CARDINAL RESOURCES PLC
LSE : CDL

CARDINAL RESOURCES PLC

May 30, 2006 17:23 ET

Cardinal Resources plc Announces Preliminary Results for the Year Ended 31 December 2005

LONDON--(CCNMatthews - May 30, 2006) - The Directors of Cardinal Resources plc (AIM: CDL) ("Cardinal" or "the Company") today announce the preliminary results of the Company for the year ended 31 December 2005.

HIGHLIGHTS

- Admitted to the London Stock Exchange's Alternative Investment Market (AIM) in April 2005 raising $20 million for growth

Proved and probable reserves increased over 75% to 32.5 MMBOE from 18.4 MMBOE at the time of admission to AIM, largely as a result of the acquisition of Rudis Drilling Company

- Average daily production at 31 December was up 72% year-on-year to 1,154 barrels of oil equivalent

- Rudis Drilling Company was acquired in October 2005 for $14.8 million, or $0.85 per BOE, increasing reserves by 17.6 MMBOE and boosting the number of owned and operated licence areas held by the Company

- $38 million financing was secured in December 2005 from Silver Point Capital (SPC) to assist in reinstating Cardinal's net profit interest in the Rudivsko-Chernovozavodske (RC) Field back up to 45% and to provide additional working capital for Cardinal's field development programme

- Aggressive work programme started on the Rudis assets to increase current year-end production of 1,154 boepd by 2,500 to 3,000 boepd by the end of 2007 with the initiation of drilling on seven new development wells and seven workovers

- Gas prices increased 45% to $2.38/Mcf at 2005 year-end from $1.64/Mcf at the end of 2004

- Group turnover increased 52% to $4.6 million, including the Company's share of joint venture turnover at the Bytkiv Field

- Gross profit increased to $1.4 million (2004: $0.4 million)

Robert J. Bensh, Chairman and Chief Executive of Cardinal, said: "The year 2005 was one of exceptional achievements and continuing challenges for the Company.

"While we are proud of our accomplishments and the value we have created by nearly doubling our reserves and production since the IPO, developing our operating position in Ukraine, enhancing the strength of our board and raising the capital necessary to develop our assets, our accomplishments in 2005 are nothing more than milestones as we focus and stay disciplined towards achieving our longer-term goal of becoming a major independent company operating in Ukraine's upstream oil and gas sector."

Chairman's Statement, Operational and Financial Reviews and Summarised Financial Statements follow.






For further information please contact:

Cardinal Resources Parkgreen Communications
Kate Spiro Justine Howarth / Victoria Thomas
+44 (0) 20 7936 5258 +44 (0) 20 7493 3713
kspiro@cardinal-uk.com victoria.thomas@parkgreenmedia.com

###




CHAIRMAN'S STATEMENT

The year 2005 was one of exceptional achievements and continuing challenges for Cardinal Resources. The Company's achievements include:

- Recapitalizing the business with $58 million in new capital from listing on London's AIM market and completing financings with Silver Point Capital;

- Concluding the acquisition and reorganisation of Carpatsky Petroleum;

- Completing the acquisition and integration of Rudis Drilling Company;

- Continuing to solidify our relationships with key contacts in Ukraine;

- Expanding our experienced upstream management team with additional technical professionals in Ukraine; and

- Embarking on a comprehensive business strategy to develop long-term value for our stakeholders.

While we are proud of our accomplishments in 2005, they are nothing more than milestones towards our longer-term goal of creating a leading presence in Ukraine's upstream oil and gas sector. Cardinal has a unique opportunity to aggregate a portfolio of geographically concentrated development and exploration assets at an attractive price. We believe the resulting company may be a desirable strategic acquisition target in the region for another industry player.

The continuing challenge for the global energy industry in today's operating environment is characterized by sustained increases in global demand, tight supply and a dynamic geopolitical situation. Significantly higher commodity prices have generated unprecedented revenues and earnings for oil and gas companies. In response, and in an effort to impact per share growth, companies have repurchased shares, increased dividends and accelerated the production cycle with decreasing margins. The near-term effort to boost share prices has been at the expense of continuing value creation, by failing to replace reserves.

Within this context, Cardinal has focused its long-term growth strategy away from reserve risk to above ground risk, where Cardinal's challenges include access to proved oil and gas resources, barriers to the free-flow of capital investment to develop those resources and the further development of infrastructure to link in supplies to Ukraine's highly developed pipeline system. We see Cardinal overcoming these challenges by applying modern technology and experience to develop assets, continuing to build on strong relationships with the Ukrainian business community and political leaders to integrate Cardinal into the local market, and beginning development of facilities to incorporate production into the main network. In this environment, and in Ukraine where Cardinal operates, the advantage will go to companies that demonstrate sustained and high quality operating performance, apply new technology in ways that drive results, manage risk and create partnerships to access resources and enable the cost-efficient execution of projects. These are all core capabilities of Cardinal.

Our vision and goals would be mere words on paper without a focused business strategy that is easily understood, agreed upon and followed by management, yet with enough flexibility to encourage independent thought and individual empowerment to create value.

Cardinal's guiding principles in executing its corporate strategy include:

- Pursue Strategic Acquisitions. Acquire new licence areas, drilling prospects and producing properties under the Company's operational and financial control that have significant development and exploration potential. Increase holdings in fields and basins in which we already own an interest.

- Develop Existing Properties with Modern Technology. Increase proved reserves and production through the cost efficient use of advanced technologies.

- Manage Property Portfolio. Divest higher cost, less productive properties with limited development potential, focusing on core portfolio assets with significant potential to increase proved reserves and production.

- Apply Operational and Financial Control. Manage the capital expenditure programme and enhance the cost efficiency and quality control of assets by operating properties and allowing for immediate monetization of the asset portfolio.

- Pursue and Develop Strategic Relationships. Develop partnerships and alliances that reduce the political and potential operating risks of working in an emerging market.

- Maintain Financial Flexibility. Manage the capital structure to maintain optimum financial resources to continue to exploit existing assets which we control and operate, and make opportunistic acquisitions.

- Align Directors, Management and Employees with Shareholders. Ensure that the interests of all Cardinal employees are in line with those of the Company's shareholders in order to create and maximize per share growth.

- Benefit from the Transactional Nature of Our Industry. Assemble a geographically concentrated, property and licence diverse, development and exploration asset portfolio aggregated at an attractive price that will be viewed as a strategic acquisition by another company.

With the validation of our strategy for growth ahead of us, the near-term results are promising, with the acquisition of Rudis, the increase in ownership and operational control of the Bilousivsko-Chornukhinska (BC) licence area and the continuing negotiations with Ukrnafta to reinstate Carpatsky Petroleum Inc.'s net profit interest in the Rudivsko-Chernovozavodske (RC) Field from 14.9% to 45%.

Specifically, for 2006 and 2007, we have planned a capital and exploratory spending programme in the Rudis properties of $25 to $42 million - dependent upon the number of wells drilled, the extent of modern equipment utilised and the availability of finance - to drill seven new wells and complete seven workovers, predominantly on licence areas that we own or control operations. Our 2006 drilling programme remains heavily weighted toward the exploitation of our growing inventory of development projects. Higher production, coupled with the increasing gas prices in Ukraine, position us to deliver solid results again in 2006.

We will also pursue opportunities to work with various local entities in Ukraine where Cardinal can leverage its operating expertise to further develop and enhance current and potential partnerships while increasing production, reserves and revenues. Finally, we will actively participate in licence tenders in Ukraine if it enhances our acreage position in the country.

Our success in 2005, and the primary contributor to our future success, is the people of Cardinal. Their dedication, resourcefulness and sheer ingenuity were demonstrated throughout the year. It is our people who developed our strategies, built our partnerships, instituted new technologies and applied best practices to our projects, ensured that we operate safely and ethically and managed the business risks. In so doing, they delivered the performance results in 2005 of which we can all be proud.

Robert J. Bensh

Chairman and Chief Executive Officer

30 May 2006

OPERATIONAL REVIEW

Cardinal holds interests in four fields and three licence areas in Ukraine. One of the licences, Bilousivsko-Chornukhinska (BC), is 100% owned by the Company and the remaining licences and all fields are held through agreements with two Ukrainian state-controlled entities, Ukrnafta and Ukrgazvydobuvannya (Ukrgaz).

Acquisition of Rudis Drilling Company

-------------------------------------

In October 2005 Cardinal completed the acquisition of Rudis Drilling Company (Rudis). The transaction included the purchase of three licence areas: Bilousivsko-Chornukhinska (BC), North Yablunivska (NY) and Dubrivska (DB), and a 50% working interest in a Joint Activity Agreement (JAA) with Ukrgaz, a subsidiary of Naftogaz Ukraine, which covered certain wells in such licences and two other fields. All licence areas are located approximately 40 kilometres from Cardinal's Rudivsko-Chernovozavodske (RC) Field in Eastern Ukraine. The Rudis acquisition and subsequent well swap with Ukrgaz in January 2006 added 17.6 MMBOE to Cardinal's reserves, increasing the total figure by over 75% to 32.5 MMBOE at 31 December 2005. Production in the Rudis properties at year-end was 672 boepd.

The Rudis assets hold considerable strategic importance to Cardinal as they provide operating control over a number of key drilling and well workover locations and one full licence area, the BC licence. In the BC and NY licence areas Cardinal intends to complete seven workovers and initiate drilling on seven of eleven identified development locations by the end of 2007, increasing production by approximately 2,500 to 3,000 boepd. The forecasted capital investment to develop these locations ranges from $25 to $42 million, dependant upon the number of wells drilled, the extent of modern equipment utilised and the availability of finance.

Bilousivsko-Chornukhinska (BC) Licence Area

Cardinal has a 100% interest in and operates the BC licence. One workover, Well #13, announced at the time of the Rudis acquisition, was completed in early
2006. Cardinal intends to complete a further four workovers on the licence by the end of 2007. Work is currently underway to drill Well #3 located on the BC licence; it is expected to spud in June and complete in the second quarter of 2007. Preparation for the drilling of a further three wells on the licence is also expected to commence by the end of 2007.

A gas processing and gathering facility for the BC licence area is in the process of being designed and construction is expected to begin in the second half of 2006. Operations and gas sales are expected to commence in the first half of 2007. Meanwhile the gas from the two producing BC Wells #13 and #110 will continue to be flared to permit condensate production.

North Yablunivska (NY) Licence Area

Cardinal holds a 100% working and net profit interest in the NY licence area. However, four wells on the area (Wells #4, #201, #203 and #300) are covered by JAA #429 and Cardinal's interest in each such well is therefore 50%. Cardinal intends to begin preparations for drilling two wells independent of the JAA on this licence area by the end of 2007.

JAA #429

Three wells, located in the Bilskie and Kulickykhin Fields, are producing under Joint Activity Agreement 429 with Ukrgaz. NY Well #203, which used to produce intermittently, is currently being worked over using an Ukrgaz rig. Following its completion it is anticipated that the same rig will be used to work over the NY #300 and NY #201 wells in sequence. The location for drilling Well NY #4 is currently being prepared and the rig is expected to be on site by June.

Dubrivska (DB) Licence Area An exploratory well is currently drilling on the Dubrivska licence. It is at a total depth of 3,806 metres and in late May was being evaluated.

Equipment

---------

The wells to be drilled on the BC and NY licences will be drilled with locally-sourced Uralmash rigs upgraded using certain modern equipment and supplies. The Company believes these changes will provide for faster drilling times and result in better downhole conditions and production completions.

Rudivsko-Chernovozavodske (RC) Field

------------------------------------

The RC Field is a large gas field with 1.5 Tcf originally in place situated in the Dnieper-Donets basin in Eastern Ukraine. Cardinal has an interest in the field through a JAA with Ukrnafta, Ukraine's state-controlled oil and gas company. Ukrnafta owns and operates the 20-year production licence.

A total of 40 wells have been drilled on the RC Field, nine of which are within the JAA. Cardinal recognizes significant potential in this field to introduce modern drilling and completion techniques to not only enhance production of existing wells but also to drill new wells with higher production rates and longer production lives.

Under its JAA with Ukrnafta Cardinal has completed one unplanned workover since the Company's admission to AIM (Well #114) which is now back on production. A total of five wells within the JAA were producing 365 boepd net to Cardinal at the end of December 2005. Production has trailed 2005 internal projections due to the unforeseen problems encountered in the workover and consequent downtime on Well #102, which has led to subsequent delays in working over Wells #100 and #109, and in prolonged discussions regarding the reinstatement of the Company's full 45% interest in the field. The workover on Well #102 has been temporarily suspended and it is expected that, apart from the four wells Ukrnafta is currently drilling outside of the JAA, no further wells will be drilled in the field in 2006.

Reinstatement of 45% Net Profit Interest

----------------------------------------

Cardinal's net profit interest in the RC Field was diluted from 45% down to 14.9% due to historical under-funding of the JAA capital account prior to admission to AIM. It is Cardinal's intention to reinstate its interest in the field by settling the unpaid balance of the JAA account and paying the additional costs associated with four new wells currently being drilled by Ukrnafta. The $38 million financing secured in December was negotiated primarily for this purpose. Cardinal expects discussions with Ukrnafta and its primary shareholders regarding the reinstatement and purchase of shares in the four wells currently drilling will resume after a Parliamentary coalition has been formed in Ukraine.

Bytkiv-Babchenske (Bytkiv) Field

--------------------------------

Bytkiv is a large oil field located in the Western part of Ukraine in the Carpathian fold belt. Bytkiv's licence is owned by UkrCarpatOil - a joint venture (JV) between Cardinal and Ukrnafta.

Bytkiv is a good candidate for infill drilling, gas lift enhancement, modern rod pumps and water flood pressure maintenance. 12 wells were producing 117 boepd net to Cardinal at 2005 year-end. The workover on Well #1004 was completed in 2005, and in March 2006 a previously shut-in Well, #506, was returned to production. A further workover on #524 is currently in progress.

In addition, a further nine wells have been scheduled to be worked over by the end of 2008, and a total of 12 new wells to be drilled. However, the economics for drilling new wells has diminished significantly recently due to the expiration of Bytkiv's royalty-free status and a significant increase in taxes on oil, both of which have a marked impact on the Bytkiv licence operations. UkrCarpatOil will therefore focus primarily on low cost, high return workovers. Cardinal is currently in discussions with Ukrnafta to decide whether the drilling of Well #1007 will proceed as planned.

Sales and Gas Prices

--------------------

Gas accounts for 85% of Cardinal's total production, and the Company is therefore highly leveraged towards movements in Ukrainian gas prices. Cardinal sells its gas from the RC Field into the domestic market at monthly auctions. The buyers at these auctions are industrial consumers and gas traders. Production of oil from the Bytkiv Field is sold to a local refinery owned by Ukrnafta. Cardinal sells all of the Rudis gas and condensate from JAA #429 and the BC licence to the local market.

Since December 2004, Cardinal's average gas realizations, inclusive of VAT, have risen by more than 80% to $2.99/Mcf in March 2006. This trend is expected to continue as prices trend more in line with Europe where prices are currently four times higher than in Ukraine. The Ukrainian gas price forecasts prepared by Scott Pickford in its recent reserve report show a more conservative progression, as indicated below:





Time Period Forecast Average Price for Period/Mcf

2006 $2.60
2007 $2.67
2008 to 2020 $3.40
2021 to 2030 $4.52

Source: Scott Pickford, 31 December 2005




FINANCIAL REVIEW

Turnover

--------

Group turnover for the year was up by 52% to $4.6 million, including the Company's share of joint venture turnover at the Bytkiv Field. Oil, condensate and gas sales volume increased by 15%, reflecting production gains from the Rudis Drilling Company assets acquired in October 2005 but offset by delays in the work programmes at the Bytkiv and RC Fields, and temporary production losses from two unscheduled workovers. All production was sold locally to industrial and agricultural customers at an average price of $39.09 per barrel for oil and condensate and $2.30/Mcf for gas. Gas sales represented 54.5% of total revenues in 2005.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

-----------------------------------------------------------------------

EBITDA for the year was a loss of $6.7 million. Excluding non-recurring costs EBITDA was a loss of $4.7 million, compared to a loss of $3.7 million in 2004. Gross profit was $1.4 million, up from $0.4 million in 2004, in spite of an increase in unit operating costs in 2005 due to higher production taxes and rentals. General & Administration (G&A) expenses, including non-recurring reorganisation expenses related to the acquisition of Carpatsky and share issue costs expensed, amounted to $9.5 million. Excluding such one-time costs, other G&A increased by $2.1 million to $7.5 million. The Company's share of operating profit from the Bytkiv joint venture increased to $956,000 from a loss of $167,000 in 2004.






EBITDA was calculated as follows:

2005 2004
$'000 $'000

Operating Loss (8,060) (5,787)
Depreciation/Depletion Charge 196 1,316
Share of Joint Venture 1,173 63
-------------------------------------------------------------
EBITDA (including non-recurring costs)(6,691) (4,408)
Non-recurring costs 1,976 698
--------------------------------------------------------------
EBITDA (excluding non-recurring costs)(4,715) (3,710)





Consolidated Balance Sheet

--------------------------

The Company continued to invest in acquiring new producing assets, field development activities and expanding its capital structure. Cash at bank and in hand increased more than ten-fold to $24 million as a result of the proceeds from the AIM listing and the initial funding under the $38 million Silver Point facility. In addition, $14.1 million of the Silver Point financing remains undrawn as of year-end.

Fixed Assets increased to $19.0 million from $2.6 million in 2004, primarily as a result of the Rudis acquisition. Total Liabilities increased to $25.3 million with the initial funding under the Silver Point facility.

Financing Activities

---------------------

In recapitalizing the Company during the year we have provided financial flexibility to execute our strategy of exploiting the undeveloped potential of our existing assets, as well as continuing to grow through acquisitions.

In April 2005, the Company issued 33,000,000 new ordinary shares at a subscription price of GBP0.32 per share via its admission to trading on the London Stock Exchange's Alternative Investment Market (AIM). Gross proceeds amounted to GBP10.6 million ($19.8 million). The new issue was well subscribed by both European and US institutional investors.

In December, the Company completed and partially funded a $38 million two-year bridge facility with Silver Point to provide funding for the deferred cash portion of the Rudis acquisition, financing fees, the RC Field equity reinstatement, development activities at the RC Field and Rudis fields and general corporate purposes. The coupon rate is 15% per annum in the first six months, rising to 20% per annum and then another 1% per annum for every quarter thereafter until maturity, payable quarterly in cash or with payment-in-kind notes. The issue included warrants with a term of five years to subscribe for approximately 32.2% of Cardinal Resources Finance Limited, a recently formed UK intermediate holding company owned by Cardinal under which Cardinal's assets are held. Silver Point also has warrants to approximately 4.4 million Cardinal ordinary shares. Subject to any necessary shareholder and regulatory approvals required, it is intended that the $38 million facility will be replaced with a five year senior PIK note facility at a lower interest rate of 15% per annum with warrants to 80 million shares in Cardinal Resources plc at an exercise price of GBP0.275 per share, a 49% premium to the share price at the time the agreement was made. The Cardinal Resources plc warrants would replace all existing warrants held by Silver Point.

Share Capital

-------------

Called up share capital at the beginning of 2005 stood at 15,933,325 issued shares. During the course of 2005 further issues were made to facilitate the acquisition of Carpatsky, the Initial Public Offering and the acquisition of
Rudis Drilling Company from Hares Group Ltd. Total shares issued at 31 December 2005 were 114,554,109.





###


Consolidated Profit and Loss Account

Year Year
ended ended
31 31
December December
Continuing Acquired 2005 2004
$'000 $'000 $'000 $'000
----------------- -------- ------- ------- -------
Turnover
Group and share
of joint venture 3,796 791 4,587 3,024
Less: share of
joint venture
turnover (1,556) - (1,556) (1,429)
----------------- -------- ------- ------- -------
2,240 791 3,031 1,595
Cost of admission
to AIM (937) (658) (1,595) (1,220)
----------------- -------- ------- ------- -------
Gross profit 1,303 133 1,436 375
Share issue costs (467) - (467) -
Reorganisation
expenses (1,509) - (1,509) (698)
Other general and
administrative
expenses (7,506) (14) (7,520) (5,464)
----------------- -------- ------- ------- -------
Total general and
administrative
expenses (9,482) (14) (9,496) (6,162)
----------------- -------- ------- ------- -------
Operating
(loss)/profit (8,179) 119 (8,060) (5,787)
Share of
operating
profit/(loss)
of joint
Venture 1,173 63
Interest
receivable 96 45
Interest
payable (221) 495
----------------- -------- ------- ------- -------
Loss on ordinary
activities
before taxation (7,012) (5,184)
Taxation on
profit on
ordinary
activities (473) (409)
----------------- -------- ------- ------- -------
Loss on ordinary
activities
transferred to
reserves (7,485) (5,593)
----------------- -------- ------- ------- -------
Basic and diluted
loss per share ($) (0.09) (0.11)
----------------- -------- ------- ------- -------

There were no recognised gains and losses other than the
loss for the year.

All transactions arise from continuing operations.


Consolidated Balance Sheet
As at As at
31 December 31 December
2005 2004
$'000 $'000
Fixed assets
Intangible assets 1,587 -
Tangible assets 16,345 2,604
--------------------- -------- -------
17,932 2,604
Investments
Joint ventures
Share of gross assets 2,428 1,881
Share of gross
liabilities (1,171) (1,580)
--------------------- -------- -------
1,257 301
--------------------- -------- -------
19,189 2,905
--------------------- -------- -------
Current assets
Stocks 160 15
Debtors 1,543 3,453
Cash at bank and in hand 23,995 2,185
25,698 5,653
Creditors: amounts
falling due within one
year (5,045) (4,634)
--------------------- -------- -------
Net current assets 20,653 1,019
--------------------- -------- -------
Total assets less current
liabilities 39,842 3,924
Creditors: amounts
falling due after more
than one year (19,233) (1,220)
Provision for liabilities (897) (144)
--------------------- -------- -------
19,712 2,560
--------------------- -------- -------
Capital and reserves
Called up share capital 42,165 5,825
Share premium account 2,968 960
Reverse acquisition
reserve (1,278) (1,278)
Shares to be issued - 14,209
Other reserves 1,829 1,331
Profit and loss account (25,972) (18,487)
--------------------- -------- -------
Total shareholders' funds 19,712 2,560
--------------------- -------- -------

The financial statements were approved by the Board of
Directors on 30 May 2006.

Robert J. Bensh
Director


Consolidated Cashflow Statement

Year ended Year ended
31 December 31 December
2005 2004
$'000 $'000
Net cash outflow from
operating activities (5,905) (7,064)
Returns on investments and
servicing of finance
Interest received 96 45
Interest paid (220) (146)
--------------------- -------- -------
Net cash outflow from
returns on investments
and Servicing of finance (124) (101)
Taxation (256) (179)
Capital expenditure and
financial investment
Purchase of intangible
fixed assets (1,131) -
Purchase of tangible
fixed assets (380) (156)
--------------------- -------- -------
Net cash outflow from
capital expenditure and
financial Investment (1,511) (156)
Acquisitions
Cash paid for purchase
of subsidiary
undertaking (6,000) -
Net cash from purchase
of subsidiary
undertaking 723 9,500
--------------------- -------- -------
Net cash (outflow)/inflow
from acquisitions (5,277) 9,500
Financing
Repayment of borrowings - (175)
Silverpoint Loan advance 23,900 -
Costs of loan arrangement (4,817) -
Share and warrant issues 20,341 -
Costs of admission to AIM (4,541) -
--------------------- -------- -------
Net cash inflow/(outflow)
from financing 34,883 (175)
--------------------- -------- -------
Increase in cash 21,810 1,825
--------------------- -------- -------

The accompanying accounting policies and notes form an
integral part of these financial statements.

###




PRINCIPAL ACCOUNTING POLICIES

Basis of preparation

--------------------

The financial statements have been prepared under the historical cost convention and in accordance with applicable accounting standards except for the adoption of reverse acquisition accounting described within which constitutes a true and fair override departure from UK Accounting Standards. The financial statements are also prepared under the Statement of Recommended Practice for "Accounting for Oil and Gas Exploration, Development, Production and Decommissioning Activities" issued June 2001 (the "SORP").

The principal accounting policies of the Group are set out below. The policies have remained unchanged from the previous year apart from the adoption of FRS 21 "Events after the balance sheet date" and FRS 25 "Financial Instruments: Disclosure and Presentation". These changes are described in more detail below.

Changes in accounting policies

------------------------------

In preparing the financial statements for the current year, the Group has adopted the following Financial Reporting Standards:

FRS 21 'Events after the Balance Sheet date (IAS 10)' The adoption of FRS 21 has had no impact on the Group during the year.

FRS 25 'Financial Instruments: Disclosure and Presentation (IAS 32)' The Group took out a loan in the year from Silver Point Capital. In prior years the company had no financial instruments other than this so no adjustment to comparatives was required. The Silver Point loan included warrants which were valued at $498,000 and have been separated from the loan and included in equity.

Financial instruments

---------------------

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities.

Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability.

Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.

Compound financial instruments

------------------------------

Compound financial instruments comprise both a liability and an equity component. At date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar debt instrument without the equity feature. The liability component is accounted for as a financial liability.

The residual is the difference between the net proceeds of issue and the liability component (at time of issue). The residual is the equity component, which is accounted for as an equity instrument.

The interest expense on the liability component is calculated by applying the effective interest rate for the liability component of the instrument. The difference between any repayments and the interest expense is deducted from the carrying amount of the liability in the balance sheet.

Basis of consolidation

----------------------

The Group financial statements consolidate those of the Company and its subsidiary undertakings made up to 31 December 2005. Acquisitions of subsidiaries are dealt with by the acquisition method of accounting except for the reverse takeover transaction of Carpatsky by the Company in 2004 and completed in April 2005, which was fully explained in the Group's 2004 Annual Report and Financial Statements.

Joint ventures

--------------

A joint venture is an entity in which the Group holds a long-term interest and which is jointly controlled by the Group and one or more other venturers under a contractual arrangement. The result of the joint venture is accounted for using the gross equity method of accounting and includes the Group's proportion of operating profit or loss, interest, tax and net assets.

The Group's interest in UkrCarpatOil Limited has been accounted for as a joint venture.

Joint arrangements that are not entities

The Group has certain contractual arrangements with other entities to engage in joint activities that do not create a separate legal entity carrying on a trade or business of its own. The Group includes its share of assets, liabilities and cash flows in such joint arrangements, measured in accordance with the terms of
each arrangement, which is usually pro rata to the Group's risk interest in the joint arrangement.

The Group's interests in its Joint Activity Agreements with Ukrnafta and Ukrgazvydobuvannya have been accounted for as joint arrangements that are not entities.

Turnover

--------

Turnover represents sales of oil and gas and is recorded exclusive of indirect taxes and duties.

Revenue recognition Sales of oil and gas are recorded in the period in which the title to the product transfers to the customer. Produced but unsold products are recorded as stocks until sold.

The Company records revenue based on oil, gas and condensate prices which are set at monthly auctions in Ukraine.

Petroleum and natural gas properties

------------------------------------

Full cost method

Cardinal follows the "full cost" method of accounting for the costs associated with exploration, appraisal, development and production of oil and gas reserves.

The costs of acquisition of property, geological and geophysical costs, costs of field production facilities, pipelines and plants and equipment are classified as tangible fixed assets if they relate to proved and probable oil and gas properties. Proceeds from sales of oil and gas properties are credited to the full cost pool with no gain or loss recognised unless such adjustments would significantly alter the related cost centre's rate of depletion.

Depletion

Producing oil and gas assets are depleted by pool on a unit of production method in the proportion of actual production for the period to the total remaining commercial reserves. The total remaining commercial reserves are those estimated at the end of the period, plus production during the period. For depletion purposes only, the cost base includes the cost of capital assets and anticipated future development expenditures.

For depletion purposes, relative volumes of petroleum and natural gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil.

Oil and gas reserves

In respect of the Group's oil and gas reserves, the terms "Proven Reserves" and "Probable Reserves" are the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible for the period for which a licence is held. Proven Reserves are considered to have at least a 90% chance of being recovered. Probable Reserves are considered to have at least a 50% chance of being recovered.

Decommissioning costs

Where there is a material liability for the removal of production facilities and site restoration at the end of the production life for a field, the Company recognises the provision when the obligation to decommission arises. A corresponding tangible fixed asset of an amount equivalent to the provision is also created.

Foreign currencies

------------------

In view of the international nature of the Group's activities and due to the fact that more of the Group's revenues are denominated in US dollars than in any other single currency, the consolidated financial statements are reported in US dollars. The Group's functional currency is primarily the US dollar. The reporting currency of the Group is also the US dollar.

Transactions in foreign currencies are translated into US dollars at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. The financial statements of foreign subsidiaries, joint ventures and joint arrangements that are not entities are translated at the rate of exchange ruling at the balance sheet date. The exchange differences arising from the retranslation of the opening net investment in subsidiaries and joint ventures are taken directly to reserves.

Tangible fixed assets and depreciation

--------------------------------------

Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment. Depreciation is calculated to write down the cost of all tangible fixed assets by equal annual instalments over their estimated useful economic lives which range between three and seven years.

Computer Equipment depreciated over 3 years.

Leasehold Improvements and Office Furniture depreciated over 5 years.

Motor Vehicles depreciated over 7 years.

Oil & Gas Assets depreciated on a 'units of production' basis following statement of recommended practise for Oil & Gas Activities.

Intangible assets

-----------------

Pre-licence acquisition and work in progress on individual assets and wells held outside a cost pool remain undepreciated pending determination subject to there being no evidence of impairment. When an acquisition has taken place or the drilling creates a producing asset then these costs will be transferred to the appropriate cost pool within tangible fixed assets.

Stocks

------

Stocks comprise oil, gas and condensate in tanks, pipelines and storage facilities and materials, all of which are stated at the lower of cost or net realisable value.

Deferred taxation

-----------------

Deferred tax is recognised on all timing differences where the transactions or events that give the Group an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance date.

Operating leases

----------------

Payments made under operating leases are charged to the profit and loss account on a straight line basis over the lease term.





###






NOTES TO THE FINANCIAL STATEMENTS



1 Turnover



Turnover represents amounts invoiced in respect of sales of oil and gas,
exclusive of indirect taxes and excise duties.



An analysis of turnover is presented below:







Year ended Year ended
31 December 31 December
2005 2004
$'000 $'000

Oil sales 1,374 1,296
Gas sales 2,500 1,484
Condensate sales 713 244
--------------------- -------- -------
Group turnover 4,587 3,024
--------------------- -------- -------
Share of joint ventures'
turnover
Gas sales/oil sales (1,556) (1,296)
Condensate sales - (133)
--------------------- -------- -------
(1,556) (1,429)
--------------------- -------- -------
Net turnover 3,031 1,595
--------------------- -------- -------





Turnover was wholly attributable to the Group's primary activities, all of which arise in Ukraine.

2 Loss per share

The basic and diluted loss per share is based on equity losses of $7,017,000 (2004: $5,593,000) and 83,200,895 (2004: 50,836,727) ordinary shares at 20p each, being the average number of shares in issue during the year. The options and warrants in issue are not dilutive.

3 Fixed asset investments

Group

Joint Ventures

Total fixed asset investments comprise:





Year ended Year ended
31 December 31 December
2005 2004

$'000 $'000
Interests in joint ventures 1,257 301





At 31 December 2005 and 2004 the Group had interests in the following joint ventures:






Joint venture Country Class of Proportion Nature of
of share held business
incorporation capital
held

UkrCarpatOil Ukraine Capital 45% Oil
Limited contribution production





UkrCarpatOil Limited is a joint venture for operations at the Bytkiv Field between Carpatsky Petroleum Corporation ("CPC") and Ukrnafta. The Company has a 45% interest in UkrCarpatOil Limited through its ownership of Carpatsky and CPC. As UkrCarpatOil Limited is a limited liability company registered under Ukrainian law, it does not issue shares and the shareholders' (known as "participants") ownership and voting interests are directly proportional to their respective portion of capital contribution subscribed. The authorised fund of UkrCarpatOil Limited is UAH 12,220, with Ukrnafta holding a 55% participation interest and CPC holding a 45% participation interest.





Share of
net assets
$'000
Cost
At 1 January 2005 1,208
Share of profit 956
---------------------- ---------
At 31 December 2005 2,164
---------------------- ---------
Amounts written off
At 1 January 2005 907
---------------------- ---------
At 31 December 2005 907
---------------------- ---------
Net book amount at
31 December 2005 1,257
---------------------- ---------
Net book amount at
31 December 2004 301
---------------------- ---------





The Group's share of the results, assets and liabilities of UkrCarpatOil Limited was:

arrangement, which is usually pro rata to the Group's risk interest in the joint arrangement.

The Group's interests in its Joint Activity Agreements with Ukrnafta and Ukrgazvydobuvannya have been accounted for as joint arrangements that are not entities.

Turnover

--------

Turnover represents sales of oil and gas and is recorded exclusive of indirect taxes and duties.

Revenue recognition Sales of oil and gas are recorded in the period in which the title to the product transfers to the customer. Produced but unsold products are recorded as stocks until sold.

The Company records revenue based on oil, gas and condensate prices which are set at monthly auctions in Ukraine.

Petroleum and natural gas properties

------------------------------------

Full cost method

Cardinal follows the "full cost" method of accounting for the costs associated with exploration, appraisal, development and production of oil and gas reserves.

The costs of acquisition of property, geological and geophysical costs, costs of field production facilities, pipelines and plants and equipment are classified as tangible fixed assets if they relate to proved and probable oil and gas properties. Proceeds from sales of oil and gas properties are credited to the full cost pool with no gain or loss recognised unless such adjustments would significantly alter the related cost centre's rate of depletion.

Depletion

Producing oil and gas assets are depleted by pool on a unit of production method in the proportion of actual production for the period to the total remaining commercial reserves. The total remaining commercial reserves are those estimated at the end of the period, plus production during the period. For depletion purposes only, the cost base includes the cost of capital assets and anticipated future development expenditures.

For depletion purposes, relative volumes of petroleum and natural gas production and reserves are converted at the energy equivalent conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil.

Oil and gas reserves

In respect of the Group's oil and gas reserves, the terms "Proven Reserves" and "Probable Reserves" are the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible for the period for which a licence is held. Proven Reserves are considered to have at least a 90% chance of being recovered. Probable Reserves are considered to have at least a 50% chance of being recovered.

Decommissioning costs

Where there is a material liability for the removal of production facilities and site restoration at the end of the production life for a field, the Company recognises the provision when the obligation to decommission arises. A corresponding tangible fixed asset of an amount equivalent to the provision is also created.

Foreign currencies

------------------

In view of the international nature of the Group's activities and due to the fact that more of the Group's revenues are denominated in US dollars than in any other single currency, the consolidated financial statements are reported in US dollars. The Group's functional currency is primarily the US dollar. The reporting currency of the Group is also the US dollar.

Transactions in foreign currencies are translated into US dollars at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. The financial statements of foreign subsidiaries, joint ventures and joint arrangements that are not entities are translated at the rate of exchange ruling at the balance sheet date. The exchange differences arising from the retranslation of the opening net investment in subsidiaries and joint ventures are taken directly to reserves.

Tangible fixed assets and depreciation

--------------------------------------

Tangible fixed assets are stated at cost or valuation, net of depreciation and any provision for impairment. Depreciation is calculated to write down the cost of all tangible fixed assets by equal annual instalments over their estimated useful economic lives which range between three and seven years.

Computer Equipment depreciated over 3 years.

Leasehold Improvements and Office Furniture depreciated over 5 years.

Motor Vehicles depreciated over 7 years.

Oil & Gas Assets depreciated on a 'units of production' basis following statement of recommended practise for Oil & Gas Activities.

Intangible assets

-----------------

Pre-licence acquisition and work in progress on individual assets and wells held outside a cost pool remain undepreciated pending determination subject to there being no evidence of impairment. When an acquisition has taken place or the drilling creates a producing asset then these costs will be transferred to the appropriate cost pool within tangible fixed assets.

Stocks

------

Stocks comprise oil, gas and condensate in tanks, pipelines and storage facilities and materials, all of which are stated at the lower of cost or net realisable value.

Deferred taxation

-----------------

Deferred tax is recognised on all timing differences where the transactions or events that give the Group an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised when it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance date.

Operating leases

----------------

Payments made under operating leases are charged to the profit and loss account on a straight line basis over the lease term.





###






NOTES TO THE FINANCIAL STATEMENTS



1 Turnover



Turnover represents amounts invoiced in respect of sales of oil and gas,
exclusive of indirect taxes and excise duties.



An analysis of turnover is presented below:







Year ended Year ended
31 December 31 December
2005 2004
$'000 $'000

Oil sales 1,374 1,296
Gas sales 2,500 1,484
Condensate sales 713 244
--------------------- -------- -------
Group turnover 4,587 3,024
--------------------- -------- -------
Share of joint ventures'
turnover
Gas sales/oil sales (1,556) (1,296)
Condensate sales - (133)
--------------------- -------- -------
(1,556) (1,429)
--------------------- -------- -------
Net turnover 3,031 1,595
--------------------- -------- -------





Turnover was wholly attributable to the Group's primary activities, all of which arise in Ukraine.

2 Loss per share

The basic and diluted loss per share is based on equity losses of $7,017,000 (2004: $5,593,000) and 83,200,895 (2004: 50,836,727) ordinary shares at 20p each, being the average number of shares in issue during the year. The options and warrants in issue are not dilutive.

3 Fixed asset investments

Group

Joint Ventures

Total fixed asset investments comprise:





Year ended Year ended
31 December 31 December
2005 2004

$'000 $'000
Interests in joint ventures 1,257 301





At 31 December 2005 and 2004 the Group had interests in the following joint ventures:






Joint venture Country Class of Proportion Nature of
of share held business
incorporation capital
held

UkrCarpatOil Ukraine Capital 45% Oil
Limited contribution production





UkrCarpatOil Limited is a joint venture for operations at the Bytkiv Field between Carpatsky Petroleum Corporation ("CPC") and Ukrnafta. The Company has a 45% interest in UkrCarpatOil Limited through its ownership of Carpatsky and CPC. As UkrCarpatOil Limited is a limited liability company registered under Ukrainian law, it does not issue shares and the shareholders' (known as "participants") ownership and voting interests are directly proportional to their respective portion of capital contribution subscribed. The authorised fund of UkrCarpatOil Limited is UAH 12,220, with Ukrnafta holding a 55% participation interest and CPC holding a 45% participation interest.





Share of
net assets
$'000
Cost
At 1 January 2005 1,208
Share of profit 956
---------------------- ---------
At 31 December 2005 2,164
---------------------- ---------
Amounts written off
At 1 January 2005 907
---------------------- ---------
At 31 December 2005 907
---------------------- ---------
Net book amount at
31 December 2005 1,257
---------------------- ---------
Net book amount at
31 December 2004 301
---------------------- ---------





The Group's share of the results, assets and liabilities of UkrCarpatOil Limited was:





31 December 31 December
2005 2004
$'000 $'000

Turnover 1,556 1,429
Profit before tax 1,173 63
Taxation (217) (230)
Profit/(loss) after tax 956 (167)
Fixed assets 518 940
Current assets 1,910 941
Liabilities due
within one year 1,171 1,580
----------------------- -------- ---------





Joint Arrangements

The Group also conducts its operations through two joint activity agreements ("JAA"). One is between CPC and Ukrnafta covering development of the RC Field. The second JAA is between Rudis and Ukrgazvydobuvannya (Ukrgaz) and covers development of two licence areas and a further two fields. CPC and Rudis have accounted for their interests in the JAAs as joint activities that are not an entity in line with Financial Reporting Standard 9 based on their relative ownership percentages in the JAAs.

The RC Field JAA was entered into by CPC with Ukrnafta in 1995 to undertake the joint development of the RC Field. The RC Field JAA contemplates both parties owning a 50% working interest in the project venture based on equal capital contributions, with Ukrnafta receiving an additional 10% net profit interest (i.e. the Group would have a 45% net profit interest if both parties had contributed an equal 50% to the joint account). Under the JAA, the working interest of each party is based on the capital contributions computed on a quarterly basis. The Group's share of net profit is calculated as 90% of its
capital contributions to the JAA at the end of each quarter. Due to CPC's inability to meet capital commitments under the JAA during the period from 2001 to 2003, its working interest and net profits interest were reduced on a dilutive basis to a 16.57% working interest and 14.91% net profit interest in the JAA, in both 2005 and 2004.

The Rudis JAA was entered into by Rudis with Ukrgaz in 2004 to undertake the joint development of certain wells in two licence areas owned 100% by Rudis (BC Area and NY Area), exploration on the DB licence area and for reworking of certain wells in two more fields owned by Ukrgaz. The Rudis JAA was amended in January 2006 to provide that the wells on the BC licence area are exclusively owned and operated by Rudis. In addition, the amendment provided that certain wells were removed from the Rudis JAA and others from the NY licence were added. Under the Rudis JAA the parties each own a 50% working and net profit interest. It was envisaged that profit obtained from certain of the workovers would provide finance for the exploration of the DB licence and for drilling development wells on some of the other licences. To the extent that the profits are insufficient, the parties have the right to make cash contributions. Rudis is required to pay 100% of any shortfall to the JAA account, netted against any proceeds from production.





4 Creditors: Amounts falling due within one year

Group Group
As at As at
31 December 31 December
2005 2004
$'000 $'000

Trade creditors 1,699 2,030
Social security and other
taxes 61 244
Amounts owed to joint ventures
and joint arrangements 304 321
Other creditors 618 -
Accruals 2,363 2,039
--------------------- -------- -------
5,045 4,634
--------------------- -------- -------



Amounts owed to related parties represent amounts due to the Group's partner in its joint venture and joint activity agreement, Ukrnafta.

5 Creditors: Amounts falling due after more than one year





Group Group
As at As at
31 December 31 December
2005 2004
$'000 $'000

Gross bank borrowings
1-2 years 23,900 -
Less: costs of raising
bank borrowing (4,817) -
--------------------- -------- -------
19,083 -
Other creditors 150 1,220
--------------------- --------- --------
19,233 1,220
--------------------- --------- --------





Silver Point Capital - bank borrowings

Pre-Bridge Loan

On 1 December 2005, the Group closed on an $8 million financing, the first tranche of $38 million in bridge financing from Silver Point Capital (SPC) This enabled the Group to pay the $5 million cash consideration due under the Rudis Drilling acquisition, with the remaining cash used for transaction expenses and general corporate purposes. Under the terms of the financing agreement, the Group issued $8 million in Payment-in-Kind (PIK) Notes to SPC. The PIK Notes carried a coupon of 15% with quarterly interest payable in cash or by issue of further PIK Notes (on the same terms) at the Group's option. As part of this financing, the Group also issued to SPC warrants to subscribe at a price of GBP0.275 for 4,389,875 new Company ordinary shares for a period of 5 years. The PIK Notes had a 6 month term. On 23 December 2005, the PIK Notes were refinanced by the issue of the new PIK Notes in the second tranche of the $38 million financing (see below). The transaction fees amounted to $1,769,125 with net cash to the Group of $6,230,875.

Bridge Loan

On 23 December 2005, the Group closed on a $38 million bridge financing facility with SPC. At the closing, $23.9 million was funded, while another $14.1 million remains committed but unfunded. The amounts funded under the Bridge facility were used to (i) refinance the $8 million in (PIK) Notes issued on 1 December 2005 by the Group to SPC; (ii) settle fees and expenses relating to the transaction; and (iii) provide for general corporate and capital expenditure purposes. The committed funds ($14.1m) and a portion of the funding are intended for the Group to (a) reinstate its net profit interest in the RC Field back up to 45% by settling its outstanding balance in the JAA capital account with Ukrnafta; and (b) reinstate its 45% interest in four development wells in the RC Field currently being drilled by Ukrnafta. In the financing transaction, the Group issued $38 million in two-year Bridge PIK Notes to SPC, which carry a coupon of 15% with quarterly interest payable in cash or by issue of further PIK Notes (on the same terms), at the Group's option. In addition, the Group formed a new wholly-owned UK intermediate holding company, Cardinal Resources Finance Limited. Cardinal Finance issued to SPC warrants to subscribe for approximately 32.2% of Cardinal Finance, before adjustment to take account of inter-company balances, (at a price equivalent to GBP0.275 if such shares had been issued at the parent company level) for a period of five years. The Group has the right to redeem the notes in full after one year, subject to an early redemption fee, unless refinanced by SPC or its affiliates.

Subject to shareholder and UK regulatory approval, it is intended that the $38 million Bridge PIK Notes will be refinanced with SPC, by an issue of five-year Senior PIK Notes and that the Cardinal Finance warrants will be cancelled and reissued as warrants in the Company upon issuance of the Senior Notes. If the Senior PIK Notes are not issued before 23 June 2006, interest payments on the Bridge PIK Notes will rise from 15% to 20% p.a. and then another 1% p.a. for every quarter thereafter until maturity. The $8 million PIK Notes, issued on 1 December 2005, were refinanced in this new two-year facility but SPC retained the 4,389,875 Company warrants issued in conjunction with the pre-bridge loan.

All bank borrowings are secured by a fixed and floating charge over all the Company's assets.

6 Acquisitions

On 27 October 2005, the Group completed the acquisition of Raget Commercial Limited (a Cyprus company) from a subsidiary of the Hares Group Limited. Raget's sole asset is the ownership of Rudis Drilling Company, a Ukrainian limited liability company ("Rudis"). Under the acquisition, with direct ownership of Rudis, the Group became owner of three oil and gas licences - Dubrivska (DB), Bilousivsko-Chornukhinska (BC) and North Yablunivska (NY) - and a 50% working interest in a Joint Activity Agreement (JAA) with JSC Ukrgazvydobuvannya, a subsidiary of Naftogaz Ukraine. The consideration paid by the Group for Raget was $6,000,000 in cash and issuance to Hares of 21,949,364 ordinary shares of the Company (at a deemed price of GBP0.22 per share); for a total transaction value of $14,836,814. At closing, $1,000,000 of the cash was paid and the remaining amount of $5,000,000 was paid on 2 December 2005. In this transaction, Hares Group had the right to appoint a non-executive member to the Company's Board of Directors and Mr. Misbah Al Droubi was selected to fill this seat. According to Scott Pickford, the Rudis acquisition added 17.6 MMBOE as of 31 December 2005 to the Company's then existing reserves of 18.4 MMBOE. 12 Rudis employees joined the Group in Ukraine. Following the closing of the Rudis transaction, the Company had 114,554,109 ordinary shares outstanding, of which 19.2% is held by Hares Group Ltd.

The fair value of net assets acquired is set out in the following table.





Book value Fair value Fair value
adjustment
$'000 $'000 $'000

Intangible assets 456 456
------------------------ ------- --------- --------
Tangible assets 1905 11,972 13,877
------------------------ ------- --------- --------
Debtors 478 - 478
------------------------ ------- --------- --------
Cash at bank 723 - 723
------------------------ ------- --------- --------
Total assets 3,562 11,972 15,534
------------------------ ------- --------- --------
Creditors 699 - 699
------------------------ ------- --------- --------
Provisions (2) - (2)
------------------------ ------- --------- --------
Total liabilities 697 - 697
------------------------ ------- --------- --------
Fair value of net assets
acquired 2,865 11,972 14,837
------------------------ ------- --------- --------
Satisfied by:
Cash 6,000
Shares 8,837
------------------------ ------- --------- --------
14,837
------------------------ ------- --------- --------





The above fair values are provisional.

The Company does not have the information on the operating results of Rudis prior to its acquisition.

Rudis made the following contributions to, and utilisations of, Group cash flow during the year:

tal contributions to the JAA at the end of each quarter. Due to CPC's inability to meet capital commitments under the JAA during the period from 2001 to 2003, its working interest and net profits interest were reduced on a dilutive basis to a 16.57% working interest and 14.91% net profit interest in the JAA, in both 2005 and 2004.

The Rudis JAA was entered into by Rudis with Ukrgaz in 2004 to undertake the joint development of certain wells in two licence areas owned 100% by Rudis (BC Area and NY Area), exploration on the DB licence area and for reworking of certain wells in two more fields owned by Ukrgaz. The Rudis JAA was amended in January 2006 to provide that the wells on the BC licence area are exclusively owned and operated by Rudis. In addition, the amendment provided that certain wells were removed from the Rudis JAA and others from the NY licence were added. Under the Rudis JAA the parties each own a 50% working and net profit interest. It was envisaged that profit obtained from certain of the workovers would provide finance for the exploration of the DB licence and for drilling development wells on some of the other licences. To the extent that the profits are insufficient, the parties have the right to make cash contributions. Rudis is required to pay 100% of any shortfall to the JAA account, netted against any proceeds from production.





4 Creditors: Amounts falling due within one year

Group Group
As at As at
31 December 31 December
2005 2004
$'000 $'000

Trade creditors 1,699 2,030
Social security and other
taxes 61 244
Amounts owed to joint ventures
and joint arrangements 304 321
Other creditors 618 -
Accruals 2,363 2,039
--------------------- -------- -------
5,045 4,634
--------------------- -------- -------



Amounts owed to related parties represent amounts due to the Group's partner in its joint venture and joint activity agreement, Ukrnafta.

5 Creditors: Amounts falling due after more than one year





Group Group
As at As at
31 December 31 December
2005 2004
$'000 $'000

Gross bank borrowings
1-2 years 23,900 -
Less: costs of raising
bank borrowing (4,817) -
--------------------- -------- -------
19,083 -
Other creditors 150 1,220
--------------------- --------- --------
19,233 1,220
--------------------- --------- --------





Silver Point Capital - bank borrowings

Pre-Bridge Loan

On 1 December 2005, the Group closed on an $8 million financing, the first tranche of $38 million in bridge financing from Silver Point Capital (SPC) This enabled the Group to pay the $5 million cash consideration due under the Rudis Drilling acquisition, with the remaining cash used for transaction expenses and general corporate purposes. Under the terms of the financing agreement, the Group issued $8 million in Payment-in-Kind (PIK) Notes to SPC. The PIK Notes carried a coupon of 15% with quarterly interest payable in cash or by issue of further PIK Notes (on the same terms) at the Group's option. As part of this financing, the Group also issued to SPC warrants to subscribe at a price of GBP0.275 for 4,389,875 new Company ordinary shares for a period of 5 years. The PIK Notes had a 6 month term. On 23 December 2005, the PIK Notes were refinanced by the issue of the new PIK Notes in the second tranche of the $38 million financing (see below). The transaction fees amounted to $1,769,125 with net cash to the Group of $6,230,875.

Bridge Loan

On 23 December 2005, the Group closed on a $38 million bridge financing facility with SPC. At the closing, $23.9 million was funded, while another $14.1 million remains committed but unfunded. The amounts funded under the Bridge facility were used to (i) refinance the $8 million in (PIK) Notes issued on 1 December 2005 by the Group to SPC; (ii) settle fees and expenses relating to the transaction; and (iii) provide for general corporate and capital expenditure purposes. The committed funds ($14.1m) and a portion of the funding are intended for the Group to (a) reinstate its net profit interest in the RC Field back up to 45% by settling its outstanding balance in the JAA capital account with Ukrnafta; and (b) reinstate its 45% interest in four development wells in the RC Field currently being drilled by Ukrnafta. In the financing transaction, the Group issued $38 million in two-year Bridge PIK Notes to SPC, which carry a coupon of 15% with quarterly interest payable in cash or by issue of further PIK Notes (on the same terms), at the Group's option. In addition, the Group formed a new wholly-owned UK intermediate holding company, Cardinal Resources Finance Limited. Cardinal Finance issued to SPC warrants to subscribe for approximately 32.2% of Cardinal Finance, before adjustment to take account of inter-company balances, (at a price equivalent to GBP0.275 if such shares had been issued at the parent company level) for a period of five years. The Group has the right to redeem the notes in full after one year, subject to an early redemption fee, unless refinanced by SPC or its affiliates.

Subject to shareholder and UK regulatory approval, it is intended that the $38 million Bridge PIK Notes will be refinanced with SPC, by an issue of five-year Senior PIK Notes and that the Cardinal Finance warrants will be cancelled and reissued as warrants in the Company upon issuance of the Senior Notes. If the Senior PIK Notes are not issued before 23 June 2006, interest payments on the Bridge PIK Notes will rise from 15% to 20% p.a. and then another 1% p.a. for every quarter thereafter until maturity. The $8 million PIK Notes, issued on 1 December 2005, were refinanced in this new two-year facility but SPC retained the 4,389,875 Company warrants issued in conjunction with the pre-bridge loan.

All bank borrowings are secured by a fixed and floating charge over all the Company's assets.

6 Acquisitions

On 27 October 2005, the Group completed the acquisition of Raget Commercial Limited (a Cyprus company) from a subsidiary of the Hares Group Limited. Raget's sole asset is the ownership of Rudis Drilling Company, a Ukrainian limited liability company ("Rudis"). Under the acquisition, with direct ownership of Rudis, the Group became owner of three oil and gas licences - Dubrivska (DB), Bilousivsko-Chornukhinska (BC) and North Yablunivska (NY) - and a 50% working interest in a Joint Activity Agreement (JAA) with JSC Ukrgazvydobuvannya, a subsidiary of Naftogaz Ukraine. The consideration paid by the Group for Raget was $6,000,000 in cash and issuance to Hares of 21,949,364 ordinary shares of the Company (at a deemed price of GBP0.22 per share); for a total transaction value of $14,836,814. At closing, $1,000,000 of the cash was paid and the remaining amount of $5,000,000 was paid on 2 December 2005. In this transaction, Hares Group had the right to appoint a non-executive member to the Company's Board of Directors and Mr. Misbah Al Droubi was selected to fill this seat. According to Scott Pickford, the Rudis acquisition added 17.6 MMBOE as of 31 December 2005 to the Company's then existing reserves of 18.4 MMBOE. 12 Rudis employees joined the Group in Ukraine. Following the closing of the Rudis transaction, the Company had 114,554,109 ordinary shares outstanding, of which 19.2% is held by Hares Group Ltd.

The fair value of net assets acquired is set out in the following table.





Book value Fair value Fair value
adjustment
$'000 $'000 $'000

Intangible assets 456 456
------------------------ ------- --------- --------
Tangible assets 1905 11,972 13,877
------------------------ ------- --------- --------
Debtors 478 - 478
------------------------ ------- --------- --------
Cash at bank 723 - 723
------------------------ ------- --------- --------
Total assets 3,562 11,972 15,534
------------------------ ------- --------- --------
Creditors 699 - 699
------------------------ ------- --------- --------
Provisions (2) - (2)
------------------------ ------- --------- --------
Total liabilities 697 - 697
------------------------ ------- --------- --------
Fair value of net assets
acquired 2,865 11,972 14,837
------------------------ ------- --------- --------
Satisfied by:
Cash 6,000
Shares 8,837
------------------------ ------- --------- --------
14,837
------------------------ ------- --------- --------





The above fair values are provisional.

The Company does not have the information on the operating results of Rudis prior to its acquisition.

Rudis made the following contributions to, and utilisations of, Group cash flow during the year:





2005
$'000

Net cash inflow from operating activities 145
Decrease in cash 423
--------------------- -------





PUBLICATION OF NON-STATUTORY ACCOUNTS

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in section 240 of the Companies Act 1985.

The summarised balance sheet at 31 December 2005 and the summarised profit and loss account, summarised cash flow statement and associated notes for the year then ended have been extracted from the Group's 2005 statutory financial statements upon which the auditors opinion is unqualified and does not include any statement under Section 237 of the Companies Act 1985. Those financial statements have not yet been delivered to the registrar of companies.






###


Glossary of Terms

-----------------

Bbl Barrel of oil
Boepd Barrels of oil equivalent per day
Bcf Billion cubic feet of gas
Bcfe Billion cubic feet of gas equivalent
Farm-In A "farm-in" occurs when a leasehold interest in an
oil & gas property, along with the burden of
developing the property, is transferred from one
working interest owner to another and the transferee
agrees to assume the development burden in return
for the leasehold interest in the property. The
transferor will usually retain some type of interest
in the property, normally an overriding royalty
interest.
JAA Joint activity agreement
JV Joint venture
MBOE Thousand barrels of oil equivalent
MMbbl Million barrels of oil
MMBOE Million barrels of oil equivalent
Mcf Thousand cubic feet of gas
MMcf Million cubic feet of gas
MMcfed Million cubic feet of gas equivalent per day
NPI or Net
Profit
Interest The right and interest, expressed as a percentage,
of the NPI owner to receive a share of the oil and
gas produced (or the income attributable to such
production) after satisfaction of all government
extraction and licence related taxes and fees.
Proved (P1) Those oil or gas reserves considered to have at
least a 90% chance of being recovered.
Probable (P2) Those oil or gas reserves considered to have at
least a 50% chance of being recovered.
Tcf Trillion cubic feet of gas
WI or Working
Interest The right and interest, expressed as a percentage,
of the WI owner to participate in operations to
explore for, develop and produce oil and gas
reserves; and obligates such owner to meet its share
of the costs and expenses of such exploration,
development and production operations.
Workover The process of performing major maintenance or
remedial treatment on an existing oil or gas well,
which may include the removal and replacement of the
production tubing string after production from the
well has been stopped and a workover rig has been
placed on location.



This information is provided by RNS
The company news service from the London Stock Exchange





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