REG - Hardy Oil & Gas - Preliminary Results - Part 2
Released: 04/03/2010
- Part 2: For the preceeding part double click [ID:nRSD0620Ia]
interrupted, increased capital expenditure and production costs and result in
liability to the contractor or operator of the field.
Key Risks for 2010
Several of Hardy's blocks have been retained via appraisal and are no longer in the exploration phase. In the event that
the joint venture concludes that a discovery is sub-commercial then the corresponding block may be relinquished. Upon
relinquishment the Company will no longer retain a commercial interest in the block. Relinquishment may result in the
Company values on the balance sheet being revised downward.
With respect to Hardy's Ganesha (CY-OS/2) non-associated natural gas discovery, the Company has presented a case to the
Directorate General of Hydrocarbons that supports our claim of entitlement to a licence extension. In the absence of a
resolution in our favour, in the near future, we intend to refer the dispute for sole expert or conciliation and
arbitration.
The Company's exploration plans comprise activities primarily on non-operated blocks. Subsequently the timing of
commencement of activities may not commence as currently forecast. The exploration focus of the Company's 2009 work
programme may result in the failure to discover hydrocarbons in commercial quantities.
The status of several of the Company's licences are either approaching or have exceeded the contracted term. These
licences can be extended through various government approvals however there is no certainty that these extensions will be
granted. Should an extension not be received then the Company will no longer have a commercial interest in the blocks and
may be subject to non-performance penalties.
Clear Risk Identification
The table below sets out the general long-tem risks facing Hardy, their potential impact and mitigation strategies
developed. Risks are grouped into four main categories: strategic; financial; operational; and external. Effective risk
management is critical to achieving our strategic objectives and protecting our people and reputation. Hardy manages and
mitigates its risks by maintaining a balanced portfolio, through compliance with the terms of its licences and application
of policies and procedures appropriate for an international oil and gas company of its size and scale and through the
recruitment and retention of skilled personnel throughout its business.
Risk Category Mitigation
Strategic risk Ineffective or poorly executed strategy fails to create shareholder value
Ineffective mix of oil and gas interests Geographical focus on single region (India) with interests in several autonomous sedimentary basins comprising interests in difference geographical region.
Organic and acquisition - led growth Regular review of capital investment programmes and limiting allocation to high impact exploration. Board approval required for all annual exploration programmes, acquisitions and divestitures
Inefficient capital allocation Comprehensive annual budgeting process covering all material expenditures. Annual budget dated an approved by the Board.
Ineffective management processes Policies and procedures appropriate for an exploration and production company of Hardy's scale and size.
Loss of key staff/succession planning Remuneration policies to attract and retain staff (employee stock options, annual review, etc), and specific development and training policies implemented.
Financial risk Assets performance and excessive leverage results in the Group unable to meet its financial obligations
Industry cost inflation Asset joint operating agreement mandates rigorous contracting procedures with competitive tendering. Inflationary pressures will persist in high commodity price environment.
Capital structure Conservative approach to debt/equity financing of development projects. Exploration and appraisal activities strictly equity financed.
Uninsured events Comprehensive insurance programme.
Underperforming assets Conservative forecasting in the budgeting process. Development of the additional field's (Oza) to reduce dependence on PY-3
Cost overrun Main capital expenditures incurred via drilling offshore exploration wells. Lower working interest and maintaining strong working capital position mitigates against operations exceeding budgeted number of drilling days.
Capital structure
Conservative approach to debt/equity financing of development projects. Exploration and appraisal activities strictly
equity financed.
Uninsured events
Comprehensive insurance programme.
Underperforming assets
Conservative forecasting in the budgeting process. Development of the additional field's (Oza) to reduce dependence on
PY-3
Cost overrun
Main capital expenditures incurred via drilling offshore exploration wells. Lower working interest and maintaining strong
working capital position mitigates against operations exceeding budgeted number of drilling days.
Operational risk Operational event impacts staff, contractors, communities or the environment leading to loss of reputation and/or revenue
HSE incident HSE standards set and monitored regularly across the Group (policies, procedures and performance discussed further in CPR section of report)
Security incident Ongoing collaboration with Navy and Coast Guard Services, Ministry of Shipping, Ministry of Home Affairs, Ministry of Defence. Periodic offshore security incident simulation exercises.
Key development failure Technical, financial and Board approval for all projects and quarterly progress reports provided to the Board.
Failure to secure equipment, services and resources Rigorous contract and procurement procedures implemented internally and required by joint operating agreements. Long-term planning required to resource projects on a timely basis. The Company has limited influence on procurement of equipment services and resources for non-operator assets.
Sustained exploration failure Effective portfolio management (low interest, many assets) comprise with rigorous review and implementation of best practice exploration processes and techniques. Internal expertise review process prior to Board approval.
Hostile acquisition Robust defence strategies against hostile acquisitions. Effective and continuous communication with shareholders.
External risk The overall external political, industry or market environment may negatively impact the Company's ability to independently manage and grow its business
Political risk and fiscal change Develop sustainable relationships with governments and communities. Indian PSC include fiscal stability clauses. Actively collaborate with industry groups to formulate and communicate interests to government authorities.
Lack of control of keys assets Joint venturing with partners and governments. Proactive formal and informal communications to convey corporate interests and mandates.
Corporate governance failings Regular review of compliance requirements and ongoing consultation with legal and financial advisors and audit committee.
Shareholder sentiment Communicate with investors on a regular basis providing transparent and timely information. Effectively convey and execute corporate strategy
Oil and gas price volatility Conservative planning and forecasting of future oil prices. The Company's single producing asset and PSC terms limit the practicality to implement financial instruments to mitigate volatility.
Global capital market environment The Board regularly reviews 24-month capital requirement forecasts. Develop long-term relationships with financial institutions.
Capital default of joint venture partners Senior management monitors the financial status of the Company's joint venture partners to mitigate any unforeseen funding issues.
Regular review of compliance requirements and ongoing consultation with legal and financial advisors and audit committee.
Shareholder sentiment
Communicate with investors on a regular basis providing transparent and timely information. Effectively convey and execute
corporate strategy
Oil and gas price volatility
Conservative planning and forecasting of future oil prices. The Company's single producing asset and PSC terms limit the
practicality to implement financial instruments to mitigate volatility.
Global capital market environment
The Board regularly reviews 24-month capital requirement forecasts. Develop long-term relationships with financial
institutions.
Capital default of joint venture partners
Senior management monitors the financial status of the Company's joint venture partners to mitigate any unforeseen funding
issues.
HARDY OIL AND GAS plc
Consolidated Income Statement
For the year ended 31 December 2009
2009 2008
Notes US$ US$
Revenue 3 7,687,355 17,306,042
Cost of sales
Production costs 4 (5,661,574) (7,523,972)
Depletion (1,078,839) (1,521,919)
Decommissioning charge (104,859) (151,174)
Gross profit 842,083 8,108,977
Administrative expenses (8,974,255) (9,847,526)
Operating loss (8,132,172) (1,738,549)
Gain on sale of investment - 12,953,064
Interest and investment income 261,672 1,320,189
Finance costs (71,378) (91,204)
(Loss) profit before taxation (7,941,878) 12,443,500
Taxation 1,424,702 (4,971,144)
(Loss) profit for the year (6,517,176) 7,472,356
(Loss) earnings per share
Basic 7 (0.10) 0.12
Diluted 7 (0.10) 0.11
1,424,702
(4,971,144)
(Loss) profit for the year
(6,517,176)
7,472,356
(Loss) earnings per share
Basic
7
(0.10)
0.12
Diluted
7
(0.10)
0.11
HARDY OIL AND GAS plc
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2009
2009 2008
US$ US$
(Loss) profit for the year (6,517,176) 7,472,356
Other comprehensive income (loss)
Reclassification of gain included in profit or loss - (12,354,477)
Reclassification of deferred tax on gain - 3,441,945
- (8,912,532)
Total comprehensive loss for the year (6,517,176) (1,440,176)
(8,912,532)
Total comprehensive loss for the year
(6,517,176)
(1,440,176)
HARDY OIL AND GAS plc
Consolidated Statement of Changes in Equity
For the year ended 31 December 2009
Share capital US$ Share premium US$ Shares to be issued US$ Retained earnings US$ Other reserves US$ Total US$
At 1 January 2008 622,625 93,101,579 2,501,590 38,857,499 8,912,532 143,995,825
Changes in equity for the year 2008
Total comprehensive income for the year - - - 7,472,356 (8,912,532) 1,440,176
Share based payment - - 1,425,280 - - 1,425,280
Share options exercised 383 80,001 - - - 80,384
Issue of share capital 202 170,358 - - - 170,560
At 31 December 2008 623,210 93,351,938 3,926,870 46,329,855 - 144,231,873
Changes in equity for the year 2009 -
Total comprehensive loss for the year - - - (6,517,176) - (6,517,176)
Share based payment - - 2,630,838 - - 2,630,838
Issue of share capital 62,090 15,764,184 - - - 15,826,274
Issue expenses (640,198) (640,198)
At 31 December 2009 685,300 108,475,924 6,557,708 39,812,679 - 155,531,611
46,329,855
-
144,231,873
Changes in equity for the year 2009
-
Total comprehensive loss for the year
-
-
-
(6,517,176)
-
(6,517,176)
Share based payment
-
-
2,630,838
-
-
2,630,838
Issue of share capital
62,090
15,764,184
-
-
-
15,826,274
Issue expenses
(640,198)
(640,198)
At 31 December 2009
685,300
108,475,924
6,557,708
39,812,679
-
155,531,611
Other reserves represented the gain on past revaluation of an available for sale investment which was transferred to profit
and loss on disposal.
HARDY OIL AND GAS plc
Consolidated Statement of Financial Position
As at 31 December 2009
Notes 2009 2008
US$ US$
Assets
Non-current assets
Property, plant and equipment 8 10,046,762 8,477,099
Intangible assets - exploration 9 134,725,547 124,013,261
Intangible assets - others 46,144 111,640
Site restoration deposit 3,630,471 3,211,830
Total non-current assets 148,448,924 135,813,830
Current assets
Inventories 2,453,998 3,736,437
Trade and other receivables 3,822,520 4,087,719
Short term investments 11 20,505,130 22,010,291
Cash and cash equivalents 10,036,678 8,139,314
Total current assets 36,818,326 37,973,761
Total assets 185,267,250 173,787,591
Equity and liabilities
Equity attributable to owners of the parent
Share capital 12 685,300 623,210
Share premium 108,475,924 93,351,938
Shares to be issued 6,557,708 3,926,870
Retained earnings 39,812,679 46,329,855
Total equity 155,531,611 144,231,873
Non-current liabilities
Provision for decommissioning 4,500,000 4,500,000
Provision for deferred tax 9,872,917 11,297,619
Total non-current liabilities 14,372,917 15,797,619
Current liabilities
Trade and other payables 15,362,722 13,758,099
Total current liabilities 15,362,722 13,758,099
Total liabilities 29,735,639 29,555,718
Total equity and liabilities 185,267,250 173,787,591
Trade and other payables
15,362,722
13,758,099
Total current liabilities
15,362,722
13,758,099
Total liabilities
29,735,639
29,555,718
Total equity and liabilities
185,267,250
173,787,591
HARDY OIL AND GAS plc
Consolidated Statement of Cash Flows
For the year ended 31 December 2009
2009 2008
Notes US$ US$
Operating activities
Cash flow (used in) from operating activities 5 (1,000,877) 2,065,776
Taxation paid (10,088) (1,373,117)
Net cash (used in) from operating activities (1,010,965) 692,659
Investing activities
Expenditure on property, plant and equipment (2,853,122) (6,802,348)
Expenditure on intangible assets - exploration (10,712,286) (24,728,727)
Purchase of intangible assets - others - (3,841)
Purchase of other property, plant and equipment (8,773) (117,097)
Purchase of investment - (13,184,387)
Sale of investment - 41,378,216
Site restoration deposit (418,641) 157,990
Short-term investments 1,505,161 (22,010,291)
Net cash (used in) investing activities (12,487,661) (25,310,485)
Financing activities
Interest and investment income 281,292 1,520,555
Finance costs (71,378) (91,204)
Issue of shares 15,186,076 170,741
Net cash from financing activities 15,395,990 1,600,092
Net increase (decrease) in cash and cash equivalents 1,897,364 (23,017,734)
Cash and cash equivalents at the beginning of the year 8,139,314 31,157,048
Cash and cash equivalents at the end of the year 10,036,678 8,139,314
15,395,990
1,600,092
Net increase (decrease) in cash and cash equivalents
1,897,364
(23,017,734)
Cash and cash equivalents at the beginning of the year
8,139,314
31,157,048
Cash and cash equivalents at the end of the year
10,036,678
8,139,314
HARDY OIL AND GAS plc
Notes to the Consolidated Financial Statements
Year ended 31 December 2009
1. Accounting Policies
The following accounting policies have been applied in preparation of consolidated financial statements of Hardy Oil and
Gas plc ("Hardy" or the "Group").
a) Basis of Measurement
Hardy prepares its financial statements on a historical cost basis except as otherwise stated.
b) Going Concern
The Group has successfully raised financing in the past to provide funding for its ongoing exploration and development
programmes and to augment its working capital. Having regard to the Group's existing working capital position and its
ability to raise potential financing the Directors are of the opinion that the Group has adequate resources to enable it to
undertake its planned work programme of exploration, appraisal and development activities over the next 12 months.
c) Basis of Preparation
Hardy prepares its financial statements in accordance with applicable International Financial Reporting Standards (IFRS)
and interpretations issued by the International Accounting Standards Board as adopted by the European Union.
As at the date of approval of these financial statements, the following standards and interpretations were in issue but not
yet effective:
IFRS 1 First time adoption of International Financial Reporting Standards (revised 2008)
IFRS 3 Consolidated financial statements (revised 2008)
IFRS 9 Financial instruments (replacement of IAS 39) *
Amendments to IFRS 1 Additional Exemptions for First-time Adopters*
IFRS 1 Amendment - Limited exemption from IFRS 7 Disclosures for First-time Adopters*
IFRS 2 Amendment - Group Cash-settled Share-based Payment Transactions*
IFRS 7 Improving Disclosures about Financial Instruments Amendments to IFRS 7 Financial Instruments: Disclosures
Amendment to IAS 32 Classification of Rights Issues
IAS 24 (Revised) Related Party Disclosures*
IAS 39 Financial instruments: recognition and measurement (Amendment) - eligible hedged items
IFRIC 17 Distribution of non-cash assets to owners
IFRIC 18 Transfer of assets from customers
IFRIC 19 Extinguishing financial liabilities with equity instruments*
IFRIC 14 (Amendment) Prepayments of a minimum funding requirement*
Pronouncements marked '*' have not yet been adopted by the European Union.
In addition, there are certain requirements of Improvements to IFRSs which are not yet effective.
The Directors do not anticipate that the adoption of these standards and interpretations in future reporting periods will
have a material impact on the Group's results.
d) Functional and Presentation Currency
These financial statements are presented in US dollars which is the Group's functional currency. All financial information
presented is rounded to the nearest dollar.
e) Basis of Consolidation
The consolidated financial statements include the results of Hardy and its subsidiary undertakings. The Consolidated Income
Statement, the Consolidated Statement of Comprehensive Income and Consolidated Statement of Cash Flows include the results
and cash flows of subsidiary undertakings up to the date of disposal.
The Group conducts the majority of its exploration, development and production through unincorporated joint arrangements
with other companies.
The consolidated financial statements reflect the Group's share of production revenues and costs attributable to its
participating interests under the proportional consolidation method.
f) Revenue and Other Income
Revenue represents the sale value of the Group's share of oil which excludes the profit oil sold and paid to the Government
as a part of profit sharing in the year, tariff, and income from technical services to third parties if any. Revenues are
recognized when crude oil has been lifted and title has been passed to the buyer or when services are rendered.
g) Oil and Gas Assets
i) Exploration and Evaluation Assets
Hardy follows the full cost method of accounting for its oil and gas assets. Under this method, all expenditures incurred
in connection with, and directly attributable to, the acquisition, exploration and appraisal having regard to the
requirements of IFRS 6 'Exploration for and Evaluation of Mineral Resources' are accumulated and capitalised in two
geographical cost pools, which are not larger than a segment: India and Nigeria.
The capitalised exploration and evaluation costs are classified as intangible assets - exploration which includes the
licence acquisition, exploration and appraisal costs relating either to unevaluated properties or properties awaiting
further evaluation but do not include costs incurred prior to having obtained legal right to explore an area, which costs
are expensed directly to the income statement as they are incurred.
Intangible exploration and evaluation cost relating to each licence or block remain capitalised pending a determination of
whether or not commercial reserves exists. Commercial reserves are defined as proven and probable on a net entitlement
basis.
When a decision to develop these properties is taken or there is evidence of impairment, the costs are transferred to the
cost pools within development/producing assets when the commercial reserves attributable to the underlying asset have been
established.
ii) Oil and Gas Development and Producing Assets
Development and production assets are accumulated on a field by field basis. These comprise of the cost of developing
commercial reserves discovered to put them on production and the exploration and evaluation costs transferred from
intangible exploration and evaluation assets, as stated in policy above. In addition, interest payable and exchange
differences incurred on borrowings directly attributable to development projects, if any, and assets in the production
phase, as well as cost of recognizing provision for future restoration and decommissioning, are capitalised.
iii) Decommissioning
At the end of the producing life of a field, costs are incurred in removing and decommissioning facilities, plugging and
abandoning wells. Future decommissioning costs are estimated and stated at an amount representing the costs which would be
incurred should decommissioning occur at the balance sheet date and the estimates are reassessed each year. The provision
is assessed at prices prevailing at the balance sheet date and, accordingly, it is not appropriate to discount this
provision. The decommissioning asset is included within the property, plant and equipment with the cost of the related
assets installed and is adjusted for any revision to the decommissioning costs and the provision thereof. The amortisation
of the asset, calculated on a unit of production basis based on proved and probable reserves, is shown as "Decommissioning
charge" in the income statement.
iv) Disposal of Assets
Proceeds from any disposal of assets are credited against the specific capitalised costs included in the relevant cost pool
and any loss or gain on disposal is recognised in the income statement. Gain or loss arising on disposal of a subsidiary
is recorded in the income statement.
h) Depletion and Impairment
i) Depletion
The net book values of the producing assets are depreciated on a field by field basis using the unit of production method,
based on proved and probable reserves taking into consideration future development expenditures necessary to bring the
reserves into production. Hardy periodically obtains an independent third party assessment of reserves, which is used as a
basis for computing depletion.
ii) Impairment
Exploration assets are reviewed regularly for indications of impairment, if any, where circumstances indicate that the
carrying value might not be recoverable. In such circumstances, if the exploration asset has a corresponding
development/producing cost pool, then the exploration costs are transferred to the cost pool and depleted on unit of
production. In cases where no such development/producing cost pool exists, the impairment of exploration costs is
recognised in the income statement. Impairment reviews on development/producing oil and gas assets for each field are
carried out each year by comparing the net book value of the cost pool with the associated discounted future cash flows.
If there is any impairment in a field representing a material component of the cost pool, an impairment test is carried out
for the cost pool as a whole. If the net book value of the cost pool is higher, then the difference is recognised in the
income statement as impairment.
i) Property, Plant and Equipment
Property, plant and equipment other than oil and gas assets are measured at cost and depreciated over their expected useful
economic lives as follows:
Annual rate (%) Depreciation method
Leasehold improvements over lease period Straight line
Furniture and fixtures 20 Straight line
Information technology and computers 33 Straight line
Other equipment 20 Straight line
33
Straight line
Other equipment
20
Straight line
j) Intangible Assets
Intangible assets other than oil and gas assets are measured at cost and depreciated over their expected useful economic
lives as follows:
Annual rate (%) Depreciation method
Computer software 33 Straight line
33
Straight line
k) Investments
Investments in publicly traded securities are treated as available for sale and are recognized at fair values based upon
the quoted market prices on the balance sheet date in other reserves. On disposal of an investment, the cumulative
realised gain or loss is recognised in the income statement.
Investments by the parent company in its subsidiaries are stated at cost.
l) Short Term Investments
Short term investments are regarded as 'financial assets at fair value through profit or loss' and are carried at fair
value. In practice, the nature of these investments is such that the fair value equates to the value of initial outlay and
therefore in normal circumstances no fair value gain or loss is recognised in the income statement.
m) Inventory
Inventory of crude oil is valued at the lower of average cost and market value. Average cost is determined based on actual
production cost for the year. Inventories of drilling stores are recorded at cost including taxes duties and freight.
Provision is made for obsolete or defective items where appropriate based on technical evaluation.
n) Financial instruments
Financial assets and financial liabilities are recognised at fair value in the Group's balance sheet based on the
contractual provisions of the instrument.
Trade receivables are not interest bearing and their fair value is deemed to be their nominal value as reduced by necessary
provisions for estimated irrecoverable amounts.
Trade payables are not interest bearing and their fair value is deemed to be their nominal value.
o) Equity
Equity instruments issued by Hardy and the Group are recorded at net proceeds after direct issue costs.
p) Taxation
The tax expense represents the sum of current tax and deferred tax.
Current tax is based on the taxable profit of the year. Taxable profit differs from net profit as reported in the income
statement as it excludes certain items of income or expenses that are taxable or deductible in years other than the current
year, and it further excludes items that are never taxable or deductible. The current tax liability is calculated using the
tax rates that have been enacted or subsequently enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and
liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is
accounted for using the liability method.
Deferred income tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised
to the extent that it is probable that taxable profits will be available against which deductible temporary differences can
be utilised.
Deferred income tax liabilities are recognised for all temporary differences except in respect of taxable temporary
differences associated with investment in subsidiaries, associates and interest in joint ventures where the timing of the
reversal of the temporary differences can be controlled and it is possible that the temporary differences will not reverse
in the foreseeable future.
Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance
sheet date, where transactions or events have occurred at that date that will result in an obligation to pay more or a
right to pay less or to receive more tax.
Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply in
the periods in which temporary differences reverse, based on tax rates and laws enacted or substantively enacted at the
balance sheet date.
q) Foreign Currencies
Foreign currency transactions are accounted for at the exchange rate prevailing on the date of the transaction. At the year
end, all foreign currency monetary assets and monetary liabilities are restated at the closing rate at the balance sheet
date. Exchange difference arising out of actual payments/realisations and from the year end restatement are reflected in
the income statement.
Rates of exchanges are as follows:
31 December 2009 31 December 2008
£ to US$ 1.6154 1.4626
US$ to Indian Rupees 46.67 48.52
1.4626
US$ to Indian Rupees
46.67
48.52
r) Leasing Commitments
Rental charges or charter hire charges payable under operating leases are charged to the income statement as part of
production cost over the lease term.
s) Share Based Payments
Hardy issues share options to Directors and employees, which are measured at fair value at the date of grant. The fair
value of the equity-settled options determined at the grant date is expensed on a straight line basis over the vesting
period based on the actual number of shares vested in the accounting period. In performing the valuation of these options,
only conditions other than the market conditions are taken into account. Fair value is derived by use of the binomial
model. The expected life used in the model is based on management estimates and considers non-transferability, exercise
restrictions and behavioural considerations.
2. Critical Accounting Estimates and Judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates may differ from the
related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year are addressed below.
i) Intangible Assets Exploration
The Group holds a 75 per cent participating interest in the block CY-OS/2 offshore the east coast of India. Intangible
assets include an amount of US$83,469,418 with respect to exploration expenditures on the block wherein a gas discovery was
announced on 8 January 2007. The exploration period for the block ended on 23 March 2007 and the Government of India (GOI)
has been requested to extend the block for appraisal and declaration of commerciality for its gas discovery until 7 January
2012.
Provisions of the PSC provide for an appraisal period of 60 months from the date of discovery. For an oil discovery, this
period is limited to 24 months. Directorate General of Hydrocarbons (DGH) has informed the Company that in their opinion
the discovery is classified as an oil discovery and not a non-associated natural gas (NANG) discovery.
The Company has obtained third party legal and technical opinions that support the Company's view that the discovery is
NANG. The Group continues to be in an ongoing dialogue with the GOI and believes that it will be successful in obtaining
the extension of its licence in block CY-OS/2 until 7 January 2012. In the absence of a resolution in its favour in the
near future, Hardy intends to refer the dispute for sole expert or conciliation and arbitration.
The Group believes that it will be successful in obtaining the extension of its licence in block CY-OS/2 until 7 January
2012. Therefore, the intangible assets arising from expenditure on this block continues to be recognized in full and the
Directors do not believe that any impairment of these costs has arisen as at the balance sheet date. In the event that the
Group's application for an extension was to be unsuccessful, the capitalized expenditure will be subject to impairment
testing.
ii) Decommissioning
The liability for decommissioning is based on estimates of the costs of decommissioning that will arise in the future.
Significant changes in costs as a result of technical advancements and other factors can result in material change to this
provision.
iii) Depletion
Depletion calculations are based on best estimates of commercial reserves existing as at the balance sheet date. The
determination of commercial reserves is based on assumptions which include those relating to the future prices of crude oil
and natural gas, capital expenditure plans, cost of production and other factors. Any changes in these assumptions could
result in a material change in the depletion charge or the carrying value of associated assets.
3. Segment Analysis
The Group is organised into three business units: India, Nigeria and United Kingdom. India business unit is operated by its
subsidiary undertaking Hardy Exploration & Production (India) Inc. Nigeria business unit is operated by Hardy Oil Nigeria
Limited. Hardy Oil and Gas plc operates in the United Kingdom.
India business unit focuses on exploration and production of oil and gas assets in India. Nigeria business unit focuses on
exploration and production of oil and gas assets in Nigeria. Management monitors these business units separately for
resource allocation, decision making and performance assessment.
2009 US$
India Nigeria UK Inter-segment eliminations Total
Revenue
Oil sales 7,687,355 - - - 7,687,355
Management fees - - 180,000 (180,000) -
7,687,355 - 180,000 (180,000) 7,687,355
Operating loss (2,967,105) (590,071) (4,574,996) (8,132,172)
Interest income 142,801 - 1,401,316 (1,282,445) 261,672
Finance costs (1,202,591) (151,232) - 1,282,445 (71,378)
Loss before taxation (4,206,895) (741,303) (3,173,680) 180,000 (7,941,878)
Taxation 323,233 - 1,101,469 - 1,424,702
Loss for the year (3,883,662) (741,303) (2,072,211) (6,517,176)
Segment assets 154,454,229 4,407,428 26,405,593 185,267,250
Inter corporate loan - - 97,576,000 (97,576,000) -
Segment liabilities 26,392,711 9,708 3,333,220 29,735,639
Inter corporate borrowings (90,368,000) (7,208,000) 97,576,000 -
Capital expenditure 13,566,820 - 7,361 13,574,181
Depletion, depreciation and amortisation 1,279,846 33,926 143,956 - 1,357,728
(6,517,176)
Segment assets
154,454,229
4,407,428
26,405,593
185,267,250
Inter corporate loan
-
-
97,576,000
(97,576,000)
-
Segment liabilities
26,392,711
9,708
3,333,220
29,735,639
Inter corporate borrowings
(90,368,000)
(7,208,000)
97,576,000
-
Capital expenditure
13,566,820
-
7,361
13,574,181
Depletion, depreciation and amortisation
1,279,846
33,926
143,956
-
1,357,728
2008 US$
India Nigeria UK Inter-segment eliminations Total
Revenue
Oil sales 18,748,999 - - - 18,748,999
Profit oil to government (2,311,862) - - - (2,311,862)
Management fees - - 180,000 (180,000) -
Other income - - 868,905 868,905
16,437,137 - 868,905 (180,000) 17,306,042
Operating profit (loss) 3,494,875 (271,740) (4,961,684) (1,738,549)
Interest income 351,152 - 3,159,127 2,190,090 1,320,189
Finance costs (2,057,559) (223,735) - (2,190,090) (91,204)
Gain on sale of investment - - 12,953,064 12,953,064
Profit (loss) before taxation 1,788,468 (495,475) 11,150,507 12,443,500
Taxation (1,372,230) - (3,598,914) (4,971,144)
Profit (loss) for the year 416,238 (495,475) 7,551,593 7,472,356
Segment assets 146,174,240 4,230,902 23,382,449 173,787,771
Inter corporate loan - - 86,788,000 (86,788,000) -
Segment liabilities 25,279,783 2,194 4,273,740 29,555,717
Inter corporate borrowings (80,400,000) (6,388,000) - 86,788,000 -
Capital expenditure 30,948,918 686,040 17,056 31,652,014
Depletion, depreciation and amortisation 1,837,481 48,507 70,594 - 1,956,582
(3,598,914)
(4,971,144)
Profit (loss) for the year
416,238
(495,475)
7,551,593
7,472,356
Segment assets
146,174,240
4,230,902
23,382,449
173,787,771
Inter corporate loan
-
-
86,788,000
(86,788,000)
-
Segment liabilities
25,279,783
2,194
4,273,740
29,555,717
Inter corporate borrowings
(80,400,000)
(6,388,000)
-
86,788,000
-
Capital expenditure
30,948,918
686,040
17,056
31,652,014
Depletion, depreciation and amortisation
1,837,481
48,507
70,594
-
1,956,582
The Group is engaged in one business activity, the exploration and production and for oil and gas. Other income relates to
technical services to third parties, overhead recovery from joint venture operations and miscellaneous receipts, if any.
Revenue arises from the sale of oil produced from the contract area CY-OS-90/1-India. The revenue by destination is not
materially different from the revenue by origin.
4. Cost of Sales
Production cost included in the cost of sales consists of:
2009 US$ 2008 US$
Opening stock of crude oil 1,843,226 1,132,065
Cost of crude oil produced and saved 3,818,348 8,235,133
Closing stock of crude oil - (1,843,226)
Production cost 5,661,574 7,523,972
Closing stock of crude oil
-
(1,843,226)
Production cost
5,661,574
7,523,972
5. Reconciliation of Operating Loss to Operating Cash Flows
2009 US$ 2008 US$
Operating loss (8,132,172) (1,738,549)
Depletion and depreciation 1,252,869 1,805,408
Decommissioning charge 104,859 151,174
Share based payments charges 2,657,572 1,429,736
(4,116,872) 1,647,769
Decrease (increase) in inventory 1,282,439 (1,032,522)
Decrease (increase) in trade and other receivables 228,933 (2,676,392)
Increase in trade and other payables 1,604,623 4,126,921
Net cash flow (used in) operating activities (1,000,877) 2,065,776
1,282,439
(1,032,522)
Decrease (increase) in trade and other receivables
228,933
(2,676,392)
Increase in trade and other payables
1,604,623
4,126,921
Net cash flow (used in) operating activities
(1,000,877)
2,065,776
6. Staff Costs
2009 US$ 2008 US$
Wages and salaries Social security costs Share based payments charge 3,398,707 179,520 2,789,471 3,830,118 214,537 2,632,812
6,367,698 6,677,467
Share based payments charge
3,398,707
179,520
2,789,471
3,830,118
214,537
2,632,812
6,367,698
6,677,467
Staff costs include Executive Directors' salaries, fees, benefits and share based payments, and is shown gross before
amounts recharged to joint ventures.
The average monthly number of employees, including Executive Directors and individuals employed by the Group working on
joint venture operations, are as follows:
2009 2008
Management and administration 25 27
Operations 26 24
51 51
26
24
51
51
7. (Loss) Earnings Per Share
(Loss) earnings per share are calculated on a loss of US$ 6,517,176 for the year 2009 (profit for 2008: US$ 7,472,356) on a
weighted average of 66,506,242 Ordinary Shares for the year 2009 (2008: 62,287,526).
The diluted (loss) earnings per share are calculated on a loss of US$ 6,517,176 for the year 2009 (profit for 2008: US$
7,472,356) on a weighted average of 71,258,343 Ordinary Shares for the year 2009 (2008: 66,994,627). For the year 2008 the
weighted average shares are calculated after giving impact to dilutive potential Ordinary Shares of 4,302,101 relating to
share options after excluding 405,000 options wherein the strike price exceeds the average market price of the shares of
the Company. As there is a loss in 2009, no dilutive potential is considered for computing the loss per share.
8. Property, Plant and Equipment
Oil and gas assets represent interests in producing oil and gas assets falling under the India cost pool. There is no oil
and gas assets currently in the Nigerian cost pool. Other fixed assets consist of office furniture, computers, workstations
and office equipment.
Oil and gas assets US$ Other fixed assets US$ Total US$
Cost At 1 January 2008 25,996,319 2,572,706 28,569,025
Additions 6,802,348 117,097 6,919,445
At 1 January 2009 32,798,667 2,689,803 35,488,470
Additions 2,853,122 8,773 2,861,895
Deletions - (89,304) (89,304)
At 31 December 2009 35,651,789 2,609,272 38,261,061
Depletion, depreciation and amortisation
At 1 January 2008 22,903,662 2,289,900 25,193,562
Charge for the year 1,673,093 144,716 1,817,809
At 1 January 2009 24,576,755 2,434,616 27,011,371
Charge for the year 1,183,698 108,534 1,292,232
Deletions - (89,304) (89,304)
At 31 December 2009 25,760,453 2,453,846 28,214,299
Net book value at 31 December 2009 9,891,336 155,426 10,046,762
Net book value at 31 December 2008 8,221,912 255,187 8,477,099
Charge for the year
1,183,698
108,534
1,292,232
Deletions
-
(89,304)
(89,304)
At 31 December 2009
25,760,453
2,453,846
28,214,299
Net book value at 31 December 2009
9,891,336
155,426
10,046,762
Net book value at 31 December 2008
8,221,912
255,187
8,477,099
9. Intangible Assets - Exploration
India US$ Nigeria US$ Total US$
Costs and net book value
At 1 January 2008 96,821,650 2,462,884 99,284,534
Additions 24,094,090 634,637 24,728,727
At 1 January 2009 120,915,740 3,097,521 124,013,261
Additions 10,712,286 - 10,712,286
At 31 December 2009 131,628,026 3,097,521 134,725,547
3,097,521
124,013,261
Additions
10,712,286
-
10,712,286
At 31 December 2009
131,628,026
3,097,521
134,725,547
The Group holds a 75 per cent participating interest in the block CY-OS/2 in offshore the east coast of India. Intangible
assets include an amount of US$ 83,469,418 with respect to exploration expenditures on the block wherein a gas discovery
was announced on 8 January 2007. The exploration period for the block ended on 23 March 2007 and the Government of India
(GOI) has been requested to extend the block for appraisal and declaration of commerciality for its gas discovery until 7
January 2012.
Provisions of the PSC provide for an appraisal period of 60 months from the date of discovery. For an oil discovery, this
period is limited to 24 months. The Directorate General of Hydrocarbons (DGH) has informed the Company that in their
opinion the discovery is classified as an oil discovery and not a non associated natural gas (NANG) discovery.
The Company has obtained third party legal and technical opinions that support the Company's view that the discovery is
NANG. The Group continues to be in an ongoing dialogue with the GOI and believes that it will be successful in obtaining
the extension of its licence in block CY-OS/2 until 7 January 2012. In the absence of a resolution in its favour in the
near future, Hardy intends to refer the dispute for sole expert or and conciliation and arbitration.
In the event that Hardy's application for an extension of the CY-OS/2 licence was to be unsuccessful, the capitalised
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