Heritage Oil Plc
TSX : HOC
LSE : HOIL

Heritage Oil Plc

August 25, 2011 02:00 ET

Heritage Oil Announces 2011 Interim Results

LONDON, UNITED KINGDOM--(Marketwire - Aug. 25, 2011) -

THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.

Heritage Oil Plc ("Heritage" or the "Company") (TSX:HOC)(LSE:HOIL), an independent upstream exploration and production company, announces the publication of its interim results for the six months ended 30 June 2011.

Operational Highlights

  • Miran West-3 well in the Kurdistan Region of Iraq ("Kurdistan") commenced drilling on 7 August 2011
  • Miran 3D seismic acquisition is nearing completion and 2D seismic acquisition in the southern portion of the Miran Block has commenced
  • Miran Field conceptual engineering studies have been completed for early development in 2013, followed by full field development in 2015
  • An initial gas marketing study for the Miran Field has been completed
  • Completed drilling well 363 in Russia which is producing 1,205 bopd
  • Completed acquisition of 2D seismic data in both Mali and offshore Malta
  • Seismic data being processed and interpreted for Tanzania, Mali and Malta
  • Net average daily production of 420 bopd in the first half of 2011

Corporate Highlights

  • Strong balance sheet with cash of approximately $468 million, excluding $405 million related to the tax dispute
  • Share buy back programme commenced in April 2011 and to date 28,556,281 Ordinary Shares have been bought back and held in treasury
  • 12.46% of PetroFrontier Corp. acquired for investment purposes
  • Arbitration proceedings have commenced in London against the Government of the Republic of Uganda (the "Ugandan Government") to resolve the tax dispute
  • Implemented internal systems for managing requirements of the UK Bribery Act which became law in July 2011

Outlook

  • Multiple reservoir intervals to be tested and evaluated in the Miran West-3 well during the second half of 2011 as the well is drilled to a target depth of c.4,400 metres
  • Exploration drilling on the Miran East structure planned to commence in December 2011, at which time two rigs will be operational in the field
  • Final processing of 3D seismic data on the Miran Field is scheduled to be completed in the fourth quarter of 2011
  • Work programmes in Tanzania, Mali and Malta continuing
  • A further development well planned for Russia in the fourth quarter of 2011
  • Production from the Zapadno Chumpasskoye Field, in Russia, expected to continue to increase
  • Active assessment of new acquisitions and opportunities continues

Tony Buckingham, Chief Executive Officer, commented:

"We have started the second half of the year with a strong balance sheet, an active multi-well exploration and appraisal drilling programme in Kurdistan and increased production following the success of our first horizontal well in Russia. We continue to assess opportunities to acquire and invest in exploration and early development opportunities throughout the world, with a particular emphasis on our core areas of Africa and the Middle East where we have a strong technical understanding and an established network of contacts."

Heritage's 2011 Interim Report and Accounts is available on its website at www.heritageoilplc.com.

Notes to Editors

  • Heritage is listed on the Main Market of the London Stock Exchange and is a constituent of the FTSE 250 Index. The trading symbol is HOIL. Heritage has a further listing on the Toronto Stock Exchange (TSX:HOC).
  • Heritage is an independent upstream exploration and production company engaged in the exploration for, and the development, production and acquisition of, oil and gas in its core areas of Africa, the Middle East and Russia.
  • Heritage has a producing property in Russia and exploration projects in the Kurdistan Region of Iraq, the Democratic Republic of Congo, Malta, Pakistan, Tanzania and Mali.
  • All dollars are US$ unless otherwise stated.

If you would prefer to receive press releases via email please contact Jeanny So (jeanny@chfir.com) and specify "Heritage press releases" in the subject line.

CHAIRMAN'S AND CHIEF EXECUTIVE'S REVIEW

Heritage has achieved success through the discovery of significant hydrocarbon resources and has capitalised on the ability to monetise these at the appropriate stage. The Miran Field, a major gas discovery with oil and condensate, is believed by management to be the largest gas field discovered in Iraq in almost 30 years. With the success of our first two wells, the focus with Miran is now centred on three initiatives: the appraisal of these large hydrocarbon bearing reservoirs, the exploration on Miran East and other potential structures in the south of the Miran Block and development of the field. Since announcing the Miran gas discovery, we have made significant progress towards early production which is currently expected to commence in 2013. Full field development would continue with key activities completed by 2015. In Tanzania, Mali and Malta work programmes are progressing with some high-impact exploration drilling scheduled to commence in 2012.

Operational overview

Kurdistan

The Miran West-2 well reached a total depth of 4,426 metres in November 2010 after which a series of tests were conducted. On conclusion of these tests, in January 2011, we announced the discovery of a major gas field with oil and condensate. Management currently estimates in-place volumes for the Miran West structure to have a P90–P50 range of 6.8–9.1 TCF, with an upside P10 potential of 12.3 TCF of gas with a P90–P50 range of 42–71 MMbbls of condensate and 53–75 MMbbls of oil. Miran East, on which we are planning to commence drilling in the fourth quarter of this year, has an additional estimated P90–P50 gas in-place range of 0.6–0.9 TCF with a P10 upside of 1.3 TCF. Additionally, further exploration potential exists in the Miran Field within the Jurassic and the Triassic.

Drilling of the Miran West-3 appraisal well commenced at the beginning of August 2011. The well is targeting reservoir sections encountered in discovery wells with the primary objective of appraising the Jurassic and Cretaceous reservoirs in the Miran West structure. The Miran West-3 location and well trajectory achieves a c.4.3 kilometre appraisal step out from the Miran West-2 Jurassic reservoir penetration. The planned well path targets the flanks of the structure. The well bore is being orientated and inclined to optimally intercept open fracture networks associated with multiple faults identified on recently acquired 3D seismic data. This well will also appraise the Cretaceous oil and gas reservoirs discovered in the Miran West-1 and Miran West-2 wells, further enhancing our knowledge of the Miran structures.

Drilling of the Miran West-3 well is expected to take approximately seven months with key reservoir intervals being tested as the well is drilled. After drilling and testing, it is intended that this rig will move to drill the Miran West-4 appraisal well. A second rig is being sourced to drill the planned Miran East-1 exploration well, with drilling expected to commence before year end, at which time there will be two rigs operating in the Miran Field.

Seismic acquisition

The original Miran 3D seismic programme covering 550 square kilometres was completed at the beginning of July 2011. After the success of the Miran West-2 well, the 3D programme was extended by 180 square kilometres and the programme is nearing completion. Seismic data is being processed in tranches in order to expedite understanding of the structures and to select optimum drilling locations. It is expected that final processing will be completed in the fourth quarter, providing a better understanding of the Miran fracture networks and enabling the drilling programme to target these networks more effectively.

A significant improvement in seismic data quality achieved in our 3D programme in the Miran Field assists greatly with the selection of well locations. Initial interpretation of the first tranche of data acquired has highlighted increased resource potential, in particular in the Miran East structure. This potential will be targeted by the Miran East-1 exploration well to be spudded before year end.

In addition to the 3D seismic programme, the acquisition of 180 kilometres of 2D seismic has commenced and will target leads and additional exploration potential in the southern portion of the Miran Block. This 2D programme is expected to be completed in the fourth quarter.

Development of the Miran Field

The Miran Field is a commercial discovery and independent engineering studies have confirmed the potential for a fast-tracked, phased development of the field enabling early revenues. Options being considered include deliveries from early production to existing and planned power plants for local markets in Kurdistan and exports to Turkey and to the European market under full field development. The Kurdistan Regional Government (the "KRG") has outlined favoured development options for gas utilisation and the initial priority will be to satisfy local gas demand by supplying produced gas on commercial terms to local power stations and other end-users in the Sulymaniyah region in 2013. Early gas production would also result in associated condensate and oil production.

Early production activities will be paralleled with full development and the export of gas to Turkey/Europe with full production of oil and condensate. Independent gas marketing studies highlight increasing demand in the KRG region, Turkey and Europe that can provide valuable markets for our gas volumes.

Conceptual engineering design studies have confirmed the potential for early production of between 80 and 180 MMscfd for local markets commencing in 2013, followed by full development of between 560 and 750 MMscfd in 2015 for exports. Exports would require the construction of either a 180 kilometre gas export pipeline tie-in to a previously planned pipeline or a 320 kilometre pipeline to the Iraq/Turkey border. Oil and condensate production of between 5,000 and 12,000 bpd would be trucked to Kirkuk for export in the early production scheme. This would be followed by construction of a 78 kilometre oil/condensate pipeline to Kirkuk for full development production of between 37,000 and 50,000 bpd.

Other exploration assets

In Malta, Heritage has an extensive data set of approximately 5,000 kilometres of 2D seismic that indicates the presence of multiple prospects and leads. In July 2011, the acquisition of 1,400 kilometres of infill and exploration 2D seismic was completed in Area 7 over the large Caravaggio structure and some additional leads. Current management estimates for the prospects, based on existing data, are for 500 MMboe of oil and gas.

In Mali, 1,077 kilometres of 2D seismic was acquired over Blocks 7 and 11 between June and August 2011 and the data is currently being interpreted. Previous drilling in the region has encountered oil and gas shows indicating the potential for a working hydrocarbon system. In both Mali and Tanzania, Heritage is actively looking to advance leads to drillable prospects.

Producing asset

Russia

Production averaged 420 bopd in the first half of 2011, a decrease of 28% from the six month period ended 30 June 2010. Production declined in the first quarter of the year due to a temporary problem with power generation which has since been resolved. In addition, there was some repair work undertaken on one of three producing wells.

In May 2011, we commenced the drilling of well 363, the first horizontal well in the licence, which completed in August 2011. Results of this well exceeded pre-drill expectations and production from the field is currently c.1,600 bopd which is a significant increase over the level achieved in the first half of the year. Well 363 is currently producing at a controlled rate of 1,205 bopd. During the flow test, the well produced at rates of up to 1,405 bopd and the well potential has been calculated by management to be 2,365 bopd. Currently, we plan to commence drilling a second horizontal well in the field in the fourth quarter.

Historical development of this reservoir type throughout the region has been through conventional drilling on a grid pattern. We recognised an opportunity to improve the efficiency and economics of field development by utilising horizontal drilling technology, thus decreasing the number of wells and the total cost required to develop the field, while potentially improving recovery. The previous reserves review and development plan undertaken by RPS Energy in June 2009 will be updated in due course, incorporating the results of well 363, and management expects these results will increase the valuation of the field.

Corporate

As at 30 June 2011, Heritage held a cash position of approximately $468 million, excluding $405 million related to the tax dispute. This is more than sufficient to cover the planned 2011/2012 work programmes.

In April 2011, Heritage announced the commencement of a share buy back programme. To date 28,556,281 Ordinary Shares have been bought back and are held in treasury. Consequently Heritage has 261,191,749 Ordinary Shares in issue, excluding treasury shares, as well as 2,811,408 exchangeable shares of no par value of Heritage Oil Corporation each carrying one voting right in Heritage. The total number of voting rights in Heritage, excluding treasury shares, as at 24 August 2011 is 264,003,157.

In May 2011, Heritage Oil & Gas Limited ("HOGL"), a wholly owned subsidiary of Heritage, commenced arbitration proceedings in London against the Ugandan Government. HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million in aggregate currently on deposit with the Ugandan Revenue Authority ("URA") or in escrow with Standard Chartered Bank in London following HOGL's sale of its interests in Blocks 1 and 3A in Uganda (the "Ugandan Assets") on 26 July 2010.

In July 2011, it was announced that Heritage had acquired common shares ("Shares") of PetroFrontier Corp. ("PetroFrontier") and currently holds 12.46% of the outstanding Shares of PetroFrontier. All Shares acquired and/or held by Heritage in PetroFrontier were acquired for investment purposes. PetroFrontier is listed on the TSX Venture Exchange and has commenced a high-impact drilling programme in Australia targeting billions of barrels of resources.

Corporate Social Responsibility ("CSR")

CSR policies developed since the Company's formation are considered a fundamental element supporting our successful business record. Our CSR systems are reviewed regularly by our CSR Board Committee. The framework of our CSR policy has been refined through our experiences and we continue to work diligently with stakeholders affected, or potentially affected, by our operations. We believe that our active, ongoing involvement in community projects in areas where we operate is fundamental in developing and maintaining strong relationships within these regions. During the first half of 2011 we continued with our programmes in Kurdistan through active recruitment of local labour.

Corporate strategy

With the benefit of our strong cash position, we aim to generate significant growth in shareholder value by focusing on high-impact international plays with the potential to discover significant hydrocarbon reserves. We continue to assess opportunities to acquire and invest in exploration and early development opportunities throughout the world, with a particular emphasis on our core areas of Africa and the Middle East where we have a strong technical understanding. Heritage looks to enter into regions early either through direct interests or through investing in corporate initiatives pursuing high-impact opportunities.

Outlook

Activities across our diversified asset portfolio are set to continue to pick up over the remainder of the year as exploration and appraisal drilling continues in the Miran Field. Work programmes on the remainder of our portfolio continue with seismic data being interpreted to establish potential drilling locations for exploration drilling planned for 2012. A strong balance sheet ensures we can continue with multiple work programmes across our portfolio whilst also looking for further opportunities to generate shareholder value.

Michael J. Hibberd
Chairman and Non-Executive Director
Anthony Buckingham
Chief Executive Officer

FINANCIAL REVIEW

Heritage has a strong balance sheet to support execution of current work programmes and assessment of opportunities to generate shareholder value.

SELECTED OPERATIONAL AND FINANCIAL DATA

Six months Six months
ended ended
30 June 30 June
2011 2010 Change
Production bopd 420 583 (28 %)
Sales volume bopd 411 580 (29 %)
Average realised price $/bbl 38.3 23.4 64 %
Petroleum and natural gas revenue $ million 2.8 2.5 12 %
Loss from continuing operations $ million (9.7 ) (12.3 ) (21 %)
Loss from discontinued operations $ million (1.7 ) (1.9 ) (11 %)
Net loss $ million (11.4 ) (14.2 ) (20 %)
Total cash capital expenditures – continuing operations $ million (52.7 ) (29.3 )
As at As at
30 June 31 December
2011 2010
Period end cash balance1 $ million 468.3 598.3
1 Excluding amounts related to the tax dispute in Uganda of $405 million.

Operating performance

Production

All production and revenue is generated from the Zapadno Chumpasskoye Field in Russia.

Average daily production decreased by 28% from 583 bopd in the six month period ended 30 June 2010 to 420 bopd in the six month period ended 30 June 2011. This decrease resulted primarily from power issues which have since been resolved and repair work on one of three producing wells. Average daily production was 16% lower than the six months ended 31 December 2010.

Well 363, the first horizontal well to be drilled in the Zapadno Chumpasskoye Field, Russia, was completed in August 2011 and commenced production from mid-August at a rate of 1,205 bopd which is expected to result in a significant increase in production from the field in the second half of this year.

Revenue

Petroleum and natural gas revenue increased by 12% to $2.8 million, as a result of higher average realised prices offset by lower volumes of crude oil sales. The average realised price per barrel in the first half of 2011 of $38.3/bbl was 64% higher than in the first half of 2010 due to increased average commodity prices in Russia in 2011.

Operating results

Petroleum and natural gas operating costs of $1.3 million in the six month period ended 30 June 2011 were 30% higher than in the same period last year due to cost increases in Russia, particularly impacting fuel costs, and weakening of the US dollar against the Russian rouble. The average operating cost per barrel increased from $9.8/bbl in the first half of 2010 to $17.8/bbl in the first half of 2011. The lower level of production and the fixed nature of certain costs also contributed to this increase.

Production tax increased from $1.3 million in the first half of 2010 to $1.5 million in the first half of 2011 as a result of the 12% increase in revenues.

General and administrative expenses increased from $8.1 million in the first half of 2010 to $8.8 million in the same period in 2011, principally due to increased legal fees and travel expenses related to corporate initiatives.

Depletion, depreciation and amortisation expenses were $1 million in the first half of 2011, which was consistent with the same period in the prior year.

Exploration expenditures, expensed and not capitalised, increased from $0.9 million in the first half of 2010 to $2.8 million in the first half of 2011. Exploration expenditures in the first half of 2011 related principally to potential new ventures in Africa.

Interest income of $3.2 million in the first half of 2011 was $2.9 million higher than in the same period in 2010, primarily as a result of higher average cash balances in 2011. Cash and cash equivalents are typically held in interest bearing treasury accounts.

Other finance costs increased from $1.4 million in the first half of 2010 to $1.7 million in the first half of 2011 due to higher convertible bonds accretion expense as the maturity of the convertible bonds is approaching.

The Company recognised foreign exchange gains of $1.2 million in the first half of 2011 (first half of 2010 – losses of $0.9 million) primarily because of an intercompany US dollar denominated loan provided to the Russian subsidiary used to develop the Zapadno Chumpasskoye Field. The revaluation of this loan in Russian roubles, the functional currency of the Russian subsidiary, created the foreign exchange gains due to the strengthening of the Russian rouble against the US dollar during the first half of 2011. In accordance with Heritage's accounting policy, the revaluation gain was recognised in the financial statements of the Russian subsidiary in Russian roubles and on consolidation the revaluation gains were translated into US dollars and included in the statement of comprehensive income.

Heritage recognised an unrealised gain on the fair value of its investment in Afren plc ("Afren") warrants of $0.3 million in the first half of 2011, compared to a $0.4 million loss in the first half of 2010. The gain or loss is determined by the performance of the share price of Afren. Heritage holds 1,500,000 warrants in Afren, received as partial consideration from the sale of Heritage Congo Limited in 2006, with an exercise price of £0.60 per warrant. The warrants have a term until 22 December 2011. At 30 June 2011, Afren's share price was £1.58 per share.

Heritage's net loss from continuing operations after tax in the first half of 2011 was $9.7 million, 21% lower than the loss of $12.3 million in the first half of 2010.

Disposal

On 18 December 2009, Heritage announced that the Company and HOGL had entered into a Sale and Purchase Agreement ("SPA"), with ENI International B.V. ("Eni") for the sale of the Ugandan Assets and on 17 January 2010, Tullow Uganda Limited ("Tullow") exercised its rights of pre-emption. The sale of the Ugandan Assets completed on 26 July 2010; Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion.

The URA contends that income tax is due on the capital gain arising on the disposal and it raised assessments of $404,925,000 prior to completion of the disposal. Heritage's position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets.

Tullow paid cash consideration of $1.35 billion and an additional contractual settlement amount of $100 million. On closing, Heritage deposited $121,477,000 with the URA, representing 30% of the disputed tax assessment of $404,925,000. $121,477,000 has been classified as a deposit in the balance sheet at 30 June 2011 and 31 December 2010. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan Government and HOGL of the tax dispute. Including accrued interest, an amount of $283,841,000 is classified as restricted cash in the balance sheet at 30 June 2011.

In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL disputed this assessment and no provision has been made for this amount.

A tax tribunal is ongoing in Uganda and in May 2011 HOGL commenced international arbitration proceedings in London against the Ugandan Government.

HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. Accordingly, the arbitration proceedings concern HOGL's claims that the Ugandan Government wrongfully or unreasonably withheld consent to the sale by HOGL of the rights under the Production Sharing Agreements ("PSAs") for the Ugandan Assets, including by making this consent conditional upon the payment of a sum alleged to be a tax liability of HOGL. The arbitration proceedings are being held in London in accordance with the provisions of the PSAs in relation to the Ugandan Assets.

In March 2011, Tullow paid working capital adjustments with respect to the Ugandan Assets of $13.6 million.

On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL's and Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the claim has no basis and are in the process of vigorously and robustly defending it. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank.

Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.

The results of the Ugandan operations have been classified as discontinued operations. Loss on disposal of discontinued operations for the six months ended 30 June 2011 and 2010 are as follows:

Six months Six months
ended ended
30 June 30 June
2011 2010
$'000 $'000
Loss on disposal of discontinued operations (1,654 )
Loss of the discontinued operations (1,852 )
(1,654 ) (1,852 )

In the first half of 2011 the basic and diluted loss per share was $0.04, compared to the basic and diluted loss per share of $0.05 in the first half of 2010.

Cash flow and capital expenditures

Cash used in operating activities of continuing operations was $9.5 million in the first half of 2011 compared to $13.0 million in the first half of 2010. Total cash capital expenditures for continued operations in the first half of 2011 were $52.7 million compared to $29.3 million in the first half of 2010. The following major work programmes were undertaken in the first half of 2011:

  • testing of the Miran West-2 well completed in January 2011. The well was drilled to a total depth of 4,426 metres. This resulted in the discovery of large gas field which management considers to be the largest gas field to be discovered in Iraq in almost 30 years;
  • the 3D seismic survey across the Miran Field continued during the first half of 2011 and is nearing completion. The seismic survey covering 730 square kilometres will be processed over the remainder of the year;
  • well 363 in the Zapadno Chumpasskoye Field, Russia, completed at the beginning of August 2011, leading to a significant increase in production;
  • in Mali, approximately 1,077 kilometres of 2D seismic was acquired over Blocks 7 and 11; and
  • the acquisition of 300 square kilometres of 3D seismic offshore Tanzania completed in January 2011.

On 26 April 2011, the Company announced a buy back programme to acquire Ordinary Shares. Shareholders approved the resolution at the Annual General Meeting ("AGM") on 20 June 2011 to acquire up to 28,900,000 Ordinary Shares from that date. Purchased Ordinary Shares are held in treasury. At 30 June 2011, the Company held 18,347,696 Ordinary Shares in treasury. The total acquisition cost of these shares was $66.6 million.

As at 30 June 2011, the Company had acquired 6,594,200 Shares, through the facilities of the TSX Venture Exchange, of PetroFrontier representing 10.39% of the Shares of PetroFrontier. The investment in share capital of PetroFrontier is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. The valuation at market price at 30 June 2011 of $19.0 million, resulted in a loss of $0.9 million recognised in equity.

Financial position

Liquidity

Heritage had a net decrease in cash and cash equivalents during the first half of 2011 of $130 million. At 30 June 2011, Heritage had a working capital surplus of $703.5 million, including cash and cash equivalents of $468.3 million.

Like most oil and gas exploration companies, Heritage raises finance for its activities from time to time using a variety of sources. Sources of funding for future exploration and development programmes will be derived from, inter alia, disposal proceeds from the sale of assets, such as the sale of the Ugandan Assets in 2010 (see Disposal section of the Financial Review) using its existing treasury resources, new credit facilities, reinvesting its funds from operations, farm-outs and, when considered appropriate, issuing debt and additional equity. Accordingly, the Group has a number of different sources of finance.

Capital structure

Heritage's financial strategy has been to fund its capital expenditure programmes and any potential acquisitions by selling non-core assets, reinvesting funds from operations, using existing treasury resources, finding new credit facilities and, when considered appropriate, either issuing unsecured convertible bonds or equity.

On 26 July 2010, the Company completed the disposal of the Ugandan Assets for cash consideration of $1.35 billion and an additional contractual settlement amount of $100 million.

At 30 June 2011, Heritage had net cash of $277.5 million (31 December 2010 – $409.2 million) (cash and cash equivalents less total liabilities) and nil gearing (31 December 2010 – nil) (net debt as a percentage of total shareholders' equity).

As referred to above, as at 30 June 2011, Heritage had acquired 18,347,696 Ordinary Shares, which are held in treasury, at a total cost of $66.6 million.

Primary risks and uncertainties facing the business

Heritage's business, financial standing and reputation may be impacted by various risks, not all of which are within its control. The Group identifies and monitors the key risks and uncertainties affecting it and runs its business in a way that minimises the impact of such risks where possible.

The primary risks to the business include:

  • exploration and development expenditures and success rates – the Group has experienced management and technical teams with a track record of finding attractive hydrocarbon discoveries and has a diversified portfolio of exploration, development and production assets. Considerable technical work is undertaken to reduce related areas of risk and maximise opportunities;
  • factors associated with operating in developing countries including political, fiscal and regulatory instability - the Group maintains close contact with governments in the areas within which it operates and, where appropriate, invests in community projects. Considerable work is undertaken before commencing operations in any new territory. The Group continually reviews fiscal regimes and enters into robust, transparent PSCs or licences;
  • title disputes – notwithstanding potential challenges in Kurdistan and Malta, the Group believes that it has good title to its oil and gas properties. However, the Group cannot control or completely protect itself against the risk of title disputes or challenges and there can be no assurance that claims or challenges by third parties against the Group's properties will not be asserted at a future date. Naturally, the Group strives to employ the best internal and advisory knowledge available to help to minimise this risk associated with its activities;
  • oil and gas sales volumes and prices – whilst not under the direct control of the Company, a material movement in commodity prices could impact on the Group. The Group did not hedge oil prices in the first half of 2011;
  • loss of key employees – remuneration packages are regularly reviewed to ensure key executives and senior management are properly remunerated. Long-term incentive programmes have been established; and
  • foreign exchange exposure – generally, it is the Group's policy to conduct and manage its business in US dollars, which is its reporting currency. Cash balances in Group subsidiaries are primarily held in US dollars but small amounts may be held in other currencies in order to meet immediate operating or administrative expenses or to comply with local currency regulations.

Further details on risks and how the Company mitigates them are disclosed on pages 36 to 39 of the Annual Review report within the 2010 Annual Report and Accounts issued on 18 April 2011.

Paul Atherton
Chief Financial Officer

Responsibility statement of the Directors in respect of the Interim Report and Accounts

We confirm on behalf of the Board that to the best of our knowledge:

  • the condensed set of financial statements has been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting as adopted by the European Union ("EU");
  • the Interim Report and Accounts includes a fair review of the information required by:
    • DTR 4.2.7R of the Disclosure and Transparency Rules ("DTR"), being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
    • DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last Annual Report and Accounts that could do so.

For and on behalf of the Board

Anthony Buckingham
Chief Executive Officer
24 August 2011
Paul Atherton
Chief Financial Officer
24 August 2011

Independent review report to Heritage Oil Plc

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the Interim Report and Accounts for the six months ended 30 June 2011 which comprises the condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement and the related explanatory notes. We have read the other information contained in the Interim Report and Accounts and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the "DTR") of the UK's Financial Services Authority (the "UK FSA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The Interim Report and Accounts is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Interim Report and Accounts in accordance with the DTR of the UK FSA.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Interim Report and Accounts based on our review.

Scope of review

We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim Report and Accounts for the six months ended 30 June 2011 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

Emphasis of matter – uncertain outcome of tax dispute

In forming our conclusion on the condensed set of financial statements, which is not modified, we have considered the adequacy of the disclosures made in note 4 to the condensed set of financial statements concerning the dispute as to whether or not tax is payable on the disposal of the Group's interest in Uganda. In this respect, based on advice received, the Directors believe that the amounts on deposit ($121,477,000) and held in escrow ($283,841,000) shown in the condensed consolidated balance sheet will be recovered. However, the ultimate outcome of the matter is uncertain and it may be some considerable time before the issue is resolved.

Jimmy Daboo
for and on behalf of KPMG Audit Plc
Chartered Accountants
15 Canada Square
London
E14 5GL
24 August 2011

Condensed consolidated income statement

Six months Six months
ended ended
30 June 2011 30 June 2010
$'000 $'000
Revenue
Petroleum 2,850 2,458
Expenses
Petroleum operating (1,349 ) (1,034 )
Production tax (1,491 ) (1,333 )
General and administrative (8,761 ) (8,076 )
Depletion, depreciation and amortisation (993 ) (1,031 )
Exploration expenditures (2,765 ) (863 )
Operating loss (12,509 ) (9,879 )
Finance income/(costs)
Interest income 3,202 276
Other finance costs (1,749 ) (1,416 )
Foreign exchange gains/(losses) 1,202 (926 )
Unrealised gain/(loss) on other financial assets 303 (371 )
2,958 (2,437 )
Loss from continuing operations before tax (9,551 ) (12,316 )
Income tax expense (174 )
Loss from continuing operations after tax (9,725 ) (12,316 )
Loss on disposal of discontinued operations (note 4) (1,654 ) (1,852 )
Net loss for the period attributable to owners of the Company (11,379 ) (14,168 )

The notes are an integral part of these condensed set of financial statements.

Condensed consolidated statement of comprehensive income

Six months Six months
ended ended
30 June 2011 30 June 2010
$'000 $'000
Loss for the period (11,379 ) (14,168 )
Other comprehensive gain/(loss)
Exchange differences on translation of foreign operations 998 (383 )
Net change in fair value of available-for-sale financial assets (885 )
Other comprehensive gain/(loss) net of income tax 113 (383 )
Total comprehensive loss for the period (11,266 ) (14,551 )
Attributable to
Owners of the Company (11,266 ) (14,551 )
Net loss per share from continuing operations (dollars)
Basic and diluted (0.03 ) (0.04 )
Net loss per share from discontinued operations (dollars)
Basic and diluted (0.01 ) (0.01 )
Net loss per share (dollars)
Basic and diluted (0.04 ) (0.05 )

The notes are an integral part of these condensed set of financial statements.

Condensed consolidated balance sheet

30 June 31 December
2011 2010
$'000 $'000
ASSETS
Non-current assets
Intangible exploration assets (note 5) 228,485 183,424
Property, plant and equipment (note 5) 110,124 101,993
Other financial assets (note 6) 18,985 2,050
357,594 287,467
Current assets
Inventories 141 97
Prepaid expenses 1,503 746
Trade and other receivables 3,496 20,240
Deposit with URA (note 4) 121,477 121,477
Other financial assets (note 6) 2,353
Restricted cash (note 4) 283,841 283,603
Cash and cash equivalents 468,271 598,275
881,082 1,024,438
1,238,676 1,311,905
LIABILITIES
Current liabilities
Current tax liabilities 371 197
Trade and other payables 52,857 54,083
Borrowings (note 7) 124,324 896
177,552 55,176
Non-current liabilities
Borrowings (note 7) 12,824 133,515
Provisions 408 389
13,232 133,904
190,784 189,080
Net assets 1,047,892 1,122,825
SHAREHOLDERS' EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY
Share capital (note 8) 402,627 460,280
Reserves 82,558 86,678
Retained earnings 562,707 575,867
1,047,892 1,122,825

The notes are an integral part of these condensed set of financial statements.

Condensed consolidated statement of changes in equity

Six months ended 30 June 2011
Share capital Foreign currency translation reserve Available-for-sale investments revaluation reserve Share-based payments reserve Retained earnings Equity portion of convertible debt Total equity
$'000 $'000 $'000 $'000 $'000 $'000 $'000
Balance at 1 January 2011 460,280 (940 ) 62,969 575,867 24,649 1,122,825
Total comprehensive income for the period
Loss for the period (11,379 ) (11,379 )
Other comprehensive gain/(loss)
Exchange differences on translation of foreign operations 998 998
Net change in fair value of available-for-sale financial assets (885 ) (885 )
Total other comprehensive gain/(loss) 998 (885 ) 113
Total comprehensive gain/(loss) for the period 998 (885 ) (11,379 ) (11,266 )
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Share buy back (66,630 ) (66,630 )
Exercise of share options net of attributable dividends 1,225 (1,225 ) (1,781 ) (1,781 )
Share-based payment transactions and exercise of share options 7,752 (3,008 ) 4,744
Total transactions with owners (57,653 ) (4,233 ) (1,781 ) (63,667 )
Balance at 30 June 2011 402,627 58 (885 ) 58,736 562,707 24,649 1,047,892

The notes are an integral part of these condensed set of financial statements.

Condensed consolidated statement of changes in equity

Six months ended 30 June 2010
Share capital Foreign currency translation reserve Share-based payments reserve Retained earnings Equity portion of convertible debt Total equity
$'000 $'000 $'000 $'000 $'000 $'000
Balance at 1 January 2010 460,280 (816 ) 58,714 (153,164 ) 24,649 389,663
Total comprehensive income for the period
Loss for the period (14,168 ) (14,168 )
Other comprehensive loss
Exchange differences on translation of foreign operations (383 ) (383 )
Total other comprehensive loss (383 ) (383 )
Total comprehensive loss for the period (383 ) (14,168 ) (14,551 )
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Share-based payment transactions and exercise of share options 2,070 2,070
Total transactions with owners 2,070 2,070
Balance at 30 June 2010 460,280 (1,199 ) 60,784 (167,332 ) 24,649 377,182

The notes are an integral part of these condensed set of financial statements.

Condensed consolidated cash flow statement

Six months Six months
ended ended
30 June 2011 30 June 2010
$'000 $'000
Cash provided by (used in)
Operating activities
Net loss from continuing operations for the period (9,725 ) (12,316 )
Items not affecting cash
Depletion, depreciation and amortisation 993 1,031
Finance costs – accretion expenses 641 474
Foreign exchange (gains)/losses (473 ) 481
Share-based compensation 1,536 1,562
(Gain)/loss on other financial assets (303 ) 371
Decrease/(increase) in trade and other receivables 734 (188 )
(Increase)/decrease in prepaid expenses (757 ) 63
Increase in inventory (44 ) (10 )
Decrease in trade and other payables (1,859 ) (4,453 )
Accrued interest on restricted cash (238 )
Continuing operations (9,495 ) (12,985 )
Discontinued operations (1,858 ) (2,195 )
(11,353 ) (15,180 )
Investing activities
Property, plant and equipment expenditures (9,125 ) (1,413 )
Intangible exploration expenditures (43,526 ) (27,893 )
Other financial assets (19,870 )
Continuing operations (72,521 ) (29,306 )
Discontinued operations
Working capital adjustments 9,901
Property, plant and equipment expenditures and intangible exploration expenditures (18,842 )
(62,620 ) (48,148 )
Financing activities
Share buy back (note 8) (58,138 )
Shares issued for cash, proceeds from exercise of share options 2,659
Payment on exercise of share options (note 9) (1,781 )
Payment of consent fee to the holders of the convertible bonds (2,378 )
Repayment of long-term debt (346 ) (373 )
(57,606 ) (2,751 )
Decrease in cash and cash equivalents (131,579 ) (66,079 )
Cash and cash equivalents – beginning of period 598,275 208,094
Foreign exchange gain/(loss) on cash held in foreign currency 1,575 (1,218 )
Cash and cash equivalents – end of period 468,271 140,797
Non-cash investing and financing activities
Supplementary information
The following have been included within cash flows for the period under operating and investing activities:
Interest received 3,781 272
Interest paid 5,216 5,247

The notes are an integral part of these condensed set of financial statements.

Notes to condensed set of financial statements

1. Reporting entity

Heritage Oil Plc (the "Company") was incorporated under the Companies (Jersey) Law 1991 (as amended) (the "Jersey Companies Law") on 6 February 2008 as Heritage Oil Limited. The Company changed its name to Heritage Oil Plc on 18 June 2009. Its primary business activity is the exploration, development and production of petroleum and natural gas in Africa, the Middle East and Russia. The Company was established in order to implement a corporate reorganisation of Heritage Oil Corporation ("HOC", the "Corporation").

2. Basis of accounting and presentation and significant accounting policies

These interim condensed set of financial statements of the Company as at and for the six months ended 30 June 2011 include the results of the Company and all subsidiaries over which the Company exercises control (together referred as the "Group").

The Group had available cash of $468.3 million at 30 June 2011, excluding amounts related to the tax dispute with the Ugandan Government.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Interim Report and Accounts.

The condensed set of financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. They do not include all information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Company and all its subsidiaries as at the year ended 31 December 2010.

The Company's condensed set of financial statements are presented in thousand US dollars unless otherwise stated. US dollars are the Company's functional and presentation currency.

The accounting policies applied in the preparation of these condensed set of financial statements are consistent with those applied by the Company and all its subsidiaries in its consolidated financial statements as at and for the year ended 31 December 2010.

The condensed set of financial statements were approved by the Board and authorised for issuance on 24 August 2011.

The comparative information at 31 December 2010 is abridged and therefore is not the Company's statutory accounts for that financial period.

3. Segment information

The Group has a single class of business which is international exploration, development and production of petroleum oil and natural gas. The geographical areas are defined by the Company as operating segments in accordance with IFRS 8 Operating Segments. The Group operates in a number of geographical areas based on location of operations and assets, being Russia, the DRC, Kurdistan, Pakistan, Tanzania, Malta, Mali and Uganda (discontinued). The Group's reporting segments comprise each separate geographical area in which it operates.

Six months ended 30 June 2011
Depreciation,
depletion
External Segment Total Total Capital and
revenue result assets liabilities additions amortisation
$'000 $'000 $'000 $'000 $'000 $'000
Russia 2,850 169 60,749 2,914 6,398 (501 )
Kurdistan 163,786 13,741 28,361
Pakistan 5,306 564
Tanzania 24,398 213 4,294
Mali 16,515 6,236 13,167
Malta 15,534 63 1,741
Uganda – discontinued operations (1,654 )
Total for reportable segments 2,850 (1,485 ) 286,288 23,167 54,525 (501 )
Corporate (9,894 ) 952,388 167,617 268 (492 )
Elimination of discontinued operations 1,654
Total from continuing operations 2,850 (9,725 ) 1,238,676 190,784 54,793 (993 )
Six months ended 30 June 2010
Depreciation,
depletion
External Segment Total Total Capital and
revenue result assets liabilities additions amortisation
$'000 $'000 $'000 $'000 $'000 $'000
Russia 2,458 (1,478 ) 49,679 788 2,032 (696 )
DRC 1,693 31
Kurdistan (12 ) 95,213 3,363 21,103
Pakistan 4,263 1,585
Tanzania 21,493 134 1,267
Mali 2,452 332
Malta 11,590 70 437
Uganda – discontinued operations (1,852 ) 183,082 13,384 19,946
Total for reportable segments 2,458 (3,342 ) 369,465 17,739 46,733 (696 )
Corporate (10,826 ) 164,178 138,722 14 (335 )
Elimination of discontinued operations 1,852 (183,082 ) (13,384 ) (19,946 )
Total from continuing operations 2,458 (12,316 ) 350,561 143,077 26,801 (1,031 )

In 2010, capitalised expenditures relating to the DRC were written off and therefore no amounts are disclosed with respect to the DRC in the 2011 segmental report.

Corporate activities include the financing activities of the Group and is not an operating segment. There have been no changes to the basis of segmentation or the measurement basis for the segment results since 31 December 2010.

4. Discontinued operations

On 18 December 2009, Heritage announced that the Company and HOGL had entered into a SPA with Eni for the sale of the Ugandan Assets and on 17 January 2010 Tullow exercised its rights of pre-emption. The sale of the Ugandan Assets completed on 26 July 2010; Tullow paid cash of $1.45 billion, including $100 million from a contractual settlement, of which Heritage received and retained $1.045 billion.

The URA contends that income tax is due on the capital gain arising on the disposal and it raised assessments to $404,925,000 prior to completion of the disposal. Heritage's position, based on comprehensive advice from leading legal and tax experts in Uganda, the United Kingdom and North America, is that no tax should be payable in Uganda on the disposal of the Ugandan Assets.

Tullow paid cash consideration of $1.35 billion and an additional contractual settlement amount of $100 million. On closing, Heritage deposited $121,477,000 with the URA, representing 30% of the disputed tax assessment of $404,925,000. $121,477,000 has been classified as a deposit in the balance sheet at 30 June 2011 and 31 December 2010. A further $283,447,000 has been retained in escrow with Standard Chartered Bank in London, pursuant to an agreement between HOGL, Tullow and Standard Chartered Bank pending resolution between the Ugandan Government and HOGL of the tax dispute. Including accrued interest, an amount of $283,841,000 is classified as restricted cash in the balance sheet at 30 June 2011.

In August 2010, the URA issued a further income tax assessment of $30 million representing 30% of the additional contractual settlement amount of $100 million. HOGL disputed this assessment and no provision has been made for this amount.

A tax tribunal is ongoing in Uganda and in May 2011 HOGL commenced international arbitration proceedings in London against the Ugandan Government.

HOGL is seeking a decision requiring, among other things, the return or release of approximately $405 million in aggregate currently on deposit with the URA or in escrow with Standard Chartered Bank in London. Accordingly, the arbitration proceedings concern HOGL's claims that the Ugandan Government wrongfully or unreasonably withheld consent to the sale by HOGL of the rights under the PSAs for the Ugandan Assets, including by making this consent conditional upon the payment of a sum alleged to be a tax liability of HOGL. The arbitration proceedings are being held in London in accordance with the provisions of the PSAs in relation to the Ugandan Assets.

In March 2011, Tullow paid working capital adjustments with respect to the Ugandan Assets of $13.6 million.

On 15 April 2011, Heritage and its wholly owned subsidiary HOGL received Particulars of Claim filed in the High Court of Justice in England by Tullow seeking $313,447,500 for alleged breach of contract as a result of HOGL's and Heritage's refusal to reimburse Tullow in relation to a payment made by Tullow of $313,447,500 on 7 April 2011 to the URA. Heritage and HOGL believe that the claim has no basis and are in the process of vigorously and robustly defending it. Heritage and HOGL have filed their Defence and Counterclaim against Tullow seeking instead the release to HOGL of $283,447,000 plus interest currently being held in escrow with Standard Chartered Bank in London.

Although disputes of this nature are inherently uncertain, the Directors believe that the monies on deposit and held in escrow will ultimately be recovered by Heritage.

The results of the Ugandan operations have been classified as discontinued operations. Loss on disposal of discontinued operations as at 30 June 2011 and 2010 is as follows:

Six months Six months
ended ended
30 June 2011 30 June 2010
$'000 $'000
Loss on disposal of discontinued operations (1,654 )
Loss of the discontinued operations (1,852 )
(1,654 ) (1,852 )

5. Property, plant and equipment and intangible exploration assets

Capital additions

During the six months ended 30 June 2011, the Group acquired property, plant and equipment and intangible exploration assets with a cost of $54,793,000 (six months ended 30 June 2010 – $46,747,000), including nil relating to discontinued operations (six months ended 30 June 2010 – $19,946,000).

6. Other financial assets

30 June 31 December
2011 2010
$'000 $'000
Current other financial assets
Investment in warrants 2,353
Non-current other financial assets
Investment in warrants 2,050
Investment in listed securities 18,985

The investment in Afren warrants is classified as held for trading. Afren warrants expire within a period less than one year from 30 June 2011, and therefore they have been classified as current assets at 30 June 2011.

As at 30 June 2011, the Company had acquired 6,594,200 of the listed Shares of PetroFrontier representing 10.39% of the Shares of PetroFrontier. The investment in share capital of PetroFrontier is classified as available-for-sale and valued at fair value which is determined using market price at the end of the period. The valuation at market price at 30 June 2011 resulted in a loss of $885,000 recognised in equity.

7. Borrowings

30 June 31 December
2011 2010
$'000 $'000
Current borrowings – secured
Convertible bonds – unsecured 123,413
Current portion of secured long-term debt 911 896
124,324 896
Non-current borrowings
Convertible bonds – unsecured 120,468
Non-current portion of secured long-term debt 12,824 13,047
12,824 133,515

Convertible bonds mature within a period less than one year from 30 June 2011 and therefore have been reclassified as current liabilities at 30 June 2011.

8. Share capital

The Company was incorporated under the Jersey Companies Law on 6 February 2008. The Company's authorised share capital is an unlimited number of Ordinary Shares without par value.

Ordinary Shares

Six months ended Six months ended
30 June 2011 30 June 2010
Amount Amount
Number $'000 Number $'000
At 1 January 284,899,830 457,746 284,842,830 457,697
Exchange of exchangeable shares of HOC for Ordinary Shares 155,700 132
Issued on exercise of stock options 4,692,500 8,977
Shares bought back and held in treasury (18,347,696 ) (66,630 )
At 30 June, excluding treasury shares 271,400,334 400,225 284,842,830 457,697

Special Voting Share

Six months ended Six months ended
30 June 2011 30 June 2010
Amount Amount
Number $'000 Number $'000
At 1 January 1 1
Issued during the period
At 30 June 1 1

Exchangeable shares of HOC each carrying one voting right in the Company

Six months ended Six months ended
30 June 2011 30 June 2010
Amount Amount
Number $'000 Number $'000
At 1 January 2,967,108 2,534 3,024,108 2,583
Exchange of exchangeable shares of HOC for Ordinary Shares (155,700 ) (132 )
At 30 June, excluding treasury shares 2,811,408 2,402 3,024,108 2,583
Balance of Ordinary Shares of the Company, excluding treasury shares, and exchangeable shares of HOC – at 30 June 274,211,742 402,627 287,866,938 460,280

On 26 April 2011, the Company announced a buy back programme to acquire Ordinary Shares. Shareholders approved the resolution at the AGM on 20 June 2011 to acquire up to 28,900,000 Ordinary Shares from that date. The purchased Ordinary Shares are held in treasury. At 30 June 2011, the Company held 18,347,696 Ordinary Shares in treasury.

Following the payment of a special dividend of 100 pence per share in August 2010, holders of share options are entitled to receive 100 pence per share when the option is exercised. The net exercise price for the 2,150,000 options exercised was less than 100 pence per share, which resulted in net payment of $1,781,000 to the option holders on exercise of these share options during the period ended 30 June 2011.

9. Share based payments

Long Term Incentive Plan ("LTIP")

On 20 June 2011, the AGM of the Company approved the 2011 LTIP. Under the terms of the plan, the LTIP awards will be in the form of full-value shares, subject to performance and time-vesting conditions. Eligible employees will normally be considered by the Remuneration Committee for an award once each year.

The award would vest in line with the following schedule:

Percentage of award vesting
Upper quartile 100% of the award
Between median and upper quartile 25% – 100% on a straight line basis
Median 25 %
Below median 0 %

Total Shareholder Return ("TSR") will be measured in comparison to a peer group of 18 oil companies selected based on one of or a combination of size (market capitalisation, revenue, turnover, cash expenditure or a combination thereof), area of operations and country of domicile. The TSR measurement will be conducted by the independent consultants in discussion with the Remuneration Committee.

Since there are market-related conditions the awards of shares under LTIP were fair valued using the Monte Carlo model which takes into account the market-based performance conditions which effectively estimate the number of shares expected to vest. No subsequent adjustment is made to the fair value charge for shares that do not vest in the event that these performance conditions are not met. Adjustments are, however, made for leavers. The fair value of the awards is recognised as an employee expense with the corresponding increase in equity. The total amount to be expensed is spread over the vesting period during which the employees become unconditionally entitled to the shares and options.

The table below summarises the main assumptions used to fair value the awards made under the above LTIP and the fair values of the shares granted.

Award date 20 June 2011
Vesting period 3 years
Exercise price Nil
Share price at date of grant 212.8 p
Expected volatility 55 %
Risk free interest 1.3 %
Fair value as at grant date 1.63
Number of shares granted 2,834,367

The 2008 Long Term Incentive Plan (Performance Share Plan) (the "2008 LTIP") was approved by shareholders at the AGM on 19 June 2008. The 2008 LTIP compared the Company's TSR over a three year period ended 19 June 2011 against a comparator group of 18 other companies. The 2008 LTIP comprised two plans, one for members of staff and another for the Executive Directors. The plan for the Executive Directors included an additional performance condition over-and-above the Company's relative TSR performance.

Independent executive reward consultants, Hay Group, compared the Company's TSR against the comparator group during this three year period. The additional 2008 LTIP performance conditions for the Executive Directors were not met and so none of their awards over 3,507,246 shares vest. While performance conditions for the staff plan were achieved with the result that all of the awards of 1,419,187 shares could have vested in accordance with the plan. Participants have agreed (due to a range of contributing factors) to forego 25% of their potential awards in accordance with the 2008 LTIP rules. As a result, awards over a total of only 1,064,372 shares will vest. The Remuneration Committee also approved such a reduction in accordance with the 2008 LTIP rules.

The Remuneration Committee agreed with Mr. Buckingham, the Company's CEO, to amend the performance criteria relating to 915,913 shares under the 2008 LTIP to reflect substantially the same terms and conditions as those under the new 2011 LTIP rules.

The share-based payment recognised in the period ended 30 June 2011 was $2,030,000 (six months ended 30 June 2010 – $2,071,000) out of which $459,000 (six months ended 30 June 2010 – $509,000) was capitalised.

10. Loss per share

The following table summarises the weighted average Ordinary Shares and exchangeable shares used in calculating net loss per share:

Six months ended 30 June
2011 2010
Weighted average Ordinary and Exchangeable Shares
Basic 287,573,271 287,866,938
Diluted 302,355,193 305,330,803

The reconciling item between basic and diluted weighted average number of Ordinary Shares is the dilutive effect of stock options. A total of 27,042,553 of shares relating to the convertible bonds (30 June 2010 – 27,042,553) were excluded from the above calculation, as they were antidilutive. However, since the Company has made a loss in each period for the purposes of calculating diluted loss per share, all potential Ordinary Shares have been treated as anti-dilutive.

11. Related party transactions

During the six months ended 30 June 2011, the Company incurred transportation costs of $75,000 (six months ended 30 June 2010 – $32,000) with respect to the services provided by a company indirectly owned by Mr. Buckingham, CEO of the Company.

12. Non-cash investing and financing activities supplementary information

30 June 30 June
2011 2010
$'000 $'000
Capitalised portion of share-based compensation (459 ) (509 )
Capitalised portion of interest (6,422 ) (6,404 )
Non-cash property, plant and equipment and intangible exploration assets additions relating to the capitalised portion of share-based compensation and interest 6,881 6,913

FORWARD-LOOKING INFORMATION:

Except for statements of historical fact, all statements in this news release – including, without limitation, statements regarding production estimates and future plans and objectives of Heritage – constitute forward-looking information that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate; actual results and future events could differ materially from those anticipated in such statements. Factors that could cause actual results to differ materially from anticipated results include risks and uncertainties such as: risks relating to estimates of reserves and recoveries; production and operating cost assumptions; development risks and costs; the risk of commodity price fluctuations; political and regulatory risks; and other risks and uncertainties as disclosed under the heading "Risk Factors" in its Prospectus and elsewhere in Heritage documents filed from time-to-time with the London Stock Exchange and other regulatory authorities. Further, any forward-looking information is made only as of a certain date and the Company undertakes no obligation to update any forward-looking information or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events, except as may be required by applicable securities laws. New factors emerge from time to time, and it is not possible for management of the Company to predict all of these factors and to assess in advance the impact of each such factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking information.

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