Coastal Energy Co.
AIM : CEO
TSX VENTURE : CEO

Coastal Energy Co.

September 07, 2007 08:45 ET

Coastal Energy Announces Interim Results for the Six Months Ended June 30, 2007

LONDON, UNITED KINGDOM--(Marketwire - Sept. 7, 2007) -

THIS NEWS RELEASE IS NOT FOR DISSEMINATION IN THE UNITED STATES OR THROUGH UNITED STATES NEWSWIRE SERVICES

Coastal Energy Company (the "Company") (TSX VENTURE:CEO)(AIM:CEO), the independent exploration and production company with core assets in South-East Asia, announced today the results for the six months ended June 30, 2007. Interim highlights include:

- Net earnings from investment in APICO, LLC of US $3,711,000 based on net operating income of US $8,090,000

- Net loss of US $2,427,000 or US $(0.01) per share basic and diluted

- Total assets of US $130,312,000

The Company's earnings from its investment in APICO, LLC represent the Company's net 12.6% interest in the Phu Horm gas field. Aggregate gas production in the Phu Horm field was producing in excess of 90 million cubic feet of gas per day ("mmcf/d") during the second quarter.

In the six months ended June 30, 2007, the Company secured US $50 million of borrowing based credit facilities, maturing on December 31, 2013, arranged by Sumitomo Mitsui Banking Corporation Europe Limited. The closing took place in early July 2007, at which time over US $40 million was available for drawdown.

Also in the interim, the Company incurred US $2.0 million non-cash loss on its investment in its Nevada oil and gas properties. These properties were written down to nil in anticipation of formal abandonment of these properties, which was consummated in August 2007.

The Company's offshore operations in block G5/43 continue to be focused on developing and maturing the discovered assets in the Songkhla basin. Engineering work related to platform design for the Songkhla oilfield is nearing completion with fabrication of the platforms expected to commence in Q4, 2007. Technical evaluation over several of the other discovered fields in the basin continues with the interpretation of the 330 sq. km. high resolution 3D seismic survey that was acquired earlier in the year. Included in the evaluation is the Bua Ban field which has four appraisal wells and is the second field the company is looking to develop over the next 12-18 months. During the second quarter the Company also acquired the Ocean 66 jack-up platform that is currently being refurbished for use in the development operations in the Gulf of Thailand.

Commenting on the results, Frank Inouye, CEO of Coastal said, "The Company has made significant progress during the second quarter of the year especially in regard to developing the offshore assets. The development of the Songkhla oilfield remains a priority for the Company and is expected to make a material impact on our production profile in 2008. Onshore production from the Phu Horm gas field continues to provide Coastal with a stable cash flow and additional funding has been secured with a US$50 million credit facility. Overall, the Company is in excellent shape to be able to meet our near term corporate objective of increasing cash flow and production."

These interim financial statements and related Management's Discussion and Analysis follow and have been filed on SEDAR (www.sedar.com) and the Company's website (www.coastalenergy.com).

On behalf of Coastal Energy Company

Frank Inouye, Chief Executive Officer & Director

For additional information, please visit our website: www.coastalenergy.com.

These securities have not been registered under United States Securities Act of 1933 (the "US Securities Act") or the securities laws of any state and may not be offered or sold in the United States or to US persons (as defined in Regulation S under the US Securities Act) unless an exemption from registration is available.

Management's Discussion and Analysis

Six Months Ended June 30, 2007

All amounts are expressed in US$000's unless otherwise stated except share and per share amounts

The following is Management's Discussion and Analysis ("MD&A") of the results and financial condition of Coastal Energy Company (the "Company"). This MD&A, dated August 29, 2007, should be read in conjunction with the accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2007 and related notes thereto. Additional information related to the Company is available on SEDAR at www.sedar.com.

Overview

The Company was incorporated in the Cayman Islands as PetroWorld Corp. under the Companies Law of the Cayman Islands on May 26, 2004. The Company is engaged in the acquisition and exploration of petroleum and natural gas properties and is listed on the Alternative Investment Market ("AIM") of the London Stock Exchange and on the TSX Venture Exchange ("TSX-V") under the symbol "CEO" for both. The functional and reporting currency of the Company and its subsidiaries is the US dollar ("USD").

The Company's principal oil and gas properties and assets are: (1) 100% direct ownership in the offshore Block G5/43 in the Gulf of Thailand which includes the Bua Ban and Songkhla oil fields; and (2) various interest holdings in the following petroleum concessions in the Khorat Plateau in north eastern Thailand which the Company holds via its 36.1% ownership interest in Apico LLC ("Apico").



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Petroleum Concession Apico Coastal
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Block EU-1 and E-5N in the Phu Horm gas field 35% 12.635%
Block L 15/43 (surrounding the Phu Horm gas field) 100% 36.100%
Block L 27/43 (southeast of the Phu Horm gas field) 100% 36.100%
Block L 13/48 (immediately east of the Phu Horm
gas field) 60% 21.660%


In September 2006, the Company made an additional investment in Apico which exceeded its proportional share of net assets of Apico by $18.7 million ("excess basis"). The difference has been allocated to Apico's oil and gas properties and is being amortized using the units of production method in accordance with the Company's accounting policy. At June 30, the remaining unamortized excess basis is $17.9 million.

Second Quarter 2007 Highlights

- The Company has reported $2.148 million as its share of earnings of significantly influenced investee. This represents its 36.1% of Apico's unaudited second quarter net income of $6.967 million less amortization of the Company's excess basis in Apico of $0.370 million.

- The Company secured $50 million of borrowing base credit facilities arranged by Sumitomo Mitsui Banking Corporation Europe Limited.

- The Phu Horm gas field, in which the Company has a net 12.6% indirect interest, was averaging over 90 million cubic feet per day ("mmcf/d") during the second quarter.

- The Company continued to conduct geological and development work on its assets in the G5/43 block, Gulf of Thailand; including interpretation of the 3-D seismic shoot of 330 square kilometers over the western half of the Songkhla basin. The area covered by the seismic acquisition includes the Bua Ban oil field which is one of two fields the Company is looking to develop over the next 12-18 months. The seismic will supplement existing 3-D over the Songkhla field.

Forward Looking Statements

Certain information included in this discussion may constitute forward-looking statements. Forward looking statements are based on current expectations, estimates, and projections that involve various risks and uncertainties. These risks and uncertainties could cause or contribute to actual results that are materially different from those expressed or implied.

Oil & Gas Properties



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Thailand Thailand Nevada
Summary of Oil & Gas Properties On-Shore Off-shore USA Totals
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Balance, December 31, 2005 $ 7,670 $ 4,751 $ - $ 12,421
Additions during the period:
Exploration & development 11,247 4,076 407 15,730
Net assets acquired via
NuCoastal Acquisition - 57,540 1,402 58,942
Net assets acquired via
Apico Acquisition 22,008 - - 22,008
Advances associated with Apico
Acquisition 2,750 - - 2,750
Equity earnings in Apico 371 - - 371
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Balance, December 31, 2006 44,046 66,367 1,809 112,222
Additions during the period:
Exploration & development 482 2,017 229 2,728
Add (deduct) other item
Write-down of Nevada oil and
gas property - - (2,038) (2,038)
Equity earnings in Apico 4,526 - - 4,526
Amortization of excess basis
in Apico (815) - - (815)
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Balance, June 30, 2007 $ 48,239 $68,384 $ - $116,623
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(a) Thailand Onshore
The Thailand onshore interests are held indirectly through the Company's equity investment in Apico. Apico is considered a significant equity investee. Apico's results of operations for the six months ended June 30 and financial position are as follows:



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Six months ended June 30, 2007 2006
---------------------------------------------------------------------------
Total revenue $ 30,375 $ -
Total expenses 7,966 418
Income tax expense 9,881 -
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Net Income $ 12,528 $ (418)
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June 30, 2007 December 31, 2006
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Current assets $ 26,330 $7,255
Property, plant and equipment 78,185 68,336
Other assets 3,123 237
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Total assets $107,638 $ 75,828
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Current liabilities $ 22,475 $ 6,260
Non-current liabilities 1,917 101
Members equity 83,246 69,467
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Total liabilities and equity $107,638 $ 75,828
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Production at the Phu Horm gas field commenced on November 30, 2006 and will supply the Nam Phong power plant with over 500 billion cubic feet of gas, plus condensate, under a 15 year Gas Sales Agreement with PTT Public Company Limited. Coastal's net interest of 12.6% is held through its equity investment in Apico which holds a 35% interest in the gas field. The other partners in the field include Hess Corporation (Operator - 35%), PTT Exploration & Production (20%) and Exxon Mobil Corp. (10%). During the second quarter, three wells at Phu Horm had average aggregate production rates in excess of 90mmcf/day to Nam Phong. The field was also producing in excess of 450 bbls of condensate per day.

Block L15/43 surrounds Phu Horm. Work is being conducted to drill the Phu Horm South appraisal well on the southern extension of Phu Horm in the second half of 2007. The well will determine whether the productive Phu Horm reservoir extends beyond the Hess operated production license into the surrounding L15/43 concession.

Block L27/43 is located 50 km southeast of the L15 concession. Seismic operations were conducted and evaluated over the Dong Mun structure in 2006. An appraisal well is expected to be drilled in the second half of 2007 to evaluate the Dong Mun prospect. The appraisal well offers the opportunity to add reserves in close proximity to Phu Horm and Nam Phong infrastructure.

Block L13/48 is located 40km east of the Phu Horm gas field. The L13 concession holds the Si That discovery which tested gas in the Si That-2 well. Similar to Dong Mun, Si That offers an appraisal opportunity for additional reserves with low geological and technical risk. The Si That appraisal well is expected to be drilled in 2008.

(b) Thailand Offshore

The Company maintains a 100% working interest in Block G5/43 (the "Block") in the Gulf of Thailand. The Block is approximately 17,110 square kilometres and average water depths are approximately 70 feet. Three successful wells were drilled by NuCoastal and PetroWorld on the Bua Ban oil field ("Bua Ban") in August 2005 which confirmed proved and probable oil reserves of approximately 12 million barrels of oil. The three well program encountered the Lower Oligocene reservoir with estimated net pay ranging from 66-77 feet and a confirmed oil column of 577-724 feet. The Songkhla oil field, which is smaller than Bua Ban, was discovered in 1989 and originally tested 1,500 barrels of production per day and contains proved and probable oil reserves of approximately 4.2 million barrels. As part of a fast track development plan, environmental impact assessment and production area applications are currently being prepared for both the Songkhla and Bua Ban fields. The Company has begun contracting services for the Songkhla development and expects to be in production within the next 12 months.

(c) Nevada

The Company considered this asset to be non-core. The Company has a thirty (30%) percent working interest in Federal Leases located in Gabbs Valley, Nevada. In the second quarter, testing of the Cobble Cuesta 1-12 well was carried out over a number of zones. The well was plugged and abandoned. This property has been written down to nil (see Subsequent Events.)

Summary of Quarterly Information



---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating Expenses $ 3,514 $ 22 $ 4,809 $ 59
Share of (earnings) loss
of Apico, LLC (2,148) 80 (3,711) 89
(Gain) loss on sale of
assets 40 - 40 -
Foreign exchange (gain)
loss 282 (19) 1,289 (88)
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Net Income (loss) (1,688) (83) (2,427) (60)
-------------------------------------------------
Per share basic and
diluted $ (0.01) $ 0.00 $ (0.01) $ 0.00

Working capital (deficit) $ 4,320 $(9,786)
Total assets $130,312 $12,160
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Cash Flow Analysis

The Company's cash and cash equivalents decreased by $11.2 million from $18.4 million at December 31, 2006 to $7.2 million at June 30, 2007. These funds were primarily used to: invest in Apico for $0.5 million; invest in property, plant and equipment for $3.4 million; invest in other long-term assets for $1.2 million; reduce accounts payables and accrued liabilities by $4.1 million; and pay operating expenses of $2.4 million. These expenditures were offset by $0.8 million proceeds from sale of assets.

Summary of Quarterly Results



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---------------------------------------------------------------------------
2007 2006 2005
---------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
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Operating expenses $ 3,514 $1,295 $ 2,588 $ 140 $ 22 $ 36 $ 224 $ 59
Share of (earnings)
loss of Apico LLC (2,148) (1,563) (583) 123 80 10 43 43
(Gain) loss on sale
of assets 40 - - - - - - -
Foreign exchange
(gain) loss 282 1,007 1,763 (38) (19) (69) (91) (7)
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Net income (loss) $(1,688) $ (739) $(3,768) $(225)$ (83)$ 23 $(176)$ (95)
Per share
basic & diluted $ (0.01) $ 0.00 $ (0.02) $0.00 $0.00 $0.00 $0.00 $0.00
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The amounts reported prior to September 25, 2006 are the historical information of NuCoastal Thailand Limited. Subsequent to September 25, 2006 the amounts reported include the results of PetroWorld.

(a) Operating Expenses

- The increase in Q2 2007 compared to the prior quarter was primarily the result of the write down of the Nevada oil & gas property. In addition, the Company had higher salaries, stock based compensation, office and general, and regulatory and transfer agent fees which were partially offset by reduced professional fees and travel and entertainment

- The decrease in Q1 2007 compared to the prior quarter was primarily the result of lower professional fees, regulatory and listing fees

- The increase in Q4 2006 compared to the prior quarter was primarily the result of the consolidation of operations of PetroWorld and NuCoastal (effective September 25, 2006) combined with additional professional fees, regulatory and listing fees and stock based compensation.

- The increase in Q3 2006 compared to the prior quarter was primarily the result of increased regulatory & listing fees.

- The increase in Q4 2005 compared to the prior quarter was primarily the result of increased professional fees.

(b) Share of (earnings) loss of Apico LLC

Under the equity method of accounting, the Company records its share of net income / loss of Apico based on the reported quarterly net income / loss of Apico. Apico recorded its first quarter of profitability in Q4 2006, when the Phu Horm gas field began production. Q1 2007 was the first full quarter of production for the Phu Horm gas field. The Company's share of earnings was reduced in Q1 and Q2 2007 by the amortization of the Company's excess basis in Apico

(c) Foreign exchange (gain) loss

The foreign exchange gain/loss is a result of the Company carrying out transactions and maintaining certain assets and liabilities in currencies other than the US Dollar, including the Canadian Dollar, the British Pound and the Thai Baht. The FX loss attributable to the revaluation of the long-term Thailand tax liability created by the reverse takeover of PetroWorld is as follows:

- $0.36 million in Q2 2007

- $0.76 million in Q1 2007

- $0.91 million in Q4 2006

Liquidity and Capital Resources

As at June 30, 2007, the Company had cash and cash equivalents of $7.2 million, which, in management's opinion, is sufficient to cover ongoing obligations as they become due. Beginning with December 2006, Apico has been largely self-funding as a result of production from its Phu Horm interest and the Company has made only one additional advance to its investment in Apico, in the amount of $0.48 million. The Company presently has earnings from its interest in Apico, which is accounted for under the equity method on the Statement of Operations.

In order to put the offshore Gulf of Thailand property into commercial production, substantial capital will be required. The additional sources of capital presently available to the Company for development are from borrowings under the Company's revolving credit facility or the sale of equity. In June, the Company secured $50 million of borrowing base credit facilities, maturing on December 31, 2013. In excess of $40 million will be available for drawdown at closing in July 2007. The Facility is secured by the Company's investment in Apico, LLC.

As a requirement of the credit facilities, the Company entered into a derivative hedging agreement with an affiliate of the lender under which the Company has the right to sell up to 96,000 metric tons of Singapore fuel oil at a price of $290.00 per metric ton. The Company paid $1.166 million for this option and the option expires on June 30, 2009. Derivative positions are recorded on the balance sheet at fair value with changes in fair value recorded in the statement of operations and deficit. At June 30, 2007 there were no unrealized gains or losses on this instrument.

(a) Share Capital

1,000,000,000 common shares with par value of $0.01 each

As of the date of this report, the Company had 307,932,888 common shares outstanding.

(b) Stock Options

Effective May 3, 2007, options for 700,000 shares expired unexercised. On June 14, 2007, options for 250,000 shares were exercised. The Company granted stock options for 1,500,000 shares on June 15, 2007. On July 12, 2007, options for 250,000 shares were exercised. The following table summarizes the outstanding and exercisable options as of the date of this report:



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Outstanding & Expiry Remaining
Exercisable Exercise Price Date Contractual Life
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850,000 $0.20 (pound sterling0.10) January 25, 2009 1.5 Years
1,600,000 $0.70 (pound sterling0.35) July 6, 2010 3.0 Years
11,600,000 $ 0.52 (C$0.55) December 27, 2011 4.5 Years
1,500,000 $ 0.70 (C$0.74) June 16, 2012 5.0 Years
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15,550,000


(c) Warrants

Effective January 20, 2007, warrants for 1,125,000 shares with an exercise price of pound sterling0.35 expired unexercised. Effective July 20, 2007, warrants for 214,350 shares with an exercise price of pound sterling0.35 expired unexercised. The following table summarizes the outstanding and exercisable warrants as of the date of this report:



-------------------------------------------------------
Outstanding &
Exercisable Exercise Price Expiry Date
-------------------------------------------------------
9,375,000 $1.40 (pound sterling0.70) July 20, 2010
-------------------------------------------------------


Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Related Party Transaction

A non-executive director of the Company is an officer and director of a company which is the temporary operator of the Company's working interest in Gabbs Valley, Nevada. Included in accounts payable and accrued liabilities at June 30, 2007 and December 31, 2006 were $0.09 million and $0.06 million, respectively, owed to this operator. This transaction, occurring in the normal course of operations, is measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

Commitments and Contingencies

There have been no material changes in the Company's commitments and contingencies as described in the Management's Discussion and Analysis for the year ended December 31, 2006 and also in Note 12 to the annual audited financial statements for the year ended December 31, 2006.

Subsequent Events

On August 3, 2007, the Company signed an agreement to release its working interest to the operator of the Federal Leases in Gabbs Valley, Nevada in return for relief from any future commitments related to these leases (see Related Party Transaction.)

On August 17, 2007 at the Annual General Meeting, the shareholders of the Company approved a reduction in the authorized shares of the Company's common stock through a reverse stock split with a conversion ratio of one share for every four held. The Company anticipates this becoming effective in September 2007.

Financial Instruments

The Company's financial instruments are comprised of cash and cash equivalents, accounts receivable, amounts due to joint interest partners, amounts due to shareholder and accounts payable. The fair values of the financial instruments approximate their carrying values due to their short term nature.

It is management's opinion that the Company is not exposed to interest risk arising from these financial instruments, but is exposed to currency, commodity and credit risk. The Company does not use derivative instruments to reduce these risks.

Critical Accounting Policies and Estimates

A detailed summary of the company's critical accounting policies and estimates is included in Management's discussion and analysis for the year ended December 31, 2006 and also in Note 2 to the annual audited financial statements for the year ended December 31, 2006.

New Accounting Pronouncements

Effective January 1, 2007, the Company has adopted two new accounting standards that were issued by the Canadian Institute of Chartered Accountants ("CICA"). These accounting policy changes were adopted on a prospective basis with no restatement of prior period financial statements. The new standards and accounting policy changes are as follows:

(a) Financial Instruments - Recognition and Measurement (CICA Handbook Section 3855)

In accordance with this new standard, the Company now classifies all financial instruments as either held-to-maturity, available-for-sale, held for trading, loans and receivables, or other financial liabilities. Financial assets held to maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Instruments classified as held for trading are measured at fair value with unrealized gains and losses recognized on the statement of operations and deficit.

Upon adoption of this new standard, the Company has designated its cash and cash equivalents as held-for-trading, which is measured at fair value. Accounts receivable and other are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities and amounts due to shareholder are classified as other financial liabilities, which are measured at amortized cost. As at June 30, 2007, the Company did not have any financial assets classified as available-for-sale and therefore, the adoption of the standard noted above had no effect on the presentation of the Company's consolidated financial statements.

(b) Comprehensive Income (CICA Handbook Section 1530)

Comprehensive income is the change in shareholders' equity during a period from transactions and other events and circumstances from non-owner sources. In accordance with this new standard, the Company now reports a statement of comprehensive income and a new category, accumulated other comprehensive income, in the shareholders' equity section of the consolidated balance sheet. The components of this new category may include unrealized gains and losses on financial assets classified as available-for-sale, exchange gains and losses arising from the translation of financial statements of a self-sustaining foreign operation and the effective portion of the changes in fair value of cash flow hedging instruments.

During the six month period ended June 30, 2007, there were no changes in shareholders' equity that resulted from the non-owner sources and consequently, the adoption of the standard noted above had no effect on the presentation of the Company's consolidated financial statements.

Risks and Uncertainties

(a) Going Concern

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with Canadian GAAP on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and accordingly will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company is currently a development stage entity and has no direct revenue from production; however, the Company has earnings from its interest in Apico, which is accounted for under the equity method on the income statement. The Company's ability to continue as a going concern is dependent upon its ability to obtain additional financing or bring one of its resource properties into commercial production and ultimately achieve profitable operations. Although to date the Company has been successful in obtaining financing, there can be no assurance that the Company will be successful in raising additional share capital or generating revenue to generate sufficient cash flows to continue as a going concern.

(b) Trends

In recent years, the petroleum and natural gas exploration industry has seen significant growth, primarily as a result of increased global demand, led by India and China. During this period, prices for petroleum have steadily increased, resulting in multi-year price highs. Prior to this recent surge, large companies found it more feasible to grow their reserves and resources by purchasing companies or existing oilfields. However, with improving prices and increasing demand, a discernible need for the development of exploration projects has arisen. Junior companies have become key participants in identifying properties of merit to explore and develop.

(c) Risks and Uncertainties

The Company is subject to a number of risk factors due to the nature of the petroleum and gas business in which it is engaged, not the least of which are adverse movements in commodity prices, which are impossible to forecast. The Company is also subject to the oil and gas services sector which, at the present, has limited available capacity and therefore may demand premium rates. The Company seeks to counter these risks as far as possible by selecting exploration areas on the basis of their recognized geological potential to host economic returns.

(d) Industry

The Company is engaged in the acquisition of petroleum and natural gas properties, an inherently risky business, and there is no assurance that an economic petroleum and natural gas deposit will ever be discovered and subsequently put into production. Most exploration projects do not result in the discovery of commercially viable petroleum and natural gas deposits. The geological focus of the Company is on areas in which the geological setting is well understood by management.

(e) Petroleum and Gas Prices

The price of petroleum and natural gas is affected by numerous factors beyond the control of the Company including global consumption and demand for petroleum and natural gas, international economic and political trends, fluctuations in the U.S. dollar and other currencies, interest rates, and inflation. While prices for petroleum and natural gas have increased significantly since the start of 2003, there is no assurance that this trend will continue or that current prices will be sustained.

(f) Cash Flows and Additional Funding Requirements

The Company presently has earnings from its interest in Apico, which is accounted for under the equity method on the income statement. In order to put the offshore Gulf of Thailand property into commercial production, substantial capital will be required. The sources of capital presently available to the Company for development are from borrowings under the Company's revolving credit facility or the sale of equity. The Company has sufficient financial resources to undertake its firm obligations for the next 12 months.

(g) Environmental

The Company's exploration activities are subject to extensive laws and regulations governing environmental protection. Although the Company closely follows and believes it is operating in compliance with all applicable environmental regulations, there can be no assurance that all future requirements will be achievable on reasonable terms. Failure to comply may result in enforcement actions causing operations to cease or be curtailed and may include corrective measures requiring capital expenditures.

(h) Laws and Regulations

The Company's exploration activities are subject to local laws and regulations governing prospecting, drilling, development, exports, taxes, labour standards, occupational health and safety, and other matters. Such laws and regulations are subject to change, can become more stringent and compliance can therefore become more costly.

There are also many risks associated with operations in international markets, including changes in foreign governmental policies relating to crude oil and natural gas taxation, other political, economic or diplomatic developments, changing political conditions and international monetary fluctuations. These risks include: political and economic instability or war; the possibility that a foreign government may seize our property with or without compensation; confiscatory taxation; legal proceedings and claims arising from our foreign investments or operations; a foreign government attempting to renegotiate or revoke existing contractual arrangements, or failing to extend or renew such arrangements; fluctuating currency values and currency controls; and constrained natural gas markets dependent on demand in a single or limited geographical area. The Company applies the expertise of its management, its advisors, its employees and contractors to ensure compliance with current local laws.

(i) Title to Oil & Gas Properties

While the Company has undertaken customary due diligence in the verification of title to its oil & gas properties, this should not be construed as a guarantee of title. The properties may be subject to prior unregistered Petroleum Agreements or transfers and title may be affected by undetected defects.

(j) Dependence on Management

The Company strongly depends on the business and technical expertise of its senior management team and there is little possibility that this dependence will decrease in the near term. The loss of one or more of these individuals could have a materially adverse effect on the Company.

(k) Apico Financial Reporting

The Company accounts for its 36.1% investment in Apico under the equity method whereby it records its share of Apico's earnings as earnings from significantly influenced investee. Apico is required to provide the partners its financial statements under the Joint Venture Agreement on a timely basis. While the Company has a seat on the Board of Directors of Apico, it does not control the Board or the management of Apico. Therefore, the Company relies heavily on Apico management to provide timely and accurate financial information to the partners.

Disclosure Controls and Procedures and Internal Control over Financial Reporting

Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of December 31, 2006, that the Company's disclosure controls and procedures as of December 31, 2006 are effective to provide reasonable assurance that material information related to the Company is made known to them by others within the Company.

In addition, the certifying officers of the Company are responsible for designing or causing internal controls over financial reporting to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The certifying officers have concluded that the Company's internal control over financial reporting, as defined in 52-109, is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for the year ended December 31, 2006, in accordance with Canadian GAAP.

There has been no change in the Company's disclosure controls and procedures or internal control over financial reporting that occurred during the most recently completed quarter that have materially affected, or are reasonably likely to materially affect, the Company's disclosure controls or internal control over financial reporting.

Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls and procedures should not exceed their expected benefits. As such, the Company's disclosure controls and procedures and internal controls over financial reporting can only provide reasonable assurance, and not absolute assurance.

Outlook

The Company is continuing to work towards and continues to operate in the business segment of acquiring and exploring petroleum and natural gas properties.



CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Six Months Ended June 30, 2007
All amounts are expressed in US$000's unless otherwise stated
except share and per share amounts

------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
2007 2006 2007 2006
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$ $ $ $
Expenses
Salaries and benefits 485 8 915 18
Professional fees 232 2 525 3
Stock based compensation 259 - 427 -
Office and general 245 9 410 23
Travel and entertainment 60 1 160 10
Regulatory and transfer
agent 128 - 200 -
Interest Expense 55 - 106 -
Depreciation and
amortization 16 2 32 5
Write-down of unproved
oil and gas
properties (Note 4) 2,034 - 2,034 -
------------------------------------------------------------------------
3,514 22 4,809 59
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Other items
Share of (earnings)
loss of significantly
influenced investee,
net of taxes (Note 3) (2,148) 80 (3,711) 89
Loss on sale of assets 40 - 40 -
Foreign exchange
(gain) loss 282 (19) 1,289 (88)
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(1,826) 61 (2,382) 1
------------------------------------------------------------------------

Net income (loss) and
comprehensive
income (loss) (1,688) (83) (2,427) (60)
Deficit, beginning
of period (5,670) (854) (4,931) (877)
------------------------------------------------------------------------
Deficit, end of period (7,358) (937) (7,358) (937)
------------------------------------------------------------------------
------------------------------------------------------------------------

Earnings (loss) per
share
Basic (0.01) 0.00 (0.01) 0.00
Diluted (0.01) 0.00 (0.01) 0.00
------------------------------------------------------------------------

Weighted average number
of common
shares outstanding
Basic 307,435,635 151,663,323 307,434,269 151,663,323
Diluted 307,435,635 151,663,323 307,434,269 151,663,323
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CONSOLIDATED BALANCE SHEETS
Six Months Ended June 30, 2007
All amounts are expressed in US$000's
unless otherwise stated except share and per share amounts

June 30, December 31,
2007 2006
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$ $
Assets
Current assets
Cash and cash equivalents 7,226 18,350
Accounts receivable and other (Note 2) 886 490
-------------------------------------------------------------------------
8,112 18,840

Investment in and advances to
Apico LLC (Note 3) 48,239 44,046
Property, plant and equipment,
net (Note 4) 72,727 68,784
Derivative instrument (Note 7) 1,166 -
Other long-term assets 68 394
-------------------------------------------------------------------------
130,312 132,064
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities
Current liabilities
Accounts payable and accrued
liabilities (Note 5) 3,792 4,820
-------------------------------------------------------------------------

Amounts due to shareholder
(Note 6) 4,829 4,724
Future income tax liability 26,273 25,153
-------------------------------------------------------------------------
34,894 34,697
-------------------------------------------------------------------------

Shareholders' equity
Share capital (Note 8) 3,077 3,074
Contributed surplus 99,699 99,224
Deficit (7,358) (4,931)
-------------------------------------------------------------------------
95,418 97,367
-------------------------------------------------------------------------
130,312 132,064
-------------------------------------------------------------------------
-------------------------------------------------------------------------



CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended June 30, 2007
All amounts are expressed in US$000's unless
otherwise stated except share and per share amounts

---------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
2007 2006 2007 2006
---------------------------------------------------------------------------
$ $ $ $
Operating activities
Net income (loss) for the period (1,688) (83) (2,427) (60)
Items not involving cash
Stock-based compensation 259 - 427 -
Interest expense 55 - 106 -
Depreciation and amortization 16 2 32 5
Write-down of unproved oil and gas
properties 2,034 - 2,034 -
Share of (earnings) loss of
significantly influenced investee (2,148) 80 (3,711) 89
Loss on sale of assets 40 - 40 -
Foreign exchange (gain) loss 299 (19) 1,064 (88)
Change in non-cash working capital
Accounts receivable and other (204) 399 (468) 826
Accounts payable and accrued
liabilities (1,180) (830) (4,085) (1,036)
---------------------------------------------------------------------------
(2,517) (451) (6,988) (264)
---------------------------------------------------------------------------

Investing activities
Investment in and advances to
Apico LLC - (1,219) (482) (2,663)
Purchase of property, plant and
equipment (2,301) (4,476) (3,408) (5,045)
Proceeds from disposal of property,
plant and equipment 849 - 849 -
Increase in other long-term assets (1,163) - (1,201) -
---------------------------------------------------------------------------
(2,615) (5,695) (4,242) (7,708)
---------------------------------------------------------------------------

Financing activities
Issuance of shares for cash 51 - 51 -
Amounts due to shareholder - 6,064 - 8,431
---------------------------------------------------------------------------
51 6,064 51 8,431
---------------------------------------------------------------------------

Net effect of foreign exchange
on cash held in foreign currencies 55 19 55 88
---------------------------------------------------------------------------

Change in cash and cash equivalents (5,026) (63) (11,124) 547
Cash and cash equivalents,
beginning of period 12,252 745 18,350 135
---------------------------------------------------------------------------
Cash and cash equivalents,
end of period 7,226 682 7,226 682
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Cash and cash equivalents
consists of:
---------------------------------------------------------------------------
Cash 1,687 682 1,687 682
Short-term money market instruments 5,539 - 5,539 -
---------------------------------------------------------------------------
7,226 682 7,226 682
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Supplemental cash flow information
- For each of the periods presented, the Company made
no cash payments for interest or income taxes
- During the period ended June 30, 2006, NuCoastal's Shareholder
advanced funds of $2.7 million to Apico, LLC


Notes to the Consolidated Financial Statements

Six Months Ended June 30, 2007

All amounts are expressed in US$000's unless otherwise stated except share and per share amounts

Note 1. Basis of presentation

These interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP") for interim financial statements and following the same accounting policies and methods of their application as the audited consolidated financial statements of the Company as at December 31, 2006, except as described below. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended December 31, 2006. Certain disclosures that are normally required to be included in the notes to the annual financial statements have been condensed or excluded. In the opinion of management, all adjustments (consisting primarily of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and six months ended June 30, 2007 and 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Changes in Accounting Policies

Effective January 1, 2007, the Company has adopted two new accounting standards that were issued by the Canadian Institute of Chartered Accountants ("CICA"). These accounting policy changes were adopted on a prospective basis with no restatement of prior period financial statements. The new standards and accounting policy changes are as follows:

Financial Instruments - Recognition and Measurement (CICA Handbook Section 3855)

In accordance with this new standard, the Company now classifies all financial instruments as either held-to-maturity, available-for-sale, held for trading, loans and receivables, or other financial liabilities. Financial assets held to maturity, loans and receivables and financial liabilities other than those held for trading, are measured at amortized cost. Available-for-sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income. Instruments classified as held for trading are measured at fair value with unrealized gains and losses recognized on the statement of operations and deficit.

Upon adoption of this new standard, the Company has designated its cash and cash equivalents as held-for-trading, which is measured at fair value. Accounts receivable and other are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities and amounts due to shareholder are classified as other financial liabilities, which are measured at amortized cost. As at June 30, 2007, the Company did not have any financial assets classified as available-for-sale and therefore, the adoption of the standard noted above had no effect on the presentation of the Company's consolidated financial statements.

Comprehensive Income (CICA Handbook Section 1530)

Comprehensive income is the change in shareholders' equity during a period from transactions and other events and circumstances from non-owner sources. In accordance with this new standard, the Company now reports a statement of comprehensive income and a new category, accumulated other comprehensive income, in the shareholders' equity section of the consolidated balance sheet. The components of this new category may include unrealized gains and losses on financial assets classified as available-for-sale, exchange gains and losses arising from the translation of financial statements of a self-sustaining foreign operation and the effective portion of the changes in fair value of cash flow hedging instruments.

During the six month period ended June 30, 2007, there were no changes in shareholders' equity that resulted from the non-owner sources and consequently, the adoption of the standard noted above had no effect on the presentation of the Company's consolidated financial statements.



Note 2. Accounts receivable and other
------------------------------------------------------------------------
June 30, 2007 December 31, 2006
------------------------------------------------------------------------
Refundable taxes $477 $ 64
Amounts due from joint interest partners 278 123
Other receivables 86 149
Prepaids, deposits and other assets 45 154
------------------------------------------------------------------------
$886 $490
------------------------------------------------------------------------


Note 3. Investment in and advances to Apico LLC

The Company holds approximately 36.1% of Apico LLC ("Apico"), a limited liability company incorporated in the State of Delaware, USA. Apico's primary purpose is the acquisition, exploration and development of onshore petroleum interest in the Kingdom of Thailand. Apico has the following working interests in petroleum concessions located in the Khorat Plateau area in northeastern Thailand:

- 35% in Blocks EU-1 and E-5N in the Phu Horm gas field (net 12.635% to the Company);

- 100% in Block L15/43 surrounding the Phu Horm gas field (net 36.1% to the Company);

- 100% in Block L27/43 located southeast of the Phu Horm gas field (net 36.1% to the Company); and

- 60% in Block L13/48 located immediately east of the Phu Horm gas field (net 21.66% to the Company.)

The Company's September 2006 additional investment in Apico exceeded its proportionate share of net assets of Apico by $18.7 million ("excess basis"). This difference has been allocated to Apico's oil and gas properties and is being amortized using the units of production method in accordance with the Company's accounting policy. At June 30, 2007, the remaining unamortized excess basis is $17.9 million.

The following table summarizes the Company's investments in and advances to Apico:



-----------------------------------------------------------------------
Six months ended Year ended
June 30, 2007 December 31, 2006
-----------------------------------------------------------------------
Balance, beginning
of period $44,046 $ 7,670
Advances during the
period 482 11,247
Acquisition of
additional ownership
percentage - 24,758
Amortization of
excess basis in
Apico (815) -
Share of earnings
(loss) of
significant investee 4,526 371
-----------------------------------------------------------------------
Balance, end of
period $48,239 $44,046
-----------------------------------------------------------------------


Note 4. Property plant and equipment

-----------------------------------------------------------------------
Cost Accumulated depreciation, Net Book Value
amortization and write-down
-----------------------------------------------------------------------
Oil and gas
properties
Thailand $ 68,384 $ - $ 68,384
United States 2,038 (2,038) -
Construction in
progress 3,899 - 3,899
Office furniture &
computer equipment 453 (71) 382
Leasehold
improvements 63 (1) 62
-----------------------------------------------------------------------
Balance, June 30,
2007 $ 74,837 $ (2,110) $ 72,727
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Cost Accumulated depreciation Net Book Value
and amortization
-----------------------------------------------------------------------
Oil and gas
properties
Thailand $ 66,367 $ - $ 66,367
United States 1,809 - 1,809
Office furniture &
computer equipment 146 (40) 106
Leasehold
improvements 554 (52) 502
-----------------------------------------------------------------------
Balance, December
31, 2006 $ 68,876 $ (92) $ 68,784
-----------------------------------------------------------------------



During the six months ended June 30, 2007 and 2006 the Company capitalized $1.054 million and $0.070 million, respectively, of general and administrative overhead into oil and gas properties.

Thailand

The Company has a 100% working interest in Block G5/43 in the Gulf of Thailand which includes the Bua Ban and Songkhla oil fields.

United States

The Company considered this asset to be non-core. The Company has a thirty (30%) percent working interest in Federal Leases located in Gabbs Valley, Nevada. In the second quarter, testing of the Cobble Cuesta 1-12 well was carried out over a number of zones. The well was plugged and abandoned. This property has been written down to nil (see Subsequent Events.)


Note 4. Property plant and equipment (continued)

Construction in progress

Construction in progress is the acquisition and refurbishment of a mat-based jack-up rig which the Company intends to use in its development of its interests in the Gulf of Thailand. Once this asset is placed in service, it will be depreciated using the straight line method over its useful life in accordance with the Company's accounting policy.



Note 5. Accounts payable and accrued liabilities
------------------------------------------------------------------------
June 30, 2007 December 31, 2006
------------------------------------------------------------------------
Accounts Payable $1,807 $4,173
Accrued Expenses 1,985 264
Amounts due to joint interest partners - 383
------------------------------------------------------------------------
$3,792 $4,820
------------------------------------------------------------------------


Note 6. Amounts due to shareholder

The amounts due to shareholder are unsecured, bear interest at 4.5% per annum and are due on July 20, 2008.

Note 7, Credit facility

In June, the Company secured $50 million of borrowing base credit facilities, maturing on December 31, 2013. In excess of $40 million will be available for drawdown at closing in July 2007. Amounts drawn under this facility will bear interest at the lenders' LIBOR plus an applicable margin between 1.75% and 3.5%. The facility is secured by the Company's investment in Apico, LLC. As at June 30, 2007, the Company had not drawn down under this facility. Proceeds form the facility will be used to fund the continuing investment in Apico, the offshore Thailand development program and for general corporate purposes.

As a requirement of the credit facilities, the Company entered into a derivative hedging agreement with an affiliate of the lender under which the Company has the right to sell up to 96,000 metric tons of Singapore fuel oil at a price of $290.00 per metric ton. The Company paid $1.166 million for this option and the option expires on June 30, 2009. Derivative positions are recorded on the balance sheet at fair value with changes in fair value recorded in the statement of operations and deficit. At June 30, 2007 there were no unrealized gains or losses on this instrument.

Note 8. Share capital

Common Stock

Authorized 1,000,000,000 common shares with par value of $0.01 each 307,682,888 common shares issued and outstanding at June 30, 2007

Stock Options

During the six months ended June 30, 2007, options for 250,000 common shares were exercised, 700,000 options expired unexercised and 1,500,000 options were granted with an exercise price of C$0.74 and an expiry date of June 16, 2012. The following table summarizes the outstanding and exercisable options at June 30, 2007:



--------------------------------------------------------------------------
Remaining
Number contractual Exercise Price Number Expiry date
Outstanding life Exercisable
--------------------------------------------------------------------------
1,100,000 1.5 years $0.20 ((pound)0.10) 1,100,000 January 25, 2009
1,600,000 3.0 years $0.70 ((pound)0.35) 1,600,000 July 6, 2010
11,600,000 4.5 years $0.52 (C$0.55) 2,900,000 December 27, 2011
1,500,000 5.0 years $0.70 (C$0.74) 375,000 June 16, 2012
--------------------------------------------------------------------------
15,800,000 5,975,000
--------------------------------------------------------------------------


Warrants

During the six months ended June 30, 2007, warrants for 1,125,000 common shares expired unexercised. The following table summarizes the outstanding and exercisable warrants at June 30, 2007:



------------------------------------------------------------------
Outstanding and exercisable Exercise Price Expiry date
------------------------------------------------------------------
214,350 $0.70 ((pound)0.35) July 20, 2007
9,375,000 $1.40 ((pound)0.70) July 20, 2010
------------------------------------------------------------------
------------------------------------------------------------------
9,589,350


Stock-based compensation

The fair value of each option granted is estimated at the time of the grant using the Black-Scholes option pricing model with weighted average assumptions for grants as follows:



-----------------------------------------------------------------
2007 2006
-----------------------------------------------------------------
Risk-free interest rate 4.25% 4.25%
Expected life 3 years 3 years
Annualized volatility 40% 40%
Dividend rate 0% 0%
Weighted average grant date fair value per option $0.23 $0.12


Note 9. Related party transactions

A non-executive director of the Company is an officer and director of a company which is the temporary operator of the Company's working interest in Nevada. Included in accounts payable and accrued liabilities at June 30, 2007 and December 31, 2006 were $0.09 million and $0.06 million, respectively, owed to this operator. This transaction, occurring in the normal course of operations, is measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Note 10. Segmented information

Operating segment

The Company's current operations are in one business segment, being the acquisition and exploration of oil and gas properties, primarily in Thailand .

Geographic segments

The Company's oil and gas assets as at June 30, 2007 and December 31, 2006 and revenues and expenses for the six months ended June 30, 2007 and 2006 were as follows:



---------------------------------------------------------------------------
Corporate Thailand United States Total
2007 2006 2007 2006 2007 2006 2007 2006
---------------------------------------------------------------------------
Oil and gas
assets
-----------
Investment in
Apico - - 48,239 44,046 - - 48,239 44,046
Property, plant
& equipment, net 4,113 585 68,614 66,390 - 1,809 72,727 68,784
---------------------------------------------------------------------------
Subtotal 4,113 585 116,853 110,436 - 1,809 120,966 112,830
---------------------------------------------------------------------------
Operating
expenses 2,352 - 423 59 2,034 - 4,809 59
Share of Apico's
(earnings) loss - - (3,711) 89 - - (3,711) 89
(Gain) loss on
sale of assets 40 - - - - - 40 -
Foreign exchange
(gain) loss 1,341 - (52) (88) - - 1,289 (88)
---------------------------------------------------------------------------
Net income
(loss) for the
period (3,733) - 3,340 (60) (2,034) - (2,427) (60)
---------------------------------------------------------------------------



Prior to the acquisition of PetroWorld on September 25, 2006, all of the Company's operations were in Thailand.

On August 3, 2007, the Company signed an agreement to release its working interest to the operator of the Federal Leases in Gabbs Valley, Nevada in return for relief from any future commitments related to these leases. (see Note 9)

On August 17, 2007 at the Annual General Meeting, the shareholders of the Company approved a reduction in the authorized shares of the Company's common stock through a reverse stock split with a conversion ratio of one share for every four held. The Company anticipates this becoming effective in September 2007.


The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Coastal Energy Company
    Frank A. Inouye
    Chief Executive Officer
    +44 (0) 148 354 9555
    or
    Coastal Energy Company
    William C. Phelps
    Chief Financial Officer
    (713) 877-6727
    Email: investor@coastalenergy.com
    Website: www.coastalenergy.com
    or
    KBC Peel Hunt, Ltd.
    Jonathan Marren
    +44 (0) 20 7418 8990
    or
    Bell Pottinger Corporate & Financial
    Ann-marie Wilkinson / Nick Lambert / Rosanne Perry
    +44 (0) 20 7861-3232