Melrose Resources plc Interim Report for the six month period ended 30 June 2011 Melrose Resources plc Melrose Resources plc is an oil and gas exploration and production company with interests in Egypt, Bulgaria, Romania, France, Turkey and the USA. The Group has a diverse portfolio of production, development, appraisal and exploration assets offering a range of investment opportunities. Melrose is headquartered in Edinburgh and is listed on the Main Market of the London Stock Exchange. This interim report may contain forward-looking statements based on current expectations of, and assumptions and forecasts made by, the Company’s management team. Various known and unknown risks, uncertainties and other factors could lead to differences between the actual future results, financial situation development or performance of the Company and the estimates and historical results given herein. Undue reliance should not be placed on forward-looking statements which speak only as of the date of this document. Melrose accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required. Highlights Operational highlights • average production increased by 23 percent to 20.2 Mboepd on a net entitlement basis (equivalent to 38.0 Mboepd on a working interest basis) • 3D seismic interpretation completed on the South East Mansoura concession (Egypt) confirming Cretaceous oil play potential • 2D seismic acquisition completed on the Mesaha (Egypt) and Rhône Maritime (France) frontier exploration concessions • operations on the South West Kanun (Turkey) exploration well are nearing completion with no oil shows yet encountered • Concession Agreements signed for the Muridava and Est Cobalcescu licences (Romania) • entered into a two year extension on the Galata Block exploration concession (Bulgaria) Financial highlights • revenue increased to $155.8 million (H1 2010: $110.0 million) • EBITDAX increased to $134.4 million (H1 2010: $86.3 million) • profit after tax increased to $33.2 million (H1 2010: $4.1 million) • net debt reduced to $367.3 million (H1 2010: $459.6 million) • financial gearing of 107 percent (H1 2010: 140 percent) Robert Adair, Executive Chairman commented “The first half of 2011 represented an important turning point for the Company, with the production revenues from our two core areas in Egypt and Bulgaria allowing us to progress a number of high potential exploration initiatives. The Company has delivered a strong financial performance and our underlying profitability has continued to improve whilst we have made a major step towards reducing financial gearing. We look forward to making further progress in continuing to grow as a diversified, well balanced exploration and production company.” Melrose Resources plc 2011 01 Chairman’s Statement Introduction interpretation of these surveys is still a few months by a presidential election. ongoing but the preliminary analysis During this transitional period we will The first half of 2011 has been a period indicates that both blocks contain continue to monitor the political situation of strong financial performance for the numerous large structures which could closely and manage our operational and Company as we began to see the form the basis for hydrocarbon traps. We financial position accordingly. benefits from our new Bulgarian gas field plan to drill our first well on Mesaha next developments which came on stream late Melrose has continued to pursue an active year and envisage 3D seismic acquisition last year. Coupled with production from work programme on its Egyptian acreage or drilling on the Rhône Maritime block our existing Egyptian assets, the new fields including the Mansoura and South East within the same timeframe. have helped generate significant post tax Mansoura concessions onshore in the Nile profits and operating cash flow of $33.2 During the period, the Company was Delta and the Mesaha concession which million and $104.9 million, respectively, pleased to announce the Concession is a large frontier exploration block in and we are on track to reduce our Agreements for the Muridava and Est Southern Egypt. financial gearing towards 100 percent Cobalcescu concessions offshore Romania The average production rate during the by year end. had been signed and we are looking first half of the year was 30.4 Mboepd forward to acquiring seismic surveys The Company achieved an average on a working interest basis, comprising over these blocks in 2012 with a view production rate of 20.2 Mboepd on 148.9 MMcfpd of gas and 4,714 bpd of to starting a drilling campaign in 2013. a net entitlement basis (equivalent to In addition, the Company has exercised its oil, condensate and Liquid Petroleum 38.0 Mboepd on a working interest basis) option to enter a two year extension of the Gas (“LPG”). Net entitlement production during the first half of 2011. This was Galata exploration permit in Bulgaria. Both averaged 61.1 MMcfpd of gas and somewhat below forecast due to a these shallow water western Black Sea 2,011 bpd of oil, condensate and LPG. number of operational factors in Egypt areas are highly prospective, containing The production stream continues to be which we are addressing through a remedial drilling and work-over a number of plays and have the potential underpinned by contributions from our programme. Whilst these considerations to make a significant contribution to the two major fields, West Khilala and West should have a minimal impact on reserves, Company’s growth plans. Dikirnis, supplemented by eight other we feel it prudent to reduce our full year fields. Performance during the first six production guidance to 36.0 Mboepd on a months of the year was lower than Egypt working interest basis pending completion expected due to a number of operational of the rig activities. In early 2011, President Mubarak resigned factors. The most material of these was from power following a period of civil the onset of water production in the North During the period we made good progress unrest in Egypt. The protests were East Abu Zahra-1 production well which on a number of exploration initiatives as primarily confined to large urban areas ceased to flow in April this year. In order we strengthen the Company’s focus on and have had no impact on Melrose’s to reinstate production and maintain high growth opportunities. We completed operations. The Company has continued reserves, the Company is currently drilling the interpretation of the 3D seismic data to receive payments for its gas and oil a replacement well at the crest of the which we acquired over the South East sales during the first half of the year structure (the original well was located Mansoura concession in Egypt last year and receipts are in line with our budget down-dip on the flank of the reservoir). and were pleased to confirm significant assumptions. Other factors which are impacting the oil potential in the Cretaceous exploration play. We plan to drill our first test well on Since President Mubarak left office, the 2011 production levels include the this play later this year on a prospect country has been administered by an decision to temporarily complete one of called Al Hajarisah. We also completed interim government which is likely to stay the West Dikirnis horizontal wells with a the acquisition of key 2D seismic surveys in power until the parliamentary elections, vertical wellbore to maximise oil recovery, over our high potential frontier exploration which are currently scheduled to take a well integrity work-over programme blocks in Egypt (Mesaha) and offshore place in the fourth quarter of this year. in the West Khilala field and water France (Rhône Maritime). Detailed These are expected to be followed within production at the South Zarqa field. 02 Melrose Resources plc 2011 Development activity in the first half had an unstable flow regime with oil rates reservoir structures. The joint venture focussed on the West Dikirnis field fluctuating between 80 and 280 bopd. partnership is preparing to drill the which is currently producing at a stable The Company is currently evaluating first well on the block in the second half rate of around 3,900 bpd of hydrocarbon whether, with an improved completion of 2012. liquids. During the period one vertical design, the well may be completed as and one horizontal production well a commercial producer and is also have been successfully completed and reviewing the field appraisal options. Bulgaria these are producing at a combined The Kavarna and Kaliakra offshore gas In parallel with the development activity, rate of 820 bopd. field developments have continued to Melrose has been actively progressing its The West Dikirnis Gas Reinjection facilities exploration initiatives. On the South East exhibit strong production performance and LPG plant are continuing to perform Mansoura concession, onshore in the Nile during the period and are currently well, with approximately 28 MMcfpd of Delta, the Company has completed the producing at a combined average daily gas currently being reinjected into the field processing and interpretation of the 3D rate of 45 MMcfpd. These sustained and 910 bpd of additional condensate seismic data recently acquired over the production levels, coupled with an average and LPG being recovered from the plant. under-explored Cretaceous oil play. These realised gas price in Bulgaria of $7.42 The liquids yield per unit of gas passing studies have confirmed the play potential per Mcf during the first six months, have through the LPG plant is exceeding and the presence of multiple oil prospects generated a significant new revenue expectations and the rate of decline in and leads with combined unrisked stream for the Company. the existing oil wells has been significantly prospective resources of 54 MMbbl. One With the two new fields now fully reduced, with both observations indicating prospect, called Al Hajarisah, has been commissioned, the Company has turned that the gas reinjection process is working selected for drilling in the fourth quarter its attention to developing the Kavarna effectively. The gas re-injection process is 2011 which has prospective resources East discovery and has recently received reducing our short term gas sales volumes of 6 MMbbl (working interest basis) the Certificate of Commerciality from in order to maximise the amount of high and a chance of success of 21 percent. the Bulgarian authorities. This field was value oil recovered from the field. The gas discovered in 2010 approximately three On the Mesaha frontier exploration is not lost, however, and will be produced kilometres east of the Kavarna field and concession in southern Egypt, where we later in the field life after the oil reserves contains estimated recoverable reserves have a 40 per cent interest, the Company have been recovered. The next phase of of 10 Bcf. It is intended to develop the has completed the acquisition of a second the development will involve the addition field with a single subsea completion phase of 2D seismic data with a total of of a refrigeration unit to the LPG plant which will be tied back to the Kavarna 1,844 kilometres of lines acquired. The which, allowing time for design and subsea development with a short 6 inch quality of the new seismic data is much procurement optimisation, is now line. This operation is presently scheduled superior to the first phase of 2D data scheduled for completion late 2012. to take place in the second half of 2012 acquired in 2010 and has significantly and the procurement process for the Well testing operations have recently been improved the definition of the sedimentary project is ongoing. completed on the West Zahayra-1 well basin. Based on this encouragement, the which was a Qawasim formation discovery scope of the second phase survey was As recently announced, the drilling made in 2008, seven kilometres west of increased from the original plan (which operations have been completed on the West Dikirnis field. Prior to testing, the was to acquire 700 kilometres of data) the Kaliakra East-1 exploration well and original discovery well was sidetracked and and the interpretation is now expected the Palaeocene reservoir interval was the new wellbore encountered 39 feet of to be complete around year end. In the found to be eroded at the drilled location. net oil pay with an average porosity of 16 interim, the preliminary interpretation has The Company is now moving ahead with percent. During testing the well flowed confirmed the presence of major structural plans to shoot 500 square kilometres of good quality black oil (44 degree gravity) features in the basin, in particular tilted 3D seismic over the central area of the with only small amounts of gas. The well fault block geometries and intra-basinal Galata Block to the north of the Galata was produced for a period of four days but highs, which have the potential to form to Kaliakra field trend. Three further Melrose Resources plc 2011 03 Chairman’s Statement (continued) explorations leads have been identified in licences located in the South Mardin yielded material gas discoveries elsewhere this area on regional 2D seismic data and district of southern Turkey. The well is in the Mediterranean, and has already these have combined prospective resources testing a prospect called South West indicated the presence of a number of of 130 Bcf and an average chance of Kanun which was identified on the 2D significant structures. Depending on the success 23 percent. A contractor has seismic survey acquired in 2010 and in outcome of the detailed interpretation, been selected to conduct the seismic the event of success the well could open the joint venture may opt to acquire 3D survey which is scheduled to commence up a new exploration play in the region. seismic data over the most promising in September. In order to provide sufficient areas of the block prior to initiating a The well has reached a depth of 8,780 time to pursue the planned exploration drilling programme. feet and has drilled through the shallow work programme the Company recently Cretaceous target interval and penetrated received Ministerial approval to extend into the deeper Ordovician reservoir target. the Galata Block exploration permit by two USA It encountered 338 feet of good quality years to February 2013. Following the sale of its Permian Basin carbonate in the Cretaceous formation which open hole logs indicated to be assets in late 2010, the Company has water bearing. The well is currently 220 retained some minor gas field interests Romania in East Texas and we are reviewing our feet into the Ordovician sandstone In 2010 Melrose was awarded an 80 sequence and no oil shows have been strategic options for these assets with percent working interest and operatorship observed on the mud log or in the drill a view to their likely divestment. of two exploration blocks, Muridava (EX- cuttings. The wellbore is being conditioned 27) and Est Cobalcescu (EX-28), in the in preparation for open hole logging Financial Results Romanian 10th Licensing Round. Both across this interval and on receipt of the blocks are located in shallow water and results the Company will decide whether We are pleased to be reporting another have significant oil and gas potential in to continue the well operations and/or period of strong financial performance exploration plays on trend with existing apply for a two year extension to the for the Company, underpinned by gas discoveries elsewhere in Romanian waters. exploration licenses. production from Bulgaria and better than Our preliminary mapping of the area, projected commodity prices in the first We believe that Turkey represents based on old vintage regional 2D seismic half of the year. an attractive investment environment data, has identified a number of leads and we are pursuing additional business Revenues for the period were $156 million and prospects with the potential to hold development initiatives in the country. and EBITDAX was $134 million, as 1Tcfe to 2Tcfe of unrisked gross resources. compared with equivalent figures for the In March this year, we were pleased same period in 2010 of $110 million and to announce that Melrose and the France $86 million, respectively. Profit after tax Romanian authorities have now signed increased to $33 million compared to $4 During the first half, Melrose and its joint the Concession Agreements for both million for the period ended 30 June 2010, venture partner, Noble Energy, completed blocks and Melrose, with its partners, equating to increased earnings of 28.9 the acquisition of a block-wide, 7,500 is looking forward to initiating a seismic cents per share compared with 3.5 cents kilometre 2D seismic survey over the work programme on the acreage in 2012. per share for the same period in 2010. Rhône Maritime concession, offshore This is expected to be followed by a multi- Cash from operations increased by 39 southern France, where Melrose has a well drilling campaign starting in 2013. percent to $105 million compared to $75 27.5 per cent non-operated interest. million for the comparable period in 2010. The new seismic is of excellent quality and the data set is currently being processed Capital expenditure during the first six Turkey and interpreted. The initial data analysis is months was $30 million and our revised In May this year, Melrose spudded an focusing on the post-salt Pliocene and the full year forecast for 2011 is $87 million. exploration well on the frontier exploration pre-salt Miocene sections, which have The full year forecast reflects the planned 04 Melrose Resources plc 2011 increase in exploration activity in the recoverable reserves and will smooth second half of the year, with wells in the working interest production profile Turkey, Bulgaria and Egypt in addition over the next three years. Based on the to Egyptian development costs. current forecast the Company is reducing full year production guidance for 2011 We are also pleased to report a significant to 36.0 Mboepd. reduction in the Company’s net debt position from $419 million at year end We are currently drilling a well in 2010 to $367 million at 30 June 2011. Turkey and later this year we should be During the same period, the Company’s in receipt of the results of the new seismic financial gearing has reduced by some interpretation for our Mesaha and Rhône 26 percent to 107 percent, putting us well Maritime exploration concessions. We will on track to achieve our target of around also be drilling our first well to test the 100 percent by year end. It should be Cretaceous oil play in the Egyptian Nile noted, however, that due to increased Delta. Looking further ahead to next year, capital expenditure the rate of gearing we plan to commence the exploration decline in the second half of the year will work programme on our new blocks not be as rapid as observed in the first offshore Romania and will be evaluating half of the year. the central area of the Galata Block in Bulgaria. No interim dividend is proposed at this time and the final dividend will be assessed In addition to the growth opportunities as usual following the completion of the presented by our existing portfolio, Company’s Annual Results. our strengthening financial position is providing us with the capacity to pursue new business development opportunities Outlook and we are focussing on assets in both the The first half of 2011 represented exploration and development phase of the something of a turning point for the asset lifecycle. We are currently evaluating Company, with the strong production a number of opportunities in our existing revenues from our two core areas in Egypt areas of operations and also in some new and Bulgaria allowing us to progress a countries which present an attractive number of high potential growth combination of good hydrocarbon initiatives whilst simultaneously reducing fundamentals, competitive fiscal terms our financial gearing. and sound operating environments. Underpinning our future outlook is the I would like to thank the Melrose staff, performance of our existing producing management and board as well as our assets and we are maintaining a prudent shareholders for their continued support approach to reservoir management. for the Company. We look forward to the Notwithstanding this, we have experienced next phase of our evolution with great some operational challenges in Egypt this confidence. year which require remedial drilling and completion activity and we have also chosen to defer some West Khilala and West Dikirnis facilities expenditures. These Robert FM Adair changes should have minimal impact on 16 August 2011 Melrose Resources plc 2011 05 Financial Review Revenue in the period increased to $155.8 million reflecting production from the Kavarna and Kaliakra fields in Bulgaria of $57.5 million in the period. Operating cash flow increased by 39 percent on the period ended 30 June 2010, enabling the Company to reduce net debt from $418.9 million at 31 December 2010 to $367.3 million at 30 June 2011, taking the gearing level towards the Company’s targeted level of 100 percent by year end. Results for the six months ended 30 June 2011 Revenue in the six months ended 30 June 2011 increased by 42 percent to $155.8 million compared with $110.0 million for the six months ended 30 June 2010. This increase is due to production from the Kavarna and Kaliakra fields of $57.5 million, offset in part by the reduction in the revenues generated in the US due to the sale of the Permian Basin assets at the end of 2010. Profit from operations in the period increased to $73.0 million compared with $38.1 million for the six months ended 30 June 2010. This is after a ceiling test impairment charge of $12.3 million included in the depletion charge which relates to leases held in East Texas that, due to sustained low gas prices, are thought unlikely to be developed. Excluding the impairment, profit from operations would be $85.3 million; an increase of 124 percent on the period ended 30 June 2010 and earnings would increase to 39.6 cents per share. Profit before taxation in the first six months was $61.8 million (six months ended 30 June 2010: $26.2 million). Profit after taxation was $33.2 million (six months ended 30 June 2010: $4.1 million), increasing earnings to 28.9 cents per share compared with 3.5 cents per share for the six months ended 30 June 2010. Revenue analysis by segment: 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 Gas Oil & liquids Total Gas Oil & liquids Total Gas Oil & liquids Total Revenue $m $m $m $m $m $m $m $m $m Bulgaria 57.5 - 57.5 - - - 16.9 - 16.9 Egypt 43.5 53.6 97.1 51.1 48.8 99.9 105.4 96.8 202.2 USA 1.0 0.2 1.2 2.2 7.9 10.1 4.2 17.1 21.3 Total 102.0 53.8 155.8 53.3 56.7 110.0 126.5 113.9 240.4 Group cash flow from operations for the six months ended 30 June 2011 was $104.9 million compared with $75.4 million for the same period in 2010, an increase of 39 percent in the period. EBITDAX for the period was $134.4 million (six months ended 30 June 2010, $86.3 million). 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 EBITDAX $000 $000 $000 Profit before taxation 61,760 26,187 29,824 Add back: Depreciation of other assets 199 270 542 Depreciation and depletion 59,823 39,702 83,236 Decommissioning charge 1,315 982 1,946 Unsuccessful exploration costs - 7,226 10,843 Net financing cost 11,281 11,889 24,305 EBITDAX 134,378 86,256 150,696 Write-back loss on disposal of oil and gas assets - - 38,190 Adjusted EBITDAX 134,378 86,256 188,886 Capital expenditures during the period amounted to $30.0 million (six months ended 30 June 2010, $38.3 million). These expenditures were split geographically between Egypt $25.2 million, Bulgaria $2.1 million, Turkey $2.5 million and other $0.2 million. Group net debt reduced from $418.9 million at 31 December 2010 to $367.3 million at 30 June 2011 (30 June 2010: $459.6 million). This reduction was funded from cash generated from operations of $104.9 million (June 2010: $75.4 million). Cash balances held at 30 June 2011 were $32.5 million (30 June 2010: $24.5 million) and undrawn loan facilities as at 30 June 2011 were $111.6 million (30 June 2010: $21.8 million). Group gearing reduced to 107 percent at 30 June 2011 from 140 percent at 30 June 2010. 06 Melrose Resources plc 2011 Responsibility statement We confirm that to the best of our knowledge: • the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; and • the interim management report includes a fair review of the information required by: (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and (b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. Diane MV Fraser Finance Director 16 August 2011 Principal risks and uncertainties Melrose is subject to various risks and uncertainties that may impact its business in the remaining six months of the financial year as well as in the more distant future. The principal risks and uncertainties faced by the Group remain unchanged from the disclosures included in the Annual Report as at 31 December 2010. The Board categorises the risks as follows: political, operational, bribery and corruption, financial, strategic and corporate. A more detailed explanation of the risks can be found on pages 26-27, 35-36 and 69-72 of the 2010 Annual Report and Financial Statements. Melrose Resources plc 2011 07 Condensed consolidated statement of comprehensive income for the six months ended 30 June 2011 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 Note $000 $000 $000 Revenue 2 155,766 110,033 240,381 Depletion and depreciation (59,823) (39,702) (83,236) Decommissioning charge (1,315) (982) (1,946) Unsuccessful exploration costs - (7,226) (10,843) Other cost of sales (10,824) (13,382) (28,601) Total cost of sales (71,962) (61,292) (124,626) Gross profit 83,804 48,741 115,755 Administrative expenses (10,763) (10,665) (23,436) Loss on disposal of oil and gas assets - - (38,190) Profit from operations 2 73,041 38,076 54,129 Financing income 30 5 1,529 Financing costs (11,311) (11,894) (25,834) Profit before taxation 61,760 26,187 29,824 Tax release on disposal of oil and gas assets - - 6,338 Income tax expense 3 (28,610) (22,137) (47,847) Profit/(loss) for the period 33,150 4,050 (11,685) Earnings/(loss) per share (cents) Basic 4 28.9 3.5 (10.2) Diluted 4 28.9 3.5 (10.2) The profit/(loss) for the period is 100% attributable to equity shareholders. All activities were continuing activities. Condensed consolidated statement of comprehensive income for the six months ended 30 June 2011 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 $000 $000 $000 Profit/(loss) for the period 33,150 4,050 (11,685) Total other comprehensive profit as a result of changes in fair value of cash flow hedges 533 321 1,625 Total comprehensive income/(loss) for the period 33,683 4,371 (10,060) No income tax arises on the change in fair value of cash flow hedges since the deferred tax asset on these losses is not recognised in the Company. 08 Melrose Resources plc 2011 Condensed consolidated balance sheet as at 30 June 2011 As at As at As at 30 June 2011 30 June 2010 31 December 2010 Note $000 $000 $000 Non-current assets Goodwill 52,976 52,976 52,976 Intangible assets 5 79,166 85,446 87,383 Property, plant and equipment 5 491,005 614,244 513,855 Deferred tax asset - 3,343 1,267 623,147 756,009 655,481 Current assets Inventories 26,220 27,047 25,235 Trade and other receivables 148,913 115,582 159,396 Cash and cash equivalents 32,469 24,498 70,353 207,602 167,127 254,984 Total assets 2 830,749 923,136 910,465 Current liabilities Trade and other payables (37,931) (48,073) (55,103) Provisions (831) (784) (524) (38,762) (48,857) (55,627) Non-current liabilities Other payables - (329) (181) Bank loans 6 (399,751) (484,056) (489,215) Deferred tax liability (31,462) (41,400) (32,166) Provisions (17,526) (19,860) (18,281) (448,739) (545,645) (539,843) Total liabilities 2 (487,501) (594,502) (595,470) Net assets 343,248 328,634 314,995 Total equity attributable to equity holders of the parent Issued capital 7 20,702 20,699 20,699 Share premium 7 23 209,225 209,225 Hedging reserve - (1,837) (533) Retained reserves 322,523 100,547 85,604 Total equity 343,248 328,634 314,995 Melrose Resources plc 2011 09 Condensed consolidated statement of cash flows for the six months ended 30 June 2011 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 $000 $000 $000 Cash flows from operating activities Profit from operations 73,041 38,076 54,129 Adjustments for: Depreciation of other assets 199 270 542 Depreciation, depletion and decommissioning charge 61,138 40,684 85,182 Unsuccessful exploration costs - 7,226 10,843 Excess cost of decommissioning (1,243) (52) (335) Loss on disposal of oil and gas assets - - 38,190 Non cash expense relating to share-based payment 768 884 1,597 Income tax charge on Egyptian revenue (27,728) (26,470) (53,067) Operating cash flow before changes in working capital 106,175 60,618 137,081 (Increase)/ decrease in inventory (985) 5,448 7,260 Decrease/(increase) in trade and other receivables 3,454 16,421 (17,752) (Decrease)/increase in trade and other payables (3,788) (7,063) 3,979 Cash generated from operations 104,856 75,424 130,568 Income taxes paid (48) (1,140) (1,058) Net cash inflow from operating activities 104,808 74,284 129,510 Cash flows from investing activities Proceeds from sale of property, plant and equipment 9,068 - 63,322 Interest received 30 5 19 Acquisition of property, plant and equipment and intangible assets (46,880) (43,994) (108,437) Net cash outflow from investing activities (37,782) (43,989) (45,096) Cash flows from financing activities Proceeds from the exercise of share options 26 - - Interest paid (14,028) (15,069) (21,852) Borrowings raised - 10,000 18,181 Repayment of borrowings (90,857) (7,658) (11,901) Dividends paid - - (5,561) Net cash (outflow)/inflow from financing activities (104,859) (12,727) (21,133) Net (decrease)/increase in cash and cash equivalents (37,833) 17,568 63,281 Cash and cash equivalents at start of period 70,353 6,467 6,467 Effect of exchange rate fluctuations on cash held (51) 463 605 Cash and cash equivalents at end of period 32,469 24,498 70,353 10 Melrose Resources plc 2011 Condensed consolidated statement of changes in equity for the six months ended 30 June 2011 Attributable to Owners of the Company Share Share Hedging Retained Total capital premium reserve earnings equity For the six months ended 30 June 2011 Note $000 $000 $000 $000 $000 Balance at 1 January 2011 20,699 209,225 (533) 85,604 314,995 Profit for the period - - - 33,150 33,150 Transfer from share premium to retained earnings 7 - (209,225) - 209,225 - Share options exercised 7 3 23 - - 26 Change in fair value of cash flow hedges - - 533 - 533 Dividends to equity holders 7 - - - (6,247) (6,247) Equity settled transactions - - - 791 791 Balance at 30 June 2011 20,702 23 - 322,523 343,248 Attributable to Owners of the Company Share Share Hedging Retained Total capital premium reserve earnings equity For the six months ended 30 June 2010 Note $000 $000 $000 $000 $000 Balance at 1 January 2010 20,699 209,225 (2,158) 101,307 329,073 Profit for the period - - - 4,050 4,050 Change in fair value of cash flow hedges - - 321 - 321 Dividends to equity holders 7 - - - (5,561) (5,561) Equity settled transactions - - - 751 751 Balance at 30 June 2010 20,699 209,225 (1,837) 100,547 328,634 Attributable to Owners of the Company Share Share Hedging Retained Total capital premium reserve earnings equity For the year ended 31 December 2010 Note $000 $000 $000 $000 $000 Balance at 1 January 2010 20,699 209,225 (2,158) 101,307 329,073 Loss for the year - - - (11,685) (11,685) Change in fair value of cash flow hedges - - 1,625 - 1,625 Dividends to equity holders 7 - - - (5,561) (5,561) Equity settled transactions - - - 1,543 1,543 Balance at 31 December 2010 20,699 209,225 (533) 85,604 314,995 Melrose Resources plc 2011 11 Notes to the interim condensed financial statements for the six months ended 30 June 2011 1. Accounting policies and basis of preparation Melrose Resources plc is a company domiciled in the United Kingdom. The Condensed Consolidated Interim Financial Statements of the Company as at and for the six months ended 30 June 2011 comprise the Company and its subsidiaries (together referred to as the “Group”). This condensed set of financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. As required by the Disclosure and Transparency Rules of the Financial Services Authority, the condensed set of financial information has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company’s published consolidated financial statements for the year ended 31 December 2010, except for the changes set out below. The comparative figures for the financial year ended 31 December 2010 are not the Company’s statutory accounts for that financial year. Those accounts have been reported on by the Company’s auditors and delivered to the registrar of companies. The report of the auditors was i) unqualified, ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. This condensed consolidated interim financial information does not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 December 2010, which are available on the Company’s website, www.melroseresources.com. The interim financial information for the six months ended 30 June 2011 is unaudited and has not been reviewed by the auditors. The directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the financial information. The condensed consolidated interim financial information was approved by the Board of Directors on 16 August 2011. The following new standards, amendments to standards and interpretations which are mandatory for the first time for financial periods commencing on 1 January 2011 have been adopted. None of these have had a significant impact on the reported results. • Revised IAS 24 ‘Related party disclosures’, issued in November 2009; and • ‘Improvements to IFRSs’, issued in May 2010. 12 Melrose Resources plc 2011 2. Operating segments The chief operating decision maker has been identified as the executive directors. The executive directors review the Group’s internal reporting in order to assess performance and allocate resources and the Group has determined the operating segments based on this reporting. The executive directors consider the business from a geographic perspective, and assess the performance of the following regions: Bulgaria, Egypt, USA and other Europe. All of the operating segments derive their revenues from the sale of oil, associated liquids and gas to external customers. The executive directors consider the performance of the operating segments based on profit from operations. The information provided to the chief operating decision maker is measured in a manner which is consistent with the financial statements. Bulgaria Egypt USA Other Europe Consolidated Six months ended 30 June 2011 $000 $000 $000 $000 $000 Revenues 57,459 97,115 1,192 - 155,766 Operating profit/(loss) by segment 37,147 56,444 (13,028) (706) 79,857 Corporate expenses (6,816) Operating profit 73,041 Financing income 30 Financing costs (11,311) Profit before taxation 61,760 Bulgaria Egypt USA Other Europe Consolidated Six months ended 30 June 2010 $000 $000 $000 $000 $000 Revenues - 99,907 10,126 - 110,033 Operating (loss)/profit by segment (1,976) 53,705 (8,047) (596) 43,086 Corporate expenses (5,010) Operating profit 38,076 Financing income 5 Financing costs (11,894) Profit before taxation 26,187 Bulgaria Egypt USA Other Europe Consolidated Year ended 31 December 2010 $000 $000 $000 $000 $000 Revenues 16,866 202,216 21,299 - 240,381 Operating profit/(loss) by segment 7,939 107,452 (47,346) (3,836) 64,209 Corporate expenses (10,080) Operating profit 54,129 Financing income 1,529 Financing costs (25,834) Profit before taxation 29,824 Other Europe comprises Turkey, France and Romania. Melrose Resources plc 2011 13 Notes to the interim condensed financial statements (continued) 2. Operating segments (continued) 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 Oil/liquids/ Oil/liquids/ Oil/liquids/ Gas Condensate Gas Condensate Gas Condensate Revenues $000 $000 $000 $000 $000 $000 Bulgaria 57,459 - - - 16,866 - Egypt 43,460 53,655 51,085 48,822 105,378 96,838 USA 1,014 178 2,263 7,863 4,205 17,094 Total 101,933 53,833 53,348 56,685 126,449 113,932 Two of the Group’s customers accounted for more than 10% of revenue in 2011 and one customer accounted for more than 10% of revenue in 2010. All sales in Egypt in 2010 and 2011 are to a state owned company. The revenue derived from sales to this customer is set out in the table above. Revenue in the period to 30 June 2011 included $52.3 million to a Bulgarian state owned company. Unallocated Other Corporate Bulgaria Egypt USA Europe Balances Total As at 30 June 2011 $000 $000 $000 $000 $000 $000 Total segment assets 155,151 645,848 6,044 6,279 17,427 830,749 Total segment liabilities (211,197) (62,240) (149,730) (57) (64,277) (487,501) As at 30 June 2010 Total segment assets 115,285 649,703 137,071 4,771 16,306 923,136 Total segment liabilities (156,100) (74,415) (200,793) (98) (163,096) (594,502) As at 31 December 2010 Total segment assets 161,569 647,627 32,318 3,593 65,358 910,465 Total segment liabilities (165,523) (72,460) (191,599) (39) (165,849) (595,470) 3. Income tax expense The tax charge for the period of $28.6 million gives an effective tax rate of 46.3% based on the forecast tax rate for the current financial year. The tax charge comprises a charge of $28.0 million for current tax and a charge of $0.6 million for deferred tax. The effective tax rate reflects that a significant proportion of the Group’s profits arise in Egypt, where the standard rate of tax is 40.55%. There are also expenses incurred by the Group which do not qualify for tax relief in the relevant countries, increasing the effective rate of the tax charge. Due to uncertainty on recovery against future profits, certain tax losses have not been recognised in deferred tax. 4. Earnings per share The calculation of basic and diluted earnings/(loss) per share is based upon the following: 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 $000 $000 $000 Profit/(loss) for the period attributable to ordinary shareholders (basic and diluted) 33,150 4,050 (11,685) Earnings/(loss) per share (cents) Basic 28.9 3.5 (10.2) Diluted 28.9 3.5 (10.2) 14 Melrose Resources plc 2011 The weighted average number of ordinary shares used in the calculation of basic and diluted earnings/(loss) per share for each period was calculated as follows: 6 months ended 6 months ended 12 months ended 30 June 2011 30 June 2010 31 December 2010 No. of shares No. of shares No. of shares Issued ordinary shares at start of period 114,668,063 114,668,063 114,668,063 Shares issued during the period 21,115 - - Shares in issue at end of period 114,689,178 114,668,063 114,668,063 Weighted average number of ordinary shares at end of period 114,678,679 114,668,063 114,668,063 Effect of share options in issue 124,082 2,370,366 - Weighted average number of ordinary shares at end of period – for diluted earnings per share 114,802,761 117,038,429 114,668,063 5. Capital expenditure Capital expenditure during the period amounted to $30.0 million (six months ended 30 June 2010, $38.3 million). Capital expenditures were split between Egypt - $25.2 million, Bulgaria - $2.1 million, Turkey - $2.5 million and other - $0.2 million. 6. Bank loans and financial instruments The Group’s interest-bearing loans and borrowings are as follows: As at As at As at 30 June 2011 30 June 2010 31 December 2010 $000 $000 $000 Non-current liabilities Bank loans 399,751 484,056 489,215 The Company has a Senior Loan Facility of $450 million and a Subordinate Loan Facility of $70 million. Both facilities have a final repayment date of 31 December 2014. The Group made repayments of $45.9 million during the period against the Senior Loan Facility, and $45 million against the Subordinate Loan Facility. The following table indicates the effective interest rates of interest-bearing liabilities at the balance sheet date and the period in which the principal amounts fall due: Repayable Repayable Repayable Effective Rate Total1 within 1 year1 1-2 years1 3-5 years1 % $000 $000 $000 $000 As at 30 June 2011 Secured bank loans 3.4 406,500 - 74,500 332,000 As at 30 June 2010 Secured bank loans 4.3 493,419 - 36,419 457,000 As at 31 December 2010 Secured bank loans 4.3 497,356 - 47,356 450,000 Note 1: Excluding the effect of amortisation of loan arrangement fees The Group is exposed to currency risk arising from purchases, sales, borrowings, cash and cash equivalents that are denominated in currencies other than US Dollars. It is Group policy that borrowings should match the currency of the cash flows from which it is expected that they will be repaid. This has been the case throughout the interim reporting period. Melrose Resources plc 2011 15 Notes to the interim condensed financial statements (continued) 7. Share capital and share premium During the period 21,115 shares at 78 pence per share were issued under employee share options arrangements (six months ended 30 June 2010: nil shares). In March 2011, the High Court of England and Wales passed a Special Resolution to reduce the share capital of the Company by cancelling the Share Premium Account at that date. The amount was transferred to distributable reserves on 7 March 2011 following registration of cancellation by the Registrar of Companies of England and Wales. Dividends The following dividends were declared and approved by the Group: Pence Total cost Total cost per share £000 $000 In the six months ended 30 June 2011 3.40p 3,899 6,247 In the six months ended 30 June 2010 3.10p 3,555 5,561 In the twelve months ended 31 December 2010 3.10p 3,555 5,561 The dividend declared and approved in the six months ended 30 June 2011 was paid on 22 July 2011. 8. Contingent liabilities and capital commitments The Group has contingent liabilities of $350 million (30 June 2010: $340 million) in respect of guarantees provided to secure the bank loans of subsidiary undertakings. The Group had capital commitments of $11 million at 30 June 2011 (30 June 2010: $62 million) with associated cash outflows arising over the period ending September 2011. 9. Related party transactions Controlling related party The directors consider that the immediate and ultimate parent company of Melrose Resources plc is Skye Investments Limited, which is registered in England and Wales, as it owns over 50% of the ordinary share capital. Skye Investments Limited is controlled by the Adair Trusts. Skye Investments Limited is the parent company of the largest group of companies for which group accounts have been drawn up. Copies of the group accounts of Skye Investments Limited are available from No. 1 Portland Place, London W1B 1PN. Identity of related parties The Company has a related party relationship with its subsidiaries and its directors. Related Party Transactions With the exception noted below, there are no related party transactions during the six months ended 30 June 2011 (30 June 2010: nil). Contract of significance Under the terms of a Net Profit Interest Agreement relating to the Galata gas field and originally entered into in 1998 an amount of nil is payable in respect of the six months ended 30 June 2011 (nil in respect of the six months ended 30 June 2010) to Orbis Holding Ltd, a company in which David Archer has a 50% beneficial interest. 16 Melrose Resources plc 2011 Directors and advisers Directors USA office Solicitors Robert F M Adair Melrose Energy Company Tods Murray LLP James D Agnew 20333 State Highway 249 Edinburgh Quay David F Archer Suite 310 133 Fountainbridge Diane M V Fraser Houston, TX 77070 Edinburgh, EH3 9AG Ahmed L Kebaili USA DLA Piper UK LLP Alan J Parsley 3 Noble Street Anthony E Richmond-Watson Egyptian office London, EC2V 7EE David H Thomas 3/C Lasilky Zone William P Wyatt Ahmed Kamel Street Principal bankers New Maadi Bank of Scotland Plc Company Secretary Cairo 11431 New Uberior House Alasdair N Robinson Egypt 11 Earl Grey Street Edinburgh, EH3 9BN Registered Office Bulgarian offices No. 1 Portland Place Melrose Resources S.à r.l. International Finance Corporation London, W1B 1PN Office 10 2121 Pennsylvania Avenue NW 2 Nikolai Haitov Street Washington, DC Registered in England Iztok, Sofia 1113 USA 20433 No. 3210072 Bulgaria Registrars Melrose Resources S.à r.l. Head office Share Registrars Limited 32 Marko Balabanov Street Exchange Tower 9 Lion & Lamb Yard Varna 9010 19 Canning Street Farnham Bulgaria Edinburgh, EH3 8EG Surrey, GU9 7LL Telephone: +44 (0) 131 221 3360 Auditors Stockbrokers KPMG Audit Plc Brewin Dolphin Saltire Court 48 St. Vincent Street 20 Castle Terrace Glasgow, G2 5TS Edinburgh, EH1 2EG Collins Stewart Europe Limited 88 Wood Street London, EC2V 7QR Glossary bbl barrel of oil or condensate bwpd barrels of water per day Mbpd thousand barrels per day Bcf billion cubic feet of gas EBITDAX earnings before interest, Mcf thousand cubic feet of gas Bcfe billion cubic feet of taxation, depletion, Melrose the Company or the Group, gas equivalent depreciation, amortisation as appropriate and exploration costs bcpd barrel of condensate Mm3 thousand cubic per day GRI gas re-injection metres of gas bpd barrels per day the Group the Company and MMbbl million barrels of oil its subsidiaries or condensate boe barrel of oil equivalent LPG liquid petroleum gas MMboe million barrels of oil boepd barrel of oil equivalent per day Mbbl thousand barrels of oil equivalent or condensate MMcf million cubic feet of gas the Company Melrose Resources plc Mboe thousand barrels of MMcfpd million cubic feet of gas Bm³ billion cubic metres of gas oil equivalent per day bopd barrel of oil or condensate Mboepd thousand barrels of MMcfepd million cubic feet of gas per day oil equivalent per day equivalent per day The factor used to convert Mcf to bbl is 5.8 Melrose Resources plc www.melroseresources.com Produced by Smith Brands Photography by Anna Henly This document is printed on a paper which uses fibre sourced from FSC® certified forests. 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