Information  X 
Enter a valid email address

Madagascar Oil Ltd (MOIL)

  Print      Mail a friend

Monday 27 June, 2011

Madagascar Oil Ltd

Full Year Results

RNS Number : 1257J
Madagascar Oil Limited
27 June 2011
 



NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

 

27 June 2011                                                    

MADAGASCAR OIL LIMITED

 ("Madagascar Oil", "MOIL" or the "Company")

 

Full Year Results

 

Madagascar Oil today announces its full year results for the year ended 31 December, 2010.

 

Highlights

 

Financial Results:

Ø Net loss for the year was $11.6 million compared to a loss of $3.9 million in 2009

Ø Capital expenditure amounted to $12.4 million (2009: $4.3 million)

Ø The Group ended the year with $67.5 million of unrestricted cash and cash equivalents (2009: $2.9 million) and a further $1.8 million of restricted cash (2009: $3.5 million).

Ø MOIL has $59 million of unrestricted cash on hand in June 2011 to deliver the approved work plan, and has no debt (other than trade payables)

 

Operational:

Ø 18 successful wells out of 24 new wells drilled at Tsimiroro and the completion of 430km of Electrical Resistivity Tomography

Ø Installation of the Tsimiroro steam flood pilot facility expected in Q3 2012

Ø Netherland, Sewell & Associates Inc. is currently revising the 965 million barrels contingent original oil-in-place estimate for Tsimiroro with updated report expected in near future

Ø 86 core wells completed in Bemolanga 2010 drilling programme support the estimate that the MOIL share of the gross mine resources is 472 million barrels contingent petroleum-initially-in-place

Ø Shift in work programme at Bemolanga to focus on pursuit of conventional hydrocarbon potential on the block

Ø GORE micro-seepage survey collected across 880 km² on the exploration blocks is currently under detailed analysis and will lead to further analysis of at least three drilling leads

Ø Discussions with the Government of Madagascar regarding the approval of the 2011-2012 work programmes for exploration blocks and resolution of outstanding issues on these blocks are set to continue early July 2011

Commenting on today's announcement, Laurie Hunter, Chief Executive Officer, said:

We are pleased to have recently reported that we have achieved resolution of the dispute on our Tsimiroro Block with the Government of Madagascar and believe that we can now proceed as contemplated at the date of our admission to trading on the AIM market.

The Company has recently resumed its planned development work and, with unrestricted cash balances of $59 million, has the funds in place to execute its work programmes and increase value for shareholders. The Company is planning to commence immediately the installation of a steam flood pilot facility at Tsimiroro, which is designed to obtain reservoir performance data and evaluate the potential for a commercial development. With 18 of the 24 wells drilled in 2010 discovering oil, an upgrade in the resource base by independent reservoir engineers NSAI is expected in the near future.

The Company remains committed to Madagascar and is looking forward to continuing its work programme, which is in the best interests of all shareholders and stakeholders, including the people of Madagascar."

Contact Information:

Pelham Bell Pottinger                                                                 +44 (0)20 7861 3232

Mark Antelme / Jenny Renton

 

Strand Hanson Limited                                                               +44 (0)20 7409 3494

Simon Raggett / Angela Peace

 

A copy of the Company's annual report and accounts for 2010 will be posted to shareholders on or before 30 June 2011 and will be available on the Company's website.

 

 

Chairman and Chief Executive Officer's Statement 

We are pleased to report, after several challenging months of efforts to engage with the Government of Madagascar to address uncertainty over the status of some of our Production Sharing Contracts ("PSCs"), that we have achieved resolution of the dispute on our Tsimiroro Block with the Government of Madagascar and believe that we can now proceed as contemplated at the date of our admission to trading on the AIM market.

Madagascar Oil was founded in 2004 to investigate the potential development of existing heavy oil resources, and to pursue further exploration and development opportunities of both heavy oil and conventional oil deposits, in Madagascar.

Having acquired five contiguous onshore blocks covering 29,500 km², the Group currently has the largest onshore exploration and development rights for both heavy oil and conventional oil and gas in Madagascar. The Group's two principal fields have, in the last five years, been demonstrated to have considerable resources in place, and field tests and studies undertaken suggest that a large portion of the Company's heavy oil assets have excellent potential for development.

The Tsimiroro field on Block 3104 has been independently attributed 'best estimate' gross original heavy oil-in-place of 965 million barrels (mmbbls) in known accumulations, with over 780 mmbbls potential in prospective, adjacent structures. Base case production from Tsimiroro, if planned testing verifies commercial economics, is estimated to reach 87,500 barrels of oil per day and to last for between 30 and 40 years. The Company has recently performed additional evaluation and delineation of this resource and is in the process of revising its previous estimates with the aim of reflecting an increase in gross oil-in-place.

The Bemolanga field on Block 3102 has been independently attributed 'best estimate' gross discovered bitumen-in-place of approximately 1.2 billion barrels, with over 1.0 billion barrels potential upside. Following the 2008 farm-out of a 60 per cent interest and assignment of operatorship in the field to Total, the Company and Total recently completed a two-year 160 well coring programme at Bemolanga to determine the viability of a mining project. Based on the results from those wells, the parties have elected not to proceed currently with the next phase of the mining campaign.  In May 2011, OMNIS (the state regulatory authority that is the counterparty to the Company's PSCs) agreed to an amendment to the PSC on Block 3102 (Bemolanga) that extended the current sub phase of the exploration period for an additional year and removed the obligation to fund our 40% share of a minimum work commitment of $100 million for the originally contemplated mining pilot. The revised PSC includes a modification of the work programme and this extension time will be utilized to conduct an aerial gravity survey to evaluate conventional hydrocarbon opportunities on this block. The work programme over the next twelve months will therefore shift to an evaluation of deeper potential by collecting reservoir and surface data on conventional hydrocarbon potential. We think this shift in focus at Bemolanga could be very exciting and we are pleased to continue our partnership with Total.

In response to the statements made by the Minister of Mines and Hydrocarbons regarding Blocks 3104, 3105, 3106 and 3107, in December 2010 the Company took the decision to request that trading in its common shares on the AIM market be suspended pending resolution of these issues. As a precautionary measure we reluctantly declared force majeure on the four blocks in March 2011. The exercise of this contractual provision allows the Group to preserve time upon the occurrence of an event or action that impedes that party from meeting contractual deadlines. In April 2011 we were advised that it would be prudent to begin international arbitration proceedings under the PSCs in order to preserve the rights of the Company and its shareholders, should a resolution not be forthcoming. The Company is confident that it has complied fully with all contractual obligations and has provided extensive documentation to the Ministry of Mines and Hydrocarbons ("MMH") regarding activity on all of the blocks. In mid May 2011, the Government of Madagascar acknowledged the delays that had been imposed upon the Company and began the process of resolving them.

We are pleased to report that our efforts in resolving this dispute have been successful. The Company recently held its Management Committee Meeting for the Tsimiroro Block. In conjunction with that meeting, OMNIS has approved the 2011-2012 work programme and budget for Tsimiroro and has acknowledged that the Tsimiroro PSC is valid and its validity has never been in question. The MMH and OMNIS have also assured us that that there are no technical issues outstanding under this PSC. OMNIS has scheduled a Management Committee Meeting for the Exploration Blocks (Blocks 3105, 3106 and 3107) for July 6, 2011 to work on full resolution of the budgets for work on these blocks. Based on these events, trading has resumed in our common shares. With this recent milestone, we are now in a position to put the difficulties of the last six months behind us.

Madagascar Oil has invested heavily in the country since first obtaining its PSCs in 2004. To date the Company has spent in excess of US$210 million, which is more than any other oil company active in the region.

The Company has recently resumed its planned development work, and with unrestricted cash balances of $59 million as of June 2011, it has the funds in place to execute its work programmes and increase value for shareholders. With 18 of the Tsimiroro 24 wells drilled in 2010 discovering oil, an upgrade in the resource base by independent reservoir engineers NSAI is expected in the near future. The Company is also planning to commence immediately the installation of a steam flood pilot facility at Tsimiroro, which is designed to obtain reservoir performance data and evaluate the potential for a commercial development. Madagascar Oil will continue work on its exploration plays while it also continues to evaluate the mining options available at Bemolanga.

The last six months have highlighted risks associated with operating in frontier petroleum provinces, but we believe that our recent constructive dialogue with the Government of Madagascar has served to reaffirm our historical compliance under our contracts, the amount of work we have already completed to date, and our clear and well funded plans for future development to bring onstream the country's first commercial oil production.

The Company remains committed to Madagascar and is looking forward to continuing its work programme, which is in the best interests of all shareholders and stakeholders, including the people of Madagascar.

 

Operational Review 

The Company conducted operations on all five of its blocks in 2010.  In all, a total of 110 wells were drilled and 490 kilometres of Electrical Resistivity Tomography were acquired in the shallow sands, and 880 square kilometres of GORE micro seepage survey was performed on deeper sands on seven deep prospects.

Tsimiroro - Block 3104

The Tsimiroro block comprises 6,670 square kilometres, of which the northern portion contains an approximate 1,600 square kilometre area of formation, bearing heavy oil of an average 14o API, referred to as the Tsimiroro Field. The work to date has defined high confidence level oil-in-place volumes within the Amboloando sand. Drilling results have also found measurable oil in the more shallow Ankaramanabe sand and underlying Isalo sand. However, the potential in the Ankaramanabe and Isalo sands has not yet been quantified by third party experts. 

A 44 well drilling programme was conducted in 2007 and 2008 on the Tsimiroro Field which led to a 2009 analysis that yielded a high estimate of 1.4 billion barrels of contingent oil-in-place plus 1.8 billion of prospective oil-in-place.  The 2010 operations programme targeted further definition of the oil-in-place through a combination of surface investigation and drilling.  Based on the fact that the definition of the shallow oil horizons was not conclusive utilizing a conventional seismic approach, the Company's geologic team developed a programme to test and subsequently utilize a surface process known as Electrical Resistivity Tomography ("ERT"). 

ERT utilizes an array of 18 inch long probes that are driven into the soil every 22.5 meters over a line that is 450 meters long. Electric current is applied to alternating pairs of probes and signal returns are measured at the other 18 probe sites on the line; penetrating to a depth of approximately 300 meters investigative depth. Following processing, an implied resistivity trace is developed that allows low resistive intervals like shale to be distinguished from sands. The ERT results were utilized to identify the 24 delineation well locations for the 2010 drilling programme. The results of the initial examination of the ERT results indicate that it is very effective for identifying structural areas. The drilling programme encountered 18 wells with good oil shows and six that were not oil bearing (three were drilled in fault zones and three found wet sand). Additional follow-up drilling locations have been identified for 2011 and ERT will be studied further for application in subsequent years.

At year-end the Tsimiroro nine pattern steam flood pilot project design phase was well underway, and the location preparation for the wells and facilities was approximately 30% completed. Engineering preparation and location work has progressed in early 2011; however, the uncertainties surrounding the block since December 2010 indicated in the Chairman/CEO Statement have resulted in delays in the procurement and estimated timing of the pilot production schedule. In June 2011 those delays were resolved and approval from OMNIS of our proposed steam flood project was confirmed. At the end of the contract term in August 2012, the Company's option to extend the term for two years beyond the end of Phase 3 has also been reaffirmed. This will provide the Company with three years prior to reaching the decision point required to make a declaration for commercial development. In addition, OMNIS and the MMH acknowledged the force majeure and the parties have agreed to address an extension to the Tsimiroro PSC should it be necessary at the end of the contract term.

The steam flood pilot will test the application of both cyclic and continuous injection of steam in a vertical steam flood configuration and it is presently projected that cyclic steam injection will begin in Q3 2012, and continuous steam injection in Q4 2012.

The cost for the drilling and ERT operation in 2010 was approximately $8 million. We estimate that the 2010 work will result in an increase in contingent and prospective resources oil-in-place volumes and that an independent report by Netherland, Sewell & Associates, Inc. will be issued shortly.

 Manambolo - Block 3105, Morondava - Block 3106, Manandaza - Block 3107

These three blocks, referenced collectively as the "Exploration Blocks", comprise 3,995, 6,825 and 6,580 square kilometres respectively. Manambolo had a gas well test in 1987 and Manandaza had a 41o API light oil test in 1991. Madagascar Oil has analyzed existing seismic in past years, and in 2009 designed a seismic acquisition programme that resulted in the identification of nine structural leads in seven areas. There were two areas on both Manambolo and Morondava and three areas on Manandaza that suggested potential for structures up-dip from hydrocarbon observations. To examine further the leads and attempt to de-risk the possibility for hydrocarbon capture in the structures; a team was contracted to install GORE Modules for geochemical testing of hydrocarbon micro-seepage to surface over a total of 880 square kilometres in 2010.

The GORE testing is conducted by installing sampling modules in a grid on the surface above an identified subsurface structural feature. The modules selectively capture minute carbon molecules from C2 to C20 in four groupings. Following a three week ground exposure, the modules are removed and sent to the laboratory for testing, with the goal of determining if any areas above the structures have micro-seepage of hydrocarbon at levels above the normal background level.

The Manambolo structures tested were east of the 1987 gas test in the centre of the block. The structure from the gas well was determined, following the 2009 seismic test, to have been very small and to have fully migrated to surface before encountering any structural trap up dip to the east. Two areas of 160 square kilometres each were sampled above the two newly projected Manambolo leads. The northern test area indicated very few GORE readings above background and initial judgment is that the identified structure does not contain hydrocarbon. The southern lead had several areas of elevated hydrocarbon signature, but lacks the seismic definition to fully determine the structural continuity.

The Morondava leads have very little data that suggest hydrocarbon presence from any wells drilled prior to Madagascar Oil's operation. The north Morondava lead was a 160 square kilometre area and, like Manambolo in the north, showed very little hydrocarbon activity. The southerly 160 square kilometre area, however, indicated at least two areas of elevated hydrocarbon that look like potential prospects, however, the shapes do not conform to the structural high that has been mapped below the survey area. There may be a correlation to Cretaceous channel sands in a slightly shallower horizon, but additional seismic will be required to obtain a more complete assessment.

There were three areas sampled with GORE on Manandaza. These were 146, 54 and 40 square kilometres in size respectively and all three had good signs of elevated hydrocarbon. The largest, most northerly area is the site of the Manandaza #1 well and 1991 drill stem test conducted by Shell, which recovered 10 barrels of 41o API light oil. The two smaller areas were similar in style, but exhibited considerably smaller areas of potential hydrocarbon capture. The larger area is currently being examined for stratigraphic features, as the largest areas of hydrocarbon response were not on the crest of the structure. It is likely additional seismic will also be required in this location.

The cost for GORE testing was approximately $2.2 million in 2010.

Work on these blocks was halted during the first half of 2011 pending resolution of Company's impasse with the Government of Madagascar. OMNIS has scheduled our Management Committee Meeting for these blocks on 6 July 2011. Each PSC requires either seismic work or the drilling of one well in 2011. We hope to enter into a negotiation with OMNIS to extend the term on these blocks to account for the 2011 delay and for the additional time required to conduct the assessment of prospective drilling locations identified in the work to date. It is expected that a combination of airborne gravimetric surveys (Full Tensor Gravity) and seismic will be required to define further the drilling prospects, and the addition of these items to the block work activity will be addressed at the upcoming Management Committee Meeting.

Bemolanga - Block 3102

The Bemolanga block is a 5,463 square kilometre area and contains the oldest known hydrocarbon deposit in Madagascar. The first wells were drilled in the late 1800s and work has been conducted over the area of what has been determined to be a potential bitumen mining project. The block is operated by Total (60% working interest) and Madagascar Oil (40% working interest) and following the farm-in by Total in 2008, 72 core wells were drilled and cored in 2009 and an additional 86 wells were drilled and cored in 2010.

There was considerable work done to define the mineable area and bitumen content based on the two drilling and coring programmes. The most significant finding is that the bitumen content ranges from about 3.5 weight percent to approximately 11.0 weight percent, with the effective mineable area at the level of an average of 5.5 weight percent bitumen in the ore. For reference, this bitumen content is approximately half of that found on the Canadian tar sands.

In addition to the coring, extraction testing and detailed cost estimates for mine and extraction plant design were conducted by both Total and Madagascar Oil. Removal of the bitumen from the ore was tested extensively with hot water extraction and subsequent froth treatment and the resulting production and sales streams were estimated. The sales stream is an approximate 10o API product that will require diluent blending, or upgrading, for subsequent pipelining to the west coast of Madagascar and delivery via offshore terminal to crude tankers. The shipping and handling were also estimated, along with the projected market value of the blended product. A key factor in the evaluation is that, with no current native oil or gas supply, the required diluent must be imported and the project power requirements will need to be fueled by either the bitumen production or the diluent import.

There is an estimated median volume of approximately 1.2 billion barrels of mineable bitumen present (Madagascar Oil share: 472 mmbbls). However, at an evaluation price range per barrel of $60-$100 Brent, the cost of handling the ore, the bitumen extraction, and the upgrading and shipping, does not presently support proceeding with the mine project. In June 2011 Total and Madagascar Oil received approval from OMNIS for a modification of the Bemolanga work plans to focus on deeper conventional plays on the block. An extension of one year was granted in June 2011 with the commitment to run airborne gravity surveys later this year over the entire block area to identify possible conventional hydrocarbon plays, with an option for a further two-year extension to drill a well. The mine will continue to be evaluated for potential improvements in extraction and upgrading technology.

The Bemolanga project spent approximately $28 million in 2010 and Madagascar Oil's 40% share of the costs was carried by Total as part of the farm-in transaction. Under the terms of the revised Joint Operating Agreement with Total, the Company is carried on the next $10 million of gross expenditures for the revised work programme.

 

Financial Review

Loss for the Financial Year

The net loss for the year ended 31 December, 2010 was $11.6 million, taking account of $7.9 million in IPO-related expenditures (of which $5.1 million of such expenses were netted against the share premium account with the balance included in the 2010 net loss calculation). This compares to a loss of $3.9 million in 2009.

Gross administrative costs, summarised in the table below, totaled $7.2 million (2009: $10.9 million). Employees and headcount-related contractor payments were $3.5 million (2009: $7.3 million), including $1.3 million (2009: $5.1 million) of IFRS charges related to restricted stock and share options granted to directors, staff and third parties.  Production sharing contract-related fees and expenses were $1.1 million (2009: $1.3 million). Depreciation, IPO costs and losses associated with foreign currency exchange, asset disposal and impairments are not included in gross administrative costs listed below. 

 

Gross Administrative Costs

2010

(US$ Millions)

2009

(US$ Millions)

Employee and Headcount - Related Contractors

$2.2

$2.2

Share Based Payments

$1.3

$5.1

Total Employee and Headcount - Related Payments

$3.5

$7.3

Production Sharing Contract - Related Fees and Expenses

$1.1

$1.3

Other

$2.6

$2.3

Total Gross Administrative Costs

$7.2

$10.9

 

 

Statement of Financial Position

At 31 December, 2010 the Group had net assets of $174 million (2009: $98 million). The most significant balances are property, plant and equipment of $15.1 million (2009: $18.5 million), exploration and evaluation assets of $85.8 million (2009: $70.9 million) and cash of $69.2 million (2009: $6.4 million).

 

Capital Expenditures

The Company had $12.4 million of capital expenditures in 2010. This compares to $4.3 million in capital expenditures in 2009. The Company focused its capital expenditures as follows:

 

Capital Expenditures

2010

(US$ Millions)

Electrical Resistivity Tomography (ERT)

 $4.3

Exploration wells-drilling

 $4.2

Steam Flood Pilot

 $1.7

Prospect testing (GORE)

 $2.2

Total

 $12.4

 

 

Cash Flow

The Group ended the year with $67.5 million of unrestricted cash and cash equivalents (2009: $2.9 million) and a further $1.8 million of restricted cash (2009: $3.5 million). The Group remains debt free, other than trade payables in the ordinary course of business, which ended the year at $2.8 million (2009: $0.7 million).

All of the Group's restricted cash at 31 December, 2010 supports $1.5 million of performance guarantees in favor of the Government of Madagascar under the Group's PCSs for Blocks 3105, 3106, and 3107. These guarantees will remain in effect through 31 December, 2011, which is the end of the current phase of each license.

At 31 December, 2010 approximately $69 million was held on deposit with Credit Suisse and earns a floating rate interest. Madagascar Oil has diversified its cash holdings amongst other significant financial institutions in 2011. At 31 December, 2010 over 95% of the Group's cash was held in US dollars.

On 29 November 2010, the Company's common shares were admitted to trade on the AIM market of the London Stock Exchange. The Company's common shares trade on the AIM through depository interests under the symbol "MOIL". In its initial public offering the Company issued 53,197,000 shares at 95 pence per share for total gross proceeds to the Company of $78.3 million. Net proceeds to the Company after payment of certain IPO expenses were $70.4 million. At the time of admission, the Company's total outstanding share capital was 192,365,157 shares. 



Madagascar Oil Limited

 

Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

 


Madagascar Oil Limited

 

Contents

 

Independent Auditors' Report 3

 

Consolidated Financial Statements

 

        Statements of Financial Position                                                                                               4

 

        Statements of Comprehensive Income                                                                                       5

 

        Statements of Cash Flows                                                                                                         6

 

        Statements of Changes in Equity                                                                                               7

 

        Notes to Consolidated Financial Statements                                                                          9-40


Independent Auditor's Report

 

Board of Directors and shareholders of Madagascar Oil Limited

Madagascar Oil Limited

Houston, Texas

We have audited the accompanying consolidated statements of financial position of Madagascar Oil Limited and subsidiaries ("the Company") as of December 31, 2010 and 2009 and the related consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 35, uncertainty exists related to the status of certain of the Company's production sharing contracts in Madagascar.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Madagascar Oil Limited at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

June 25, 2011


Madagascar Oil Limited

Consolidated Statements of Financial Position

 

As of December 31,


2010


2009




$(000)


$(000)


Assets












Non-Current Assets






      Property, plant and equipment (Note 16)

$

15,171


18,540


      Exploration and evaluation assets (Note 17)


85,830


70,857


      Other intangible assets (Note 18)


172


370


      Non-current tax assets (Note 15)


1,802


1,570


      Financial assets (Note 21)


16


11


      Restricted cash (Note 22)


1,765


3,508


Total non-current assets


104,756


94,856


Current Assets






      Other assets (Note 20)


1,386


451


      Cash and cash equivalents (Note 22)


67,523


2,901


Total current assets


68,909


3,352



$

173,665


98,208








Equity and Liabilities






Capital and reserves






      Issued capital (Note 23)

$

195,087


111,419


      Equity-settled transactions reserve (Note 28)


3,049


141,911


      Accumulated deficit (Note 24)


(27,567)


(156,540)


Total equity


170,569


96,790








Non-Current Liabilities






      Provisions (Note 25)


246


603


Total non-current liabilities


246


603








Current Liabilities






      Trade and other payables (Note 26)


2,800


723


      Provisions (Note 25)


50


92


Total current liabilities


2,850


815



$

173,665


98,208


See accompanying notes to consolidated financial statements.


Madagascar Oil Limited

Consolidated Statements of Comprehensive Income







For the Years Ended December 31,


2010


2009




$(000)


$(000

)

Revenue

$

-   


-   








Operating expenses






      Salaries and employee benefits expense (Note 12)


(3,471)


(7,327

)

      Depreciation and amortization expense (Note 13)


(322)


(373

)

      Consulting expense (Note 10)


(559)


(639

)

      Production sharing and contractual fees (Note 11)


(1,127)


(1,272

)

      IPO transaction expense (Note 23)


(2,763)


-   


      Other expenses (Note 9)


(2,068)


(1,715

)

      Net foreign exchange loss (Note 6)


(290)


(198

)

      Loss on disposals


(298)


(91

)

      Oil activities income (loss) (Note 33)


(105)


7,798








Operating Loss


(11,003)


(3,817

)







Finance Income (Note 7)


9


320


Finance Expense (Note 7)


(518)


(307

)







Loss before taxes


(11,512)


(3,804

)







Income Tax Expense (Note 8)


(62)


(49

)







Net Loss

$

(11,574)


(3,853

)

 

(Loss) per share attributable to the equity owners (Note 14)






      Basic and diluted

$

(0.08)


(0.03)








See accompanying notes to consolidated financial statements.

 


Madagascar Oil Limited

Consolidated Statements of Cash Flow

 

For the Years Ended December 31,


2010


2009




$(000

)

$(000

)

Cash Flows From Operating Activities:






Net Loss

$

(11,574)


(3,853

)

      Income tax expense recognized in net loss


62


49


      Finance (income) expense, net


509


(13

)

      Loss on disposals


298


91


      Depreciation and amortization of non-current assets


322


373


      Oil activities (income) loss


105


(7,798

)

      Net foreign exchange loss


462


198


      Expense recognized in loss in respect of equity-settled share-based payments


1,304


5,054




(8,512)


(5,899

)

      Movements in working capital






            (Increase) decrease in other assets


(1,635)


284


            Increase (decrease) in trade and other payables


2,031


(1,578

)

            Decrease in provisions


(42)


(1,000

)

      Interest paid


(125)


-


      Income taxes paid


(14)


(62

)

Net cash used in operating activities


(8,297)


(8,255

)







Cash Flows From Investing Activities






      Interest received


-


7


      Payments for equipment and intangible assets


(57)


(11)


      Proceeds from disposal of property, plant and equipment


7


193


      Exploration and evaluation costs paid


(12,436)


(4,297

)

Net cash used in investing activities


(12,486)


(4,108

)







Cash Flows From Financing Activities






      Proceeds from issues of equity shares


83,657


5,820


      Proceeds from debt


2,873


-


      Repayment of debt


(2,868)


-


      Restricted cash


1,743


3,051


Net cash provided by financing activities


85,405


8,871








Net increase (decrease) in cash and cash equivalents


64,622


(3,492

)







Cash and cash equivalents at beginning of year


2,901


6,393








Cash and cash equivalents at end of year

$

67,523


2,901








Non-cash Investing and Financing Activities:






      Warrants liability reclassified to equity

$

-


9,656


       Conversion of debt to equity


5


-


       Depreciation capitalized in exploration and evaluation assets


2,932


2,934


See accompanying notes to consolidated financial statements.


Madagascar Oil Limited

Consolidated Statements of Changes in Equity

For the Years Ended

December 31, 2010


 

Share

Capital



 

Share

Premium



Equity-Settled Transactions Reserves



 

Accumulated

Deficit



Total




$(000)



$(000)



$(000)



$(000)



$(000)


















Balance at December 31, 2008 

 

$

 

116


$

 

105,175


$

 

127,183


$

 

(152,687

)

$

79,787


Loss for the period


-



-



-



(3,853

)


(3,853

)

Issue of ordinary shares to shareholders


 

12



 

5,808



 

-



 

-



5,820


Issue of ordinary shares under employee share option plan


 

1



 

-



 

274



 

-



 

275


Issue of ordinary shares to Directors


1



-



135



-



136


Recognition of equity-settled transactions under employee share option plan


 

 

-



 

 

-



 

 

4,643



 

 

-



4,643


Issue of ordinary shares to Credit Suisse


 

1



 

305



 

-



 

-



306


Reclassification of warrants issued


-



-



9,676



-



9,676


















Balance at December 31, 2009

$

131


$

111,288


$

141,911


$

(156,540)


$

96,790


Loss for the period


-



-



-



 (11,574)



(11,574)


Transfer of equity settled transaction reserve








 

(140,547)



 

140,547



-


Issue of ordinary shares to shareholders


 

60



 

83,597



 

-



 

-



83,657


Recognition of equity-settled transactions under employee share option plan


-



-



709



-



709


Issue of ordinary shares under employee share option plan


2



-



478



-



480


Issue of ordinary shares to Directors


1



-



114



-



115


Issue of ordinary shares to Credit Suisse and conversion of convertible debt


 

 

3



 

 

5



 

 

384



 

 

-



392


















Balance at December 31, 2010

$

197


$

194,890


$

3,049


$

(27,567)


$

170,569


















 



Voting Shares



Non-Voting Shares



Total


Balance at December 31, 2008


103,179,470



13,040,000



116,219,470


Shares granted to Directors


500,000



-



500,000


Shares granted to personnel


1,922,990



-



1,922,990


Shares granted to shareholders


12,442,230



-



12,442,230


Shares granted to others


613,580



-



613,580












Balance at December 31, 2009


118,658,270



13,040,000



131,698,270


Shares granted to Directors


1,100,000



-



1,100,000


Shares granted to personnel


1,003,300



-



1,003,300


Shares granted to shareholders


72,829,947



(13,040,000)



59,789,947


Shares granted to others


2,773,640



-



2,773,640












Balance at December 31, 2010


196,365,157



-



196,365,157


See accompanying notes to consolidated financial statements.

 


Madagascar Oil Limited

Notes to Consolidated Financial Statements

 

1.  General Information

 

Madagascar Oil Limited (Bermuda) (the "Company") is an exempted limited liability company incorporated in Bermuda with registration number 37901.  The address of its registered office is Canon's Court 22 Victoria Street - Hamilton HM12 Bermuda.

 

Madagascar Oil Limited and its affiliates (collectively, the "Group") commenced business in 2004 by entering into six production sharing contracts ("PSC's") for oil exploration and production in Madagascar with the Republic of Madagascar.  The production sharing contracts are held in two wholly owned subsidiaries, Madagascar Oil SA ("MOSA") and Majunga Oil SARL ("Majunga") registered under the Laws of the Republic of Madagascar.

 

On March 17, 2006 an internal reorganization took place in order to improve the visibility of the structure of the Group:  a share exchange agreement (the "Share Exchange Agreement") was entered into between all of the shareholders of Madagascar Oil Limited of Mauritius ("MOM") and the Company which was created for this purpose.

 

Under the Share Exchange Agreement all of the shareholders in MOM agreed to transfer their shares in MOM to the Company in exchange for Common Shares or Non-Voting Shares of the Company.  Pursuant to the Share Exchange Agreement, among other things (a) each shareholder agreed to waive and/or to procure the waiver of all pre-emption and similar rights over the shares in MOM in relation to the sale and purchase contemplated by the Share Exchange Agreement; (b) each shareholder agreed to waive any and all provisions of any contract or arrangement under which it was required to give his consent for the transactions contemplated by the Share Exchange Agreement; (c) each shareholder agreed that any breach by MOM or another shareholder of the constitution of MOM as set out in the Second Schedule of the Companies Act of Mauritius 2001 (pre-emption on transfer) was ratified, and that it had no claim against MOM or any other shareholder for any such breach; (d) all existing shareholder agreements and contractual investor rights terminated; (e) relevant options issued by MOM converted into options over Common Shares in the capital of the Company or (in one instance) into options over Non-Voting Shares in the Company on the same terms; and (f) relevant warrants issued by MOM converted into warrants over Common Shares in the Company on the same terms.

 

The principal activities of the Group are described in Note 5.

 

MOSA holds Production Sharing Contracts for the onshore license blocks 3102, 3104, 3105, 3106 and 3107 all of which are geographically contiguous on the west part of the island:

 

·      Block 3102 Bemolanga is 7,175 km2 (2,770 sq. mi.) in size and hosts the Bemolanga ultra heavy oil field.  It was granted on August 17, 2004.

 

·      Block 3104 Tsimiroro is 6,670 km2 (2,575 sq. mi.) in size and hosts the Tsimiroro heavy oil field.  It was granted on August 17, 2004.

 

·      Block 3105 Manambolo is 5,325 km2 (2,056 sq. mi.) in size and was granted on December 14, 2004.  Surrendered 25% to 3,994km2 on April 3, 2007.

 

·      Block 3106 Morondava is 9,100 km2 (3,514 sq. mi.) in size and was granted on December 14, 2004.  Surrendered 25% to 6,825 km2 on April 3, 2007.

 

·      Block 3107 Manandaza is 8,775 km2 (3,388 sq. mi.) in size and was granted on December 14, 2004.  Surrendered 25% to 6,581 km2 on April 3, 2007.

 

Majunga also held one production sharing contract for Block 2103 that was surrendered in 2009.  Block 2103 Majunga was 11,930 km2 (4,606 sq. mi.) in size and was granted on December 14, 2004.  It was surrendered to the Madagascar government effective July 27, 2009.

 

On September 17, 2008, the Malagasy government approved a 60% farm out and transfer of operatorship of Block 3102 Bemolanga to an affiliate of TOTAL S.A. ("TOTAL").  MOSA has also transferred to TOTAL the operatorship of the license.

 

In addition to the 4 blocks held 100% and operated by the Group and the 40% non-operated share in the 3102 Bemolanga block, the Group entered into an Agreement in December 2006 with Tullow Oil, Plc ("Tullow") for the exploration of the onshore block 3109 Mandabe (11,050 km² in size).  The Office des Mines Nationales et des Industries Strategiques ("OMNIS") approved the transfer to Majunga on December 20, 2006 of a 50% interest in the block.  Tullow is operating the block.  In September 2008 Majunga withdrew from the Joint Operating Agreement and the Production Sharing Contract as of October 31, 2008.  See Note 19.

 

The exploration period under the PSC's generally consist of 3 phases of 2 years, 2 years and 4 years respectively.  An extension of 2 years maximum can also be granted by the OMNIS at the end of the 3rd phase of the Exploration Period specified in the PSC.

 

Per amendments to the applicable PSC's in June 2009, the split of the different phases composing the exploration period has been modified for the licenses 3105, 3106, 3107.  The total duration of the Exploration Period was not modified.

 

At December 31, 2010, the:

·      3102 and 3104 blocks held by Madagascar Oil SA are in the 3rd of the 3 phases constituting the Exploration Period

 

·      3105, 3106, 3107 blocks held by Madagascar Oil SA are in the 2nd of the 3 phases constituting the Exploration Period

 

2.  Significant Accounting Policies

 

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.  These policies have been consistently applied from those used in prior years, unless otherwise stated.

 

Standards, amendments and interpretations effective in 2009 and 2010

 

IFRS 8 'Operating Segments' - IFRS 8 sets out requirements for disclosure of information about an entity's operating segments and also about the entity's products and services, the geographical areas in which it operates, and its major customers.

 

IAS 27 'Consolidated and Separate Financial Statements (Amendment)' - The amendment affects the acquisition of subsidiaries achieved in stages and disposals of interests.  Amendment does not require the restatement of previous transactions.

 

IFRS 2 'Share-Based Payments (Amendment)' - The amendment clarifies that where a parent (or another group entity) has an obligation to make a cash-settled share-based payment to another group entity's employees or suppliers, the entity receiving the goods or services should account for the transaction as equity-settled.

 

IAS 1 'Presentation of Financial Statements (Amendment)' - The amendment addresses the current/non-current classification of convertible instruments.

 

IAS 7 'Statement of Cash Flows (Amendment)' - The amendment addresses the classification of expenditures on unrecognized assets.

 

IAS 17 'Leases (Amendment)' - The amendment addresses the classification of leases of land and buildings.

 

IAS 18 'Revenue (Amendment)' - The amendment addresses the determination of whether an entity is acting as a principal or as an agent.

 

IAS 32 and 39 'Financial Investments (Amendments)' - The amendments clarified the principles for determining eligibility of hedged items.

 

IFRIC 18 'Transfers of Assets from Customers' - The interpretation clarifies the treatment of agreements in which an entity receives from a customer an item of property that it must use to provide the customer with an on-going access to goods or services.

 

IFRIC 17 'Distributions of Non-Cash Assets to Owners' - The interpretation clarifies the reporting, measurement and disclosures of non-cash assets distributed to owners.

 

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group.

 

The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after January 1, 2011 or later periods, but the Group has not early adopted them.  The Company does not expect implementation of these statements to have a material impact on financial results.

 

·      IAS 24 Related Party Disclosures

 

·      IAS 27 Separate Financial Statements (as amended in 2011)

 

·      IAS 28 Investments in Associates and Joint Ventures (as amended in 2011)

 

·      IRFIC 19 Extinguishing Financial Liabilities with Equity Instruments

 

·      IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendment)

 

·      IFRS 9 Financial Instruments

 

·      FRS 10 Consolidated Financial Statements

 

·      IFRS 11 Joint Arrangements

 

·      IFRS 12 Disclosure of Interests in Other Entities

 

·      IFRS 13 Fair value measurement ( applied for annual periods beginning or after January 1, 2013

 

Basis of Preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS).  They have been prepared on the historical cost basis except for the revaluation of financial instruments and impairment of exploration and evaluation assets.

 

 

Management has concluded that the US dollar is the functional currency of each entity of the Group due mainly to the facts that the US dollar is the currency in which:

 

·      Most of the expenses of the entities of the Group are denominated in US dollars

 

·      Oil sales are always denominated in US dollars on the international markets and

 

·      Funds from financing activities (debt or equity instruments) are generated in US dollars, other than its November IPO, which was denominated in Great British pounds before subsequent conversion into US dollars.

 

The consolidated financial statements are presented in US dollars.

 

Basis of consolidation

 

Subsidiaries

The consolidated financial statements incorporate the financial statements of the Company and its wholly-owned subsidiaries.  Subsidiaries are those entities controlled by the Company.  Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.  The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

 

The following companies have been consolidated within the Group financial statements:

 

Name of Subsidiary


Registered


Holding


Voting power held


Principal activity






%


%




Madagascar Oil Ltd


Mauritius


100


100


Investment


Madagascar Oil SA


Madagascar


100


100


Oil exploration and production


Majunga Oil SARL


Madagascar


100


100


Oil exploration and production


Madagascar Oil (USA) LLC

 


United States of America

 


100

 


100

 


Administration and Technical Support


 

Transactions eliminated upon consolidation

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.  All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.  There is no non-controlling interest in any of the subsidiaries of the Group.

 

Joint venture operations

 

It is standard industry practice to conduct petroleum operations jointly with other exploration and production companies.

 

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, that is when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control (venturers).

 

Where a group entity undertakes its activities under joint venture arrangements directly, the Group's share of jointly controlled assets and any liabilities incurred jointly with other venturers are recognized in the financial statements of the relevant entity and classified according to their nature.  Liabilities

and expenses incurred directly in respect of interests in jointly controlled assets are accounted for on an accrual basis.  Income from the sale or use of the Group's share of the output of jointly controlled assets, and its share of joint venture expenses, are recognized when it is probable that the economic benefits associated with the transactions will flow to/from the Group and their amount can be measured reliably.

 

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable.  Revenue is reduced for estimated customer returns, rebates and other similar allowances.

 

Sale of goods

Since its creation, the Group has recognized no revenue due to the fact that the Group is in the exploration phase of its projects and has not reached commercial operations as of December 31, 2010.

 

Leasing

 

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee.  All other leases are classified as operating leases.

 

Assets held under finance leases are initially recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments.  The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

 

Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability.  Finance charges are related to non-qualifying assets and charged directly to profit and loss.  Contingent rentals are recognized as expenses in the periods in which they are incurred.

 

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.  Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

 

Foreign currencies

 

The individual financial statements of each entity of the Group are presented in the currency of the primary economic environment that the entity operates (its functional currency).  On consolidation the results and financial position of each entity are expressed in US dollar (USD).

 

In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the average of the official bid and offered exchange rates as published by the Central Bank of Madagascar on the first day of the month in which the expenses are recorded in order to comply with the regulation stated in the Production Sharing Contracts signed by the Group with Malagasy authorities.  At each statement of financial position date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the statement of financial position date.  Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined.  Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

Actual exchange differences are recognized in profit or loss in the period in which they arise.  Exchange differences resulting from the retranslation of monetary items at the rates prevailing at the statement of financial position date are recognized in profit or loss at each statement of financial position date.

 

Share-based payments

 

The Group issues equity-settled share-based payments to some of their employees through stock options plans or restricted shares.  According to IFRS 2, these plans are measured at fair value on the grant date and are accounted for as an employee expense on a straight-line basis over the vesting period of the plans.  The fair value of granted options is determined based on a lattice model in order to take into account all the characteristics of these instruments.

 

The Group issues equity-settled share-based payments to certain members of its Board through stock options plans or restricted shares or warrants.  According to IFRS 2, these plans are measured at fair value on the grant date and are accounted for as a director fee expense on a graded vesting for each tranche over the vesting period of the plans.  The fair value of granted options and warrants is determined based on a lattice model in order to take into account all the characteristics of these instruments.

 

The Group may also issue equity instruments as a counterpart of goods and services received from financial institutions and other intermediaries.  According to IFRS 2, these instruments (warrants) are accounted for as an expense on the basis of the market value of goods and services received.

 

For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognized at the current fair value determined at each statement of financial position date.

 

The proceeds received net of any directly attributable costs are credited to share capital (nominal value) and share premium.

 

Taxation

 

The tax expense represents the sum of the tax currently payable and deferred tax.

 

Current tax

The tax currently payable is based on taxable profit for the year.  Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.  The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date.

 

Deferred tax

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit and is accounted for using the statement of financial position liability method.

 

Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized.  Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

 

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

 

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.  Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the statement of financial position date.  The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or to settle the carrying amount of its assets and liabilities.

 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 

Current and deferred tax for the period

Current and deferred tax are recognized as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognized directly in equity.

 

Property, plant and equipment

 

Fixtures and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.  Depreciation is charged so as to write off the cost or valuation of assets over their estimated useful lives, using the straight-line method.  The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis.

 

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.  Useful lives used by the Group are the following:

 



Useful Lives (Years)


Installations and equipment


10


Machinery


10


Drilling and exploration equipment


5-10


Vehicles


5


Furniture, fittings and equipment


5


IT equipment


5


 

The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.

 

Intangible assets

 

Intangible assets acquired separately are reported at cost less accumulated amortization and accumulated impairment losses.  Amortization is charged on a straight-line basis over their estimated useful lives of 4 years and recorded in the statement of comprehensive income as depreciation and amortization expense.  The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

 

Exploration and evaluation assets

 

The Group applies the full cost method of accounting for exploration and evaluation costs.  Under the full cost method, costs directly associated with exploring for and evaluating oil and gas properties are accumulated and capitalized.  However, they do not include costs incurred prior to having obtained the legal rights to explore an area, which are expensed directly to the income statement of operations as they are incurred.  Once commercial reserves are found, exploration and evaluation assets are tested for impairment.  Depreciation of property, plant and equipment assets utilized in exploration and evaluation activities is capitalized within exploration and evaluation costs.  No amortization or depletion is charged during the Exploration and Evaluation Phase.  Management believes that the carrying value of these costs will be recovered from future operations.

 

If the exploration and development is ceased or if it is determined that the carrying value cannot be supported by future production or sale, the excess of the carrying value above recoverable value will be charged against operations in the period that the determination of an impairment is made. Where an impairment subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years.  A reversal of an impairment loss is recognized immediately in profit or loss.

 

At the completion of the Exploration and Evaluation Phase, if technical feasibility is demonstrated and commercial reserves are discovered, then, following the decision to continue into the development phase, the carrying value of the relevant E&E asset will be reclassified as a Development and Production ("D&P") asset, but only after the carrying value of the asset has been assessed for impairment.

 

Impairment

 

Tangible and intangible assets excluding exploration and evaluation assets

At each statement of financial position date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss.  If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

 

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired.

 

The recoverable amount is the higher of fair value less costs to sell and value in use.  In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.  If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount.  An impairment loss is recognized immediately in profit or loss.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years.  A reversal of an impairment loss is recognized immediately in the statement of comprehensive income as non-current activities income.

 

Exploration and evaluation assets

Impairment tests are performed when the Group identifies facts or circumstances implying a possible impairment in accordance with IFRS 6.

 

Decommissioning costs

 

When the Group is legally, contractually or constructively required to restore a site, the estimated costs of site restoration are accrued.  The estimated future costs for known restoration requirements are determined on a field by field basis and are calculated based on the present value of estimated future costs.  When the Group does not have a reliable reversal time or when the effect of the passage of time is not material, the provision is calculated based on undiscounted cash flows.

 

Provisions

 

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

 

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation.

 

Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

 

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

 

Financial assets

 

Investments are recognized and derecognized on a trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

 

Cash and cash equivalents

Cash and cash equivalents consist of cash and time deposits.  Time deposits are used to guaranty the Bank Letters of Guarantee submitted to the Malagasy State as per Production Sharing Contracts' requirements during the Exploration Period.

 

Other financial assets

Other financial assets consist of deposits paid under lease agreements.  These assets are stated at the carrying value, as it approximates fair-value due to the short-term maturity of these instruments.

 

Impairment of financial assets

Financial assets are assessed for indicators of impairment at each statement of financial position date.  Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

 

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account.

 

When a trade receivable is uncollectible, it is written off against the allowance account.  Subsequent recoveries of amounts previously written off are credited against the allowance account.  Changes in the carrying amount of the allowance account are recognized in profit or loss.

 

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be rebated objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized.

 

Financial liabilities and equity instruments issued by the Group

 

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

 

The Company has classified the convertible debt in issue as a compound financial instrument. Accordingly, the Company presents the liability and equity components separately on the balance sheet. The classification of the liability and equity components is not reversed as a result of a change in the likelihood that the conversion option will be exercised. No gain or loss arises from initially recognizing the components of the instrument separately. Interest on the debt element of the loan is accreted over the term of the loan. Costs associated with the raising of debt are set off against the gross value of monies received.

 

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

 

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

 

Trade payables

Trade payables are stated at their carrying value, as it approximates fair value due to the short-term maturity of these instruments.

 

Financial liabilities

Financial liabilities consist of trade and other payables and borrowings.

 

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.  Financial liabilities are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.  The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period.  The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.  The effective interest method is always considered but not applied when its impact is negligible.

 

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

 

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

 

3.  Prior Period Presentation

 

The Company made reclassifications to 2009 of $103K, increasing salaries expense and decreasing other expenses to better reflect operational comparisons.  Drilling and exploration equipment totaling $18,084K as of December 31, 2009 has been reclassified to property, plant and equipment from exploration and evaluation assets.  The corresponding adjustment at January 1, 2009 was $21,003K.  Depreciation expense on equipment used in exploration and evaluation activities totaling $7.7 million is capitalized as of December 31, 2009 as exploration and evaluation assets.  This adjustment has no effect on the reported net assets or results for the group at January 1, 2009 or December 31, 2009.

 

4.   Critical Accounting Judgments and Key Sources of Estimation Uncertainty

 

In the application of the Group's accounting policies, which are described in Note 2, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources.  The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant.  Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.  Such disclosures are included in the relevant asset and liability notes or as part of the relevant accounting policy disclosures.  The estimates used by management relate to the decommissioning costs, impairments and share-based transactions.

 

The estimates and underlying assumptions are based on the best possible review and interpretation of the petroleum and general regulations applicable to the Group in the countries where it operates in accordance with international industry standards.

 

Critical accounting judgements and key sources of estimation uncertainty:

In the process of applying the Group's accounting policies, which are described in Note 1, Management has made the following judgements that have the most significant effect on the amounts recognised in the financial statements:

Recoverability of exploration and evaluation costs - Under the full cost accounting method of accounting for exploration costs, such costs are capitalized as intangible assets and assessed for impairment on a cost pool basis when circumstances suggest that the carrying amount off the costs pool may exceed its recoverable value and, therefore, there is a potential risk of an impairment adjustment. This assessment involves judgement as to the likely future commerciality of the asset and when such commerciality should be determined based on future revenue and costs pertaining to any concession based on proved plus probable, prospective and contingent resources and the discount rate to be applied to such revenues and cost for the purpose of deriving a recoverable value. Management has reviewed the recoverability of the assets and consider this to be greater than the current net book value.

Share options - Provisions for share-based payment costs requires the selection of an appropriate valuation model, consideration as to the inputs necessary for the valuation model chosen and the estimation of the number of awards that will ultimately vest, inputs for which arise from judgements relating to the continuing participation of employees.

Fair value of exploration and evaluation assets - The fair value of exploration and evaluation assets is based on internal and third-party reports, further discounted to reflect future risks such as higher interest rates, smaller than expected reserves and variation to other critical assumptions.

Impairment review - While conducting an impairment review of its assets, the Group makes certain judgements in making assumptions about the likelihood of license conversion, the future prices, reserve levels and future development and production costs. Changes in the estimates used can result in significant charges to the statement of comprehensive income. This is performed solely for the purposes of considering the carrying value of the Group's assets.

Legal proceedings and commercial disputes - In accordance with IFRS, the Group only recognises a provision where there is a present obligation from a past event, a transfer of economic benefit is probable and the amount of cost of the transfer can be estimated reliably. In instances where the criteria are not met, a contingent liability may be disclosed in the notes to the financial statements. Realisation of any contingent liabilities not currently recognised or disclosed in the financial statements could have a material effect on the Group's financial position. Application of this accounting principle requires the Group's management to make determinations about various factual and legal matters beyond their control. Among the factors considered in making decisions on provisions are the nature of the disputes and litigations, the progress of the cases, the opinions of legal advisers, experience of similar cases and any decision of the Group's management as to how it will respond to any such claim or litigation.

5.  Business and Geographical Segments

 

Business segment

 

The Group operated in one principle operating segment, the exploration for and production of oil and gas in the country of Madagascar.  The Group is engaged in oil and gas exploration and production which represents its only activity as of December 31, 2010; all its operations are in the Exploration Period of the Production Sharing Contracts signed by its subsidiaries with the Republic of Madagascar.

 

No revenues have been generated by the Group.  Non-current assets located in Madagascar total $102.9 million as of December 31, 2010.

 

 

Geographical segment

 

The Group only operates in Madagascar where it holds all its licenses.  The primary segment of the Group is the business segment and its secondary segment is the geographical segment.

 

6.  Net Foreign Exchange Losses

 

The net foreign exchange loss booked is not significant and mainly the consequence of the erratic movements of the Malagasy currency (MGA) as well as the ones of other currencies against the US dollar during the years 2009 and 2010.  For information 1 USD = 2,146.12 MGA as of December 31, 2010 and 1 USD = 1,954.64 MGA as of December 31, 2009.

 

7.       Finance Income (Expense)

 

 Year Ended December 31,


2010


2009




$(000)


$(000)


Time deposits investments (i)

$

9


8


Interest on borrowings (ii)


(374)


(307

)

Other finance income


-


312


Convertible debt warrants(iii)


(144)


-


Total finance income (loss), net


(509)


13


 

(i)           Available cash represents the amount of funds raised by the Company to finance its operations but not yet used.  This cash is invested in time deposits with an international bank of first rank at short term.

(ii)          Interests on borrowings are composed of the value of shares issued to Credit Suisse in settlement of terms of a warrant contract (Note 28). At December 31, 2010, interests on borrowings are composed of costs associated with the modification of the Credit Suisse warrants and of interest paid on interim financing.

(iii)         The Company incurred expense due to the issuance of convertible debt with warrants in 2010 (Note 27).

 

8.  Income Taxes

 

The tax expense for the Group is:

 

Year Ended December 31,


2010


2009




$(000)


$(000)


The minimum tax liability payable by Madagascar Oil SA


-


-


The minimum tax liability payable by Majunga Oil SARLU


-


-


The tax liability due by Madagascar Oil (USA) LLC


62


49




62


49


 

As of December 31, 2010 the Group has $9.7 million in operating losses in the Madagascar subsidiaries, MOSA and Majunga, which may be applied to future operating income for income tax purposes with no expiration date. The Group did not recognize any deferred tax in accordance with IAS 12 for 2009 or 2010.

 

9. Other Expenses

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Rentals


249


397


Auditors Fees and Expenses


194


141


Services from related parties(i)


658


839


Travel and telecommunications


502


94


Other general and administrative expenses(ii)


465


244




2,068


1,715


 

(i)   Services from related parties constitute contracts with Mark Weller, Jim Lederhos, Jim Collins, Gil Melman and Seth Fagelman.  See Note 29 Related Parties.

(ii)  Other general and administrative expenses are constituted of recruitment fees, public relations, insurance, contracted personnel, security expenses, office running costs and bank commissions.

 

10. Consulting Expenses

 

The consulting expenses relate to the legal, fiscal and financial advices provided to the Group related to its activities in Bermuda, Madagascar and Mauritius.  See Note 29 about legal advisors from related parties.

 

Year Ended December 31,


2010


2009



$(000)


$(000)

Legal and fiscal advisors- Bermuda & Mauritius


427


145

Legal and fiscal advisors -Madagascar


67


11

Legal and fiscal advisors-USA


65


483



559


639

 

11. Production Sharing Contractual Fees

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Administrative fees


837


944


Training fees


290


328




1,127


1,272


 

Amounts represent the contractual charges for all licenses under the Production Sharing Contracts signed with the Republic of Madagascar.

 

12. Salaries and Employee Benefits Expenses

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Wages, salaries and incentives


2,144


2,241


Social security costs


23


32


Share-based payments


1,304


5,054




3,471


7,327


 

See Note 28 Share-based payment for more details.

 

13. Depreciation and Amortization Expenses

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Depreciation of tangible assets


136


160


Amortization of intangible assets


186


213




322


373


 

14. (Loss)/Earnings per share (EPS)

 

Basic loss per share amounts are calculated by dividing the loss for the years attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the year.

 

Diluted loss per share amounts are calculated by dividing the loss for the years attributable to ordinary holders by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of shares that would be issued on the conversion of dilutive potential ordinary shares into ordinary shares.   The effect of the warrants and options are anti-dilutive in 2009 and 2010.

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Net loss attributable to equity holders used in basic calculation


(11,574)


(3,853)


Net loss attributable to equity holders used in dilutive calculation


(11,574)


(3,853)


Basic weighted average number of shares


139,461,480


124,136,340


Dilutive potential ordinary shares






   Shares related to warrants


3,984,945


3,860,370


   Shares related to options


364,150


180,000


Diluted weighted average number of shares


143,810,575


128,176,710








Loss Per Share






   Basic


$(0.08)


$(0.03)


   Dilutive


$(0.08)


$(0.03)








 

15. Non-Current Tax Assets

 

As of December 31,


2010


2009




$(000)


$(000)


VAT credit


1,802


1,570




1,802


1,570


 

The amount corresponds to the VAT receivable and shall be recovered when the Company begins collecting VAT on sales of crude oil.

 

16. Property, Plant and Equipment

 

Cost


Vehicles


Equipment


Other


Drilling & Exploration Equipment


Total




$(000)


$(000)


$(000)


$(000)


$(000)


Balance at January 1, 2009


188


784


350


25,858


27,180


Additions


-


2


4


-


6


Disposals


(45

)

(30

)

(244

)

(25)


(344)


Balance at December 31, 2009


143


756


110


25,833


26,842


Additions


-


22


-


57


79


Disposals


-


(360)


(58)


(72)


(490)


Balance at December 31, 2010


143


418


52


25,818


26,431


 

 

 

Accumulated depreciation


Vehicles


Equipment


Other


Drilling & Exploration Equipment


Total




$(000)


$(000)


$(000)


$(000)


$(000)


Balance at January 1, 2009


(104)


(288)


(66)


(4,855)


(5,313)


Depreciation expense


(34)


(152)


(27)


(2,934)


(3,147)


Disposals


29


22


67


40


158


Balance at December 31, 2009


(109)


(418)


(26)


(7,749)


(8,302)


Depreciation expense


(29)


(94)


(13)


(2,932)


(3,068)


Impairment(i)


-


-


-


(105)


(105)


Disposals


-


199


16


-


215


Balance at December 31, 2010


(138)


(313)


(23)


(10,786)


(11,260)


 

 

Net


Vehicles


Equipment


Other


Drilling & Exploration Equipment


Total




$(000)


$(000)


$(000)


$(000)


$(000)


Balance at January 1, 2009


84


496


284


21,003


21,867


Balance at December 31, 2009


34


338


84


18,084


18,540


Balance at December 31, 2010


5


105


29


15,032


15,171


 

(i)  The Group recorded $105K as impairment of exploration works for the license 3104 Tsimiroro during 2010.

 

17. Exploration and Evaluation Assets

 

During the Exploration Period of the existing Production Sharing Contracts the Group considers as intangible assets:

 

·    The exploration works performed in the licenses 3102 Bemolanga, 3104 Tsimiroro, 3105 Manambolo, 3106 Morondava and 3107 Manandaza

 

·    The consumable costs included in the pilot project costs implemented in the license 3104 Tsimiroro

 

During the Exploration Period of the Production Sharing Contracts the Group considers as tangible assets the capital costs included in the licenses.

 

Cost



Total





$(000)


Balance at January 1, 2009



60,569


Movements



4,250


Capitalization of depreciation



2,934


Reversal of impairment at December 31, 2009(i)



3,104


Balance at December 31, 2009



70,857


Movements



12,398


Capitalization of depreciation



2,932


Asset retirement discount (iv)



(357)


Balance at December 31, 2010



85,830


 

The detail of the exploration works by license as explained in Note 1 is:

 

As of December 31,


2010


2009




$(000)


$(000)


License 3102 Bemolanga (operated by TOTAL)(ii)


-


-


License 3104 Tsimiroro (operated)


76,978


64,300


    Environmental assessment


872


508


    Pilot project


56,973


52,913


    Studies and other exploration expenses


6,039


2,594


    Exploration wells


3,514


1,279


    E&E capitalization of depreciation


9,937


7,006


    Asset retirement discount (iii)


(357)


-


License 3105 Manambolo (operated)


2,606


1,841


    Geochemistry


344


344


    Environmental assessment


95


95


    Studies and other exploration expenses


1,092


350


    Seismic acquisition


1,075


1,052


    Impairment(i)


-


-


License 3106 Morondava (operated)


3,235


2,469


    Environmental assessment


148


148


    Geochemistry


380


380


    Seismic acquisitions


1,104


1,079


    Rock physics


199


199


    Studies and other exploration expenses


1,402


662


    E&E capitalization of depreciation


2


1


    Impairment(i)


-


-


License 3107 Manandaza (operated)


3,011


2,247


    Airborne magnetic


214


214


    Environmental assessment


132


132


    Seismic acquisitions


1,241


1,217


    Rock physics


198


197


    Studies and other exploration expenses


1,226


487


    Impairment(i)


-


-


Total of exploration works


85,830


70,857


 

 

(i)  Management reversed the 2008 impairment of these assets in accordance with decisions of the Board made in 2009 and instead to pursue additional work in these blocks in 2009 and 2010.  Although the Group is seeking partners for its 100% held exploration blocks (3105, 3106 and 3107), if it is unable to obtain partners, the Group may elect to return the blocks to the government in 2011 which may result in the forfeiture of $1.5 million USD of bank guarantees pursuant to the production sharing contracts.

(ii) All historical costs related to the Bemolanga block were recovered through the sale of 60% of the interest to TOTAL in 2008.

(iii)   In 2010 the Company recorded $357K as a discount on the provision for the retirement of wells. No discount was recorded in 2009.

 

The Group has the intention to continue to operate Tsimiroro block and has no reason to believe that any impairment other than the impairment related to the 120 man camp and the VSAT equipment that is provided for in these consolidated financial statements, should be considered on the related Tsimiroro assets recorded by the Company. (See discussion in footnote 35)

 

18. Other Intangible Assets

Cost

Software


$(000)

Balance at January 1, 2009

864

Additions

5

Disposals

-

Balance at December 31, 2009

869

Additions

-

Disposals

(33)

Balance at December 31, 2010

836

 

 

Accumulated depreciation

Software


$(000)

Balance at January 1, 2009

(286)

Depreciation expense

(213)

Disposals

-

Balance at December 31, 2009

(499)

Depreciation expense

(186)

Disposals

21

Balance at December 31, 2010

(664)

 

19. Joint Venture Operations

 

License 3109 Mandabe 

 

Majunga and Tullow were 50/50 parties to a joint operating agreement dated December 7, 2005 for Production Sharing Contract No. 3109 (the "Tullow JOA").    In January 2011, Majunga S.A.R.L., a subsidiary of Madagascar Oil Ltd., entered into a settlement agreement with Tullow Madagascar Limited, a subsidiary of Tullow, covering their joint operating agreement for Block 3109 (Mandabe), of which Tullow was the operator. Majunga had withdrawn from the Mandabe block in September 2008. Under the settlement agreement, Majunga paid Tullow approximately US$127,000, which reflected Majunga's share of costs incurred for joint operations prior to its withdrawal. As part of the settlement agreement, the parties entered into mutual releases in connection with the joint operations.

 

License 3102 Bemolanga

Since September 17, 2008 the Group has held a 40% interest in a joint venture with the group TOTAL for the license 3102 Bemolanga.  Under the farm-out agreement TOTAL has become the operator.

 

The Group is entitled to a proportionate share of the rental income received and bears a proportionate share of the expenses. 

 

The following amounts are included in the consolidated financial statements as a result of the share of the Group in the joint venture operations:

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Non-current assets (Note 17)


-


-


Current liability (Note 26)


(140)


(52

)

Expenses


(29)


(52

)

 

20. Other Assets

 

Prepayments correspond to payments made to OMNIS as per Production Sharing Contracts signed for periods covering 2010 and 2009 and to payments for insurance policies.

 

21. Financial Assets

 

Deposits are for the rental of offices and equipment.

 

22. Cash and Cash Equivalents

 

For the purposes of the cash flow statement, cash and cash equivalents include cash on hand and in banks and investments in time deposits, net of outstanding bank overdrafts.  Cash and cash equivalents at the end of the financial year as shown in the cash flow statement can be reconciled to the related items in the statement of financial position as follows:

 

As of December 31,


2010


2009




$(000)


$(000)


Cash and bank balances


69,288


6,409


Restricted cash(i)


(1,765)


(3,508

)

Net cash available


67,523


2,901


 

(i)Cash collateral of $1,765K in 2010 and $3,508K in 2009, corresponds to 111% of guarantees provided by the bank on the behalf of the Group.  See Note 31 Commitments for expenditure - bank guarantees for more details about the guarantees provided.

 

23. Issued Capital

 

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximizing the return to stockholders through the optimization of the debt and equity balance.  The Group's overall strategy remains unchanged from 2006.

 

The capital structure of the Group consists of debt (when any), cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and accumulated deficit as disclosed in Notes 23, 24 and 28 respectively.

 

The gearing ratio at the year-end was as follows:

As of December 31,


2010


2009

 



$(000)


$(000)


Debt(i)


-


-


Cash and cash equivalents(ii)


(67,523)


(2,901

)

Net debt


(67,523)


(2,901

)

Equity(iii)


170,569


96,790


Net debt to equity ratio


-%


-%


 

(i)Debt is defined as long- and short-term borrowings from financial institutions.

(ii)Only non-restricted cash and cash equivalents.

(iii)Equity includes all capital and reserves of the Group including accumulated deficit.

 

In 2009 the Company completed a consolidation of its stock of 1:100.  All share, option and warrant amounts, prices and fair values have been adjusted retrospectively accordingly.  In 2010 the Company completed a 10:1 stock split.  All share, option and warrant amounts, prices and fair values have been adjusted retrospectively accordingly.

 

In August 2010, the Company issued Blakeney LLP 6,666,670 common shares at a price of $1.50 per share for an aggregate price of $10,000,005.  The Company raised funds from the Blakeney financing for general corporate purposes.

 

On November 29, 2010, the Company's common shares were admitted for listing on the Alternative Investment Market ("AIM") of the London Stock Exchange. The Company's common shares trade on the exchange through depository interests under the AIM symbol "MOIL". In its initial public offering ("IPO") the Company issued and sold 53,197,000 shares at 95 pence per share for total gross proceeds to the Company of $78.3 million. Net proceeds to the Company after payment of IPO related expenses were $70.4 million. At the time of admission, the Company's total outstanding share capital was 192,365,157 shares. The Company incurred $7.9 million in IPO related costs of which $5.1 million is offset against the share premium.

 

Details of the Share Capital of the Company as of December 31, 2010 and 2009 are:

 

As of December 31,


2010


2009


Total number of shares authorized (post 2010 split)


1,200,000,000


1,200,000,000








Fully paid common shares


196,365,157


118,658,270


Fully paid non-voting shares


-


13,040,000


Total number of shares fully paid


196,365,157


131,698,270








Par value per share in USD


0.001


0.001


 

As of December 31,


2010


2009




$(000)


$(000)


Share capital


197


131


Share premium


194,890


111,288


Total issued capital


195,087


111,419


 



Number of Shares



Share Capital



Share Premium







$(000)



$(000)


Balance, January 1, 2009


116,219,470



116



105,175


Issue of shares


13,055,810



13



6,113


Shares granted to personnel for free (Note 25)


1,922,990



1



-


Shares granted to Directors for free (Note 25)


500,000



1



-


Balance, December 31, 2009


131,698,270



131



111,288


Issue of shares


60,119,967



60



83,597


Shares issued - conversion of debt and warrants


2,443,620



3



5


Shares granted to personnel for free (Note 28)


1,003,300



2



-


Shares granted to Directors for free (Note 28)


1,100,000



1



-


Balance, December 31, 2010


196,365,157



197



194,890


 

In 2010, all 13 million of the Company's non-voting shares were converted into voting shares.  Approximately 5.6 million non-voting shares, held by existing shareholders, were exchanged for voting shares under the terms of contractual agreements between the Company and the holders of such shares.  Approximately 7.4 million non-voting shares automatically converted, pursuant to their terms, into voting shares when they were sold to other shareholders.

 

At December 31, 2010 the detail of financial instruments in issue is:

 

Total number of warrants in issue




2,138,430


    Warrants at $15 per share

30,000





    Warrants at $10 per share

1,390,060





    Warrants at $2 per share

718,370





 

Total number of options in issue




1,735,788


    Options at $15 per share

10,000





    Options at $13 per share

60,000





    Options at $10 per share

100,000





    Options at .95 GBP per share

1,565,788





 

The valuation of the warrants and options granted is described in Note 28 Share-based payments except:

 

1.3 million warrants granted to shareholders in connection with equity investment in the Company:  Under IAS 32.22 these warrants are an equity instrument booked for its selling value at its grant date which is zero.  Because these warrants are equity instruments their change in fair value over time is not recognized in the financial statements.

 

24. Accumulated Deficit and Dividends

 

Year Ended December 31,


2010


2009




$(000)


$(000)


Balance at beginning of the year


(156,540

)

(152,687

)

Transfer of equity settled transaction reserve


140,547


-


Net loss


(11,574

)

(3,853

)



(27,567

)

(156,540

)

 

Since its creation no member of the Group has proposed, declared or distributed any dividend.

 

25.  Provisions

 



2010


2009




$(000)


$(000)


Employee Benefits(i)






    Current


50


92


     Non-Current


-


-


Decommissioning costs(ii)






    Current


-


-


     Non-Current


246


603


Total Current


50


92


Total Non-Current


246


603


 

(i)       Provision for employee benefits represents annual leave accrued.

(ii)      The provision for decommissioning costs represents management's best estimate for the plugging and abandonment costs associated with the core holes drilled to date on the license 3102 Bemolanga, with the cores holes, the cyclical steam simulation (CSS) wells and the exploration wells drilled to date on the license 3104 Tsimiroro and with the production facilities installed in relation with the production test conducted on the license 3104 Tsimiroro.

 

26.

Trade and Other Payables

 

As of December 31,


2010


2009

 



$(000)


$(000)


Trade payables(i)


2,358


622


Other payables(ii)


182


33


Partner operator(iii)


260


68




2,800


723


                       

(i)Trade payables include Malagasy suppliers for US $1,546K and $189K and non-Malagasy suppliers for US $812K and $432K as of December 31, 2010 and 2009 respectively.

(ii)Other payables include dues to personnel and other taxes.

(iii)Amount due to TOTAL and Tullow under the joint venture agreements in place at year end.

 

27.

Debt

 

In July and August 2010, the Company offered 12% convertible notes due December 31, 2010 to its shareholders to fund operations during the second half of 2010 in contemplation of a strategic transaction. Investor groups led by the Company's three largest shareholders (Grafton Resource Investments Limited, Touradji Capital Management LP and Persistency Capital) subscribed for $2,868,453 of notes with other shareholders subscribing for an aggregate of $4,903. The notes were convertible at a conversion price of $15.00 ($1.50 on a post 2010 split).

 

The notes were subject to mandatory prepayment upon aggregate financing by the Company during 2010 exceeding US$75 million or upon consummation of a merger or similar strategic transaction. Purchasers of the notes received 718,370 warrants with a term of one year in an amount equal to fifty percent of the principal amount of the notes. The warrants have a strike price of $20.00 per common share ($2.00 per share on a post 2010 split). The Company recognized $144K in expense due to the warrants in 2010.

 

Total notes in principal amount of $2,873,356 were issued. $4,903 of the notes were converted into 3,310 shares. The remainder of the notes were paid in full with proceeds from the Company's initial public offering.

 

28.

Share-Based Payments

 

All amounts stated are after consideration of the Company's 10:1 stock split which took place in 2010.

 

Credit Suisse Agreement

In July 2009, the Company issued Credit Suisse International 6,135,771 common shares in settlement of a dispute over whether certain share issuances during 2008 constituted dilutive events under Credit Suisse's warrant agreement.  In November 2010 Credit Suisse exercised outstanding warrants for 2,440,310 common shares.  The expense recognized related to the 2010 exercised warrants was $240,600 due to the modification of the exercise price from $1.00 to $.001 per share.

 

Bank Julius Baer Agreement

In November 2010, the Company issued Bank Julius Baer & Co. 333,330 common shares at a price of $1.50 per share for an aggregate value of $499,995 for services rendered in connection with the Blakeney financing (Note 23).

 

Stock options granted to management and employees

The Group issued several stock options in 2006 and 2007 but no options were granted in 2008 and 2009.  In 2010 the Group issued 1,565,788 stock options to its Chairman and CEO, Chief Operating Officer, and Non-Executive Directors in conjunction with its IPO.  The main characteristic of the options are summarised in the following table:

 

Option

Grant

Dates


Exercise

Price


First

Exercise

Date


Last

Exercise

Date


Estimated Fair Value of Option


Options Granted


Options Cancelled


Options Exercised


Outstanding Options

SO2

03/27/2006


13 USD


03/27/2006


11/29/2013


6 USD


120,000


(60,000

)

0


60,000

SO8

06/15/2006


15 USD


06/15/2007


06/14/2011


5 USD


35,000


(25,000

)

0


10,000

SO9

07/17/2007


10 USD


07/17/2007


07/17/2010


3 USD


10,000


(10,000

)

0


0

SO10

07/27/2007


10 USD


07/27/2008


07/27/2017


5 USD


100,000


0


0


100,000

SO11

11/18/2010


.95 GBP


11/29/2011


11/18/2015


0.62 USD


1,250,000


0


0


1,250,000

SO12

11/18/2010


.95 GBP


11/29/2011


11/18/2020


0.90 USD


315,788


0


0


315,788

 

Plans SO2 and SO8 were partially surrendered in 2007. Plan S09 expired in 2010. No options were exercised in 2009 or 2010.

 

In order to determine the fair value of each option granted, the following parameters were considered:

·      Share prices at grant date were determined based on the last known share price for capital increase

·      Volatility was estimated based on a suitable peer group of companies listed in the Toronto stock exchange.  This analysis led to volatility estimate of 46%

·      Risk free rates based on zero coupon Canadian government bonds

·      No forfeiture rate was recognized

·      No expected dividends were considered

 

The expense recognized related to outstanding stock options plans granted to management and employees was zero in 2009 and $41,595 in 2010.

 

Shares granted to management and employees

The Group granted restricted shares in 2006, 2007, 2008, 2009 and 2010.  The main features of the plans are summarised in the following table.

 

Plan


Grant

Dates


Vested

Date


Estimated Fair Value of Shares


Shares Granted


Shares Cancelled



Shares Vested


Shares Non-Vested or Locked


S1


07/27/2006


12/31/2006


15 USD


70,000


0



70,000


0


S1


07/27/2006


07/27/2007


15 USD


100,000


0



100,000


0


S1


07/27/2006


07/27/2009


15 USD


100,000


0



100,000


0


S2


12/18/2006


12/31/2006


17.5 USD


26,230


0



26,230


0


S2


12/18/2006


12/31/2007


17.5 USD


26,230


(10,260)



15,970


0


S2


12/18/2006


12/31/2008


17.5 USD


26,230


(14,770)



11,460


0


S3


02/07/2007


11/29/2010


10 USD


675,000


(157,500)



517,500


0


S4


01/19/2007


01/19/2007


10 USD


25,005


0



25,005


0


S5


02/28/2007


02/28/2007


10 USD


16,888


0



16,888


0


S6


05/11/2007


05/11/2007


10 USD


6,667


0



6,667


0


S7


06/01/2007


06/01/2007


10 USD


10,000


0



10,000


0


S8


08/16/2007


08/16/2007


10 USD


15,000


0



15,000


0


S11


06/01/2007


06/01/2007


10 USD


20,000


(10,000)



10,000


0


S12


11/27/2007


11/27/2007


4 USD


33,330


0



33,330


0


S13


11/05/2007


11/05/2009


4 USD


25,000


0



25,000


0


S15


01/18/2008


01/18/2011


4 USD


568,820


(97,980)



425,112


45,728


S16


08/07/2008


08/07/2011


1 USD


5,947,250


(714,588)



4,726,390


506,272


S17


10/07/2008


10/07/2008


.2 USD


65,000


0



65,000


0


S18


07/10/2008


07/10/2011


1 USD


60,513


(60,513)



0


0


S19


02/22/2008


02/22/2008


4 USD


3,000


0



3,000


0


S20


07/16/2008


07/16/2008


1 USD


3,675


0



3,675


0


S20


07/16/2008


07/16/2011


1 USD


22,500


(22,500)



0


0


S21


10/14/2008


10/14/2011


.2 USD


1,000,000


0



300,000


700,000


S22


10/28/2008


10/28/2009


.2 USD


1,500,000


0



1,500,000


0


S23


12/31/2008


12/31/2008


.2 USD


49,080


0



49,080


0


S24


01/20/2009


01/20/2012


.2 USD


1,375,000


0



1,375,000


0


S25


06/19/2009


06/19/2010


.5 USD


500,000


0



500,000


0


S26


12/18/2009


11/29/2010


.5 USD


548,000


0



0


548,000


S27


11/18/2010


1/29/2011


1.5 USD


20,000


0



0


20,000


S28


11/18/2010


1/29/2011


1.5 USD


300,000


0



0


300,000


S29


11/18/2010


02/28/2012


1.5 USD


780,000


0



0


780,000


S30


11/18/2010


01/2/2012


1.5 USD


100,000


0



0


100,000


S31


11/18/2010


01/2/2012


1.5 USD


666,670


0



0


666,670


S31


11/18/2010


11/29/2013


1.5 USD


333,330


0



0


333,330


 

The Group granted restricted shares to Management (plan S1), on July 27, 2006:  270,000 shares were granted at a per share value of USD 15 (post 2010 split).  Of these, 70,000 vested in 2006, 100,000 in July 2007 and 100,000 vested in July 2009.  Share price at grant date was determined based on the last known share price for capital increase.

 

The Group also granted a total of 78,690 shares (plan S2) to some employees on December 18, 2006 as a bonus for the year 2006.  The share price at grant date was determined based on the managements' best estimate of fair value.  These shares vested by third until December 31, 2008.

 

Some options (780,000) and warrants (120,000) granted in 2006 (post 2010 split) were surrendered in 2007 and replaced by restricted shares (plan S3) vested at the Company's admission date to a recognized stock exchange.  The share price at grant date was determined based on management best estimate of fair value.  The total fair value of options and warrants surrendered and the increase in fair value for the restricted shares granted were recognized at the date of surrender.

 

Other shares (plans S4 to S14) were granted in 2007 to management and employees:  The fair value of these plans was determined based on the estimated share price at grant date.

 

Plans S15 to S23 were granted in 2008:  some plans vested at grant date, others were due to vest after 3 years.  Furthermore, several beneficiaries left the Company as "good leavers" under the plan, thus they vested immediately.  Vesting of certain shares in Plans S15, S16 and S21 were locked-in for 60 days at the November 2010 IPO.

 

Plans S24 to S26 were granted in 2009.  Vesting periods ranged from one to three years with certain shares vesting upon an initial public offering or a change of control.  Vesting of certain shares in Plan S26 were locked-in for 60 days at the November 2010 IPO.

 

Plans S27 to S31 were granted in 2010.  Vesting periods ranged from one to three years with certain shares vesting upon an initial public offering or a change of control.  Vesting of certain shares in Plan S27 and S28 were locked-in for 60 days at the November 2010 IPO.

 

The expense recognized in the 2009 and 2010 consolidated statement of operations related to shares granted to management and employees is $5.1 million and $1.3 million, respectively. During 2010, the Company reclassified certain amounts within the equity accounts in order to reflect only unvested restricted shares, warrants and options in the equity settled transaction reserve account.

 

 

Warrants plans issued to management

The Group issued several warrants in 2006 and 2007 but no warrants were issued in 2008, 2009 or 2010.  The primary terms of such warrants are summarised in the following table:

Plan

Grant

Dates


Exercise Price


First

Exercise

Date


Last

Exercise

Date


Estimated Fair Value of Warrant


Warrants Granted


Warrants Cancelled



Warrants Exercised


Outstanding Warrants


W2

06/15/2006


13 USD


06/15/2006


06/15/2012


6 USD


30,000


0



0


30,000


W6

06/30/2007


10 USD


06/30/2007


06/30/2012


3 USD


40,020


0



0


40,020


 

No warrants were exercised in 2008, 2009 or 2010.

 

In order to determine the fair value of each warrant granted, following parameters were considered:

·    Share prices at grant date were determined based on the last known share price for capital increase

·    Volatility was estimated based on a suitable peer group of companies listed in the Toronto stock exchange.  This analysis led to volatility estimate of 46%

·    Risk free rates based on US government bonds

·    No forfeiture rate was considered

·    No expected dividends were considered

 

No expense was recognized in 2009 or 2010.

 

Other share based payments

The Group issued in 2007 and 2010 equity instruments (warrants and options) for the payment of goods and services to financial institutions and debt holders.  In 2010, 2,440,300 of previously issued warrants held by the Credit Suisse consortium were converted into common shares.  Main features of the plans are summarised in the following table:

Plan

Grant

Dates


Number of Options and Warrants


Exercise Price


First

Exercise

Date


Last

Exercise

Date


Estimated Fair Value of Warrant


Options and Warrants Cancelled



Options and Warrants Exercised


Outstanding Options and Warrants


TP7

03/28/2007


2,440,300


.001 USD


03/28/2007


03/28/2012


4 USD


0



2,440,300


0


TP8

07/15/2010


718,370


2 USD


07/15/2010


07/15/2011


0.2 USD


0



0


718,370


 

For plans TP7 and TP8, the fair value was determined based on a lattice model using the assumptions applied for options and warrants granted to management and employees.

 

No expense was recorded in 2009 related to share based payments granted to third parties. In 2010 the finance expense recognized related to the modification of the Credit Suisse exercised warrants and the warrants issued with convertible debt equaled $240,600 and $143,674, respectively.

 

29. Related Party Transactions

 

Transactions between the Company and its subsidiaries which are related parties of the Company have been eliminated on consolidation and are not disclosed in this note.  Details of transactions between the Company and other related parties are disclosed below.

 

Trading transactions

During the years ended December 31, 2010 and 2009, Group entities entered into the following trading transactions with related parties that are not members of the Group:

 

Party


Transaction/Contract


Term


2010 Payments in USD


2009 Payments in USD








$(000)


$(000)


Laurie Hunter - Fees and Salary


Board Acceptance Letter


10/28/2008 to Present 


259


180


Laurie Hunter - Business Expenses


Board Acceptance Letter


10/28/2008 to Present 


206


60


Gene Davis-Pirinate Consulting


Consulting Agreement


10/28/2008 to 4/30/10


60


60


Ian Barby


Board Acceptance Letter


10/19/2010 to Present 


12


-


John van der Welle


Board Acceptance Letter


11/6/2010 to Present 


10


-


Colin Orr-Ewing


Board Acceptance Letter


10/19/2010 to Present 


11


-


Andrew Morris


Board Acceptance Letter


10/19/2010 to Present 


11


-


Gil Melman-Phillips & Reiter


Phillips & Reiter


On request


-


128


Gil Melman-Selman Munson & Lerner


Selman Munson


On request


527


100


Jim Collins


Consulting Agreement


On request


268


109


Jim Dorman-Dtex


Consulting Agreement


On request


71


50


Jim Lederhos


Consulting Agreement


On request


155


114


Mark Weller - Fees and Salary


Consulting Agreement


On request


416


98


Mark Weller - Business Expenses






106


18


Michael McGown-CFO & Consultant


Consulting Agreement & Employee


On request


-


98


Matthew Meyer


Consulting Agreement


On request


38


-


Seth Fagelman, CFO & Consultant


Consulting Agreement


On request


156


6


 

Amounts listed above include reimbursed business expenses and fees for services provided under the contract by individuals other than the identified related party. Fees payable to Mr. Melman include legal fees paid to Mr. Melman's firm for additional work by other attorneys in connection with the IPO.  Outstanding amounts are unsecured. No guarantees have been given or received.  No expense has been recognized in the period for bad or doubtful debts in respect of the amounts owed to related parties.

 

Compensation of key management personnel

Key management personnel of the Group is composed of the Chairman and Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and the members of the Board.

 

The remuneration of directors and other members of key management during the year was as follows:

 

Years Ended December 31,




2010


2009





$(000)


$(000)

Board fees




44


-

Service fees




813


442

Salaries




68


-

Bonuses




10


-

Share-based payments




419


274





1,354


716

 

30. Operating Lease Arrangements

 

Leasing arrangements

Operating leases relate to:

 

·    Office facilities and equipments with lease terms not over 5 years with options to renew for up to 5 years

·    Housing facilities and equipments for expatriates with lease terms not over 1 year with monthly renewal options

·    Air charter with lease term not over 1 year with option for annual renewal

 

All operating lease contracts contain market review clauses in the event that the Company exercises its option to renew.  The Company does not have an option to purchase the leased assets at the expiry of the lease period.

 

Payments recognized as an expense

For the years ended December 31,


2010


2009



$(000)


$(000)

Minimum lease payments


151


306

 

Non-cancellable operating lease commitments

As of December 31,


2010


     2009

 



$(000)


      $(000)

 

Not longer than 1 year


54


-

 

Longer than 1 year and not longer than 5 years


83


159

 



137


159

 

 

The Group has no contingent rentals and does not receive any sublease payments as of December 31, 2010 & 2009.

 

31. Commitments For Expenditure

 

Commitments

The Group has no commitment for expenditures with any of its consultants and advisors except in the case of fund raising (equity and debt) for which agreements have been signed with its usual financial institution advisor and other intermediaries.

 

Except for the finance lease and the operating leases mentioned in this document, the Group has no other pluri-annual commitment with private companies.

 

The Production Sharing Contracts signed with the Malagasy authorities with respect to blocks 3015, 3106 and 3107 state that the Group is obligated to drill an exploratory test well and perform additional seismic  work (if needed) at each of the sites before December 31, 2011.  As of December 31, 2010 both the financial and physical obligations for license 3104 Tsimiroro had been fulfilled.  The contracts include the following annual fees:

·      Administrative fees

*      Licenses 3102 (no longer operated since September 17 2008) and 3104: $250,000 per year per license as of second phase of Exploration Period only during Exploration Period

*      Other operated licenses:  $162,500 per year per license only during Exploration Period

·      Training fees

*      Licenses 3102 and 3104:  $100,000 per year for the life of the contract

*      All other licenses:  $50,000 per year for the life of the contract

Bank guarantees

A bank guarantee exists in favor of OMNIS in respect of the Group's obligation for the execution of the minimum exploration works as under the terms of the Production Sharing Contracts.

Expiration Date


Guarantor


Beneficiary


In Force at December 31, 2010








 

December 31, 2011


Madagascar Oil Ltd (Bermuda)


OMNIS


$1,500,000








$1,500,000


 

32. Financial Instruments

 

(A) Fair value of financial instruments

Recognition and measurement principles regarding financial assets and liabilities are defined in IAS 32 and IAS 39.  The classification of financial instruments into specific categories is described in Note 2.

 



2009 Carrying Amount


Amortized Cost


Loans and Receivables


Fair Value Through Income


2009 Fair Value


Assets


$(000)


$(000)


$(000)


$(000)


$(000)


Non-current financial assets


11


-


11


11


11


Restricted cash


3,508


-


-


3,508


3,508


Current financial assets


-


-


-


-


-


Cash and cash equivalents


2,901


-


-


2,901


2,901


Liabilities












Accounts and other payables


723


723


-


-


723


 

 



2010 Carrying Amount


Amortized Cost


Loans and Receivables


Fair Value Through Income


2010 Fair Value


Assets


$(000)


$(000)


$(000)


$(000)


$(000)


Non-current financial assets


16


-


16


16


16


Restricted cash


1,765


-


-


1,765


1,765


Current financial assets


-


-


-


-


-

-

Cash and cash equivalents


67,523


-


-


67,523


67,523


Liabilities












Accounts and other payables


2,640


2,640


-


-


2,640


 

 

(B) Risk management policy

In the context of its business activity, the Group operates in an international environment in which it is confronted with market risks, specifically foreign currency risk and interest rate risk.  It does not use derivatives to manage and reduce its exposure to changes in foreign exchange rates and interest rates.

 

Cash and cash equivalents are kept in the Group's functional currency except for an amount corresponding to the needs of the local subsidiaries.  The policy of the Group is to have a balance in the currency of the local subsidiaries not higher than the expected needs in local currency for one month.

 

In addition to market risks, the Group is also exposed to liquidity risk and financial instrument counterparty risk.

 

Exposure to foreign currency risk

The Group has a very limited exposure to foreign exchange risk arising from transactions in currencies other than its functional currency since such transactions are either not material or very short term transactions.

 

Based on notional amounts, most of the Group's net exposure to foreign currency risk arises on the following currencies (excluding entities functional currencies):

 

As of December 31, 2009


USD


GBP


CAD


MGA


2009


 



$(000)


$(000)



$(000)


$(000)


 

Financial Assets


-


-


-


11


11


 

Restricted cash equivalents


3,508


-


-


-


3,508


 

Cash


2,869


12


-


20


2,901


 

Exposure (Assets)


6,377


12


-


31


6,420


 

Trade and other payables


432


-


-


291


723


 

Exposure (Liability)


432


-


-


291


723


 

Gross exposure in statement of financial position


5,945


12


-


(260)

)

 

5,697


 

Forecasted disbursements


-


-


-


-


-


 

Forecasted sales


-


-


-


-


-


 

Net Exposure


5,945


12


-


(260)


5,697


 

 

 












As of December 31, 2010


USD


GBP


CAD


MGA


2010




$(000)


$(000)


$(000)


$(000)


$(000)


Financial Assets


-


-


-


16


16


Restricted cash equivalents


1,765


-


-


-


1,765


Cash


67,357


89


-


77


67,523


Exposure (Assets)


69,122


89


-


93


69,304


Trade and other payables


2,046


-


46


708


2,800


Exposure (Liability)


2,046


-


46


708


2,800


Gross exposure in statement of financial position


67,076


89


 

(46)

)

(615)


 

66,504


Forecasted disbursements


-


-


-


-


-


Forecasted sales


-


-


-


-


-


Net Exposure


67,076


89


(46)


(615)


66,504


 

Interest rate risk

Exposure to interest rate risk - Cash and cash equivalents are invested in short-term variable-rate instruments.  There is no long-term debt at December 31, 2010.

 

Analysis of the sensitivity to interest rate risk - At December 31, 2010 100% of short-term investments is at variable rates.

 

A sudden 1% fall in short-term interest rates would have a positive $675K impact on consolidated income before tax.

 

Liquidity risk

The Group aims to maximize operating cash flows in order to be in a position to finance the investments required for its development.

 

The Group's strategy also aims to ensure that it has the cash resources necessary to meet all circumstances. See discussion in Note 2.

 

Residual contractual maturities of financial liabilities can be analyzed as follows:



2009


Less than 1 Year


1 to 5 Years


More than 5 years




$(000)


$(000)


$(000)


$(000)


Non-derivatives


(723)  

  

(723)


-


-


Credit facilities


-


-


-


-


Debts related to finance leases


-


-


-


-


Trade and other payables


(723)


(723)


-


-


Derivatives


-


-


-


-


Total


(723)


(723)


-


-


 



2010


Less than 1 Year


1 to 5 Years


More than 5 years




$(000)


$(000)


$(000)


$(000)


Non-derivatives


(2,800)


(2,800)


-


-


Credit facilities


-


-


-


-


Debts related to finance leases


-


-


-


-


Trade and other payables


(2,800)


(2,800)


-


-


Derivatives


-


-


-


-


Total


(2,800)


(2,800)


-


-


 

33. Oil Activity Operations

 

During 2009, per the strategy of its Board, the Group has reversed the impairment of the exploration works performed ($3,104K) (see Note 17 Exploration and evaluation assets) and reversed the provision for the letters of credit related to the minimum work commitments for the licenses 3105 Manambolo, 3106 Morondava and 3107 Manandaza for $4,694K. The Group recorded $105K as impairment of exploration works for the license 3104 Tsimiroro during 2010.

 

34. Contingent Liabilities and Contingent Assets

 

Taxe Forfaitaire sur les Transferts (TFT)

During 2006 the Group received a notification from the Malagasy tax administration that it should apply the TFT to the services rendered by foreign suppliers.  The Group believed that it is exempted from this tax as per applicable regulations.  The Group challenged this interpretation of the Tax Administration which was contradicting the implementation of the TFT for many years and received confirmation in 2007 from the Minister of Finance that TFT was not applicable to petroleum industry transactions.  Accordingly, TFT has been cancelled in subsequent Malagasy budgets.

 

In July 2010, the Group received a notification from the Malagasy tax administration claiming the payment of VAT and income tax on services rendered by foreign suppliers, with interests on delayed payment and penalties. The adjustments relate to fiscal year 2007 and 2008.

 

The Group believes it complied with the applicable regulations and the practice of all oil companies in Madagascar. Therefore, the Group has challenged the proposed tax adjustment and submitted the case to the Appeal commission (CFRA) for review and opinion.

 

In its letter addressed to the Appeal commission dated August 30, 2010, the tax administration dismissed the claims on income tax, but maintained its position on the VAT adjustment. The amount claimed relating to VAT is US $6,790K (consisting of VAT of US $3,990K, interest on delayed payment of US $980K and penalty of US $1,820K).

 

The case is being processed by the Appeal commission. Whatever the opinion of the Appeal commission, the tax administration has the ability to maintain the tax adjustment. The appeal ruling is not expected until 2012.  If the appeal ruling is not in favor of the Group, the Group has the possibility to bring the matter before the Council of State. This procedure does not suspend the payment of the claimed tax (US $3,990K), nevertheless the Group can request to pay only 50% of the claimed tax (US $1,995K) pending the decision of the Council of State, but the authorities have the ability to refuse this request.  Efforts are also underway to modify the Madagascar Petroleum Code to specifically exempt the disputed taxes, both retroactively and prospectively.

 

Management believes that the tax authority's position would be highly punitive to the industry with respect to claims for payment of VAT in prior years. The Company's position has been followed by all petroleum companies since 2006 and has never been challenged by the tax authority.

 

35. Events After the Statement of Financial Position Date

 

In January 2011, Majunga S.A.R.L., a subsidiary of Madagascar Oil Ltd.,  entered into a settlement agreement with Tullow Madagascar Limited, a subsidiary of Tullow, covering their joint operating agreement for Block 3109 (Mandabe), of which Tullow Madagascar Limited was the operator. Majunga had withdrawn from the Mandabe block in September 2008. Under the settlement agreement, Majunga paid Tullow Madagascar Limited approximately US$127,000 which reflected Majunga's share of costs incurred for joint operations prior to its withdrawal. As part of the settlement agreement, the parties entered into mutual releases in connection with the joint operations.

 

In a meeting with the Company's management on December 16, 2010, the Minister of Mines and Hydrocarbons of the State of Madagascar stated that Madagascar may be interested in acquiring MOSA's interest in the production sharing contracts for blocks 3104, 3105, 3106 and 3107 at a price based on historic costs. To date there has been no formal action or written statement from the government acting upon this statement. In addition, OMNIS cancelled the semi-annual management committee meeting that was to be held on December 17, 2010 and did not reschedule such meeting until May 20, 2011 (as discussed below). The Company has significantly curtailed operations and expenditures, pending resolution of these issues.

 

On March 21, 2011, MOSA declared force majeure under production sharing contracts for blocks 3104, 3105, 3106 and 3107 based on statements made by the Minister in December 2010 and OMNIS' failure to hold requisite management committee meetings for the blocks.

 

On April 29, 2011, MOSA filed a request for arbitration under the rules of the International Chamber of Commerce ("ICC") for breach of contract under these production sharing contracts based on the government's lack of response to the force majeure declaration. Such request claimed, among other things, breach of contract based on the recent actions by OMNIS and the Ministry of Mines and Hydrocarbons. The filing seeks declaration that the production sharing contracts that are subject of the dispute are valid and that OMNIS be instructed to proceed with the approval process of the Company's work programmes and related extensions. 

 

Simultaneously the Company also submitted a notice of dispute to the government of Madagascar under the rules of the International Centre for Settlement of Investment Disputes ("ICSID") with regard to the government's threatened expropriation of the Company's assets. While the arbitration process under the ICC rules began immediately, the notice sent by the Company under ICSID triggered a nine-month cooling off period designed to stimulate negotiations between the parties.  Management believes that it has fulfilled all of its obligations under the production sharing contracts and can demonstrate such compliance. The Company continues to vigorously pursue all of its legal rights under these agreements.

 

In June 2011, MOSA and OMNIS resolved their outstanding dispute on the Tsimiroro Block, and the Company has had its 2011-2012 annual work programme and budget for the Tsimiroro Block approved by the management committee. In addition, MOSA was able to obtain assurances from OMNIS as to the validity of the Tsimiroro production sharing contract and the potential for an extension of the contract term to address the delays caused by the force majeure event. 

 

With respect to MOSA's three exploration blocks (blocks 3105, 3106 and 3107), MOSA has been granted a management committee meeting to be held on July 6, 2011.  The production sharing contracts for these blocks each require additional seismic work (if needed) and the drilling of one well in 2011. The Company intends on requesting an extension of the terms of these blocks to account for the 2011 delay and for the additional time required to conduct the assessment of prospective drilling locations.  The Company will continue to maintain the force majeure declaration and the claim in arbitration for these blocks until the dispute is resolved. There can be no assurance that MOSA will be granted the requisite extensions and approvals by OMNIS in a timely fashion in order to proceed with contemplated operations on these blocks for 2011. Although management does not believe that the impact of these exploration blocks on the Company's business is material, a continued failure on the part of the government of Madagascar to allow MOSA to proceed under these production sharing contracts could have an adverse effect on the Company's assets.

 

There can be no assurance that OMNIS or the government of Madagascar will not take actions in the future that are adverse to the Company's ownership of its assets and its ability to operate in the country.

 

On May 20, 2011 Total (the operator and holder of a 60% interest in the Bemolanga production sharing contract, Block 3102), MOSA and OMNIS amended the Bemolanga production sharing contract to extend the current exploration phase for one year and create an additional optional two year drilling phase for the purpose of exploring for conventional hydrocarbon resources. In addition, the requirement to incur US$100 million on a mining pilot project for the block has been removed. The parties intend to focus on assessing the viability of conventional oil extraction techniques on the block.

 

36. Approval of Financial Statements

 

The financial statements were reviewed by the Audit Committee, approved by the Board of Directors and authorized for issue on June 25, 2011.

 

 

 


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