ABERDEEN, SCOTLAND--(Marketwired - Aug 13, 2013) -
Ithaca Energy Inc (TSX VENTURE :IAE ) (TSX :IAE ) Not for Distribution to U.S. Newswire Services or for Dissemination in the United States Ithaca Energy Inc. Second Quarter and Half Yearly 2013 Financial Results 13 August 2013 Ithaca Energy Inc. (TSX :IAE ), (LSE AIM: IAE) ("Ithaca" or the "Company") announces its quarterly results for the three months ended June 30, 2013 ("Q2 2013") and half yearly results for the six months ended June 30, 2013 ("H1 2013"). The acquisition of Valiant Petroleum plc ("Valiant") was completed on April 19, 2013, with the financial results reflecting the takeover of the company from that time. Financial Highlights - Q2 2013 cashflow from operations increased approximately 300% to $65.0 million (Q2 2012: $16.3 million), resulting in half yearly cashflow from operations of $100.5 million (H1 2012: $44.7 million) - H1 2013 cashflow per share $0.36 (H1 2012: $0.17) - Q2 2013 net earnings of $52.2 million (Q2 2012: $30.2 million), resulting in half yearly net earnings of $55.7 million (H1 2012: $43.2 million) - H1 2013 earnings per share $0.20 (H1 2012: $0.20) - Q2 2013 profit before tax of $69.1 million (Q2 2012: $21.7 million), resulting in half yearly profit before tax of $71.4 million (H1 2012: $35.5 million) - Q2 2013 average realised oil price of $111 / bbl (Q2 2012: $116 / bbl), including a realised hedging gain of $8 / bbl - Net drawn debt of $346 million from bank facilities of $780 million at June 30, 2013 (zero net drawn debt at December 31, 2012) - UK tax allowances pool of $923 million and Norwegian tax receivable of $70 million at June 30, 2013 - Approximately 4.3 million barrels of future 2013-14 oil production hedged at a weighted average price of around $103 / bbl (approximately 30% puts / 70% swaps) H1-2013 Pro-Forma The acquisition of Valiant was completed on April 19, 2013, with the financial results reflecting that. The table below sets out the financial highlights of H1 2013 with the exceptional restructuring costs associated with the Valiant transaction separately identified. Also shown is a pro-forma cashflow summary for H1 2013 to provide an overview of the cash generative nature of the enlarged Company. Fin. Results Pro-Forma H1 2013 Valiant from Valiant from 19-Apr-13 01-Jan-13 Production boepd 9,138 14,300 Revenue M$ 188.1 299.6 Reduction in oil inventory M$ (22.7) (27.0) Operating Costs M$ (66.3) (83.2) G & A M$ (5.4) (15.9) Forex M$ (2.0) (0.2) Realised Derivative Gains M$ 14.1 14.1 Cashflow from Ongoing Operations M$ 105.8 187.4 Non-Recurring Valiant Costs* - Restructuring Costs M$ (5.2) (5.2) Cashflow from Operations M$ 100.5 182.2 *Ithaca's Valiant acquisition transaction costs of $5 million are included within cashflow from investing activities, resulting in total non-recurring costs of $10.2 million. The H1-2013 pro-forma highlights are: - Average net export production in H1 2013 of 14,300 boepd, 95% oil - H1 2013 cashflow from ongoing operations of $187.4 million - Operating costs of $32 per barrel of oil equivalent ("boe") yielding a netback per barrel of over $70 / boe - Future annual G&A savings of over $20million per annum resulting from the now completed restructuring and full integration of Valiant's assets into the enlarged Company Production & Operations Based on pro-forma production in H1 2013 and a balanced view of the opportunities and challenges for the second half of 2013 ("H2 2013"), the Company anticipates that full year 2013 production will be at the lower end of the pro-forma annual guidance range of 14,000 to 16,000 boepd. Production is expected to benefit from recent operational activities and planned work programmes. - An additional production well on the Don Southwest field was drilled and brought online in late June 2013 and drilling of a water injection well in the same area of the field is nearing completion. A chemical treatment campaign on the wells on the West Don field has also successfully been completed. - Good progress continues to be made on the work programme required to enable start-up of the electrical submersible pump ("ESP") on the Causeway field. It is anticipated that the facilities being installed on the host platform for the field will be operational in the fourth quarter of the year, significantly boosting production from the field. - Production from the Athena field was partially reduced during the second quarter as one of the four producing wells, the "P2" well, was temporarily shut-in. A repair was successfully completed as planned in early July 2013 and the well was brought back online. The key risks to production in H2 2013 relate to completion of works on certain of the Company's non-operated assets and the results of an ongoing evaluation on one of the Athena wells. - The planned start-up of the ESP on the Causeway field in Q4 2013 is subject to TAQA delivering an on time turnaround of six weeks on the North Cormorant platform and thereafter executing on the plan to deliver power to the Causeway well ESP package. - The Shell operated Cook field has had to be shut-in in the last few days to allow inspection of the infield flowline connecting the field to the Anasuria floating production, storage and offloading vessel. The Operator is planning for the work to be completed in September 2013 to allow restart of production. - Production from one well on the Athena Field, the "P4" well which contributes under 400 boepd (net) was shut-in on 12 August 2013. Diagnostic testing, including investigation of the ESP installed in the well, is underway. Substantial delay to completion of the above works, including any rig or vessel work required as an outcome of the Athena P4 diagnostic testing, has the potential to reduce full year production below the guidance range. Greater Stella Area Development - Drilling on the Stella field commenced in June 2013. The first development well is progressing as planned, with drilling currently ongoing in the horizontal reservoir section of the well. - Excellent progress is being made on the subsea infrastructure installation work programme - the 60km 10-inch gas export pipeline and main subsea structures have been installed and infield flowline trenching has been completed. - Execution of the marine system works currently being conducted on the"FPF-1" floating production unit, in Gdansk, Poland is progressing well. Corporate - The acquisition of Valiant was completed on April 19, 2013 and all the main integration milestones have now been completed. - All future UK exploration and appraisal well commitments transferred as a result of the Valiant acquisition have been farmed out with material expenditure carries - removing approximately $75 million of net exploration expenditure, while creating upside exposure to future wells at an anticipated net cost of less than $10 million. Monetisation of the UK exploration portfolio has exceeded expectations in terms of levels of expenditure carry and speed of execution. - Drilling operations on the Norvarg well were successfully completed in August 2013. The reserves of the field and potential future development options are currently being evaluated. - A re-focused strategy has been established for the Norwegian business, targeting lower risk geology / geography, with new leadership provided by Lars Thorrud, previously Vice President Business Development in Det Norske Oljeselskap ASA. Iain McKendrick, Chief Executive Officer, commented:"In the first half of the year we have both doubled production and operating cashflow and importantly diversified our producing asset base to 11 fields. The Greater Stella Area development is moving forward rapidly and with the integration of the Valiant acquisition now completed, including restructuring of the UK exploration portfolio, we look forward to an active second half of the year." Company Website Ithaca has today launched a re-developed Company website, www.ithacaenergy.com , with further background information on all its assets and on-going activities. - ENDS - Enquiries: Ithaca Energy: Iain imckendrick@ithacaenergy.com +44 (0)1224 650 261 McKendrick, CEO Graham gforbes@ithacaenergy.com +44 (0)1224 652 151 Forbes, CFO FTI Consulting: Billy billy.clegg@fticonsulting.com +44 (0)207 269 7157 Clegg Edward edward.westropp@fticonsulting.com +44 (0)207 269 7230 Westropp Georgia georgia.mann@fticonsulting.com +44 (0)207 269 7212 Mann Cenkos Securities plc: Jon jfitzpatrick@cenkos.com +44 (0)207 397 8900 Fitzpatrick Neil nmcdonald@cenkos.com +44 (0)131 220 6939 McDonald RBC Capital Markets: Tim Chapman tim.chapman@rbccm.com +44 (0)207 653 4641 Matthew Coakes matthew.coakes@rbccm.com +44 (0)207 653 4871 Notes In accordance with AIM Guidelines, John Horsburgh, BSc (Hons) Geophysics (Edinburgh), MSc Petroleum Geology (Aberdeen) and Subsurface Manager at Ithaca is the qualified person that has reviewed the technical information contained in this press release. Mr Horsburgh has over 15 years operating experience in the upstream oil and gas industry. References herein to "boe" are derived by converting gas to oil in the ratio of six thousand cubic feet ("Mcf") of gas to one barrel ("bbl") of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. This press release contains non-International Financial Reporting Standards ("IFRS") industry benchmarks and terms, such as "netbacks","cashflow from operations" and "cashflow from ongoing operations". Netbacks are calculated on a per unit basis as oil, gas and natural gas liquids revenues less royalties and transportation and operating costs. Cashflow from operations and cashflow from ongoing operations are determined by adding back changes in non-cash operating working capital to cash from operating activities. The Company considers cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. The non-IFRS financial measures do not have any standardised meaning and therefore are unlikely to be comparable to similar measures presented by other companies. The Company uses the foregoing measures to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. Further details on the above are provided in the unaudited interim consolidated financial statements of Ithaca for the quarter ended June 30, 2013, which have been filed with the securities regulatory authorities in Canada. These financial statements are available on the System for Electronic Document Analysis and Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com . About Ithaca Energy Ithaca Energy Inc. (TSX: IAE, LSE AIM: IAE) is a North Sea oil and gas operator focused on the delivery of lower risk growth through the appraisal and development of UK undeveloped discoveries, the exploitation of its existing UK producing asset portfolio and a Norwegian exploration and appraisal business centred on the generation of discoveries capable of monetisation prior to development. Ithaca's strategy is centred on generating sustainable long term shareholder value by building a highly profitable 25kboe/d North Sea oil and gas company. For further information please consult the Company's website www.ithacaenergy.com . Not for Distribution to U.S. Newswire Services or for Dissemination in the United States Forward-looking statements Some of the statements and information in this press release are forward-looking. Forward-looking statements and forward-looking information (collectively, "forward-looking statements") are based on the Company's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, drilling, well completion times, future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. When used in this press release, the words"anticipate", "continue", "estimate", "expect", "may", "will","project", "plan", "should", "believe", "could", "target" and similar expressions, and the negatives thereof, whether used in connection with operational activities, production forecasts, budgetary figures, potential developments or otherwise, are intended to identify forward-looking statements. Such statements are not promises or guarantees, and are subject to known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward-looking statements and are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and included in this press release should not be unduly relied upon. These forward-looking statements speak only as of the date of this press release. Ithaca Energy Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based except as required by applicable securities laws. HIGHLIGHTS SECOND QUARTER 2013 - The acquisition of Valiant Petroleum plc ("Valiant") was completed on April 19, 2013, and the financial results reflect the takeover of the acquired assets from that time Record cashflow from - Q2 2013 cashflow from operations increased operations approximately 300% to $65.0 million (Q2 2012: $16.3 million) resulting in half yearly cashflow from operations of $100.5 million (H1 2012: $44.7 million) - H1 2013 cashflow per share $0.36 (H1 2012: $0.17) - Q2 2013 profit before tax of $69.1 million (Q2 2012: $21.7 million) and net earnings of $52.2 million (Q2 2012: $30.2 million) resulting in H1 2013 profit before tax of $71.4 million (H1 2012: $35.5 million) and H1 2013 net earnings of $55.7 million (H1 2012: $43.2 million) - Q2 2013 average realised oil price of $111 / bbl (Q2 2012: $116 / bbl), including a realised hedging gain of $8 / bbl - Net drawn debt of $346 million at June 30, 2013 (zero net drawn debt at December 31, 2012) - UK tax allowances pool of $923 million at quarter end. Norwegian tax receivable of $70 million - Approximately 4.3 million barrels of future 2013-14 oil production hedged at a weighted average price of approximately $103 / bbl (approximately 30% puts / 70% swaps) Solid H1 2013 production - Taking into account production from the performance Valiant assets on a pro-forma basis from the start of 2013, total average net export production in H1 2013 was approximately 14,300 barrels of oil equivalent per day ("boepd"), approximately 95% oil - Based on pro-forma production in H1 2013 and a balanced view of the opportunities and challenges for H2 2013, the Company anticipates that full year 2013 production will be at the lower end of the pro-forma annual guidance range of 14,000 to 16,000 boepd - Total average net export production in Q2 2013, taking into account the Valiant acquisition from the transaction completion date of April 19, 2013, was 12,100 boepd, approximately 95% oil (Q2 2012: 3,964 boepd), resulting in H1 2013 production of 9,138 boepd, approximately 93% oil (H1 2012: 4,132 boepd) Strong progress on Stella - Drilling on the Stella field commenced in - development drilling June 2013 - the first well is currently and subsea drilling in the horizontal reservoir section infrastructure installation programmes - Excellent progress is being made on the commenced subsea infrastructure installation work programme - the 60km 10-inch gas export pipeline and main subsea structures have been installed and infield flowline trenching has been completed - Steady progress has being made on execution of the "FPF-1" floating production facility marine system works following the transfer of the vessel to the dry dock facility at the modifications yard in Gdansk, Poland, in April 2013. The hull tank refurbishment operations are nearing completion and installation of the additional buoyancy has commenced Norvarg drilling - Drilling operations on the Norvarg completed appraisal well were successfully completed in August 2013. Work is now being undertaken to evaluate the estimated reserves on the structure and potential future development options Valiant acquisition - All Valiant's UK assets have been integration milestones integrated into Ithaca's existing completed organisation and Valiant's UK office has been closed - this is expected to yield approximately $20 million per annum of overhead savings - All future UK exploration and appraisal well commitments transferred as a result of Valiant acquisition have been farmed out with material expenditure carries - removing approximately $75 million of net UK exploration expenditure, while creating upside exposure to future wells at an anticipated net cost of under $10 million - Re-focused strategy established for the Norwegian business, targeting lower risk geology / geography, with new leadership SUMMARY STATEMENT OF INCOME 3 Months Ended June 30 2013 2012 % Average Brent Oil Price $/bbl 102 108 -6% Average Realised Oil Price(1) $/bbl 103 110 -6% Revenue M$ 128.4 35.8 259% Cost of Sales - excluding DD&A M$ (62.1) (18.9) 229% G&A etc M$ (6.2) (2.6) 138% Non-recurring Valiant Restructuring M$ (5.2) - Realised Derivatives Gain / (Loss) M$ 10.2 2.0 410% Cashflow From Operations M$ 65.0 16.3 299% DD&A M$ (41.4) (11.1) 273% Unrealised Derivatives Gain / (Loss) M$ 7.3 17.4 -58% Non-recurring Valiant Deal Costs M$ (4.4) - Non-recurring Negative Goodwill M$ 48.0 - Other M$ (5.5) (0.9) 511% Profit Before Tax M$ 69.1 21.7 218% Deferred Tax Credit / (Charge) M$ (16.9) 8.5 Profit After Tax M$ 52.2 30.2 73% Earnings Per Share(2) $/Sh. 0.17 0.12 42% Cashflow Per Share(2) $/Sh. 0.21 0.06 233% 6 Months Ended June 30 2013 2012 % Average Brent Oil Price $/bbl 108 114 -5% Average Realised Oil Price(1) $/bbl 104 113 -8% Revenue M$ 188.1 76.3 147% Cost of Sales - excluding DD&A M$ (89.0) (31.5) 183% G&A etc M$ (7.5) (1.1) 581% Non-recurring Valiant Restructuring M$ (5.2) - Realised Derivatives Gain / (Loss) M$ 14.1 1.8 683% Cashflow From Operations M$ 100.5 44.7 125% DD&A M$ (60.9) (24.5) 149% Unrealised Derivatives Gain / (Loss) M$ (3.8) 18.1 Non-recurring Valiant Deal Costs M$ (5.0) - Non-recurring Negative Goodwill M$ 48.9 - Other M$ (8.3) (2.8) 196% Profit Before Tax M$ 71.4 35.5 101% Deferred Tax Credit / (Charge) M$ (15.7) 7.7 Profit After Tax M$ 55.7 43.2 29% Earnings Per Share(2) $/Sh. 0.20 0.20 - Cashflow Per Share(2) $/Sh. 0.36 0.17 100% (1) Average realised price before hedging (2) Q2 2013 weighted average number of shares of 305.9 million and H1 2013 weighted average number of shares of 283.1 million SUMMARY BALANCE SHEET M$ Q2 2013 Q4 2012 Cash & Equivalents 30 31 Other Current Assets 315 198 PP&E 1,356 663 Other Non-Current Assets 47 41 Total Assets 1,750 934 Current Liabilities (365) (206) Asset Retirement Obligations (141) (53) Deferred Tax Liabilities (110) (62) Other Non-Current Liabilities (377) (7) Total Liabilities (994) (328) Net Assets 757 606 Share Capital 525 431 Other Reserves 22 20 Surplus 210 154 Shareholders Equity 757 606 CORPORATE STRATEGY Ithaca Energy Inc. ("Ithaca" or the "Company") is a North Sea oil and gas operator focused on the delivery of lower risk growth through the appraisal and development of UK undeveloped discoveries, the exploitation of its existing UK producing asset portfolio and a Norwegian exploration and appraisal business centred on the generation of discoveries capable of monetisation prior to development. The Company has a solid and diversified UK producing asset base generating significant free cashflow from mainly oil production. Ithaca's goal is to generate sustainable long term shareholder value by building a highly profitable 25kboe/d North Sea oil and gas company. Execution of the Company's strategy is focused on the following core activities: - Maximising cashflow and production from the existing asset base. - Delivery of lower risk development led growth through the appraisal of undeveloped discoveries. - Delivering first hydrocarbons from the Ithaca operated Greater Stella Area development. - Monetising proven Norwegian asset reserves derived from exploration and appraisal drilling prior to the development phase. - Continuing to grow and diversify the cashflow base by securing new producing, development and appraisal assets through targeted acquisitions and licence round participation. - Maintaining financial strength and a clean balance sheet, supported by lower cost debt leverage. PRODUCTION & OPERATIONS UPDATE Taking into account production from the Valiant assets on a pro-forma basis from the start of Solid H1-2013 2013, total average net export production in H1 production 2013 was approximately 14,300 boepd, performance approximately 95% oil. This is in line with the Company's pro-forma annual guidance range of 14,000 to 16,000 boepd. Total average net export production in Q2 2013, taking into account the Valiant acquisition from the transaction completion date of April 19, 2013, was 12,100 boepd, approximately 95% oil (Q2 2012: 3,964 boepd), resulting in H1 2013 production of 9,138 boepd, approximately 93% oil (H1 2012: 4,132 boepd). Production during the quarter was derived from the operated Athena, Causeway Area (Causeway and Fionn), Beatrice, Jacky and Anglia fields and the non-operated Dons (Don Southwest and West Don), Cook, Broom and Topaz fields. The material increase in production delivered in Q2 2013 compared to the same quarter in 2012 was primarily attributable to the contribution of the Valiant assets, in addition to the positive impact of the Athena field start-up (first oil May 2012) and the acquisition of an additional 12.885% interest in the Cook field from Noble Energy Capital Limited, the "Cook Acquisition" (transaction completed February 2013). OPERATIONAL ACTIVITIES The fields produced strongly during the quarter, although, as anticipated, production was impacted by planned maintenance shutdowns on a number of assets, including the Beatrice Area infrastructure and Anglia, together with the non-operated Topaz field. Scheduled shutdowns Main on-going were also incurred on the Shell-operated operational work Anasuria Floating Production, Storage and programmes focused on Offloading vessel ("FPSO"), which serves as the production host facility for the Cook field, to enable the enhancement re-start of production from another field that activities uses the vessel. Athena During the quarter the Ithaca operated Athena field completed its first full year of operations. Gross daily production was reduced towards the end of the quarter as one of the four producing wells, the "P2" well, was temporarily shut-in awaiting a repair to the electrical cable serving that particular well. The necessary repair was completed in early July 2013 and the well was brought back online. During the quarter the Athena field commenced the production of water with oil. This was significantly later than originally anticipated prior to start-up of production from the field. The future evolution of the water production profile will now provide important information for forecasting the ultimate field production profile and the scope for future potential upside investment opportunities. The Athena field accounts for less than 15% of the Company's 2013 production following completion of the Valiant acquisition. Production from one well on the Athena Field, the "P4" well which contributes under 400 boepd (net) was shut-in on 12 August 2013. Diagnostic testing, including investigation of the ESP installed in the well, is underway. Causeway Area Drilling activities on the Causeway water injection well and the Fionn production well were completed in Q1 2013. Since taking control of the assets in Q2 2013, the Company has completed the subsea tie-in works required to put the Fionn well into production and is working closely with Taqa, the operator of the Causeway Area host infrastructure, to facilitate start-up of the installed electrical submersible pumps ("ESPs") and (Causeway) water injection as soon as practicable. It is anticipated that the facilities required to start-up the ESPs on the Causeway field will be operational in the fourth quarter of the year. Flow tests that have been performed on the Fionn well since completion of the subsea tie-in works have confirmed that the field has the potential to flow at considerably better rates if the well is sidetracked to a more optimal location (the well is a re-completed appraisal well). The Company has exercised a rig option originally held by Valiant to complete the sidetrack of the Fionn well. It is anticipated that drilling operations will commence in the fourth quarter of 2013. The well will be sidetracked to a location updip of the existing well to optimise access to the prime reservoir formation and to target potential upside reserves in a secondary reservoir. Prior to the commencement of drilling operations, the well will be produced on free flow (awaiting the start-up of the ESPs). Beatrice Area During the quarter a planned maintenance shutdown was completed on the Beatrice Area infrastructure, which comprises the Beatrice and Jacky offshore platforms and the Nigg oil terminal. The shutdown was focused on both the completion of asset integrity workscopes and the implementation of measures designed to improve the operating efficiency of the facilities. Dons A number of production enhancement activities have been completed on the EnQuest operated Dons fields since the end of Q1 2013. An additional production well on the Don Southwest field was drilled and brought online in late Q2 2013. Drilling of a water injection well in the same area of the field, to support production and reserves recovery from that area of the field, is nearing completion. A chemical treatment campaign on a number of the wells on the West Don field was successfully completed in July 2013, using the facilities on the Northern Producer, in order to increase production. Cook During the quarter, the Cook field performed strongly. In the last few days the field has had to be shut-in to allow inspection of the infield flowline connecting the field to the Anasuria FPSO. The Operator is planning for the work to be completed in September 2013 to allow restart of production. PRODUCTION OUTLOOK Based on pro-forma production in H1 2013 and a balanced view of the opportunities and challenges for H2 2013, the Company anticipates that full year production will be at the lower end of the pro-forma annual guidance range of 14,000 to 16,000 boepd. Production is expected to benefit from recent operational activities and planned work programmes, notably on the Dons and the Causeway fields. The key risks relate to the timely completion of the works on the Causeway and Cook fields and the results of the on-going evaluation on the Athena P4 well. Substantial delay to completion of the works on these fields, including any rig or vessel work required as an outcome of the Athena P4 diagnostic testing, has the potential to reduce full year production below the guidance range. GREATER STELLA AREA DEVELOPMENT UPDATE Strong progress has continued to be made with development of the Greater Stella Area ("GSA"), Development drilling with commencement of both the Stella development and subsea drilling campaign and the initial subsea infrastructure infrastructure installation programme marking installation two major project execution milestones. programmes underway Drilling Programme The high-spec ENSCO 100 heavy duty jack-up drilling rig that is being used for the GSA development drilling campaign commenced operations on the Stella field in June 2013. Management of the drilling and completion operations is being performed by Advanced Drilling Technology International ("ADTI") under"turnkey" contract arrangements. The initial campaign involves the drilling and completion of four production wells on the Stella field prior to start-up. Three horizontal wells are to be drilled into the oil rim of the field, along with one highly deviated gas-condensate well on the crest of the structure. Each well is anticipated to take approximately 80-90 days to drill, complete and clean-up test. Drilling operations on the first well are currently on-going in the horizontal reservoir section. Subsea Infrastructure Works Execution of the main subsea infrastructure manufacturing and installation programme, which is being executed by Technip UK Limited under the terms of an integrated Engineering, Procurement, Installation and Construction contract, continued to move forward as planned in Q2 2013. The initial offshore installation works commenced in June 2013, with trenching operations being completed in preparation for installation of the infield flowlines. The infield flowlines, which will connect the drill centres to the FPF-1, are scheduled to be installed in Q3 2013. Over a two week period in July 2013, the Apache II pipelay vessel completed the installation of the 60km 10-inch gas export pipeline that will connect the FPF-1 with the BP operated Central Area Transmission System, through which the gas will be transported to shore for processing at the Teeside Gas and Liquids Processing ("TGLP") terminal. The existing facilities at the TGLP terminal will be used to separate the natural gas, which will be sold to the UK spot market on a daily basis, and the associated propane, butane and condensate from within the gas, with such natural gas liquids being sold by TGLP at prevailing market prices. Installation of the main subsea structures that will be used for the production and export of hydrocarbons to and from the FPF-1 was also completed in July, using the Skandi Arctic construction and diving support vessel. FPF-1 Modification Works Work on the FPF-1 modifications and upgrade programme, which is being managed by Petrofac under the terms of a lump sum incentivised contract, has continued to be focused on execution of the marine system works during the quarter. The FPF-1 was transferred on to the dry dock barge at the Remontowa shipyard in Gdansk, Poland, in April 2013. The key elements of the dry dock works being completed on the vessel are inspection, repair and coating of the hull tanks and the installation of additional buoyancy. The hull tank refurbishment operations are nearing completion. Construction and installation of the steelwork blocks that will form the additional sponsons that are being added to the pontoons of the FPF-1 for enhanced buoyancy is advancing and fabrication of the additional buoyancy "blisters" that are being added to the legs of the vessel has commenced. DRILLING PROGRAMME NORVARG APPRAISAL WELL - NORWAY Drilling operations Drilling of the TOTAL E&P Norge operated Norvarg on Norvarg appraisal appraisal well in the Norwegian sector of the well completed - Barents North Sea was completed in August 2013. reserves and Two formation tests were carried out in the development options upper and lower parts of the Kobbe Formation, evaluation to with the well flowing at a maximum gross commence production rate of approximately 6.2 million standard cubic of feet per day on a 52/64-inch choke. An extensive data acquisition programme was completed, including wire line logging, coring and fluid sampling, and work will now be undertaken by the Operator to evaluate the estimated recoverable hydrocarbons on the structure. Downhole pressure gauges have been installed in the well to recover long term pressure build-up data that will be used to evaluate the extent of the reservoir. HANDCROSS The Company is in the process of preparing for the drilling of the operated exploration well on the Handcross prospect located in the West of Shetlands basin. The Stena Carron drillship will be used for the drilling operations and it is anticipated that it will be on location at the end of 2013. CORPORATE ACTIVITIES Valiant Petroleum plc Acquisition & Integration Efficient execution On April 19, 2013 the Company completed the of Valiant acquisition of Valiant. Since this time, the acquisition Company has efficiently executed its integration integration plan - plan to maximise the value of the acquisition. maximising shareholder value - All Valiant's UK assets have been integrated into Ithaca's existing organisation and Valiant's UK office has been closed - this is expected to yield approximately $20 million per annum of overhead savings. - All future UK exploration and appraisal well commitments transferred as a result of the Valiant acquisition have been farmed out with material expenditure carries being paid by the companies farming in to the licences - removing approximately $75 million of net UK exploration expenditure, while creating upside exposure to future wells at an anticipated net cost of under $10 million. - A re-focused strategy has been established for the Norwegian business, targeting lower risk geology / geography, with new leadership. - Mr Lars Thorrud, previously Vice President Business Development in Det Norske Oljeselskap ASA (Norway), will be taking up the position of General Manager of the Company's Norwegian subsidiary from September 1, 2013. Mr Thorrud, a geologist by background, has been working in the North Sea oil and gas industry for over 24 years in various senior technical and commercial management positions. He brings a wealth of experience of building and monetising Norwegian exploration and appraisal portfolios. UK EXPLORATION FARM-OUTS Four significant farm-out transactions have been executed to effectively restructure and de-risk the UK exploration and appraisal portfolio acquired from Valiant. In addition to the main farm-out transactions listed below, the Company has also withdrawn from a number of licences in the portfolio transferred from Valiant. - Handcross - P1631 & P1832 (Blocks 204/14c, 204 /18b & 204/19c): farm-outs have been executed with RWE Dea UK SNS Limited and a subsidiary of Edison International SpA reducing Ithaca's paying interest in the operated West of Shetland exploration well to be drilled in late 2013 from 100% to 6%, while retaining a 45% working interest. - Beverley - P1792 (Blocks 21/30f, 22/26c): farm-out executed with Shell UK Limited, resulting in Ithaca reducing its 40% interest in the non-operated Central North Sea exploration well to 20%, in return for a partial carry of the costs of a well on the Beverly prospect. - Isabella - P1820 (Blocks 30/6b, 30/11a & 30/ 12d): farm-out executed with Maersk Oil North Sea UK Limited, resulting in Ithaca reducing its 50% interest in the non-operated Central North Sea exploration well to 20%, in return for a partial carry of the costs of a well on the Isabella prospect. With the completion of the above farm-outs, the Company has exceeded its expectations in respect of the restructuring of the UK exploration and appraisal programmes. The Company will continue to farm-out, divest or relinquish the Valiant UK exploration portfolio in order to create further value. BRIDGE LOAN FACILITY The Company remains on schedule to refinance the existing $350 million Bridge Loan facility, which was fully drawn on April 19, 2013 as part of financing the Valiant acquisition, into an enlarged Senior Borrowing Base facility in the second half of the year. NORWEGIAN DEBT FACILITY On July 1, 2013 the company signed a NOK 450 Enlarged Senior million (~$75 million) Norwegian Exploration Borrowing Base Financing Facility. Under the Norwegian tax facility to be regime, 78% of exploration, appraisal and established in H2 supporting expenditure resulting from operations 2013 on the Norwegian Continental Shelf is refunded by the Government in the December of the year following the year the costs were incurred. This facility will accelerate the receipt of 95% of the tax refund receivable from the Norwegian Government, significantly increasing financial flexibility and assisting Ithaca's growth in Norway. This is a conventional tax refund facility, on industry standard terms. COMMODITY HEDGING In the quarter, the Company received $9.4 million through the settlement of commodity 4.3MMbbl of future hedges relating to approximately 0.7 million 2013-14 oil barrels of oil and the exercise of an option to production hedged at swap 1 million barrels of production at $107/ ~$103/bbl bbl. On the day of exercise, the Brent forward curve for the period to which the hedge related was at $101 / bbl resulting in the swaption being converted to a cash settlement of $6 million and a forward swap of 1 million barrels of production at $101 / bbl. Following the above transactions, 4.3 million barrels of future 2013-14 oil production is hedged at a weighted average price of around $103 / bbl (approximately 30% puts / 70% swaps). The Company recognised a gain of $6.6 million through the revaluation of oil swaps and put options. The hedging instruments are measured at June 30, 2013 and a valuation attributed based on the Brent oil forward curve on that date (spot Brent was trading at $102.4/bbl on June 30, 2013). The gains relate to movement in the Brent oil forward curve, and an increase in the implied volatility. Q2 2013 RESULTS OF OPERATIONS REVENUE Three Months Ended June 30, 2013 Record quarterly Revenue increased by $92.6 million in Q2 2013 to revenue of $128.4 $128.4 million (Q2 2012: $35.8 million). This million was mainly driven by an increase in oil sales volumes, partially offset by a reduction in the oil price. Oil sales volumes increased primarily due to the inclusion of sales from the Dons and Causeway fields from April 19, 2013 following the acquisition of Valiant. In addition, there was a significant increase from the Athena field (first oil May 2012) and the additional Cook Acquisition (transaction completed in Q1 2013) offset by lower volumes from the Beatrice and Jacky fields attributable to planned shutdowns. Average realised oil prices decreased quarter on quarter from $110/bbl in Q2 2012 to $103/bbl in Q2 2013. The average Brent price for the quarter was $102/bbl compared to $108/bbl for Q2 2012. The Company's realised oil prices do not strictly follow the Brent price pattern given the various oil sales contracts in place, with certain field sales sold at a discount or premium to Brent. This decrease in average realised oil price was nonetheless offset by a realised hedging gain of $8/bbl in Q2 2013. Q2 2013 gas sales increased compared to Q2 2012, although volumes remain modest, accounting for only 2% of total revenue. Six Months Ended June 30, 2013 Revenue increased by $111.8 million in H1 2013 to $188.1 million (H1 2012: $76.3 million). This movement mainly comprises an increase in oil sales volumes, partially offset by a reduction in oil price. In line with the above quarterly movement, oil sales volumes increased primarily due to the inclusion of sales from the Dons and Causeway fields acquired from Valiant as well as the additional interest acquired in the Cook field, offset by lower volumes from the Beatrice and Jacky fields attributable to planned shutdowns. Total gas sales increased primarily as a result of higher realised gas prices, with an increase from $37/boe to $44/boe, partially offset by lower production volumes in the period. 3-Months Ended June 30th Average Realised Price 2013 2012 Oil Pre-Hedging $/bbl 103 110 Oil Post-Hedging $/bbl 111 116 Gas $/boe 41 32 6-Months Ended June 30th Average Realised Price 2013 2012 Oil Pre-Hedging $/bbl 104 113 Oil Post-Hedging $/bbl 112 116 Gas $/boe 44 37 COST OF SALES 3-Months Ended 6-Months Ended June 30th June 30th $'000 2013 2012 2013 2012 Operating Expenditure 43,155 15,406 66,382 31,128 DD&A 41,367 11,092 60,865 24,477 Movement in Oil & Gas Inventory 18,137 3,481 21,713 380 Oil Purchases 790 - 947 - Total 103,449 29,979 149,907 55,985 Three Months Ended June 30, 2013 Cost of sales increased in Q2 2013 to $103.5 million (Q2 2012: $30.0 million) due to increases in operating costs, depletion, depreciation and amortisation ("DD&A") and movement in oil and gas inventory. Operating costs increased in the quarter to $43.2 million (Q2 2012: $15.4 million) primarily due to the inclusion of costs for the Dons and Causeway fields acquired from Valiant, plus the additional acquired interest in the Cook field. Unit operating costs decreased to $39/boe in the period (Q2 2012: $43/boe) mainly as a result of the inclusion of the lower cost Dons and Causeway fields acquired from Valiant. Unit operating costs were not reduced further in the quarter because of the planned Beatrice shutdown and a light well intervention campaign on the West Don field. Absent these two events, the combined unit operating cost would have been approximately $35/boe following the Valiant acquisition. DD&A for the quarter increased to $41.4 million (Q2 2012: $11.1 million). This was primarily due to higher production volumes in Q2 2013 as a result of the addition of the Dons and Causeway fields, together with a full quarter of production from the Athena field and the additional acquired interest in the Cook field. The blended DD&A rate for the quarter increased to $37/boe (Q2 2012: $30/boe). The blended DD&A rate in Q2 2012 was unusually low due to the production mix, however the driver for the increase has been"business combination" accounting for transactions. As the below "Changes in Accounting Policies" section outlines, the adoption of IFRS and accounting for acquisitions as business combinations has led to increased DD&A rates. It should be noted that this increase in DD&A, and hence Cost of Sales, is offset by a credit in the Deferred Tax charged through the Statement of Income. An oil and gas inventory movement of $18.1 million was charged to cost of sales in Q2 2013 (Q2 2012 charge of $3.5 million). Movements in oil inventory arise due to differences between barrels produced and sold, with production being recorded as a credit to movement in oil inventory through cost of sales until the oil has been sold. In Q2 2013 more barrels of oil were sold (1,213k bbls) than produced (1,041k bbls), as a result of significant Cook field liftings. Movement in Operating Oil Gas Total Oil & Gas Inventory kbbls kboe kboe Opening inventory 241 11 253 Production 1,041 60 1,101 Liftings/sales (1,213) (61) (1,274) Acquired volumes 104 - 104 Closing volumes 173 10 184 Six Months Ended June 30, 2013 Cost of sales increased in H1 2013 to $149.9 million (H1 2012: $56.0 million) due to increases in operating costs and DD&A and movement in oil and gas inventory. Operating costs increased in the period to $66.4 million (H1 2012: $31.1 million) primarily due to the inclusion of costs for the Dons and Causeway fields acquired from Valiant, plus increased Athena costs (only part period in 2012) and the additional interest acquired in the Cook field as noted above. DD&A for the period increased to $60.9 million (H1 2012: $24.5 million). This was primarily due to higher production volumes in H1 2013 with the addition of the Dons and Causeway fields, together with a full quarter of production from the Athena field and the additional interest in the Cook field. An oil and gas inventory movement of $21.7 million was charged to cost of sales in H1 2013 (H1 2012: charge of $0.4 million). In H1 2013 more barrels of oil were sold (1,741k bbls) than produced (1,536k bbls), again mainly as a result of Cook field liftings in Q2. ADMINISTRATION & EXPLORATION & EVALUATION EXPENSES 3-Months Ended 6-Months Ended June 30th June 30th $'000 2013 2012 2013 2012 General & Administration 3,623 1,034 5,415 2,105 Share Based Payments 366 204 663 339 Total Administration Expenses 3,989 1,238 5,478 2,444 Non-recurring Valiant Acquisition 9,554 - 10,235 - Costs Exploration & Evaluation 132 4 443 79 Total 13,675 1,242 16,756 2,523 Three Months Ended June 30, 2013 Total administrative expenses increased in the quarter to $4.0 million (Q1 2012: $1.2 million) primarily due to an increase in general and administrative expenses as a result of the continued growth of the Company, including the associated costs of an enlarged Ithaca group post the Valiant acquisition. Share based payment expenses increased as a result of options being granted towards the end of 2012 (none end 2011), therefore higher amortisation expense has been reflected through Q2 2013. Valiant acquisition costs of $9.6 million were incurred in the quarter with approximately half of the costs relating to advisory fees and the other half to restructuring costs. The post-acquisition restructuring is now complete, with Valiant's UK office now closed and new management in place in Norway. Exploration and evaluation expenses of $0.1 million were recorded in the quarter (Q2 2012: $0.0 million) primarily due to the expensing of previously capitalised costs relating to areas where exploration and evaluation activities have ceased. Six Months Ended June 30, 2013 Total administrative expenses increased in the period to $5.5 million (H1 2012: $2.4 million) primarily associated with an increase in general and administrative expenses as a result of the associated costs of an enlarged Ithaca group post the Valiant acquisition as well as higher levels of corporate activity, particularly in the first quarter of the year. FOREIGN EXCHANGE & FINANCIAL INSTRUMENTS Three Months Ended June 30, 2013 A foreign exchange loss of $2.6 million was recorded in Q2 2013 (Q2 2012: $1.5 million). The majority of the Company's revenue is US dollar driven while operating expenditures are primarily incurred in British pounds. As such, general volatility in the USD:GBP exchange rate is the driver behind the foreign exchange gains and losses, particularly on the revaluation of the GBP bank accounts (USD:GBP 1.52 at the start and end of the quarter but fluctuating between 1.50 and 1.58 during the quarter). This volatility was partially offset by the foreign exchange hedges and resultant gains described below. The Company recorded a $17.5 million gain on financial instruments for the quarter ended June 30, 2013 (Q2 2012: $19.3 million). The gain was predominantly due to a $9.4 million realised gain on commodity hedges together with a $6.6 million increase in the value of oil swaps and put options, due to a reduction in the Brent oil forward curve, and an increase in the implied volatility. In addition, the Company realised a gain of $0.8 million on foreign exchange instruments as well as a $0.6 million gain on the revaluation of foreign exchange instruments. The Company continues to limit exposure to fluctuations in foreign currencies with forward contracts to hedge a further GBP100 million and EUR30 million of capital expenditure on the GSA development at rates of $1.52: GBP1.00 and $1.29: EUR1.00. Six Months Ended June 30, 2013 A foreign exchange loss of $2.1 million was recorded in H1 2013 (H1 2012: $0.1 million gain). As above, general volatility in the USD:GBP exchange rate was the main driver behind the foreign exchange loss in H1 2013 (USD:GBP at January 1, 2013: 1.62. USD:GBP at June 30, 2013: 1.52 with fluctuations between 1.48 and 1.64 during the period). The Company recorded a $10.3 million gain on financial instruments for the six months ended June 30, 2013 (H1 2012: $18.6 million). This was primarily driven by a $13.6 million realised gain on commodity hedges, including a $6 million settlement on the swaption conversion, partially offset by a $2.4 million downwards revaluation of commodity hedges due to a reduction in value of oil swaps and put options together with a $1.5 million loss on the revaluation of foreign exchange instruments. NEGATIVE GOODWILL If the cost of an acquisition is more than the fair value of net assets acquired, the difference is recognised on the balance sheet as goodwill. Conversely, if the cost of an acquisition is less than the fair value of the assets acquired, the difference is recognised as negative goodwill in the statement of income. As a result of business combination accounting for the Valiant acquisition, $48.0 million of negative goodwill was recognised in the quarter ended June 30, 2013. In addition, $0.9 million negative goodwill was recognised in Q1 2013 in relation to the Cook Acquisition representing negative goodwill of $48.9 million in the six month period ended June 30, 2013. TAXATION Three Months Ended June 30, 2013 A tax charge of $16.9 million was recognised in the quarter ended June 30, 2013 (Q2 2012: $8.5 No UK tax million credit). $18.5 million is a non-cash anticipated to be charge relating to UK taxation and is a product payable in the of adjustments to the deferred tax charge mid-term primarily relating to the UK Ring Fence Expenditure Supplement and share based payments. As noted in the Cost Of Sales section the deferred tax credit is increased by the use of accounting for acquisitions as business combinations. The remaining $1.6 million credit is due to Norway tax refunds which have been generated as a result of exploration expenditure, incurred by Ithaca's Norwegian operations, expensed in the statement of income. Further Norwegian tax refunds totalling $70 million relate to Norwegian capital expenditure and are recognised on the balance sheet. As a result of the above factors, profit after tax decreased to $52.2 million (Q2 2012: $30.2 million). Six Months Ended June 30, 2013 A tax charge of $15.7 million was recognised in the six months ended June 30, 2013 (H1 2012: $7.7 million credit). $17.3 million of this non-cash charge relates to UK taxation and is a product of adjustments to the deferred tax charge primarily relating to the UK Ring Fence Expenditure Supplement and share based payments. The remaining $1.6 million credit is due to Norway tax credits which have been generated as a result of exploration expenditure incurred by Ithaca's Norwegian operations. As a result of the above factors, profit after tax decreased to $55.7 million (H1 2012: $43.2 million). No taxes are expected to be paid in the mid-term relating to upstream oil and gas activities as a result of the $923 million UK tax allowances pool available to the Company. CAPITAL INVESTMENTS $608 million of the total $748 million capital additions to D&P assets in H1 2013 was Capital expenditure attributable to the fair value on acquisition of driven by the Valiant producing fields resulting from significant business combination accounting (the total investment in acquisition cost being $293.6 million). The development projects remaining D&P additions of $140 million relate and the acquisition primarily to the acquisition of the additional of Valiant interest in the Cook field and execution of the GSA development, with the main areas of expenditure being on the manufacture and fabrication of subsea infrastructure and execution of the FPF-1 modification works (as described above). Capital expenditure on E&E assets in H1 2013 was $29.7 million, offset by a $24.2 million release of the acquired E&E liability, resulting in a net addition of $5.5 million. Expenditure was primarily focused on the Storbarden and Norvarg exploration and appraisal wells in Norway as well as UK development projects. As part of the Valiant acquisition accounting, a liability was created to cover the committed exploration spend along with a corresponding asset for the associated Norwegian tax credit receivable. This liability is released as the spend is incurred, essentially resulting in a nil asset value within PP&E. $'000 Q2 2013 Q2 2012 Development & Production ("D&P") 748,223 58,558 Exploration & Evaluation ("E&E") 5,495 2,553 Other Fixed Assets 567 43 Total 754,285 61,154 LIQUIDITY AND CAPITAL RESOURCES $'000 Q2 2013 Q4 2012 Increase / (Decrease) Cash & Cash Equivalents 30,319 31,376 (1,057) Trade & Other Receivables 278,747 173,949 104,798 Inventory 20,790 15,878 4,912 Other Current Assets 15,560 8,251 7,309 Trade & Other Payables (365,281) (205,635) (159,646) Net Working Capital (19,865) 23,819 43,684 As at June 30, 2013, Ithaca had a working capital credit of $19.9 million including a cash balance of $30.3 million. Available cash has been, and is currently, invested in money market deposit accounts with BNP Paribas ("BNPP"). Management has received confirmation from the financial institution that these funds are available on demand. Cash and cash equivalents remained relatively constant period on period with other working capital movements driven by the timing of receipts and payments of balances. A significant proportion of Ithaca's accounts receivable balance is with customers in the oil and gas industry and is subject to normal joint venture/industry credit risks. The Company assesses partners' credit worthiness before entering into joint venture agreements. The Company regularly monitors all customer receivable balances outstanding in excess of 90 days. As at June 30, 2013, substantially all of the accounts receivable is current, being defined as less than 90 days. In the past, the Company has not experienced credit loss in the collection of accounts receivable. At June 30, 2013, Ithaca had two loan facilities totalling $780 million, being the existing BNPP facility (the "Facility") of $430 million and an additional bridge loan (the "Bridge Facility") of $350 million. At quarter end, the Company had unused credit facilities totalling $404 million (Q4 2012: $430 million). $376 million was drawn down under the facilities at June 30, 2013, being $30 million drawn under the Facility and $346 million drawn under the Bridge Facility. During the quarter ended June 30, 2013, there was a net cash outflow of approximately $38.5 million (Q2 2012: inflow of $21.9 million). Cashflow from Operations Cash generated from operating activities in Q2 2013 was $65.0 million primarily due to cash generated from Athena, Beatrice, Jacky, Anglia, Cook and Broom operations, augmented in Q2 2013 primarily due to the inclusion of Dons and Causeway operations. Cashflow from Financing Activities Cash generated from financing activities in Q2 2013 was $196.9 million primarily due to the draw down of the existing debt facility in Q2 2013 ($320 million), partially offset by the repayment of the existing Valiant loan ($115 million). Cashflow from Investing Activities Cash used in investing activities in Q2 2013 was $259.4 million primarily due to the cash consideration paid on the Valiant acquisition as well as further capital expenditure on the GSA development, including modification of the FPF-1 and subsea infrastructure fabrication works. The Company continues to be fully funded, with more than sufficient financial resources to cover its anticipated future commitments from its existing cash balance, debt facilities and forecast cashflow from operations. No unusual trends or fluctuations are expected outside the ordinary course of business. COMMITMENTS The engineering financial commitments relate to committed capital expenditure on the Stella and Harrier fields, as well as ongoing capital expenditure on existing producing fields. Rig commitments reflect rig hire costs committed in relation to the anticipated Stella wells. As stated above, these commitments are expected to be funded through the Company's existing cash balance, forecast cashflow from operations and its debt facility. $'000 1 Year 2-5 Years 5+ Years Office Leases 423 1,316 - Other Operating Leases 12,319 12,078 - Exploration Licence Fees 583 - - Engineering 159,861 - - Rig Commitments 46,269 - - Total 219,455 13,394 - OUTSTANDING SHARE INFORMATION The Company's common shares are traded on the Toronto Stock Exchange ("TSX") in Canada under the symbol "IAE" and on the Alternative Investment Market ("AIM") in the UK under the symbol "IAE". As at June 30, 2013, Ithaca had 317,365,658 common shares outstanding along with 19,614,630 options outstanding to employees and directors to acquire common shares. In Q2 2013, a total of 56,952,321 new Ithaca common shares were issued and allotted to holders of Valiant shares as part of the Valiant acquisition consideration. Admission of the new shares to trading on AIM and the TSX occurred by April 22, 2013. No options were granted by the Board of Directors in the quarter ended June 30, 2012. As at August 10, 2013, Ithaca had 317,365,658 common shares outstanding along with 19,614,630 options outstanding to employees and directors to acquire common shares. June 30, 2013 Common Shares Outstanding 317,365,658 Share Price(1) $1.69 / Share Total Market Capitalisation $536,347,962 (1) Represents the TSX close price (CAD$1.78 on last trading day of June, 2013. US$:CAD$ 0.95 on June 30, 2013 SUMMARY OF QUARTERLY RESULTS $'000 30 Jun 2013 31 Mar 2013 Revenue 128,360 59,769 Profit After Tax 52,228 3,472 EPS - Basic 0.17 0.01 EPS - Diluted 0.17 0.01 $'000 31 Dec 2012 30 Sep 2012 30 Jun 2012 31 Mar 2012 Revenue 52,566 41,579 35,779 40,553 Profit After Tax 45,347 4,894 30,238 12,916 EPS - Basic 0.17 0.02 0.12 0.05 EPS - Diluted 0.17 0.02 0.11 0.05 Restated $'000 31 Dec 2011 30 Sep 2011 Revenue 54,870 26,415 Profit After Tax 13,318 16,016 EPS - Basic 0.05 0.06 EPS - Diluted 0.05 0.06 The most significant factors to have affected the Company's results during the above quarters, other than transactions such as the Valiant acquisition, are fluctuation in underlying commodity prices and movement in production volumes. The Company has utilised forward sales contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the exposure to price volatility. These contracts can cause volatility in profit after tax as a result of unrealised gains and losses due to movements in the oil price and USD : GBP exchange rate. Q3 2011 was restated following the Company's election to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. Refer to the "Changes in Accounting Policies" below for more details. FINANCIAL INSTRUMENTS All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Company has classified each financial instrument into one of these categories: held-for-trading, held-to-maturity investments, loans and receivables, or other financial liabilities. Loans and receivables, held-to-maturity investments and other financial liabilities are measured at amortised cost using the effective interest rate method. For all financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognised for that financial instrument. These costs are expensed using the effective interest rate method and are recorded within interest expense. Held-for-trading financial assets are measured at fair value and changes in fair value are recognised in net income. All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the hedged transaction is recognised in net earnings. The Company has classified its cash and cash equivalents, restricted cash, derivatives, commodity hedges and long term liability as held-for-trading, which are measured at fair value with changes being recognised in net income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and accrued liabilities are classified as other liabilities, all of which are measured at amortised cost. The classification of all financial instruments is the same at inception and at June 30, 2013. The table below presents the total gain/(loss) on financial instruments that has been disclosed through the statement of comprehensive income. Three months Six months ended June 30 ended June 30 $'000 2013 2012 2013 2012 Revaluation Forex Forward Contracts 584 (428) (1,471) 541 Revaluation of Gas Contract - 872 - 758 Revaluation of Other Long Term 96 61 153 (29) Liability Revaluation of Commodity Hedges 6,623 16,858 (2,444) 16,858 Total Revaluation Gain / (Loss) 7,303 17,363 (3,762) 18,128 Realised Gain on Forex Contracts 837 68 544 68 Realised Gain/(Loss) on Commodity 9,374 1,908 13,560 1,709 Hedges Total Realised Gain/(Loss) 10,211 1,976 14,104 1,777 Total Realised / Revaluation Gain / 17,514 19,339 10,342 19,905 (Loss) Contingent Consideration - - - (1,295) Total Gain/(Loss) on Financial 17,514 19,339 10,342 18,610 Instruments The following table summarises the commodity hedges in place at the end of the quarter. Derivative Term Volume Average Price bbl $/bbl Oil Swaps July 2013 - 3,048,951 105 December 2014 Put Options July 2013 - 1,286,699 102 September 2014 Derivative Term Volume Average Price Therms p/therm Gas Swaps July 2013 - 2,342,000 67 December 2014 The table below summarises the foreign exchange financial instruments in place at the end of Q2 2013. Derivative Forward Forward Forward Plus contract contract Term July 13 - July 13 - Aug 13 - Dec 13 Jan 14 Dec 13 Value GBP4 GBP100 EUR30 million / million million month Protection Rate $1.59/ $1.52/ $1.29/ GBP1.00 GBP1.00 EUR1.00 Trigger Rate $1.50/ N/A N/A GBP1.00 CONSOLIDATION The consolidated financial statements of the Company and the financial data contained in this management's discussion and analysis ("MD&A") are prepared in accordance with international financial reporting standards ("IFRS"). The consolidated financial statements include the accounts of Ithaca and its wholly-owned subsidiaries Ithaca Energy (Holdings) Limited ("Ithaca Holdings"), Ithaca Energy (UK) Limited ("Ithaca UK"), Ithaca Minerals North Sea Limited ("Ithaca Minerals") and Ithaca Energy Holdings (UK) Limited ("Ithaca Holdings UK") and its associates FPU Services Limited ("FPU") and FPF-1 Limited ("FPF-1"). The consolidated financial statements also include, from 19 April 2013 only (being the acquisition date) the Valiant group of companies, comprising the following companies: - Ithaca Petroleum Limited (formerly Valiant Petroleum plc) - Ithaca Causeway Limited (formerly Valiant Causeway Limited) - Ithaca Exploration Limited (formerly Valiant Exploration Limited) - Ithaca Alpha (NI) Limited (formerly Valiant Alpha (NI) Limited - Ithaca Gamma Limited (formerly Valiant Gamma Limited) - Ithaca Epsilon Limited (formerly Valiant Epsilon Limited) - Ithaca Delta Limited (formerly Valiant Delta Limited) - Ithaca Petroleum Holdings AS (formerly Valiant Petroleum Holdings AS) - Ithaca Petroleum Norge AS (formerly Valiant Petroleum Norge AS) - Ithaca Technology AS (formerly Valiant Technology AS) - Ithaca AS (formerly Querqus AS) - Ithaca Petroleum EHF (formerly Valiant Petroleum EHF) All inter-company transactions and balances have been eliminated on consolidation. A significant portion of the Company's North Sea oil and gas activities are carried out jointly with others. The consolidated financial statements reflect only the Company's proportionate interest in such activities. CRITICAL ACCOUNTING ESTIMATES Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the reader in assessing the critical accounting policies and practices of the Company and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates. The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Company might realise different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies. Capitalised costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved and probable reserves are depreciated on a unit-of-production basis, by asset, using estimated proved and probable reserves as adjusted for production. A review is carried out each reporting date for any indication that the carrying value of the Company's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with IAS 36. The Company's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Statement of Income. Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the Statement of Income. Impairment losses relating to goodwill cannot be reversed in future periods. Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. In periods following recognition, the liability and associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. All financial instruments, other than those designated as effective hedging instruments, are initially recognised at fair value on the balance sheet. The Company's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. In order to recognise share based payment expense, the Company estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time. The determination of the Company's income and other tax liabilities / assets requires interpretation of complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded on the financial statements. The accrual method of accounting will require management to incorporate certain estimates of revenues, production costs and other costs as at a specific reporting date. In addition, the Company must estimate capital expenditures on capital projects that are in progress or recently completed where actual costs have not been received as of the reporting date. CONTROL ENVIRONMENT Ithaca has established disclosure controls, procedures and corporate policies so that its consolidated financial results are presented accurately, fairly and on a timely basis. The Chief Executive Officer and Chief Financial Officer have designed, or have caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company's financial statements in accordance with IFRS with no material weaknesses identified. Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As of June 30, 2013, there were no changes in Ithaca's internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. CHANGES IN ACCOUNTING POLICIES On January 1, 2011, the Company adopted IFRS using a transition date of January 1, 2010. The financial statements for the quarter ended June 30, 2013, including required comparative information, have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB"). The Company elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. One impact of accounting for acquisitions as business combinations is the recognition of asset values, upon which the DD&A rate is calculated as pre-tax fair values and the recognition of a deferred tax liability on estimated future cash flows. With current tax rates at 62% this increases the DD&A charge for such assets. An offsetting reduction is recognised in the deferred tax charged through the consolidated statement of income. In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after 1 January 2013. There has been no material impact from the adoption of the new and amended standards on the Company's financial statements. OTHER Non-IFRS 'Cashflow from operations' referred to in this MD&A is Measures not prescribed by IFRS. This non-IFRS financial measure does not have any standardised meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Company uses this measure to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Company considers Cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities. BOE The calculation of boe is based on a conversion rate of Presentation six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 mcf: 1 bbl, utilising a conversion ratio at 6 mcf: 1 bbl may be misleading as an indication of value. Well Test Certain well test results disclosed in this MD&A Results represent short-term results, which may not necessarily be indicative of long-term well performance or ultimate hydrocarbon recovery there from. Off Balance The Company has certain lease agreements and rig Sheet commitments which were entered into in the normal course Arrangements of operations, all of which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at June 30, 2013. Related A director of the Company is a partner of Burstall Winger Party LLP who acts as counsel for the Company. The amount of Transactions fees paid to Burstall Winger LLP in Q2 2013 was $0.0 million (Q2 2012: $0.1 million). These transactions are in the normal course of business and are conducted on normal commercial terms with consideration comparable to those charged by third parties. As at June 30, 2013 the Company had a loan receivable from FPF-1 Ltd, an associate of the Company, for $21.6 million (Q2 2012: $21.6 million) as a result of the completion of the GSA transactions in 2012. RISKS AND UNCERTAINTIES The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints, lack of pipeline capacity or lack of markets. The Company is dependent upon the production rates and oil price to fund the current development program. For additional detail regarding the Company's risks and uncertainties, refer to the Company's Annual Information Form dated March 25, 2013, (the "AIF") filed on SEDAR at www.sedar.com . RISK MITIGATIONS Commodity The Company's performance is In order to mitigate the Price significantly impacted by risk of fluctuations in oil Volatility prevailing oil and natural gas and gas prices, the Company prices, which are primarily routinely executes commodity driven by supply and demand as price derivatives, well as economic and political predominantly in relation to factors. oil production, as a means of establishing a floor in realised prices. Foreign The Company is exposed to Given the increasing Exchange financial risks including proportion of development Risk financial market volatility capital expenditure and and fluctuation in various operating costs incurred in foreign exchange rates. currencies other than the United States dollar, the Company routinely executes hedges to mitigate foreign exchange rate risk on committed expenditure. Interest The Company is exposed to In order to mitigate the Rate Risk fluctuation in interest rates, fluctuations in interest particularly in relation to rates, the Company routinely the debt facilities entered reviews cost exposures as a into. result of varying rates and assesses the need to lock in interest rates. Debt The Company is exposed to The Company believes that Facility borrowing risks relating to there are no circumstances Risk drawdown of its debt at present that result in facilities (the "Facilities"). its failure to meet the The ability to drawdown the financial tests and it can Facilities is based on the therefore draw down upon its Company meeting certain Facilities. covenants including coverage ratio tests, liquidity tests The Company routinely and development funding tests produces detailed cashflow which are determined by a forecasts to monitor its detailed economic model of the compliance with the Company. There can be no financial tests and assurance that the Company liquidity requirements of will satisfy such tests in the the Facilities. future in order to have access to the full amount of the Facilities. The Facilities includes covenants which restrict, among other things, the Company's ability to incur additional debt or dispose of assets. As is standard to a credit facility, the Company's and Ithaca Energy (UK) Limited's ("Ithaca UK") assets have been pledged as collateral and are subject to foreclosure in the event the Company or Ithaca UK defaults. To the extent cashflow from The Company has established operations and the Facilities' a fully funded business plan Financing resources are ever deemed not and routinely monitors its Risk adequate to fund Ithaca's cash detailed cashflow forecasts requirements, external and liquidity requirements financing may be required. to maintain its funding Lack of timely access to such requirements. The Company additional financing, or believes that there are no access on unfavourable terms, circumstances at present could limit the future growth that would lead to selected of the business of Ithaca. To divestment, delays to the extent that external existing programs or a sources of capital, including default relating to the public and private markets, Facility. become limited or unavailable, Ithaca's ability to make the necessary capital investments to maintain or expand its current business and to make necessary principal payments under the Facilities may be impaired. A failure to access adequate capital to continue its expenditure program may require that the Company meet any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development programs. Third Party The Company is and may in the The Company believes this Credit Risk future be exposed to third risk is mitigated by the party credit risk through its financial position of the contractual arrangements with parties. All of the its current and future joint Company's oil production venture partners, marketers of from the Beatrice, Jacky and its petroleum production and Athena fields is sold to BP other parties. The Company Oil International Limited. extends unsecured credit to Oil production from Cook, these parties, and therefore, Broom, Causeway, Fionn and the collection of any Dons is sold to Shell receivables may be affected by Trading International Ltd. changes in the economic Anglia and Topaz gas environment or other production is sold through conditions. contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd. and Esso Exploration & Production UK Ltd. The Company has not experienced any material credit loss in the collection of accounts receivable to date. The joint venture partners in those assets operated by the Company are largely well financed international companies. Where appropriate, a cash call process has been implemented with the GSA partners to cover high levels of anticipated capital expenditure thereby reducing any third party credit risk. Property The Company's properties will The Company has routine Risk be generally held in the form ongoing communications with of licenses, concessions, the UK oil and gas permits and regulatory regulatory body, the consents ("Authorisations"). Department of Energy and The Company's activities are Climate Change ("DECC"). dependent upon the grant and Regular communication allows maintenance of appropriate all parties to an Authorisations, which may not Authorisation to be fully be granted; may be made informed as to the status of subject to limitations which, any Authorisation and if not met, will result in the ensures the Company remains termination or withdrawal of updated regarding fulfilment the Authorisation; or may be of any applicable otherwise withdrawn. Also, in requirements. the majority of its licenses, the Company is often a joint interest-holder with another third party over which it has no control. An Authorisation may be revoked by the relevant regulatory authority if the other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the obligations required to maintain each Authorisation will be met. Although the Company believes that the Authorisations will be renewed following expiry or granted (as the case may be), there can be no assurance that such authorisations will be renewed or granted or as to the terms of such renewals or grants. The termination or expiration of the Company's Authorisations may have a material adverse effect on the Company's results of operations and business. The areas covered by the Authorisations are or may be subject to agreements with the proprietors of the land. If such agreements are terminated, found void or otherwise challenged, the Company may suffer significant damage through the loss of opportunity to identify and extract oil or gas. Operational The Company is subject to the The Company acts at all Risk risks associated with owning times as a reasonable and oil and natural gas prudent operator. The properties, including Company takes out market environmental risks associated insurance to mitigate many with air, land and water. All of these operational, of the Company's operations construction and are conducted offshore in the environmental risks. United Kingdom Continental Shelf; as such Ithaca is The Company uses the exposed to operational risk services of Sproule associated with weather delays International Limited that can result in a material ("Sproule") to independently delay in project execution. assess the Company's Third parties operate some of reserves on an annual basis. the assets in which the Company has interests. As a result, the Company may have limited ability to exercise influence over the operations of these assets and their associated costs. The success and timing of these activities may be outside the Company's control. There are numerous uncertainties in estimating the Company's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital. Competition In all areas of the Company's The Company places Risk business, there is competition appropriate emphasis on with entities that may have ensuring it attracts and greater technical and retains high quality financial resources. resources to enable it to maintain its competitive position. FORWARD-LOOKING INFORMATION This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and forward-looking information which are based on the Company's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words "anticipate", "continue", "estimate", "expect","may", "will", "project", "plan", "should", "believe","could", "scheduled", "targeted", "approximately" and similar expressions are intended to identify forward-looking statements and forward-looking information. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. The Company believes that the expectations reflected in those forward-looking statements and information are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this MD&A and any documents incorporated by reference herein should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of this MD&A and any documents incorporated by reference herein and the Company does not undertake any obligation to publicly update or revise any forward-looking statements or information, except as required by applicable laws. In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking statements and information pertaining to the following: - the quality of and future net revenues from the Company's reserves; - oil, natural gas liquids ("NGLs") and natural gas production levels; - commodity prices, foreign currency exchange rates and interest rates; - capital expenditure programs and other expenditures; - the sale, farming in, farming out or development of certain exploration properties using third party resources; - supply and demand for oil, NGLs and natural gas; - the Company's ability to raise capital; - the continued availability of the Main Facility and the Bridge Facility; - the Company's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom; - the realisation of anticipated benefits from acquisitions and dispositions; - the Company's ability to continually add to its reserves; - schedules and timing of certain projects and the Company's strategy for growth; - the Company's future operating and financial results; - the ability of the Company to optimise operations and reduce operational expenditures; - treatment under governmental and other regulatory regimes and tax, environmental and other laws; production rates; - targeted production levels; and - timing and cost of the development of the Company's reserves. With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference herein, the Company has made assumptions regarding, among other things: - Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required; - access to third party hosts and associated pipelines can be negotiated and accessed within the expected timeframe; - FDP approval and operational construction and development is obtained within expected timeframes; - the Company's development plan for the Stella and Harrier discoveries will be implemented as planned; - the effect of the Valiant acquisition on Ithaca; - reserves volumes assigned to Ithaca's properties; - ability to recover reserves volumes assigned to Ithaca's properties; - revenues do not decrease below anticipated levels and operating costs do not increase significantly above anticipated levels; - future oil, NGLs and natural gas production levels from Ithaca's properties and the prices obtained from the sales of such production; - the level of future capital expenditure required to exploit and develop reserves; - Ithaca's ability to obtain financing on acceptable terms, in particular, the Company's ability to access the Facility; - the continued ability of the Company to collect from third parties who Ithaca has provided credit to; - Ithaca's reliance on partners and their ability to meet commitments under relevant agreements; and - the state of the debt and equity markets in the current economic environment. The Company's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of assumptions proving inaccurate and of both known and unknown risks, including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the documents incorporated by reference herein, and those set forth below: - risks associated with the exploration for and development of oil and natural gas reserves in the North Sea; - risks associated with the integration of Valiant into Ithaca's existing operations; - risks associated with offshore development and production including transport facilities; - operational risks and liabilities that are not covered by insurance; - volatility in market prices for oil, NGLs and natural gas; - the ability of the Company to fund its substantial capital requirements and operations; - risks associated with ensuring title to the Company's properties; - changes in environmental, health and safety or other legislation applicable to the Company's operations, and the Company's ability to comply with current and future environmental, health and safety and other laws; - the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Company's exploration and development drilling and estimated decline rates; - the Company's success at acquisition, exploration, exploitation and development of reserves; - risks associated with realisation of anticipated benefits of acquisitions; - risks related to changes to government policy with regard to offshore drilling; - the Company's reliance on key operational and management personnel; - the ability of the Company to obtain and maintain all of its required permits and licenses; - competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel; - changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide; - actions by governmental or regulatory authorities including changes in income tax laws or changes in tax laws, royalty rates and incentive programs relating to the oil and gas industry including any increase in UK taxes; - adverse regulatory rulings, orders and decisions; and - risks associated with the nature of the common shares. Additional The information in this MD&A is provided as of August 10, Reader 2013. The Q2 2013 results have been compared to the Advisories results of the comparative period in 2012. This MD&A should be read in conjunction with the Company's unaudited consolidated financial statements as at June 30, 2013 and 2012 and with the Company's audited consolidated financial statements as at December 31, 2012 together with the accompanying notes and MD&A, and AIF for the 2012 fiscal year. Copies of these documents are available without charge from Ithaca or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com . Consolidated Statement of Income For the three and six months ended 30 June 2013 and 2012 (unaudited) Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 Note US$'000 US$'000 US$'000 US$'000 Revenue 4 128,360 35,779 188,129 76,332 Cost of sales 5 (103,449) (29,979) (149,907) (55,985) Gross Profit 24,911 5,800 38,222 20,347 Exploration and evaluation 10 (132) (4) (443) (79) expenses Administrative expenses 6 (3,989) (1,238) (6,078) (2,444) Non-recurring Valiant 6 (9,554) - (10,235) - acquisition costs Total administrative (13,543) (1,238) (16,313) (2,444) expenses Operating Profit 11,236 4,558 21,466 17,824 Foreign exchange (2,637) (1,548) (2,074) 103 Gain on financial 25 17,514 19,339 10,342 18,610 instruments Gain on asset disposal - 205 - 205 Negative goodwill 12 47,964 - 48,878 - Profit Before Interest and 74,077 22,554 78,612 36,742 Tax Finance costs 7 (5,001) (902) (7,277) (1,371) Interest income 21 69 42 134 Profit Before Tax 69,097 21,721 71,377 35,505 Taxation - UK deferred tax 23 (18,504) 8,517 (17,309) 7,651 Taxation - Norwegian 23 1,635 - 1,635 - Profit After Tax 52,228 30,238 55,703 43,156 Earnings per share Basic 22 0.17 0.12 0.20 0.20 Diluted 22 0.17 0.11 0.19 0.20 The accompanying notes on pages 7 to 23 are an integral part of the financial statements. Consolidated Statement of Comprehensive Income For the three and six months ended 30 June 2013 and 2012 (unaudited) Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 Profit for the period 52,228 30,238 55,703 43,156 Release of loss on oil price hedge - 376 - - Other comprehensive income - 376 - - Total comprehensive income 52,228 30,614 55,703 43,156 The accompanying notes on pages 7 to 23 are an integral part of the financial statements. Consolidated Statement of Financial Position (unaudited) 30 June 31 December 2013 2012 Note US$'000 US$'000 ASSETS Current assets Cash and cash equivalents 27,091 31,374 Restricted cash 8 3,228 2 Accounts receivable 254,894 159,195 Deposits, prepaid expenses and other 23,852 14,754 Inventory 9 20,790 15,878 Derivative financial instruments 26 15,560 8,251 345,415 229,454 Non current assets Long-term receivable 28 21,551 21,551 Investment in associate 14 18,337 18,337 Exploration and evaluation assets 10 52,442 47,390 Property, plant & equipment 11 1,303,713 615,788 Goodwill 13 985 985 Other non-current assets 7,738 - 1,404,766 704,051 Total assets 1,750,181 933,505 LIABILITIES AND EQUITY Current liabilities Trade and other payables 316,980 205,635 Exploration obligations 16 48,301 - 365,281 205,635 Non current liabilities Bank debt 15 368,823 - Decommissioning liabilities 17 140,998 52,834 Other long term liabilities 18 2,866 3,018 Contingent consideration 19 4,000 4,000 Derivative financial instruments 26 1,596 - Deferred tax liability 109,970 62,370 628,253 122,222 Net Assets 756,647 605,648 Equity attributable to equity holders Share capital 20 524,908 431,318 Share based payment reserve 21 22,046 20,340 Retained earnings 209,693 153,990 Shareholders' Equity 756,647 605,648 The financial statements were approved by the Board of Directors on 12 August 2013 and signed on its behalf by:"Jay Zammit" Director"John Summers" Director The accompanying notes on pages 7 to 23 are an integral part of the financial statements. Consolidated Statement of Changes in Equity (unaudited) Share Share Retained Total Capital based Earnings payment reserve US$'000 US$'000 US$'000 US$'000 Balance, 1 Jan 2012 429,502 17,318 60,591 507,411 Net income for the period - - 43,156 43,156 Total comprehensive income 429,502 17,318 103,747 550,567 Share based payment - 1,615 - 1,615 Options exercised 250 (107) - 143 Balance, 30 June 2012 429,752 18,826 103,747 552,325 Balance, 1 Jan 2013 431,318 20,340 153,990 605,648 Net income for the period - - 55,703 55,703 Total comprehensive income 431,318 20,340 209,693 661,351 Shares issued 93,005 - - 93,005 Share based payment - 1,963 - 1,963 Options exercised 585 (257) - 328 Balance, 30 June 2013 524,908 22,046 209,693 756,647 The accompanying notes on pages 7 to 23 are an integral part of the financial statements. Consolidated Statement of Cash Flow For the three and six months ended 30 June 2013 and 2012 (unaudited) Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 CASH PROVIDED BY (USED IN): Operating activities Profit Before Tax 69,097 21,721 71,377 35,505 Adjustments for: Depletion, depreciation and 41,367 11,092 60,865 24,477 amortisation Exploration and evaluation 132 4 444 79 expenses Share based payment 366 204 661 339 Loan fee amortisation 592 416 1,184 494 Revaluation of financial (7,303) (17,362) 3,762 (18,128) instruments Revaluation of contingent - - - 1,295 consideration Movement in goodwill (47,964) - (48,878) - Gain on disposal - (205) - (205) Accretion 1,088 436 1,590 820 Bank interest & charges 3,296 - 4,455 - Valiant acquisition fees 4,351 - 5,032 - Cashflow from operations 65,022 16,306 100,492 44,676 Changes in inventory, debtors and 19,963 11,168 20,842 10,347 creditors relating to operating activities Net cash from operating activities 84,985 27,474 121,334 55,023 Investing activities Acquisition of Valiant (200,636) - (200,636) - Cash acquired on acquisition of 11,611 - 11,611 - Valiant Valiant acquisition fees (4,351) - (5,032) - Acquisition of Cook - - (33,370) - Capital expenditure (66,050) (31,782) (91,434) (54,290) Investment in associate - (18,337) - (18,337) Loan to associate - (21,551) - (21,551) Proceeds on disposal - 44,878 - 44,878 Settlement of contingent - (15,700) - (15,700) consideration Changes in debtors and creditors (56,880) 38,666 (44,441) 30,855 relating to investing activities Net cash used in investing (316,306) (3,826) (363,302) (34,145) activities Financing activities Proceeds from issuance of shares 299 143 328 143 (Increase) / decrease in (3,226) 457 (3,226) (3,710) restricted cash Derivatives (1,680) - (9,627) - Loan repayment (115,000) - (115,000) - Loan draw down 320,918 - 375,918 - Bank interest & charges (4,396) - (5,506) - Net cash from/used in financing 196,915 600 242,887 (3,567) activities Currency translation differences (4,137) (2,307) (5,202) (971) relating to cash Increase / (decrease) in cash and (38,543) 21,941 (4,283) 16,340 cash equiv. Cash and cash equivalents, 65,634 89,944 31,374 95,545 beginning of period Cash and cash equivalents, end of 27,091 111,885 27,091 111,885 period The accompanying notes on pages 7 to 23 are an integral part of the financial statements. 1. NATURE OF OPERATIONS Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated and domiciled in Alberta, Canada on 27 April 2004, is a publicly traded company involved in the exploration, development and production of oil and gas in the North Sea. The Corporation's registered office is 1600, 333 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P 2Z1. The Corporation's shares trade on the Toronto Stock Exchange in Canada and the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". 2. BASIS OF PREPARATION These interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, including IAS 34 Interim Financial Reporting. These interim consolidated financial statements do not include all the necessary annual disclosures in accordance with IFRS. The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as of 12 August 2013, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Corporation's annual consolidated financial statements for the year ending 31 December 2013 could result in restatement of these interim consolidated financial statements. The condensed interim consolidated financial statements should be read in conjunction with the Corporation's annual financial statements for the year ended 31 December 2012. 3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTY Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities (under IFRS) to fair value, including derivative instruments. Basis of consolidation The consolidated financial statements of the Corporation include the accounts of Ithaca Energy Inc. and all wholly-owned subsidiaries as listed per note 28. Ithaca has seventeen wholly-owned subsidiaries, thirteen of which were acquired on 19 April 2013 as part of the acquisition of Valiant Petroleum PLC ("Valiant"). The consolidated financial statements include the Valiant group of companies from 19 April 2013 only (being the acquisition date). All inter-company transactions and balances have been eliminated on consolidation. A subsidiary is an entity which the Corporation controls by having the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Ithaca controls another entity. A subsidiary is fully consolidated from the date on which control is obtained by Ithaca and is de-consolidated from the date that control ceases. Investments in associates Interests in entities over which Ithaca has significant influence, but not control or joint control, are accounted for using the equity method. Ithaca's share of equity investments' results are recorded in the consolidated statement of income. Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of completion of the acquisition. Acquisition costs incurred are expensed and included in administrative expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Corporation's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the Corporation's share of the net assets required, the difference is recognised directly in the statement of income as negative goodwill. Goodwill Capitalisation Goodwill acquired through business combinations is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised as the fair value of the Corporation's share of the identifiable net assets acquired and liabilities assumed. If this consideration is lower than the fair value of the identifiable assets acquired, the difference is recognised in the statement of income. Impairment Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit ("CGU") to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the statement of income. Impairment losses relating to goodwill cannot be reversed in future periods. Foreign currency translation Items included in the financial statements are measured using the currency of the primary economic environment in which the Corporation and its subsidiary operate (the 'functional currency'). The consolidated financial statements are presented in United States Dollars, which is the Corporation's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. Share based payments The Corporation has a share based payment plan as described in note 20 (c). The expense is recorded in the statement of income or capitalised for all options granted in the year, with the gross increase recorded in the share based payment reserve. Compensation costs are based on the estimated fair values at the time of the grant and the expense or capitalised amount is recognised over the vesting period of the options. Upon the exercise of the stock options, consideration paid together with the amount previously recognised in share based payment reserve is recorded as an increase in share capital. In the event that vested options expire unexercised, previously recognised compensation expense associated with such stock options is not reversed. In the event that unvested options are forfeited or expired, previously recognised compensation expense associated with the unvested portion of such stock options is reversed. Cash and Cash Equivalents For the purpose of the statement of cash flow, cash and cash equivalents include investments with an original maturity of three months or less. Restricted cash Cash that is held for security for bank guarantees is reported in the balance sheet and cash flow statements separately. If the expected duration of the restriction is less than twelve months then it is shown in current assets. Financial Instruments All financial instruments, other than those designated as effective hedging instruments, are initially recognised at fair value in the statement of financial position. The Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities, contingent consideration and the long term liability on the Beatrice acquisition. The Corporation classifies its financial instruments into one of the following categories: held-for-trading financial assets and financial liabilities; held-to-maturity investments; loans and receivables; and other financial liabilities. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value recognised in net earnings. All other categories of financial instruments are measured at amortised cost using the effective interest method. Cash and cash equivalents are classified as held-for-trading and are measured at fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities, certain other long-term liabilities, and long-term debt are classified as other financial liabilities. Although the Corporation does not intend to trade its derivative financial instruments, they are classified as held-for-trading for accounting purposes. Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability and original issue discounts on long-term debt have been included in the carrying value of the related financial asset or liability and are amortised to consolidated net earnings over the life of the financial instrument using the effective interest method. The Corporation may designate financial instruments as a hedging instrument for accounting purposes. Hedge accounting requires the designation of a hedging relationship, including a hedged and a hedging item, identification of the risk exposure being hedged and an expectation that the hedging relationship will be highly effective throughout its term. The Corporation assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments designated as hedges are highly effective in offsetting changes in cash flows of the hedged items. The effective portion of the gains and losses on cash flow hedges is recorded in Other Comprehensive Income until the hedged transaction is recognised in net earnings. Any hedge ineffectiveness is immediately recognised in net earnings. When the hedged transaction is recognised in net earnings, the fair value of the associated cash flow hedging item is reclassified from other reserves into net earnings. Hedge accounting is discontinued on a prospective basis when the hedging relationship no longer qualifies for hedge accounting. Analysis of the fair values of financial instruments and further details as to how they are measured are provided in notes 25 to 27. Inventory Inventories of materials and product inventory supplies, other than oil and gas inventories, are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out method. Oil and gas inventories are stated at fair value less cost to sell. Property, Plant and Equipment Oil and gas expenditure - exploration and evaluation assets Capitalisation Pre-acquisition costs on oil and gas assets are recognised in the statement of income when incurred. Costs incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and commercial appraisal costs and other directly attributable costs of exploration and evaluation including technical, administrative and share based payment expenses are capitalised as intangible exploration and evaluation ("E&E") assets. E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following development sanction, the carrying value of the E&E asset is reclassified as a development and production ("D&P") asset, but only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If after completion of evaluation activities in an area, it is not possible to determine technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration and evaluation is written off to the statement of income in the period the relevant events occur. Impairment The Corporation's oil and gas assets are analysed into CGUs for impairment review purposes, with E&E asset impairment testing being performed at a grouped CGU level. The current E&E CGU consists of the Corporation's whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E assets for impairment, the combined carrying value of the grouped CGU is compared with the grouped CGU's recoverable amount. The recoverable amount of a grouped CGU is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the statement of income. Oil and gas expenditure - development and production assets Capitalisation Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment, direct costs including staff costs and share based payment expense together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset. Normally each individual field development will form an individual D&P asset but there may be cases, such as phased developments, or multiple fields around a single production facility when fields are grouped together to form a single D&P asset. Depreciation All costs relating to a development are accumulated and not depreciated until the commencement of production. Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment will normally be fully depreciated over the life of the field. However, these items are assessed to consider if their useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would be charged Impairment A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the CGU. Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the statement of income. Non Oil and Natural Gas Operations Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated useful lives on a straight-line basis over five years. Decommissioning liabilities The Corporation records the present value of legal obligations associated with the retirement of long term tangible assets, such as producing well sites and processing plants, in the period in which they are incurred with a corresponding increase in the carrying amount of the related long term asset. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the field location. In subsequent periods, the asset is adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. Contingent consideration Contingent consideration is accounted for as a financial liability and measured at fair value at the date of acquisition with any subsequent remeasurements recognised either in the statement of income or in other comprehensive income in accordance with IAS 39. Taxation Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or substantively enacted by the reporting date. Deferred income tax Deferred tax is recognised for all deductible temporary differences and the carry-forward of unused tax losses. Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if realisation is considered more likely than not. Recent accounting pronouncements In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after 1 January 2013. There has been no material impact from the adoption of the new and amended standards on the Corporation's financial statements. Significant accounting judgements and estimation uncertainties The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made based on unsettled transactions and other events and a precise determination of many assets and liabilities is dependent upon future events. Actual results may differ from estimated amounts. The amounts recorded for depletion, depreciation of property and equipment, long-term liability, stock-based compensation, contingent consideration, decommissioning liabilities, derivatives and deferred taxes are based on estimates. The depreciation charge and any impairment tests are based on estimates of proved and probable reserves, production rates, prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material. Further information on each of these estimates is included within the notes to the financial statements. 4. REVENUE Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 Oil sales 125,064 33,293 181,217 69,101 Gas sales 2,452 1,759 5,224 4,580 Condensate sales 135 136 272 306 Other income 709 591 1,416 2,345 Total 128,360 35,779 188,129 76,332 5. COST OF SALES Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 Operating costs (43,155) (15,406) (66,382) (31,128) Oil purchases (790) - (947) - Movement in oil and gas inventory (18,137) (3,481) (21,713) (380) Depletion, depreciation and (41,367) (11,092) (60,865) (24,477) amortisation (103,449) (29,979) (149,907) (55,985) 6. ADMINISTRATIVE EXPENSES Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 General & administrative (3,623) (1,034) (5,415) (2,105) Non-recurring Valiant acquisition (9,554) - (10,235) - related costs Share based payment (366) (204) (663) (339) (13,543) (1,238) (16,313) (2,444) 7. FINANCE COSTS Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 Accretion (1,088) (436) (1,590) (820) Bank charges (3,297) (38) (4,460) (44) Non-operated asset finance fees (24) (12) (42) (13) Loan fee amortisation (592) (416) (1,185) (494) (5,001) (902) (7,277) (1,371) 8. RESTRICTED CASH 30 June 31 Dec 2013 2012 US$'000 US$'000 Security 3,228 2 3,228 2 The above represents cash backed letters of credit at 30 June 2013. 9. INVENTORY 30 June 31 Dec 2013 2012 US$'000 US$'000 Crude oil inventory 20,575 15,865 Materials inventory 215 13 20,790 15,878 10. EXPLORATION AND EVALUATION ASSETS US$'000 At 1 January 22,689 2012 Additions 38,188 Write offs/ (4,261) relinquishments Disposals (9,226) At 31 December 47,390 2012 Additions 5,495 Write offs/ (443) relinquishments At 30 June 2013 52,442 Following completion of geotechnical evaluation activity, certain licences were declared unsuccessful and certain prospects were declared non-commercial and therefore the related expenditure of $0.4 million was expensed in the six months to 30 June 2013. 11. PROPERY, PLANT AND EQUIPMENT Development& Production Oil and Gas Other fixed Assets assets Total US$'000 US$'000 US$'000 Cost At 1 January 2012 623,549 2,292 625,841 Additions 139,383 133 139,516 Disposals (37,912) - (37,912) At 31 December 2012 725,020 2,425 727,445 Additions 748,223 567 748,790 At 30 June 2013 1,473,243 2,992 1,476,235 DD&A At 1 January 2012 (53,988) (1,497) (55,485) Charge for the period (55,770) (402) (56,172) At 31 December 2012 (109,758) (1,899) (111,657) Charge for the period (60,665) (200) (60,865) At 30 June 2013 (170,423) (2,099) (172,522) NBV at 1 January 2012 569,561 795 570,356 NBV at 1 January 2013 615,262 526 615,788 NBV at 30 June 2013 1,302,820 893 1,303,713 12. BUSINESS COMBINATION On 19 April 2013 the Corporation completed the acquisition of Valiant Petroleum PLC ("Valiant"). The total acquisition consideration was $293.6 million, being $200.6 million paid in cash and $93 million paid with Ithaca shares. The interim condensed consolidated financial statements include the results of Valiant from the acquisition date. The provisional fair values of the identifiable assets and liabilities of Valiant as at the acquisition date were: Provisional Fair value US$'000 PP&E 608,000 Other non-current assets 7,145 Deferred tax asset 10,863 Inventories 10,432 Trade and other receivables 46,718 Norwegian tax receivable 69,064 Cash and cash equivalents 11,611 Trade and other payables (151,298) Borrowings (115,000) Exploration obligations (72,500) Provisions (83,430) Total identifiable net assets at fair value 341,605 Negative goodwill arising on acquisition (47,964) Total consideration 293,641 The cash outflow on acquisition is as follows: Net cash acquired 11,611 Cash paid (200,636) Net consolidated cash flow (189,025) From the date of acquisition, Valiant has contributed $52.1 million of revenue and approximately $6 million to the net profit before tax. If the combination had taken place at the beginning of the year, the profit before tax from continuing operations for the period would have been approximately $32 million and revenue from continuing operations would have been $163.5 million. Note profit before tax excludes negative goodwill. 13. GOODWILL US$'000 Cost At 1 January 2012, 31 December 2012 & 30 June 2013 985 $1.0 million represents goodwill recognised on the acquisition of gas assets from GDF in December 2010. As at 30 June 2013, the recoverable amount of assets acquired from GDF was sufficiently high to support the carrying value of this goodwill. 14. INVESTMENT IN ASSOCIATES 30 June 31 Dec 2013 2012 US$'000 US$'000 Investments in FPF-1 and FPU services 18,337 18,337 Investment in associates comprises shares, acquired by Ithaca Energy (Holdings) Limited, in FPF-1 Limited and FPU Services Limited as part of the completion of the Greater Stella Area transactions in 2012. There has been no change in value during the period with the above investment reflecting the Corporation's share of the associates' results. 15. LOAN FACILITY On 29 June 2012, the Corporation executed a Senior Secured Borrowing Base Facility agreement (the "Facility") for up to $430 million, being provided by BNP Paribas as Lead Arranger. The loan term is up to five years and attracts interest at LIBOR plus 3-4.5%. This Facility replaced the previous undrawn $140 million debt facility with Lloyds Banking Group. The Corporation also executed a $350 million bridge loan (the "Bridge Facility") in April 2013 with BNP Paribas, the Bank of Nova Scotia and Bank of America Merrill Lynch. The Bridge Facility is available for 12 months and attracts interest of between LIBOR plus 1.0 - 2.25%, averaging 1.6% if drawn over the full 12 month period. The intention is to fold the borrowing secured against the Valiant assets into an enlarged borrowing base facility during 2013. The Corporation is subject to financial and operating covenants related to the Facility and the Bridge Facility. Failure to meet the terms of one or more of these covenants may constitute an event of default as defined in the facility agreements, potentially resulting in accelerated repayment of the debt obligations. Security provided against the loan Security provided against the Facility is in the form of a floating charge over all assets of the Ithaca group pre Valiant acquisition. Security provided against the Bridge Facility is in the form of a floating charge over all former Valiant assets. The Corporation is in compliance with its financial and operating covenants. As at 30 June 2013, $30 million was drawn down under the Facility and $346 million was drawn down under the Bridge Facility. The $369 million in the balance sheet represents amounts drawn down net of unamortised loan fees. 16. EXPLORATION OBLIGATIONS 30 June 31 Dec 2013 2012 US$'000 US$'000 Exploration obligations 48,301 - The above reflects the fair value of E&E commitments assumed as part of the Valiant transaction (see note 12), including the release of expenditure incurred in the period. 17. DECOMMISSIONING LIABILITIES 30 June 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 52,834 39,382 Additions 87,588 9,613 Accretion 1,590 1,777 Revision to estimates (1,014) 2,062 Utilisation - - Balance, end of period 140,998 52,834 The total future decommissioning liability was calculated by management based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. The Corporation uses a risk free rate of 3.9 percent (31 December 2012: 3.8 percent) and an inflation rate of 2.1 percent (31 December 2012: 2.1 percent) over the varying lives of the assets to calculate the present value of the decommissioning liabilities. These costs are expected to be incurred at various intervals over the next 10 years. The economic life and the timing of the obligations are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. Note that upon the acquisition of the Beatrice Field in November 2008, the Corporation did not assume the decommissioning liabilities. 18. OTHER LONG TERM LIABILITIES 30 June 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 3,018 2,785 Revaluation in the period (152) 233 Balance, end of period 2,866 3,018 On completion of the acquisition of the Beatrice Facilities on November 10, 2008 there were 75,000 barrels of oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when the Beatrice Facilities are re-transferred. This volume of oil is valued at the price on the forward oil price curve at the expected date of re-transfer and discounted. The liability is subject to revaluation at each financial period end. 19. CONTINGENT CONSIDERATION 30 June 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 4,000 24,580 Revision to estimates - 1,295 Release - (21,875) Balance, end of period 4,000 4,000 The contingent consideration at the end of the period relates to the acquisition of the Stella field and is payable upon first oil. 20. SHARE CAPITAL No. of Amount ordinary Authorised share capital 000 US$'000 At 31 December 2012 and 30 June 2013 Unlimited - (a) Issued The issued share capital is as follows: Issued Number of Amount common shares US$'000 Balance 1 January 2012 259,164,461 429,502 Issued for cash - options exercised 755,542 1,020 Transfer from Share based payment reserve on - 796 options exercised Balance 31 December 2012 259,920,003 431,318 Share issue 56,952,321 93,005 Issued for cash - options exercised 493,334 331 Transfer from Share based payment reserve on - 254 options exercised Balance 30 June 20123 317,365,658 524,908 (b) Stock options In the quarter ended 30 June 2013, the Corporation's Board of Directors did not grant any new options. In the quarter ended 31 March 2013, the Corporation's Board of Directors granted 90,000 options at a weighted average exercise price of $2.00 (C$1.97). The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at 30 June 2013, 19,614,630 stock options to purchase common shares were outstanding, having an exercise price range of $0.20 to $2.28 (C$0.25 to C$2.31) per share and a vesting period of up to 3 years in the future. Changes to the Corporation's stock options are summarised as follows: 30 June 2013 31 December 2012 Wt. Avg Wt. Avg No. of Exercise No. of Exercise Options Price* Options Price* Balance, beginning of period 20,347,964 $1.63 17,506,839 $1.66 Granted 90,000 $2.00 6,045,000 $2.05 Forfeited / expired (330,000) $2.26 (2,448,333) $3.42 Exercised (493,334) $0.63 (755,542) $1.26 Options 19,614,630 $1.65 20,347,964 $1.63 * The weighted average exercise price has been converted into U.S. dollars based on the foreign exchange rate in effect at the date of issuance. The following is a summary of stock options as at 30 June 2013 Options Outstanding Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.28 (C$2.25-C$2.31) 5,090,000 1.6 $2.23 $1.49-$2.03 (C$1.54-C$1.99) 10,326,667 2.1 $1.81 $0.20-$0.81 (C$0.25-C$0.87) 4,197,963 0.3 $0.55 19,614,630 1.6 $1.65 Options Exercisable Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.28 3,260,003 1.5 $2.22 (C$2.25-C$2.31) $1.49-$2.03 4,475,001 0.6 $1.52 (C$1.54-C$1.99) $0.20-$0.81 4,197,963 0.3 $0.55 (C$0.25-C$0.87) 11,932,967 0.7 $1.37 The following is a summary of stock options as at 31 December 2012 Options Outstanding No. of Wt. Avg Wt. Avg Range of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.70 5,350,000 2.0 $2.22 (C$2.25-C$2.69) $1.49-$2.03 10,331,667 2.6 $1.81 (C$1.54-C$1.99) $0.20-$0.81 4,666,297 0.8 $0.56 (C$0.25-C$0.87) 20,347,964 2.0 $1.63 Options Exercisable Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.70 3,280,003 2.0 $2.22 (C$2.25-C$2.69) $1.49-$2.03 3,113,338 1.2 $1.53 (C$1.54-C$1.99) $0.20-$0.81 4,666,297 0.8 $0.80 (C$0.25-C$0.87) 11,059,638 1.3 $1.43 (c) Share based payments Options granted are accounted for using the fair value method. The compensation cost during the three months and six months ended 30 June 2012 for total stock options granted was $0.9 million and $1.9 million respectively (Q2 2012: $0.8 million, Q2 YTD: $1.6 million). $0.3 million and $0.7 million were charged through the income statement for share based payment for the three and six months ended 30 June 2013 respectively, being the Corporation's share of share based payment chargeable through the income statement. The remainder of the Corporation's share of share based payment has been capitalised. The fair value of each stock option granted was estimated at the date of grant, using the Black-Scholes option pricing model with the following assumptions: For the For the six months year ended ended 30 June 31 December 2013 2012 Risk free interest rate 1.31% 0.40% Expected stock volatility 63% 74% Expected life of options 3 years 3 years Weighted Average Fair Value $0.94 $1.08 21. SHARE BASED PAYMENT RESERVE 30 June 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 20,340 17,318 Share based payment cost 1,963 3,817 Transfer to share capital on exercise of options (257) (795) Balance, end of period 22,046 20,340 22. EARNINGS PER SHARE The calculation of basic earnings per share is based on the profit after tax and the weighted average number of common shares in issue during the period. The calculation of diluted earnings per share is based on the profit after tax and the weighted average number of potential common shares in issue during the period. Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 Weighted average number 305,912,433 259,198,399 283,055,608 259,181,430 of common shares (basic) Weighted average 309,278,839 264,314,570 287,225,134 264,662,007 numbers of common shares (diluted) 23. TAXATION Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 UK Deferred tax (18,504) 8,517 (17,309) 7,651 Norwegian tax 1,635 - 1,635 - (16,869) 8,517 (15,674) 7,651 24. COMMITMENTS Operating lease commitments 30 June 31 Dec 2013 2012 US$'000 US$'000 Within one year 12,742 12,759 Two to five years 13,394 18,756 More than five years - 65 Capital commitments 30 June 31 Dec 2013 2012 US$'000 US$'000 Capital commitments incurred jointly with other 206,713 111,747 ventures (Ithaca's share) 25. FINANCIAL INSTRUMENTS To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or industry accepted third-party models and valuation methodologies that utilise observable market data. In addition to market information, the Corporation incorporates transaction specific details that market participants would utilise in a fair value measurement, including the impact of non-performance risk. The Corporation characterises inputs used in determining fair value using a hierarchy that prioritises inputs depending on the degree to which they are observable. However, these fair value estimates may not necessarily be indicative of the amounts that could be realised or settled in a current market transaction. The three levels of the fair value hierarchy are as follows: - Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. - Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the marketplace. The Corporation obtains information from sources such as the New York Mercantile Exchange and independent price publications. - Level 3 - inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument's fair value. In forming estimates, the Corporation utilises the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorised based upon the lowest level of input that is significant to the fair value measurement. The valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorised as Level 2. The following table presents the Corporation's material financial instruments measured at fair value for each hierarchy level as of 30 June 2013: Total Fair Level 1 Level 2 Level 3 Value US$'000 US$'000 US$'000 US$'000 Derivative financial instrument asset - 15,560 - 15,560 Long term liability on Beatrice - - (2,866) (2,866) acquisition Contingent consideration - (4,000) - (4,000) Derivative financial instrument - (1,596) - (1,596) liability The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of net and comprehensive income: Three months Six months ended 30 June ended 30 June 2013 2012 2013 2012 US$'000 US$'000 US$'000 US$'000 Revaluation of forex forward contracts 584 (428) (1,471) 541 Revaluation of gas contract - 872 - 758 Revaluation of other long term 96 61 153 (29) liability Revaluation of commodity hedges 6,623 16,858 (2,444) 16,858 7,303 17,363 (3,762) 18,128 Realised gain on commodity hedges 9,374 1,908 13,560 1,709 Realised gain/(loss) on forex contracts 837 68 544 68 10,211 1,976 14,104 1,777 Contingent consideration - - - (1,295) Total gain on financial instruments 17,514 19,339 10,342 18,610 The Corporation has identified that it is exposed principally to these areas of market risk. i) Commodity Risk The table below presents the total gain / (loss) on commodity hedges that has been disclosed through the statement of net and comprehensive income: Three months ended 30 June 2013 2012 US$'000 US$'000 Revaluation of commodity hedges 6,623 16,858 Realised gain on commodity hedges 9,374 1,908 Total gain on commodity hedges 15,997 18,766 Commodity price risk related to crude oil prices is the Corporation's most significant market risk exposure. Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. The Corporation is also exposed to natural gas price movements on uncontracted gas sales. Natural gas prices, in addition to the worldwide factors noted above, can also be influenced by local market conditions. The Corporation's expenditures are subject to the effects of inflation, and prices received for the product sold are not readily adjustable to cover any increase in expenses from inflation. The Corporation may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows. The below represents commodity hedges in place: Derivative Term Volume Average price Oil puts July 13 - 1,268,699 bbls $105/bbl Sept 14 Oil swaps July 13 - 3,048,951 bbls $102/bbl (including swaption) Dec 14 Gas swaps July 13 - 2,342,000 therms 66.64p/therm Dec 14 ii) Interest Risk Calculation of interest payments for the Senior Secured Borrowing Base Facility agreement with BNP Paribas that was signed on 29 June 2012 incorporates LIBOR. The Corporation will therefore be exposed to interest rate risk to the extent that LIBOR may fluctuate. The Corporation will evaluate its annual forward cash flow requirements on a rolling monthly basis. iii) Foreign Exchange Rate Risk The table below presents the total (loss) on foreign exchange financial instruments that has been disclosed through the statement of net and comprehensive income: Three months ended 30 June 2013 2012 US$'000 US$'000 Revaluation of foreign exchange forward 584 (428) contracts Realised gain on foreign exchange forward 837 68 contracts Total gain/(loss) on forex forward contracts 1,421 (360) The Corporation is exposed to foreign exchange risks to the extent it transacts in various currencies, while measuring and reporting its results in US Dollars. Since time passes between the recording of a receivable or payable transaction and its collection or payment, the Corporation is exposed to gains or losses on non USD amounts and on balance sheet translation of monetary accounts denominated in non USD amounts upon spot rate fluctuations from quarter to quarter. The below represents foreign exchange financial instruments in place: Derivative Term Value Protection rate Trigger rate Forward July 13 - GBP4 million/month $1.59/GBP1.00 $1.50/GBP1.00 plus Dec 13 Forward July 13 - GBP100 million $1.52/GBP1.00 N/A Jan 14 Forward Aug 13 - EUR30 million $1.29/EUR1.00 N/A Dec 13 iv) Credit Risk The Corporation's accounts receivable with customers in the oil and gas industry are subject to normal industry credit risks and are unsecured. All of its oil production from the Beatrice, Jacky and Athena field is sold to BP Oil International Limited. Oil production from Cook, Broom, Dons, Causeway and Fionn is sold to Shell Trading International Ltd. Anglia and Topaz gas production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd and Esso Exploration & Production UK Ltd. The Corporation assesses partners' credit worthiness before entering into farm-in or joint venture agreements. In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. As the Corporation's exploration, drilling and development activities expand with existing and new joint venture partners, the Corporation will assess and continuously update its management of associated credit risk and related procedures. The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at 30 June 2013 substantially all accounts receivables are current, being defined as less than 90 days. The Corporation has no allowance for doubtful accounts as at 30 June 2013 (31 December 2012: $Nil). The Corporation may be exposed to certain losses in the event that counterparties to derivative financial instruments are unable to meet the terms of the contracts. The Corporation's exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. As at 30 June 2013, exposure is $15.6 million (31 December 2012: $8.3 million). The Corporation also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The maximum credit exposure associated with financial assets is the carrying values. v) Liquidity Risk Liquidity risk includes the risk that as a result of its operational liquidity requirements the Corporation will not have sufficient funds to settle a transaction on the due date. The Corporation manages liquidity risk by maintaining adequate cash reserves, banking facilities, and by considering medium and future requirements by continuously monitoring forecast and actual cash flows. The Corporation considers the maturity profiles of its financial assets and liabilities. As at 30 June 2013, substantially all accounts payable are current. The following table shows the timing of cash outflows relating to trade and other payables. Within 1 year 1 to 5 years US$'000 US$'000 Accounts payable and accrued liabilities 316,980 - Other long term liabilities - 2,866 316,980 2,866 26. DERIVATIVE FINANCIAL INSTRUMENTS 30 June 31 December 2013 2012 US$'000 US$'000 Oil swaps 8,112 2,497 Put options 7,369 5,667 Gas swaps (46) - Embedded derivative - 87 Foreign exchange forward contract (1,471) - 13,964 8,251 27. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Financial instruments of the Corporation consist mainly of cash and cash equivalents, receivables, payables, loans and financial derivative contracts, all of which are included in these financial statements. At 30 June 2012, the classification of financial instruments and the carrying amounts reported on the balance sheet and their estimated fair values are as follows: 30 June 2013 31 December 2012 US$'000 US$'000 Classification Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents 27,091 27,091 31,374 31,374 (Held for trading) Restricted cash 3,228 3,228 2 2 Derivative financial 15,560 15,560 - - instruments (Held for trading) Accounts receivable 254,894 254,894 159,195 159,195 (Loans and Receivables) Deposits 23,852 23,852 14,754 14,754 Contingent consideration (4,000) (4,000) (4,000) (4,000) Derivative financial (1,596) (1,596) - - instruments (Held for trading) Other long term liabilities (2,866) (2,866) (3,018) (3,018) Accounts payable (316,980) (316,980) (205,635) (205,635) (Other financial liabilities) 28. RELATED PARTY TRANSACTIONS The consolidated financial statements include the financial statements of Ithaca Energy Inc and the subsidiaries listed in the following table: Country of % equity interest at incorporation 30 June 2013 2012 Ithaca Energy (UK) Limited Scotland 100% 100% Ithaca Minerals (North Sea) Scotland 100% 100% Limited Ithaca Energy (Holdings) Bermuda 100% Nil Limited Ithaca Energy Holdings (UK) Scotland 100% Nil Limited Ithaca Petroleum PLC England and Wales 100% Nil Ithaca North Sea Limited England and Wales 100% Nil Ithaca Exploration Limited England and Wales 100% Nil Ithaca Causeway Limited England and Wales 100% Nil Ithaca Gamma Limited England and Wales 100% Nil Ithaca Alpha Limited Northern Ireland 100% Nil Ithaca Epsilon Limited England and Wales 100% Nil Ithaca Delta Limited England and Wales 100% Nil Ithaca Petroleum Holdings AS Norway 100% Nil Ithaca Petroleum Norge AS Norway 100% Nil Ithaca Technology AS Norway 100% Nil Ithaca AS Norway 100% Nil Ithaca Petroleum EHF Iceland 100% Nil Transactions between subsidiaries are eliminated on consolidation. The following table provides the total amount of transactions that have been entered into with related parties during the six month period ending 30 June 2013 and 30 June 2012, as well as balances with related parties as of 30 June 2013 and 31 December 2012: Sales Purchases Accounts Accounts receivable payable US$'000 US$'000 US$'000 US$'000 Burstall Winger 2013 - 57 - - LLP 2012 - 138 - - Loans to related parties Amounts owed from related parties 30 June 31 Dec 2013 2012 US$'000 US$'000 FPF-1 Limited 21,551 21,551 29. SEASONALITY The effect of seasonality on the Corporation's financial results for any individual quarter is not material. This information is provided by RNS The company news service from the London Stock Exchange END
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