncertainties note below.
The Corporation recorded a $3.4 million loss on financial instruments for the year (2010 $9.3 million loss).
The loss was predominantly due to a combination of a $6.5 million loss recorded from the revaluation of oil
'put options' held, partially offset by a $3.1 million gain on the revaluation of the Anglia gas sales contract
embedded derivative.
Goodwill
Negative goodwill of $15.2 million was recorded in 2011 (2010 $Nil). $6.5 million related to the acquisition of
the Cook asset while $8.7 million resulted from the Challenger Minerals (North Sea) Limited purchase. Negative
goodwill arises when the cost of an acquisition is less than the Corporation's share of the fair value of the
net assets acquired. This difference is recognized directly in the consolidated statement of income.
Taxation
A deferred tax charge of $1.2 million was recognized in the year ended December 31, 2011 (2010: $3.9 million
credit) representing an effective tax rate of 3%. This rate is a product of adjustments to taxable income
relating to negative goodwill, the UK Ring Fence Expenditure Supplement, share based payments, and the changes
in UK Corporation Tax rates for upstream and non-upstream oil and gas activities.
No tax is expected to be paid in the mid-term future relating to upstream oil and gas activities.
As a result of the above factors, Profit after tax decreased to $35.9 million (2010 $61.9 million).
SUMMARY OF QUARTERLY RESULTS
The following table provides a summary of quarterly results of the Corporation for its eight most recently
completed quarters:
To view the table, please visit the following link: http://media3.marketwire.com/docs/778012.pdf
The most significant factors to have affected the Corporation's results during the above quarters are
fluctuation in underlying commodity prices and movement in production volumes. Commodity prices have generally
risen through the periods. The Corporation 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.
Each of the quarters from Q4 2010 to Q3 2011 has been restated in line with the Alberta Securities Commission's
recommendations to reflect acquisitions since the IFRS transition date as business combinations. Refer to the
Changes in Accounting Policies note below for more details.
FOURTH QUARTER
Oil and gas sales revenue increased from $33.7 million in Q4 2010 to $54.5 million in Q4 2011. The increase was
predominantly due to the addition of Cook and Broom in 2011, contributing $35.8 million to Q4 oil sales,
partially offset by an expected decline in Beatrice and Jacky revenues. Moreover, there was an increase in
average realized oil prices from $90.25 in Q4 2010 to $110.33 / bbl in Q4 2011 and the addition of a full
quarter of gas production from the gas producing assets Anglia, Topaz and Cook (gas production from Anglia and
Topaz commenced December 17, 2010).
Cost of sales increased to $48.8 million (Q4 2010: $17.4 million). The main driver behind the increase in costs
of sales in Q4 2011 was the movement in inventory of $22.6 million, which is primarily due to barrels produced
and sold from the Cook field (acquired August 25, 2011). In addition, DD&A was significantly increased due to
the treatment of all acquisitions as business combinations under IFRS 3, inflating the DD&A rates for Anglia,
Topaz, Cook and Broom.
SELECTED ANNUAL INFORMATION
The consolidated financial statements of the Corporation and the financial data contained in the MD&A are
prepared in accordance with IFRS. The consolidated financial statements include the accounts of Ithaca and its
wholly-owned subsidiaries Ithaca Energy (UK) Limited ("Ithaca UK") and Ithaca Minerals and its associate FPU
Services. All inter-company transactions and balances have been eliminated on consolidation. A significant
portion of the Corporation's North Sea oil and gas activities are carried out jointly with others. The
consolidated financial statements reflect only the Corporation's proportionate interest in such activities.
The following table sets forth selected consolidated financial information of the Corporation for its three
most recently completed fiscal years.
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Year ended December 31, 2011 2010 2009
($'000)
=---------------------------------------------------------------------------
Total revenues 129,059 135,121 110,812
=---------------------------------------------------------------------------
Net Earnings 35,867 61,931 7,938
=---------------------------------------------------------------------------
Total assets 804,674 589,186 309,140
=---------------------------------------------------------------------------
Total long-term liabilities 195,129 54,437 10,674
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Net gain per share ($) 0.14 0.31 0.05
=---------------------------------------------------------------------------
Net gain per share diluted basis ($) 0.14 0.30 0.05
=---------------------------------------------------------------------------
2010 figures have been restated in line with the Alberta Securities Commission's recommendations to reflect
acquisitions since the IFRS transition date as business combinations. Refer to the Changes in Accounting
Policies note below for more details. Comparative figures for 2009 have been reported under Canadian GAAP.
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2011, Ithaca had working capital of $108.5 million including a free cash balance of $95.5
million. Available cash has been, and is currently, invested in money market deposit accounts with Lloyds
Banking Group ("Lloyds"). Management has received confirmation from the financial institution that these funds
are available on demand. The restricted cash of $16.5 million comprises $16.2 million currently held by Lloyds
as decommissioning security provided as part of the acquisitions of the Anglia and Cook fields (with release
dates of: February 29, 2012 ($1 million), March 30, 2012 ($6 million) and December 31, 2012 ($9.2 million)) and
$0.3 million also held by Lloyds as cash security for a bank guarantee provided to the Crown Estate as part of
the Field Development Plan approval for the Jacky Field (release date of December 23, 2012).
At December 31, 2011, Ithaca has unused credit facilities currently totalling $140 million.
During the year ended December 31, 2011 there was a cash outflow from operating, investing and financing
activities of $100.0 million (2010 inflow of $165.7 million). The net outflow was due to a cash inflow from
operating activities of $103.5 million offset by a cash outflow from investing activities of $192.0 million,
and a cash outflow from financing activities of $10.4 million. The remainder of the movement was due to foreign
exchange on non US Dollar denominated cash deposits. This overall free cash outflow is the product of the
acquisition of the Cook field, the acquisition of CMNSL, significant development capital expenditure on the
Athena field, J03 well drilling costs and J01 well ESP replacement operations on Jacky, and the purchase of
long lead items for the Greater Stella Area, offset by cash generated from Beatrice, Jacky, Anglia, Topaz, Cook
and Broom operations.
A significant proportion of Ithaca's accounts receivable balance is with customers in the oil and gas industry
and is subject to normal industry credit risks. The Corporation assesses partners' credit worthiness before
entering into farm-in or joint venture agreements. The Corporation regularly monitors all customer receivable
balances outstanding in excess of 90 days. As at December 31, 2011 99% of the accounts receivable is current,
being defined as less than 90 days. In the past, the Corporation has not experienced credit loss in the
collection of accounts receivable.
The Corporation continues to be fully funded, with more than sufficient financial resources to cover the
anticipated level of development capital expenditure commitments and to continue the pursuit of both additional
asset acquisition opportunities and licencing round participation through its existing cash balance, forecast
cashflow from operations and its undrawn debt facility. No unusual trends or fluctuations are expected outside
the ordinary course of business.
COMMITMENTS
The Corporation has the following financial commitments:
1 year 2-5 years More than 5 years
US$'000 US$'000 US$'000
=-------------------------------------------------------------------------
Office lease 247 989 309
Exploration license fees 591 - -
Engineering 46,965 33,419 -
=-------------------------------------------------------------------------
Total 47,804 34,408 309
The engineering financial commitments relate to pre-development committed capital expenditure on the Stella and
Hurricane fields as well as ongoing capital and operating expenditure on the Athena, Beatrice and Jacky fields.
As stated above, these commitments are expected to be funded through the Corporation's existing cash balance,
forecast cashflow from operations and its undrawn debt facility.
OUTSTANDING SHARE INFORMATION
As at December 31, 2011 Ithaca had 259,164,461 common shares outstanding along with 17,506,839 options
outstanding to employees and directors to acquire common shares.
As at March 28, 2012, the number of common shares outstanding has not changed. Options outstanding to employees
and directors to acquire common shares have increased to 17,906,839.
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 Corporation 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 Corporation 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 Corporation's
Development & Production ("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 Corporation'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 recognised 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 (including derivatives, financial assets and liabilities) are initially recognized at
fair value on the balance sheet. The Corporation'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 Corporation 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 Corporation'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 Corporation 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Corporation 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 December 31, 2011.
RELATED PARTY TRANSACTIONS
A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The
amount of fees paid to Burstall Winger LLP in 2011 was $0.2 million (2010 - $0.6 million). All related party
transactions are in the normal course of business and are conducted on normal commercial terms with
consideration comparable to those charged by third parties.
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 Corporation is dependent upon the production rates and oil price to fund the current development program.
In order to mitigate the Corporation's risk to fluctuations in oil price, the Corporation has taken out a
number of commodity derivatives. In March 2011, a put option to sell 804,500 bbls of the Corporation's 2011
forecast production at $105 / bbl was entered into. In April 2011 a further put option to sell an additional
300,000 bbls of the Corporation's forecast 2011 production at $115 / bbl was entered into. These options
guaranteed a minimum price on the specified volumes of oil and left the Corporation to benefit from any oil
price upside above $105 and $115 per barrel respectively. Due to movements in oil prices during the year, the
$105 per barrel option expired with no gain or loss realized in excess of the put premium and the $115 per
barrel option expired with a net cost of $1.9 million including the put option premium.
In February 2012, the Corporation entered into two swap options: to sell 268,800 bbls of the Corporation's
March 2012 - December 2012 forecast production at a fixed price of $121.32/bbl; and to sell 500,000 bbls of the
Corporation's forecast July 2012 - June 2013 production at $113.25 per barrel.
The Corporation is exposed to financial risks including financial market volatility, fluctuation in interest
rates and various foreign exchange rates. Given the increasing development expenditure and operating costs in
currencies other than the United States dollar, the Board of Directors of the Corporation has a hedging policy
to mitigate foreign exchange rate risk on committed expenditure. In 2011 in order to protect against movements
in USD:GBP exchange rates, the Corporation held GBP denominated cash on deposit in order to match the forecast
2011 GBP denominated expenditure. In November 2011, the Corporation entered into a forward extra plus contract
with Lloyds to hedge its forecast GBP 2012 operating costs, including general and administrative expenses. The
hedge amounts to $4 million per month (total $48 million) at a USD:GBP rate of no worse than $1.60/GBP 1.0
while benefiting in any improvement of the rate down to a trigger rate of $1.40/GBP 1.00. If the trigger rate
is reached in any month the conversion rate realized for that month is $1.58/GBP 1.00.
A further risk relates to the Corporation's ability to meet the conditions precedent for a full drawdown on the
Corporation's credit facility with the Bank of Scotland (the "Credit Facility"). Ability to drawdown the Credit
Facility is based on the Corporation meeting certain covenants including coverage ratio tests, liquidity tests
and development funding tests which are determined by a detailed economic model of the Corporation.
There can be no assurance that the Corporation will satisfy such tests in order to have access to the full
amount of the Credit Facility, however at present the Corporation believes that there are no circumstances
present that result in failure to meet those tests and can therefore draw down upon its Credit Facility.
In addition, the Credit Facility contains the aforementioned covenants that require the Corporation to meet
certain financial tests and that restrict, among other things, the ability of Ithaca to incur additional debt
or dispose of assets. To the extent the cash flow from operations is ever deemed not adequate to fund Ithaca's
cash requirements, external financing may be required. Lack of timely access to such additional financing, or
which may not be on favorable terms, could limit the future growth of the business of Ithaca. To the extent
that external sources of capital, including public and private markets, become limited or unavailable, Ithaca's
ability to make the necessary capital investments to maintain or expand its current business and to make
necessary principal payments under the Credit Facility may be impaired. At present the Corporation believes
that there are no circumstances present that result in failure to meet those certain financial tests. Access to
the full Credit Facility will probably require syndication of the debt, the success of which at the current
Credit Facility pricing levels will be influenced by the volatility in European bank liquidity.
A failure to access adequate capital to continue its expenditure program may require that the Corporation meet
any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development
programs. As is standard to a credit facility, the Corporation's and Ithaca UK assets have been pledged as
collateral and are subject to foreclosure in the event the Corporation or Ithaca UK defaults. At present the
Corporation believes that there are no circumstances present that would lead to selected divestment, delays to
existing programs or a default relating to the Credit Facility.
The Corporation is and may in the future be exposed to third-party credit risk through its contractual
arrangements with its current and future joint venture partners, marketers of its petroleum production and
other parties. The Corporation extends unsecured credit to these parties, and therefore, the collection of any
receivables may be affected by changes in the economic environment or other conditions. Management believes the
risk is mitigated by the financial position of the parties. All of the Corporation's oil production from the
Beatrice, Jacky, and forthcoming Athena fields is sold to BP Oil International Limited. Oil production from
Cook and Broom is sold to Shell Trading International Ltd. Anglia and Topaz gas production is currently sold
through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd.
and Esso Exploration & Production UK Ltd. The Corporation has not experienced any material credit loss in the
collection of accounts receivable to date.
The Corporation's properties will be generally held in the form of licenses, concessions, permits and
regulatory consents ("Authorizations"). The Corporation's activities are dependent upon the grant and
maintenance of appropriate Authorizations, which may not be granted; may be made subject to limitations which,
if not met, will result in the termination or withdrawal of the Authorization; or may be otherwise withdrawn.
Also, in the majority of its licenses, the Corporation is often a joint interest-holder with another third
party over which it has no control. An Authorization may be revoked by the relevant regulatory authority if the
other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the
obligations required to maintain each Authorization will be met. Although the Corporation believes that the
Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that
such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination
or expiration of the Corporation's Authorizations may have a material adverse effect on the Corporation's
results of operations and business.
In addition, the areas covered by the Authorizations are or may be subject to agreements with the proprietors
of the land. If such agreements are terminated, found void or otherwise challenged, the Corporation may suffer
significant damage through the loss of opportunity to identify and extract oil or gas.
The Corporation is also subject to the risks associated with owning oil and natural gas properties, including
environmental risks associated with air, land and water. The Corporation takes out market insurance to mitigate
many of these operational, construction and environmental risks. In all areas of the Corporation's business
there is competition with entities that may have greater technical and financial resources. There are numerous
uncertainties in estimating the Corporation's reserve base due to the complexities in estimating the magnitude
and timing of future production, revenue, expenses and capital. All of the Corporation's operations are
conducted offshore in the UKCS; as such Ithaca is exposed to operational risk associated with weather delays
that can result in a material delay in project execution. Third parties operate some of the assets in which the
Corporation has interests. As a result, the Corporation may have limited ability to exercise influence over the
operations of these assets and their associated costs. The success and timing of these activities may be
outside the Corporation's control.
For additional detail regarding the Corporation's risks and uncertainties, refer to the Corporation's most
recent AIF filed on SEDAR at www.sedar.com.
CONTROL ENVIRONMENT
As of December 31, 2011, there were no changes in our internal control over financial reporting that occurred
during 2011 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2011, the Corporation adopted IFRS using a transition date of January 1, 2010. The financial
statements for the year ended December 31, 2011, including required comparative information, have been prepared
in accordance with International Financial Reporting Standards 1, First-time Adoption of International
Financial Reporting Standard, as issued by the International Accounting Standards Board ("IASB"). Previously,
the Corporation prepared its Interim and Annual Consolidated Financial Statements in accordance with Canadian
GAAP. Refer to Note 27 of the Consolidated Financial Statements for the Corporation's assessment of impacts of
the transition to IFRS.
Following the introduction of IFRS the Corporation accounted for the acquisitions of the non-operated interests
in the Cook field and of CMNSL as asset acquisitions. This was done in consideration of normal North Sea
accounting practice. In December 2011, the Company entered into correspondence with the Alberta Securities
Commission ("ASC"). During this correspondence, the ASC made clear its preference and recommendation that all
acquisitions involving producing oil and gas assets should be accounted for as business combinations by
companies listed in Canada. The Company has therefore elected to present all acquisitions since the IFRS
transition date as business combinations in accordance with IFRS 3(R). This has resulted in a restatement of
the original accounting for the Cook acquisition (in 3Q 2011) and the acquisition of gas assets from GDF (in 4Q
2010) as shown in previous interim statements during 2011.
One significant 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 significantly An offsetting reduction of approximately the same value is recognized in the deferred tax
charged through the consolidated statement of income.
IMPACT OF FUTURE ACCOUNTING CHANGES
In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"),
IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS
27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28,
Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual
periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation has not yet
assessed the impact that the new and amended standards will have on its financial statements or whether to
early adopt any of the new requirements.
FINANCIAL INSTRUMENTS AND OTHER 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 Corporation has classified each financial
instrument into one of these categories: held-for-trading, held-to-maturity investments, loans and receivables,
or other financial liabilities. Loans and receivables, held-to-maturity investments and other financial
liabilities are measured at amortized cost using the effective interest rate method. For all financial assets
and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly
attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair
value initially recognized for that financial instrument. These costs are expensed using the effective interest
rate method and are recorded within interest expense. Held-for-trading financial assets are measured at fair
value and changes in fair value are recognized in net income.
All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected
purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow
hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income.
The Corporation has classified its cash and cash equivalents, restricted cash, derivatives, commodity hedge and
long term liability as held-for-trading, which are measured at fair value with changes being recognized in net
income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and
accrued liabilities are classified as other liabilities, all of which are measured at amortized cost. The
classification of all financial instruments is the same at inception and at December 31, 2011.
The table below presents the total gain / (loss) on financial instruments that has been disclosed through the
statement of comprehensive income:
Year ended 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------------
Unrealized (loss) on forex forward contracts (510) (686)
Realized (loss) on forex forward contracts - (4,442)
Revaluation of gas contract 3,099 -
Revaluation of other long term liability 87 (154)
Contingent consideration 2,000 (4,044)
Unrealized (loss) on commodity hedges (6,159) (48)
Realized (loss) on commodity hedges 70 62
=---------------------------------------------------------------------------
Total (loss) on financial instruments (1,413) (9,312)
The contingent consideration of $2 million relating to the relinquinshment of Opal and Garnet prospects in Q1
2011 was released to the statement of income through E&E expense.
FORWARD-LOOKING INFORMATION
This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and
forward-looking information which are based on the Corporation'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, future capital expenditures and cash flow. The reader is cautioned that
assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words
"anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could",
"scheduled", "targeted" and similar expressions are intended to identify forward-looking statements and forward-
looking information. These statements are not guarantees of future performance and involve 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 or information. The Corporation believes that the expectations
reflected in those forward-looking statements and information 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 and information included in this MD&A and any documents incorporated by reference herein
should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of
this MD&A and any documents incorporated by reference herein and the Corporation does not undertake any
obligation to publicly update or revise any forward-looking statements or information, except as required by
applicable laws.
In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking
statements and information pertaining to the following:
=- the quality of and future net revenues from the Corporation's reserves;
=- oil, natural gas liquids ("NGLs") and natural gas production levels;
=- commodity prices, foreign currency exchange rates and interest rates;
=- capital expenditure programs and other expenditures;
=- the sale, farming in, farming out or development of certain exploration
properties using third party resources;
=- supply and demand for oil, NGLs and natural gas;
=- the Corporation's ability to raise capital;
=- the Corporation's acquisition strategy, the criteria to be considered in
connection therewith and the benefits to be derived therefrom;
=- the Corporation's ability to continually add to reserves;
=- schedules and timing of certain projects and the Corporation's strategy
for growth;
=- the Corporation's future operating and financial results;
=- the ability of the Corporation to optimize operations and reduce
operational expenditures;
=- treatment under governmental and other regulatory regimes and tax,
environmental and other laws;
=- production rates;
=- targeted production levels;
=- timing and cost of the development of the Corporation's reserves; and
=- estimates of production volumes and reserves in connection with the
acquisitions of the Cook field and CMNSL.
With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference
herein, the Corporation has made assumptions regarding, among other things:
=- Ithaca's ability to obtain additional drilling rigs and other equipment
in a timely manner, as required;
=- Access to third party hosts and associated pipelines can be negotiated
and accessed within the expected timeframe;
=- Field development plan approval and operational construction and
development is obtained within expected timeframes;
=- The Corporation's development plan for the Stella and Harrier
discoveries will be implemented as planned;
=- Reserves volumes assigned to Ithaca's properties;
=- Ability to recover reserves volumes assigned to Ithaca's properties;
=- Revenues do not decrease below anticipated levels and operating costs do
not increase significantly above anticipated levels;
=- future oil, NGLs and natural gas production levels from Ithaca's
properties and the prices obtained from the sales of such production;
=- the level of future capital expenditure required to exploit and develop
reserves;
=- Ithaca's ability to obtain financing on acceptable terms, in particular,
the Corporation's ability to access the Credit Facility;
=- Ithaca's reliance on partners and their ability to meet commitments
under relevant agreements; and
=- the state of the debt and equity markets in the current economic
environment.
The Corporation's actual results could differ materially from those anticipated in these forward-looking
statements and information as a result of assumptions proving inaccurate and of both known and unknown risks,
including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the
documents incorporated by reference herein, and those set forth below:
=- risks associated with the exploration for and development of oil and
natural gas reserves in the North Sea;
=- risks associated with offshore development and production including
transport facilities;
=- operational risks and liabilities that are not covered by insurance;
=- volatility in market prices for oil, NGLs and natural gas;
=- the ability of the Corporation to fund its substantial capital
requirements and operations;
=- risks associated with ensuring title to the Corporation's properties;
=- changes in environmental, health and safety or other legislation
applicable to the Corporation's operations, and the Corporation's
ability to comply with current and future environmental, health and
safety and other laws;
=- the accuracy of oil and gas reserve estimates and estimated production
levels as they are affected by the Corporation's exploration and
development drilling and estimated decline rates;
=- the Corporation's success at acquisition, exploration, exploitation and
development of reserves;
=- the Corporation's reliance on key operational and management personnel;
=- the ability of the Corporation to obtain and maintain all of its
required permits and licenses;
=- competition for, among other things, capital, drilling equipment,
acquisitions of reserves, undeveloped lands and skilled personnel;
=- changes in general economic, market and business conditions in Canada,
North America, the United Kingdom, Europe and worldwide, specifically
being the unavailability of the debt and equity markets to the
Corporation during the current economic crisis;
=- actions by governmental or regulatory authorities including changes in
income tax laws or changes in tax laws, royalty rates and incentive
programs relating to the oil and gas industry including the recent
increase in UK taxes;
=- adverse regulatory rulings, orders and decisions;
=- risks associated with the nature of the common shares; and
=- the impact of adoption of IFRS as opposed to GAAP from January 1, 2011.
Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced
in the future. Many of these risk factors, other specific risks, uncertainties and material assumptions are
discussed in further detail throughout the AIF and in the MD&A. Readers are specifically referred to the risk
factors described in the AIF under "Risk Factors" and in other documents the Corporation files from time to
time with securities regulatory authorities. Copies of these documents are available without charge from Ithaca
or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com.
The estimates of reserves and future net revenue for individual properties may not reflect the same confidence
level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.
Consolidated Statement of Income
For the year ended 31 December 2011
Year ended 31 December
2011 2010
Note US$'000 US$'000
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Revenue 4 129,059 135,121
Cost of sales 5 (95,127) (61,132)
=---------------------------------------------------------------------------
Gross Profit 33,932 73,989
Exploration and evaluation expenses 10 (791) (1,119)
Administrative expenses 6 (5,982) (5,930)
Foreign exchange (755) 818
=---------------------------------------------------------------------------
Operating Profit 26,404 67,758
(Loss) on financial instruments 23 (3,413) (9,312)
Negative goodwill 12 15,210 -
=---------------------------------------------------------------------------
Profit Before Interest and Tax 38,201 58,447
Finance costs 7 (1,521) (564)
Interest income 434 112
=---------------------------------------------------------------------------
Profit Before Tax 37,114 57,994
Taxation - Deferred tax 21 (1,246) 3,936
=---------------------------------------------------------------------------
Profit After Tax 35,868 61,930
Earnings per share (US$ per share)
Basic 20 0.14 0.34
Diluted 20 0.14 0.33
No separate statement of comprehensive income has been prepared as all such
gains and losses have been incorporated in the consolidated statement of
income above.
The results above are entirely derived from continuing operations.
The notes on pages 8 to 32 are an integral part of these consolidated
financial statements.
Consolidated Statement of Financial Position
as at 31 December 2011
31 Dec 2011 31 Dec 2010 1 Jan 2010
Note US$'000 US$'000 US$'000
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents 95,545 195,581 29,886
Restricted cash 8 16,510 352 5,224
Accounts receivable 80,960 93,434 67,166
Deposits, prepaid expenses and other 8,793 12,341 352
Inventory 9 8,836 - -
Derivative financial instruments 24 - - 685
=---------------------------------------------------------------------------
210,644 301,708 103,313
Non-current assets
Restricted cash 8 - 5,956 352
Exploration and evaluation assets 10 22,689 17,832 15,500
Property, plant & equipment 11 570,356 258,960 189,975
Goodwill 13 985 985 -
=---------------------------------------------------------------------------
594,030 283,733 205,827
Total assets 804,674 585,441 309,140
LIABILITIES AND EQUITY
Current Liabilities
Trade and other payables 102,136 75,566 43,613
Derivative financial instrument - 349 397
=---------------------------------------------------------------------------
102,136 75,915 44,010
Non-current liabilities
Decommissioning liabilities 15 39,382 23,652 8,751
Other long term liabilities 16 2,785 2,872 2,718
Deferred tax liability 21 126,534 6,814 -
Contingent consideration 17 24,580 12,976 6,933
Derivative financial instruments 24 1,846 4,378 -
=---------------------------------------------------------------------------
195,127 50,692 18,402
=---------------------------------------------------------------------------
Net Assets 507,411 458,834 246,728
=---------------------------------------------------------------------------
Shareholders' Equity
Share capital 18 429,502 422,372 277,075
Share based payment reserve 19 17,318 11,427 6,860
Warrants issued 18 - 311 -
Retained earnings / (deficit) 60,591 24,723 (37,207)
=---------------------------------------------------------------------------
Shareholders' Equity 507,411 458,834 246,728
=---------------------------------------------------------------------------
The financial statements were approved by the Board of Directors on 28 March 2012 and signed on its behalf by:
"John Summers"
=---------------------------------------------------------------------------
Director
"Jay Zammit"
=---------------------------------------------------------------------------
Director
The notes on pages 8 to 32 are an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2011
Share Share based Warrants Retained Total
Capital payment Issued E'ings/
reserve (Deficit)
US$'000 US$'000 US$'000 US$'000 US$'000
=---------------------------------------------------------------------------
Balance, 1 Jan 2010 277,075 6,860 - (37,207) 246,728
Net income for the
period - - - 61,930 61,930
=---------------------------------------------------------------------------
Total comprehensive
income 277,075 6,860 - 24,723 308,658
Transactions with
owners
Share based payment - 4,840 - - 4,840
Options exercised 578 (273) - - 305
Issued for cash 15,248 - - - 153,248
Share issue costs (8,528) - - - (8,528)
Warrants issued - - 311 - 311
=---------------------------------------------------------------------------
Balance, 31 Dec 2010 422,373 11,427 311 24,723 458,834
=---------------------------------------------------------------------------
Balance, 1 Jan 2011 422,373 11,427 311 24,723 458,834
Net income for the
period - - - 35,868 35,868
=---------------------------------------------------------------------------
Total comprehensive
income 422,373 11,427 311 60,591 494,702
Transactions with
owners
Share based payment - 6,351 - - 6,351
Options exercised 1,032 (460) - - 572
Warrants exercised 6,097 - (311) - 5,786
=---------------------------------------------------------------------------
Balance, 31 Dec 2011 429,502 17,318 - 60,591 507,411
=---------------------------------------------------------------------------
The notes on pages 8 to 32 are an integral part of these consolidated
financial statements.
Consolidated Statement of Cash Flow
For the year ended 31 December 2011
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
Operating activities
Profit Before Tax 37,114 57,994
Adjustments for:
Depletion, depreciation and amortisation 31,447 23,281
Exploration and evaluation write off 2,791 1,119
Share based compensation 1,399 2,097
Loan fee amortisation 311 155
Unrealised (gain) / loss on financial instruments 3,483 713
Revaluation of contingent consideration (2,000) 4,044
Movement in goodwill (15,210) -
Accretion 858 283
=---------------------------------------------------------------------------
Cashflow from operations 60,193 89,686
=---------------------------------------------------------------------------
Changes in inventory, debtors and creditors relating
to operating activities 43,276 (836)
=---------------------------------------------------------------------------
Net cash from operating activities 103,469 88,850
=---------------------------------------------------------------------------
Investing activities
Capital expenditure
Oil and gas assets (128,477) (63,055)
Business acquisitions (77,342) -
Non oil and gas assets (705) (313)
Decommissioning (358) -
Changes in debtors and creditors relating to
investing activities 14,877 (2,765)
=---------------------------------------------------------------------------
Net cash used in investing activities (192,005) (66,132)
=---------------------------------------------------------------------------
Financing activities
Proceeds from issuance of shares 6,356 153,554
Share issue costs - (8,529)
(Increase) / decrease in restricted cash (10,202) (732)
Loan issue costs - (962)
Derivatives (6,508) -
=---------------------------------------------------------------------------
Net cash used in/from financing activities (10,354) 143,330
=---------------------------------------------------------------------------
Currency translation differences relating to cash (1,146) (353)
=---------------------------------------------------------------------------
(Decrease) / increase in cash & cash equivalents (100,036) 165,695
=---------------------------------------------------------------------------
Cash and cash equivalents, beginning of period 195,581 29,886
=---------------------------------------------------------------------------
Cash and cash equivalents, end of period 95,545 195,581
=---------------------------------------------------------------------------
The notes on pages 8 to 32 are an integral part of these consolidated
financial statements.
Notes to the consolidated financial statements
1. NATURE OF OPERATIONS
Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated and domiciled in Alberta, Canada on 27 April
2004, is a publicly traded company involved in the exploration, development and production of oil and gas in
the North Sea. The Corporation's registered office is 1600, 333 - 7th Avenue S.W., Calgary, Alberta, Canada,
T2P 2Z1. As of November 1, 2011 the Corporation's shares have traded on the Toronto Stock Exchange in Canada
(previously the TSX Venture Exchange). The Corporation's shares continue to trade on the London Stock
Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has two wholly-
owned subsidiaries, Ithaca Energy (UK) Limited ("Ithaca UK") and Ithaca Minerals (North Sea) Ltd ("Ithaca
Minerals"), which was acquired on 19 October 2011, both incorporated in Scotland. See note 12 for further
details of the acquisition. Ithaca also has one associate, FPU Services Limited ("FPU Services"), incorporated
in Jersey.
The consolidated financial statements of Ithaca Energy Inc. for the year ended 31 December 2011 were authorised
for issue in accordance with a resolution of the directors on March 28 2012.
2. BASIS OF PREPARATION AND ADOPTION OF IFRS
The Corporation prepares its financial statements in accordance with International Financial Reporting
Standards (IFRS) as issued by the International Accounting Standards Board (IASB), including IFRS 1 First Time
Adoption of IFRS. Subject to certain transition elections disclosed in note 27, the Corporation has
consistently applied the same accounting policies in its opening IFRS statement of financial position at 1
January 2010 and throughout all periods presented, as if these policies had always been in effect. Note 27
discloses the impact of the transition to IFRS on the Corporation's reported financial position, financial
performance and cash flows, including the nature and effect of significant changes in accounting policies from
those used in the Corporation's consolidated financial statements for the year ended 31 December 2010.
The consolidated financial statements should be read in conjunction with the Corporation's Canadian GAAP annual
financial statements for the year ended 31 December 2010. Note 27 discloses IFRS information for the year ended
31 December 2010 not provided in the 2010 annual financial statements.
The consolidated financial statements are presented in US dollars and all values are rounded to the nearest
thousand (US$ 000), except when otherwise indicated.
3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTY
Basis of measurement
The consolidated financial statements have been prepared under the historical cost convention, except for the
revaluation of certain financial assets and financial liabilities to fair value, including derivative
instruments.
Basis of consolidation
The consolidated financial statements of the Corporation include the accounts of Ithaca Energy Inc. and the
wholly-owned subsidiaries Ithaca Energy (UK) Ltd and Ithaca Minerals (North Sea) Ltd (from 19 October 2011, the
acquisition date). All inter-company transactions and balances have been eliminated on consolidation.
A subsidiary is an entity (including special purpose entities) which the Corporation controls by having the
power to govern the financial and operating policies. The existence and effect of potential voting rights that
are currently exercisable or convertible are considered when assessing whether Ithaca controls another entity.
A subsidiary is fully consolidated from the date on which control is obtained by Ithaca and is de-consolidated
from the date that control ceases.
Business Combinations
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as
the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the
date of completion of the acquisition. Acquisition costs incurred are expensed and included in administrative
expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date. The excess of the cost of
acquisition over the fair value of the Corporation's share of the identifiable net assets acquired is recorded
as goodwill. If the cost of the acquisition is less than the Corporation's share of the net assets required,
the difference is recognised directly in the statement of income.
Goodwill
Capitalisation
Goodwill acquired through business combinations is initially measured at cost, being the excess of the
aggregate of the consideration transferred and the amount recognised as the fair value of the Corporation's
share of the identifiable net assets acquired and liabilities assumed. If this consideration is lower than the
fair value of the identifiable assets acquired, the difference is recognised in the statement of income.
Impairment
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
cash generating unit ("CGU") to which the goodwill relates. Where the recoverable amount of the CGU is less
than its carrying amount, an impairment loss is recognised in the statement of income. Impairment losses
relating to goodwill cannot be reversed in future periods.
Joint Ventures
The Corporation is engaged in oil and gas exploration, development and production through unincorporated joint
ventures. The Corporation accounts for its share of the results and net assets of these joint ventures as
jointly controlled assets.
Revenue
Oil, gas and condensate revenues associated with the sale of the Corporation's crude oil and natural gas are
recognised when title passes to the customer. This generally occurs when the product is physically transferred
into a vessel, pipe or other delivery mechanism. Revenues from the production of oil and natural gas properties
in which the Corporation has an interest with joint venture partners are recognised on the basis of the
Corporation's working interest in those properties (the entitlement method). Differences between the production
sold and the Corporation's share of production are recognised within cost of sales at market value.
Interest income is recognised on an accruals basis and is separately recorded on the face of the statement of
income.
Foreign currency translation
Items included in the financial statements are measured using the currency of the primary economic environment
in which the Corporation and its subsidiaries operate (the 'functional currency'). The consolidated financial
statements are presented in United States Dollars, which is the Corporation's functional and presentation
currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing
at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognised in the statement of income.
Share based payments
The Corporation has a share based payment plan as described in note 18 (c). The Corporation's proportionate
share of expense is recorded in the statement of income or capitalised for all options granted in the year,
with the gross increase recorded in the share based payment reserve. Compensation costs are based on the
estimated fair values at the time of the grant and the expense or capitalised amount is recognised over the
vesting period of the options. Upon the exercise of the stock options, consideration paid together with the
amount previously recognised in share based compensation reserve is recorded as an increase in share capital.
In the event that vested options expire unexercised, previously recognised compensation expense associated with
such stock options is not reversed. In the event that unvested options are forfeited or expired, previously
recognised compensation expense associated with the unvested portion of such stock options is reversed.
Cash and cash equivalents
For the purpose of cash flow statements, cash and cash equivalents include investments with an original
maturity of three months or less.
Restricted cash
Cash that is held for security for bank guarantees is reported in the statement of financial position and cash
flow statements separately. If the expected duration of the restriction is less than twelve months then it is
shown in current assets.
Financial instruments
All financial instruments are initially recognised at fair value on the statement of financial position. The
Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits,
derivatives, accounts payable, accrued liabilities, contingent consideration and the long term liability
acquired as part of the Beatrice field acquisition. The Corporation classifies its financial instruments into
one of the following categories: held-for-trading financial assets and financial liabilities; held-to-maturity
investments; loans and receivables; and other financial liabilities. All financial instruments are required to
be measured at fair value on initial recognition. Measurement in subsequent periods is dependent on the
classification of the respective financial instrument.
Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value
recognised in net earnings. All other categories of financial instruments are measured at amortised cost using
the effective interest method. Cash and cash equivalents are classified as held-for-trading and are measured at
fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities,
certain other long-term liabilities, and long-term debt are classified as other financial liabilities. Although
the Corporation does not intend to trade its derivative financial instruments, they are classified as held-for-
trading for accounting purposes.
Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability
and original issue discounts on long-term debt have been included in the carrying value of the related
financial asset or liability and are amortised to consolidated net earnings over the life of the financial
instrument using the effective interest method.
Analyses of the fair values of financial instruments and further details as to how they are measured are
provided in notes 23 to 25.
Inventory
Inventories of materials and product inventory supplies, other than oil and gas inventories, are stated at the
lower of cost and net realisable value. Cost is determined on the first-in, first-out method. Oil and gas
inventories are stated at fair value less cost to sell.
Property, plant and equipment
Oil and gas expenditure - exploration and evaluation assets
Capitalisation
Pre-acquisition costs on oil and gas assets are recognised in the statement of income when incurred. Costs
incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and
commercial appraisal costs and other directly attributable costs of exploration and evaluation including
technical and administrative costs are capitalised as intangible exploration and evaluation ("E&E") assets.
E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation
activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following
development sanction, the carrying value of the E&E asset is reclassified as a development and production
("D&P") asset, but only after the carrying value is assessed for impairment and where appropriate its carrying
value adjusted. If after completion of evaluation activities in an area, it is not possible to determine
technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation
decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration
and evaluation are written off to the statement of income in the period the relevant events occur.
Impairment
The Corporation's oil and gas assets are analysed into CGU for impairment review purposes, with E&E asset
impairment testing being performed at a grouped CGU level. The current E&E CGU consists of the Corporation's
whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the
carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E assets for impairment, the
combined carrying value of the grouped CGU is compared with the grouped CGU's recoverable amount. The
recoverable amount of a grouped CGU is determined as the higher of its fair value less costs to sell and value
in use. Impairment losses resulting from an impairment review are written off to the statement of income.
Oil and gas expenditure - development and production assets
Capitalisation
Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment
together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset.
Normally each individual field development will form an individual D&P asset but there may be cases, such as
phased developments, or multiple fields around a single production facility when fields are grouped together to
form a single D&P asset.
Depreciation
All costs relating to a development are accumulated and not depreciated until the commencement of production.
Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the
asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant
and equipment will normally be fully depreciated over the life of the field. However, these items are assessed
to consider if their useful lives differ from the expected life of the D&P asset and should this occur a
different depreciation rate would be charged.
Impairment
A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P
assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on
the CGU. Each CGU is identified in accordance with IAS 36. The Corporation'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.
(b) Non Oil and Natural Gas Operations
Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-
line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated
useful lives on a straight-line basis over five years.
Decommissioning liabilities
The Corporation records the present value of legal obligations associated with the retirement of long-term
tangible assets, such as producing well sites and processing plants, in the period in which they are incurred
with a corresponding increase in the carrying amount of the related long-term asset. The obligation generally
arises when the asset is installed or the ground/environment is disturbed at the field location. In subsequent
periods, the asset is adjusted for any changes in the estimated amount or timing of the settlement of the
obligations. 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.
Contingent consideration
Contingent consideration is accounted for as a financial liability and measured at fair value at the date of
acquisition with any subsequent remeasurements recognised either in profit or loss or in other comprehensive
income in accordance with IAS 39.
Taxation
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to
the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or
substantively enacted by the reporting date.
Deferred income tax
Deferred tax is recognised for all deductible temporary differences and the carry-forward of unused tax losses.
Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates
expected to apply to taxable income in the years in which temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the
period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if
realisation is considered more likely than not.
Operating leases
Rentals under operating leases are charged to the statement of income on a straight line basis over the period
of the lease.
Maintenance expenditure
Expenditure on major maintenance refits or repairs is capitalised where it enhances the life or performance of
an asset above its originally assessed standard of performance; replaces an asset or part of an asset which was
separately depreciated and which is then written off, or restores the economic benefits of an asset which has
been fully depreciated. All other maintenance expenditure is charged to the statement of income as incurred.
Recent accounting pronouncements
In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"),
IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS
27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28,
Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual
periods beginning on or after 1 January 2013 with early adoption permitted. The Corporation has not yet
assessed the impact that the new and amended standards will have on its financial statements. The Corporation
has not decided to early adopt any of the new requirements.
Significant accounting judgements and estimation uncertainties
The preparation of financial statements in conformity with IFRS requires management to make estimates and
assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made
based on unsettled transactions and other events and a precise determination of many assets and liabilities is
dependent upon future events. Actual results may differ from estimated amounts.
The amounts recorded for depletion, depreciation of property and equipment, long-term liability, stock-based
compensation, contingent consideration, decommissioning liabilities, derivatives, and deferred taxes are based
on estimates. The depreciation charge and any impairment tests are based on estimates of proved and probable
reserves, production rates, prices, future costs and other relevant assumptions. By their nature, these
estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such
estimates in future periods could be material. Further information on each of these estimates is included
within the notes to the financial statements.
4. REVENUE
Year ended 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------
Oil sales 112,806 131,560
Gas sales 12,429 739
Condensate sales 995 52
Other income 2,830 2,770
=---------------------------------------------------------------------
Total 129,059 135,120
5. COST OF SALES
Year ended 31 Dec
2011 2010
US$'000 US$'000
Operating costs (48,295) (37,836)
Movement in oil and gas inventory (15,385) (15)
Depletion, depreciation and amortisation (31,447) (23,281)
(95,127) (61,132)
6. ADMINISTRATIVE EXPENSES
Year ended 31 Dec
2011 2010
US$'000 US$'000
=-------------------------------------------------------------------------
General & administrative (4,584) (3,833)
Share based payment (1,398) (2,097)
=-------------------------------------------------------------------------
(5,982) (5,930)
7. FINANCE COSTS
Year ended 31 Dec
2011 2010
US$'000 US$'000
=--------------------------------------------------------------------------
Accretion (858) (283)
Bank charges (352) (126)
Loan amortisation (311) (155)
=--------------------------------------------------------------------------
(1,521) (564)
8. RESTRICTED CASH
31 Dec 31 Dec 1 Jan
2011 2010 2010
US$'000 US$'000 US$'000
=--------------------------------------------------------------------------
Decommissioning security 16,167 5,956 -
Other security 343 352 5,576
=--------------------------------------------------------------------------
16,510 6,308 5,576
Restricted cash of $16.2 million is held by Lloyds as decommissioning security in respect of the Corporation's
interests in the Anglia and Cook fields with maturity dates of: 29 February 2012 ($1 million), 30 March 2012
($6 million) and 31 December 2012 ($9.2 million).
Further restricted cash of $0.3 million (maturity date of 23 December 2012) is held by Lloyds as cash security
for lease payments to the Crown Estate on the Jacky Field.
$5.2 million of restricted cash held by the Bank of Scotland in 2009 as cash security for the 2010 foreign
exchange forward contract was released in January 2010.
9. INVENTORY
31 Dec 31 Dec 1 Jan
2011 2010 2010
US$'000 US$'000 US$'000
=---------------------------------------------------------------------------
Crude oil inventory 8,823 - -
Materials inventory 14 - -
=---------------------------------------------------------------------------
8,836 - -
Approximately 190,000 barrels of crude oil inventory was obtained on August 25, 2011 on completion of the Cook
field acquisition. The value attributed was $21 million. This was sold in December 2011 and the balance at year
end primarily reflects oil produced into tanks not yet sold.
10. EXPLORATION AND EVALUATION ASSETS
US$'000
=---------------------------------------------------------------------
At 1 January 2010 15,500
Additions 3,451
Write offs/relinquishments (1,119)
=---------------------------------------------------------------------
At 31 December 2010 17,832
Additions 7,752
Write offs/relinquishments (2,791)
Disposals (104)
=---------------------------------------------------------------------
At 31 December 2011 22,689
Following completion of geotechnical evaluation activity, certain licences were declared unsuccessful and
certain prospects were declared non-commercial and therefore the related expenditures of $2.8 million were
written off in the year to 31 December 2011.
$2 million of associated contingent consideration relating to the licences and prospects relinquished was also
released to the consolidated statement of income in Q1 2011 to give a total debit of $0.8 million for the year
ended 31 December 2011. See note 17 for details.
11. PROPERTY, PLANT AND EQUIPMENT
Development &
Production Other fixed
Oil and Gas assets assets Total
US$'000 US$'000 US$'000
=-----------------------------------------------------------------------
Cost
At 1 January 2010 189,458 1,274 190,732
Additions 91,953 313 92,266
=-----------------------------------------------------------------------
At 31 December 2010 281,411 1,587 282,998
Additions 342,138 705 342,843
=-----------------------------------------------------------------------
At 31 December 2011 623,549 2,292 625,841
DD&A
At 1 January 2010 - (757) (757)
Charge for the period (22,934) (347) (23,281)
=-----------------------------------------------------------------------
At 31 December 2010 (22,934) (1,104) (24,038)
Charge for the period (31,054) (393) (31,447)
=-----------------------------------------------------------------------
At 31 December 2011 (53,988) (1,497) (55,485)
NBV at 1 January 2010 189,458 517 189,975
NBV at 1 January 2011 258,477 483 258,960
=-----------------------------------------------------------------------
NBV at 31 December 2011 569,561 795 570,356
12. BUSINESS COMBINATIONS
Acquisitions in 2011
On 19 October 2011 the Company completed the acquisition of Challenger Minerals (North Sea) Limited, ("CMNSL")
subsequently renamed Ithaca Minerals (North Sea) Ltd from Transocean Drilling U.K. Limited for a consideration
of US$35 million; US$25 million payable immediately and US$10 million upon approval of the Stella / Harrier
Field Development Plan by the Department of Energy and Climate Change, thereby increasing its interests in the
Stella / Harrier fields, obtaining a non-operated interest in the producing Broom field and gaining access to
additional undeveloped North Sea discoveries.
The fair values of the identifiable assets and liabilities of CMNSL as at the acquisition date, before securing
an export route through the FPF-1 floating production unit, were:
Fair value
US$'000
=-------------------------------------------------------------------------
Oil and gas properties 97,853
Inventories 2,117
Other current assets 2,147
Cash and cash equivalents 517
Trade and other payables (8,194)
Deferred tax liabilities (48,313)
Provisions (3,294)
Contingent consideration (4,104)
=-------------------------------------------------------------------------
Total identifiable net assets at fair value 38,729
Negative goodwill arising on acquisition (8,743)
=-------------------------------------------------------------------------
Total consideration 29,986
The cash outflow on acquisition is as follows:
Cash paid (20,484)
Net cash acquired 517
=-------------------------------------------------------------------------
Net consolidated cashflow (19,967)
From the date of acquisition, Ithaca Minerals has contributed $3.1million to revenue and $0.1million to profit.
Given the date of the acquisition and the fact that full year financial statements are not yet available for
the subsidiary, it is impractical to disclose the contribution the company would have made to the consolidated
results had it been acquired on the first day of the financial year.
On 25 August 2011, the Company completed the acquisition of a 28.46% non-operated interest in the Cook oil
field from Hess Limited ("Hess") for a cash consideration of $56.9 million.
The provisional fair values of the identifiable assets and liabilities of Cook as at the acquisition date were:
Fair value
US$'000
=---------------------------------------------------------------------------
Oil and gas properties 123,200
Inventories 21,011
Trade and other payables (584)
Deferred tax liabilities (70,161)
Provisions (10,037)
=---------------------------------------------------------------------------
Total identifiable net assets at fair value 63,429
Negative goodwill arising on acquisition (6,467)
=---------------------------------------------------------------------------
Total consideration 56,962
The cash outflow on acquisition is as follows:
Cash paid (56,858)
=---------------------------------------------------------------------------
Net consolidated cashflow (56,858)
From the completion date of the acquisition, Cook has contributed $33.6million to revenue, $14.1million to
profit and $28.9 million to cashflow. It is impractical to disclose the contribution the company would have
made to the consolidated results had it been acquired on the first day of the financial year given the lack of
access to pre-acquisition information.
Goodwill on the above transactions arises principally because of the requirement to recognise deferred income
tax assets and liabilities for the difference between the assigned values and the tax bases of the assets
acquired and liabilities assumed in these business combinations at amounts that do not reflect fair value.
13. GOODWILL
US$'000
Cost
At 1 January 2010 -
Additions 985
At 31 December 2010 985
Additions -
At 31 December 2011 985
This represents goodwill on the GDF acquisition in December 2010.
14. LOAN FACILITY
On 12 July 2010, the Corporation signed and completed a Senior Secured Borrowing Base Facility agreement (the
"Facility") for up to US$140 million with the Bank of Scotland Plc. The loan term is up to five years. The main
facility attracts interest of LIBOR plus 2-3.5% and a cost over run facility will attract interest at LIBOR
plus 4.5%. Loan issue costs of $0.9 million were incurred in the year ended 31 December 2010 and are being
amortised over the period of the loan (approx $0.2 million amortised in the year ended 31 December 2011).
The Corporation is subject to industry standard financial and operating covenants related to the Facility.
Failure to meet the terms of one or more of these covenants may constitute an event of default as defined in
the Facility agreement, potentially resulting in accelerated repayment of the debt obligations.
Security provided against the loan
Security provided against the loan is in the form of a floating charge over all assets.
The Corporation is in compliance with its financial and operating covenants.
No funds are currently drawn down under the Facility.
15. DECOMMISSIONING LIABILITIES
31 Dec 31 Dec
2011 2010
US$'000 US$'000
Balance, beginning of period 23,652 8,751
Additions 15,250 12,772
Accretion 858 283
Revision to estimates (20) 1,846
Utilisation (358) -
Balance, end of period 39,382 23,652
The total future decommissioning liability was calculated by management based on its net ownership interest in
all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing
of the costs to be incurred in future periods. The decommissioning liability is re-measured each period using a
pre-tax, risk-free discount rate of 3.9 percent (3 percent from Jan 2011 to Sept 2011) and an inflation rate of
2 percent over the varying lives of the assets to calculate the present value of the decommissioning
liabilities. These costs are expected to be incurred at various intervals over the next 16 years.
$0.4 million of the decommissionng provision was utilised during the year to plug and abandon the Opal well
prior to relinquishment.
The economic life and the timing of the obligations are dependent on Government legislation, commodity price
and the future production profiles of the respective production and development facilities. $15.3 million of
additional liability was recorded in the year ended 31 December 2011 due to decommissioning liabilities assumed
on the acquisition of the Cook field, the acquisition of the Broom field and liabilities from the drilling of
development wells in 2011. Note that upon the acquisition of the Beatrice Field in November 2008, the
Corporation did not assume the decommissioning liabilities.
16. OTHER LONG-TERM LIABILITIES
31 Dec 31 Dec
2011 2010
US$'000 US$'000
=------------------------------------------------------------
Balance, beginning of period 2,872 2,718
Revaluation in the period (87) 154
=------------------------------------------------------------
Balance, end of period 2,785 2,872
On completion of the acquisition of the Beatrice Facilities on 10 November 2008 there were 75,000 barrels of
oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when
the Beatrice Facilities are re-transferred. This volume of oil is valued at the price on the forward oil price
curve at the expected date of re-transfer and discounted. The liability is subject to revaluation at each
financial period end. The expected date of re-transfer is likely to be more than three years in the future.
17. CONTINGENT CONSIDERATION
31 Dec 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------------
Balance, beginning of period 12,976 6,933
Additions 13,604 2,000
Revision to estimates (2,000) 4,043
=---------------------------------------------------------------------------
Balance, end of period 24,580 12,976
Additions in the year to 31 December 2011 relate to the acquisition of CMNSL; $9.5 million on the acquisition
of the entity and $4.1 million as a result of increased interest in the Stella field.
Of the total consideration, $19.8 million is payable upon approval of the Greater Stella Area Field Development
Plan (FDP) and $4.7 million is payable upon first oil. Key considerations for Stella FDP approval are centred
around economic viability, partner alignment and available development options including export route.
Probability of FDP approval and of petroleum being produced have both been assessed as 95% at the year end,
therefore, the above contingency reflects 95% of total potential costs.
The revision in the year to 31 December 2011 relates to the reassessment of the Opal and Garnet prospects which
were determined uncommercial in the second quarter of the year, resulting in a release of the associated
contingent consideration.
18. SHARE CAPITAL
No. of ordinary Amount
Authorised share capital 000 US$'000
=---------------------------------------------------------------------------
At 1 January 2011 and 31 December 2011 Unlimited -
(a)Issued
The issued share capital is as follows:
Issued Number of common Amount
shares
US$'000
=---------------------------------------------------------------------------
Balance 1 January 2010 162,361,975 277,075
Issued for cash - options exercised 765,205 305
Transfer from Share based payment
reserve on options exercised 273
Issued for cash - prospectus 92,662,284 153,248
Share issue costs (8,528)
=---------------------------------------------------------------------------
Balance 31 December 2010 255,789,464 422,373
Issued for cash - options exercised 874,997 572
Issued for cash - warrants exercised 2,500,000 5,786
Transfer from Share based payment
reserve on options exercised - 460
Transfer from Warrants issued on
warrants exercised - 311
=---------------------------------------------------------------------------
Balance 31 December 2011 259,164,461 429,502
On 28 July 2010, the Corporation successfully closed a Canadian bought deal and UK private placement. Gross
proceeds were $78.3 million (C$80.9 million) through the issue of 47.6 million shares at a price of C$1.70 per
share and $74.9 million (GBP 48.2 million) through the issue of 45.1 million shares at GBP 1.07 per common
share.
Capital Management
The Corporation's objectives when managing capital are:
=- to safeguard the Corporation's ability to continue as a going concern;
=- to maintain balance sheet strength and optimal capital structure, while
ensuring the Corporation's strategic objectives are met; and
=- to provide an appropriate return to shareholders relative to the risk of
the Corporation's underlying assets.
Capital is defined as shareholders' equity. Shareholders' equity includes share capital, share based payment
reserve, warrants issued, retained earnings or deficit and other comprehensive income.
31 Dec 31 Dec
2011 2010
US$'000 US$'000
=----------------------------------------------------------------
Share capital 429,502 422,373
Share based payment reserve 17,318 11,427
Warrants issued - 311
Retained earnings / (deficit) 60,591 24,723
=----------------------------------------------------------------
Shareholders' Equity 507,411 458,834
=----------------------------------------------------------------
The Corporation maintains and adjusts its capital structure based on changes in economic conditions and the
Corporation's planned requirements. The Board of Directors reviews the Corporation's capital structure and
monitors requirements. The Corporation may adjust its capital structure by issuing new equity and/or debt,
selling and/or acquiring assets, and controlling capital expenditure programs.
The Corporation monitors its capital structure using the debt-to-equity ratio and other benchmark measures at
the consolidated group level.
31 Dec 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------
Debt - -
Equity 507,411 458,834
=---------------------------------------------------------------------
Debt as a % of equity N/A N/A
(b) Stock options
In the quarter ended 31 March 2011, the Corporation's Board of Directors granted 260,000 options at a weighted
average exercise price of $1.99 (C$2.01). 200,000 of these options were reserved for issue in Q3 2010 in
contemplation of hiring.
In the quarter ended 30 September 2011, 400,000 options were reserved for issue for a future employee. These
options were granted in January 2012, therefore they have not been included in the table below and no expense
has been incurred in relation to the options during 2011.
The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at 31
December 2011, 17,506,839 stock options to purchase common shares were outstanding, having an exercise price
range of $0.20 to $3.65 (C$0.25 to C$3.65) per share and a vesting period of up to 3 years in the future.
Changes to the Corporation's stock options are summarised as follows:
31
31 December December
2011 2010
=---------------------------------------------------------------------------
Wt. Avg Wt. Avg
No. of Exercise No. of Exercise
Options Price (i) Options Price (i)
=---------------------------------------------------------------------------
Balance, beginning of
period 20,146,003 $1.61 11,042,875 $1.48
Granted 260,000 $1.99 10,100,000 $1.88
Forfeited / expired (2,024,167) $2.29 (231,667) $1.28
Exercised (874,997) $0.61 (765,205) $0.33
=---------------------------------------------------------------------------
Options 17,506,839 $1.66 20,146,003 $1.61
=---------------------------------------------------------------------------
(i) The weighted average exercise price has been converted into U.S. dollars
based on the foreign exchange rate in effect at the date of issuance.
The following is a summary of stock options as at 31 December 2011
Options Outstanding
=----------------------------------------------------------------
Range of Exercise Wt. Avg. Wt. Avg.
Price Life Exercise
No. of Options (Years) Price (i)
=----------------------------------------------------------------
$3.65 (C$3.65) 2,165,000 0.1 $3.65
$2.22-$2.70 (C$2.25-
C$2.69) 5,050,000 3.0 $2.23
$1.49-$1.79 (C$1.54-
C$1.85) 5,311,667 2.0 $1.55
$0.20-$0.81 (C$0.25-
C$0.87) 4,980,172 1.8 $0.56
=----------------------------------------------------------------
17,506,839 0.5 $1.72
=----------------------------------------------------------------
=----------------------------------------------------------------
Options Exercisable
Wt. Avg. Wt. Avg.
Range of Exercise Life Exercise
Price No. of Options (Years) Price (i)
=----------------------------------------------------------------
$3.65 (C$3.65) 2,165,000 0.1 $3.65
$2.22-$2.86 (C$2.25-
C$2.70) 1,663,330 3.0 $2.22
$1.49-$1.79 (C$1.54-
C$1.85) 2,048,329 1.8 $1.57
$0.20-$0.81 (C$0.25-
C$0.87) 3,904,548 1.8 $0.49
=----------------------------------------------------------------
9,781,207 1.6 $1.71
=----------------------------------------------------------------
=----------------------------------------------------------------
The following is a summary of stock options as at 31 December 2010
Options Outstanding
=---------------------------------------------------------------------------
Wt. Avg. Wt. Avg.
Life Exercise
Range of Exercise Price No. of Options (Years) Price (i)
=---------------------------------------------------------------------------
$3.65 (C$3.65) 2,435,000 1.14 $3.65
$2.22-$2.86 (C$2.25-
C$3.00) 6,375,000 2.40 $2.25
$1.49-$1.76 (C$1.54-
C$1.85) 5,345,000 3.01 $1.54
$0.20-$0.81 (C$0.25-
C$0.87) 5,991,003 2.77 $0.55
=---------------------------------------------------------------------------
20,146,003 2.50 $1.61
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
Options Exercisable
=---------------------------------------------------------------------------
Wt. Avg. Wt. Avg.
Life Exercise
Range of Exercise Price No. of Options (Years) Price (i)
=---------------------------------------------------------------------------
$3.65 (C$3.65) 1,623,334 1.1 $3.65
$2.29-$2.86 (C$2.51-
C$3.00) 1,285,000 0.3 $2.38
$1.49-$1.68 (C$1.54-
C$1.80) 300,000 1.7 $1.68
$0.20-$0.81 (C$0.25-
C$0.87) 2,591,084 2.8 $0.45
=---------------------------------------------------------------------------
5,799,418 1.3 $1.44
=---------------------------------------------------------------------------
=---------------------------------------------------------------------------
(c) Share based payment
Options granted are accounted for using the fair value method. The compensation cost during the year ended 31
December 2011 for total stock options granted was $6.4 million (2010: $4.8 million). $1.4 million was charged
through the statement of income for share based payment for the year ended 31 December 2011, being the
Corporation's share of share based payment chargeable through the statement of income. The remainder of the
Corporation's share of share based payment has been capitalised. The fair value of each stock option granted
was estimated at the date of grant, using the Black-Scholes option pricing model with the following
assumptions:
2011 2010
=------------------------------------------------------------
Risk free interest rate 1.20% 1.20%
Expected stock volatility 97% 104%
Expected life of options 3 years 3 years
Weighted Average Fair Value $1.68 $1.14
(d) Gemini Agreement
In September 2006 Gemini Oil & Gas Fund 11 L.P. ("Gemini") provided non-recourse funding of $6 million. Further
to a supplemental agreement entered into in August 2008, the loan was fully repaid. Under the supplemental
agreement Gemini retained rights, under certain circumstances relating to the Athena Field, to elect to receive
warrants to acquire up to 3,000,000 common shares at $3.00 per share and to receive payments connected to asset
sales of interests in Athena.
On 20 September 2010, a further agreement was entered into with Gemini whereby in exchange for and in
consideration of Gemini's waiver of any right to proceeds from the disposal of equity interest in the Athena
discovery and in substitution for any previously awarded or agreed warrants, Ithaca Energy Inc. granted Gemini
warrants to acquire up to 2,500,000 common shares in Ithaca Energy Inc. The warrants were exercised at C$2.25
per share on March 3, 2011. The agreement terminates all rights that Gemini has in respect of the Corporation's
interests. The total fair value attributed to warrants issued in 2010 was $0.3 million.
19. SHARE BASED PAYMENT RESERVE
31 Dec 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------------
Balance, beginning of period 11,427 6,860
Share based payment cost 6,351 4,840
Transfer to share capital on exercise of
options (460) (273)
=---------------------------------------------------------------------------
Balance, end of period 17,318 11,427
20. EARNINGS PER SHARE
The calculation of basic earnings per share is based on the profit after tax and the weighted average number of
common shares in issue during the period. The calculation of diluted earnings per share is based on the profit
after tax and the weighted average number of potential common shares in issue during the period.
Year ended 31
2011 Dec 2010
=---------------------------------------------------------------------------
Wtd av. number of common shares (basic) 258,350,813 184,811,251
Wtd av. number of common shares (diluted) 262,997,935 188,385,443
21. TAX
Year ended 31
2011 Dec 2010
US$000 US$000
=---------------------------------------------------------------------------
Current tax
Current tax on profits for the year - 80
Deferred tax
Relating to the origination and reversal
of temporary differences 1,414 (4,016)
Relating to changes in tax rates 1,095 -
Adjustment in respect of prior periods (1,263) -
=---------------------------------------------------------------------------
Total tax expense 1,246 (3,936)
The tax on the group's profit before tax differs from the theoretical amount
that would arise using the effective rate of tax applicable for UK ring
fence oil and gas activities as follows:
Year ended 31 Dec
2011 2010
US$000 US$000
=---------------------------------------------------------------------------
Accounting profit before tax 37,112 57,994
At tax rate of 59.3% (2010 50%) 22,008 28,997
Non-deductible income (23,258) (4,386)
Difference in foreign tax rates 1,420 253
Under/(over) provided in prior years (724) 1,495
Recognition of deferred tax assets - (30,506)
Unrecognised tax losses 261 124
Change in tax rates 1,909 32
Other (370) 55
=---------------------------------------------------------------------------
Total tax recorded in the consolidated
statement of income 1,246 (3,936)
The effective rate of tax applicable for UK ring fence oil and gas activities in 2011 was 59.3% (2010:50%).
This weighted average rate was due to the increase in supplementary charge on oil and gas activities from 20%
to 32% announced on 23 March 2011 by the UK government resulting in a 62% marginal tax rate.
Deferred income tax at 31 December relates to the following:
Year ended 31 Dec
2011 2010
US$000 US$000
=---------------------------------------------------------------------------
Deferred tax liability 336,682 117,061
Deferred tax asset (210,148) (110,248)
=---------------------------------------------------------------------------
Net deferred tax liability 126,534 6,814
The gross movement on the deferred income
tax account is as follows: 2011 2010
US$000 US$000
=---------------------------------------------------------------------------
At 1 January 6,814 -
Acquisitions 118,475 10,750
Income statement charge 1,246 (3,936)
=---------------------------------------------------------------------------
At 31 December 126,534 6,814
Deferred tax on
Accelerated tax business
depr'n combinations Total
Deferred tax
liability US$000 US$000 US$000
=--------------------------------------------------------------------------
At 1 January 2011 106,503 10,559 117,061
Charged/(credited)
to income statement 95,715 (5,301) 90,414
Acquisitions - 129,207 129,207
=--------------------------------------------------------------------------
At 31 December 2011 202,218 134,465 336,682
Abandonment
Tax Losses provision Other Total
Deferred tax assets US$000 US$000 US$000 US$000
=---------------------------------------------------------------------------
At 1 January 2011 (107,800) (2,448) - (110,248)
Charged/(credited)
to income statement (81,188) (3,653) (4,328) (89,168)
Acquisitions (10,732) - - (10,732)
=---------------------------------------------------------------------------
At 31 December 2011 (199,719) (6,101) (4,328) (210,148)
Deferred income tax assets are recognised for the carry-forward of unused tax losses and unused tax credits to
the extent that it is probable that taxable profits will be available in the future against which the unused
tax losses/credits can be utilised.
The UK related non-capital losses of $325 million do not expire under UK tax legislation and may be carried
forward indefinitely.
On 23 March 2011, the UK government announced that the rate of supplementary tax applicable to North Sea oil
companies would rise from 20% to 32% from 24 March 2011, resulting in an effective combined base and
supplementary tax rate of no less than 62%. Based on current production and price assumptions and a continuing
business model whereby the Corporation reinvests capital, incurs general, administrative and interest costs,
together with the non-capital losses available to the Corporation, Ithaca does not expect to pay trade related
cash income taxes in the short or medium term.
22. COMMITMENTS
Year ended 31 Dec
2011 2010
US$'000 US$'000
-----------------------------------
Operating lease commitments
Within one year 247 248
Two to five years 989 988
More than five years 309 557
Capital commitments
Capital commitments related to joint
ventures Year ended 31 Dec
2011 2010
US$'000 US$'000
-----------------------------------
Capital commitments incurred jointly with
other venturers (Ithaca's share) 82,521 27,147
23. FINANCIAL INSTRUMENTS
To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or
industry accepted third-party models and valuation methodologies that utilise observable market data. In
addition to market information, the Corporation incorporates transaction specific details that market
participants would utilise in a fair value measurement, including the impact of non-performance risk. The
Corporation characterises inputs used in determining fair value using a hierarchy that prioritises inputs
depending on the degree to which they are observable. However, these fair value estimates may not necessarily
be indicative of the amounts that could be realised or settled in a current market transaction. The three
levels of the fair value hierarchy are as follows:
- Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example,
exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient
frequency and volume to provide pricing information on an ongoing basis.
- Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or
indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices
for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the
marketplace. The Corporation obtains information from sources such as the New York Mercantile Exchange and
independent price publications.
- Level 3 - inputs that are less observable, unavailable or where the observable data does not support the
majority of the instrument's fair value.
In forming estimates, the Corporation utilises the most observable inputs available for valuation purposes. If
a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is
categorised based upon the lowest level of input that is significant to the fair value measurement. The
valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active
markets or industry standard models that primarily rely on market observable inputs. Substantially all of the
assumptions for industry standard models are observable in active markets throughout the full term of the
instrument. These are categorised as Level 2.
The following table presents the Corporation's material financial instruments measured at fair value for each
hierarchy level as of 31 December 2011:
Total Fair
Level 1 Level 2 Level 3 Value
US$'000 US$'000 US$'000 US$'000
=---------------------------------------------------------------------------
Long term liability on Beatrice
acquisition - - (2,785) (2,785)
Contingent consideration - (24,580) - (24,580)
Derivative financial instrument
liability - (1,846) - (1,846)
=---------------------------------------------------------------------------
Assets measured at fair value in the statement of financial position are
minimal. Measurement was based on oil price at the time of acquisition.
The table below presents the total gain / (loss) on financial instruments
that has been disclosed through the statement of net and comprehensive
income / (loss):
Year ended 31 Dec
2011 2010
US$'000 US$'000
=---------------------------------------------------------------------------
Unrealised gain/(loss) on forex forward
contracts (510) (686)
Unrealised (loss)/gain on commodity hedges (6,159) (48)
Revaluation of gas contract 3,099 -
Revaluation of other long term liability 87 (154)
=---------------------------------------------------------------------------
(3,483) (888)
Realised (loss)/gain on forex forward
contracts - (4,442)
Realised (loss)/gain on commodity hedges 70 62
=---------------------------------------------------------------------------
70 (4,380)
=---------------------------------------------------------------------------
Total realised/unrealised (3,413) (5,268)
Contingent consideration 2,000 (4,044)
=---------------------------------------------------------------------------
Total gain / (loss) on financial instruments (1,413) (9,312)
The contingent consideration of $2 million relating to the relinquinshment of Opal and Garnet prospects was
released to the statement of income through E&E expense. See note 10.
The Corporation has identified that it is exposed principally to these areas of market risk.
i) Commodity Risk
|
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| This press release was issued by Ithaca Energy Inc. and was initially posted at http://staging.hemscottir.com/ir/iae_new/ir.jsp?page=news-item&item=971152235180739 . It was distributed, unedited and unaltered, by noodls on 2012-03-29 14:07:55 PM. The issuer is solely responsible for the accuracy of the information contained therein. |
