Ithaca Energy Inc.
TSX VENTURE : IAE
AIM : IAE

Ithaca Energy Inc.

April 12, 2010 02:00 ET

Ithaca Announces Net Profit for 2009

LONDON, UNITED KINGDOM and CALGARY, ALBERTA--(Marketwire - April 12, 2010) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Ithaca Energy Inc. (TSX VENTURE:IAE)(AIM:IAE) and its wholly owned subsidiary Ithaca Energy (UK) Limited ("Ithaca" or the "Company"), an independent oil & gas company with exploration, development and production assets in the UK sector of the North Sea, announces its financial results for the twelve months ended December 31, 2009.

2009 Highlights

2009 was a year of great progress and financial transformation. A sustained contribution of production from the Beatrice Field during the year, the start-up of the Jacky Field in April 2009 and increasing crude oil prices throughout the year provided substantial sales revenues. The Dyas asset transaction eliminated debt and provided resources to drive forward the development of a re-balanced portfolio with lower average net working interests. The acquisition of an additional interest in Stella and the subsequent Challenger Minerals (North Sea) Limited farmout gave access, with operator control, to the important Greater Stella Area. The production performance of Jacky, work on optimising Beatrice well delivery and quantification of the Stella and Harrier reserves, together with the Carna non-operated discovery resulted in Proved and Probable reserves upgrades of approximately 115% from 17.20 million barrels of oil equivalent ("mmboe") to 37.19 mmboe as at December 31, 2009 and as reported on February 1, 2010.

Financial Performance

  • Revenues of US$110.8 million principally provided by:
    • Oil sales (US$101.3 million) with an average realised oil price of US$68.65 per barrel
    • Earnings from the provision of facilities and services at the Nigg terminal and other services (US$9.2 million)
  • Strong Earnings before Interest, Depreciation & Tax of US$61.6 million
  • Full Year Net Profit of US$7.9 million
  • Cash and Equivalents of US$29.9 million at year end - fourth consecutive quarter of positive cash flow from operations
  • Zero Debt
  • Surplus of Current Assets over Current Liabilities of US$59.3 million with minimal long term liabilities.
  • Cost and expenses of US$102.8 million reflected a full year of Beatrice operations and Jacky start-up.

4th Quarter Contribution

  • Revenues of US$39.7 million
  • Earnings before Interest, Depreciation & Tax of US$30.5 million
  • 4th Quarter Net Profit of US$17.6 million

Targets for 2010 and Post 2009 balance sheet events

  • Successful workover campaign at Beatrice Bravo (Q1 2010) adding 1,500 barrels of oil per day ("bopd") gross to production potential
  • Drilling of the Stella appraisal well (Q1/Q2 2010)
  • Five well intervention programme at Beatrice Alpha maintaining the production base (Q2/Q3 2010)
  • Athena FDP approval (July 2010) and start of development drilling (Q4 2010), fabrication of subsea facilities and modifications to FPSO (Q3/Q4 2010)
  • Stella area development plan and FDP submission on a successful Stella appraisal
  • 5,100 bopd 2010 average net production target. (Q1 2010 average, 4,193 bopd)
  • Priority to identify and execute growth opportunities

Iain McKendrick, CEO, commented,

"As a result of the clear progress made in 2009, Ithaca is in a strong cash position, clean of commitments, has the ability to access bank debt and is poised for future growth. We have made a good start to the current year with the drilling of the Stella appraisal well, from which test results are expected shortly. In the remainder of the year, incremental projects in the Beatrice area will secure base production levels and the development of Athena and potential expansion of operated activities in the Stella area should provide a exciting flow of project work and future production growth."

Note:

Depletion, depreciation and accretion were calculated using the full cost method, the asset transaction with Dyas and the reserve upgrade being reflected in the quarter in which they were realised. Losses on foreign exchange arising from the movements between the corporations operating and reporting currencies were more than offset by the gains on the financial instruments put in place to mitigate such movements. Interest and tax charges were not significant reflecting the robust financial position of the company and the tax allowances available against past investment and expenditures.

In accordance with AIM Guidelines, Lawrie Payne, MA Marine Geology (Alberta & Columbia) and Chairman of Ithaca Energy is the qualified person that has reviewed the technical information contained in this press release.

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

Forward-looking statements

Some of the statements in this announcement are forward-looking. Forward-looking statements include statements regarding the intent, belief and current expectations of Ithaca Energy Inc. or its officers with respect to various matters. When used in this announcement, the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could", "target" and similar expressions, and the negatives thereof, are intended to identify forward-looking statements. Such statements are not promises or guarantees, and are subject to known and unknown risks and uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. These forward-looking statements speak only as of the date of this announcement. 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.

The term "boe" may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

ITHACA ENERGY INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2009

The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca Energy Inc. (the "Corporation" or "Ithaca" or the "Company") for the year ended December 31, 2009. The information is provided as of April 8, 2010. The 2009 results have been compared to the results of 2008. This discussion and analysis should be read in conjunction with the Corporation's audited consolidated financial statements as at December 31, 2009 and 2008, and for each of the years then ended, together with the accompanying notes, and the Annual Information Form for the 2009 fiscal year. These documents and additional information about Ithaca are available on SEDAR at www.sedar.com.

Certain statements contained in this MD&A, including estimates of reserves, estimates of future cash flows and estimates of future production as well as other statements about future events or anticipated results, are forward-looking statements. The forward-looking statements contained herein are based on assumptions and are subject to known and unknown risks, uncertainties and other factors. Should the underlying assumptions prove incorrect or should one or more of these risks, uncertainties or factors materialize, actual results may vary significantly from those expected. See "Forward-Looking Information", below.

All financial data contained herein is presented in accordance with Canadian generally accepted accounting principles ("GAAP") and is expressed in United States dollars ("$"), unless otherwise stated.

BUSINESS OF THE CORPORATION

Ithaca is an oil and gas exploration, development and production Company active in the United Kingdom's Continental Shelf ("UKCS"). The goal of Ithaca, in the near term, is to maximise production and achieve early production from the development of existing discoveries on properties held by Ithaca, to originate and participate in exploration on properties held by Ithaca, when capital permits, and to consider other opportunities for growth as they are identified from time to time by Ithaca. The Corporation took over the operation of the producing Beatrice field on November 10, 2008 and the Jacky field commenced its first oil production on April 6, 2009. Production from its Stella field, depending on the results of the current appraisal well, and its Carna discovery are targeted for early 2012. The Athena Joint Venture Partners have committed to the purchase of long lead equipment and have approved the letter of intent for the contracting of the FPSO vessel "BW Carmen". A full project team has been commissioned to plan and engineer the development. The Environmental Impact Statement (EIS) and Field Development Plan (FDP) are in the final stages of preparation prior to submission.

The Corporation's common shares are listed for trading on the TSX Venture Exchange and the London Alternative Investment Market under the symbol "IAE".

NON-GAAP MEASURES

Operating costs per barrel referred to in this MD&A are not prescribed by Canadian generally accepted accounting principles (GAAP). This non-GAAP financial measure does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented by other companies. We include operating costs per barrel data because investors may use this information to analyze operating performance. The additional information should not be considered in isolation or as a substitute for measures performance prepared in accordance with Canadian GAAP. See 'results of operations' section for details.

BOE PRESENTATION

The calculation of barrels of oil equivalent ("boe") is based on a conversion rate of six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). Boes 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.

2009 HIGHLIGHTS

Ithaca achieved the following highlights during the 2009 fiscal year:

Operational

  • Beatrice Alpha, Beatrice Bravo and Jacky production averaged 7,083 barrels of oil per day ("bopd") (4,042 bopd net to Ithaca) to the tank at Nigg Terminal over the twelve month period to December 31, 2009. 2008 production from Beatrice Alpha averaged 1,540 bopd (1,152 bopd net to Ithaca) from the acquisition date of the Beatrice field on November 11, 2008 to the year end at December 31, 2008.

  • Cumulative production since start up on April 6, 2009 from Jacky now exceeds 2.55 million barrels ("mmbbls") gross (1.21 mmbbls net to Ithaca) as at the date of this report.

Corporate

  • The Corporation announced on July 29, 2009 that it had completed a transaction with Dyas UK Limited ("Dyas"), whereby Dyas purchased an interest in certain assets of the Corporation for $101.6 million and the Corporation agreed to repay the loans of $61.2 million and £5 million ($8.2 million) to Dyas ("Dyas II Transaction"). Finalizing the Dyas II Transaction left Ithaca debt free and in receipt of a further cash payment from Dyas of approximately $40.6 million, of which $32.2 million was paid upon closing and a further $8.4 million was paid on final completion on November 27, 2009.

  • The Corporation announced on October 28, 2009 that it had signed a "farm out" agreement with Challenger Minerals (North Sea) Limited ("CMI") and agreed to terms with Applied Drilling Technology International ("ADTI") (a subsidiary of Transocean Inc.) to drill an appraisal well on the Stella discovery. CMI will pay 27% of gross Stella appraisal well costs in exchange for an 18% equity interest in the Stella and Harrier discoveries, thereby carrying a part of Ithaca's share of drilling costs. Upon successful appraisal and completion of the "farm out" CMI will also be obliged to fund a further Stella or Harrier well for up to £2 million ($3.2 million) or 9% of the gross cost whichever is the lower amount.

  • The Corporation announced on November 27, 2009 that it had completed a transaction with Maersk Oil North Sea UK Limited and Maersk Oil Exploration UK Limited (collectively "Maersk Oil"), whereby Ithaca purchased the entire 33.33% working interest of Maersk Oil in the Stella discovery and undeveloped satellite discovery Harrier and the entire 50% interest of Maersk Oil in the underdeveloped satellite discovery Hurricane for $10 million. Ithaca is committed to pay a further $3 million at Field Development approval and $5 million at first oil. The Corporation assumed operatorship of all assets involved in the transaction. 

Reserves

  • Net Proved reserves rose approximately 90% from 8.37 million barrels of oil equivalent ("mmboe") to 15.99 mmboe. This reflects primarily an upward adjustment of reserves at Beatrice and Jacky due to a re-evaluation based on actual production results as well as new reserves at Stella (Ekofisk) and Harrier that Sproule had not previously evaluated.

  • Net Proved and Probable reserves rose approximately 115% from 17.20 mmboe to 37.19 mmboe as at December 31, 2009. The overall rise in net 2P reserves is largely attributed to discoveries and reservoirs namely, Stella (Ekofisk), Hurricane, Harrier and Carna previously not evaluated by Sproule in the December 31, 2008 reserves report. 

  • All reserve numbers assume that/the CMI "farm out" is completed

Financial

  • Weighted average realised price for the year ended December 31, 2009 was $68.65/barrel before hedging. This compares to a weighted average price of $42.10/barrel for 2008.

  • The Corporation recorded its third consecutive quarter of positive cash flow from operations amounting to $32.8 million ($24.2 million in the prior quarter) due primarily to increased production from the Jacky field due to water injection, progress on enhancing Beatrice production and an increase in the commodity price.

  • Net profit for the year was $7.9 million (loss of $30.4 million for the year ended December 31, 2008) driven by a full year of operating revenues, offset by associated increases in operating costs and depletion.
  • Total cash at the year end stood at $29.9 million.
  • Restricted cash at the year end stood at $5.6 million. Bank of Scotland held $5.2million of the restricted cash as cash security for the 2010 foreign exchange forward contract. This was released in January 2010.
  • In the year to December 31, 2009 total fixed assets decreased $91.0 million to $205.5 million ($296.5 million as at December 31, 2008) representing a full year of depletion ($52 million), the impact of the Dyas II Transaction ($106 million) offset by $67 million of capital expenditures.

HIGHLIGHTS SUBSEQUENT TO YEAR END

Ithaca has achieved the following highlights to date in 2010:

  • Production from Jacky and Beatrice Bravo in January averaged 7,073 bopd (3,375 bopd net to Ithaca) at a realised price of $72.13/bbl and in February averaged 9,351 bopd (4,464 bopd net to Ithaca) at a realised price of $77.39/bbl (pricing before hedging and additional price uplift at the point of sale to a third party). The volumes were reduced from typical rates in the previous quarter as a result of an operational incident on December 28, 2009 which caused damage to the produced water treatment vessels on the Beatrice Alpha installation. Repairs have now been completed and modifications made to prevent a reoccurrence. Production from Jacky and Beatrice Bravo recommenced on January 11 and production from Beatrice Alpha wells recommenced in March. Instantaneous rates, metered at the platform for Beatrice and Jacky, at the date of this report have now recovered to over 13,000 bopd (6,250 bopd net to Ithaca)
  • On January 6, Ithaca announced the Board of Directors approved the granting of 4,345,000 stock options to Directors and Employees at a price of CDN $1.54 which was the closing price on the Toronto Stock Exchange (TSX) Venture Exchange on Tuesday, January 5, 2010.
  • On February 4, Ithaca announced that the Beatrice Bravo well intervention programme has been successfully completed, resulting in a significant boost to production.
  • On February 12, Maersk Oil exercised its option to Farm In to the High Pressure/High Temperature ("HP/HT") play in both Ithaca's blocks 29/4b and 29/5e which lie in the Greater Stella Area ("GSA"). This transaction offers the potential to Maersk Oil to drill two deep exploration wells (one on each block) in which Ithaca shall be carried for all costs up to the end of the first well on each block. Maersk Oil shall earn a 95% equity interest in the deep horizons (below the Base Chalk horizon) by drilling an HP/HT well, leaving Ithaca with a 5% equity interest. Ithaca shall retain a 100% equity interest in the shallow horizons (above the Base Chalk horizon).
  • On February 19, Ithaca announced that the Galaxy II heavy duty jack-up rig commenced drilling at the Stella appraisal well location in block 30/6. The primary objectives of the appraisal well are to i) confirm Ithaca's assessment of the in-place volume of hydrocarbons; ii) understand changes in composition of hydrocarbon fluids with depth; and iii) verify the distribution and quality of the reservoir.
  • On March 15, Ithaca announced that a Letter of Intent had been signed with BW Offshore for the provision of the Floating Production Storage and Offloading vessel 'BW Carmen' to be provided for the development of the Athena field. A full contract will be developed to modify the vessel and deploy it to Athena for 3 years plus options for the remainder of the field life.
  • On March 29, Ithaca announced that it was preparing to Drill Stem Test ("DST") the Stella appraisal well, 30/6a-8. The well has been drilled to a total measured depth of 10,863 feet to appraise the downdip extension of the gas condensate rich Palaeocene Andrew sands, the primary reservoir of the Stella discovery. Electric wireline logs and coring have been run which confirm a 22 foot gross Andrew sand interval. Pressure and fluid sampling has been undertaken across the Andrew sand reservoir interval and based on the analysis of results, a previously planned DST will now be conducted which will last for approximately 12 days.

OVERALL PERFORMANCE

Production

In the twelve months ended December 31, 2009, Beatrice Alpha, Bravo and Jacky delivered 1,475,281 (net) barrels of oil to the tank at Nigg Terminal. This figure is the stabilised sales volume after removal of gas and water and represents the volume of hydrocarbons for which payment is received on a monthly basis from BP International in advance of sale to third parties. The production represents an increase over 2008 (58,720 net to Ithaca). In addition, strengthening oil prices led to a $26.55 increase in the weighted average price achieved on oil sales over the year.

Jacky and Beatrice Fields

The recently completed Jacky water injection well is now operating with injection rates between 10,000 and 12,000 barrels of water per day with the actual injection rate being controlled to maintain reservoir pressure and hence support production rates. The daily metered ex-platform Jacky production rates at year-end were in excess of 10,150 bopd gross (4,821 bopd net to Ithaca).

Production from Jacky and the Beatrice Bravo facilities was interrupted over several days in September and October to allow the Jack-up rig 'Ensco 92' to be positioned over the Jacky and then Bravo facilities to successfully conduct drilling and workover activities.

Dyas Early Debt Conversion

Under an agreement dated October 30, 2008, Dyas had the option ("2008 Dyas Option") to acquire an additional 15.15% of all of Ithaca's interests held at 1st November 2008 (the "Effective Date") for $61.2 million.

The Corporation announced on July 29, 2009 that it had completed the Dyas II Transaction for the early exercise of the 2008 Dyas Option, whereby it transferred additional interests in the assets held as at the Effective Date in exchange for $101.6 million consideration against which $61.2 million and £5 million ($8.2 million) of loans to Dyas were repaid. Finalizing the Dyas II Transaction left Ithaca debt free and in receipt of a further cash payment from Dyas of approximately $40.6 million, of which $32.2 million was paid upon closing and a further $8.4 million was paid on final completion (Stella discovery).

RESULTS OF OPERATIONS

During the year ended December 31, 2009, total net production averaged 4,042 bopd (2008 net production averaged 1,152 bopd, from the acquisition date of Beatrice on November 11, 2008) with an average realised price of $68.65 per barrel before hedging. Other income of $9.2 million relates to the rental of the second oil storage tank at Nigg to BP, ship to ship transfers at the Nigg deep water terminal, and normal year-end adjusted charge-outs to partners for joint venture services. The last five quarters have seen an increase in revenues and operating costs as the Corporation first took over the Beatrice facilities in November, 2008, followed by the start-up of production at the Jacky field in early April, 2009. Operating costs on a per barrel basis were $32 for the year, before adjusting for the impact of foreign exchange hedging entered into specifically to protect operating costs. This has steadily reduced since the start-up of Jacky production, as the operating costs are shared between the two fields. Note that the second, third and fourth quarters of 2009 are the quarters where the operating costs across the Beatrice facility have been shared with Jacky on a unit of production basis.

For the year ended December 31, 2009 the Corporation had a net profit of $7.9 million. The profits were delivered by sustained production levels, higher commodity prices, a lower unit depletion cost following reserve revaluation, realised gains on foreign exchange hedges and lower net cost following recoveries from Joint Venture partners. No valid comparison can be drawn for the year ended December 31, 2008 given the entirely changed context of the production, price and net interest basis.

As set forth in the table below, General and administrative expenses for the year ended December 31, 2009, before stock compensation charges and interest charges, were $3.9 million compared to $4.8 million for the year ended December 31, 2008. The decrease is predominantly due to the effect of equity changes in the year following the Dyas II transaction.

100,000 options were exercised during the year ended December 31, 2009 (2008 – NIL). In the twelve months to December 31, 2009, 3,876,875 new options were granted to employees and directors. The stock based compensation charge for the year ended December 31, 2009 was $2,707,233 compared to a charge of $3,529,252 for the year ended December 31, 2008. This charge relates to options granted in the current and previous years with the cost being amortised over the three year vesting period.

A tax charge of $80,972 was recognised in the year due to unrelieved tax arising on bank interest income, this compared to a charge of $347,458 for the year ended December 31, 2008. 

US$ 2009 2008
Staff costs 7,056,327 6,270,990
Stock compensation expense 2,707,233 3,529,252
Office costs and other administrative expenses 5,285,254 6,214,226
Less - capitalized overheads 8,432,759 7,662,576
TOTAL 6,616,055 8,351,892

SUMMARY OF QUARTERLY RESULTS

The following table provides a summary of quarterly results of the Corporation for its eight most recently completed quarters.

  31-Dec-09 30-Sep-09 30-Jun-09 31-Mar-09 31-Dec-08 30-Sep-08 30-Jun-08 31-Mar-08
        (Restated)        
  US$ US$ US$ US$ US$ US$ US$ US$
REVENUE                
  Oil Sales 33,850,242 36,375,077 28,280,275 2,775,844 2,472,106 - - -
  Other income 5,809,265 923,692 1,476,638 969,595 - - - -
  Interest income 16,277 96,456 146,305 91,950 143,441 160,635 126,137 379,350
  39,675,783 37,395,225 29,903,218 3,837,389 2,615,547 160,635 126,137 379,350
                 
COSTS AND EXPENSES                
  General and administrative (627,056) 1,727,821 1,273,583 1,534,474 3,287,190 1,954,388 1,680,204 1,675,593
  Loan Fee Amortization - - - - 1,194,497 2,339,082 135,312 -
  (Gain) / Loss on Financial Instrument (5,360,600) 4,324,781 (5,602,293) (1,441,234) 1,777,181 - - -
  Revaluation of Nigg Heel of Tank (363,409) (3,750) 483,818 - - - - -
  Operating 13,065,356 9,179,698 12,056,509 12,648,388 4,587,834 - - -
  Depreciation and accretion 12,893,949 20,378,993 17,585,049 2,467,981 2,076,311 249,794 278,838 206,540
  (Gain) / Loss on foreign exchange 2,318,756 2,051,399 (890,935) (226,546) 7,739,985 648,805 (447,527) 3,997,151
  Stock based compensation 180,409 772,592 644,732 1,109,500        
  Interest and bank charges (451) 108,323 572,826 11,536        
  22,106,954 38,539,857 26,123,289 16,104,099 20,662,998 5,192,069 1,646,827 5,879,284
                 
NET PROFIT / (LOSS) BEFORE TAX 17,568,829 (1,144,632) 3,779,929 (12,266,710) (18,047,451) (5,031,434) (1,520,690) (5,499,934)
                 
TAXES (80,972) - - - (347,458) - - -
                 
NET PROFIT / (LOSS) AFTER TAX 17,487,857 (1,144,632) 3,779,929 (12,266,710) (18,394,909) (5,031,434) (1,520,690) (5,499,934)
                 
NET PROFIT / (LOSS) PER SHARE 0.11 (0.01) 0.02 (0.08) (0.14) (0.04) (0.01) (0.05)
                 
Deficit, beginning of period (47,918,839) (46,774,207) (50,554,136) (38,287,426) (19,892,517) (14,861,083) (13,340,393) (7,840,459)
                 
Deficit, end of period (30,430,982) (47,918,839) (46,774,207) (50,554,136) (38,287,426) (19,892,517) (14,861,083) (13,340,393)

Significant factors and trends that have impacted the Corporation's results during the above periods include:

  • The Corporation took over the operation of the producing Beatrice field in November 2008 and the Jacky field commenced its first oil production in April 2009.

  • Revenue and royalties are significantly impacted by underlying commodity prices. Commodity price have steadily risen through the year. The Corporation has utilized forward sales contracts to reduce the exposure to commodity price fluctuations. These contracts can cause volatility in net income as a result of unrealized gains and losses on commodity contracts held for risk management purposes.

  • The Corporation's general and administrative costs were subject to inflationary pressures brought on by increased work scope. However, the Corporation's lower net average interest in properties following the Dyas II transaction resulted in a reduction in the net G&A borne by the Company. G&A costs charged out to the partners were actualized at year end in accordance with industry practice.

  • The Corporation utilized forward sales contracts and foreign exchange contracts during the year ended December 31, 2009 to reduce the exposure to commodity price and exchange rate fluctuations. The gains and losses on these contracts are the result of movements in the oil price and US dollar: British Pounds Sterling exchange rate.

SELECTED ANNUAL INFORMATION

The consolidated financial statements of the Corporation and the financial data contained in the MD&A are prepared in accordance with GAAP. The consolidated financial statements include the accounts of Ithaca Energy Inc. and its wholly-owned subsidiary Ithaca Energy (UK) Limited. All inter-company transactions and balances have been eliminated on consolidation. A significant portion of the Corporation's North Sea oil and gas activities are carried out jointly with others. The consolidated financial statements reflect only the Corporation's proportionate interest in such activities.

The Corporation's reporting currency is United States dollars. The accounting records of Ithaca Energy (UK) Limited are likewise maintained in United States dollars.

The following table sets forth selected consolidated financial information of the Corporation for its three most recently completed fiscal years.

Year ended December 31,(US$) 2009 2008 2007
Total revenues 110,811,615 3,281,669 -
Net income / (loss) 7,937,416 (30,446,967) (2,328,571)
Net gain / (loss) per share 0.05 (0.23) (0.02)
Net gain / (loss) per share diluted basis 0.05 (0.23) (0.02)
Total assets 309,139,799 357,670,361 226,142,544
Total long-term liabilities 10,673,994 72,744,703 4,716,475

Ithaca's petroleum and natural gas sales, cash provided by operations, funds from operations and net income are all impacted by production levels and commodity pricing.

LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2009, Ithaca had working capital of $59.7 million which included a cash balance of $29.9 million. Available cash has been, and is currently, invested on deposit with the Bank of Scotland. Management has received confirmation from the financial institution that these funds are available on demand.

During the year ended December 31, 2009 there was a cash inflow from operating, investing and financing activities of $3 million (2008 - $69.3 million outflow). The net inflow was largely a result of positive operating cash flows of $63.8 million, proceeds from the Dyas Transaction of $101.4 million, offset by a $43.9 million decrease in working capital, $64.5 million investment in fixed assets and the repayment of outstanding loans amounting to $61.2 million. The fixed asset investment in the year predominantly related to the installation of the Jacky platform, the Jacky water injector well, capital expenditure on Beatrice, and acquisition costs for Stella.

Significant capital will be required to further the Corporation's currently anticipated development activities in 2010 and management expects that the Corporation will have sufficient liquidity to fund such activities through a combination of existing cash resources and cash flow from production. Discussions continue with a select group of banks to assess the availability of debt to help fund future development activities beyond 2010. Notwithstanding these discussions Ithaca will be opportunistic in accessing further equity financing should the markets be favourable.

COMMITMENTS

The Corporation has the following financial commitments:

Year ended 2010 2011 2012 2013 2014 Subsequent to 2014
  US$ US$ US$ US$ US$ US$
Office lease 254,811 254,811 254,811 254,811 254,811 828,136
Exploration license fees 1,005,568 1,380,580 1,548,522 - - -
Equipment 2,436,246          
Stella appraisal well 12,464,154 - - - - -
Total 16,160,779 1,635,391 1,803,333 254,811 254,811 828,136

Throughout 2009 Ithaca retained one firm commitment well in Block 14/18c (neighbouring the Athena discovery). Detailed technical work showed that there was no credible prospect to drill within the block and therefore the Corporation made a successful case to the authorities that to drill any well would not be an appropriate use of financial resources. As requested by the authorities, Block 14/18c was relinquished in December 2009; the Company no longer retains any outstanding firm well commitments.

2010 OUTLOOK

The completion of the Dyas Transaction has provided the Corporation with additional funds to pursue current developments, enhance the efficiency of existing operations and to seek new opportunities to strengthen the portfolio:

  • Management has set a target for 2010 average production of 5,100 bopd net to Ithaca. Sustaining this level of production will be subject to further successful well interventions from the Beatrice Alpha platform and takes into account management's view of anticipated production decline at Jacky.

  • The Stella appraisal well is targeted for completion and testing in the late first or early second quarter of 2010.

  • Following completion and testing of the Stella appraisal well management will consider the potential development of the neighbouring Harrier and Hurricane discoveries as additional tiebacks to Stella.

  • The Carna development (operated by Centrica) is likely to be referred to the UK Government for development approval in the second half of 2010 after ongoing project definition and evaluation work. This work includes seismic re-evaluation and host facility commercial discussions.

  • The Athena Joint Venture Partners have committed to the purchase of long lead equipment and have approved the letter of intent for the contracting of the FPSO vessel "BW Carmen". A full project team has been commissioned to plan and engineer the development. The Environmental Impact Statement (EIS) and Field Development Plan (FDP) have been submitted for consideration by the UK Authorities

OUTSTANDING SHARE INFORMATION

As at December 31, 2009, Ithaca had 162,361,975 common shares outstanding along with 11,042,875 options to acquire common shares. As at April, 2010, Ithaca had 162,571,973 common shares outstanding along with 15,077,877 options to acquire common shares.

CRITICAL ACCOUNTING ESTIMATES

Ithaca's significant accounting policies are disclosed in note 2 to the December 31, 2009 consolidated financial statements. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the reader in assessing the critical accounting policies and practices of the Corporation and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates.

The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.

Capitalized costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved reserves, are depleted and depreciated on a unit-of-production basis using estimated proved reserves as adjusted for production.

The carrying value of property, plant and equipment is reviewed annually for impairment. Impairment occurs when the carrying value of the assets is not recoverable by the future undiscounted cash flows. The cost recovery ceiling test is based on estimates of proved reserves, production rates, oil and gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material.

Liability recognition for asset retirement obligations associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. These capitalized costs are amortized on a unit-of-production basis, consistent with depletion and depreciation. Over time, the liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation.

Financial assets or liabilities are only recognised when the entity becomes a party to the contractual provisions of the financial instrument. Financial assets and financial liabilities are, with certain exceptions, initially measured at fair value.

Derivative financial instruments are required to be recorded on the balance sheet at fair value. Any changes in fair value are immediately recorded as a net gain or loss in the statement of net income.

In order to recognize stock based compensation expense, the Corporation estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time.

The determination of the Corporation's income and other tax liabilities 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.

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation has certain lease agreements which were entered into in the normal course of operations, all of which are disclosed under the heading "Commitments", above. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or general and administrative expenses depending on the nature of the lease. No asset or liability value has been assigned to these leases in the balance sheet as at December 31, 2009.

RELATED PARTY TRANSACTIONS

A director of the Corporation is a partner of Burstall Winger LLP who act as counsel for the Corporation. The amount of fees paid to Burstall Winger LLP in 2009 were $0.2 million (2008 $0.4 million). All related party transactions are in the normal course of business and have been measured at the terms agreed to and exchange values, being the consideration established and agreed to by the parties and on normal commercial terms comparable to those charged by third parties.

REPORTING CURRENCY

The Corporation generates revenues in United States dollars. The Corporation expects to receive 100% of its income over 2010 in United States dollars. Budgeted expenditure indicates that approximately 19% of 2010 expenditure is expected to be in United States dollars.

The Corporation therefore believes that the United States dollar remains the appropriate reporting currency.

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 price the Corporation will receive for its oil and natural gas production may fluctuate continuously and, for the most part, is beyond the Corporation's control.

The Corporation is exposed to financial risks including financial market volatility, fluctuation in interest rates and various foreign exchange rates. Given the increasing development expenditure and operating costs in currencies other than the United States dollar, the Board of the Corporation has a hedging policy to mitigate foreign exchange rate risk on committed expenditure. On March 11, 2009 a series of foreign exchange contracts totalling $49 million was entered into in accordance with the agreed hedging policy. On October 12, 2009, the Corporation entered into a further contract with the Bank of Scotland to hedge its British Pounds Sterling 2010 forecast operating costs, including general and administrative expenses. The hedge amounts to $4 million per month (total $48 million) at a $/£ rate of no worse than $1.60/£1.00 and allows the Corporation to benefit from spot movements down to $1.4975: £1.00.

The Corporation is and may in the future be exposed to third-party credit risk through its contractual arrangements with its current and future joint venture partners, marketers of its petroleum production and other parties. The Corporation has not experienced any material credit loss in the collection of accounts receivable to date.

The Corporation is heavily dependent upon the production rates and oil price to fund the current development program. On July 24, 2009, the Corporation entered in to a derivative whereby it fixed the price of 50,000 barrels of production for each of the months of July, August and September at $70/barrel. A further oil price hedge was entered into on November 16, 2009 for 204,000 barrels of production over four months fixed at $77/barrel. No further commodity price fixes have been entered into by the Corporation at this date. The forecast production budgeted to meet future expenditures is heavily reliant upon the performance of the Jacky well that came on stream on April 6, 2009.

The Corporation is also subject to the risks associated with owning oil and natural gas properties, including environmental risks associated with air, land and water. The Corporation takes out market insurance to mitigate many of these operational, construction and environmental risks. In all areas of the Corporation's business there is competition with entities that may have greater technical and financial resources. There are numerous uncertainties in estimating the Corporation's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital. All of the Corporation's operations are conducted offshore in the UKCS; as such Ithaca is exposed to operational risk associated with weather delays that can result in a material delay in project execution. Third parties operate some of the assets in which the Corporation has interests. As a result, the Corporation may have limited ability to exercise influence over the operations of these assets and their associated costs. The success and timing of these activities may be outside the Corporation's control.

It should be noted that the Corporation is not required to certify the design and evaluation of the Corporation's disclosure controls and procedures and internal control over financial reporting and it has not completed such an evaluation. Furthermore, given the size of the Corporation there are inherent limitations on the certifying officers to design and implement on a cost effective basis disclosure controls and procedures and internal control over financial reporting that may result in additional risks to the quality, reliability, transparency, and timeliness of annual filings.

For additional detail regarding the Corporation's risks and uncertainties, refer to the Corporation's most recent Annual Information Form filed on SEDAR at www.sedar.com.

CONTROL ENVIRONMENT

Based on their evaluation as of December 31, 2009, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit to Canadian securities authorities is recorded, processed, summarized and reported within the time periods specified in Canadian securities laws. In addition, as of December 31, 2009, there were no changes in our internal control over financial reporting that occurred during 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to periodically evaluate our disclosure controls and procedures and internal control over financial reporting and will make any modifications from time-to-time as deemed necessary.

Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

CHANGES IN ACCOUNTING POLICIES

On January 1, 2009, the Corporation adopted the CICA Handbook Section 3064: "Goodwill and Intangible Assets". The new standard replaces the previous goodwill and intangible asset standard and revises the requirement for recognition, measurement, presentation and disclosure of intangible assets. The adoption of this standard was applied retroactively and has had no material impact on Ithaca's consolidated financial statements.

On January 1, 2009, the Corporation adopted the recommendations of CICA Emerging Issues Committee Abstract 173 relating to the fair value of financial assets and liabilities. The Abstract requires that an entity's own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial assets and liabilities, including derivative instruments. The Abstract is to be applied retroactively without restatement of prior periods. The Corporation has evaluated the new abstract and concluded that the adoption of the new requirements did not have a material impact on Ithaca's consolidated financial statements.

On December 31, 2009, the Corporation prospectively adopted amendments to CICA Handbook section 3862 ''Financial Instruments: Disclosures,'' requiring adoption for annual periods ending on or after September 30, 2009. The amendments require additional disclosures on fair value measurements of financial instruments and enhanced liquidity risk disclosure. These additional disclosures are provided in note 13 of the consolidated financial statements.

IMPACT OF FUTURE ACCOUNTING CHANGES

In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the changeover to IFRS from GAAP will be required for publicly accountable enterprises for interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011, including comparatives for 2010. Ithaca's financial statements up to and including the December 31, 2010 financial statements will continue to be reported in accordance with GAAP as it exists on each reporting date. Financial statements for the quarter ended March 31, 2011, including comparative amounts, will be prepared on an IFRS basis.

In July 2009, the International Accounting Standards Board ("IA SB") issued amendments to IFRS 1 "First time adoption of IFRS" allowing additional exemptions for first-time adopters. These amendments allow an entity that used full cost accounting under its previous GAAP to elect to measure oil and gas assets including exploration and evaluation assets and development and production assets being allocated pro rata using reserves volumes or reserve values as of the date of the adoption, providing that all assets are tested for impairment on adoption. Ithaca is currently planning to adopt this exemption.

IFRS adoption is currently scheduled for the Corporation's fiscal year commencing January 1, 2011.

The Company has completed the diagnostic assessment phase by performing comparisons of the differences between Canadian GAAP and IFRS. The Company has determined that the most significant impact of IFRS conversion is to property, plant and equipment. The Company currently follows full cost accounting as prescribed in the Accounting Guideline ("AcG") 16 ,Oil and Gas Accounting-Full Cost." Conversion to IFRS may have a significant impact on how the company accounts for costs pertaining to oil and gas activities. The company is monitoring the impact of these changes on the Company's financial position. The company is currently completing the design, planning and solution development stage and all changes to IFRS required prior to January 1, 2011 will be incorporated as required.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Corporation has classified each financial instrument into one of these five categories: held-for-trading, held-to-maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Loans and receivables, held-to-maturity investments and other financial liabilities are measured at amortized cost using the effective interest rate method. For all financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognized for that financial instrument. These costs are expensed using the effective interest rate method and are recorded within interest expense. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income.

Available-for-sale financial instruments are measured at fair value with changes in fair value recorded in other comprehensive income until the instrument is derecognized or impaired. All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income.

The Corporation has classified its derivative commodity contracts and cash and cash equivalents as held-for-trading, which are measured at fair value with changes being recognized in net income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and accrued liabilities, and long-term debt, including interest payable, are classified as other liabilities, all of which are measured at amortized cost the classification of all financial instruments is the same at inception and at December 31, 2008.

The Corporation's accounts receivables are primarily with industry partners and are subject to normal industry credit risks. The Corporation extends unsecured credit to these entities, and therefore, the collection of any receivables may be affected by changes in the economic environment or other conditions. Management believes the risk is mitigated by the financial position of the entities.

FORWARD-LOOKING INFORMATION

This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and forward-looking information which are based on the Corporation's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "plan", "should", "believe", "could" and similar expressions are intended to identify forward-looking statements and forward-looking information. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. The Corporation believes that the expectations reflected in those forward-looking statements and information are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this MD&A and any documents incorporated by reference herein should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of this MD&A and any documents incorporated by reference herein, as the case may be, and the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or information, except as required by applicable laws.

In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking statements and information pertaining to the following:

  • the quality of and future net revenues from the Corporation's reserves;
  • oil, natural gas liquids ("NGLs") and natural gas production levels;
  • commodity prices, foreign currency exchange rates and interest rates;
  • capital expenditure programs and other expenditures;
  • the sale, farming in, farming out or development of certain exploration properties using third party resources;
  • supply and demand for oil, NGLs and natural gas;
  • the Corporation's ability to raise capital;
  • the Corporation's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived thereform;
  • the Corporation's ability to continually add to reserves;
  • schedules and timing of certain projects and the Corporation's strategy for growth;
  • the Corporation's future operating and financial results;
  • the ability of the Corporation to optimize operations and reduce operational expenditures;
  • treatment under governmental and other regulatory regimes and tax, environmental and other laws; and
  • targeted production levels.

With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference herein, the Corporation has made assumptions regarding, among other things:

  • Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required;
  • future oil 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;
  • Ithaca's reliance on partners and their ability to meet commitments under relevant agreements: and
  • the state of the debt and equity markets in the current economic environment.

The Corporation's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of assumptions proving inaccurate and of both known and unknown risks, including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the documents incorporated by reference herein, and those set forth below:

  • risks associated with the exploration for and development of oil and natural gas reserves;
  • operational risks and liabilities that are not covered by insurance;
  • volatility in market prices for oil, NGLs and natural gas;
  • the ability of the Corporation to fund its substantial capital requirements and operations;
  • risks associated with ensuring title to the Corporation's properties;
  • changes in environmental or other legislation applicable to the Corporation's operations, and the Corporation's ability to comply with current and future environmental and other laws;
  • the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Corporation's exploration and development drilling and estimated decline rates, in particular the production rates of the Jacky field;
  • the Corporation's success at acquisition, exploration, exploitation and development of reserves;
  • the Corporation's reliance on key operational and management personnel;
  • the ability of the Corporation to obtain and maintain all of its required permits and licenses;
  • competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel;
  • changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide;
  • 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;
  • adverse regulatory rulings, orders and decisions; and
  • risks associated with the nature of the Common Shares.

Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. Many of these risk factors, other specific risks, uncertainties and material assumptions are discussed in further detail throughout the AIF and in the MD&A. Readers are specifically referred to the risk factors described in the AIF under "Risk Factors" and in other documents the Corporation files from time to time with securities regulatory authorities. Copies of these documents are available without charge from Ithaca or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com.

The information with respect to net present values of future net revenues from reserves presented throughout this discussion and analysis, whether calculated without discount or using a discount rate, are estimated values and do not represent fair market value. It should not be assumed that the net present values of future net revenues from reserves contained in this discussion and analysis are representative of the fair market value of the reserves. There is no assurance that the price and cost assumptions will be attained and variances could be material.

Consolidated Balance Sheets    
  December 31, December 31,
  2009 2008
  US$ US$
ASSETS    
     
Current assets    
  Cash and cash equivalents 29,886,359 26,943,802
  Accounts receivable 67,166,377 12,879,389
  Restricted cash (note 3) 5,224,308 12,305,014
  Deposits, prepaid expenses and other 351,041 7,329,059
  Foreign exchange forward contract (note 13) 685,355 -
  Inventory - 1,289,032
  103,313,440 60,746,296
     
Long term receivable - 400,617
Restricted cash (note 3) 351,627 -
Property, plant and equipment (net) (note 4) 205,474,732 296,523,448
     
  309,139,799 357,670,361
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
     
Current liabilities    
  Accounts payable and accrued liabilities 43,612,899 41,057,033
  Commodity hedge (note 13) 396,780 -
     
Loan payable (note 5) - 61,200,000
Long term liability on Beatrice acquisition (note 6) 2,718,027 4,137,413
Asset retirement obligations (note 7) 7,955,967 7,407,290
  54,683,673 113,801,736
     
Shareholders' equity    
  Share capital (note 8) 277,075,488 277,029,766
  Contributed surplus (note 9) 7,811,620 5,126,285
  Deficit (30,430,982) (38,287,426)
  254,456,126 243,868,625
     
  309,139,799 357,670,361

Commitments (note 12)

"Approved on behalf of the Board"          

"John P. Summers"
Director

"Jack Lee"
Director

Consolidated Statements of Net and Comprehensive Income / (Loss)    
     
     
  2009 2008
  US$ US$
REVENUES    
  Oil sales 101,281,437 2,472,106
  Other income 9,179,190 -
  Interest income 350,988 809,563
  110,811,615 3,281,669
     
COSTS AND EXPENSES    
  General and administrative 3,908,822 4,822,640
  Loan fee amortization (note 5) - 3,668,891
  Operating 46,949,951 4,587,834
  Depletion, depreciation and accretion (note 4) 53,325,972 2,811,483
  Loss on foreign exchange 3,252,674 11,938,414
  Revaluation of long term liability (note 6) 116,659 -
  Unrealized (gain) / loss on derivatives (note 13) (288,575) -
  Realized (gain) / loss on derivatives (note 13) (7,790,771) 1,777,181
  Stock based compensation (note 8(c)) 2,707,233 3,529,252
  Interest and bank charges 692,234 245,483
  102,874,199 33,381,178
     
     
Profit / (loss) before income taxes 7,937,416 (30,099,509)
     
Income taxes (80,972) (347,458)
     
Net and comprehensive income / (loss) 7,856,444 (30,446,967)
     
Net and comprehensive income / (loss) per share (basic & diluted) (note 10) 0.05 (0.23)

Consolidated Statements of Shareholders' Equity
(all amounts are US$)

  Share Capital Contributed Surplus Deficit Total
Balance, Jan 1 2009 277,029,766 5,126,285 (38,287,426) 243,868,625
Stock based compensation - 2,707,233 - 2,707,233
Options exercised 45,722 (21,898) - 23,824
Net income for the year - - 7,856,444 7,856,444
         
Balance, Dec 31 2009 277,075,488 7,811,620 (30,430,982) 254,456,126
         
  Share Capital Contributed Surplus Deficit Total
Balance, Jan 1 2008 209,551,869 1,765,333 (7,840,459) 203,476,743
Stock based compensation - 3,529,252 - 3,529,252
Options exercised 927,899 (168,300) - 759,599
Issued for cash 70,290,535 - - 70,290,535
Share issue costs (3,740,537) - - (3,740,537)
Net income for the year - - (30,446,967) (30,446,967)
         
Balance, Dec 31 2008 277,029,766 5,126,285 (38,287,426) 243,868,625
Consolidated Statements of Cash Flows
   
  2009 2008
  US$ US$
CASH PROVIDED BY (USED IN):    
 
OPERATING ACTIVITIES:
  Net profit / (loss) 7,856,444 (30,446,967)
  Items not affecting cash    
    Depletion, depreciation and accretion 53,325,972 2,811,483
    Unrealised loss / (gain) on financial instrument (685,355) 1,777,181
    Unrealised loss on commodity hedge 396,780 -
    Revaluation of long term liability 116,659 -
    Loan Fee Amortization - 3,668,891
    Stock based compensation (note 5) 2,707,233 3,360,952
  63,717,733 (18,828,460)
Changes in non-cash working capital relating to operating activities (33,797,709) (21,956,849)
  29,920,024 (40,785,309)
     
FINANCING ACTIVITIES:    
  Proceeds from issuance of shares 21,898 71,050,134
  Share issue costs - (3,740,537)
  Decrease / (Increase) in restricted cash 6,729,079 (12,305,014)
  Loan proceeds / (repayment) (61,200,000) 61,200,000
  Loan issue costs - (3,668,891)
  (54,449,023) 112,535,692
     
INVESTING ACTIVITIES:    
  Proceeds on disposal 101,649,406 -
  Oil and natural gas properties (54,515,444) (180,595,707)
  Acquisition (9,983,847)  
  Office furniture and equipment (102,716) (693,400)
  37,047,399 (181,289,107)
Changes in non-cash working capital relating to investing activities (10,088,878) 25,478,840
  26,958,521 (155,810,267)
     
Gain on foreign exchange 513,035 14,788,979
     
Increase / (Decrease) in cash and cash Equivalents 2,942,557 (69,270,905)
     
Cash and cash equivalents, beginning of period 26,943,802 96,214,707
     
Cash and cash equivalents, end of period 29,886,359 26,943,802

Ithaca Energy Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2009

All figures are in US Dollars, except where otherwise stated.

1. NATURE OF OPERATIONS

Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated in Alberta, Canada on April 27, 2004, is a publicly traded company involved in the exploration, development and production of oil and gas in the North Sea. The Corporation's shares are listed on the TSX Venture Exchange in Canada and the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has a wholly-owned subsidiary Ithaca Energy (UK) Limited ("Ithaca UK"), incorporated in Scotland,

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The consolidated financial statements of the Corporation include the accounts of Ithaca and its wholly-owned subsidiary Ithaca UK. All inter-company transactions and balances have been eliminated.

Revenue Recognition

Oil revenues associated with the sale of the Corporation's crude oil are recognised when title passes to the customer and collectability is reasonably assured. The costs associated with the delivery, including operating and maintenance costs and transportation expenses are recognised in the same period in which the related revenue is earned and recorded.

Use of Estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. The recoverability of amounts shown for oil and natural gas properties is dependent upon the determination of economically recoverable reserves. The amounts recorded for depreciation, depletion, asset retirement obligation, future income taxes, accruals, derivatives, and stock based compensation are based upon estimates, as are assumptions used in the ceiling test. Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purpose of cash flow statements, cash and cash equivalents include investments with an original maturity of three months or less.

Restricted Cash

Cash that is held for security for bank guarantees is reported in the 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.

Inventory

Inventories of materials and product inventory supplies are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out method.

Financial Instruments

All financial instruments are initially recognized at fair value on the balance sheet. The Corporation's financial instruments consist of cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Analysis of the fair values of financial instruments and further details as to how they are measured are provided in notes 6, 13 and 14.

Derivative Financial Instruments

The Corporation uses derivative financial instruments to manage certain exposures to fluctuations in commodity prices and foreign exchange rates. Derivative financial instruments are required to be recorded on the balance sheet at fair value. Any changes in fair value are immediately recorded as a net gain or loss in the statement of net income.

Foreign Currency Translation

Items included in the financial statements are measured using the currency of the primary economic environment in which the Corporation operates (the 'functional currency'). The consolidated financial statements are presented in United States Dollars, which is the Corporation's and Ithaca UK's functional and presentation currency. Foreign currency transactions are translated into the functional currency under the temporal method 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 recognized in the income statement.

Property, Plant and Equipment

(a) Oil and Natural Gas Operations

The Corporation follows the full cost method of accounting for exploration and development expenditures whereby all costs relating to the acquisition, exploration and development of oil and natural gas reserves are capitalized. Such costs include lease acquisitions, geological and geophysical data, lease rentals on undeveloped properties, drilling both productive and non-productive wells, production equipment, and overhead charges directly related to acquisition, exploration and development activities. Proceeds received from disposals of properties and equipment are credited against capitalized costs unless the disposal would alter the rate of depletion and depreciation by more than 20 percent, in which case a gain or loss on disposal is recorded.

All costs of acquisition, exploration and development of oil and natural gas reserves, associated tangible plant and equipment costs, and estimated costs of future development of proved developed reserves are depleted and depreciated by the unit of production method based on estimated gross proved reserves before royalties as determined by independent evaluators. Natural gas reserves are converted to equivalent units using their relative energy content of six thousand cubic feet of natural gas to one barrel of oil. The costs of acquiring and evaluating unproved properties are excluded from costs subject to depletion. These properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the costs subject to depletion.

Petroleum and natural gas assets are evaluated annually to determine whether the costs are recoverable. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves exceed the carrying value of the petroleum and natural gas assets. If the carrying value of the petroleum and natural gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves. The cash flows are estimated using future product prices and costs and are discounted using the risk-free interest rate.

(b) Furniture and Office Equipment

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.

Captalized Interest

Interest costs associated with major development projects are capitalized until the project is substantially completed. These costs are subsequently depleted together with the related assets.

Joint Interest Operations

Substantially all of the Corporation's oil and natural gas activities are carried out jointly with others. These consolidated financial statements reflect only the Corporation's proportionate interest in such activities.

Asset Retirement Obligation

The Corporation records the present value of legal obligations associated with the retirement of long-lived 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-lived asset. In subsequent periods, the asset estimate obligation is adjusted for the passage of time and any changes in the estimated amount or timing of the settlement of the obligations. The carrying amounts of the long-lived assets are depleted using the unit of production method. Actual costs to retire tangible assets are deducted from the liability as incurred.

Stock based Compensation

The Corporation has a stock based compensation plan as described in note 8 (b). Stock based compensation expense is recorded in the statement of net and comprehensive income / (loss) for all options granted in the year, with a corresponding increase recorded as contributed surplus. Compensation expense is based on the estimated fair values at the time of the grant and the expense is recognized over the vesting period of the options. Upon the exercise of the stock options, consideration paid together with the amount previously recognized in contributed surplus is recorded as an increase in share capital. In the event that vested options expire unexercised, previously recognized compensation expense associated with such stock options is not reversed. In the event that unvested options are forfeited or expired, previously recognized compensation expense associated with the unvested portion of such stock options is reversed.

Earnings per Share

Basic earnings per common share are calculated on the net earnings using the weighted average number of shares outstanding during the fiscal period. Diluted earnings per share information is calculated using the treasury stock method which assumes that proceeds obtained upon exercise of options and warrants would be used to purchase common shares at the average market price for the period. No adjustment to diluted earnings per share is made if the result of this calculation is anti-dilutive.

Income Taxes

Income taxes are accounted for using the liability method of tax allocation. Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income 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 future income tax assets and liabilities of a change in rates is included in earnings in the period of the enactment date. Future income tax assets are recorded in the consolidated financial statements if realization is considered more likely than not.

Recent Accounting Pronouncements

Business Combinations

In January 2009, the Canadian Institute of Chartered Accountants ("CICA") issued section 1582 ''Business Combinations'' to replace section 1581. The CICA concurrently issued section 1601 ''Consolidated Financial Statements'' and section 1602 ''Non-Controlling Interests'' which replace section 1600 ''Consolidated Financial Statements''. Prospective application of the standards is effective for fiscal years beginning on or after January 1, 2011, with early adoption permitted. The new standards revise guidance on the determination of the carrying amount of the assets acquired and liabilities assumed, goodwill and accounting for non-controlling interests at the time of a business combination. The new standards have not been early adopted.

Changes in Accounting Policies

On January 1, 2009, the Corporation adopted the CICA Handbook Section 3064: "Goodwill and Intangible Assets". The new standard replaces the previous goodwill and intangible asset standard and revises the requirement for recognition, measurement, presentation and disclosure of intangible assets. The adoption of this standard was applied retroactively and has had no material impact on Ithaca's consolidated financial statements.

On January 1, 2009, the Corporation adopted the recommendations of CICA Emerging Issues Committee Abstract 173 relating to the fair value of financial assets and liabilities. The Abstract requires that an entity's own credit risk and the credit risk of the counterparty are taken into account in determining the fair value of financial assets and liabilities, including derivative instruments. The Abstract is to be applied retroactively without restatement of prior periods. The Corporation has evaluated the new abstract and concluded that the adoption of the new requirements did not have a material impact on Ithaca's consolidated financial statements.

On December 31, 2009, the Corporation prospectively adopted amendments to CICA Handbook section 3862 ''Financial Instruments: Disclosures'', requiring adoption for annual periods ending on or after September 30, 2009. The amendments require additional disclosures on fair value measurements of financial instruments and enhanced liquidity risk disclosure. These additional disclosures are provided in note 13.

3. RESTRICTED CASH

Restricted cash of $5,224,308 is held by the Bank of Scotland as cash security for the 2010 foreign exchange forward contract. This was released in January 2010.

The remaining $351,627 of the restricted cash is held by the Bank of Scotland as cash security for a Bank Guarantee that Ithaca Energy (UK) Limited provided to the Crown Estate when it was granted Field Development Plan approval for the Jacky Field.

4. PROPERTY, PLANT AND EQUIPMENT

  December 31, December 31,
2009 2008
  US$ US$
     
Oil and natural gas properties 259,285,146 297,918,747
Less accumulated depletion (54,327,340) (2,178,728)
  204,957,806 295,740,019
     
Office furniture and equipment 1,273,938 1,171,222
Less accumulated depreciation and amortization (757,012) (387,793)
  516,926 783,429
     
Total property, plant and equipment 205,474,732 296,523,448

The Corporation acquired the producing Beatrice facilities on November 10, 2008 and has therefore recognised depletion charges since that date. The depletion charge in the year was $52.1 million (2008: $2.2 million). As at December 31, 2009, oil and natural gas properties included $189.5 million (2008: $272.1 million) relating to proved properties and $15.5 million (Dec 2008: $23.6 million) unproved properties. During the year to December 31, 2009, the Corporation capitalized $8.4 million (2008: $7.6 million) of overhead directly related to exploration, appraisal and development activities. The Corporation also capitalized $2.0 million (2008: $1.7 million) of interest in the year to December 31, 2009. Future development costs for the proved oil and gas properties are forecast to be approximately $270.9 million (2008: $334.7million) and are included in the depletion calculation.

Disposal

The Corporation announced on July 29, 2009 that it had completed a transaction with Dyas UK Limited ("Dyas"), whereby Dyas purchased an interest in certain assets of the Corporation for $101.6 million and the Corporation agreed to repay the loans of $61.2 million and £5 million ($8.2 million) from Dyas ("Dyas Transaction"). Cash of $32.2 million was paid immediately to Ithaca and a further $8.4 million was paid upon the outstanding transfer of an interest in Stella.

The majority of the proceeds were credited to Property, Plant and Equipment, with no gain or loss on disposal.

Acquisition

On October 28, 2009, the Corporation signed an agreement for the acquisition from Maersk Oil North Sea UK Limited and Maersk Oil Exploration UK Limited of additional interest in the Stella and Harrier discoveries and the Hurricane discovery. Ithaca paid $10 million in consideration for this purchase and is committed to pay a further $3 million at Field Development approval and $5 million at first oil.

On the same date Ithaca entered in to a "farm out" agreement with Challenger Minerals (North Sea) Limited ("CMI") whereby CMI is committed to pay 27% of gross Stella appraisal well costs in exchange for an option to acquire 18% equity interest in the Stella and Harrier discoveries prior to 1st August 2010, thereby carrying a part of Ithaca's share of drilling costs. Upon successful appraisal, CMI will also carry Ithaca on a further Stella or Harrier development well for up to £2 million ($3.2 million) or 9%, whichever is lower. Following the "farm out" the Corporation's final interest in the Stella and Harrier discoveries will be 50.33% and will remain at 100% in the Hurricane discovery.

A ceiling test was performed for 2009 and 2008 and there was no impairment of proved oil and gas properties. There was no impairment (2008: $24.1 million) relating to unproved oil and gas properties in 2009.

The forecasted future prices used in the ceiling test were as follows:

  Oil Reference Price (US$/bbl)
2010 77.92
2011 83.19
2012 85.59
2013 88.88
2014 90.65

5. LOAN PAYABLE

The Corporation had a loan facility in place with Dyas for $61,200,000. This was fully repaid in July 2009 as part of the Dyas Transaction referred to in note 4. An additional £5.0 million ($8.2 million) loan, also referred to in note 4, was received and repaid to Dyas in the year.

6. LONG TERM LIABILITY ON BEATRICE ACQUISITION

  2009 2008
  US$ US$
Balance January 1 4,137,413 -
Addition - 4,137,413
Disposal (1,536,045) -
Revaluation in the year 116,659 -
Balance, December 31 2,718,027 4,137,413

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 using a credit adjusted risk free rate of 6.0 percent. The disposal in the year relates to the Dyas Transaction referred to in note 4. The liability is subject to revaluation at each financial year end. The expected date of re-transfer is likely to be more than three years.

7. ASSET RETIREMENT OBLIGATIONS

The total future asset retirement obligation 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 estimates its total undiscounted asset retirement obligations to be $10,799,626 as at December 31, 2009. The Corporation uses a credit adjusted risk free rate of 6.0 percent and an inflation rate of 2.5 percent over the varying lives of the assets to calculate the present value of the asset retirement obligation. These costs are expected to be incurred at various intervals over the next 7 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. The liabilities disposed of relate to the Dyas transactions.

The following table provides a reconciliation of the Corporation's total discounted asset retirement obligations:

  2009 2008
  US$ US$
Balance, January 1 7,407,290 4,716,475
Additions 5,530,301 4,493,350
Accretion 808,140 434,730
Revision to estimates (362,722) -
Liabilities disposed of (5,427,042) (2,237,265)
Balance, December 31 7,955,967 7,407,290

8. SHARE CAPITAL

(a) Issued

The issued share capital is as follows:

Issued Number of common shares Amount US$
Balance December 31, 2007 111,931,975 209,551,869
Issued for cash – options exercised 330,000 759,599
Issued for cash 50,000,000 70,290,535
Share issue costs   (3,740,537)
Transfer from Contributed Surplus on options exercised   168,300
Balance December 31, 2008 162,261,975 277,029,766
Issued for cash - options exercised 100,000 23,824
Transfer from Contributed Surplus on options exercised   21,898
Balance December 31, 2009 162,361,975 277,075,488

On August 11, 2008 the Corporation successfully closed an equity offering via a fully marketed deal. Gross proceeds were C$75 million through the issue of 50 million common shares at a price of C$1.50 per common share.

(b) Stock Options

In the year ended December 31, 2009, the Corporation's Board of Directors granted 3,876,875 options at an exercise price of C$0.87 to employees and directors pursuant to the terms of the Corporation's stock-based compensation plan. The Corporation's stock options and exercise prices are denominated in Canadian Dollars. As at December 31, 2009, 11,042,875 stock options to purchase common shares were outstanding, having an exercise price range of $0.23 to $3.36 (C$0.25 to C$3.65) per share and a vesting period of up to 3 years.

Changes to the Corporation's stock options are summarized as follows:

  December 31, 2009 December 31, 2008
  Number of Wt. Avg. Number of Wt. Avg.
  Options Exercise Options Exercise
    Price *   Price *
    US$   US$
Balance, January 1, 2009 10,694,500 $ 1.92 4,330,000 $ 2.01
Granted 3,876,875 $ 0.83 7,224,500 $ 1.82
Forfeited / expired (3,428,500) $ 2.18 (530,000) $ 1.97
Exercised (100,000) $ 0.24 (330,000) $ 2.07
Options outstanding, end of period 11,042,875 $ 1.48 10,694,500 $ 1.89

* 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 outstanding as at December 31, 2009.

Options Outstanding
Range of Exercise   Number of Wt. Avg.   Wt. Avg.
Price   Options Life   Exercise
      (Years)   Price *
          US$
           
$0.23 (C$0.25)   3,096,000 3.94   $0.20
           
$0.80 (C$0.87)   3,676,875 3.64   $0.79
           
$1.66 (C$1.80)   450,000 2.67   $1.42
           
$3.36 (C$3.65)   2,435,000 2.21   $3.36
           
$2.84 (C$3.00)   200,000 1.67   $2.84
           
$2.28 (C$2.51)   1,085,000 1.37   $2.28
           
$2.14 (C$2.32)   100,000 0.04   $2.14
           
    11,042,875 3.06   $ 1.48

* The exercise price and the weighted average exercise price have 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 exercisable as at December 31, 2009.

Options Exercisable
Range of Exercise   Number of Wt. Avg.   Wt. Avg.
Price   Options Life   Exercise
      (Years)   Price *
          US$
           
$0.23 (C$0.25)   1,032,001 3.94   $0.20
           
$1.66 (C$1.80)   149,999 2.67   $1.42
           
$3.36 (C$3.65)   811,666 2.21   $3.36
           
$2.84 (C$3.00)   133,334 1.67   $2.84
           
$2.28 (C$2.51)   723,334 1.37   $2.28
           
$2.14 (C$2.32)   100,000 0.04   $2.14
           
    2,950,334 2.52   $1.91
           

* The exercise price and the weighted average exercise price have been converted into U.S. dollars based on the foreign exchange rate in effect at the date of issuance

The Board of Directors approved the granting of 4,345,000 stock options to Directors and employees at a price of CDN $1.54 which was the closing price on the Toronto Stock Exchange (TSX) Venture Exchange on Tuesday, January 5th 2010.

(c) Stock-Based Compensation

Options granted are accounted for using the fair value method. The compensation cost charged during the year ended December 31, 2009 for stock options granted was $2,707,233 (2008; $3,529,252) 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 year ended December 31, 2009 For the year ended December 31, 2008
Risk free interest rate 2.13 3.12
Expected dividend yield 0% 0%
Expected stock volatility 94% 154%
Expected life of options 4 years 5 years
Weighted Average Fair Value $0.83 $0.92

(d) Gemini Agreement

On September 2006 Gemini Oil & Gas Fund 11 L.P. ("Gemini") provided non–recourse funding of $6 million. Further to a supplemental agreement entered into in August 2008 the loan was fully repaid. Under the supplemental agreement Gemini retain rights, under certain circumstances relating to the Athena Field, to elect to receive warrants to acquire up to 3,000,000 common shares at $3.00 per share. 

9. CONTRIBUTED SURPLUS

  2009 2008
  US$ US$
Balance, January 1 5,126,285 1,765,333
Stock based compensation cost 2,707,233 3,529,252
Transfer to share capital on exercise of options (21,898) (168,300)
Balance, December 31 7,811,620 5,126,285

10. EARNINGS PER SHARE

Basic earnings per share amounts are calculated by dividing net profit for the year by the weighted average number of common shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders by the weighted average number of common shares outstanding during the year plus the weighted average number of common shares that would be issued upon exercise of all the dilutive options and warrants.

The following reflects the income and share data used in the basic and diluted earnings per share computations:

  December 31, 2009 December 31, 2008
Weighted average number of common shares for basic earnings per share 162,270,468 131,633,833
Weighted average number of common shares adjusted for the effect of dilution 164,377,456 138,513,009

11. FUTURE INCOME TAXES

The provision for future income taxes differs from the amount computed by applying the combined statutory Canadian Federal and Provincial tax rates to earnings before taxes. The reasons for these differences are as follows:

  2009 2008
  US$ US$
Net Income / (Loss) before taxes 7,937,416 (30,099,509)
Enacted tax rate 29.00% 29.50%
Computed income taxes at the enacted rate 2,301,851 (8,879,355)
Expenses not deductable for tax purposes (3,022,460) 30,136,136
Recognition of previously unrecognised assets - 965,193
Difference in foreign tax rates (99,441) 24,810,622
Change in tax rates 80,192 (928,858)
Change in tax rates on opening temporary 611,055 (58,962)
Change in valuation allowance 1,088,324 (63,803,486)
Share issue costs (861,780) -
Adjustment in respect of previous period (17,305) -
Other 536 -
     
Total 80,972 -

At December 31, 2009, the Corporation had estimated future tax assets as follows:

  2009 2008
  US$ US$
Future Tax Assets    
  Non-capital losses 122,955,710 144,955,846
  Share issue costs 1,472,970 2,906,756
  Fixed assets (95,524,168) (134,013,428)
  General Provision 4,107,716 2,594,348
     
Valuation Allowance (33,012,228) (16,443,522)
     
Total - -

There is no expiry date on the Corporation's Canadian and United Kingdom Non-capital losses carried forward.

12. COMMITMENTS

As at December 31, 2009, the Corporation had the following financial commitments:

Year ended 2010 2011 2012 2013 2014 Subsequent to 2014
  US$ US$ US$ US$ US$ US$
Office lease 254,811 254,811 254,811 254,811 254,811 828,136
Exploration license fees 1,005,568 1,380,580 1,548,522 - - -
Equipment 2,436,246          
Appraisal Well 12,464,154 - - - - -
Total 16,160,779 1,635,391 1,803,333 254,811 254,811 828,136

13. 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 utilize observable market data. In addition to market information, the company incorporates transaction specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk. The company characterizes inputs used in determining fair value using a hierarchy that prioritizes 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 realized 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 company 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 company utilizes the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized 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 categorized as Level 2.

The following table presents the Corporation's material assets and liabilities measured at fair value for each hierarchy level as of December 31, 2009:

  Level 1 Level 2 Level 3 Total Fair Value
  US$ US$ US$ US$
Long term liability on Beatrice acquisition - - (2,718,027) (2,718,027)
Commodity Hedge - (396,780) - (396,780)
Foreign exchange forward contract - 685,355 - 685,355
Total - 288,575 - 288,575

The table below presents the total gain / (loss) on derivatives that has been disclosed through the statement of net and comprehensive income / (loss):

  2009 2008
  US$ US$
Unrealized gain on foreign exchange forward contract 685,355 -
Realized gain / (loss) on foreign exchange forward contract 7,763,286 (1,777,181)
Realized gain on commodity hedges 27,485 -
Unrealized loss on commodity hedges (396,780) -
Total gain / (loss) on derivatives 8,079,346 (1,777,181)

The Corporation has identified that it is exposed principally to these areas of market risk.

i) Commodity Risk

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. To a lesser extent the Corporation is also exposed to natural gas price movements as it holds undeveloped gas discoveries in its portfolio. Natural gas prices are generally influenced by oil prices and 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. If the oil price had been lower by $5 per barrel in 2009 then the profit for the year would have been lower by $6,118,000.

In July, 2009, the Corporation entered into a forward swap for 50,000 barrels per month over July, August and September production fixing the price at $70/barrel. This forward swap resulted in a realized loss of $104,350.

In November, 2009, the Corporation entered into a further forward swap for 51,000 barrels per month over November, December, January and February production fixing the price at $77/barrel. This forward swap resulted in a realized gain of $131,835, and an unrealized loss of $396,780.

ii) Interest Risk

As a result of the repayment of all security held by Dyas referred to in note 4, the Corporation's exposure to the risk of changes in market interest rates is now negligible. If the Corporation utilizes floating rate debt to finance its developments and operations in the future, the Corporation may 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 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.

On March 11, 2009, the Corporation entered into a "Window Forward Plus" contract with the Bank of Scotland to hedge circa 90% of the Corporation's known, at that time, future US Dollar to British Pound Sterling exchange rate exposure. The contract ensures that the Corporation, which incurs a substantial amount of its operating expenditure in British Pounds Sterling ("£"), is able to lock in a rate of no worse than USD1.40/£1.00 for a series of foreign exchange transactions throughout the year and yet continues to benefit from any additional strengthening of the US Dollar down to USD1.29/£1.00 (the "Trigger rate"). Any strengthening of the USD/£ rate beyond the Trigger rate during any of the periods or "windows" between the transaction dates will lead to a rate of USD1.40/£1.00 being applied to that individual transaction. The contract covers $49 million equivalent of British Pounds Sterling expenditure. The subsequent weakening of the US Dollar has resulted in a realized gain on the contract of $7,763,286 for the year ended December 31, 2009.

On October 12, 2009, the Corporation entered in to a further Window Forward Plus contract with the Bank of Scotland to hedge its forecast British Pounds Sterling 2010 operating costs, including general and administrative expenses. The hedge amounts to $4 million per month (total $48 million) at a US$/£ rate of no worse than USD1.60/1.0 and a Trigger rate of USD1.4975/£1.00. An unrealized gain of $685,355 has been recognized on the contract as at December 31, 2009. If the US$ had increased by $1 (USD2.50/£1.00) in 2009 then the profit for the year would have been lower by $36,000,000.

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. It should be noted that the Corporation has entered in to a five year marketing agreement with BP Oil International Limited to sell all of its North Sea oil production.

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 December 31, 2009 substantially all accounts receivables are current, being defined as less than 90 days, and have been paid as at the date of completion of these financial statements.

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 company's exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. At December 31, 2009, the Corporation's exposure was $685,355 (2008: $nil).

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 December 31, 2009, 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$ US$
Accounts payable 44,316,936 -
Commodity hedge 396,780 -
Long term liability - 2,718,027
Total 44,713,716 2,718,027

14. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments of the Company consist mainly of cash and cash equivalents, receivables, payables, loans and financial derivative contracts, all of which are included in these financial statements. At December 31, 2009, the classification of financial instruments and the carrying amounts reported on the balance sheet and their estimated fair values are as follows:

  2009 2008
  US$ US$
Classification Carrying Amount Fair Value Carrying Amount Fair Value
Cash and cash equivalents (Held for trading) 29,886,359 29,886,359 26,943,802 26,943,802
Foreign exchange forward contract (Held for trading) 685,355 685,355 - -
Accounts receivable - current (Loans and Receivables) 67,166,377 67,166,377 12,879,389 12,879,389
Accounts receivable – long term (Loans and Receivables) - - 400,617 400,617
         
Commodity hedge (Held for trading) 396,780 396,780 - -
Long Term Liability (Held for trading) 2,718,027 2,718,027 4,137,413 4,137,413
Accounts payable (Other financial liabilities) 43,612,899 43,612,899 41,057,033 41,057,033
Loans (Other financial liabilities) - - 61,200,000 61,200,000
Total 144,465,797 144,465,797 146,618,254 146,618,254

15. SUPPLEMENTAL INFORMATION

  2009 2008
  US$ US$
Interest paid during the year 3,076,249 3,311,177
Income taxes paid during the year - 116,464
Total 3,076,249 3,427,641

16. CAPITAL DISCLOSURE

The Corporation's objectives when managing capital are:

  • to safeguard the Corporation's ability to continue as a going concern;
  • to maintain balance sheet strength and optimal capital structure, while ensuring the Corporation's strategic objectives are met; and
  • to provide an appropriate return to shareholders relative to the risk of the Corporation's underlying assets.

In the definition of capital, the Corporation includes shareholders' equity, and working capital. Shareholders' equity includes share capital, contributed surplus, retained earnings or deficit and other comprehensive income.

The Corporation maintains and adjusts its capital structure based on changes in economic conditions and the Corporation's planned requirements. The Board of Directors reviews the Corporation's capital structure and monitors requirements. The Corporation may adjust its capital structure by issuing new equity and/or debt, selling and/or acquiring assets, and controlling capital expenditure programs.

The Board sets guidelines for the management of the Corporation's capital. The Corporation monitors its capital structure using the debt-to-equity ratio and other benchmark measures at the consolidated group level.

  December 31, 2009 December 31, 2008
  US$ US$
Debt - 61,200,000
Equity 253,255,843 243,868,625
     
Debt as a % of Equity N/A 25%

On July 29, 2009 all debt was repaid and the Corporation is debt free with all security released.

There have been no significant changes from the previous quarter to management's objectives, policies and processes to manage capital or to the components defined as capital.

17. RELATED PARTY TRANSACTIONS

A Director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The amount of fees paid to Burstall Winger LLP in the year ended December 31, 2009 was $215,861 (2008 - $384,925). The balance outstanding at December 31, 2009 was $nil (2008 - $nil). These amounts have been recorded at the exchange amount.

To view the Auditors' Report, please visit the following link: http://media3.marketwire.com/docs/IAE0412S.pdf

Neither TSX Venture nor it's Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

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