Ithaca Energy Inc.
LSE : IAE

November 14, 2011 02:07 ET

Third Quarter 2011 Financial Results

FOR:  ITHACA ENERGY INC.

TSX, AIM SYMBOL:  IAE

November 14, 2011

Ithaca Energy Inc.: Third Quarter 2011 Financial Results

LONDON, UNITED KINGDOM and CALGARY, ALBERTA--(Marketwire - Nov. 14, 2011) -

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

Ithaca Energy Inc. (TSX:IAE)(AIM:IAE) announces its quarterly financial results for the three and nine months
ended September 30, 2011.

HIGHLIGHTS

Financial

 

- Q3 Profit before Tax of US$10.8 million (Q3 2010: US$18.1 million)

- Q3 Cashflow from Operations of US$18.1 million (Q3 2010: US$23.0 million)

- Average realised oil price of $111.24 / bbl (Q3 2010: $79.06 / bbl)

- Cash US$115.3 million, inclusive of US$16.7 million restricted cash (Q2
  2011: US$176.6 million inclusive of restricted cash)

- Undrawn senior debt facility

- Crude oil inventory of US$29.4 million

- Tax losses available for utilisation of US$289 million (Q2 2011 $265
  million)

 

Operations

 

- Export production averaged 3,602 barrels of oil equivalent per day
  ("boepd") net to Ithaca over the 3 month period to September 30 through
  the restoration of production in the Jacky J01 well, replacement of an
  Electric Submersible Pump on Beatrice Alpha A21 and the introduction of
  Cook production from August 25, offset by a 7 day shutdown on Beatrice
  Alpha.

- September average export production was 4,719 boepd.

- Significant progress was made in the Corporation's key developments with
  the completion of major milestones on Athena and the conclusion of the
  Greater Stella Area ('GSA') concept select process and related
  transactions. Further details are provided in Management's Discussion and
  Analysis below. The highlights of the GSA concept select process are:

  - Creation of a production hub - through deployment of a floating
    production unit in an area with many undeveloped discoveries.

  - Higher production rates than previously advised - at an expected initial
    annualised average rate of 30,000 boepd (gross).

  - Strategically aligned partnership - through transactions between co-
    venturers.

  - Development de-risking - through the introduction to the GSA of
    Petrofac, a FTSE 100 listed worldwide, full cycle oil and gas service
    company.

 

Corporate

 

- The Corporation completed a transaction to acquire a 28.46% non-operated
  interest in the Cook oil field from Hess Limited ("Hess") for an adjusted
  cash consideration of $57 million and the transfer from Ithaca to Hess of
  a 10% interest in each of exploration blocks 42/25b, 43/16a and 43/21c in
  the Southern North Sea. Included in the asset acquisition was an oil
  inventory of approximately 190,000 the asset acquisition was an oil
  inventory of approximately 190,000 barrels.

- On November 1, the Company commenced trading on the Toronto Stock Exchange
  ("TSX") graduating from the TSX Venture Exchange. The common shares
  continue to trade on AIM, a market operated by London Stock Exchange plc.

 

Notes:

Further details on the above are provided in the Interim Consolidated Financial Statements and Management's
Discussion and Analysis for the three and nine months ended September 30, 2011 which have been filed with
securities regulatory authorities in Canada. These documents are also available on the System for Electronic
Document Analysis and Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com.

Notes to oil and gas disclosure:

In accordance with AIM Guidelines, Hugh Morel, BSc Physics and Geology (Durham), PhD Hydrogeology (London) and
senior petroleum engineer at Ithaca is the qualified person that has reviewed the technical information
contained in this press release. Dr Morel has 30 years operating experience in the upstream oil industry.

About Ithaca Energy:

Ithaca Energy Inc. and its wholly owned subsidiary Ithaca Energy (UK) Limited ("Ithaca" or "the Company"), is
an oil and gas exploration, development and production company active in the United Kingdom's Continental Shelf
("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early production from the
development of existing discoveries on properties held by Ithaca, to originate and participate in exploration
and appraisal on properties held by Ithaca when capital permits, and to consider other opportunities for growth
as they are identified from time to time by Ithaca.

Not for Distribution to U.S. Newswire Services or for Dissemination in the United States.

Forward-looking statements

Some of the statements in this announcement are forward-looking. Forward-looking statements include statements
regarding the intent, belief and current expectations of Ithaca or its officers with respect to various matters
including, but not limited to future production levels and the benefits of the GSA concept select process. When
used in this announcement, the words "anticipate", "continue", "estimate", "expect", "may", "will", "project",
"plan", "should", "believe", "could", "target" and similar expressions, and the negatives thereof, are intended
to identify forward-looking statements. Such statements are not promises or guarantees, and are subject to
known and unknown risks and uncertainties and other factors that may cause actual results or events to differ
materially from those anticipated in such forward-looking statements or information. Please refer to the risk
factors affecting Ithaca as set out in the Company's Annual Information Form and the Company's Q3 MD&A filed on
SEDAR at www.sedar.com. These forward-looking statements speak only as of the date of this announcement. Ithaca
Energy Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or
any change in events, conditions or circumstances on which any forward-looking statement is based except as
required by applicable securities laws.

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

 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS
                  FOR THE QUARTER ENDED SEPTEMBER 30, 2011

 

The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca
Energy Inc. (the "Corporation" or "Ithaca" or the "Company") for the three and nine months ended September 30,
2011. The information is provided as of November 11, 2011. The third quarter 2011 results have been compared to
the results of the comparative period in 2010. This MD&A should be read in conjunction with the Corporation's
unaudited consolidated financial statements as at September 30, 2011 and with the Corporation's audited
consolidated financial statements as at December 31, 2010 together with the accompanying notes, MD&A and Annual
Information Form ("AIF") for the 2010 fiscal year. These documents and additional information about Ithaca are
available on SEDAR at www.sedar.com.

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

All financial data contained herein is presented in accordance with International Financial Reporting Standards
("IFRS") and is expressed in United States dollars ("$"), unless otherwise stated. All comparative figures for
2010 have been restated to be in accordance with IFRS.

BUSINESS OF THE CORPORATION

Ithaca is an oil and gas exploration, development and production company active in the United Kingdom's
Continental Shelf ("UKCS"). The goal of Ithaca, in the near term, is to maximize production and achieve early
production from the development of existing discoveries on properties held by Ithaca, to originate and
participate in exploration and appraisal on properties held by Ithaca when capital permits, and to consider
other opportunities for growth as they are identified from time to time by Ithaca.

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

NON-GAAP MEASURES

'Cashflow from operations' referred to in this MD&A is not prescribed by IFRS. This non-GAAP financial measure
does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented
by other companies. The Corporation uses this measure to help evaluate its performance. As an indicator of the
Corporation's performance, cashflow from operations should not be considered as an alternative to, or more
meaningful than, net cash from operating activities as determined in accordance with IFRS. The Corporation's
determination of cashflow from operations does not have any standardized meaning and therefore may not be
comparable to similar measures presented by other companies. The Corporation considers cashflow from operations
to be a key measure as it demonstrates the Corporation's ability to generate the cash necessary to fund
operations and support activities related to its major assets. Cashflow from operations is determined by adding
back changes in non-cash operating working capital to cash provided by operating activities.

BOE PRESENTATION

The calculation of barrels of oil equivalent ("boe") is based on a conversion rate of six thousand cubic feet
of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used
in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

HIGHLIGHTS THIRD QUARTER 2011

Financial

 

--  Q3 Profit before tax of $10.8 million (Q3 2010: $18.1 million) resulting
    in YTD Profit before tax of $22.0 million (Q3 2010 YTD: $44.3 million)

--  Q3 Cashflow from operations of $18.1 million (Q3 2010: $23.0 million)
    resulting in YTD cashflow from operations of $43.9 million (Q3 2010 YTD:
    $65.3 million)

--  Average realized oil price of $111.24 / bbl (Q3 2010: $79.06 / bbl)

--  Cash $115.3 million, inclusive of $16.7 million restricted cash (Q2
    2011: $176.6 million)

--  Undrawn senior debt facility

--  Crude oil inventory of $29.4 million

--  Tax losses available for utilization of $289 million (Q2 2011 $265
    million)

 

Operational

Production

Export production averaged 3,602 barrels of oil equivalent per day ("boepd") net to Ithaca over the 3 month
period to September 30 through the restoration of production in the Jacky J01 well, replacement of an ESP on
Beatrice Alpha A21, the introduction of Cook production from August 25, offset by a 7 day shutdown on Beatrice.

September average export production was 4,719 boepd.

Athena

In July, the engineering and modifications associated with the dry dock works in Dubai to extend the FPSO 'BW
Athena' by 65 feet and install a turret docking system were completed. The FPSO was subsequently re-floated.

Also in July, operations to prepare the development well 14/18b-A2Z for production were successfully concluded.
The Sedco 704 drilling unit stayed on location to undertake further completion work and is expected to complete
the final well of the five well drilling program imminently.

In August the subsea installation campaign began with loadout and transport to the field of the submerged buoy
mooring system.

Following the end of the quarter some major scheduled milestones for the project were achieved with the
installation of the FPSO mooring system, riser base and subsea manifold, the installation of all topsides
equipment on the FPSO. Installation of the subsea flowlines and umbilicals is ongoing.

The FPSO is planned to leave Dubai in mid November / early December to arrive in the field in December. The
transit will take approximately 20 days and involves passage through the Suez Canal. The start up procedure in
the field will then take approximately 14 days to complete, involving securing the vessel over the STP buoy,
final hook up and commissioning of all surface and subsea systems.

The Athena project remains within budget.

Jacky

Strong production from the Jacky field was restored in July at approximately 3,120 bopd (1,482 bopd net to
Ithaca) through the replacement of a dual ESP system with slightly larger pumps that will provide greater
operational flexibility and prolonged run life.

Beatrice

The workover campaign on Beatrice Alpha was completed in August with the final workover well, A21, returned to
ESP production. The workover unit was subsequently demobilised from Beatrice Alpha.

Beatrice production was shut in for 7 days in September to allow maintenance of the produced water treatment
system. Jacky production was not restricted during the Beatrice shut-in.

Greater Stella Area

Significant progress was made on the development of the Greater Stella Area ("GSA").

In July a contract was placed with GE Oil & Gas to manufacture and supply subsea trees and controls systems as
an integrated package which are designed for installation using a heavy duty jackup drilling unit.

A geotechnical program was also successfully completed to determine the suitability of certain jackup drilling
units at four potential development drilling locations on the Stella and Harrier fields. The program
incorporated test boreholes in advance of the planned Hurricane appraisal well.

In October the Corporation concluded its development concept select process for the GSA fields with the
decision to create a production hub based on a floating production unit located over the Stella field. The
development concept involves the introduction of Petrofac, a global integrated energy services company listed
on the FTSE 100 in London as a new strategic partner through the granting of the right to earn a 20% interest
in Stella / Harrier and the transfer of interests in the Hurricane and Helios fields. In addition Petrofac
transferred ownership interests in the floating production unit to the existing co-venturers of Stella. This
created a fully integrated partnership for the GSA hub and the ability to increase the recovery of hydrocarbons
from the fields. The Company will submit a Stella / Harrier Field Development Plan to the Department of Energy
and Climate Change ("DECC") at the end of 2011.

Management forecast that first hydrocarbons will be in H2-2013 at an initial annualised average rate of
approximately 30,000 boepd (gross). This represents a higher rate than previously advised by the Company,
driven by optimisation of the reservoir management strategy and the ability of the FPF-1 to handle higher oil
and gas rates than those of other development solutions. Management forecasts that gas production from Stella /
Harrier should remain on plateau at the gas processing limit of the FPF-1 for nearly three years.

The Corporation also completed the acquisition of Challenger Minerals (North Sea) Ltd ("CMNSL"), subsequently
renamed Ithaca Minerals (North Sea) Ltd, from Transocean Drilling U.K. Limited for a consideration of US$35
million; US$25 million payable immediately and US$10 million upon approval of the Stella / Harrier Field
Development Plan by the DECC. This transaction increases the Corporation's interests in the Stella / Harrier
fields, gives the Corporation a non-operated interest in the producing Broom field and gains the Corporation
access to additional undeveloped North Sea discoveries and exploration prospects.

The Corporation also signed an agreement to divest a 25.34% interest in Block 29/10b, which contains the
Hurricane field, to Dyas UK Limited ("Dyas"). The agreement has an effective date of January 1, 2011. In
consideration for the interest, Dyas will pay its pro-rata share of costs incurred since the effective date.
The transaction is subject to the submission for approval of a Stella / Harrier Field Development Plan to the
DECC.

As a result of the transfer of interests in the various GSA fields to Petrofac, the acquisition of CMNSL, and
the divestment of an interest in Hurricane to Dyas, the Company and its GSA co-venturers now have full field
interest alignment across Stella / Harrier, Hurricane and Helios as follows:

 

----------------------------------------------------------------------------
Field                        Block      Ithaca(i)         Dyas     Petrofac
----------------------------------------------------------------------------
Stella / Harrier             30/6a          54.66%       25.34%          20%
----------------------------------------------------------------------------
Hurricane                   29/10b          54.66%       25.34%          20%
----------------------------------------------------------------------------
Helios                      29/10d          54.66%       25.34%          20%
----------------------------------------------------------------------------
(i)post acquisition of CMNSL

 

A contract letter of intent was also signed with Awilco Drilling plc to provide a semi-submersible drilling
unit for the drilling of Hurricane appraisal well and performance of a well test commencing in Q1 2012.

In November the Corporation signed an a Letter of Award with Ensco Offshore UK Limited to provide the jack up
drilling unit 'Ensco 100' for development drilling on the Stella and Harrier fields. The campaign, which will
include the drilling of 5 firm wells and up to 3 options for additional wells, will commence on Stella in H2
2012.

Corporate

In July, the Corporation appointed Mr. Mike Travis as Chief Production Officer effective as of January 2012.
Mr. Travis has over 28 years of diverse offshore and onshore experience in the oil industry and has held key
leadership positions throughout his career in all aspects of production and development projects including
asset management, drilling and operations.

The Corporation established a Share Incentive Plan ("SIP") effective as of July 19, 2011. The purpose of the
SIP is to provide UK based officers and employees with the opportunity to acquire common shares in the Company
in a tax-effective way. Approval for the SIP was obtained from HM Revenue & Customs under Schedule 2 to the
Income Tax (Earnings and Pensions) Act 2003.

On August 25, the Corporation completed a transaction to acquire a 28.46% non-operated interest in the Cook oil
field from Hess Limited ("Hess") for a cash consideration of $57 million and the transfer from Ithaca to Hess
of a 10% interest in each of exploration blocks 42/25b, 43/16a and 43/21c in the Southern North Sea. Included
in the cash consideration was the purchase of oil inventory of approximately 190,000 barrels which will be part
of the next Ithaca cargo lifting (of approximately 300,000 barrels) now anticipated in Q4 2011 / Q1 2012.

On November 1, the common shares of the Company commenced trading on the Toronto Stock Exchange. As of the same
date, the common shares were delisted from the TSX Venture Exchange. The common shares will continue to trade
on the Alternative Investments Market (AIM), a market operated by London Stock Exchange plc under the symbol
"IAE". Ithaca's graduation to the TSX marks another progressive stage in the Company's continued growth
profile. The listing of the common shares on the TSX will provide the Company with access to Canada's largest
stock exchange and is expected to enhance Ithaca's trading liquidity and visibility within North American
capital markets.

RESULTS OF OPERATIONS

Revenue

Three months ended September 30, 2011

Sales revenue decreased in Q3 2011 to $26.4 million (Q3 2010 $36.0 million). This movement comprises a decrease
in oil sales volumes, partially offset by an increase in average realized oil prices and the addition of gas
sales from the Anglia, Topaz and Cook fields (Anglia & Topaz acquired December 17, 2010; Cook acquired August
25,2011). Cook oil production is recorded as a credit to cost of sales until oil has been lifted.

Oil sales volumes decreased from 4,862 bopd in Q3 2010 to 2,248 bopd for Q3 2011 due to the combination of the
expected natural decline in year on year production from the Jacky field and the operational issues experienced
on the Jacky J01 well from Q2 through to the beginning of Q3. The Corporation benefited from an increase in
average realized oil prices from $79.06 / bbl in Q3 2010 to $111.24/ bbl in Q3 2011.

The addition of gas production also contributed to revenue in Q3 2011 (no gas production in Q3 2010). The
combined production from the Anglia, Topaz and Cook fields contributed over $3 million to revenue.

Nine months ended September 30, 2011

Sales revenue decreased in the period to $74.2 million (Q3 YTD 2010 $100.9 million). This movement comprises a
decrease in oil sales volumes, partially offset by an increase in average realized prices and the addition of
gas sales from the Anglia and Topaz fields (acquired December 17, 2010).

Oil sales volumes decreased from 4,657 bopd in Q3 YTD 2010 to 2,002 bopd for Q3 YTD 2011. This again was due to
the combination of the expected natural decline in year on year production from the Jacky field and the
operational issues experienced on the Jacky J01 well from Q2 2011 through to the beginning of Q3 2011. The
Corporation benefited from an increase in average realized oil prices from $77.58 / bbl in Q3 YTD 2010 to
$112.33 / bbl in Q3 YTD 2011.

The addition of gas production noted above contributed over $10.3 million to revenue.

Cost of Sales

Three months ended September 30, 2011

Cost of sales decreased in Q3 2011 to $11.4 million (Q3 2010 $15.8 million) due to the recording of oil
inventory volumes (volumes produced but not yet sold) from the Cook field partially offset by increases in
operating costs and DD&A arising from increased activity.

Inventory volumes of $7.2 million were credited to cost of sales in Q3 2011 (Q3 2010 $nil) arising from Cook
oil produced into the host FPSO 'Anasuria' since the acquisition date but not yet sold. The balance of Cook
inventory of $25.9 million (from a total $29.4 million oil inventory) is held on the balance sheet with a
corresponding reduction in the asset acquisition value.

Operating costs increased in Q3 2011 to $11.9 million (Q3 2010 $10.2 million) primarily due to the addition of
Anglia, Topaz and Cook operating costs in 2011. Operating costs for the Great Beatrice Area have remained
consistent in the period.

DD&A expense for the quarter also increased in Q3 2011 to $6.7 million (Q3 2010 $5.6 million) due to an
increase in the DD&A rate due to the addition of the Anglia and Topaz gas assets and capital expenditure in the
period.

Nine months ended September 30, 2011

Cost of sales increased in the period to $44.3 million (Q3 YTD 2010 $43.7 million) due to increases in both
operating costs and DD&A, partially offset by the recording oil inventory volumes from the Cook field.

Operating costs increased in the period to $33.7 million (Q3 YTD 2010 $28.4 million) primarily due to the
addition of Anglia, Topaz and Cook operating costs in 2011.

DD&A expense for the nine months ended September 30 increased to $17.8 million (Q3 YTD 2010 $15.3 million) due
to the addition of the Anglia, Topaz and Cook assets and the significant capital expenditure in the period.

Oil inventory volumes of $7.2 million were credited to cost of sales in Q3 2011 (Q3 2010 $nil) arising from
barrels produced but not yet sold from the Cook field (acquired August 25, 2011). The balance of Cook inventory
of $25.9 million (from a total $29.4 million oil inventory) is held on the balance sheet with a corresponding
reduction in the asset acquisition value.

Administrative expenses and Exploration & Evaluation expenses

Three months ended September 30, 2011

Administrative expenses remained constant in Q3 2011 at $1.6 million (Q3 2010 $1.6 million) comprising a
marginal decrease in general and administrative costs offset by a marginal increase in stock based
compensation.

Exploration and evaluation expenses of $0.2 million (Q3 2010 $nil) were recorded for the three months ended
September 30, 2011 due to the expensing of previously capitalized costs relating to areas where the Corporation
has decided to cease exploration and evaluation activities.

Nine months ended September 30, 2011

Administrative expenses increased in the period to $5.1 million (Q3 YTD 2010 $3.7 million). The continued
growth of the corporation has caused an increase in both general & administrative and stock based compensation
costs.

Exploration and evaluation expenses of $1.8 million (Q3 YTD 2010 $nil) were recorded for the nine months ended
Sept 30, 2011 due to the expensing of previously capitalized costs relating to areas where exploration and
evaluation activities have ceased.

Foreign exchange and Financial Instruments

Three months ended September 30, 2011

A foreign exchange loss of $2.4 million was recorded in the three months ended September 30, 2011 (Q3 2010 $1.8
million gain). The loss in Q3 2011 was caused by a combination of general volatility in exchange rates and a
dip in the USD : GBP exchange rate at the end of the quarter, causing an decrease in the value of GBP cash held
on deposit. This compares to a increase in the average USD : GBP exchange rate for the three months ended
September 30, 2010.

The Corporation recorded a $0.4 million gain on financial instruments for the three months ended September 30,
2011 (Q3 2010: $2.1 million loss). The gain was due to a combination of a $2.3 million gain on the revaluation
of the embedded derivative within the Anglia gas sales contract and a $0.4 gain on the revaluation of the Nigg
storage tank liability, offset by a $2.3 million expense on the revaluation of the oil 'put options' caused by
the high Brent oil price per barrel in the quarter and movements in forecast oil prices for the remainder of
the option lives.

Nine months ended September 30, 2011

A foreign exchange gain of $0.1 million was recorded in the nine months ended September 30, 2011 (Q3 YTD 2010
$0.2 million loss). The gain in Q3 2011 was again caused by general volatility in the USD : GBP exchange rate.

The Corporation recorded a $2.2 million loss on financial instruments for the nine months ended September 30,
2011 (Q3 YTD 2010: $8.7 million loss). The loss was due to a combination of a $5.8 million loss recorded from
the revaluation of oil 'put options' held, partially offset by a $3.3 million gain on the revaluation of the
Anglia gas sales contract embedded derivative. The remaining movement was made up of revaluations of other
financial instruments.

Taxation

Three months ended September 30, 2011

A deferred tax charge of $0.7 million was recognized in the three months ended September 30, 2011 (Q3 2010:
$Nil) representing an tax rate of 7%. This rate is a product of adjustments to taxable income relating to
derivative financial instruments, stock based compensation and the UK Ring Fence Expenditure Supplement in the
quarter.

Nine months ended September 30, 2011

A deferred tax charge of $2.5 million was recognized in the nine months ended September 30, 2011 (Q3 YTD 2010:
$Nil) representing an effective tax rate of 11%. This rate is a product of adjustments to taxable income
relating to derivative financial instruments, stock based compensation, the UK Ring Fence Expenditure
Supplement, and the changes in UK Corporation Tax rates for upstream and non-upstream oil and gas activities.

No tax is expected to be paid in the mid-term future relating to upstream oil and gas activities.

As a result of the above factors, Profit after tax for the three months ended September 30 decreased to $10.0
million (Q3 2010 $18.1 million) and for the nine months ended September 30 decreased to $19.5 million (Q3 YTD
2010 $44.3 million).

SUMMARY OF QUARTERLY RESULTS

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

 

                   30/09  30/06   31/03  31/12  30/09  30/06  31/03   31/12/
                    2011   2011    2011   2010   2010   2010   2010  2009(i)
                   $'000  $'000   $'000  $'000  $'000  $'000  $'000    $'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue           26,415 16,724  31,050 34,260 35,965 34,129 30,767   39,676
Profit after tax  10,013  2,860   6,593 17,922 18,073 14,098 12,108   17,488


----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per
 share

Basic               0.04   0.01    0.03   0.07   0.08   0.09   0.07     0.11
Diluted             0.04   0.01    0.03   0.07   0.08   0.09   0.07     0.11

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selected other
 information

Profit/(Loss)
 before tax       10,753 (1,827) 13,037 14,257 18,154 14,098 12,108   17,488
(i) Comparative figures for 2009 have been reported under Canadian GAAP

 

The most significant factors to have affected the Corporation's results during the above quarters are
fluctuation in underlying commodity prices and movement in production volumes. Commodity prices have generally
risen through the periods in which the Corporation had production. The Corporation has utilized forward sales
contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the
exposure to price volatility. These contracts can cause volatility in profit after tax as a result of
unrealized gains and losses due to movements in the oil price and USD : GBP exchange rate.

LIQUIDITY AND CAPITAL RESOURCES

As at September 30, 2011, Ithaca had working capital of $144.7 million including a free cash balance of $98.7
million. Available cash has been, and is currently, invested in money market deposit accounts with the Bank of
Scotland. Management has received confirmation from the financial institution that these funds are available on
demand. The restricted cash of $16.7 million comprises $16.3 million currently held by the Bank of Scotland as
decommissioning security provided as part of the acquisitions of the Anglia and Cook fields and $0.4 million
also held by the Bank of Scotland as cash security for a bank guarantee provided to the Crown Estate as part of
the Field Development Plan approval for the Jacky Field.

During the three months ended September 30, 2011 there was a cash outflow from operating, investing and
financing activities of $70.3 million (Q3 2010 inflow of $142.8 million). The net outflow was due to a cash
inflow from operating activities of $11.4 million offset by a cash outflow from investing activities of $71.3
million, and a cash outflow from financing activities of $8.7 million. The remainder of the movement was due to
foreign exchange on non US Dollar denominated cash deposits. This overall free cash outflow is the product of
the acquisition of the Cook field (including cash paid for the purchase of oil inventory, currently valued at
over $25.9 million, due to be received in December 2011 / January 2012), significant capital expenditure on the
Athena development and the purchase of long lead items for the Greater Stella Area, offset by cash generated
from Beatrice, Jacky, Anglia, Topaz and Cook operations.

The Company continues to be fully funded, with more than sufficient financial resources to cover the
anticipated level of development capital expenditure commitments and continue the pursuit of additional asset
acquisition opportunities through its existing cash balance, forecast cashflow from operations and its undrawn
debt facility.

COMMITMENTS

The Corporation has the following financial commitments:

 

                                                                  Subsequent
Year ended                  2011       2012       2013       2014    to 2014
                         US$'000    US$'000    US$'000    US$'000    US$'000
----------------------------------------------------------------------------
Office lease                  63        250        250        250        813
Exploration license
 fees                        176        918      1,140          -          -
Engineering                6,562     33,503     11,393     11,393          -
----------------------------------------------------------------------------
Total                      6,801     34,672     12,783     11,643        813

 

OUTSTANDING SHARE INFORMATION

As at September 30 and November 14, 2011, Ithaca had 259,164,461 common shares outstanding along with
17,506,839 options outstanding to employees and directors to acquire common shares.

CRITICAL ACCOUNTING ESTIMATES

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

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

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

A review is carried out each reporting date for any indication that the carrying value of the Corporation's
Development & Production ("D&P") assets may be impaired. For D&P assets where there are such indications, an
impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with
IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally,
but not always, single developments or production areas. The impairment test involves comparing the carrying
value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of
its fair value less costs to sell and value in use, where the value in use is determined from estimated future
net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Income
Statement.

Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated
costs discounted based on the estimated life of the asset. In periods following recognition, the liability and
associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the
obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and
reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in
accordance with the depreciation policy for development and production assets. Actual costs to retire tangible
assets are deducted from the liability as incurred.

All financial instruments (including derivatives, financial assets and liabilities) are initially recognized at
fair value on the balance sheet. The Corporation's financial instruments consist of cash, restricted cash,
accounts receivable, deposits, derivatives, loan fees, accounts payable, accrued liabilities and the long term
liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of
the respective financial instrument.

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

The determination of the Corporation's income and other tax liabilities / assets requires interpretation of
complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of
considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated
and recorded on the financial statements.

The accrual method of accounting will require management to incorporate certain estimates of revenues,
production costs and other costs as at a specific reporting date. In addition, the Corporation must estimate
capital expenditures on capital projects that are in progress or recently completed where actual costs have not
been received as of the reporting date.

OFF-BALANCE SHEET ARRANGEMENTS

The Corporation has certain lease agreements which were entered into in the normal course of operations, all of
which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or
finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or
the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at
September 30, 2011.

RELATED PARTY TRANSACTIONS

A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The
amount of fees paid to Burstall Winger LLP in Q3 2011 was $0.1 million (Q3 2010 - $0.5 million). All related
party transactions are in the normal course of business and are conducted on normal commercial terms with
consideration comparable to those charged by third parties.

RISKS AND UNCERTAINTIES

The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There
is substantial risk that the manpower and capital employed will not result in the finding of new reserves in
economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints,
lack of pipeline capacity or lack of markets.

The Corporation is dependent upon the production rates and oil price to fund the current development program.
In order to mitigate the Corporation's risk to fluctuations in oil price, the Corporation has taken out a
number of commodity derivatives. In March 2011, a put option to sell 804,500 bbls of the Corporation's 2011
forecast production at $105 / bbl was entered into. In April 2011 a further put option to sell an additional
300,000 bbls of the Corporation's forecast 2011 production at $115 / bbl was entered into. These options
deliver a minimum price on the specified volumes of oil and leave the Corporation to benefit from any oil price
upside above $105 and $115 per barrel respectively.

The Corporation is exposed to financial risks including financial market volatility, fluctuation in interest
rates and various foreign exchange rates. Given the increasing development expenditure and operating costs in
currencies other than the United States dollar, the Board of Directors of the Corporation has a hedging policy
to mitigate foreign exchange rate risk on committed expenditure. In 2011 in order to protect against movements
in USD/GBP  exchange rates, the Corporation holds GBP denominated cash on deposit in order to match the
forecast 2011 GBP denominated expenditure.

A further risk relates to the Corporation's ability to meet the conditions precedent for a full drawdown on the
Corporation's credit facility with the Bank of Scotland (the "Credit Facility"). Ability to drawdown the Credit
Facility is based on the Corporation meeting certain tests including coverage ratio tests, liquidity tests and
development funding tests which are determined by a detailed economic model of the Corporation. There can be no
assurance that the Corporation will satisfy such tests in order to have access to the full amount of the Credit
Facility, however at present the Corporation believes that there are no circumstances present that results in
failure to meet those tests.

In addition, the Credit Facility contains covenants that require the Corporation to meet certain financial
tests and that restrict, among other things, the ability of Ithaca to incur additional debt or dispose of
assets. To the extent the cash flow from operations is not adequate to fund Ithaca's cash requirements,
external financing may be required. Lack of timely access to such additional financing, or which may not be on
favorable terms, could limit the future growth of the business of Ithaca. To the extent that external sources
of capital, including public and private markets, become limited or unavailable, Ithaca's ability to make the
necessary capital investments to maintain or expand its current business and to make necessary principal
payments under the Credit Facility may be impaired. At present the Corporation believes that there are no
circumstances present that results in failure to meet those certain financial tests. Access to the full Credit
Facility will probably require syndication of the debt, the success of which at the current Credit Facility
pricing levels will be influenced by the volatility in European bank liquidity.

A failure to access adequate capital to continue its expenditure program may require that the Corporation meet
any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development
programs. As is standard to a Credit facility, the Corporation's and Ithaca UK assets have been pledged as
collateral and are subject to foreclosure in the event the Corporation or Ithaca UK defaults. At present the
Corporation believes that there are no circumstances present that would lead to selected divestment, delays to
existing programs or a default relating to the Credit Facility.

The Corporation is and may in the future be exposed to third-party credit risk through its contractual
arrangements with its current and future joint venture partners, marketers of its petroleum production and
other parties. The Corporation extends unsecured credit to these parties, and therefore, the collection of any
receivables may be affected by changes in the economic environment or other conditions. Management believes the
risk is mitigated by the financial position of the parties. The Corporation has entered in to a five year
marketing agreement with BP Oil International Limited to sell all of its oil production from the Beatrice,
Jacky, and Athena fields. Oil production from Cook is sold to Shell Trading International Ltd. Anglia and Topaz
gas production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd.
Cook gas is sold to Shell UK Ltd and Esso Exploration & Production UK Ltd. The Corporation has not experienced
any material credit loss in the collection of accounts receivable to date.

The Corporation's properties will be generally held in the form of licenses, concessions, permits and
regulatory consents ("Authorizations"). The Corporation's activities are dependent upon the grant and
maintenance of appropriate Authorizations, which may not be granted; may be made subject to limitations which,
if not met, will result in the termination or withdrawal of the Authorization; or may be otherwise withdrawn.
Also, in the majority of its licenses, the Corporation is often a joint interest-holder with another third
party over which it has no control. An Authorization may be revoked by the relevant regulatory authority if the
other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the
obligations required to maintain each Authorization will be met. Although the Corporation believes that the
Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that
such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination
or expiration of the Corporation's Authorizations may have a material adverse effect on the Corporation's
results of operations and business.

In addition, the areas covered by the Authorizations are or may be subject to agreements with the proprietors
of the land. If such agreements are terminated, found void or otherwise challenged, the Corporation may suffer
significant damage through the loss of opportunity to identify and extract oil or gas.

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

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

CONTROL ENVIRONMENT

As of September 30, 2011, there were no changes in our internal control over financial reporting that occurred
during 2011 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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

CHANGES IN ACCOUNTING POLICIES

On January 1, 2011, the Corporation adopted IFRS using a transition date of January 1, 2010. The financial
statements for the three months ended September 30, 2011, including required comparative information, have been
prepared in accordance with International Financial Reporting Standards 1, First-time Adoption of International
Financial Reporting Standards, and with International Accounting Standard ("IAS") 34, Interim Financial
Reporting, as issued by the International Accounting Standards Board ("IASB"). Previously, the Corporation
prepared its Interim and Annual Consolidated Financial Statements in accordance with Canadian GAAP. Refer to
Note 24 of the Interim Consolidated Financial Statements for the Corporation's assessment of impacts of the
transition to IFRS.

IMPACT OF FUTURE ACCOUNTING CHANGES

In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"),
IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS
27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28,
Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual
periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation has not yet
assessed the impact that the new and amended standards will have on its financial statements or whether to
early adopt any of the new requirements.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

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

All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected
purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow
hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income.

The Corporation has classified its cash and cash equivalents, restricted cash, derivatives, commodity hedge and
long term liability as held-for-trading, which are measured at fair value with changes being recognized in net
income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and
accrued liabilities are classified as other liabilities, all of which are measured at amortized cost. The
classification of all financial instruments is the same at inception and at September 30, 2011.

FORWARD-LOOKING INFORMATION

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

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

 

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

 

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

 

--  Ithaca's ability to obtain additional drilling rigs and other equipment
    in a timely manner, as required;
--  Access to third party hosts and associated pipelines can be negotiated
    and accessed within the expected timeframe;
--  Field development plan approval and operational construction and
    development is obtained within expected timeframes;
--  The Corporation's development plan for the Stella and Harrier
    discoveries will be implemented as planned;
--  Reserves volumes assigned to Ithaca's properties;
--  Ability to recover reserves volumes assigned to Ithaca's properties;
--  Revenues do not decrease below anticipated levels and operating costs do
    not increase significantly above anticipated levels;
--  future oil, NGLs and natural gas production levels from Ithaca's
    properties and the prices obtained from the sales of such production;
--  the level of future capital expenditure required to exploit and develop
    reserves;
--  Ithaca's ability to obtain financing on acceptable terms, in particular,
    the Corporation's ability to access the Credit Facility;
--  Ithaca's reliance on partners and their ability to meet commitments
    under relevant agreements; and
--  the state of the debt and equity markets in the current economic
    environment.

 

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

 

--  risks associated with the exploration for and development of oil and
    natural gas reserves in the North Sea;
--  risks associated with offshore development and production including
    transport facilities;
--  operational risks and liabilities that are not covered by insurance;
--  volatility in market prices for oil, NGLs and natural gas;
--  the ability of the Corporation to fund its substantial capital
    requirements and operations;
--  risks associated with ensuring title to the Corporation's properties;
--  changes in environmental, health and safety or other legislation
    applicable to the Corporation's operations, and the Corporation's
    ability to comply with current and future environmental, health and
    safety and other laws;
--  the accuracy of oil and gas reserve estimates and estimated production
    levels as they are affected by the Corporation's exploration and
    development drilling and estimated decline rates;
--  the Corporation's success at acquisition, exploration, exploitation and
    development of reserves;
--  the Corporation's reliance on key operational and management personnel;
--  the ability of the Corporation to obtain and maintain all of its
    required permits and licenses;
--  competition for, among other things, capital, drilling equipment,
    acquisitions of reserves, undeveloped lands and skilled personnel;
--  changes in general economic, market and business conditions in Canada,
    North America, the United Kingdom, Europe and worldwide, specifically
    being the unavailability of the debt and equity markets to the
    Corporation during the current economic crisis;
--  actions by governmental or regulatory authorities including changes in
    income tax laws or changes in tax laws, royalty rates and incentive
    programs relating to the oil and gas industry including the recent
    increase in UK taxes;
--  adverse regulatory rulings, orders and decisions;
--  risks associated with the nature of the common shares; and
--  the impact of adoption of IFRS as opposed to GAAP from January 1, 2011.

 

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

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence
level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.

 

Consolidated Statement of Income
For the three and nine months ended September 30, 2011 and 2010
(unaudited)

                                     Three months ended   Nine months ended
                                           September 30        September 30
                                         2011      2010      2011      2010
                                Note  US$'000   US$'000   US$'000   US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue                            4   26,415    35,965    74,189   100,861
Cost of sales                      5  (11,408)  (15,810)  (44,339)  (43,694)
----------------------------------------------
Gross Profit                           15,007    20,155    29,850    57,167

Exploration and evaluation
 expenses                          9     (174)        -       170         -
Administrative expenses            6   (1,625)   (1,624)   (5,138)   (3,741)
----------------------------------------------------------------------------
Operating Profit                       13,208    18,531    24,882    53,426

Foreign exchange                       (2,415)    1,766       147      (172)
Gain / (loss) on financial
 instruments                      20      397    (2,127)   (2,153)   (8,730)
----------------------------------------------------------------------------
Profit Before Interest and Tax         11,190    18,170    22,876    44,524

Finance costs                            (526)     (147)   (1,275)     (298)
Interest income                            89        50       362        56
----------------------------------------------------------------------------
Profit Before Tax                      10,753    18,073    21,963    44,282

Taxation - Deferred tax           18     (740)        -    (2,479)        -
----------------------------------------------------------------------------
Profit After Tax                       10,013    18,073    19,484    44,282

Earnings per share
Basic                             17     0.04      0.08      0.08      0.24
Diluted                           17     0.04      0.08      0.07      0.24

No separate statement of comprehensive income has been prepared as all such
gains and losses have been incorporated in the consolidated statement of
income above.

The accompanying notes are an integral part of the financial statements.


Consolidated Statement of Financial Position
(unaudited)

                                            Sept 30 December 31   January 1
                                               2011        2010        2010
                                   Note     US$'000     US$'000     US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS

Current assets
Cash and cash equivalents                    98,668     195,581      29,886
Restricted cash                       7      16,679       6,308       5,224
Accounts receivable                         120,530      93,434      67,166
Deposits, prepaid expenses and
 other                                       14,055      12,341         352
Inventory                             8      29,431           -           -
Derivative financial instruments     21         682           -         685
Deferred tax asset                            1,265       3,745           -
----------------------------------------------------------------------------
                                            281,310     311,409     103,313
Non current assets
Restricted cash                       7           -           -         352
Exploration and evaluation
 assets                               9      19,116      17,522      15,500
Property, plant & equipment          10     375,976     249,968     189,975
----------------------------------------------------------------------------
                                            395,092     267,490     205,827

Total assets                                676,402     578,899     309,140


LIABILITIES AND EQUITY

Current Liabilities
Trade and other payables                    136,593      75,564      43,613
Commodity hedge                                   -         349         397
----------------------------------------------------------------------------
                                            136,593      75,913      44,010

Non current liabilities
Decommissioning liabilities          12      35,548      23,652       8,751
Other long term liabilities          13       2,394       2,872       2,718
Contingent consideration             14      10,976      12,976       6,933
Derivative financial instruments     21       1,108       4,378           -
----------------------------------------------------------------------------
                                             50,026      43,878      18,402

----------------------------------------------------------------------------
Net Assets                                  489,783     459,108     246,728
----------------------------------------------------------------------------

Equity attributable to equity
 holders
Share capital                        15     429,502     422,373     277,075
Contributed surplus                  16      15,800      11,427       6,860
Warrants issued                      15           -         311           -
Retained earnings / (deficit)                44,481      24,997     (37,207)
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Shareholders' Equity                        489,783     459,108     246,728
----------------------------------------------------------------------------

"John Summers"
--------------------------------
--------------------------------
Director

"Jay Zammit"
--------------------------------
--------------------------------
Director

The accompanying notes are an integral part of the financial statements.


Consolidated Statement of Changes in Equity
(unaudited)

                                                        Retained
                         Share Contributed   Warrants    E'ings/
                       Capital     Surplus     Issued  (Deficit)      Total
                       US$'000     US$'000    US$'000    US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Balance, Jan 1 2010    277,075       6,860          -    (37,207)   246,728
Net income for the
 period                      -           -          -     44,282     44,282
----------------------------------------------------------------------------
Total comprehensive
 income                277,075       6,860          -      7,075    291,010

Transactions with
 owners
Stock based
 compensation                -       3,602          -          -      3,602
Options exercised          540        (254)         -          -        286
Issued for cash        153,104           -          -          -    153,104
Share issue costs       (8,521)          -          -          -     (8,521)
Warrants issued              -           -        311          -        311
----------------------------------------------------------------------------
Balance, Sept 30
 2010                  422,198      10,208        311      7,075    439,792
----------------------------------------------------------------------------

Balance, Jan 1 2011    422,373      11,427        311     24,997    459,108
Net income for the
 period                      -           -          -     19,484     19,484
----------------------------------------------------------------------------
Total comprehensive
 income                422,373      11,427        311     44,481    478,592

Transactions with
 owners
Stock based
 compensation                -       4,833          -          -      4,833
Options exercised        1,032        (460)         -          -        572
Warrants exercised       6,097           -       (311)         -      5,786
----------------------------------------------------------------------------
Balance, Sept 30
 2011                  429,502      15,800          -     44,481    489,783
----------------------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.


Consolidated Statement of Cash Flow
For the three and nine months ended Sept 30, 2011 and 2010
(unaudited)

                                   Three months ended     Nine months ended
                                              Sept 30               Sept 30
                                      2011       2010       2011       2010
                                   US$'000    US$'000    US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):

Operating activities

 Profit Before Tax                  10,753     18,073     21,963     44,282

 Adjustments for:
 Depletion, depreciation and
  amortization                       6,666      5,569     17,838     15,304
 Exploration and evaluation
  expenses                             174          -      1,830          -
 Stock based compensation              603        458      1,837      1,059
 Loan fee amortization                  78         72        233         72
 Unrealized (gain) / loss on
  financial instruments               (397)    (1,253)     1,660        330
 Revaluation of contingent
  consideration                          -          -     (2,000)     4,044
 Accretion                             217         70        571        213

----------------------------------------------------------------------------
Cashflow from operations            18,094     22,989     43,932     65,304
----------------------------------------------------------------------------

 Movement in working capital        (6,709)    (4,366)       669     (3,637)

----------------------------------------------------------------------------
Net cash from operating
 activities                         11,385     18,623     44,601     61,667
----------------------------------------------------------------------------

Investing activities

 Capital expenditure
  Oil and gas assets               (88,266)   (10,515)  (154,216)   (38,875)
  Non oil and gas assets              (226)       (40)      (698)      (185)
  Decommissioning                     (358)         -       (358)         -

 Movement in working capital        17,580    (10,276)    25,050     (7,747)

----------------------------------------------------------------------------
Net cash used in investing
 activities                        (71,270)   (20,831)  (130,222)   (46,807)
----------------------------------------------------------------------------

Financing activities

 Proceeds from issuance of
  shares                               371    153,269      6,357    153,390
 Share issue costs                       -     (8,522)         -     (8,522)
 (Increase) / decrease in
  restricted cash                   (9,082)       (17)   (10,370)     5,224
 Loan issue costs                        -       (887)         -       (887)
 Derivatives                             -          -     (6,508)         -

----------------------------------------------------------------------------
Net cash from financing
 activities                         (8,711)   143,843    (10,521)   149,205
----------------------------------------------------------------------------

Currency translation differences
 relating to cash                   (1,706)     1,167       (771)      (140)

----------------------------------------------------------------------------
(Decrease) / increase in cash &
 cash equiv.                       (70,302)   142,802    (96,913)   163,925
----------------------------------------------------------------------------

Cash and cash equivalents,
 beginning of period               168,970     51,010    195,581     29,886

----------------------------------------------------------------------------
Cash and cash equivalents, end
 of period                          98,668    193,812     98,668    193,812
----------------------------------------------------------------------------

The accompanying notes are an integral part of the financial statements.

 

1. NATURE OF OPERATIONS

Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated and domiciled in Alberta, Canada on April 27,
2004, is a publicly traded company involved in the exploration, development and production of oil and gas in
the North Sea. The Corporation's registered office is 1600, 333 - 7th Avenue S.W., Calgary, Alberta, Canada,
T2P 2Z1. As of November 1, 2011 the Corporation's shares have traded on the Toronto Stock Exchange in Canada
(previously the TSX Venture Exchange). The Corporation's shares continue to trade on the London Stock
Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has two wholly-
owned subsidiaries, Ithaca Energy (UK) Limited ("Ithaca UK") and Ithaca Minerals (North Sea) Ltd ("Ithaca
Minerals"), which was acquired post quarter end on October 19, 2011, both incorporated in Scotland. See note 26
for further details of the acquisition.

2. BASIS OF PREPARATION AND ADOPTION OF IFRS

The Corporation prepares its financial statements in accordance with Canadian generally accepted accounting
principles as set out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA Handbook"). In
2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards ("IFRS"), and
require publicly accountable enterprises to apply such standards effective for years beginning on or after
January 1, 2011. Accordingly, the Corporation has commenced reporting on this basis in these interim
consolidated financial statements. In the financial statements, the term "Canadian GAAP" refers to Canadian
GAAP before the adoption of IFRS.

These interim consolidated financial statements have been prepared in accordance with IFRS applicable to the
preparation of interim financial statements, including IAS 34 Interim Financial Reporting and IFRS 1 First Time
Adoption of IFRS. These interim consolidated financial statements do not include all the necessary annual
disclosures in accordance with IFRS. Subject to certain transition elections disclosed in note 25, the
Corporation has consistently applied the same accounting policies in its opening IFRS statement of financial
position at January 1, 2010 and throughout all periods presented, as if these policies had always been in
effect. Note 25 discloses the impact of the transition to IFRS on the Corporation's reported financial
position, financial performance and cash flows, including the nature and effect of significant changes in
accounting policies from those used in the Corporation's consolidated financial statements for the year ended
December 31, 2010.

The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and
outstanding as of November 11, 2011, the date the Board of Directors approved the statements. Any subsequent
changes to IFRS that are given effect in the Corporation's annual consolidated financial statements for the
year ending December 31, 2011 could result in restatement of these interim consolidated financial statements,
including the transition adjustments recognized on change-over to IFRS.

The condensed interim consolidated financial statements should be read in conjunction with the Corporation's
Canadian GAAP annual financial statements for the year ended December 31, 2010. Note 25 discloses IFRS
information for the year ended December 31, 2010 not provided in the 2010 annual financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTY

Basis of measurement

The consolidated financial statements have been prepared under the historical cost convention, except for the
revaluation of certain financial assets and financial liabilities to fair value, including derivative
instruments.

Principles of consolidation

The consolidated financial statements of the Corporation include the accounts of Ithaca Inc. and the wholly-
owned subsidiary Ithaca Energy (UK) Ltd. All inter-company transactions and balances have been eliminated on
consolidation.

A subsidiary is an entity (including special purpose entities) which the Corporation controls by having the
power to govern the financial and operating policies. The existence and effect of potential voting rights that
are currently exercisable or convertible are considered when assessing whether Ithaca controls another entity.
A subsidiary is fully consolidated from the date on which control is obtained by Ithaca and is de-consolidated
from the date that control ceases.

Foreign currency translation

Items included in the financial statements are measured using the currency of the primary economic environment
in which the Corporation and its subsidiary operate (the 'functional currency'). The consolidated financial
statements are presented in United States Dollars, which is the Corporation's functional and presentation
currency.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing
at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated
in foreign currencies are recognized in the statement of income.

Share based payments

The Corporation has a stock based compensation plan as described in note 15 (b). The Corporation's
proportionate share of expense is recorded in the statement of income or capitalized for all options granted in
the year, with the gross increase recorded as contributed surplus. Compensation costs are based on the
estimated fair values at the time of the grant and the expense or capitalized amount is recognized over the
vesting period of the options. Upon the exercise of the stock options, consideration paid together with the
amount previously recognized in contributed surplus is recorded as an increase in share capital. In the event
that vested options expire unexercised, previously recognized compensation expense associated with such stock
options is not reversed. In the event that unvested options are forfeited or expired, previously recognized
compensation expense associated with the unvested portion of such stock options is reversed.

Cash and cash equivalents

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

Restricted cash

Cash that is held for security for bank guarantees is reported in the balance sheet and cash flow statements
separately. If the expected duration of the restriction is less than twelve months then it is shown in current
assets.

Financial instruments

All financial instruments are initially recognized at fair value on the balance sheet. The Corporation's
financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, loan fees,
accounts payable, accrued liabilities, contingent consideration and the long term liability acquired as part of
the Beatrice field acquisition. The Corporation classifies its financial instruments into one of the following
categories: held-for-trading financial assets and financial liabilities; held-to-maturity investments; loans
and receivables; and other financial liabilities. All financial instruments are required to be measured at fair
value on initial recognition. Measurement in subsequent periods is dependent on the classification of the
respective financial instrument.

Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value
recognized in net earnings. All other categories of financial instruments are measured at amortized cost using
the effective interest method. Cash and cash equivalents are classified as held-for-trading and are measured at
fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities,
certain other long-term liabilities, and long-term debt are classified as other financial liabilities. Although
the Corporation does not intend to trade its derivative financial instruments, they are classified as held-for-
trading for accounting purposes.

Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability
and original issue discounts on long-term debt have been included in the carrying value of the related
financial asset or liability and are amortized to consolidated net earnings over the life of the financial
instrument using the effective interest method.

Analysis of the fair values of financial instruments and further details as to how they are measured are
provided in notes 20 to 22.

Inventory

Inventories of materials and product inventory supplies, other than oil and gas inventories, are stated at the
lower of cost and net realizable value. Cost is determined on the first-in, first-out method. Oil and gas
inventories are stated at fair value less cost to sell.

Property, plant and equipment

Oil and gas expenditure - exploration and evaluation assets

Capitalisation

Pre-acquisition costs on oil and gas assets are recognised in the Income Statement when incurred. Costs
incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and
commercial appraisal costs and other directly attributable costs of exploration and evaluation including
technical and administrative costs are capitalised as intangible exploration and evaluation ("E&E") assets.

E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation
activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following
development sanction, the carrying value of the E&E asset is reclassified as a development and production
("D&P") asset, but only after the carrying value is assessed for impairment and where appropriate its carrying
value adjusted. If after completion of evaluation activities in an area, it is not possible to determine
technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation
decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration
and evaluation is written off to the Income Statement in the period the relevant events occur.

Impairment

The Corporation's oil and gas assets are analysed into cash generating units ("CGU") for impairment review
purposes, with E&E asset impairment testing being performed at a grouped CGU level. The current E&E CGU
consists of the Corporation's whole E&E portfolio. E&E assets are reviewed for impairment when circumstances
arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E
assets for impairment, the combined carrying value of the grouped CGU is compared with the grouped CGU's
recoverable amount. The recoverable amount of a grouped CGU is determined as the higher of its fair value less
costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the
Income Statement.

Oil and gas expenditure - development and production assets

Capitalisation

Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment
together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset.
Normally each individual field development will form an individual D&P asset but there may be cases, such as
phased developments, or multiple fields around a single production facility when fields are grouped together to
form a single D&P asset.

Depreciation

All costs relating to a development are accumulated and not depreciated until the commencement of production.
Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the
asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant
and equipment will normally be fully depreciated over the life of the field. However, these items are assessed
to consider if their useful lives differ from the expected life of the D&P asset and should this occur a
different depreciation rate would be charged.

Impairment

A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P
assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on
the CGU. Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which
generate largely independent cash flows and are normally, but not always, single developments or production
areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The
recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in
use, where the value in use is determined from estimated future net cash flows. Any additional depreciation
resulting from the impairment testing is charged to the Income Statement.

(b) Non Oil and Natural Gas Operations

Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-
line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated
useful lives on a straight-line basis over five years.

Decommissioning liabilities

The Corporation records the present value of legal obligations associated with the retirement of long term
tangible assets, such as producing well sites and processing plants, in the period in which they are incurred
with a corresponding increase in the carrying amount of the related long term asset. In subsequent periods, the
asset is adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The
carrying amounts of the associated assets are depleted using the unit of production method, in accordance with
the depreciation policy for development and production assets. Actual costs to retire tangible assets are
deducted from the liability as incurred.

Contingent consideration

Contingent consideration is accounted for as a financial liability and measured at fair value at the date of
acquisition with any subsequent remeasurements recognised either in profit or loss or in other comprehensive
income in accordance with IAS 39.

Taxation

Deferred tax is recognized for all deductible temporary differences and the carry-forward of unused tax losses.
Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates
expected to apply to taxable income in the years in which temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the
period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if
realization is considered more likely than not.

Recent accounting pronouncements

In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"),
IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS
27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28,
Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual
periods beginning on or after January 1, 2013 with early adoption permitted. The Corporation has not yet
assessed the impact that the new and amended standards will have on its financial statements or whether to
early adopt any of the new requirements.

Significant accounting judgements and estimation uncertainties

The preparation of financial statements in conformity with IFRS requires management to make estimates and
assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made
based on unsettled transactions and other events and a precise determination of many assets and liabilities is
dependent upon future events. Actual results may differ from estimated amounts.

The amounts recorded for depletion, depreciation of property and equipment, long-term liability, stock-based
compensation, contingent consideration, decommissioning liabilities, derivatives, warrants, and deferred taxes
are based on estimates. The depreciation charge and any impairment tests are based on estimates of proved and
probable reserves, production rates, prices, future costs and other relevant assumptions. By their nature,
these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in
such estimates in future periods could be material.

4. REVENUE

 

                        Three months ended Sept 30 Nine months ended Sept 30
                                 2011         2010         2011         2010
                              US$'000      US$'000      US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oil Sales                      23,006       35,434       61,385       98,630
Gas sales                       2,780            -        9,543            -
Condensate sales                  223            -          798            -
Other income                      406          531        2,463        2,231
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total                          26,415       35,965       74,189      100,861

 

5. COST OF SALES

 

                       Three months ended Sept 30 Nine months ended Sept 30
                               2011          2010         2011         2010
                            US$'000       US$'000      US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating costs             (11,926)      (10,241)     (33,723)     (28,390)
Movement in oil and gas
 inventory                    7,184             -        7,222            -
Depletion, depreciation
 and amortisation            (6,666)       (5,569)     (17,838)     (15,304)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                            (11,408)      (15,810)     (44,339)     (43,694)

 

6. ADMINISTRATIVE EXPENSES

 

                       Three months ended Sept 30 Nine months ended Sept 30
                               2011          2010         2011         2010
                            US$'000       US$'000      US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
General &
 administrative              (1,022)       (1,166)      (3,301)      (2,683)
Stock based
 compensation                  (603)         (458)      (1,837)      (1,058)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                             (1,625)       (1,624)      (5,138)      (3,741)

 

7. RESTRICTED CASH

 

                                                 Sept 30    Dec 31     Jan 1
                                                    2011      2010      2010
                                                 US$'000   US$'000   US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Decommissioning security                          16,336     5,956         -
Cash security - Crown estate                         343       352       352
Cash security - Foreign exchange contract              -         -     5,224
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                  16,679     6,308     5,576

 

Restricted cash of $16.3 million is held by the Bank of Scotland as decommissioning security in respect of the
Corporation's interests in the Anglia and Cook fields.

Further restricted cash of $0.4 million is held by the Bank of Scotland as cash security for a Bank Guarantee
that Ithaca Energy (UK) Limited provided to the Crown Estate when it was granted Field Development Plan
approval for the Jacky Field.

$5.2 million of restricted cash held by the Bank of Scotland in 2009 as cash security for the 2010 foreign
exchange forward contract was released in January 2010.

8. INVENTORY

 

                                                 Sept 30    Dec 31     Jan 1
                                                    2011      2010      2010
                                                 US$'000   US$'000   US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Crude oil inventory                               29,386         -         -
Materials inventory                                   45         -         -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                  29,431         -         -

 

Approximately 190,000 barrels of crude oil inventory were purchased as part of the acquisition of the Cook
field on August 25, 2011. This inventory, combined with Cook oil produced post acquisition, is expected to be
sold in December 2011 / January 2012.

9. EXPLORATION AND EVALUATION ASSETS

 

                                                                    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------

At January 1, 2010                                                   15,500

Additions                                                             3,141
Write offs/relinquishments                                           (1,119)
----------------------------------------------------------------------------

At December 31, 2010                                                 17,522

Additions                                                             3,528
Write offs/relinquishments                                           (1,830)
Disposals                                                              (104)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
At September 30, 2011                                                19,116

 

Following completion of geotechnical evaluation activity, certain licences were declared unsuccessful and
certain prospects were declared non-commercial and therefore the related expenditures of $0.2 million and $1.8
million were written off in the three and nine months to Sept 30, 2011 respectively.

$2 million of associated contingent consideration relating to the licences and prospects relinquished was also
released to the consolidated statement of income in Q1 2011 to give a total credit of $0.2 million for the nine
months ended Sept 30, 2011. See note 14 for details.

10. PROPERTY, PLANT AND EQUIPMENT

 

                                      Development &
                                         Production  Other fixed
                                 Oil and Gas assets       assets      Total
                                            US$'000      US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cost

At January 1, 2010                          189,458        1,274    190,732
Additions                                    82,879          313     83,192
----------------------------------------------------------------------------
At December 31, 2010                        272,337        1,587    273,924
Additions                                   143,148          698    143,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At September 30, 2011                       415,485        2,285    417,770

DD&A

At January 1, 2010                                -         (757)      (757)
Charge for the period                       (22,852)        (347)   (23,199)
----------------------------------------------------------------------------
At December 31, 2010                        (22,852)      (1,104)   (23,956)
Charge for the period                       (17,542)        (296)   (17,838)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At September 30, 2011                       (40,394)      (1,400)   (41,794)

NBV at January 1, 2010                      189,458          517    189,975
NBV at January 1, 2011                      249,485          483    249,968

----------------------------------------------------------------------------
----------------------------------------------------------------------------
NBV at September 30, 2011                   375,091          885    375,976

 

On August 25, 2011, the Company completed the acquisition of a 28.46% non-operated interest in the Cook oil
field from Hess Limited ("Hess") for a cash consideration of $57 million and the transfer from Ithaca to Hess
of a 10% interest in each of exploration blocks 42/25b, 43/16a and 43/21c in the Southern North Sea.

11. LOAN FACILITY

On July 12, 2010, the Corporation signed and completed a Senior Secured Borrowing Base Facility agreement (the
"Facility") for up to US$140 million with the Bank of Scotland Plc. The loan term is up to five years and will
attract interest at LIBOR plus 3-4.5%. Loan issue costs of $0.9 million were incurred in the year ended
December 31, 2010 and are being amortized over the period of the loan (approx $0.2 million amortized in the
nine months ended Sept 30, 2011).

The Corporation is subject to financial and operating covenants related to the Facility. Failure to meet the
terms of one or more of these covenants may constitute an event of default as defined in the Facility
agreement, potentially resulting in accelerated repayment of the debt obligations.

The Corporation is in compliance with its financial and operating covenants.

No funds are currently drawn down under the Facility.

12. DECOMMISSIONING LIABILITIES

 

                                                        Sept 30       Dec 31
                                                           2011         2010
                                                        US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                             23,652        8,751
Additions                                                11,956       12,772
Accretion                                                   571          283
Revision to estimates                                      (273)       1,846
Utilisation                                                (358)           -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of period                                   35,548       23,652

 

The total future decommissioning liability was calculated by management based on its net ownership interest in
all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing
of the costs to be incurred in future periods. The Corporation uses a risk free rate of 3 percent and an
inflation rate of 2 percent over the varying lives of the assets to calculate the present value of the
decommissioning liabilities. These costs are expected to be incurred at various intervals over the next 9
years. The economic life and the timing of the obligations are dependent on Government legislation, commodity
price and the future production profiles of the respective production and development facilities. $12.0 million
of additional liability was recorded in the nine months ended Sept 30, 2011 due to decommissioning liabilities
assumed on the acquisition of the Cook field and liabilities from the drilling of development wells in 2011.
Note that upon the acquisition of the Beatrice Field in November 2008, the Corporation did not assume the
decommissioning liabilities.

13. OTHER LONG TERM LIABILITIES

 

                                                        Sept 30       Dec 31
                                                           2011         2010
                                                        US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                              2,872        2,718
Revaluation in the period                                  (478)         154
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of period                                    2,394        2,872

 

On completion of the acquisition of the Beatrice Facilities on November 10, 2008 there were 75,000 barrels of
oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when
the Beatrice Facilities are re-transferred. This volume of oil is valued at the price on the forward oil price
curve at the expected date of re-transfer and discounted. The liability is subject to revaluation at each
financial period end. The expected date of re-transfer is likely to be more than three years in the future.

14. CONTINGENT CONSIDERATION

 

                                                        Sept 30       Dec 31
                                                           2011         2010
                                                        US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                             12,976        6,933
Additions                                                     -        2,000
Revision to estimates                                    (2,000)       4,043
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of period                                   10,976       12,976

 

The contingent consideration at the end of the period relates to the acquisition of the Stella field and is
payable once Field Development Plan approval is received.

The revision in the nine months to September 30, 2011 relates to the reassessment of the Opal and Garnet
prospects which have been determined uncommercial, resulting in a release of the associated contingent
consideration.

15. SHARE CAPITAL

(a) Issued

The issued share capital is as follows:

 


                                                      Number of      Amount
Issued                                            common shares     US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance January 1, 2010                             162,361,975     277,075
Issued for cash - options exercised                     765,205         305
Transfer from Contributed Surplus on options
 exercised                                                              273
Issued for cash - prospectus                         92,662,284     153,248
Share issue costs                                                    (8,528)
----------------------------------------------------------------------------
Balance December 31, 2010                           255,789,464     422,373
Issued for cash - options exercised                     874,997         572
Issued for cash - warrants exercised                  2,500,000       5,786
Transfer from Contributed Surplus on options
 exercised                                                              460
Transfer from Warrants issued on warrants
 exercised                                                              311
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sept 30, 2011                               259,164,461     429,502

 

On July 28 2010, the Corporation successfully closed a Canadian bought deal and UK private placement. Gross
proceeds were $78.3 million (C$80.9 million) through the issue of 47.6 million shares at a price of C$1.70 per
share and $74.9 million (GBP 48.2 million) through the issue of 45.1 million shares at GBP 1.07 per common
share.

(b) Stock options

In the quarter ended March 31, 2011, the Corporation's Board of Directors granted 260,000 options at a weighted
average exercise price of $1.99 (C$2.01). 200,000 of these options were reserved for issue in Q3 2010 in
contemplation of hiring.

In the quarter ended September 30, 2011, 400,000 options were reserved for issue for a future employee. These
options have not yet been granted, therefore they have not been included in the table below and no expense has
been incurred in relation to the options.

The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at
Sept 30, 2011, 17,506,839 stock options to purchase common shares were outstanding, having an exercise price
range of $0.20 to $3.65 (C$0.25 to C$3.65) per share and a vesting period of up to 3 years in the future.

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

 

                                  September 30, 2011       December 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------

                                             Wt. Avg                 Wt. Avg
                                  No. of    Exercise      No. of    Exercise
                                 Options   Price (i)     Options   Price (i)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period  20,146,003  $     1.61  11,042,875  $     1.48
Granted                          260,000  $     1.99  10,100,000  $     1.88
Forfeited / expired           (2,024,167) $     2.29    (231,667) $     1.28
Exercised                       (874,997) $     0.61    (765,205) $     0.33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options                       17,506,839  $     1.66  20,146,003  $     1.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(i) The weighted average exercise price has been converted into U.S. dollars
based on the foreign exchange rate in effect at the date of issuance.

 

The following is a summary of stock options as at September 30, 2011

 


         Options Outstanding                    Options Exercisable
-------------------------------------  -------------------------------------
                        Wt.                                    Wt.
                       Avg.  Wt. Avg.                         Avg.  Wt. Avg.
                       Life  Exercise                         Life  Exercise
Range of                               Range of
Exercise     No. of                    Exercise     No. of
Price       Options (Years) Price (i)  Price       Options (Years) Price (i)
-------------------------------------  -------------------------------------

$3.65                                  $3.65
(C$3.65)  2,165,000     0.4     $3.65  (C$3.65)  2,165,000     0.4     $3.65
$2.22-                                 $2.22-
 $2.70                                  $2.86
(C$2.25-                               (C$2.25-
 C$2.69)  5,050,000     3.2     $2.23   C$2.70)          -       -         -
$1.49-                                 $1.49-
 $1.76                                  $1.76
(C$1.54-                               (C$1.54-
 C$1.85)  5,311,667     2.3     $1.55   C$1.85)  1,948,330     2.0     $1.56
$0.20-                                 $0.20-
 $0.81                                  $0.81
(C$0.25-                               (C$0.25-
 C$0.87)  4,980,172     2.0     $0.56   C$0.87)  3,032,547     2.0     $0.56
-------------------------------------  -------------------------------------
-------------------------------------  -------------------------------------
         17,506,839     2.2     $1.72            7,145,877     1.5     $1.77
-------------------------------------  -------------------------------------

 

The following is a summary of stock options as at December 31, 2010

 


         Options Outstanding                   Options Exercisable
-------------------------------------  -------------------------------------

                        Wt.                                    Wt.
                       Avg.  Wt. Avg.                         Avg.  Wt. Avg.
                       Life  Exercise                         Life  Exercise

Range of                               Range of
Exercise     No. of                    Exercise     No. of
Price       Options (Years) Price (i)  Price       Options (Years) Price (i)
-------------------------------------  -------------------------------------

$3.65                                  $3.65
(C$3.65)  2,435,000    1.14     $3.65  (C$3.65)  1,623,334     1.1     $3.65
$2.22-                                 $2.29-
 $2.86                                  $2.86
(C$2.25-                               (C$2.51-
 C$3.00)  6,375,000    2.40     $2.25   C$3.00)  1,285,000     0.3     $2.38
$1.49-                                 $1.49-
 $1.76                                  $1.68
(C$1.54-                               (C$1.54-
 C$1.85)  5,345,000    3.01     $1.54   C$1.80)    300,000     1.7     $1.68
$0.20-                                 $0.20-
 $0.81                                  $0.81
(C$0.25-                               (C$0.25-
 C$0.87)  5,991,003    2.77     $0.55   C$0.87)  2,591,084     2.8     $0.45
-------------------------------------  -------------------------------------
-------------------------------------  -------------------------------------
         20,146,003    2.50     $1.61           5,799,418      1.3     $1.44
-------------------------------------  -------------------------------------

 

(c) Stock based compensation

Options granted are accounted for using the fair value method. The compensation cost during the three and nine
months ended Sept 30, 2011 for total stock options granted was $1.6 million and $4.8 million respectively (Q3
2010: $0.8 million, Q3 YTD: $4.8 million). $0.6 million and $1.8 million were charged through the income
statement for stock based compensation for the three and nine months ended Sept 30, 2011 respectively, being
the Corporation's share of stock based compensation chargeable through the income statement. The remainder of
the Corporation's share of stock based compensation has been capitalized. The fair value of each stock option
granted was estimated at the date of grant, using the Black-Scholes option pricing model with the following
assumptions:

 

                               For the nine months ended  For the year ended
                                      September 30, 2011   December 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk free interest rate                            1.20%               1.20%
Expected stock volatility                            97%                104%
Expected life of options                         3 years             3 years
Weighted Average Fair Value                        $1.64               $1.14

 

(d) Gemini Agreement

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

On September 20, 2010, a further agreement was entered into with Gemini whereby in exchange for and in
consideration of Gemini's waiver of any right to proceeds from the disposal of equity interest in the Athena
discovery and in substitution for any previously awarded or agreed warrants, Ithaca Energy Inc. granted Gemini
warrants to acquire up to 2,500,000 common shares in Ithaca Energy Inc. The warrants were exercised at C$2.25
per share on March 3, 2011. The agreement terminates all rights that Gemini has in respect of the Corporation's
interests. The total fair value attributed to warrants issued in 2010 was $0.3 million.

16. CONTRIBUTED SURPLUS

 

                                                       Sept 30       Dec 31
                                                          2011         2010
                                                       US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, beginning of period                            11,427        6,860
Stock based compensation cost                            4,833        4,840
Transfer to share capital on exercise of options          (460)        (273)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of period                                  15,800       11,427

 

17. EARNINGS PER SHARE

The calculation of basic earnings per share is based on the profit after tax and the weighted average number of
common shares in issue during the period. The calculation of diluted earnings per share is based on the profit
after tax and the weighted average number of potential common shares in issue during the period.

 

                             Three months ended Sept  Nine months ended Sept
                                                  30                      30
                                    2011        2010        2011        2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Wtd av. number of common
 shares (basic)              258,833,547 228,371,351 258,076,617 184,811,251
Wtd av. number of common
 shares (diluted)            262,850,930 231,748,163 262,935,959 188,385,443

 

18. TAXATION

 

                       Three months ended Sept 30  Nine months ended Sept 30
                              2011           2010          2011         2010
                            US$000         US$000        US$000       US$000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred tax                  (740)             -        (2,479)           -

 

Current corporation tax payable of $23k is related to tax on interest income from cash held on deposit. No
corporation tax is payable in relation to upstream oil and gas activities.

19. COMMITMENTS

 

Year ended                                                     Subsequent to
                        2011       2012       2013       2014           2014
                     US$'000    US$'000    US$'000    US$'000        US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Office lease              63        250        250        250            813
Exploration              176        918      1,140          -              -
Engineering            6,562     33,503     11,393     11,393              -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total                  6,801     34,671     12,783     11,643            813

 

20. FINANCIAL INSTRUMENTS

To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or
industry accepted third-party models and valuation methodologies that utilize observable market data. In
addition to market information, the Corporation incorporates transaction specific details that market
participants would utilize in a fair value measurement, including the impact of non-performance risk. The
Corporation characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs
depending on the degree to which they are observable. However, these fair value estimates may not necessarily
be indicative of the amounts that could be realized or settled in a current market transaction. The three
levels of the fair value hierarchy are as follows:

- Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example,
exchange- traded commodity derivatives). Active markets are those in which transactions occur in sufficient
frequency and volume to provide pricing information on an ongoing basis.

- Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or
indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices
for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the
marketplace. The Corporation obtains information from sources such as the New York Mercantile Exchange and
independent price publications.

- Level 3 - inputs that are less observable, unavailable or where the observable data does not support the
majority of the instrument's fair value.

In forming estimates, the Corporation utilizes the most observable inputs available for valuation purposes. If
a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is
categorized based upon the lowest level of input that is significant to the fair value measurement. The
valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active
markets or industry standard models that primarily rely on market observable inputs. Substantially all of the
assumptions for industry standard models are observable in active markets throughout the full term of the
instrument. These are categorized as Level 2.

The following table presents the Corporation's material financial instruments measured at fair value for each
hierarchy level as of Sept 30, 2011:

 

                                                                 Total Fair
                                    Level 1   Level 2    Level 3      Value
                                    US$'000   US$'000    US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative financial instrument
 assets                                   -       682          -        682
Long term liability on Beatrice
 acquisition                              -         -     (2,394)    (2,394)
Contingent consideration                  -   (10,976)         -    (10,976)
Derivative financial instrument
 liability                                -    (1,108)         -     (1,108)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

 

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

 

                       Three months ended Sept 30 Nine months ended Sept 30
                                2011         2010         2011         2010
                             US$'000      US$'000      US$'000      US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized gain/(loss)
 on forex forward
 contracts                         -        1,444            -         (715)
Realized (loss)/gain on
 forex forward
 contracts                         -       (3,380)           -       (4,441)
Revaluation of gas
 contract                      2,315            -        3,339            -
Revaluation of other
 long term liability             332         (191)         478          (12)
Contingent
 consideration                     -            -            -       (4,044)
Unrealized (loss)/gain
 on commodity hedges          (2,250)           -       (5,477)         396
Realized (loss)/gain on
 commodity hedges                  -            -         (493)          86
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total gain / (loss) on
 financial instruments           397       (2,127)      (2,153)      (8,730)

 

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

i) Commodity Risk

Commodity price risk related to crude oil prices is the Corporation's most significant market risk exposure.
Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political
events and supply and demand fundamentals. The Corporation is also exposed to natural gas price movements on
uncontracted gas sales. Natural gas prices, in addition to the worldwide factors noted above, can also be
influenced by local market conditions. The Corporation's expenditures are subject to the effects of inflation,
and prices received for the product sold are not readily adjustable to cover any increase in expenses from
inflation. The Corporation may periodically use different types of derivative instruments to manage its
exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows.

In Q4 2009 the Corporation entered into a forward swap for 51,000 barrels per month over November, December,
January and February 2010 production fixing the price at $77/barrel. In Q4 2010, the Corporation entered into
another forward swap for 108,668 and 80,600 barrels per month over December and January respectively to hedge a
proportion of November and December production. The combination of these forward swaps resulted in a realized
loss of $0.5 million and an unrealized gain of $0.3 million in the 9 months ended Sept 30, 2011.

In Q1 2011 the Corporation purchased a put option with a floor price of $105 / barrel for 804,500 barrels of
oil for the period March to December 2011. The option delivers a minimum price on the specified volume of oil
and allows the Corporation to benefit from any upside above $105 / barrel. Due to movements in forecast oil
prices the revaluation of this instrument in the three months ended Sept 30, 2011 resulted in an unrealized
loss of $0.5 million.

In Q2 2011 the Corporation purchased a put option with a floor price of $115 / barrel for 300,000 barrels of
2011 production. The option delivers a minimum price on the specified volume of oil and allows the Corporation
to benefit from any upside above $115 / barrel. Due to movements in forecast oil prices the revaluation of this
instrument in the three months ended Sept 30, 2011 resulted in an unrealized loss of $1.7 million.

ii) Interest Risk

Calculation of interest payments for the Senior Secured Borrowing Base Facility agreement with the Bank of
Scotland that was signed on July 12, 2010 incorporates LIBOR. The Corporation will therefore be exposed to
interest rate risk to the extent that LIBOR may fluctuate. The Corporation will evaluate its annual forward
cash flow requirements on a rolling monthly basis. No funds are currently drawn down under the facility.

iii) Foreign Exchange Rate Risk

The Corporation is exposed to foreign exchange risks to the extent it transacts in various currencies, while
measuring and reporting its results in US Dollars. Since time passes between the recording of a receivable or
payable transaction and its collection or payment, the Corporation is exposed to gains or losses on non USD
amounts and on balance sheet translation of monetary accounts denominated in non USD amounts upon spot rate
fluctuations from quarter to quarter.

On July 7, 2010, in order to protect against the strengthening of the US Dollar and secure the net proceeds
from the equity raise of $150 million the Corporation entered into a foreign exchange forward contract to swap
the Canadian Dollars and Pounds Sterling proceeds of the Canadian bought deal and UK Private placement in
exchange for US Dollars when the proceeds were estimated to be received at contracted rates of $1.00 / C$1.0489
and $1.00 / GBP 0.6592. During the period the US Dollar weakened with the result that the forex instruments
prevented an exchange gain being realized. Forex losses of $3.1 million were recorded which offset the natural
gain reflected in equity.

On October 12, 2009, the Corporation entered in to a Window Forward Plus contract with the Bank of Scotland to
hedge its forecast British Pounds Sterling 2010 operating costs, including general and administrative expenses.
The hedge amounts to $4 million per month (total $48 million) at a US$/GBP  rate of no worse than USD1.60/1.0
and a Trigger rate of USD1.4975/GBP 1.00. A realized loss of $1.3 million has been recognized on the contract
for the year ended December 31, 2010. This contract expired in December 2010, and the resulting unwinding of
unrealized gains and losses on the contracts resulted in an unrealized loss of $0.7 million for the year ended
December 31, 2010.

iv) Credit Risk

The Corporation's accounts receivable with customers in the oil and gas industry are subject to normal industry
credit risks and are unsecured. It should be noted that the Corporation has entered in to a five year marketing
agreement with BP Oil International Limited to sell all of its oil production from the Beatrice, Jacky, and
Athena fields. Oil production from Cook is sold to Shell Trading International Ltd. Anglia and Topaz gas
production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook
gas is sold to Shell UK Ltd and Esso Exploration & Production UK Ltd.

The Corporation assesses partners' credit worthiness before entering into farm-in or joint venture agreements.
In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. As the
Corporation's exploration, drilling and development activities expand with existing and new joint venture
partners, the Corporation will assess and continuously update its management of associated credit risk and
related procedures.

The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at
Sept 30, 2011 all of accounts receivables are current, being defined as less than 90 days. The Corporation has
no allowance for doubtful accounts as at Sept 30, 2011 (December 31, 2010 $Nil).

The Corporation may be exposed to certain losses in the event that counterparties to derivative financial
instruments are unable to meet the terms of the contracts. The Corporation's exposure is limited to those
counterparties holding derivative contracts with positive fair values at the reporting date. As at Sept 30,
2011, exposure is $0.7 million (December 31, 2010: $Nil).

The Corporation also has credit risk arising from cash and cash equivalents held with banks and financial
institutions. The maximum credit exposure associated with financial assets is the carrying values.

v) Liquidity Risk

Liquidity risk includes the risk that as a result of its operational liquidity requirements the Corporation
will not have sufficient funds to settle a transaction on the due date. The Corporation manages liquidity risk
by maintaining adequate cash reserves, banking facilities, and by considering medium and future requirements by
continuously monitoring forecast and actual cash flows. The Corporation considers the maturity profiles of its
financial assets and liabilities. As at Sept 30, 2011, substantially all accounts payable are current.

The following table shows the timing of cash outflows relating to trade and other payables.

 

                                                Within 1 year   1 to 5 years
                                                      US$'000        US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accounts payable and accrued liabilities              136,593              -
Other long term liabilities                                 -          2,394
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                      136,593          2,394

 

21. DERIVATIVE FINANCIAL INSTRUMENTS

 


                                             Sept 30      Dec 31       Jan 1
                                                2011        2010        2010
                                             US$'000     US$'000     US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oil put premiums                                 682           -           -
Embedded derivative                           (1,108)     (4,378)          -
Foreign exchange forward contract                  -           -         685
----------------------------------------------------------------------------
----------------------------------------------------------------------------
                                                (426)     (4,378)        685

 

In Q1 2011 the Corporation entered into a 'put' option to sell 804,500 barrels of the Corporation's 2011
forecast production at $105 / bbl. This is recognized at its fair value in the financial statements. Fair value
represents the market price for the instrument, measured as at Sept 30, 2011.

In Q2 2011 the Corporation entered into a further 'put' option to sell 300,000 barrels of the Corporation's
2011 forecast production at $115 / bbl. This is recognized at its fair value in the financial statements. Fair
value represents the market price for the instrument, measured as at Sept 30, 2011.

In Q4 2010, the Corporation acquired an embedded derivative within an Anglia gas sales contract. This is
recognized at its fair value in the financial statements. Fair value represents the difference between the
contract price and the period end market price for the contracted volumes.

22. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

Financial instruments of the Corporation consist mainly of cash and cash equivalents, receivables, payables,
loans and financial derivative contracts, all of which are included in these financial statements. At Sept 30,
2010, the classification of financial instruments and the carrying amounts reported on the balance sheet and
their estimated fair values are as follows:

 

                                        Sept 30, 2011     December 31, 2010
                                           US$'000             US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Classification                        Carrying      Fair  Carrying     Fair
                                        Amount     Value    Amount    Value
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and cash equivalents (Held for
 trading)                               98,668    98,668   195,581  195,581
Restricted cash                         16,679    16,679     6,308    6,308
Derivative financial instruments
 (Held for trading)                        682       682         -        -
Accounts receivable (Loans and
 Receivables)                          120,530   120,530    93,434   93,434
Deposits                                   250       250       248      248
Loan fees - current                        261       261       286      286
Loan fees - non-current                    313       313       521      521

Commodity hedge (Held for trading)           -         -      (349)    (349)
Contingent consideration               (10,976)  (10,976)  (12,976) (12,976)
Derivative financial instruments
 (Held for trading)                     (1,108)   (1,108)   (4,378)  (4,378)
Other long term liabilities             (2,394)   (2,394)   (2,872)  (2,872)
Accounts payable (Other financial
 liabilities)                         (136,593) (136,593)  (75,564) (75,564)

 

23. RELATED PARTY TRANSACTIONS

A Director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The
amount of fees paid to Burstall Winger LLP in the three and nine months ended Sept 30, 2011 was $0.1 million
and $0.2 million respectively (Sept 30, 2010 - $0.5 million Sept 30, 2010 YTD - $0.6 million). The balance
outstanding at Sept 30, 2011 was $Nil (Sept 30, 2010 - $Nil).

24. SEASONALITY

The effect of seasonality on the Corporation's financial results for any individual quarter is not material.

25. TRANSITION TO IFRS

These are the Corporation's third condensed interim consolidated financial statements to be prepared in
accordance with IFRS.

The accounting policies in Note 3 have been applied in preparing the condensed interim consolidated financial
statements for the three and nine months ended September 30, 2011, the comparative information for the three
and nine months ended September 30, 2010, the balance sheet for the year ended December 31, 2010 and the
preparation of an opening IFRS balance sheet on the transition date, January 1, 2010.

An explanation of how the transition from Canadian GAAP to IFRS has affected the Corporation's financial
position, financial performance and cash flows is set out below.

IFRS 1 Exemptions

IFRS 1 First-Time Adoption of International Financial Reporting Standards allows first-time adopters certain
exemptions from retrospective application of certain IFRS.

The Corporation has applied the following exemptions:

Oil and gas assets in property, plant and equipment were recognized and measured on a full cost basis in
accordance with Canadian GAAP. The Corporation has elected to measure its properties at the amount determined
under Canadian GAAP as at January 1, 2010. Costs included in the full cost pool on January 1, 2010 were
allocated on a pro-rata basis to the underlying assets on the basis of pre-tax net present values using proved
and probable reserves as at January 1, 2010.

Associated decommissioning assets were also measured at their carrying value under Canadian GAAP while all
decommissioning liabilities were measured using a risk free rate, with a corresponding adjustment recorded to
opening retained earnings.

IFRS 3 Business Combinations has not been applied to acquisitions of subsidiaries or interests in joint
ventures that occurred before January 1, 2010.

IFRS 2 Share-Based Payments has not been applied to equity awards that were granted prior to November 7, 2002,
nor those that were granted after November 7, 2002 and vested prior to January 1, 2010.

The Corporation has elected to apply IAS 23 Borrowing Costs with an effective date of January 1, 2010 which
requires mandatory capitalization of borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets. No borrowing costs previously capitalized in accordance with Canadian GAAP
have been derecognized.

Reconciliations from Canadian GAAP to IFRS

In preparing the interim condensed Consolidated Financial Statements, the Corporation has adjusted amounts
reported previously in its Consolidated Financial Statements prepared under Canadian GAAP. The following
reconciliations present the adjustments made to the Corporation's financial position, financial performance and
cashflow (as required by IFRS 1), along with explanatory notes.

Reconciliation of equity as at January 1, 2010 (date of transition to IFRS)

 

                                                CGAAP   IFRS Adj       IFRS
                                              US$'000    US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS

Current assets
Cash and cash equivalents                      29,886          -     29,886
Restricted cash                                 5,224          -      5,224
Accounts receivable                            67,166          -     67,166
Deposits, prepaid expenses and other              352          -        352
Foreign exchange forward contract                 685          -        685
----------------------------------------------------------------------------
                                              103,313          -    103,313
Non current assets
Restricted cash                                   352          -        352
Exploration and evaluation assets (note a)          -     15,500     15,500
Property, plant & equipment (notes a, b, c)   205,475    (15,500)   189,975
----------------------------------------------------------------------------
                                              205,827          -    205,827

Total assets                                  309,140          -    309,140


LIABILITIES AND EQUITY

Current Liabilities
Trade and other payables                       43,613          -     43,613
Commodity hedge                                   397          -        397
----------------------------------------------------------------------------
                                               44,010          -     44,010

Non current liabilities
Long term liability                             2,718          -      2,718
Decommissioning liabilities (note d)            7,956        795      8,751
Contingent consideration (note e)                   -      6,933      6,933
----------------------------------------------------------------------------
                                               10,674      7,728     18,402

----------------------------------------------------------------------------
Net Assets                                    254,456     (7,728)   246,728
----------------------------------------------------------------------------

Equity attributable to equity holders
Share capital                                 277,075     - (952)   277,075
Contributed surplus (note f)                    7,812     (6,776)     6,860
Retained (deficit) (notes d and e)            (30,431)              (37,207)

----------------------------------------------------------------------------
Shareholders' Equity                          254,456     (7,728)   246,728

 

Reconciliation of equity as at Sept 30, 2010

 

                                                 CGAAP   IFRS Adj       IFRS
                                               US$'000    US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS

Current assets
Cash and cash equivalents                      193,812          -    193,812
Accounts receivable                             92,775          -     92,775
Deposits, prepaid expenses and other             6,763          -      6,763
----------------------------------------------------------------------------
                                               293,350          -    293,350
Non current assets
Restricted cash                                    352          -        352
Exploration and evaluation assets (note a)           -     17,892     17,892
Property, plant & equipment (notes a, b, c)    206,600      5,764    212,364
----------------------------------------------------------------------------
                                               206,952     23,656    230,608

Total assets                                   500,302     23,656    523,958


LIABILITIES AND EQUITY

Current Liabilities
Trade and other payables                        61,912          -     61,912
----------------------------------------------------------------------------
                                                61,912          -     61,912

Non current liabilities
Long term liability                              2,730          -      2,730
Decommissioning liabilities (note d)             6,219      2,329      8,548
Contingent consideration (note e)                    -     10,976     10,976
Derivative financial instruments                     -          -          -
----------------------------------------------------------------------------
                                                 8,949     13,305     22,254

----------------------------------------------------------------------------
Net Assets                                     429,441     10,351    439,792
----------------------------------------------------------------------------

Equity attributable to equity holders
Share capital                                  422,198          -    422,198
Contributed surplus (note f)                    11,046       (838)    10,208
Warrants issued                                    311          -        311
Retained earnings / (deficit) (notes b, d, e
 and f)                                         (4,114)    11,189      7,075

----------------------------------------------------------------------------
Shareholders' Equity                           429,441     10,351    439,792
----------------------------------------------------------------------------

 

Reconciliation of equity as at December 31, 2010

 

                                                  CGAAP  IFRS Adj       IFRS
                                                US$'000   US$'000    US$'000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS

Current assets
Cash and cash equivalents                       195,581         -    195,581
Restricted cash                                   6,308         -      6,308
Accounts receivable                              93,434         -     93,434
Deposits, prepaid expenses and other             12,341         -     12,341
Deferred tax asset (note g)                      16,074   (12,329)     3,745
----------------------------------------------------------------------------
                                                323,738   (12,329)   311,409
Non current assets
Exploration and evaluation assets (note a)            -    17,522     17,522
Property, plant & equipment (notes a, b, c)     238,113    11,855    249,968
----------------------------------------------------------------------------
                                                238,113    29,377    267,490
                                                      -
Total assets                                    561,851    17,048    578,899


LIABILITIES AND EQUITY

Current Liabilities
Trade and other payables                         75,564         -     75,564
Commodity hedge                                     349                  349
----------------------------------------------------------------------------
                                                 75,913         -     75,913

Non current liabilities
Long term liability                               2,872         -      2,872
Decommissioning liabilities (note d)             20,868     2,784     23,652
Contingent consideration (e)                          -    12,976     12,976
Derivative financial instruments                  4,378         -      4,378
----------------------------------------------------------------------------
                                                 28,118    15,760     43,878

----------------------------------------------------------------------------
Net Assets                                      457,820     1,288    459,108
----------------------------------------------------------------------------

Equity attributable to equity holders
Share capital                                   422,373         -    422,373
Contributed surplus (note f)                     11,530      (103)    11,427
Warrants issued                                     311         -        311
Retained earnings (notes b, d, e and f)          23,606     1,391     24,997

----------------------------------------------------------------------------
Shareholders' Equity                            457,820     1,288    459,108
----------------------------------------------------------------------------

 

Reconciliation of total comprehensive income for the nine months ended Sept 30, 2010

 


                                                CGAAP   IFRS Adj       IFRS
                                              US$'000    US$'000    US$'000

Revenue                                       100,861          -    100,861
Cost of sales (note b)                        (65,643)    21,949    (43,694)
----------------------------------------------------------------------------
Gross Profit                                   35,218     21,949     57,167

Admin expenses (note f)                        (3,627)      (114)    (3,741)
----------------------------------------------------------------------------
Operating Profit                               31,591     21,835     53,426

Foreign exchange                                 (172)         -       (172)
Gain / (loss) on financial instruments
 (note e)                                      (4,686)    (4,044)    (8,730)
----------------------------------------------------------------------------
Profit on ordinary activities Before
 Interest and Tax                              26,733     17,791     44,524

Finance costs (note d)                           (471)       173       (298)
Interest income                                    56          -         56
----------------------------------------------------------------------------
Profit Before Tax                              26,318     17,964     44,282

Taxation                                            -          -          -
----------------------------------------------------------------------------
Profit After Tax                               26,318     17,964     44,282

 

Reconciliation of total comprehensive income for the three months ended Sept 30, 2010

 

                                                CGAAP   IFRS Adj       IFRS
                                              US$'000    US$'000    US$'000

Revenue                                        35,965          -     35,965
Cost of sales (note b)                        (23,406)     7,596    (15,810)
----------------------------------------------------------------------------
Gross Profit                                   12,559      7,596     20,155

Admin expenses (note f)                        (1,599)       (25)    (1,624)
----------------------------------------------------------------------------
Operating Profit                               10,960      7,571     18,531

Foreign exchange                                1,766          -      1,766
Gain / (loss) on financial instruments
 (note e)                                      (2,127)         -     (2,127)
----------------------------------------------------------------------------
Profit on ordinary activities Before
 Interest and Tax                              10,599      7,571     18,170

Finance costs (note d)                           (199)        52       (147)
Interest income                                    50          -         50
----------------------------------------------------------------------------
Profit Before Tax                              10,450      7,623     18,073

Taxation                                            -          -          -
----------------------------------------------------------------------------
Profit After Tax                               10,450      7,623     18,073

 

Reconciliation of total comprehensive income for the year ended December 31, 2010

 


                                                CGAAP   IFRS Adj       IFRS
                                              US$'000    US$'000    US$'000

Revenue                                       135,121          -    135,121
Cost of sales (note b)                        (87,307)    26,257    (61,050)
----------------------------------------------------------------------------
Gross Profit                                   47,814     26,257     74,071

Exploration and evaluation (note a)                 -     (1,119)    (1,119)
Admin expenses (note f)                        (4,620)      (848)    (5,468)
----------------------------------------------------------------------------
Operating Profit                               43,194     24,290     67,484

Foreign exchange                                  818          -        818
(Loss) on financial instruments (note e)       (5,268)    (4,044)    (9,312)
----------------------------------------------------------------------------
Profit on ordinary activities Before
 Interest and Tax                              38,744     20,246     58,990

Finance costs (note d)                           (814)       249       (565)
Interest income                                   113          -        113
----------------------------------------------------------------------------
Profit Before Tax                              38,043     20,495     58,538

Taxation (note g)                              15,994    (12,329)     3,665
----------------------------------------------------------------------------
Profit After Tax                               54,037      8,166     62,203

 

Adjustments to the statement of cash flows

All IFRS transition adjustments were non-cash items therefore the transition from Canadian GAAP to IFRS had no
impact on cash flows generated by the Corporation, nor on the categorisation cash flows between operating
activities, investing activities or financing activities.

Notes to the reconciliations of equity and total comprehensive income from Canadian GAAP to IFRS

(a) Exploration and evaluation assets

Under IFRS 6, as at January 1, 2010, management has deemed exploration and evaluation assets to be $15.5
million, representing the unproved properties balance under previous GAAP. This resulted in reclassification of
$15.5 million from property, plant and equipment to exploration and evaluation assets.

(b) Depletion, depreciation and amortization

Under Canadian GAAP, development costs were depleted on a unit of production basis based on the proved reserves
of the cost pool. Under IFRS, the Corporation depletes development costs at a field level on a unit of
production basis, and has elected to deplete these over the proved and probable reserves of the assets. For the
nine months ended Sept 30, 2010, the Corporation has recognized depletion, depreciation and amortization
expense of $15.3 million under IFRS when compared to $37.3 million under Canadian GAAP. For the three months
ended Sept 30, 2010, the Corporation has recognized depletion, depreciation and amortization expense of $5.6
million under IFRS when compared to $13.2 million under Canadian GAAP. For the year ended December 31, 2010,
the Corporation has recognized depletion, depreciation and amortization expense of $23.2 million under IFRS
when compared to $49.5 million under Canadian GAAP.

(c) Deemed cost allocation

The most significant changes to the Corporation's accounting policies relate to the accounting for upstream
costs. Under Canadian GAAP, the Corporation followed the full cost method of accounting for oil and gas assets
whereby all costs of acquisition, exploration for and development of oil and gas reserves were capitalized and
accumulated within one cost centre (UK North Sea). Costs accumulated were depleted using the unit-of-production
method based on proved reserves determined using estimated future prices and costs.

The Corporation has elected to apply the IFRS 1 exemption for its Canadian oil and gas assets whereby
development costs as at January 1, 2010 were deemed to be $189.5 million, being the full cost proved PP&E net
book value. As stated above exploration and evaluation costs as at January 1, 2010 were deemed to be $15.5m,
being the unproved properties balance under Canadian GAAP.

(d) Decommissioning liabilities

Under Canadian GAAP, similar to IFRS, decommissioning liabilities were calculated based on the Corporation's
best estimate of the expenditure required to settle the present obligation at the end of the reporting period
or to transfer it to a third party at that time. The liability is however required to be remeasured at the end
of each period including changes in discount rates. As stated above, the Corporation utilized an exemption
under IFRS for measurement of oil and gas assets. This exemption has a consequential impact to the measurement
of the oil and gas assets' decommissioning liabilities upon transition to IFRS, whereby the differences arising
from the remeasurement of the decommissioning liabilities are taken directly to retained earnings rather than
adjusting the carrying amount of the underlying oil and gas assets. This resulted in an increase in
decommissioning liabilities and a decrease to retained earnings of $0.8 million as at January 1, 2010.

Subsequent remeasurements and differences in accretion were recorded in property, plant and equipment and
finance costs respectively. For the nine months ended Sept 30, 2010, the Corporation recorded accretion of $0.2
million compared to $0.4 million under CGAAP. For the three months ended Sept 30, 2010, the Corporation
recorded accretion of under $0.1 million compared to $0.1 million under CGAAP. As at December 31, 2010, the
Corporation remeasured the decommissioning liabilities resulting in an increase to decommissioning liabilities
of $2.7 million. For the 12 months ended December 31, 2010, the Corporation reduced recorded accretion by $0.2
million.

Associated decommissioning assets were measured at their carrying value under Canadian GAAP while all
decommissioning liabilities were measured using a risk free rate, with a corresponding adjustment recorded to
opening retained earnings.

(e) Contingent consideration

Under IFRS, contingent consideration is required to be accounted for as a financial liability and measured at
fair value at the date of acquisition with any subsequent remeasurements recognised either in profit or loss or
in other comprehensive income in accordance with IAS 39.

On transition, as at January 1, 2010, the Corporation recognized a liability of $6.9 million and a decrease in
retained earnings relating to a contingent consideration on the Stella acquisition.

For the nine months ended Sept 30, 2010, the Corporation recognized a further $4 million of contingent
consideration, being $4m adjustment to the Stella acquisition (opposite side recognised in the income
statement).

For the year ended December 31, 2010, the Corporation recognized a further $2 million of liability relating to
the GDF assets acquisition (opposite side recognised in PP&E).

(f) Share based payments

Under Canadian GAAP, similar to IFRS, the expense relating to the Corporation's equity-settled stock based
compensation plans was recorded at fair value using the Black-Scholes option pricing model.

Some of the required valuation inputs however differ according to each GAAP. As stated above, on transition, as
at January 1, 2010, the Corporation recognized a decrease in contributed surplus with an offsetting increase in
retained earnings of $1 million.

(g) Deferred tax

Deferred tax has been adjusted to reflect the tax effect arising from the differences between IFRS and Canadian
GAAP. Upon transition to IFRS, similar to Canadian GAAP, no deferred tax asset was recognized as realization of
the asset was not considered to be more likely than not. For the twelve months ended December 31, 2010, the
application of the IFRS adjustments as discussed in a) to f) above resulted in the recognition of a reduced
deferred tax asset of $3.7 million and a $12.3 million decrease to the Company's deferred tax credit.

26. SUBSEQUENT EVENTS

On October 19, 2011 the Company completed the acquisition of Challenger Minerals (North Sea) Limited, ("CMNSL")
subsequently renamed Ithaca Minerals (North Sea) Ltd from Transocean Drilling U.K. Limited for a consideration
of US$35 million; US$25 million payable immediately and US$10 million upon approval of the Stella / Harrier
Field Development Plan by the Department of Energy and Climate Change, thereby increasing its interests in the
Stella / Harrier fields, obtaining a non-operated interest in the producing Broom field and gaining access to
additional undeveloped North Sea discoveries.

On October 19, 2011 the Company, Dyas UK Limited and CMNSL, now a subsidiary of Ithaca, entered into various
agreements with the Petrofac group ("Petrofac"), effective from 1 October 2011, for the transfer by Petrofac of
a majority ownership interest in a company that owns the floating production vessel 'FPF-1' and the provision
of certain services. Petrofac was also granted the right to earn an interest in Stella / Harrier (Blocks 30/6a
and 29/10a) and the transfer of an interest in Hurricane (Block 29/10b) and Helios (Block 29/10d).

On October 19, 2011 the Company agreed to divest a 25.34% interest in the Hurricane field to Dyas UK Limited
with an effective date of 1 January 2011.

On November 1, 2011, the common shares of the Company commenced trading on the Toronto Stock Exchange under the
Company's existing trading symbol "IAE". The common shares were delisted from the TSX Venture Exchange on the
same day.


-30-

FOR FURTHER INFORMATION PLEASE CONTACT:

Enquiries:
Ithaca Energy
Iain McKendrick
CEO
+44 (0) 1224 650 261
imckendrick@ithacaenergy.com

OR

Ithaca Energy
Graham Forbes
CFO
+44 (0) 1224 652 151
gforbes@ithacaenergy.com

OR

Ithaca Energy
Nick Muir
CTO
+44 (0) 1224 650 267
nmuir@ithacaenergy.com
www.ithacaenergy.com

OR

Pelham Bell Pottinger Public Relations
Philip Dennis
+44 (0) 207 861 3919
pdennis@pelhambellpottinger.co.uk

OR

Pelham Bell Pottinger Public Relations
Rollo Crichton-Stuart
+44 (0) 207 861 3918
rcrichton-stuart@pelhambellpottinger.co.uk

OR

Cenkos Securities plc
Jon Fitzpatrick
+44 (0) 207 397 8900
jfitzpatrick@cenkos.com

OR

Cenkos Securities plc
Beth McKiernan
+44 (0) 131 220 6939
bmckiernan@cenkos.com

OR

RBC Capital Markets
Tim Chapman
+44 (0) 207 653 4641
tim.chapman@rbccm.com

OR

RBC Capital Markets
Matthew Coakes
+44 (0) 207 653 4871
matthew.coakes@rbccm.com

Contact Information

  • Ithaca Energy Inc.