THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR
FOR DISSEMINATION IN THE UNITED STATES.
Heritage Oil Plc (TSX:HOC)(LSE:HOIL) ("Heritage" or the "Company"), an
independent upstream exploration and production company, announces its results
for the twelve months ended 31 December 2011. All figures are in US dollars
unless otherwise stated.
2011 Operational Highlights
-- Awarded new licences in Tanzania which Heritage believes could be
geologically analogous to the Lake Albert Basin, providing the Company
with a key advantage in assessing the blocks
-- Entered Libya through an acquisition which makes Heritage well placed to
be able to play a significant role in the future development of the oil
and gas industry in Libya
-- Appraisal drilling, in Kurdistan, commenced on the Miran West-3 well and
results to date have confirmed oil in the Upper Cretaceous and gas in
the Lower Cretaceous and Jurassic reservoirs
-- An interval, above the main Jurassic reservoir, in the Miran West-3 well
has recently been tested and resulted in a flow of up to 17.5 MMscfd of
dry gas
-- Acquired seismic on the southern portion of the Miran Block which has
identified the presence of a structure capable of containing additional
resources
-- Completed seismic in Mali, Malta and Tanzania
-- Drilled first horizontal well in Russia which exceeded pre-drill
expectations resulting in a year-on-year increase in production of 24%
2011 Financial Highlights
-- Cash of $311 million, excluding amounts relating to the Ugandan tax
dispute
-- Production averaged 673 bopd, an increase of 24% from 2010 levels
-- Average realised price of $36.9/bbl, an increase of 45% from 2010 levels
-- Total cash capital expenditures increased to $135 million
Outlook
-- Miran East-1 well commenced drilling in March 2012 with results expected
at the end of the third quarter 2012
-- Further test results expected from the Miran West-3 well
-- Undertaking work to identify a suitable drilling location in the
southern portion of the Miran Block
-- Work programmes are commencing in Tanzania on newly awarded acreage
-- Planning for a high-impact exploration well offshore Malta
-- Actively looking for further opportunities
Tony Buckingham, Chief Executive Officer, commented:
"2011 has been a year in which we have enhanced the asset portfolio through the
addition of acreage, investing in opportunities and through existing work
programmes. We currently have two rigs drilling in Kurdistan and are reviewing
results from seismic campaigns that could provide future growth in the
portfolio. We are looking to further develop the existing portfolio and continue
to look for value generating opportunities within our core areas."
Notes to Editors
-- Heritage is listed on the Main Market of the London Stock Exchange and
is a constituent of the FTSE 250 Index. The trading symbol is HOIL.
Heritage has a further listing on the Toronto Stock Exchange (TSX:HOC).
-- Heritage is an independent upstream exploration and production company
engaged in the exploration for, and the development, production and
acquisition of, oil and gas in its core areas of Africa, the Middle East
and Russia.
-- Heritage has an exploration, appraisal and development asset in the
Kurdistan Region of Iraq, exploration assets in Malta, Tanzania, Mali,
Pakistan, Libya and the Democratic Republic of Congo and a producing
property in Russia.
-- Heritage Energy Middle East, a wholly-owned subsidiary of Heritage, is
operator and holds a 75% interest in the Miran Block. There are third
party back-in rights which could reduce the holding to 56.25%
-- For further information please refer to our website,
www.heritageoilplc.com.
If you would prefer to receive press releases via email please contact Jeanny So
(jeanny@chfir.com) and specify "Heritage press releases" in the subject line.
CHIEF EXECUTIVE'S REVIEW
We have made progress across the portfolio in 2011 through the addition of
acreage, investing in opportunities and pushing forward with work programmes
across our existing assets.
In particular we have added exciting new exploration acreage in Tanzania,
invested in Libya, a hydrocarbon prolific area providing potential access to
Africa's largest oil industry, conducted seismic across most of the existing
licences, increased production in Russia through employing horizontal drilling
techniques, and moved ahead with exploration, appraisal and development work in
the Miran Field in Kurdistan.
Global stock markets experienced extreme volatility during 2011 due to the
Eurozone crisis, and this came to a head in August.
The oil price, since the beginning of 2011, strengthened as supply side issues
outweighed concerns over the financial crisis in global stock markets. A popular
uprising in Tunisia sparked similar protests across the Middle East and North
Africa, the Arab Spring, which still continues in certain countries. The Libyan
crisis threatened the supply of approximately 1.5 million barrels of oil per day
and, in addition, non-OPEC countries had outages that reduced production by an
average of 0.7 million barrels per day, according to the International Energy
Association.
Prices gave up the year's gains by August amid concern the US economic recovery
was stalling and speculation that Libya would resume oil production faster than
expected after Gadaffi's ousting that month. The price of Brent crude slipped in
October to its lowest level for the year, as the debt crisis in Europe sapped
confidence in the health of the global economy. Recent threats of supply
disruption in the first quarter of 2012 have led to strengthening in the oil
price again.
EXPLORATION OPERATIONS
Kurdistan
At the beginning of 2011 we announced the discovery of a major gas field with
oil and condensate after completing drilling of the Miran West-2 well.
The Miran West-3 well commenced drilling in August 2011 with the primary
objective of appraising the productivity of the Jurassic reservoir intervals
from which we had achieved significant flow rates in the previous well. To date,
results from the well have confirmed oil in the Upper Cretaceous and gas in the
Lower Cretaceous and Jurassic reservoirs.
We successfully completed testing of the Upper Cretaceous reservoir after
drilling to a depth of 876 metres in November 2011. During testing the maximum
measured rate achieved from this reservoir section was 1,950 bopd and attempts
to flow the well at higher rates were severely restricted by the capacity of the
surface test equipment.
Gas was confirmed in the Lower Cretaceous and in April 2012, it was announced
that the testing of a reservoir interval above the main Jurassic reservoir
resulted in a flow of up to 17.5 MMcsfd of dry gas. This reservoir is proven to
be separate from those identified to date within the Miran structure. The well
is drilling ahead to the primary Jurassic reservoir targets.
In March 2012, the Miran East-1 exploration well commenced drilling. This is the
first well to be drilled on the highly prospective eastern structure, which has
an area of approximately 130 square kilometres. The well is targeting
exploration potential within the Cretaceous and Jurassic reservoir intervals of
the eastern structure, contiguous with the large hydrocarbon bearing Miran West
structure. The well design utilises recently acquired 3D seismic data and an
enhanced understanding of the structural configuration within the Miran Field
that this has provided. Multiple intervals will be evaluated and tested as the
well is drilled and have the potential to add significant hydrocarbon resources
at all of the multiple reservoir intervals.
Seismic acquisition
Acquisition of 3D seismic, covering 730 square kilometres, over the Miran Block
was completed in 2011. This is believed to be the largest 3D seismic programme
ever acquired in the region. The increased coverage and quality of the 3D data
is assisting greatly with our selection of well locations.
In addition, the acquisition of 180 kilometres of 2D seismic on the southern
portion of the Miran Block to help identify further potential prospectivity was
completed in October 2011. The interpretation of data has indicated the presence
of a structure and we are in the process of identifying potential drilling
locations.
Gas monetisation and development
We consider the Miran Gas Field to be of such a size that it is a commercial
discovery. Accordingly, we are currently reviewing options, and are in
discussions with third parties, for a phased development of the Miran Field
which includes early gas production to existing and planned cement and power
plants for local markets in Kurdistan as well as exports to Turkey and possibly
to the European market under full field development. The initial priority will
be to satisfy local gas demand by supplying gas on commercial terms to local
end-users in the Sulymaniyah region in 2013. Early gas production would also
result in associated condensate production for blending with oil production.
The early production will be paralleled with full development from 2015 and the
export of gas to Turkey/Europe with the full production of blended oil and
condensate. Independent gas marketing studies have highlighted increasing gas
demand in the Kurdistan region, Turkey and Europe that can provide valuable
markets for the gas volumes. Work on conceptual development studies and gas
marketing plans and strategies has continued and we are in discussions with the
Kurdistan Regional Government (the "KRG"), gas buyers and contractors regarding
both early and full field development.
Tanzania
We are excited to have been appointed operator and awarded new Production
Sharing Agreements ("PSAs") in Tanzania with Rukwa in November 2011 and Kyela in
January 2012. With both of these areas we recognise certain geological
similarities with the Albert Basin of Uganda, where we have had previous
experience and commercial success, thereby providing us with a material
advantage in assessing these blocks. Our work programme on Rukwa has commenced
with the reprocessing of legacy 2D seismic data and we are planning on acquiring
further 2D seismic in the summer of 2012. On the Kyela Block we will shortly
commence the acquisition of a gravity survey following which a seismic programme
will be planned.
Economic scoping has shown that, in the event of oil exploration success from
either licence, there is commercial viability of either rail export or export by
pipeline.
Other exploration assets
In Malta, we have an extensive data set of approximately 5,000 kilometres of 2D
seismic that indicates the presence of multiple prospects and leads. This
includes the acquisition over Area 7, in July 2011, of 1,400 kilometres of
infill and exploration 2D seismic. Preparations are now underway to drill a
high-impact well in Area 7.
In 2011 seismic was acquired in Mali, over Blocks 7 and 11, which is now being
interpreted and integrated with legacy data and the acquisition of a 3D seismic
programme offshore Tanzania completed.
PRODUCTION OPERATIONS
Russia
Production averaged 673 bopd over 2011, an increase of 24% on the previous year.
In August 2011 we completed the drilling of well 363, the first horizontal well
to have been drilled in the licence, with a year end exit rate of c.937 bopd.
Results of this well exceeded pre-drill expectations and we achieved a
significant increase in production from the field.
Historical development of this reservoir type throughout the region has been
through conventional drilling on a grid pattern. We recognised an opportunity to
improve the efficiency and economics of field development by utilising
horizontal drilling technology, thus decreasing the number of wells and the
total cost required to develop the field, while potentially improving recovery.
Currently, we plan to commence drilling a second horizontal well in the field in
the fourth quarter when the ground has frozen allowing access throughout the
licence.
LIBYA
We announced an exciting acquisition in October 2011 when we acquired a
controlling interest in Sahara Oil Services Holdings Limited ("Sahara Oil")
which owns the entire share capital of Sahara Oil Services Limited ("Sahara"),
an oil field services company in Libya. We consider that Heritage, through
Sahara, is uniquely positioned to pursue field rehabilitation activities and be
awarded exploration and production licences as we have operator status. This
means Heritage is well placed to play a significant role in the future oil and
gas industry in Libya. We view this acquisition as consistent with our strategy
of first mover advantage and entering regions with vast hydrocarbon wealth where
we have a strategic advantage. Ongoing discussions with the NTC and other
stakeholders continue to highlight opportunities with the potential to transform
Heritage.
CORPORATE
Cash
As at 31 December 2011, Heritage had a cash position of approximately $311
million, excluding amounts related to the tax dispute of approximately $405
million, which is more than sufficient to cover the current work programmes into
2013.
PetroFrontier Corp.
Heritage has continued to acquire common shares ("Shares") of PetroFrontier
Corp. ("PetroFrontier") for investment purposes and currently holds 15.25% of
the outstanding Shares of PetroFrontier. PetroFrontier is listed on the TSX
Venture Exchange and has commenced a high-impact drilling programme in Australia
targeting billions of barrels of resources.
Buy back programme
Heritage commenced a share buy back programme in April 2011. To date 33,856,107
Ordinary Shares have been bought back and are held in treasury. Consequently,
Heritage has 255,891,923 Ordinary Shares in issue (excluding treasury shares) as
well as 2,811,408 exchangeable shares of no par value of Heritage Oil
Corporation ("HOC", the "Corporation"), each carrying one voting right in
Heritage.
The total number of voting rights in Heritage, excluding treasury shares as at
17 April 2012, is 258,703,331.
UGANDA
In 1997, Heritage became the first oil and gas company in almost 60 years to
undertake exploration in Uganda after being awarded a licence in the Albert
Basin in western Uganda. Heritage had remarkable operational success in Uganda
as a result of technical excellence and first mover advantage.
On 18 December 2009, Heritage announced that it, and its wholly owned subsidiary
Heritage Oil & Gas Limited ("HOGL"), had entered into a Sale and Purchase
Agreement ("SPA"), with ENI International B.V. ("Eni") for the sale of Blocks 1
and 3A in Uganda (the "Ugandan Assets"). On 17 January 2010, Tullow Uganda
Limited ("Tullow") exercised its rights of pre-emption. The transaction was
overwhelmingly approved by Heritage shareholders at the General Meeting on 25
January 2010.
On 27 July 2010, Heritage announced that HOGL had completed the disposal of the
Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a
contractual settlement, of which Heritage received and retained $1.045 billion.
The Uganda Revenue Authority ("URA") contends that income tax is due on the
capital gain arising on the disposal and raised assessments of $404,925,000,
whilst Heritage's position, based on comprehensive advice from leading legal and
tax experts is that no tax is payable.
On closing, Heritage deposited $121,477,500 with the URA, representing 30% of
the disputed tax assessment of $404,925,000. A further $283,447,000 was retained
in escrow with Standard Chartered Bank in London.
In August 2010, the URA issued a further income tax assessment of $30 million
representing 30% of the additional contractual settlement amount of $100
million. HOGL has challenged the Ugandan tax assessments, totalling $435
million, but in the fourth quarter of 2011, the Tax Appeals Tribunal in Uganda
dismissed HOGL's applications. HOGL has subsequently commenced appeals to the
Ugandan High Court in relation to the rulings by the Tax Appeals Tribunal which
it believes is fatally flawed.
In May 2011, HOGL commenced international arbitration proceedings in London
against the Ugandan Government. HOGL is seeking a decision requiring, among
other things, the return or release of approximately $405 million, plus
interest, in aggregate currently on deposit with the URA or in escrow with
Standard Chartered Bank in London. The arbitration proceedings are being held in
London in accordance with the provisions of the PSAs in relation to the Ugandan
Assets.
On 15 April 2011, Heritage, and its wholly owned subsidiary HOGL, received
Particulars of Claim filed in the High Court of Justice in England by Tullow
seeking $313,447,500 for alleged breach of contract as a result of HOGL's and
Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow
of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the
claim has no basis and are in the process of vigorously and robustly defending
it.
CORPORATE SOCIAL RESPONSIBILITY
We continue to develop our approach to CSR and engagement with stakeholders
towards achieving a shared future is a key element supporting our core business
model. We have developed, and continue to review, a policy framework disclosing
our essential core values. I am delighted to report that we continue to maintain
a strong track record for health and safety which is fundamental in being viewed
as a preferred partner.
During 2011 we spent a total of approximately $700,000 on CSR related activities
with community programmes focused on areas where we were operationally more
active. For example, in Kurdistan we have continued with our focus on the
development of local infrastructure and supporting education and in Mali we
supported local healthcare.
OUTLOOK
2011 was a year in which we enhanced the portfolio in our core areas of Africa,
Middle East and Russia and secured an investment foothold in Australia though
our holding in PetroFrontier. We are currently drilling a high-impact
exploration well in Kurdistan and are reviewing results from seismic programmes
that could provide direction for future growth in the portfolio. In addition to
increasing our exposure to Tanzania, in blocks where we believe we have a
technical and operational advantage, we acquired a controlling interest in
Sahara Oil that has, we believe, made us extremely well positioned in Libya
where we expect to play an important role in the oil industry.
As always, I am very grateful to our management team, employees and supportive
Board for their dedication and contribution to the progress made by Heritage
this past year.
Finally, to our shareholders, thank you for your continued support and interest
in Heritage. We are focused and dedicated to generating shareholder value in
2012 through development of our existing portfolio and other acquisitions.
Anthony Buckingham, Chief Executive Officer
ASSET REVIEW
KURDISTAN
Heritage was one of the first companies to be awarded a Production Sharing
Contract ("PSC") in Kurdistan. Kurdistan is an autonomous region in the north of
federal Iraq bordering Syria, Iran and Turkey.
In October 2007, the Group signed a PSC with the KRG and was appointed operator
of the Miran Block, which covers approximately 1,015 square kilometres, in the
southern part of Kurdistan. The Miran structure lies approximately 65 kilometres
from the giant Kirkuk oilfield and 60 kilometres from the Taq Taq Field, which
is on production. In April 2009 Genel Energy plc ("Genel Energy") was nominated
as the third party participant in the Block.
As an early entrant in Kurdistan, the Group is strongly positioned to benefit
from development of this significant hydrocarbon-prone region especially as the
already stable security situation and political environment continue to improve.
Since 2006 approximately 30 wells have been drilled resulting in c.20
discoveries. Over 40 companies are now present in the region with entrants in
2011 including ExxonMobil.
It is generally acknowledged that there is huge potential in Kurdistan for as
yet undiscovered hydrocarbons. It has been estimated by the KRG, in November
2011, that there is approximately 45 billion barrels of oil and 100-200 TCF of
gas in the region.
Federal elections were held in March 2010 and a coalition government, which
included officials from Kurdistan, was formed in December 2010. Subsequently, in
February 2011, production from two fields in Kurdistan was exported to Turkey by
pipeline and in June companies began to receive payment. The Ministry of Natural
Resources in Kurdistan expects construction on several pipelines to commence in
2012 to help achieve near-term targets for oil and gas export.
The work programme to date
The Miran Block contains two large contiguous structures, Miran West and Miran
East, which were originally mapped using 332 kilometres of excellent quality 2D
seismic data acquired by Heritage in 2008. More recently, Heritage acquired 730
square kilometres of 3D seismic data, the interpretation of which is ongoing,
but which has already enabled the principal structural features to be identified
with much greater clarity.
The Miran West structure is believed to be one of the largest structures in
Kurdistan, with an estimated areal extent of up to 200 square kilometres and
Miran East has an estimated areal extent of 130 square kilometres. Well results
have established that the Miran Field contains two hydrocarbon systems with oil
in the shallower Upper Cretaceous section and gas/condensate within the deeper
Lower Cretaceous and Jurassic formations.
Miran West structure
Drilling of the Miran West-1 well commenced in December 2008 and reached a total
depth of 2,935 metres in March 2009. Drilling operations were designed to cope
with potential high reservoir pressures which, in fact, were not encountered and
resulted in the loss of drilling fluid and lost circulation material in the
highly permeable reservoir fracture systems. The large volumes of fluids lost
constrained initial testing operations severely. Testing was completed in August
2009 with a flow rate of 3,640 bopd recorded from a single upper reservoir
interval.
The Miran West-2 appraisal well, located approximately four kilometres
north-west of the Miran West-1 discovery well, commenced drilling in November
2009 with the aim of appraising hydrocarbons in the Cretaceous formations
discovered by that well. Data acquired after drilling operations commenced
indicated that the Miran West-2 well was also optimally positioned to test
deeper exploration objectives with potential for further substantial quantities
of hydrocarbons.
The well was subsequently modified to assess the exploration potential of these
deeper formations and was eventually drilled to a total depth of 4,426 metres.
The Miran West-2 well results have confirmed three additional pay zones within
the Lower Cretaceous and Jurassic formations in addition to the pay zone
identified in the Upper Cretaceous in the Miran West-1 well.
Drilling of the Miran West-3 appraisal well commenced at the beginning of August
2011 with the aim of targeting reservoir sections encountered in discovery wells
with the primary objective of appraising the productivity of the Jurassic
reservoir formation in the Miran West structure.
Testing of the Upper Cretaceous reservoir, resulted in a maximum measured rate
of 1,950 bopd. Attempts to flow the well at higher rates were severely
restricted by the capacity of the surface test equipment. The oil produced on
test is c.15 degrees API with very little associated gas, similar to that tested
from the same interval in the Miran West-1 discovery well.
In March 2012, it was announced that the results from detailed wireline log
interpretation, observations whilst drilling and gas recovered at surface,
confirmed that the Lower Cretaceous reservoir formation is gas bearing. Detailed
work is now being undertaken on the recently processed 3D seismic and offset
well data to establish the areas of effective reservoir for this formation.
Below the Lower Cretaceous reservoir, the well encountered a high pressure
interval as well as a loss of circulation which resulted in the need to
sidetrack the well.
In April 2012, it was announced that a reservoir interval above the main
Jurassic reservoir had been tested and resulted in a flow of up to 17.5 MMscfd
of dry gas. This reservoir interval is separate from the underlying main
Jurassic gas bearing interval tested in the Miran West-2 well.
Further drilling will appraise the Jurassic reservoir intervals discovered by
the Miran West-2 well. A number of tests are planned and drilling is expected to
be completed during the second quarter of 2012. The well is drilling ahead to
the primary Jurassic reservoir targets.
Miran East structure
Exploration drilling of the Miran East structure commenced in March 2012 with a
second rig and is expected to take approximately seven months with key reservoir
intervals being tested as the well is drilled.
This is the first well to be drilled on the highly prospective eastern
structure, which has an area of approximately 130 square kilometres. The well is
targeting exploration potential within the Cretaceous and Jurassic reservoir
intervals of the eastern structure, contiguous with the hydrocarbon bearing
Miran West structure. The well design utilises recently acquired 3D seismic data
and the enhanced understanding of the structural configuration within the Miran
Field that this has provided.
Further potential structures
Acquisition of 180 kilometres of 2D seismic on the southern portion of the Miran
Block to help identify further potential prospectivity was completed in October
2011 and interpretation of the data has identified a structure capable of
containing additional resources. Further work is being undertaken to identify a
suitable drilling location.
3D seismic programme
Acquisition of 3D seismic data, covering 730 square kilometres, across the Miran
Block has completed. The significant improvement in seismic data quality over
the Miran Field is encouraging and assists greatly with the selection of well
locations. An early phase of processing produced an initial dataset covering the
core area of the field which was used to assist in the selection and orientation
of the drilling of the deviated Miran West-3 and the Miran East-1 wells. The
increased coverage and quality of the 3D data enables enhanced mapping of the
structure and increased ability to identify fault systems.
Initial interpretation of the data is expected to be completed by the end of
April which will assist greatly in the estimation of reservoir volumes and the
identification of future drilling locations.
Development of the Miran Field
The Miran Field is a commercial discovery and independent engineering studies
have confirmed the potential for a fast-tracked, phased development of the
field.
Options being considered include early gas production to existing and planned
cement and power plants for local markets in Kurdistan, as well as exports to
Turkey and to the European market under full field development. The KRG has
outlined favoured development options for gas utilisation. The initial priority
will be to satisfy local gas demand by supplying gas on commercial terms to
local cement plants and power stations and other end-users in the Sulymaniyah
region in 2013. Development will be integrated as gas production would also
result in associated condensate production for blending with the oil production.
The early production will be paralleled with full field development and the
export of gas to Turkey/Europe with the full production of blended oil and
condensate. Independent gas marketing studies have highlighted increasing gas
demand in the KRG region, Turkey and Europe that can provide valuable markets
for the gas volumes.
Conceptual engineering design studies have focused on the potential for early
production of between 80 and 180 MMscfd for local markets commencing in 2013.
This will be accompanied by appraisal and full development of approximately 560
to 750 MMscfd in 2015 for gas export. Export requires the construction of a 320
kilometre gas pipeline to the Iraq/Turkey border in part running parallel to the
planned Kurdistan Iraq Crude Export ("KICE") pipeline, for which construction is
planned to commence in 2012. Oil and condensate production of between 5,000 and
12,000 bpd would be trucked to Taq Taq for entry to the KICE pipeline. This
would be followed by construction of a 70 kilometre oil/condensate pipeline to
tie into the KICE line for full development production export of between 37,000
and 50,000 bopd.
TANZANIA
Heritage has been awarded four licences in Tanzania, two of which are considered
to be geologically analogous to the Lake Albert Basin in Uganda.
Rukwa
In November 2011, Heritage announced the award of a PSA which covers virtually
the entire Rukwa Rift Basin, split into two separate areas, Rukwa North and
Rukwa South, and is the operator with a 100% interest. Limited exploration
activity was undertaken in the blocks in the mid-1980s which resulted in the
acquisition of c.2,300 kilometres of 2D seismic data and the drilling of two
wells. Reprocessing of legacy 2D seismic data in Rukwa has commenced and the
acquisition of c.600 kilometres of 2D seismic data is planned to commence in the
summer of 2012.
Kyela
In January 2012, Heritage was awarded the Kyela PSA covering the entire northern
onshore area of the Lake Nyasa (Livingston) Basin that lies within Tanzanian
territory. The block has never previously been targeted for hydrocarbon
exploration. Gravity data over the area suggests the presence of a sedimentary
section of sufficient thickness to allow for the generation of oil. The work
programme will commence with the acquisition of a c.1,500 square kilometre high
resolution gravity survey. A 2D reconnaissance seismic programme is planned to
be acquired based on the results of the gravity survey.
Satellite radar surveys indicate areas of wave-calming in Lake Rukwa and in Lake
Nyasa that may be slicks resulting from oil seeps. In the event of an oil
discovery, at either Rukwa or Kyela, economic scoping shows the commercial
viability of either rail export to Dar es Salaam or export by pipeline depending
on exploration success.
Heritage recognises that both the Rukwa Rift Basin and Kyela share certain
geological similarities with the prolific Albert Basin of Uganda where Heritage
had previous experience and significant success.
Latham and Kimbiji
The PSC was awarded to Petrodel Resources Limited ("Petrodel") by the Tanzanian
government in September 2006 and Heritage entered into a farm-in agreement with
Petrodel in April 2008. Later that year, 207 kilometres of 2D seismic was
acquired onshore in the Kimbiji licence area. The acquisition of over 300 square
kilometres of 3D seismic offshore Tanzania commenced in December 2010 and was
completed in January 2011. Interpretation of the Latham 3D has been completed
and the process of completing geophysical studies of seismic data is underway in
order to finalise the evaluation of mapped prospects in order to determine the
forward work programme. After a technical review it was decided that all
capitalised costs in respect of the Kimbiji licence area were written off in
2011.
MALTA
In December 2007, the Group entered into a PSC with the Maltese government for a
100% interest in Areas 2 and 7 in the south-eastern offshore region of Malta.
The licences cover almost 18,000 square kilometres and are situated
approximately 80 kilometres and 140 kilometres, offshore Malta, for Area 2 and
Area 7 respectively, in water depths of up to approximately 300 metres. The two
Areas are close to, and similar to, a number of producing fields offshore Libya
and Tunisia.
The licences are underexplored with only one well previously drilled in Area 2;
the Medina Bank-1 well in 1980. The well was drilled to a depth of 1,225 metres
but failed to reach the target horizons, estimated to be between 1,500 and 4,500
metres.
Heritage has an extensive data set of approximately 5,000 kilometres of 2D
seismic, including data acquired in July 2011 using greatly improved acquisition
parameters compared to our inherited legacy dataset. The interpretation of
seismic data has confirmed the mapping of a highly attractive Lower Eocene
carbonate reef play within a prospect in Area 7 and also allowed for the
mapping, with greater certainty, of deeper carbonate reef play within the
Cretaceous section of the prospect. These primary targets are recognised as
major hydrocarbon producing zones in the central part of the Mediterranean. Well
planning is being undertaken to drill the principal prospect in Area 7.
In addition, the Company has recognised the presence of a north-south trending
shelf margin on the eastern part of the blocks where a number of attractive reef
prospects have been mapped.
MALI
Heritage announced in March 2008 that the Government of Mali had approved
Heritage's farm-in on two exploration licences with a gross area of 64,404
square kilometres in the Gao Graben.
Heritage is the operator with the right to earn a 75% working interest in each
of Blocks 7 and 11 by financing 100% of the minimum work programme of seismic
acquisition and the drilling of one exploration well.
The two licences are located in the Gao Graben in the eastern part of the
country; a Mesozoic basin that management considers geologically similar to
other Mesozoic interior-rift basins within North Africa, such as the Muglad
Basin of Sudan and the Doba Basin of Chad. The Gao Graben has been delineated by
various surveys conducted since the early 1970s, including over 2,000 kilometres
of 2D seismic and a comprehensive gravity and magnetic survey. This data shows
the presence of tilted fault-blocks and indicates the possible presence of up to
4,000 metres of sediments above a Paleozoic succession.
Previous drilling in the Gao Graben encountered oil and gas shows, indicating
the potential for a working hydrocarbon system. The Tin Bergoui water well,
which lies approximately 30 kilometres to the west of Block 11, was drilled to a
depth of 350 metres and encountered oil and gas shows in a number of horizons.
A two year extension to the original term of the licences was awarded in January
2009 and a further three year extension to Block 11 was awarded in 2011.
1,077 kilometres of 2D seismic was acquired over Blocks 7 and 11 between June
and August 2011 and the data has been interpreted and integrated with legacy
data.
Following the coup in March 2012, Heritage is monitoring the security situation
and considering all options.
PAKISTAN
Sanjawi
Heritage has a 54% interest and is operator of the Sanjawi licence (number
3068-2) in Zone II (Baluchistan) which was awarded in November 2007. This
onshore exploration licence covers a gross area of 2,258 square kilometres and
is considered highly prospective due to an oil discovery to the west of the
licence, a number of gas fields to the south-east of the licence and the
presence of oil seeps in the licence. The licence is dominated by a series of
broad east-west trending surface features including the Dabbar and Warkan Shah
anticlines. These are large anticlines, the Dabbar structure being some 300
square kilometres in area.
Zamzama North
In December 2008, Heritage obtained a 48% interest in the Zamzama North licence
(number 2667-8) and was appointed operator. The Zamzama North licence is located
in the south of Pakistan in the western part of the Sindh Province approximately
200 kilometres north-west of Hyderabad and covers an area of 1,229 square
kilometres.
Any discovered hydrocarbons could be readily connected to the existing
infrastructure as one of the main pipelines runs through the licence. To the
south of, and adjacent to, Zamzama North is the Zamzama Gas Field, a major gas
field in production.
The current seismic database used to map the Zamzama North licence comprises
some 1,000 kilometres of good quality 2D seismic including 350 kilometres of
new, very good quality data acquired by Heritage in the fourth quarter of 2010.
On the basis of this data, Heritage has mapped a number of structural prospects
and leads and a drilling programme is under consideration. Operational activity
in the area has been hindered by floods which have made access to the area
difficult. It is planned to drill a well when access has improved.
LIBYA
In October 2011, Heritage acquired a controlling 51% interest in Sahara which
holds the necessary long-term permits and licences to provide oil field services
in Libya. Through this acquisition Heritage believes it is well positioned to
play a significant role in the future development of the oil and gas industry in
Libya.
Heritage has pursued its strategy of 'first mover advantage' in pursuing
participation in the restoration of the Libyan oil production sector which
presents a dynamic and evolving environment. Libya has proven reserves of 44
billion barrels of oil and ranks first in Africa ahead of Nigeria and Angola(1).
Only one third of the country is covered by exploration and production sharing
agreements providing the potential for additional hydrocarbons to be discovered.
It is a highly attractive oil province due to low cost of oil recovery, high
quality oil which is generally sweet with API gravity ranging between 32-44
degrees, proximity to European markets and well developed infrastructure.
Heritage Energy International Limited, a wholly owned subsidiary of Heritage,
acquired a 51% equity interest and control of Sahara Oil which owns the entire
share capital of Sahara, a Libyan registered company providing services to the
oil industry, for cash consideration of US$19.5 million.
Sahara Oil was established in April 2009 and has been granted long-term licences
to provide full oil field services in Libya, including the ability to drill
onshore and offshore and hold both oil and gas licences.
Heritage established a base in Benghazi in the first half of 2011 and has been
in discussions with senior members of the NTC, the legitimate and recognised
government of Libya, the Executive Committee which is the executive arm of the
NTC and the National Oil Company and certain subsidiaries. The dialogue with
these parties continues through Sahara with Heritage exploring ways to assist
the NTC and the state oil companies rehabilitate certain of their existing
fields and recommence production.
The acquisition provides diversification to the current portfolio through
potentially gaining access to some large producing fields in Libya. In addition,
Heritage is considering using Sahara to assist with the drilling of its targets
offshore Malta and is actively looking to contract a rig to drill in Area 7.
(1) BP Statistical Review 2011
RUSSIA
Since 2005, the Group has held a 95% equity interest in ChumpassNefteDobycha
Limited, a Russian company whose sole asset is the Zapadno Chumpasskoye licence.
The Zapadno Chumpasskoye licence is in the hydrocarbon-rich West Siberian
province of Khanty-Mansiysk, approximately 100 kilometres from the city of
Nizhnevartovsk and in the area of the region's prolific Samotlor oilfield, which
makes it accessible to existing infrastructure. The licence contains the Zapadno
Chumpasskoye Field, discovered in 1997. A total of 13 wells have been drilled on
the licence including four by the Group. The Chumpasskoye crude is light, sweet,
(42 degrees API) oil, with moderate gas-to-oil ratios.
Since 2006, the Group has acquired 2D seismic data covering an area of 200
kilometres, constructed pilot production facilities, drilled four wells and
re-entered existing well 226. Production facilities were commissioned and
production commenced in May 2007. In 2009, an electric submersible pump was
installed on well 226 to arrest the natural well production decline and a water
shut-off operation was completed on well P4. In 2010, well P14, an exploration
well drilled in 1976, was re-entered and relogged.
In August 2011, drilling of well 363, the first horizontal well in the licence,
completed and results of this well exceeded pre-drill expectations. During the
flow test the well produced at rates of up to 1,405 bopd.
Production for the field averaged 673 bopd for the year, an increase of 24% year
on year.
Historical development of this reservoir type throughout the region has been
through conventional drilling on a grid pattern. Heritage recognised an
opportunity to improve the efficiency and economics of field development by
utilising horizontal drilling technology, thus decreasing the number of wells
and the total cost required to develop the field, while potentially improving
recovery. The previous reserves review and development plan undertaken by RPS
Energy in June 2009 will be updated, incorporating the results of well 363.
Further drilling on the licence is expected later in 2012.
The Group commenced shipment via Transneft at the end of 2009 and completed the
first export sales of Zapadno Chumpasskoye crude via the Black Sea. Approval was
obtained in 2010 from Transneft for a permanent pipeline tie-in to the Transneft
transportation system. The capacity of our separation facility was expanded to
handle the forecast production from the upcoming planned horizontal wells. The
Company will be tying into Lukoil's nearby Langepas gas plant to conserve
associated gas and therefore eliminate gas flaring in the field.
FINANCIAL REVIEW
Selected operational and financial data
2011 2010 Change
----------------------------------------------------------------------------
Production bopd 673 542 24%
----------------------------------------------------------------------------
Sales volume bopd 671 539 25%
----------------------------------------------------------------------------
Average realised price $/bbl 36.9 25.5 45%
----------------------------------------------------------------------------
Petroleum revenue $ million 9.0 5.0 80%
----------------------------------------------------------------------------
Loss from continuing
operations $ million (63.0) (44.2) (43%)
----------------------------------------------------------------------------
(Loss)/gain from discontinued
operations $ million (3.9) 1,267.2 n/a
----------------------------------------------------------------------------
Net (loss)/profit $ million (66.9) 1,223.0 n/a
----------------------------------------------------------------------------
Special dividend per share Pence per share - 100 n/a
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total cash capital
expenditures $ million 134.9 119.0
----------------------------------------------------------------------------
Year end cash balance $ million 310.9 598.3
----------------------------------------------------------------------------
CORPORATE PERFORMANCE
Production and sales volumes
2011 petroleum revenue was generated from the Zapadno Chumpasskoye Field in
Russia. Well 363, the first horizontal well to be drilled in the field, was
completed in August 2011 and commenced production from mid-August. This led to
an increase in production resulting in a year-on-year increase in average daily
production of 24% from 542 bopd in 2010 to 673 bopd in 2011. The year end exit
rate was c. 937 bopd.
The difference between the production volumes and sales volumes is due to the
change in the oil inventory balance during the year.
Revenue
Petroleum revenue increased by $4.0 million (80%) to $9.0 million in 2011. This
increase comprised of:
-- $1.2 million from an increase in sales volumes from 539 bopd in 2010 to
671 bopd in 2011; and
-- $2.8 million from an increase in average commodity prices from
$25.51/bbl in 2010 to $36.86/bbl in 2011.
Operating results
Expenses
Petroleum operating costs increased by 42% to $2.9 million in 2011, primarily
due to higher crude oil production. Average operating cost per produced barrel
of oil increased from $10.64/bbl in 2010 to $11.82/bbl in 2011, due primarily to
higher well workovers, fuel and logistics costs.
Production tax in Russia increased from $2.6 million in 2010 to $4.9 million in
2011 as a result of both higher production volumes and increased average
commodity prices in 2011, both of which are used in the calculation of the tax.
General and administrative expenses decreased from $29.8 million in 2010 to
$19.9 million in 2011. This is due, principally, to certain corporate
transaction costs being expensed in 2010 and arbitration settlement costs to be
paid to a former director which were incurred in 2010. The reduction was offset
by increases in travel costs incurred in 2011 as the Company continued its focus
on increasing and diversifying its asset portfolio.
If share-based compensation expenses are excluded, net general and
administrative expenses decreased from $26.6 million in 2010 to $17.4 million in
2011. In 2011, the Group capitalised $5.5 million (2010 - $6.7 million) of
general and administrative costs relating to exploration and development
activities, including share-based compensation of $1.1 million (2010 - $1.1
million).
Depletion, depreciation and amortisation expenses increased by 25% to $2.6
million in 2011, in line with the increased production volumes.
Exploration expenditures expensed in the year, and not capitalised, increased
from $2.8 million in 2010 to $12.3 million in 2011. Exploration expenditures in
2011 related principally to activities in Africa as the Company looked to expand
its portfolio in its core areas.
In 2011, the Group recognised an impairment of intangible exploration and
evaluation assets of $10.8 million (2010 - $10.5 million). After a technical
review management decided to write-off expenditure of $10.8 million incurred
with respect to the Kimbiji licence area in Tanzania. The impairment recognised
in 2010 comprised of two elements; $1.6 million write-off in connection with the
DRC and $8.9 million write-off incurred with respect to the Kisangire and
Lukuliro licence areas in Tanzania.
In 2010, the Group recognised an impairment write-down of property, plant and
equipment of $1.9 million (2011 - nil) relating to a reduction in the fair value
of an aircraft due to unfavourable economic conditions.
Finance income/costs
In 2011, interest income was $5.7 million (2010 - $3.0 million). Cash and cash
equivalents are typically held in interest bearing treasury accounts. This
increase in interest income is primarily due to an increase in average cash and
cash equivalents balances and an increase in interest rates in 2011 in
comparison with 2010, achieved through improved treasury management.
Other finance costs increased from $3.0 million in 2010 to $3.7 million in 2011,
due primarily to increased convertible bond accretion costs.
In 2011, the Group had foreign exchange losses of $0.2 million compared to $1.8
million gains in 2010. The small loss arose from net foreign exchange gains and
losses on revaluation of balances denominated in currencies different from the
functional currency.
Heritage recognised an unrealised loss on investments of $20.3 million in 2011
(2010 - $0.9 million gain), which comprises of a decrease of $18.8 million in
market value of investments in shares of PetroFrontier and a decrease of $1.5
million in fair value of its investment in Afren plc ("Afren"). As at 31
December 2011, the Company had acquired 9,748,200 shares of PetroFrontier
representing 15.25% of listed shares of the company. The investment in share
capital of PetroFrontier is classified as available-for-sale and valued at fair
value which is determined using market price at the end of the period. At 31
December 2011, the market price of PetroFrontier shares was Cdn $1.18 per share.
As at 16 April 2012 the share price had increased to Cdn $1.68 per share.
Until 4 November 2011, Heritage held 1,500,000 warrants in Afren with an
exercise price of GBP 0.60 per warrant, which were received as partial
consideration from the sale of Heritage Congo Limited in 2006. On 4 November
2011, the Afren warrants were exercised and the Company acquired 1,500,000 of
the listed shares in Afren. The investment in Afren shares is classified as
available-for-sale and valued at fair value which is determined using market
price at the end of the period. The valuation at market price as at 31 December
2011 resulted in a gain of $120,000 which was recognised in equity.
Results from continuing operations
Heritage's loss after tax from continuing operations in 2011 was $63.0 million,
compared to $44.2 million in 2010. The adjusted loss from continuing operations
in 2011 was $29.4 million compared to $31.3 million in 2010 if certain non-cash
items (share-based compensation expense, impairment of intangible exploration
and evaluation assets, property, plant and equipment impairment write-down,
foreign exchange gains, unrealised gains/losses on revaluation of Afren warrants
and unrealised loss on investment in PetroFrontier shares) are excluded.
Disposals
On 18 December 2009, Heritage announced that it and its wholly owned subsidiary
HOGL, had entered into a SPA, with Eni for the sale of the Ugandan Assets. On 17
January 2010, Tullow exercised its rights of pre-emption. The transaction was
overwhelmingly approved by Heritage shareholders at the General Meeting on 25
January 2010.
On 27 July 2010, Heritage announced that HOGL had completed the disposal of the
Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a
contractual settlement, of which Heritage received and retained $1.045 billion.
The URA contends that income tax is due on the capital gain arising on the
disposal and it raised assessments of $404,925,000 prior to completion of the
disposal. Heritage's position, based on comprehensive advice from leading legal
and tax experts in Uganda, the United Kingdom and North America, is that no tax
should be payable in Uganda on the disposal of the Ugandan Assets.
On closing, Heritage deposited $121,477,500 with the URA, representing 30% of
the disputed tax assessment of $404,925,000. $121,477,500 has been classified as
a deposit in the balance sheet at 31 December 2011. A further $283,447,000 has
been retained in escrow with Standard Chartered Bank in London, pursuant to an
agreement between HOGL, Tullow and Standard Chartered Bank pending resolution
between the Ugandan Government and HOGL of the tax dispute. Including accrued
interest, an amount of $284,479,000 is classified as restricted cash in the
balance sheet at 31 December 2011.
In August 2010, the URA issued a further income tax assessment of $30 million
representing 30% of the additional contractual settlement amount of $100
million. HOGL has challenged the Ugandan tax assessments on the disposal of
HOGL's entire interest in the Ugandan Assets.
In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed
HOGL's applications in relation to the two assessments amounting to
$434,925,000. In December 2011 and January 2012, HOGL commenced appeals to the
Ugandan High Court in relation to the rulings from the Tax Appeals Tribunal. The
rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process
and are not final and determinative. HOGL has appealed the rulings, which it
believes are fatally flawed in many respects, through the Ugandan court system
commencing with the High Court and subsequently the Court of Appeal and Supreme
Court if necessary.
As a result of the actions of the tax authorities in Uganda, HOGL and its
advisers consider that it was compelled to take part in a Ugandan domestic
process before a Tax Appeals Tribunal, notwithstanding HOGL's belief that
arbitration, which is ongoing in London and detailed below, is the correct forum
to settle such disputes, in view of the existence of valid and binding
arbitration provisions in its PSAs with the Ugandan Government.
In May 2011, HOGL commenced international arbitration proceedings in London
against the Ugandan Government. HOGL is seeking a decision requiring, among
other things, the return or release of approximately $405 million, plus
interest, in aggregate currently on deposit with the URA or in escrow with
Standard Chartered Bank in London. Accordingly, the arbitration proceedings
concern HOGL's claims that the Ugandan Government wrongfully or unreasonably
withheld consent to the sale by HOGL of the rights under the PSAs for the
Ugandan Assets, including by making this consent conditional upon the payment of
a sum alleged to be a tax liability of HOGL. The arbitration proceedings are
being held in London in accordance with the provisions of the PSAs in relation
to the Ugandan Assets.
On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received
Particulars of Claim filed in the High Court of Justice in England by Tullow
seeking $313,447,500 for alleged breach of contract as a result of HOGL's and
Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow
of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the
claim has no basis and are in the process of vigorously and robustly defending
it. Heritage and HOGL have filed their Defence and Counterclaim against Tullow
seeking instead the release to HOGL of the $283,447,000 plus interest currently
being held in escrow with Standard Chartered Bank in London.
Although disputes of this nature are inherently uncertain, the Directors believe
that the monies on deposit and held in escrow will ultimately be recovered by
Heritage.
The results of the Ugandan operations have been classified as discontinued
operations. (Loss)/gain on disposal of discontinued operations as at 31 December
2011 and 2010 is as follows:
Year ended 31 December
------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
(Loss)/gain on disposal of discontinued operations (3,933) 1,267,211
----------------------------------------------------------------------------
(3,933) 1,267,211
----------------------------------------------------------------------------
The 2011 loss relates to legal fees incurred in connection with the tax dispute
which are considered to be an adjustment to the profit on disposal of the
Ugandan Assets.
The 2010 gain from discontinued operations in Uganda of $1,267.2 million may be
summarised as follows:
Year ended
31 December
2010
$ million
----------------------------------------------------------------------------
Consideration received
----------------------------------------------------------------------------
Cash consideration and amount to settle contractual dispute 1,450.0
----------------------------------------------------------------------------
Working capital adjustments 13.6
----------------------------------------------------------------------------
Total 1,463.6
----------------------------------------------------------------------------
Less:
----------------------------------------------------------------------------
Carrying amount of net assets sold and expenses (196.4)
----------------------------------------------------------------------------
Gain on disposal of discontinued operations 1,267.2
----------------------------------------------------------------------------
In March 2011, Tullow paid working capital adjustments with respect to the
Ugandan Assets of $13.6 million.
In 2011, the basic and diluted loss per share from continuing operations was
$0.23, compared to $0.15 and $0.30, respectively, in 2010.
Heritage's net loss in 2011 was $66.9 million, compared to a net profit of
$1,223.0 million in 2010.
In 2011, the basic and diluted loss per share was $0.25, compared to the basic
and diluted earnings per share of $4.25 and $3.57, respectively, in 2010.
Cash flow and capital expenditures
Cash used in continuing operating activities was $34.6 million in 2011 compared
to $21.0 million in 2010. Total cash capital expenditures, including acquisition
of a subsidiary, in 2011 were $134.9 million which is higher by $15.9 million
than in 2010. The following major work programmes and an acquisition were
undertaken in 2011:
-- testing of the Miran West-2 well in Kurdistan completed in January 2011.
The well was drilled to a total depth of 4,426 metres after it was
modified to assess the exploration potential of deeper formations. The
Miran West-2 well results confirmed three additional pay zones within
the Lower Cretaceous and Jurassic formations in addition to the pay zone
identified in the Upper Cretaceous in the Miran West-1 well. The Miran
Gas Field is a commercial discovery and independent engineering studies
have confirmed the potential for a fast-tracked, phased development of
the field;
-- acquisition of a 3D seismic survey, covering 730 square kilometres,
commenced on the Miran Block in the fourth quarter of 2010 and completed
in the second half of 2011. The significant improvement in seismic data
quality over the Miran Field is encouraging and assists greatly with the
selection of well locations. An early phase of processing produced an
initial dataset covering the core area of the field which was used to
assist in the selection and orientation of the drilling of the deviated
Miran West-3 and the Miran East-1 wells. The increased coverage and
quality of the 3D data enables enhanced mapping of the structure and
increased ability to identify fault systems;
-- acquisition of 180 kilometres of 2D seismic on the southern portion of
the Miran Block to help identify further potential prospectivity was
completed in October 2011. Interpretation of the data has highlighted a
structure capable of containing additional resources. Further work is
being undertaken to identify a suitable drilling location;
-- Miran West-3 well, commenced drilling in August 2011 and continued
drilling into 2012 with the aim of targeting reservoir sections
encountered in discovery wells with the primary objective of appraising
the productivity of the Jurassic reservoir formation in the Miran West
structure. To date, results from the well have confirmed oil in the
Upper Cretaceous and gas in the Lower Cretaceous and Jurassic
reservoirs. In April 2012, it was announced that a reservoir interval
above the main Jurassic reservoir had been tested and resulted in a flow
of up to 17.5 MMscfd of dry gas. Further drilling will appraise the
Jurassic reservoir intervals discovered by the Miran West-2 well. A
number of tests are planned and drilling is expected to be completed
during the second quarter of 2012;
-- acquisition of a 51% equity interest and control in Sahara Oil, a
company wholly owning Sahara for $19.5 million. Sahara has the rights to
own and operate oil and gas licences in Libya. The Group agreed to pay
the vendors additional consideration of $5 million becoming due on
signing of an oil service contract;
-- drilling of well 363 in the Zapadno Chumpasskoye Field, Russia,
completed at the beginning of August 2011, results of this well exceeded
pre-drill expectations. During the flow test the well produced at rates
of up to 1,405 bopd and led to a significant increase in production;
-- acquisition of 1,400 kilometres of 2D seismic across Area 7 in Malta in
July 2011. Well planning is being undertaken to drill the principal
prospect in Area 7;
-- in Mali, approximately 1,077 kilometres of 2D seismic was acquired over
Blocks 7 and 11 and the data has been interpreted and integrated with
legacy data; and
-- acquisition of 300 square kilometres of 3D seismic offshore Tanzania
completed in January 2011. Interpretation of the Latham 3D has been
completed and the process of completing geophysical studies of seismic
data is underway in order to finalise the evaluation of mapped prospects
in order to determine the forward work programme.
Buy back programme
At the Annual General Meetings ("AGMs") held on 17 June 2010 and 20 June 2011, a
Special Resolution was passed by shareholders authorising the Company to make
market purchases of its own shares. In April 2011, the Company announced its
intention to commence a buy back programme to spend up to $100 million to
acquire its Ordinary Shares using the authority granted at the 17 June 2010 AGM.
Shareholders approved the resolution at the AGM on 20 June 2011 to acquire up to
28,900,000 Ordinary Shares from that date. Purchased Ordinary Shares are held in
treasury.
In July 2011, the Company announced that the share purchases would be made via a
trading plan to allow the buy back programme to continue independently through
close periods. In August 2011, the Company made a further announcement that the
programme would continue over and above the initial amount of $100 million up to
a maximum amount of the buy back authority approved at the 2011 AGM if it
continues to be in the best interests of the Company and its shareholders.
As at 31 December 2011 the Company held a total of 33,228,734 Ordinary Shares in
treasury equal to 11% of the issued share capital as at 1 January 2011. The
total acquisition cost of these shares was $123.6 million.
To date 33,856,107 Ordinary Shares have been bought back and are held in
treasury. Consequently, Heritage has 255,891,923 Ordinary Shares in issue
(excluding treasury shares) as well as 2,811,408 exchangeable shares of no par
value of HOC, each carrying one voting right in Heritage. The total number of
voting rights in Heritage, excluding treasury shares as at 17 April 2012, is
258,703,331.
PetroFrontier shares
As at 31 December 2011, the Company had acquired 9,748,200 of the listed shares
of PetroFrontier representing 15.25% of the company. Total share acquisition
costs amounted to $30.2 million. PetroFrontier is listed on the TSX Venture
Exchange in Canada.
On 4 November 2011 the Afren warrants were exercised and the Company acquired
1,500,000 of the listed shares in Afren, which were continued to be held at year
end.
2010 special dividend
On 2 August 2010, Heritage announced the declaration of a special dividend of
100 pence per Ordinary Share of the Company and HOC, the Company's wholly owned
subsidiary, also announced a declaration of a special dividend of Cdn$1.62 per
Exchangeable Share of HOC, calculated at an exchange rate of GBP 1.00:Cdn$1.62.
The special dividend was paid on 27 August 2010.
Following an amendment to the terms of the $165,000,000 8.00% convertible bonds
due in 2012 (the "Bonds"), the special dividend was also paid to Bondholders and
no adjustments were made to the conversion rights under the terms of the Bond
(the "Conversion Rights") in respect of any dividend paid or made by the
Company. The Company paid a $2.4 million consent fee to Bondholders who voted in
favour of the amendment to the terms. Accordingly, the Company agreed to pay the
holder of each Bond a pass-through dividend (the "Pass-through Dividend") which
was equal to the dividend which would be received by the holder of a number of
Ordinary Shares equal to the number of Ordinary Shares to which the Bondholder
would have been entitled if it had exercised its Conversion Rights on the record
date of 13 August 2010. The aggregate principal amount of Bonds outstanding on
the record date was $127,100,000. These Bonds were convertible into 27,042,553
Ordinary Shares pursuant to the Conversion Rights and accordingly the Company
paid to Bondholders a Pass-through Dividend of GBP 27,042,553 on 27 August 2010.
FINANCIAL POSITION
Liquidity
There was a net decrease in cash and cash equivalents in 2011 of $287.4 million.
At 31 December 2011, Heritage had a working capital surplus of $550.2million,
including cash and cash equivalents of $310.9 million. Like most oil and gas
exploration companies, Heritage raises financing for its activities from time to
time using a variety of sources. Sources of funding for future exploration and
development programmes will be derived from inter alia disposal proceeds from
the sale of assets, such as the sale of the Company's Ugandan Assets in 2010
(see disposals section of the Financial Review) using its existing treasury
resources, new credit facilities, reinvesting its funds from operations,
farm-outs and, when considered appropriate, issuing debt and additional equity.
Accordingly, the Group has a number of different sources of finance.
Capital structure
Heritage's financial strategy has been to fund its capital expenditure
programmes and any potential acquisitions by selling non-core assets,
reinvesting funds from operations, using existing treasury resources, finding
new credit facilities and, when considered appropriate, either issuing unsecured
convertible bonds or equity.
On 26 July 2010, the Company completed the disposal of the Ugandan Assets for
cash consideration of $1.35 billion and an additional contractual settlement
amount of $100 million.
At 31 December 2011, Heritage had net cash of $135.1 million (31 December 2010 -
$409.2 million) (cash and cash equivalents less total liabilities) and nil
gearing (31 December 2010 - nil) (net debt as a percentage of total
shareholders' equity).
In February 2012, Heritage repaid the outstanding Bonds of $127.1 million at the
end of the five year term.
Creditors' payment policy
It is the Company and Group's general policy to settle all debts with creditors
on a timely basis and in accordance with the terms of credit agreed with each
supplier. Average creditor payment days in 2011 were approximately 45 days (2010
- 45 days).
PRIMARY RISKS AND UNCERTAINTIES FACING THE BUSINESS
Heritage's business, financial standing and reputation may be impacted by
various risks, not all of which are within its control. The Group identifies and
monitors the key risks and uncertainties affecting the Group and runs its
business in a way that minimises the impact of such risks where possible. The
primary business risks include:
-- Exploration and development expenditures and success rates - the Group
has experienced management and technical teams with a track record of
finding major hydrocarbon discoveries and has a diversified portfolio of
exploration, appraisal, development and production assets. Considerable
technical work is undertaken to reduce related areas of risk and
maximise opportunities.
-- Factors associated with operating in developing countries, political,
fiscal and regulatory instability - the Group maintains close contact
with governments in the areas where it operates and, where appropriate,
invests in community projects. Considerable work is undertaken before
commencing operations in any new territory.
-- Title disputes - notwithstanding potential challenges in Kurdistan and
Malta, the Group believes that it has good title to its oil and gas
properties. However, the Group cannot control or completely protect
itself against the risk of title disputes or challenges and there can be
no assurance that claims or challenges by third parties against the
Group's properties will not be asserted at a future date. Naturally, the
Group strives to employ the best internal and advisory knowledge
available to help to minimise this risk associated with its activities.
-- Oil and gas sales volumes and prices - whilst not under the direct
control of the Company, a large movement in commodity prices could
impact on the Group. The Group did not hedge oil prices in 2011.
-- Loss of key employees - remuneration packages are regularly reviewed to
ensure key executives and senior management are properly remunerated.
Long-term incentive programmes have been established. Employees are
encouraged to develop their potential and, where appropriate, to further
their careers within the Group. This is one of the Group's Key
Performance Indicators and continues to remain at low levels.
-- Foreign exchange exposure - generally, it is the Group's policy to
conduct and manage its business in US dollars, which is its reporting
currency. Cash balances in Group subsidiaries are primarily held in US
dollars but small amounts may be held in other currencies in order to
meet immediate operating or administrative expenses or to comply with
local currency regulations.
INTERNAL CONTROL
A system of internal control was designed and tailored to ensure key risks are
addressed appropriately and to provide assurance regarding the reliability of
financial reporting and preparation of financial statements. Risk and internal
control are assessed continually. One weakness identified in its financial
procedures reporting concerns accounting for complex transactions and the
Company ensures that it seeks third party advice to mitigate this weakness.
As part of the internal control, all transactions with related parties are
identified, scrutinised and disclosed in the financial statements appropriately.
Heritage maintains insurance policies in accordance with industry standards.
Heritage believes that the level of insurance cover it maintains is adequate,
based on various factors such as the cost of the policies, industry standard
practice and the risks associated with the exploration and development of oil
and gas properties in the countries in which it operates. Heritage does not
insure against political risk and, therefore, shareholders have full exposure to
the risks and rewards of investing in its territories.
Heritage maintains detailed financial models which allows the Company to plan
future operating and capital activities in an efficient manner.
Paul Atherton, Chief Financial Officer
17 April 2012
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The statement below explains the Directors' responsibility for preparation of
the Annual Report and Accounts 2011.
The Directors are responsible for preparing the Annual Report and Accounts for
the Group in accordance with applicable Jersey law and regulations.
Company law requires the Directors to prepare Group financial statements for
each financial year. Under that law they are required to prepare the Group
financial statements in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union ("EU") and applicable law.
The Group financial statements are required by law and IFRS as adopted by the EU
to present fairly the financial position of the Group and the performance for
that period.
In preparing the financial statements the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
-- provide additional disclosures when compliance with the specific
requirements in IFRS is insufficient to enable users to understand the
impact of particular transactions, other events and conditions on the
entity's financial position and financial performance;
-- state whether they have been prepared in accordance with IFRS as adopted
by the EU; and
-- prepare the financial statements on a going concern basis unless, having
assessed the ability of the Company to continue as a going concern, it
is inappropriate to presume the Company will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that its financial statements comply with the
Companies (Jersey) Law 1991 (as amended) (the "Jersey Companies Law"). They have
general responsibility for taking such steps, as are reasonably open to them,
for safeguarding the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law, regulations and listing rule requirements, the Directors
are also responsible for the preparation of a Directors' Report, Remuneration
Report and Corporate Governance Statement, all of which are in the Corporate
Governance Report.
The Directors are responsible for the maintenance and integrity of the statutory
and audited information on the Company's website www.heritageoilplc.com. Jersey
legislation and United Kingdom regulation, governing the preparation and
dissemination of financial statements, may differ from requirements in other
jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS
We confirm on behalf of the Board that to the best of our knowledge:
a) the financial statements prepared in accordance with the applicable
accounting standards give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole; and
b) the management report (which is incorporated within the Annual Review,
the Corporate Governance Report and the Corporate Social Responsibility
Report) includes a fair review of the development and performance of
the business, the position of the Company and the undertakings included
in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.
GOING CONCERN
The Group's activities are described in the Annual Review. The financial
position of the Group, its cash flows and liquidity position are described in
the financial review and financial statements within the Financial Statements
Report. In addition, the notes to the financial statements include the Group's
policies and processes for managing its capital and its exposures to credit and
liquidity risk. Having reviewed the future plans and projections for the Group
and its current financial position, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational existence for
the foreseeable future, a period of not less than 12 months from the date of
this report. In making this assessment they have considered the Company and
Group budgets, the cash flow forecasts and reviewed the availability of banking
facilities. For this reason, it continues to adopt the going concern basis of
accounting in preparing the annual financial statements.
For and on behalf of the Board
Michael J. Hibberd, Chairman
Paul Atherton, Chief Financial Officer
17 April 2012
Financial Information Included in This Announcement
The following information included in this Announcement does not constitute
audited financial statements of the Group. The Accounts for the year ended 31
December 2011 have been audited and will be posted on the Group's website. The
auditors have issued an unqualified opinion on those Accounts; their report
includes an 'emphasis of matter' drawing attention to the disclosures made in
the Group financial statements concerning the uncertain outcome of a dispute as
to whether or not tax is payable on the disposal of the Group's interests in
Uganda (which are reproduced in note 6 below). The following financial
information has been extracted from those Accounts.
HERITAGE OIL PLC
CONSOLIDATED INCOME STATEMENT
Years ended 31 December 2011 and 2010
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Revenue
Petroleum 9,030 5,015
Expenses
Petroleum operating (2,920) (2,055)
Production tax (4,905) (2,609)
General and administrative (note 22) (19,856) (29,785)
Depletion, depreciation and amortisation (2,630) (2,111)
Exploration expenditures (note 2e) (12,319) (2,818)
Impairment of intangible exploration assets (note 10) (10,775) (10,535)
Impairment of property, plant and equipment (note 11) - (1,854)
----------------------------------------------------------------------------
Operating loss (44,375) (46,752)
----------------------------------------------------------------------------
Finance income (costs)
Interest income 5,741 2,967
Other finance costs (note 7) (3,681) (2,970)
Foreign exchange (losses)/gains (209) 1,830
Unrealised (losses)/gains on other financial assets
(note 12) (20,282) 896
----------------------------------------------------------------------------
(18,431) 2,723
----------------------------------------------------------------------------
Loss from continuing operations before tax (62,806) (44,029)
----------------------------------------------------------------------------
Income tax expense (note 8) (152) (197)
----------------------------------------------------------------------------
Loss from continuing operations after tax (62,958) (44,226)
----------------------------------------------------------------------------
(Loss)/gain on disposal of discontinued operations
(note 6) (3,933) 1,267,211
----------------------------------------------------------------------------
(Loss)/profit for the year attributable to owners of
the Company (66,891) 1,222,985
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
HERITAGE OIL PLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Years ended 31 December 2011 and 2010
2011 2010
$'000 $'000
----------------------------------------------------------------------------
(Loss)/profit for the year (66,891) 1,222,985
Other comprehensive loss
Exchange differences on translation of foreign
operations (note 19) (883) (124)
Net change in fair values of available-for-sale
financial assets (18,765) -
Net change in fair values of available-for-sale
financial assets reclassified to the income
statement 18,885 -
----------------------------------------------------------------------------
Other comprehensive loss, net of income tax (763) (124)
----------------------------------------------------------------------------
Total comprehensive (loss)/income for the year (67,654) 1,222,861
----------------------------------------------------------------------------
Attributable to:
Owners of the Company (67,654) 1,222,861
----------------------------------------------------------------------------
Net loss per share from continuing operations
(dollars)
Basic (0.23) (0.15)
Diluted (0.23) (0.30)
----------------------------------------------------------------------------
Net (loss)/earnings per share from discontinued
operations (dollars)
Basic (0.02) 4.40
Diluted (0.02) 3.70
----------------------------------------------------------------------------
Net (loss)/earnings per share (dollars)
Basic (0.25) 4.25
Diluted (0.25) 3.57
----------------------------------------------------------------------------
The total comprehensive loss for the year of $67,654,000 (2010 income -
$1,222,861,000) includes loss of $3,933,000 (2010 income - $1,267,211,000) from
discontinued operations (note 6).
The notes are an integral part of these consolidated financial statements.
HERITAGE OIL PLC
CONSOLIDATED BALANCE SHEET
As at 31 December 2011 and 2010
2011 2010
$'000 $'000
----------------------------------------------------------------------------
ASSETS
Non-current assets
Intangible exploration and evaluation assets (note 10) 271,859 183,424
Property, plant and equipment (note 11) 106,852 101,993
Other financial assets (note 12) 13,268 2,050
----------------------------------------------------------------------------
391,979 287,467
----------------------------------------------------------------------------
Current assets
Inventories 78 97
Prepaid expenses 1,344 746
Trade and other receivables (note 13) 1,788 20,240
Deposit with the URA (note 6) 121,477 121,477
Restricted cash (note 6) 284,479 283,603
Cash and cash equivalents (note 14) 310,882 598,275
----------------------------------------------------------------------------
720,048 1,024,438
----------------------------------------------------------------------------
1,112,027 1,311,905
----------------------------------------------------------------------------
LIABILITIES
Current liabilities
Trade and other payables (note 15) 35,391 54,083
Current tax liabilities (note 8) 104 197
Borrowings (note 16) 134,397 896
----------------------------------------------------------------------------
169,892 55,176
----------------------------------------------------------------------------
Non-current liabilities
Borrowings (note 16) 5,110 133,515
Provisions (note 17) 783 389
Deferred tax (note 8) 38 -
----------------------------------------------------------------------------
5,931 133,904
----------------------------------------------------------------------------
175,823 189,080
----------------------------------------------------------------------------
Net assets 936,204 1,122,825
----------------------------------------------------------------------------
SHAREHOLDERS' EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF
THE COMPANY
Share capital (note 18) 345,682 460,280
Reserves 83,326 86,678
Retained earnings 507,196 575,867
----------------------------------------------------------------------------
936,204 1,122,825
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
HERITAGE OIL PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - 2011
Year ended 31 December 2011
---------------------------------------------------
Available-
Foreign for-sale Share-
currency investments based
Share translation revaluation payments
Capital reserve reserve reserve
$'000 $'000 $'000 $'000
----------------------------------------------------------------------------
Balance at 1 January 2011 460,280 (940) - 62,969
----------------------------------------------------------------------------
Total comprehensive loss
for the year
Loss for the year - - - -
Other comprehensive
income/(loss)
Exchange differences on
translation of foreign
operations - (883) - -
Net change in fair value
of available-for-sale
financial assets - - (18,765) -
Net change in fair value
of available-for-sale
financial asset
reclassified to the
income statement - - 18,885 -
Total other comprehensive
income/(loss) - (883) 120 -
----------------------------------------------------------------------------
Total comprehensive
income/(loss) for the
year - (883) 120 -
----------------------------------------------------------------------------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Share buy back (123,575) - - -
Exercise of share options
net of attributable
dividends (note 21) 1,225 - - (1,225)
Share-based payment
transactions and
exercise of share
options 7,752 - - (1,364)
----------------------------------------------------------------------------
Total transactions with
owners (114,598) - - (2,589)
----------------------------------------------------------------------------
Balance at 31 December
2011 345,682 (1,823) 120 60,380
----------------------------------------------------------------------------
Year ended 31 December 2011
--------------------------------------
Equity
portion of
Retained convertible Total
earnings debt equity
$'000 $'000 $'000
---------------------------------------------------------------
Balance at 1 January 2011 575,867 24,649 1,122,825
---------------------------------------------------------------
Total comprehensive loss
for the year
Loss for the year (66,891) - (66,891)
Other comprehensive
income/(loss)
Exchange differences on
translation of foreign
operations - - (883)
Net change in fair value
of available-for-sale
financial assets - - (18,765)
Net change in fair value
of available-for-sale
financial asset
reclassified to the
income statement - - 18,885
Total other comprehensive
income/(loss) - - (763)
---------------------------------------------------------------
Total comprehensive
income/(loss) for the
year (66,891) - (67,654)
---------------------------------------------------------------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Share buy back - - (123,575)
Exercise of share options
net of attributable
dividends (note 21) (1,780) - (1,780)
Share-based payment
transactions and
exercise of share
options - - 6,388
---------------------------------------------------------------
Total transactions with
owners (1,780) - (118,967)
---------------------------------------------------------------
Balance at 31 December
2011 507,196 24,649 936,204
---------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
HERITAGE OIL PLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY - 2010
Year ended 31 December 2010
-----------------------------------------
Foreign
currency Share-based
Share translation payments
Capital reserve reserve
$'000 $'000 $'000
----------------------------------------------------------------------------
Balance at 1 January 2010 460,280 (816) 58,714
----------------------------------------------------------------------------
Total comprehensive income for the
year
Profit for the year - - -
Other comprehensive loss
Exchange differences on translation
of foreign operations - (124) -
Total other comprehensive loss - (124) -
----------------------------------------------------------------------------
Total comprehensive income/(loss)
for the year - (124) -
----------------------------------------------------------------------------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Dividends to shareholders - - -
Pass-through dividend to
Bondholders - - -
Share-based payment transactions
and exercise of share options - - 4,255
----------------------------------------------------------------------------
Total transactions with owners - - 4,255
----------------------------------------------------------------------------
Balance at 31 December 2010 460,280 (940) 62,969
----------------------------------------------------------------------------
Year ended 31 December 2010
-----------------------------------------
Equity
Retained portion of
earnings/ convertible Total
(deficit) debt equity
$'000 $'000 $'000
----------------------------------------------------------------------------
Balance at 1 January 2010 (153,164) 24,649 389,663
----------------------------------------------------------------------------
Total comprehensive income for the
year
Profit for the year 1,222,985 - 1,222,985
Other comprehensive loss
Exchange differences on translation
of foreign operations - - (124)
Total other comprehensive loss - - (124)
----------------------------------------------------------------------------
Total comprehensive income/(loss)
for the year 1,222,985 - 1,222,861
----------------------------------------------------------------------------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Dividends to shareholders (451,537) - (451,537)
Pass-through dividend to
Bondholders (42,417) - (42,417)
Share-based payment transactions
and exercise of share options - - 4,255
----------------------------------------------------------------------------
Total transactions with owners (493,954) - (489,699)
----------------------------------------------------------------------------
Balance at 31 December 2010 575,867 24,649 1,122,825
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
HERITAGE OIL PLC
CONSOLIDATED CASH FLOW STATEMENT
Years ended 31 December 2011 and 2010
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Cash provided by (used in) operating activities
Net loss from continuing operations for the year (62,958) (44,226)
Items not affecting cash
Depletion, depreciation and amortisation 2,630 2,111
Finance costs - accretion expenses 1,352 998
Foreign exchange gains (665) (289)
Share-based compensation 2,525 3,169
Loss/(gain) on other financial assets 20,282 (896)
Impairment of intangible exploration and evaluation
assets 10,775 10,535
Impairment of property, plant and equipment - 1,854
Decrease/(increase) in trade and other receivables 139 (1,124)
Increase in prepaid expenses (599) (178)
Decrease/(increase) in inventory 18 (84)
(Decrease)/increase in trade and other payables (7,187) 6,953
Accrued interest on restricted cash (876) -
(Decrease)/increase in tax payable (55) 197
----------------------------------------------------------------------------
Continuing operations (34,619) (20,980)
Discontinued operations (note 6) (4,137) (300)
----------------------------------------------------------------------------
(38,756) (21,280)
Investing
Property, plant and equipment expenditures (6,864) (46,946)
Intangible exploration and evaluation expenditures (96,469) (50,284)
Other financial assets (31,612) -
----------------------------------------------------------------------------
(134,945) (97,230)
Discontinued operations
Consideration on disposal (note 6) - 1,450,000
Transaction related expenses and other 9,901 (17,397)
Increase in deposit with URA (note 6) - (121,477)
Property, plant and equipment expenditures and
intangible exploration and evaluation expenditures
(note 6) - (21,735)
Increase in restricted cash (note 6) - (283,603)
----------------------------------------------------------------------------
(125,044) 908,558
----------------------------------------------------------------------------
Financing
Share buy back (123,575) -
Shares issued for cash, proceeds from exercise of
share options 2,659 -
Payment on exercise of share options (note 21) (1,780) -
Payment of Bondholder consent fees (note 16) - (2,378)
Distribution to shareholders - (451,537)
Pass-through dividend to Bondholders - (42,417)
Repayment of long-term debt (810) (823)
----------------------------------------------------------------------------
(123,506) (497,155)
----------------------------------------------------------------------------
(Decrease)/increase in cash and cash equivalents (287,306) 390,123
Cash and cash equivalents - beginning of year 598,275 208,094
Foreign exchange (loss)/gain on cash held in foreign
currency (87) 58
----------------------------------------------------------------------------
Cash and cash equivalents - end of year 310,882 598,275
----------------------------------------------------------------------------
Non-cash investing and financing activities (note 24)
Supplementary information
The following have been included within cash flows
for the year under operating and investing
activities
Interest received 6,170 2,298
Interest paid 10,429 10,473
Aborted acquisition expenses - 800
----------------------------------------------------------------------------
The notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Reporting Entity
Heritage Oil Plc was incorporated under the Jersey Companies Law on 6 February
2008 as Heritage Oil Limited. The Company changed its name to Heritage Oil Plc
on 18 June 2009. Its primary business activity is the exploration, development
and production of petroleum and natural gas in Africa, the Middle East and
Russia. The Company was established in order to implement a corporate
reorganisation of HOC.
These consolidated financial statements include the results of the Company and
all subsidiaries over which the Company exercises control. The Company together
with its subsidiaries are referred to as the Group. The key subsidiaries
consolidated within these financial statements include inter alia Heritage Oil
Corporation, Heritage Oil & Gas Limited, Heritage Oil and Gas (U) Limited,
Heritage Energy Middle East Limited, Heritage DRC Limited, Coatbridge Estates
Limited, ChumpassNefteDobycha, Neftyanaya Geologicheskaya Kompaniya, Heritage
Mali Block 7 Limited, Heritage Mali Block 11 Limited, Begal Air Limited,
Heritage Oil & Gas Holdings Limited, Eagle Drill Limited, Heritage Oil
International Malta Limited, 1381890 Alberta ULC, Heritage Oil Cooperatief U.A,
Heritage Oil Holdings Limited, Darwin Air Limited, Heritage Tanzania
Kimbiji-Latham Limited, Heritage Oil Tanzania Limited, Heritage Oil (UK)
Limited, Heritage Rukwa (TZ) Limited, Heritage Energy Limited, Heritage Energy
International Limited, Sahara Oil Services Limited and Sahara Oil Services
Holdings Limited.
The financial statements were approved by the Board and authorised for issuance
on 17 April 2012.
2 Significant Accounting Policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
a) Basis of preparation
The consolidated financial statements have been prepared in accordance with IFRS
as adopted by the EU.
The consolidated financial statements have been prepared under the historical
cost convention, as modified by the revaluation of certain financial assets and
liabilities at fair value.
The Company's consolidated financial statements are presented in thousand US
dollars unless otherwise stated. US dollars are the Company's functional and
presentation currency.
The Group had available cash of $311 million at 31 December 2011, excluding
amounts related to the tax dispute with the Ugandan Government. Based on its
current plans and knowledge, its projected capital expenditure and operating
cash requirements, the Group has sufficient cash to finance its operations for
more than 12 months from the date of this report. As for most oil and gas
exploration companies, Heritage raises financing for its activities from time to
time using a variety of sources. Sources of funding for future exploration and
development programmes will be derived from inter alia disposal proceeds from
the sale of assets, such as the disposal of the Ugandan Assets in 2010 (note 6),
using its existing treasury resources, new credit facilities, reinvesting its
funds from operations, farm-outs and, when considered appropriate, issuing debt
and additional equity. Accordingly, the Group has a number of different sources
of finance available and the Directors are confident that additional finance
will be raised as and when needed.
After making enquiries, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going concern basis
in preparing the Annual Report and Accounts.
The financial position of the Group, its cash flows and liquidity position are
described in the Financial Review of this report. In addition, note 3 of the
financial statements includes the Group's policies and processes for managing
its capital; its financial risk management; and its exposure to foreign exchange
risk, commodity price risk, credit risk and liquidity risk.
The preparation of financial statements in conformity with IFRS requires the use
of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Company's accounting
policies. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated
financial statements, are disclosed in note 4.
b) Consolidation
The consolidated financial statements incorporate the assets and liabilities of
all subsidiaries of the Company as at 31 December 2011 and 2010 and the results
of all subsidiaries for the years then ended.
Subsidiaries are all entities, including special purpose entities over which the
Company has the power to govern the financial and operating policies, so as to
obtain benefits from its activities, generally accompanying a shareholding of
more than one half of the voting rights. The existence and effect of potential
voting rights that are currently exercisable or convertible are considered when
assessing whether the Company controls another entity. Subsidiaries are fully
consolidated from the date on which control is transferred to the Company. They
are deconsolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of the
extent of any minority interest. The excess of the cost of acquisition over the
fair value of the Group's share of the net fair value of the identifiable
assets, liabilities and contingent liabilities acquired is recorded as goodwill.
If the cost of acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognised immediately in the income
statement.
Inter-company transactions, balances and unrealised gains on transactions
between Group entities (the Company and its subsidiaries) are eliminated. For
the purposes of consolidation, the accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the policies adopted by the
Company.
c) Segment reporting
The Group determines and presents operating segments based on the information
that internally is provided to the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), who are the Group's chief operating decision makers.
An operating segment is a component of the Group that engages in business
activities from which it may earn revenues and incur expenses, including
revenues and expenses that relate to transactions with any of the Group's other
components. An operating segment's operating results are reviewed regularly by
the CEO and CFO to make decisions about resources to be allocated to the segment
and assess its performance, and for which discrete financial information is
available.
Segment results that are reported to the CEO and CFO include items directly
attributable to a segment as well as those that can be allocated on a reasonable
basis. Unallocated items comprise mainly corporate assets, corporate offices
expenses and liabilities.
Segment capital expenditure is the total cost incurred during the period to
acquire property, plant and equipment, and intangible assets other than
goodwill.
d) Joint arrangements
The majority of exploration, development and production activities are conducted
jointly with others under contractual arrangement and, accordingly, the Group
only reflects its proportionate interest in such assets, liabilities, revenues
and expenses.
e) Exploration and evaluation expenditures
The Group applies a modified full cost method of accounting for exploration and
evaluation ("E&E") costs, having regard to the requirements of IFRS 6
Exploration for and Evaluation of Mineral Resources. Under the modified full
cost method of accounting, costs of exploring for and evaluating oil and gas
properties are capitalised on a licence or prospect basis and the resulting
assets are tested for impairment by reference to appropriate cost pools. Such
cost pools are based on geographic areas and are not larger than a segment. The
Group had seven cost pools in 2011 (2010 - seven cost pools); Uganda
(discontinued in 2010); Kurdistan; Russia; the DRC (written off in 2010);
Pakistan; Malta; Mali, Tanzania and Libya (entered in 2011).
E&E costs related to each licence/prospect are initially capitalised within
'Intangible exploration and evaluation assets'. Such E&E costs may include costs
of licence acquisition, technical services and studies, seismic acquisition,
exploration drilling and testing, the projected costs of retiring the assets, if
any, and directly attributable general and administrative expenses, but do not
include costs incurred prior to having obtained the legal rights to explore an
area, which are expensed directly to the income statement as they are incurred.
Where the Company farms-in to licences and incurs costs in excess of its own
share of licence costs as consideration, these costs are capitalised as its own
share.
Tangible assets acquired for use in E&E activities are classified as property,
plant and equipment; however, to the extent that such a tangible asset is
consumed in developing an intangible E&E asset, the amount reflecting that
consumption is recorded as part of the cost of the intangible asset.
Intangible E&E assets related to each exploration licence/prospect are not
depreciated and are carried forward until the existence, or otherwise, of
commercial reserves has been determined. The Group's definition of commercial
reserves for such purpose is proved and probable reserves on an entitlement
basis.
Proved and probable reserves are the estimated quantities of crude oil, natural
gas and natural gas liquids which geological, geophysical and engineering data
demonstrate with a specified degree of certainty (see below) to be recoverable
in future years from known reservoirs and which are considered commercially
producible. There should be a 50% statistical probability that the actual
quantity of recoverable reserves will be more than the amount estimated as
proved and probable and a 50% statistical probability that it will be less. The
equivalent statistical probabilities for the proven component of proved and
probable reserves are 90% and 10%, respectively.
Such reserves may be considered commercially producible if management has the
intention of developing and producing them and such intention is based upon:
-- a reasonable assessment of the future economics of such production;
-- a reasonable expectation that there is a market for all or substantially
all the expected hydrocarbon production; and
-- evidence that the necessary production, transmission and transportation
facilities are available or can be made available.
Furthermore:
i) Reserves may only be considered proved and probable if producibility is
supported by either actual production or a conclusive formation test.
The area of reservoir considered proved includes: (a) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any, or both; and (b) the immediately adjoining portions
not yet drilled, but which can be reasonably judged as economically
productive on the basis of available geophysical, geological and
engineering data. In the absence of information on fluid contacts, the
lowest known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir.
ii) Reserves which can be produced economically through application of
improved recovery techniques, such as fluid injection, are only
included in the proved and probable classification when successful
testing by a pilot project, the operation of an installed programme in
the reservoir, or other reasonable evidence (such as, experience of the
same techniques on similar reservoirs or reservoir simulation studies)
provides support for the engineering analysis on which the project or
programme was based.
If commercial reserves have been discovered, the related E&E assets are assessed
for impairment on a cost pool basis as set out below and any impairment loss is
recognised in the income statement. The carrying value, after any impairment
loss, of the relevant E&E assets is then reclassified as development and
production assets within property, plant and equipment.
E&E assets are assessed for impairment when facts and circumstances suggest that
the carrying amount may exceed its recoverable amount. Such indicators include
the point at which a determination is made as to whether or not commercial
reserves exist. Where the E&E assets concerned fall within the scope of an
established full cost pool, the E&E assets are tested for impairment together
with all development and production assets associated with that cost pool, as a
single cash generating unit. The aggregate carrying value is compared against
the expected recoverable amount of the pool, generally by reference to the
present value of the future net cash flows expected to be derived from
production of commercial reserves. Where the E&E assets to be tested fall
outside the scope of any established cost pool, there will generally be no
commercial reserves and the E&E assets concerned will be written off in full.
f) Property, plant and equipment
i) Development and production assets
The Group had one interest at the development and production stage during the
years covered by these financial statements: Russia.
Development and production assets are accumulated on a field-by-field basis and
represent the cost of developing the commercial reserves discovered and bringing
them into production, together with the E&E expenditures incurred in finding
commercial reserves transferred from intangible E&E assets as outlined above,
the projected cost of retiring the assets and directly attributable general and
administrative expenses.
The net book values of producing assets are depleted on a field-by-field basis
using the unit of production method by reference to the ratio of production in
the year to the related proved plus probable reserves of the field, taking into
account estimated future development expenditures necessary to bring those
reserves into production.
An impairment test is performed whenever events and circumstances arising during
the development or production phase indicate that the carrying value of a
development or production asset may exceed its recoverable amount. The aggregate
carrying value is compared against the expected recoverable amount of the cash
generating unit, generally by reference to the present value of the future net
cash flows expected to be derived from the production of commercial reserves.
The cash generating unit applied for impairment test purposes is generally the
field, except that a number of field interests may be grouped as a single cash
generating unit where the cash flows generated by the fields are interdependent.
ii) Other assets
Other property, plant and equipment are stated at cost less accumulated
depreciation and any impairment in value. The assets' useful lives and residual
values are assessed on an annual basis. Furniture and fittings are depreciated
using the reducing balance method at 20% per year.
Land is not subject to depreciation.
Aircraft are depreciated over their expected useful life of 60 months.
Depreciation is charged so as to write-off the cost, less estimated residual
value of aircraft on a straight-line basis.
Corporate capital assets are depreciated on a straight-line basis over their
estimated useful lives. The building is depreciated on a straight-line basis
over 40 years with nil residual value. The land is not depreciated.
g) Cash and cash equivalents
Cash and cash equivalents include cash on hand, deposits held at call with banks
and other short-term highly liquid investments with original maturities of three
months or less. Cash and cash equivalents are stated at amortised cost using the
effective interest rate method.
h) Trade and other receivables
Trade and other receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective interest method,
less provision for impairment. A provision for impairment of trade receivables
is established when there is objective evidence that the Group will not be able
to collect all amounts due according to the original terms of the receivables.
i) Inventories
Inventories consist of petroleum, condensate, liquid petroleum gas and materials
that are recorded at the lower of weighted average cost and net realisable
value. Cost comprises direct materials, direct labour, depletion and those
overheads that have been incurred in bringing the inventories to their present
location and condition. Net realisable value is the estimated selling price in
the ordinary course of business, less applicable variable selling expenses.
Provision is made for obsolete, slow-moving or defective items where
appropriate.
j) Investments
The Group classifies its investments in the following categories: financial
assets at fair value through the income statement and available-for-sale
financial assets. The classification depends on the purpose for which the
investments were acquired. Management determines the classification of its
investments at initial recognition. During the years covered by these financial
statements the Group did not have any investments classified as 'loans and
receivables' or 'held to maturity investments'.
i) Financial assets at fair value through the income statement
Financial assets held for trading are carried at fair value with changes in fair
value recognised in the income statement. A financial asset is classified in
this category if acquired principally for the purpose of selling in the
short-term. Derivatives are classified as held for trading unless they are
designated as hedges.
Gains or losses arising from changes in the fair value of the 'financial assets
at fair value through the income statement' category are presented in the income
statement within 'Unrealised gain/(loss) on other financial assets' in the year
in which they arise.
ii) Available-for-sale financial assets
Available-for-sale financial assets, comprising principally marketable equity
securities, are non-derivatives that are either designated in this category or
not classified. They are included in non-current assets unless management
intends to dispose of the investment within 12 months of the balance sheet date.
Changes in the fair value of monetary securities classified as
available-for-sale (other than impairment losses and foreign exchange gains and
losses which are recognised in the income statement) are recognised in equity.
Upon sale of a security classified as available-for-sale, the cumulative gain or
loss previously recognised in equity is recognised in the income statement.
The Group assesses at each balance sheet date whether there is objective
evidence that a financial asset or a group of financial assets is impaired.
Measurement is assessed by reference to the fair value of the financial asset or
group of financial assets.
k) Non-current assets held for sale and discontinued operations
Non-current assets, or disposal groups, are classified as assets held for sale
and stated at the lower of their carrying amount and fair value less costs to
sell if their carrying amount will be recovered principally through a sale
transaction rather than through continuing use.
Non-current assets, including those that are part of a disposal group are not
depreciated or amortised while they are classified as held for sale. Interest
and other expenses attributable to the liabilities of a disposal group
classified as held for sale continue to be recognised.
Non-current assets classified as held for sale and the assets of a disposal
group classified as assets held for sale are presented separately, as current
assets, from the other assets in the balance sheet. The liabilities of a
disposal group classified as held for sale are presented separately, as current
liabilities, from other liabilities in the balance sheet.
A discontinued operation is a component of the Group's business that represents
a separate major line of business or geographical area of operations that has
been disposed of or is held for sale, or is a subsidiary acquired exclusively
with a view to resale. Classification as a discontinued operation occurs upon
disposal or when the operation meets the criteria to be classified as held for
sale, if earlier. When an operation is classified as a discontinued operation,
from the comparative income statement is represented as if the operation had
been discontinued from the start of the comparative period.
l) Trade and other payables
These amounts represent liabilities for goods and services provided to the Group
prior to the end of the financial year which are unpaid.
m) Borrowings
Borrowings are initially recognised at fair value, net of transaction costs
incurred. Borrowings are subsequently measured at amortised cost. Any difference
between the proceeds (net of transaction costs) and the redemption amount is
recognised in the income statement over the period of the borrowings using the
effective interest method.
Convertible bonds are separated into liability and derivative liability
components (being the Bondholders' conversion option) and each component is
recognised separately. On initial recognition, the fair value of the liability
component of a convertible bond is determined using a market interest rate for
an equivalent non-convertible bond. This amount is recorded as a liability on an
amortised cost basis using the effective interest method until extinguished on
conversion or maturity of the Bonds. The Company reassesses the classification
during the life of the convertible bond and reclassifies between liabilities and
equity when appropriate.
Borrowings are removed from the balance sheet when the obligation specified in
the contract is discharged, cancelled or expired. The difference between the
carrying amount of a financial liability that has been extinguished or
transferred to another party and the consideration paid, including any non-cash
assets transferred or liabilities assumed, is recognised in finance income or
costs.
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least 12 months
after the balance sheet date.
n) Borrowing costs
Borrowing costs incurred for the construction of any qualifying asset are
capitalised during the period of time that is required to complete and prepare
the asset for its intended use or sale. Other borrowing costs are expensed.
The capitalisation rate used to determine the amount of borrowing costs to be
capitalised is the weighted average interest rate applicable to the Group's
outstanding borrowings during the year. For the year ended 31 December 2011,
this was 13.02% (31 December 2010 - 13.01%).
o) Provisions
Asset retirement obligations
Provision is made for the estimated cost of any asset retirement obligations
when the Group has a present legal or constructive obligation as a result of
past events, it is probable that an outflow of resources will be required to
settle the obligation and the amount has been reliably estimated. Provisions are
not recognised for future operating losses. Asset retirement obligation expense
is capitalised in the relevant asset category unless it arises from the normal
course of production activities.
Provisions are measured at the present value of management's best estimate of
expenditure required to settle the present obligation at the balance sheet date.
The discount rate used to determine the present value reflects current market
assessments of the time value of money and the risks specific to the liability.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation is adjusted at the end of each year to reflect the passage of time
and changes in the estimated future cash flows underlying the obligation. The
increase in the provision due to the passage of time is recognised as finance
costs whereas changes in the estimated future cash flows are added to or
deducted from the related asset in the current period.
p) Revenue recognition
Revenue from the sale of petroleum and natural gas is recognised at the fair
value received or receivable and is recorded when the significant risks and
rewards of ownership of the product are transferred to the buyer. For sales of
oil and gas this is usually when legal title passes to the external party which
occurs on shipment of oil and gas to the buyer. Interest income is recognised on
a time proportion basis using the effective interest method.
q) Income taxes
Current income tax is based on taxable profit for the year. Taxable profit
differs from profit as reported in the income statement because it excludes
items that are never taxable or deductible as well as those that are taxable or
deductible in a different period. The Group's current tax assets and liabilities
are calculated using tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred income tax is provided in full, using the balance sheet method, on
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the consolidated financial statements. Deferred
income tax is determined using tax rates (and laws) that have been enacted or
substantively enacted by the balance sheet date and are expected to apply when
the related deferred income tax asset is realised or the deferred income tax
liability is settled.
Deferred tax assets are recognised for deductible temporary differences and
unused tax losses only if it is probable that future taxable amounts will be
available to utilise those temporary differences and losses.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets and liabilities and when the
deferred tax balances relate to the same taxation authority.
r) Foreign currency translation
Items included in the financial statements of each of the Company's consolidated
subsidiaries are measured using the currency of the primary economic environment
in which the subsidiary operates (the "functional currency"). The Company's
consolidated financial statements are presented in thousand US dollars, which is
the Company's functional and presentation currency.
Foreign currency transactions are translated into the respective functional
currencies of Group entities 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 income statement.
The results and financial position of all the Company's consolidated
subsidiaries (none of which has a functional currency that is the currency of a
hyperinflationary economy) that have a functional currency different from the
presentation currency are translated into the presentation currency as follows:
i) assets and liabilities for each balance sheet presented are translated
at the closing rate at the date of that balance sheet;
ii) income and expenses for each year are translated at average exchange
rates (unless this is not a reasonable approximation of the cumulative
effect of the rates prevailing on the transaction dates, in which case
income and expenses are translated at the dates of the transactions);
and
iii) all resulting exchange differences are recognised as either income or
expense in a separate component of equity.
Foreign currency loans and overdrafts are designated as, and are considered to
be, hedges of the exchange rate exposure inherent in foreign currency net
investments and, to the extent that the hedge is effective, exchange differences
giving rise to changes in the carrying value of foreign currency loans are also
recognised as income or expense directly in equity. All other exchange
differences giving rise to changes in the carrying value of foreign currency
loans and overdrafts are recognised in the income statement.
When a foreign operation is sold, a proportionate share of the cumulative
exchange differences previously recognised in equity are recognised in the
income statement, as part of the gain or loss on sale where applicable.
s) Share-based compensation plans
The Group applies the fair value method of accounting to all equity- classified
share-based compensation arrangements for both employees and non-employees.
Compensation costs of equity-classified awards to employees are measured at fair
value of the awards at the grant date and recognised over the periods during
which the employees become unconditionally entitled to the options. The
compensation cost is charged to the income statement with a corresponding
increase in equity. The amount recognised as an expense is adjusted to reflect
the actual number of share options that vest.
The compensation cost of equity-classified awards to non-employees is initially
measured at fair value of the awards at the grant date and periodically
remeasured to fair value until the non-employees' performance is complete, and
recognised over the periods during which the non-employees become
unconditionally entitled to the options. The compensation cost is charged to
income with a corresponding increase to share-based payment reserve.
Dividends declared but not paid out before exercise of the option are recognised
only when the exercise price, reduced for the dividends declared, becomes a
recognised receivable upon exercise. The obligation to pay the dividends reduces
the unrecognised receivable due from the option holder. The dividends are netted
against the amount with the proceeds from the exercise price and not recognised
as a separate distribution in equity.
Upon the exercise of the award, consideration received is recognised in equity
(notes 18).
t) Share capital
Ordinary and Exchangeable Shares are classified as share capital. Incremental
costs directly attributable to the issue of new shares or options are shown in
equity as a deduction, net of tax, from the proceeds.
If the Company reacquires its own equity instruments the cost is deducted from
equity and the associated shares are cancelled or held in treasury.
u) Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to
equity holders of the Company by the weighted average number of Ordinary and
Exchangeable Shares outstanding during the financial period. The rights of
different classes of shares are the same and therefore economically equivalent.
As such, Ordinary and Exchangeable Shares are treated as one class of shares for
the earnings per share calculation. Diluted earnings per share adjusts the
figures used in the determination of basic earnings per share to take into
account the after income tax effect of interest and other financing costs
associated with dilutive potential Ordinary Shares and the weighted average
number of shares assumed to have been issued for no consideration in relation to
dilutive potential Ordinary Shares.
The if-converted method used in the calculation of diluted earnings per share
assumes the conversion of convertible securities at the later of the beginning
of the reported period or issuance date, if dilutive.
v) New accounting standards and interpretations
Certain new accounting standards and interpretations have been published that
are not mandatory for the year ended 31 December 2011. The Company's assessment
of the impact of these new standards and interpretations which have not been
adopted is set out below.
i) IFRS 9 Financial Instruments (not yet endorsed for use in the EU) is
effective for accounting periods commencing 1 January 2013. The
expected impact is still being assessed by management, but is expected
to only impact disclosures of the Group.
ii) The amendments to IFRS 7 Disclosures - Transfer of Financial Assets
(endorsed by the EU in November 2011), IAS 12 Deferred Tax: Recovery of
Underlying Assets and IAS 19 Employee Benefits (not yet endorsed by the
EU) are effective for accounting periods beginning on or after 1 July
2011, 1 January 2012 and 1 January 2013 respectively. They are not
expected to have a significant impact upon the Group's net results, net
assets or disclosures.
iii) IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and
Joint Ventures (2011) (not yet endorsed for use in the EU) are
effective for accounting periods commencing 1 January 2013. The
expected impact is still being assessed by management, to ascertain the
impact upon the Group's net results, net assets and disclosures.
iv) IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of
Interests in Other Entities, IFRS 13 Fair Value Measurement and IAS 27
Separate Financial Statements (2011) (not yet endorsed for use in the
EU) are effective for accounting periods commencing 1 January 2013.
None of the amendments are expected to have a significant impact upon
the Group's net results, net assets and disclosures.
v) Presentation of Items of Other Comprehensive Income (Amendments to IAS
1) (not yet endorsed for use in the EU) is effective for periods
commencing 1 July 2012. It is not expected to have a significant impact
on the disclosures of the Group.
3 Risk Management
The Group's activities expose it to a variety of financial risks that arise as a
result of its exploration, development, production and financing activities. The
Group's overall risk management programme focuses on the unpredictability of
financial markets and seeks to minimise potential adverse effects on the Group's
financial performance.
a) Financial risk management
i) Foreign exchange risk
Foreign exchange risk arises when transactions and recognised assets and
liabilities of the Group entity concerned are denominated in a currency that is
not the Company's functional currency. The Group operates internationally and is
exposed to foreign exchange risk arising from currency exposures to the US
dollar.
There are no forward exchange rate contracts in place at, or subsequent to, 31
December 2011.
At 31 December 2011, if the Canadian dollar had strengthened/ weakened by 10%
against the US dollar with all other variables held constant, the loss from
continuing operations for the year would have been $40,000 (31 December 2010 -
$8,000) higher/(lower), mainly as a result of foreign exchange gains/losses on
translation of Canadian dollar-denominated general and administrative expenses
and cash in bank.
At 31 December 2011, if the Russian rouble had strengthened/weakened by 10%
against the US dollar with all other variables held constant, the loss from
continuing operations for the year would have been $(1,160,000) (31 December
2010 - $(761,000) higher/(lower), mainly as a result of foreign exchange
gains/losses on translation of Russian rouble-denominated cash in bank and
monetary assets and liabilities.
At 31 December 2011, if the GB pound sterling had strengthened/ weakened by 10%
against the US dollar with all other variables held constant, the loss from
continuing operations for the year would have been $1,354,000 (31 December 2010
- $611,000) higher/(lower), mainly as a result of GB pound sterling-denominated
general and administrative expenses and foreign exchange gains/losses on
translation of GB pound sterling-denominated long-term loan and cash in bank.
At 31 December 2011, if the Swiss franc had strengthened/weakened by 10% against
the US dollar with all other variables held constant, the loss from continuing
operations for the year would have been $469,000 (31 December 2010 - $728,000
higher/(lower), mainly as a result of foreign exchange gains/losses on
translation of Swiss franc- denominated receivable and monetary liabilities.
ii) Commodity price risk
The Company is exposed to commodity price risk to the extent that it sells its
entitlement to petroleum on a floating price basis. The Company may consider
partly mitigating this risk in the future.
The table below summarises the impact of increases/decreases of the relevant oil
benchmark on the Company's loss for the year. The analysis is based on the
assumption that commodity prices had increased/decreased by 5% with all other
variables held constant:
Year ended 31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Brent light crude 697 120
----------------------------------------------------------------------------
697 120
----------------------------------------------------------------------------
The loss from continuing operations for the year would increase/ decrease as a
result of commodity revenues received.
iii) Interest rate risk
The Group had fixed rate convertible bonds in the years under review, therefore
it was not exposed to interest rate risk with respect to this fixed rate
borrowing. In January 2005, a wholly owned subsidiary of the Company received a
sterling denominated loan of GBP 4.5 million to refinance the acquisition of a
corporate office. Interest on the loan is variable at a rate of Bank of Scotland
base rate plus 1.4% (note 16). In October 2007, a wholly owned subsidiary of the
Company received a long-term loan of $9.45 million with a variable rate of LIBOR
plus 1.6% (note 16). An increase/decrease of LIBOR by 1% would result in an
increase/decrease of the Company's loss from continuing operations for the year
by $58,000 (31 December 2010 - $144,000).
iv) Credit risk
All of the Company's production in 2010 and 2011 was derived from Russia. In
2011 sales were to a maximum of eight (2010 - nine) customers.
Trade debtors of the Company are subject to internal credit review to minimise
the risk of non-payment. The Company does not anticipate any default as it
transacts with creditworthy counterparties. No credit limits were exceeded
during the reporting years and management does not expect any losses from
non-performance by these counterparties.
The Company is also exposed to credit risk in relation to regular joint venture
billings which are typically outstanding for one month and in relation to its
cash balances held with reputable banks.
v) Liquidity risk
Liquidity risk is the risk that the Group will not have sufficient funds to meet
liabilities. Cash forecasts identifying liquidity requirements of the Group are
produced quarterly. These are reviewed regularly to ensure sufficient funds
exist to finance the Company's current operational and investment cash flow
requirements.
Management monitors rolling forecasts of the Company's cash position on the
basis of expected cash flow.
The Group had available cash of $311 million at 31 December 2011. Based on its
current plans and knowledge, its projected capital expenditure and operating
cash requirements, the Group has sufficient cash to finance its operations for
more than 12 months from the date of this report.
The Company's financial liabilities consist of trade and other payables and
borrowings. Trade and other payables are due within 12 months, and borrowings
fall due as outlined in notes 15 and 16.
b) Capital risk management
The Company's objectives when managing capital are to safeguard the Company's
ability to continue as a going concern in order to provide returns for
shareholders, benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital. Capital consists of share capital and
retained earnings and reserves.
The Company monitors capital on the basis of the gearing ratio. This ratio is
calculated as net debt divided by total capital. Net debt is calculated as total
borrowings (including 'borrowings', 'trade and other payables', 'current tax
liabilities', 'deferred tax'" and 'provisions' as shown in the consolidated
balance sheet) less cash and cash equivalents. Total capital is calculated as
'equity' as shown in the consolidated balance sheet plus net debt.
Year ended 31 December
-------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Total borrowings 175,823 189,080
Less cash and cash equivalents (note 14) (310,882) (598,275)
----------------------------------------------------------------------------
Net cash (135,059) (409,195)
----------------------------------------------------------------------------
Total equity 936,204 1,122,825
----------------------------------------------------------------------------
Total capital 936,204 1,122,825
----------------------------------------------------------------------------
Gearing ratio 0% 0%
----------------------------------------------------------------------------
4 Critical Accounting Estimates, Assumptions and Judgements
In the process of applying the Company's accounting policies, which are
described in note 2, management makes estimates and assumptions concerning the
future. The resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below.
a) Recoverability of E&E costs
Under the modified full cost method of accounting for E&E costs, certain costs
are capitalised as intangible assets by reference to appropriate cost pools, and
are assessed for impairment when circumstances suggest that the carrying amount
may exceed its recoverable value.
Such circumstances include, but are not limited to:
i) the period for which the entity has the right to explore in the
specific area has expired during the period, or will expire in the near
future, and is not expected to be renewed;
ii) substantive expenditure on further exploration for, and evaluation of,
mineral resources in the specific area is neither budgeted nor planned;
iii) exploration for, and evaluation of, mineral resources in the specific
area have not led to the discovery of commercially viable quantities of
mineral resources and the entity has decided to discontinue such
activities in the specific area; and
iv) sufficient data exists to indicate that, although a development in the
specific area is likely to proceed, the carrying amount of the
exploration and evaluation asset is unlikely to be recovered in full
from successful development or by sale.
This assessment involves judgement as to: (i) the likely future commerciality of
the asset and when such commerciality should be determined; (ii) future revenues
and costs pertaining to any wider cost pool with which the asset in question is
associated; and (iii) the discount rate to be applied to such revenues and costs
for the purpose of deriving a recoverable value. Note 10 discloses the carrying
amounts of the Group's E&E assets. Consequently, major uncertainties affect the
recoverability of these costs which is dependent on the Group achieving
commercial production or the sale of the assets. Note 23 discloses contingencies
relating to title risks. The Company assessed whether these risks are
contingencies or indicators of impairment and concluded that they are
contingencies. There are licences that are due for renewal in 2012. The Group is
confident they will be renewed.
b) Reserve estimates
Estimates of recoverable quantities of proved and probable reserves include
assumptions regarding commodity prices, exchange rates, discount rates,
production and transportation costs for future cash flows. It also requires
interpretation of complex and difficult geological and geophysical models in
order to make an assessment of the size, shape, depth and quality of reservoirs
and their anticipated recoveries. The economic, geological and technical factors
used to estimate reserves may change from period to period. Changes in reported
reserves can impact asset carrying values and the asset retirement obligation
due to changes in expected future cash flows. Reserves are integral to the
amount of depletion charged to the income statement and the calculation of
inventory.
The level of estimated commercial reserves is also a key determinant in
assessing whether the carrying value of any of the Group's development and
production assets has been impaired.
c) Fair value of financial instruments
The Group's accounting policies and disclosures require the determination of the
fair value of financial instruments. Fair values have been determined for
measurement and/or disclosure purposes based on the following methods:
i) Non-derivative financial instruments
These comprise investments in equity and debt securities, trade and other
receivables, cash and cash equivalents, loans and borrowings, current tax
liabilities and trade and other payables. Non-derivative financial instruments
are recognised initially at fair value plus, for instruments not at fair value
through the income statement, any directly attributable transaction costs.
Fair value of investments in equity and debt securities is determined by
reference to their quoted closing bid price at the reporting date.
Fair value of all other non-derivative financial instruments is calculated based
on the present value of future principal and interest cash flows, discounted at
the applicable market rate of interest at the reporting date.
ii) Derivatives
Derivatives are recognised initially at fair value; attributable transaction
costs are recognised in the income statement when incurred. Subsequent to
initial recognition, derivatives are measured at fair value. Embedded
derivatives are separated from the host contract and accounted for separately if
the economic characteristics and risks of the host contract and the embedded
derivative are not closely related, a separate instrument with the same terms as
the embedded derivative would meet the definition of a derivative, and the
combined instrument is not measured at fair value through the income statement.
The fair value of derivative financial instruments is based on their listed
market prices, if available. If a listed market price is not available, then
fair value is estimated by discounting the difference between the contractual
forward price and the current forward price for the residual maturity of the
contract using a risk free interest rate (based on government bonds).
IFRS 7 requires the classification of fair value measurements using a fair value
hierarchy that reflects the significance of the inputs used in making the
assessments. The fair value hierarchy has the following levels:
-- Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities.
-- Level 2: inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices).
-- Level 3: inputs for the assets or liability are not based on observable
market data (unobservable inputs).
5 Segment Information
The Group has a single class of business which is international exploration,
development and production of petroleum oil and natural gas. The geographical
areas are defined by the Company as operating segments in accordance with IFRS 8
Operating Segments. The Group operates in a number of geographical areas based
on location of operations and assets, being Russia, the DRC (written off in
2010), Kurdistan, Pakistan, Tanzania, Malta, Mali, Uganda (discontinued) and
Libya (entered in 2011). The Group's reporting segments comprise each separate
geographical area in which it operates.
Year ended 31 December 2011
--------------------------------------------
External Segment Total
revenue result assets
$'000 $'000 $'000
----------------------------------------------------------------------------
Russia 9,030 (2,641) 58,811
Kurdistan - - 203,113
Libya - (586) 20,176
Pakistan - - 4,820
Tanzania - (12,136) 15,251
Mali - - 17,871
Malta - - 20,091
Uganda - discontinued operations - (3,933) -
----------------------------------------------------------------------------
Total for reportable segments 9,030 (19,296) 340,133
Corporate - (47,595) 771,894
Elimination of discontinued
operations - 3,933 -
----------------------------------------------------------------------------
Total from continuing operations 9,030 (62,958) 1,112,027
----------------------------------------------------------------------------
Year ended 31 December 2011
--------------------------------------------
Depreciation,
Total Capital depletion and
liabilities additions amortisation
$'000 $'000 $'000
----------------------------------------------------------------------------
Russia 1,814 9,233 1,624
Kurdistan 16,311 54,405 -
Libya 20,176 -
Pakistan - 460 -
Tanzania 271 3,271 -
Mali - 14,859 -
Malta 58 6,346 -
Uganda - discontinued operations - - -
----------------------------------------------------------------------------
Total for reportable segments 18,454 108,750 1,624
Corporate 157,369 335 1,006
Elimination of discontinued
operations - - -
----------------------------------------------------------------------------
Total from continuing operations 175,823 109,085 2,630
----------------------------------------------------------------------------
Year ended 31 December 2010
--------------------------------------------
External Segment Total
revenue result assets
$'000 $'000 $'000
----------------------------------------------------------------------------
Russia 5,015 (1,892) 52,534
DRC - (1,645) -
Kurdistan - - 130,385
Pakistan - - 4,619
Tanzania - (8,890) 22,925
Mali - - 3,037
Malta - - 13,778
Uganda - discontinued operations - 1,267,211 -
----------------------------------------------------------------------------
Total for reportable segments 5,015 1,254,784 227,278
Corporate - (31,799) 1,084,627
Elimination of discontinued
operations - (1,267,211) -
----------------------------------------------------------------------------
Total from continuing operations 5,015 (44,226) 1,311,905
----------------------------------------------------------------------------
Year ended 31 December 2010
--------------------------------------------
Depreciation,
Total Capital depletion and
Liabilities additions amortisation
$'000 $'000 $'000
----------------------------------------------------------------------------
Russia 1,343 4,878 1,306
DRC - 57 -
Kurdistan 16,595 55,143 -
Pakistan 75 2,375 -
Tanzania 8,376 11,557 -
Mali - 1,018 -
Malta 85 2,613 -
Uganda - discontinued operations - 23,444 -
----------------------------------------------------------------------------
Total for reportable segments 26,474 101,085 1,306
Corporate 162,606 42,914 805
Elimination of discontinued
operations - (23,444) -
----------------------------------------------------------------------------
Total from continuing operations 189,080 120,555 2,111
----------------------------------------------------------------------------
The Group's 2011 revenue of $9,030,000 was from eight Russian based customers.
Three (2010 - five) customers had purchases of more than 10% of revenue. The
total revenue relating to these three (2010 - five) customers was $7,026,000
(2010 - $4,629,000). The remaining five customers account for revenue of
$2,004,000 (2010 - $386,000).
There have been no changes to the basis of segmentation or the measurement basis
for the segment result since 31 December 2010. In 2011, an impairment loss
relating to Tanzania of $10,775,000 (2010 - $8,890,000), the DRC of nil (2010 -
$1,645,000) and corporate of nil (2010 - $1,854,000) is included in segmental
result.
6 Discontinued Operations
Uganda
On 18 December 2009, Heritage announced that it and its wholly owned subsidiary
HOGL, had entered into a SPA, with Eni for the sale of the Ugandan Assets. On 17
January 2010, Tullow exercised its rights of pre-emption. The transaction was
overwhelmingly approved by Heritage shareholders at the General Meeting on 25
January 2010.
On 27 July 2010, Heritage announced that HOGL had completed the disposal of the
Ugandan Assets. Tullow paid cash of $1.45 billion, including $100 million from a
contractual settlement, of which Heritage received and retained $1.045 billion.
The URA contends that income tax is due on the capital gain arising on the
disposal and it raised assessments of $404,925,000 prior to completion of the
disposal. Heritage's position, based on comprehensive advice from leading legal
and tax experts in Uganda, the United Kingdom and North America, is that no tax
should be payable in Uganda on the disposal of the Ugandan Assets.
On closing, Heritage deposited $121,477,500 with the URA, representing 30% of
the disputed tax assessment of $404,925,000. $121,477,500 has been classified as
a deposit in the balance sheet at 31 December 2011. A further $283,447,000 has
been retained in escrow with Standard Chartered Bank in London, pursuant to an
agreement between HOGL, Tullow and Standard Chartered Bank pending resolution
between the Ugandan Government and HOGL of the tax dispute. Including accrued
interest, an amount of $284,479,000 is classified as restricted cash in the
balance sheet at 31 December 2011.
In August 2010, the URA issued a further income tax assessment of $30 million
representing 30% of the additional contractual settlement amount of $100
million. HOGL has challenged the Ugandan tax assessments on the disposal of
HOGL's entire interest in the Ugandan Assets.
In November 2011 and December 2011, the Tax Appeals Tribunal in Uganda dismissed
HOGL's applications in relation to the two assessments amounting to
$434,925,000. In December 2011 and January 2012, HOGL commenced appeals to the
Ugandan High Court in relation to the rulings from the Tax Appeals Tribunal. The
rulings from the Tax Appeals Tribunal in Uganda are part of a domestic process
and are not final and determinative. HOGL has appealed the rulings, which it
believes are fatally flawed in many respects, through the Ugandan court system
commencing with the High Court and subsequently the Court of Appeal and Supreme
Court if necessary.
As a result of the actions of the tax authorities in Uganda, HOGL and its
advisers consider that it was compelled to take part in a Ugandan domestic
process before a Tax Appeals Tribunal, notwithstanding HOGL's belief that
arbitration, which is ongoing in London and detailed below, is the correct forum
to settle such disputes, in view of the existence of valid and binding
arbitration provisions in its PSAs with the Ugandan Government.
In May 2011, HOGL commenced international arbitration proceedings in London
against the Ugandan Government. HOGL is seeking a decision requiring, among
other things, the return or release of approximately $405 million, plus
interest, in aggregate currently on deposit with the URA or in escrow with
Standard Chartered Bank in London. Accordingly, the arbitration proceedings
concern HOGL's claims that the Ugandan Government wrongfully or unreasonably
withheld consent to the sale by HOGL of the rights under the PSAs for the
Ugandan Assets, including by making this consent conditional upon the payment of
a sum alleged to be a tax liability of HOGL. The arbitration proceedings are
being held in London in accordance with the provisions of the PSAs in relation
to the Ugandan Assets.
On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received
Particulars of Claim filed in the High Court of Justice in England by Tullow
seeking $313,447,500 for alleged breach of contract as a result of HOGL's and
Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow
of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the
claim has no basis and are in the process of vigorously and robustly defending
it. Heritage and HOGL have filed their Defence and Counterclaim against Tullow
seeking instead the release to HOGL of the $283,447,000 plus interest currently
being held in escrow with Standard Chartered Bank in London.
Although disputes of this nature are inherently uncertain, the Directors believe
that the monies on deposit and held in escrow will ultimately be recovered by
Heritage.
The results of the Ugandan operations have been classified as discontinued
operations. (Loss)/gain on disposal of discontinued operations as at 31 December
2011 and 2010 is as follows:
Year ended 31 December
------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
(Loss)/gain on disposal of discontinued operations (3,933) 1,267,211
----------------------------------------------------------------------------
(3,933) 1,267,211
----------------------------------------------------------------------------
The following table provides additional information with respect to the
discontinued operations amounts included in the balance sheet at 26 July 2010.
26 July
2010
$'000
----------------------------------------------------------------------------
Assets
Non-current assets
Intangible exploration and evaluation assets 181,963
----------------------------------------------------------------------------
Property, plant and equipment 472
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total assets 182,435
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables 3,105
----------------------------------------------------------------------------
3,105
----------------------------------------------------------------------------
Non-current liabilities
Provisions 269
----------------------------------------------------------------------------
269
----------------------------------------------------------------------------
Total liabilities 3,374
----------------------------------------------------------------------------
Net assets 179,061
----------------------------------------------------------------------------
The profit on disposal of discontinued operations has been derived as follows:
Year ended
31 December
2010
$'000
----------------------------------------------------------------------------
Consideration received
Sales proceeds including contractual settlement 1,450,000
Working capital adjustments 13,636
----------------------------------------------------------------------------
Total disposal consideration 1,463,636
----------------------------------------------------------------------------
Add:
Revenue - transitional services agreement 1,489
Less:
Carrying amount of net assets sold (179,061)
Other expenses (17,421)
Expenses - transitional services agreement (1,432)
----------------------------------------------------------------------------
Gain on disposal of discontinued operations 1,267,211
----------------------------------------------------------------------------
Year ended
31 December
2010
$'000
----------------------------------------------------------------------------
Cash flow from (used in) discontinued operations:
Net cash used in operating activities (300)
Net cash from investing activities 1,005,788
----------------------------------------------------------------------------
Net cash flows from discontinued operations 1,005,488
----------------------------------------------------------------------------
In March 2011, Tullow paid working capital adjustments with respect to the
Ugandan Assets of $13.6 million.
7 Other Finance Costs
Year ended 31 December
-------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Interest on long-term debt 261 303
Interest on convertible bonds 10,168 10,168
Accretion of convertible debt 6,006 5,255
Accretion of asset retirement obligation 50 45
----------------------------------------------------------------------------
16,485 15,771
Amount capitalised (12,804) (12,801)
----------------------------------------------------------------------------
Finance costs expensed 3,681 2,970
----------------------------------------------------------------------------
Finance costs are capitalised in various balance sheet categories.
8 Income Tax Expense
Recognised in the income statement:
Year ended 31 December
------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Current tax expense 114 197
Deferred tax expense 38 -
----------------------------------------------------------------------------
Total tax expense 152 197
----------------------------------------------------------------------------
Current tax expense relates to the profit on operations of the Group's UK
subsidiary.
The Group did not recognise any income tax in other comprehensive income or
directly in equity. The Group is subject to income taxes in certain territories
in which it owns licences or has taxable operations. All of the Group's
operating activities are outside of Jersey. In the UK, the tax rate applicable
to the Group's operations is 26% (2010 - 28%). It is the UK government's
intention to enact legislation which will reduce the main rate of UK corporation
tax to 23% by 2014.
The Group has available tax deductions of $17,210,000 (31 December 2010 -
$17,607,000) and tax losses of $105,374,000 (31 December 2010 - $140,376,000),
of which $105,374,000 expires from 2012 to 2031, and the remaining $nil (31
December 2010 - $36,711,000) does not have an expiry period. No deferred tax
assets have been recognised for the benefit of tax deductions and tax losses
because realisation of the deferred tax assets in the foreseeable future is not
sufficiently likely.
Factors affecting the current tax charge for the year:
Year ended 31 December
-------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
(Loss)/profit for the year (66,739) 1,223,182
Standard tax rate 0% 0%
Tax on (loss)/profit at standard rate - -
Effect of higher tax rates in foreign jurisdiction (3,493) (5,242)
Effective weighted average tax rate 5.23% 0.43%
Change in statutory tax rate 158 372
Expenses not deductible for tax purposes 13,047 1,265
Foreign exchange gains 893 1,675
Effect of tax losses not recognised (10,453) 2,127
----------------------------------------------------------------------------
Tax charge 152 197
----------------------------------------------------------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
The balance comprises temporary differences
attributable to:
Available tax losses and deductions 22,828 33,281
----------------------------------------------------------------------------
Deferred tax asset (unrecognised) 22,828 33,281
----------------------------------------------------------------------------
The tax rate applied in respect of foreign jurisdictions is the local tax rate
applicable to the nature of the profits arising.
Recognised deferred tax liability
Deferred tax liabilities attributable to the following:
Year ended 31 December
------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Property, plant and equipment 38 -
----------------------------------------------------------------------------
38 -
----------------------------------------------------------------------------
9 Staff Costs
The average number of employees (including Directors) and consultants
employed/contracted by the Group during the year, analysed by category, was:
Year ended 31 December
----------------------
2011 2010
----------------------------------------------------------------------------
Jersey 4 4
Canada 5 5
Russia 42 40
Europe 24 27
Uganda 1 31
Kurdistan 27 20
Pakistan 16 17
Tanzania 13 11
Mali 1 1
South Africa 2 7
Libya 4 -
----------------------------------------------------------------------------
Total 139 163
----------------------------------------------------------------------------
The aggregate payroll expenses of those employees (including Executive
Directors) and consultants was as follows:
Year ended 31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Salaries and other short-term benefits 19,076 30,117
Share-based compensation 3,597 4,256
----------------------------------------------------------------------------
Total employee remuneration 22,673 34,373
----------------------------------------------------------------------------
Capitalised portion of total remuneration 13,441 15,733
----------------------------------------------------------------------------
Key management compensation was:
Year ended 31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Salaries and other short-term benefits 4,689 8,291
Share-based compensation 2,276 2,988
----------------------------------------------------------------------------
6,965 11,279
----------------------------------------------------------------------------
See note 22 'Related Party Transactions' for disclosures relating to an
arbitration settlement with a former director of HOC.
10 Intangible Exploration and Evaluation Assets
31 December
-------------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
At 1 January 183,424 121,278
Effect of movement in exchange differences (307) (83)
Additions 99,517 72,764
Impairment loss (10,775) (10,535)
----------------------------------------------------------------------------
At 31 December 271,859 183,424
----------------------------------------------------------------------------
No assets have been pledged as security.
The balances at the end of the years are as follows:
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Russia 10,844 11,151
Kurdistan 183,335 128,930
Pakistan 4,448 3,988
Malta 19,988 13,641
Mali 17,871 3,013
Tanzania 15,197 22,701
Libya 20,176 -
----------------------------------------------------------------------------
Balance - end of year 271,859 183,424
----------------------------------------------------------------------------
In many of the countries in which the Group operates, land title systems are not
developed to the extent found in many industrial countries and there may be no
concept of registered title. The risk of title disputes associated with
Kurdistan and Malta is described in note 23.
On 25 August 2011, the Group acquired 15,300,000 shares, representing 51% of the
shares and voting interests, in Sahara Oil, a company wholly owning Sahara for
$19.5 million. Sahara has the rights to own and operate oil and gas licences in
Libya. This acquisition was accounted as an intangible exploration and
evaluation asset. The Group agreed to pay the vendors additional consideration
of $5 million becoming due on signing of an oil service contract.
In 2011, the Group recognised an impairment of intangible exploration and
evaluation assets of $10,775,000 (2010 - $10,535,000). After a technical review
management decided to write-off expenditure of $10,775,000 incurred with respect
to the Kimbiji licence area in Tanzania. An impairment recognised in 2010 is
comprised of two elements. Firstly, following changes in future plans management
decided to write-off expenditure of $1,645,000 incurred with respect to
interests in Block 1 and 2 in the DRC. Secondly, after a technical review
management decided to write-off expenditure of $8,890,000 incurred with respect
to the Kisangire and Lukuliro licence areas in Tanzania.
11 Property, Plant and Equipment
Petroleum and Drilling
natural gas and barge Land and
interests equipment buildings Aircraft Other Total
$'000 $'000 $'000 $'000 $'000 $'000
----------------------------------------------------------------------------
Cost
At 1 January
2010 42,995 3,545 11,985 12,639 3,317 74,481
Additions 4,878 - - 42,850 63 47,791
Disposals - - - - (60) (60)
Effect of
movements in
exchange rates (128) - - - - (128)
----------------------------------------------------------------------------
At 31 December
2010 47,745 3,545 11,985 55,489 3,320 122,084
Additions 9,233 - - - 335 9,568
Disposals - - - - (185) (185)
Effect of
movements in
exchange rates (2,054) - - - - (2,054)
----------------------------------------------------------------------------
At 31 December
2011 54,924 3,545 11,985 55,489 3,470 129,413
----------------------------------------------------------------------------
Depletion,
depreciation,
amortisation
and impairment
losses
At 1 January
2010 (5,638) (2,898) (730) (4,637) (1,280) (15,183)
Charge for the
year (1,307) - - (401) (403) (2,111)
Impairment
losses - - - (1,854) - (1,854)
Disposals - - - - (943) (943)
----------------------------------------------------------------------------
At 31 December
2010 (6,945) (2,898) (730) (6,892) (2,626) (20,091)
Charge for the
year (1,624) - (138) (553) (315) (2,630)
Disposals - - - - 160 160
----------------------------------------------------------------------------
At 31 December
2011 (8,569) (2,898) (868) (7,445) (2,781) (22,561)
----------------------------------------------------------------------------
Net book value:
----------------------------------------------------------------------------
At 31 December
2010 40,800 647 11,255 48,597 694 101,993
----------------------------------------------------------------------------
At 31 December
2011 46,355 647 11,117 48,044 689 106,852
----------------------------------------------------------------------------
The corporate office, which represents the land and building category, and an
aircraft serve as security for long-term loans (note 16).
In 2010, the carrying value of an aircraft was written down to the fair value
less cost to sale of $5.9 million because of a reduction in fair value of an
aircraft due to unfavourable economic conditions. This resulted in an impairment
write down of $1.9 million recognised in the income statement in 2010.
12 Other Financial Assets
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Investment in warrants - 2,050
Investment in listed securities 13,268 -
----------------------------------------------------------------------------
13,268 2,050
----------------------------------------------------------------------------
The investment in Afren warrants was classified as held for trading at 31
December 2010. The estimate of the fair value of the warrants is determined
using the Black-Scholes model and relevant market inputs. The fair value
measurement of investment in warrants was categorised as Level 2. Loss on
revaluation of Afren warrants of $1,550,000 was recognised in the income
statement in 2011.
On 4 November 2011, the Afren warrants were exercised and the Company acquired
1,500,000 of the listed shares in Afren. The investment in Afren shares is
classified as available-for-sale and valued at fair value which is determined
using market price at the end of the period. The valuation at market price at 31
December 2011 resulted in a gain of $120,000 which was recognised in equity.
As at 31 December 2011, the Company had acquired 9,748,200 of the listed shares
of PetroFrontier representing 15.25% of the shares of PetroFrontier. The
investment in share capital of PetroFrontier is classified as available-for-sale
and valued at fair value which is determined using market price at the end of
the period.
The Group recorded an impairment of its investment in PetroFrontier to reflect
the market value as at 31 December 2011. The loss of $18,885,000 recognised in
the available-for-sale reserve for this investment has been reclassified to the
income statement.
13 Trade and Other Receivables
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Trade receivables 189 8
Receivable from the acquirer of the Ugandan Assets on
completion of the disposition (note 6) - 13,636
Other receivables 1,599 6,596
----------------------------------------------------------------------------
1,788 20,240
----------------------------------------------------------------------------
Trade receivables are due within 30 days from the invoice date. Joint ventures
billings are typically paid within 30 days from the invoice date. Interest is
not normally charged on the receivables. The carrying amount of trade and other
receivables approximates to their fair value.
The maximum exposure to credit risk at the reporting date is the fair value of
each class of receivable.
As of 31 December 2011, trade and other receivables of $1,788,000 (31 December
2010 - $20,240,000) were neither past due nor impaired. Trade and other
receivables relate to a number of independent customers and joint ventures
partners for whom there is no recent history of default. The ageing analysis of
these trade and other receivables is as follows:
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Up to 3 months 805 19,431
3 to 6 months 772 365
6 to 12 months 104 444
Over 12 months 107 -
----------------------------------------------------------------------------
1,788 20,240
----------------------------------------------------------------------------
Trade and other receivables analysed by currency are as follows:
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
US dollars 933 19,943
Russian roubles 100 93
Swiss francs 452 30
Canadian dollars 34 19
GB pounds sterling 248 124
Euros 21 31
----------------------------------------------------------------------------
1,788 20,240
----------------------------------------------------------------------------
14 Cash and Cash Equivalents
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Cash at bank and in hand 310,882 598,275
----------------------------------------------------------------------------
Cash at bank and in hand includes cash held in interest-bearing accounts.
15 Trade and Other Payables Due Within One Year
31 December
----------------------
2011 2010
$ $
----------------------------------------------------------------------------
Trade payables 14,986 19,525
Withholding tax accrual - 8,271
Other payables and accrued liabilities 20,405 26,287
----------------------------------------------------------------------------
35,391 54,083
----------------------------------------------------------------------------
Trade and other payables and accrued liabilities comprise current amounts
outstanding for trade purchases and ongoing costs. The carrying amount of trade
and other payables approximates to their fair value.
16 Borrowings
31 December
----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Non-current borrowings
Convertible bonds - unsecured - 120,468
Non-current portion of long-term debt - secured 5,110 13,047
----------------------------------------------------------------------------
5,110 133,515
----------------------------------------------------------------------------
Current borrowings
Convertible bonds - unsecured 126,406 -
Current portion of long-term debt - secured 7,991 896
----------------------------------------------------------------------------
134,397 896
----------------------------------------------------------------------------
2007 convertible bonds
On 16 February 2007, the Company raised $165 million by completing the private
placement of convertible bonds. Issue costs amounted to $6,979,000 resulting in
net proceeds of $158,021,000. HOC issued 1,650 $100,000 unsecured convertible
bonds at par, which have a maturity of five years and one day and an annual
coupon of 8% payable semi-annually on 17 August and 17 February of each year.
Bondholders had the right to convert the Bonds into Ordinary Shares at a price
of $4.70 per share at any time. The number of Ordinary Shares receivable on
conversion of the Bonds is fixed. The Company had the right to redeem, in whole
or part, the Bonds for cash at any time on or before 16 February 2008, at 150%
of par value. This right was not exercised.
The fair value of the host liability component of the Bonds (net of issue costs)
was estimated at $140,154,000 on 16 February 2007. The difference between the
$165 million due on maturity and the initial liability component is accreted
using the effective interest rate method and is recorded as finance costs. As
the Company call option meant that conversion feature could be settled in cash
in accordance with IAS 32 the conversion was treated as a derivative liability.
The fair value of this derivative liability (estimated using the Black-Scholes
option pricing model) was $17,867,000 at 16 February 2007 and subsequent gains
and losses were recorded in finance income and costs up to the expiry of the
Company call option on 17 February 2008. As a result of the expiry of this
option, and hence the cash settlement feature, the Company has reassessed the
classification of the conversion option and determined that it qualifies to be
treated as equity under IAS 32, being an option to convert a fixed amount of
cash for a fixed number of shares. Therefore, the fair value of the conversion
option was reclassified to equity at that date.
Bondholders had a put option requiring the Company to redeem the Bonds at par,
plus accrued interest, in the event of a change of control of the Company or
revocation or surrender of the Zapadno Chumpasskoye licence in Russia (the
"contingent put option"). In the event of a change of control and redemption of
the Bonds or exercise of the conversion rights, a cash payment of up to $19,700
on each Bond will be made to a Bondholder, the amount of which depends upon the
date of redemption and market value of shares at the date of any change of
control event. The contingent put option has been valued separately. The fair
value of the contingent put option was estimated de minimis by the Company at 31
December 2011 (31 December 2010 - de minimis). The fair value measurement of the
contingent put option is categorised as Level 2.
On 18 December 2009, the Company announced it had entered into a SPA for the
sale of the Ugandan Assets (note 6). The Company also announced that it would
consider returning a portion of the disposal proceeds to shareholders through a
special dividend on completion of the proposed transaction. Under the terms and
conditions of the Bonds, the Company was restricted from making or declaring a
dividend or making any other distributions to its shareholders which constitutes
on a consolidated basis more than 30% of its earnings for the immediately
preceding financial year.
In December 2009, the Company approached Bondholders with the proposal to agree
to remove this restriction and to make some other changes in the terms and
conditions of the Bonds. In consideration the Company proposed to pay to those
Bondholders who vote on the proposal the sum of $2,000.00 per $100,000 of Bonds
held by such Bondholders. The majority of the Bondholders voted in favour of
this proposal at a meeting on 31 December 2009 and the restriction of making or
declaring a dividend or making any other distributions to shareholders has been
removed. On 15 January 2010, the Company paid $2,378,000 to the Bondholders who
voted. In accordance with IAS 39, this amendment to the terms and conditions of
the Bonds does not constitute a redemption and therefore this amount was offset
against the convertible bonds liability and will be recognised in the income
statement over the period of the borrowings using the effective interest method.
Convertible bonds mature within a period less than one year from 31 December
2011 and therefore have been reclassified as current liabilities at 31 December
2011. Convertible bonds were repaid in full in February 2012.
Long-term debt
In January 2005, a wholly owned subsidiary of the Company received a sterling
denominated loan of GBP 4.5 million to refinance the acquisition of a corporate
office. Interest on the loan was fixed at 6.515% for the first five years and is
now variable at a rate of Bank of Scotland base rate plus 1.4%. The loan, which
is secured on the property, is scheduled to be repaid by 240 instalments of
capital and interest at monthly intervals, subject to a residual debt at the end
of the term of the loan of $3.5 million (GBP 1.86 million). The principal
balance outstanding as at 31 December 2011 was $5,590,000 (GBP 3.6 million) (31
December 2010 - $6,030,000 (GBP 3.9 million)).
In October 2007, a wholly owned subsidiary of the Company received a loan of
$9.45 million to refinance the acquisition of an aircraft. Interest on the loan
is variable at a rate of LIBOR plus 1.6%. The loan, which is secured on the
aircraft, is scheduled to be repaid by 19 consecutive quarterly instalments of
principal. Each instalment equals $118,000 with the final instalment being
$7,218,000. The Corporation provided a corporate guarantee to the lender. The
additional security of $2,454,000 was paid to the bank on 19 January 2010 to
maintain the loan to value ratio specified in the loan agreement.
Fair values
At 31 December 2011, the fair values of borrowings were approximately $126.4
million (31 December 2010 - $120.5 million) for the convertible bonds, $nil
million (31 December 2010 - $71.1 million) for the equity/convertible element of
the convertible bonds and $13.1 million (31 December 2010 - $13.9 million) for
the long-term debt.
17 Provisions
The Group's asset retirement obligation results from net ownership interests in
petroleum and natural gas assets including well sites and gathering systems. The
Group estimates the total undiscounted inflation adjusted amount of cash flows
required to settle its asset retirement obligation to be approximately
$1,239,000, which is expected to be incurred in the period between 2012 and
2024. A cost pool specific discount rate related to the liability of 9% was used
to calculate the fair value of the asset retirement obligation in Russia (2010 -
9%) and 10% was used in Kurdistan in 2011 (2010 - 10%).
A reconciliation of the asset retirement obligation is provided below:
31 December
-----------
2011
$'000
----------------------------------------------------------------------------
At 1 January 389
Additions 344
Accretion expense (note 7) 50
----------------------------------------------------------------------------
At 31 December 783
----------------------------------------------------------------------------
18 Share Capital
The Company was incorporated under the Jersey Companies Law on 6 February 2008.
The Company's authorised share capital is an unlimited number of Ordinary Shares
without par value. At incorporation, there was one Ordinary Share issued at $42.
On 22 February 2008, a second Ordinary Share was issued at $41.
As part of the Reorganisation described in the 2008 Annual Report and Accounts,
the rights of different classes of shares are the same and therefore
economically equivalent. As such, Ordinary and Exchangeable Shares were treated
as one class of shares for the net earnings/(loss) per share calculation.
Ordinary Shares
Year ended Year ended
31 December 2011 31 December 2010
------------------------------------------------
Amount Amount
Number $'000 Number $'000
----------------------------------------------------------------------------
At 1 January 284,899,830 457,746 284,842,830 457,697
Exchange of Exchangeable
Shares for Ordinary Shares 155,700 132 57,000 49
Issued on exercise of share
options (note 21) 4,692,500 8,977 - -
Shares bought back and held
in treasury (33,228,734) (123,575) - -
----------------------------------------------------------------------------
At 31 December 256,519,296 343,280 284,899,830 457,746
----------------------------------------------------------------------------
Special Voting Share
Year ended Year ended
31 December 2011 31 December 2010
----------------------------------------------------------------------------
Amount Amount
Number $'000 Number $'000
----------------------------------------------------------------------------
At 1 January 1 - 1 -
Issued during the year - - - -
----------------------------------------------------------------------------
At 31 December 1 - 1 -
----------------------------------------------------------------------------
Exchangeable Shares of HOC each carrying one voting right in the Company
Year ended Year ended
31 December 2011 31 December 2010
---------------------------------------------------
Amount Amount
Number $'000 Number $'000
----------------------------------------------------------------------------
At 1 January 2,967,108 2,534 3,024,108 2,583
----------------------------------------------------------------------------
Exchange of Exchangeable
Shares for Ordinary
Shares (155,700) (132) (57,000) (49)
----------------------------------------------------------------------------
At 31 December 2,811,408 2,402 2,967,108 2,534
----------------------------------------------------------------------------
Balance of Ordinary
Shares of the Company,
excluding treasury
shares, and Exchangeable
Shares of HOC at 31
December 259,330,704 345,682 287,866,938 460,280
----------------------------------------------------------------------------
On 26 April 2011, the Company announced a buy back programme to acquire Ordinary
Shares. Shareholders approved the resolution at the AGMs on 17 June 2010 and 20
June 2011 to acquire up to 28,786,693 and 28,900,000 Ordinary Shares
respectively from the date of the AGM until the next AGM. Purchased Ordinary
Shares are held in treasury. At 31 December 2011, the Company held 33,228,734
Ordinary Shares in treasury.
2010 Special dividend
On 2 August 2010, Heritage announced the declaration of a special dividend of
100 pence per Ordinary Share of the Company and HOC, the Company's wholly owned
subsidiary, also announced the declaration of a special dividend of Cdn$1.62 per
Exchangeable Share of HOC, calculated at an exchange rate of GBP 1.00:Cdn$1.62.
The special dividend was paid on 27 August 2010.
The special dividend resulted in a payment to Bondholders. As disclosed in the
announcement of 31 December 2009, certain amendments to the terms of the Bonds
were approved by Bondholders. Pursuant to such amendments, no adjustments will
be made to the Conversion Rights in respect of any dividend paid or made by the
Company; instead, the Company agreed to pay the holder of each Bond outstanding
on the record date for such dividend a Pass-through Dividend which is equal to
the dividend which would be received by the holder of a number of Ordinary
Shares equal to the number of Ordinary Shares to which the Bondholder would have
been entitled if it had exercised its Conversion Rights on the record date of 13
August 2010.
The aggregate principal amount of Bonds outstanding on the record date was
$127,100,000. These Bonds were convertible into 27,043,000 Ordinary Shares
pursuant to the Conversion Rights and accordingly the Company paid to
Bondholders a Pass-through Dividend of GBP 27,043,000 on 27 August 2010.
19 Reserves
a) Available-for-sale investments revaluation reserve
Changes in the fair value and exchange differences arising on translation of
available-for-sale investments such as equities, classified as
available-for-sale financial assets, are taken to the available-for-sale
investments revaluation reserve (note 2j). Amounts are recognised in the income
statement when the associated assets are sold or impaired.
b) Foreign currency translation reserve
Exchange differences arising on translation of a foreign controlled entity are
included in the foreign currency translation reserve (note 2r). The reserve will
be recognised in the income statement when the net investment is sold.
c) Share-based payments reserve
The share-based payments reserve (note 2s), is used to recognise the fair value
of options and LTIP awards issued, but not exercised, to employees.
d) Equity portion of convertible debt
The fair value of the conversion feature of convertible bonds is classified as
the equity portion of convertible debt which is included in reserves in the
balance sheet.
20 (Loss)/Earnings Per Share
The following table summarises the weighted average Ordinary and Exchangeable
Shares used in calculating net earnings per share:
Year ended 31 December
----------------------------
2011 2010
----------------------------------------------------------------------------
Weighted average Ordinary and Exchangeable
Shares
Basic 269,676,216 287,866,938
Diluted 284,594,888 331,012,512
----------------------------------------------------------------------------
The reconciling item between basic and diluted weighted average number of
Ordinary Shares is the dilutive effect of share options, LTIP awards and
convertible bonds. A total of nil options (31 December 2010 - nil), nil shares
relating to the LTIP (31 December 2010 - nil) and 27,042,553 shares relating to
the convertible bonds (31 December 2010 - nil) were excluded from the above
calculation, as they were anti-dilutive. However, since the Company has made a
loss in 2011 for the purposes of calculating diluted loss per share, all
potential Ordinary Shares have been treated as anti-dilutive in that year. In
calculating the 2010 loss per share from continuing operations 27,042,553 of
shares relating to the convertible bonds were excluded from the above
calculation, as they were anti-dilutive.
21 Share-Based Payments
Share options
The Company had a share option plan whereby certain Directors, officers,
employees and consultants of the Group have been granted options to purchase
Ordinary Shares. Under the terms of the plan, options granted normally vest one
third immediately and one third in each of the years following the date granted
and have a life of five years.
Ordinary Share options outstanding and exercisable:
Year ended Year ended
31 December 2011 31 December 2010
----------------------------------------------
Average Average
exercise exercise
Number price Number price
of options (GBP) of options (GBP)
----------------------------------------------------------------------------
At 1 January 23,597,010 1.52 23,597,010 1.52
Exercised (note 18) (4,692,500) 1.13 - -
----------------------------------------------------------------------------
Balance - end of year 18,904,510 1.62 23,597,010 1.52
----------------------------------------------------------------------------
Exercisable - at 31 December 18,904,510 1.62 23,597,010 1.52
----------------------------------------------------------------------------
Number of options
----------------------------
Remaining
Exercise price (GBP) Outstanding Exercisable life (years)
----------------------------------------------------------------------------
GBP 1.08-GBP 1.43 15,454,510 15,454,510 -
GBP 2.45-GBP 2.51 3,450,000 3,450,000 0.92
----------------------------------------------------------------------------
18,904,510 18,904,510 0.17
----------------------------------------------------------------------------
Following the payment of a special dividend of 100 pence per share in August
2010 (see note 18), share options holders are entitled to receive GBP 1 per
share when an option is exercised. The net exercise price for the 2,150,000
options exercised was less than 100 pence per share, which resulted in net
payment of $1,780,000 to the option holders on exercise of these share options
during the period ended 31 December 2011.
Long Term Incentive Plan ("LTIP")
On 20 June 2011, the shareholders of the Company at the AGM approved the 2011
LTIP. Under the terms of the plan, the LTIP awards will be in the form of
full-value shares, subject to three year performance conditions agreed by the
Remuneration Committee when the award is made. At the end of the three year
performance period, to the extent that awards vest, there is an additional
holding period of one year. Eligible employees will normally be considered by
the Remuneration Committee for an award once each year.
Awards made in 2011 are subject to relative Total Shareholder Return ("TSR")
performance conditions. The awards will vest in line with the following
schedule:
Percentage of award vesting
----------------------------------------------------------------------------
Upper quartile 100% of the award
Between median and upper quartile 25% - 100% on a straight line basis
Median 25%
Below median 0%
----------------------------------------------------------------------------
TSR will be measured in comparison to a peer group of 18 international oil
companies selected based on one of or a combination of size (market
capitalisation, revenue, turnover, cash expenditure or a combination thereof),
area of operations and country of domicile. The TSR measurement will be
conducted by independent consultants in discussion with the Remuneration
Committee.
Since there are market-related conditions the awards of shares under LTIP were
fair valued using the Monte Carlo model which takes into account the
market-based performance conditions which effectively estimate the number of
shares expected to vest. The expected volatility was assessed based on the
historic volatility of the Company's TSR and volatility of the TSR of each
company within the comparator group. No subsequent adjustment is made to the
fair value charge for shares that do not vest in the event that these
performance conditions are not met. Adjustments are, however, made for leavers.
The fair value of the awards is recognised as an employee expense with the
corresponding increase in equity. The total amount to be expensed is spread over
the vesting period during which the employees become unconditionally entitled to
the shares and options.
The table below summarises the main assumptions used to fair value the awards
made under the above LTIP and the fair values of the shares granted.
Award date 20 June 2011
----------------------------------------------------------------------------
Vesting period 3 years
Exercise price Nil
Share price at date of grant GBP 2.128
Expected volatility 55%
Risk free interest 1.3%
Fair value as at grant date GBP 1.630
Number of shares granted 2,834,367
----------------------------------------------------------------------------
The 2008 Long Term Incentive Plan (Performance Share Plan) (the"2008 LTIP") was
approved by Shareholders at the AGM on 19 June 2008. The 2008 LTIP compared the
Company's TSR over a three year period ended 19 June 2011 against a comparator
group of 18 international oil companies. The 2008 LTIP comprised of two plans,
one for members of staff and another for the Executive Directors. The plan for
the Executive Directors included an additional share price performance condition
over-and-above the Company's relative TSR performance.
Independent executive reward consultants, Hay Group, compared the Company's TSR
against the comparator group during this three year period. It was found that
while Heritage exceeded the TSR performance measure, the additional 2008 LTIP
performance conditions for the Executive Directors were not met and so none of
their awards over 3,507,246 shares vest. While performance conditions for the
staff plan were achieved with the result that all of the awards of 1,419,187
shares could have vested in accordance with the plan. Participants have agreed
(due to a range of contributing factors) to forego 25% of their potential awards
in accordance with the 2008 LTIP rules. As a result, awards over a total of only
1,064,372 shares will vest. The Remuneration Committee also approved of such a
reduction in accordance with the 2008 LTIP rules.
Pursuant to the waiver of the application of Rule 9 of the City Code approved by
shareholders at the last AGM, the Remuneration Committee agreed with Anthony
Buckingham, the Company's CEO, to issue his 2011 LTIP awards under the 2008
LTIP, however, Anthony Buckingham's awards fully reflect the terms and
conditions of all the other 2011 LTIP awards.
The share-based payment recognised with respect to share options and LTIP awards
previously granted, in the year ended 31 December 2011 was $3,675,000 (31
December 2010 - $4,255,000) out of which $1,114,000 (31 December 2010 -
$1,086,000) was capitalised.
22 Related Party Transactions
During the year ended 31 December 2011, the Company incurred transportation
costs of $245,000 (31 December 2010 - $93,000) with respect to the services
provided by a company indirectly owned by Anthony Buckingham, CEO and a Director
of the Company.
Anthony Buckingham used the corporate jet a few times during 2011 for personal
trips. The cost of these trips was reimbursed at independently assessed
commercial rates of $306,000 (31 December 2010 - $133,000).
Related party transactions described above have been made on an arm's length basis.
In 2010, the Company accrued $7.7 million in general and administrative
expenses, in relation to an arbitration settlement to a former director of HOC
whose services were terminated in 2006. Further arbitration proceedings have
been initiated by this individual.
23 Commitments and Contingencies
Heritage's net share of outstanding contractual commitments at 31 December 2011
was estimated at:
Less
than 1-3 4-5 After
Total 1 year years years 5 years
$'000 $'000 $'000 $'000 $'000
----------------------------------------------------------------------------
Long-term debt, including
interest 14,074 8,202 961 961 3,950
Convertible bonds,
including interest 132,184 132,184 - - -
----------------------------------------------------------------------------
146,258 140,386 961 961 3,950
Effect of interest (5,998) (5,339) (186) (157) (316)
----------------------------------------------------------------------------
Total repayments of
borrowings 140,260 135,047 775 804 3,634
----------------------------------------------------------------------------
Operating leases 6,902 518 649 649 5,086
Work programme
obligations(1) 82,246 26,926 55,320 - -
----------------------------------------------------------------------------
Total contractual
obligations 89, 148 27,444 55,969 649 5,086
----------------------------------------------------------------------------
(1) Work programme obligation includes minimum required financial
commitments for the Group to fulfil the requirements of licences and
production sharing contracts.
Of the total contractual obligations of $89,148,000, $39,812,000 relates to the
Company's share of obligations for its joint arrangements.
The Company may have a potential residual obligation to satisfy any shortfall in
officers' and former officers' secured real estate borrowings in the event of
default, a shortfall on the proceeds from the disposal of the properties and the
individuals being unable to repay the balance. The value of the residual
obligation was estimated as insignificant.
In many of the countries in which the Group operates, land title systems are not
developed to the extent found in many industrial countries and there may be no
concept of registered title. Although the Group believes that it has title to
its oil and gas properties, it cannot control or completely protect itself
against the risk of title disputes or challenges. There can be no assurance that
claims or challenges by third parties against the Group's properties will not be
asserted at a future date.
The Group received a letter from the Iraq Ministry of Oil dated 17 December 2007
stating that the PSC signed with the KRG without the prior approval of the Iraqi
government is considered to be void by the Iraqi government as they have stated
it violates the 'prevailing Iraqi law'. The Directors believe that the PSC is
valid and effective pursuant to the applicable laws.
The Group received a letter from the Chairman of the Management Committee of the
National Oil Company of Libya dated 28 February 2008 stating that the Block 7
licence area lies within the Libyan continental shelf and a portion of this area
has already been licensed to Sirte Oil Company. This letter also demands that
the Group refrain from any activities over, or concerning, the Block 7 licence
area and asserts the Libyan government's right to invoke Libyan and
international law to protect its rights in the Block 7 licence area. The
Directors believe that the Libyan government's claims are unfounded.
24 Non-Cash Investing and Financing Activities Supplementary Information
Year ended 31 December
-----------------------
2011 2010
$'000 $'000
----------------------------------------------------------------------------
Capitalised portion of share-based compensation (1,114) (1,086)
----------------------------------------------------------------------------
Capitalised portion of interest (12,804) (12,801)
----------------------------------------------------------------------------
Non-cash property, plant and equipment additions
relating to the capitalised portion of share-based
compensation 13,918 13,887
----------------------------------------------------------------------------
FORWARD-LOOKING INFORMATION:
Except for statements of historical fact, all statements in this news release -
including, without limitation, statements regarding production estimates and
future plans and objectives of Heritage - constitute forward-looking information
that involve various risks and uncertainties. There can be no assurance that
such statements will prove to be accurate; actual results and future events
could differ materially from those anticipated in such statements. Factors that
could cause actual results to differ materially from anticipated results include
risks and uncertainties such as: risks relating to estimates of reserves and
recoveries; production and operating cost assumptions; development risks and
costs; the risk of commodity price fluctuations; political and regulatory risks;
and other risks and uncertainties as disclosed under the heading "Risk Factors"
in its Prospectus and elsewhere in Heritage documents filed from time-to-time
with the London Stock Exchange and other regulatory authorities. Further, any
forward-looking information is made only as of a certain date and the Company
undertakes no obligation to update any forward-looking information or statements
to reflect events or circumstances after the date on which such statement is
made or reflect the occurrence of unanticipated events, except as may be
required by applicable securities laws. New factors emerge from time to time,
and it is not possible for management of the Company to predict all of these
factors and to assess in advance the impact of each such factor on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
information.
Anglo-Canadian Mining Corp. (TSXV:URA)
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