ABERDEEN, SCOTLAND--(Marketwired - May 13, 2013) - Ithaca Energy Inc. (
(TSX VENTURE :IAE ) Not for Distribution to U.S. Newswire Services or for Dissemination in the United States Ithaca Energy Inc. First Quarter 2013 Financial Results and Impact of Valiant Acquisition May 13, 2013 Ithaca Energy Inc. (TSX VENTURE :IAE ), (LSE :IAE ) ("Ithaca" or the "Company") announces its quarterly results for the three months ended March 31, 2013 ("Q1 2013"). In light of the Valiant transaction closing on April 19, 2013, also included is the unaudited financial highlights for the same period, for illustrative purposes only, showing the contribution from Valiant Petroleum plc ("Valiant") for the period, together with an update on integration activities. Ithaca Q1 2013 Highlights Financial - Cashflow from operations increased over 20% to $34.8 million (Q1 2012: $28.4 million) - cash flow per share $0.13 (Q1 2012: $0.11). - $14.6 million of earnings excluding unrealised losses on financial instruments of $11.1 million (Q1 2012: $12.1 million). - Average realised oil price of $114.32 / bbl (Q1 2012: $116.42 / bbl) including a realised hedging gain of $8.00 / bbl. - Strong clean balance sheet with cash net of drawn debt of $10.6 million at end Q1 2013. - UK tax allowance pool of $424 million at end Q1 2013. - Approximately 2.6 million barrels of future 2013-2014 oil production hedged at a weighted average price of ~$106 / bbl (approximately 25% puts / 75% swaps). Production & Operations - Total average net export production in Q1-2013 increased 51% to approximately 6,475 barrels of oil equivalent ("boe") per day ("boepd") (Q1-2012: 4,299 boepd), including production from the Cook field interest acquired from Noble Energy Capital Limited (transaction effective January 1, 2012 and completed on February 5, 2013). - Production during the quarter was in the upper range of that anticipated by the 2013 annual guidance range of 6,000 to 6,700 boepd. The Ithaca operated Athena field had another strong quarter, with the field continuing to produce "dry" oil at a stable gross daily production potential of between 10,000 and 11,000 bopd, 2,250 to 2,475 bopd net to Ithaca. Greater Stella Area Development - The FPF-1 has been moved on to the dry dock barge at the Remontowa shipyard in Gdansk, Poland. - The Ensco 100 heavy duty jack-up drilling rig has now completed operations on the wells being drilled prior to commencement of the Greater Stella Area ("GSA") development drilling programme - rig scheduled to be on location at Stella field in Q2 2013. - Delivery to the Remontowa yard of the long lead topsides processing plant equipment and pipework that is to be installed on the FPF-1 has commenced. - Fabrication of the subsea structures that are to be installed by Technip in 2013 has been completed on schedule at Global Energy Group's facilities in North East ("NE") Scotland. Installation and testing of the pipework spools, valves and control systems being fitted within the structures is nearing completion. - Welding is underway at Technip's Evanton spool base in NE Scotland of the 10-inch steel export infrastructure linepipe that is to be installed in 2013. Ithaca & Valiant Q1 2013 Combination Highlights The financial consolidation of Valiant is only applicable from Q2 2013, as the acquisition completed on April 19, 2013. However, the following unaudited Q1 2013 consolidated financial summary has been prepared, for illustrative purposes only, to provide a high-level overview of the potential cashflow performance of the enlarged Company. Q1 2013 Ithaca Valiant Combined Total Production boepd 6,475 8,372 14,847 Av. Realised Oil Price (Exc. Hedging) $/bbl 106 113 110 Revenue M$ 59.8 90.2 150.0 Inventory Increase/(Decrease) M$ (3.8) (3.8) (7.5) Operating Costs M$ (23.2) (14.2) (37.4) G&A M$ (1.9) (7.4) (9.3) Realised Derivatives Gain / (Loss) M$ 3.9 (0.3) 3.6 Cashflow From Operations M$ 34.8 64.5 99.5 CFPS (using issued Shares 316.9m) $USD 0.11 0.20 0.31 This information is provided to assist shareholders with quantifying the impact of the Valiant acquisition on the Company. It does not represent a guide to future financial performance. The Valiant data used above has been extracted from the management accounts of Valiant for Q1 2013. The Valiant accounting policies are broadly similar to those used by Ithaca. The Q1 2013 combined Ithaca and Valiant highlights are: - Total net average export production of ~14,850 boepd, approximately 95% oil. - Production in line with the Company's full year 2013 guidance range of 14,000 to 16,000 boepd, with volumes in the second half of 2013 scheduled to benefit from infill drilling activities on the Don Southwest field. - Cashflow from operations of ~$100 million during Q1 2013. - A substantial reduction in unit operating costs to ~$28 / boe, driven by the addition of a higher proportion of low cost barrels. - Over 30% increase in the netback per barrel, to ~$80 / boe, attributable to the predominantly oil production base and lower operating cost per barrel. - A combined UK tax allowances pool of over $900 million at the end of Q1 2013. Progress on Valiant Acquisition Integration The integration of Valiant's activities into Ithaca's existing operations is progressing well. The Company has made major steps since completion of the acquisition to realise the substantial cost synergies that are achievable through removal of operational and administrative overlaps. The Company has formally announced the closure of Valiant's UK office, with all activities being transferred to Ithaca's existing operations in Aberdeen, UK. It is anticipated that over three quarters of the UK integration activities and removal of associated overheads will have been completed within approximately six to eight weeks of completion of the acquisition, with closure of Valiant's UK office anticipated in July 2013. The Company has made significant progress towards its objective of substantially reducing the future UK exploration expenditure commitments that were transferred to Ithaca as part of the Valiant acquisition. In overall portfolio terms the Company has reduced net exploration expenditure commitments via farm-outs by over $45million. The Valiant acquisition has established Ithaca as a leading mid-cap North Sea oil and gas operator. The transaction has significantly enhanced the Company's existing production base and producing asset reserves, establishing a highly cash generative business, with tax allowances sheltering the Company from the payment of UK tax over the medium term, and provided operational entry into Norway. The Company has total proven and probable reserves of ~70 million boe and a strong balance sheet containing only low risk / low cost senior debt. In the announcement made by the Company on March 1, 2013 in connection with the Valiant acquisition, Ithaca confirmed that, upon completion of the acquisition, two existing directors of Valiant, Mr. Jannik Lindbaek and Mr. Michael Bonte-Friedheim, were to be appointed to the Board of Ithaca as Non-Executive Directors. Mr Bonte-Freidheim has since informed Ithaca that, due to other business commitments, he will be unable to dedicate sufficient time to the proposed role and, accordingly, will be unable to join the Board of Ithaca as previously announced. The Company wishes Mr. Bonte-Freidheim every success in the future and thank him for his invaluable assistance in the post-acquisition integration process. The Company is pleased to confirm that Mr. Jannik Lindbaek will be appointed to the Board as a Non-Executive Director in May 2013. Mr. Lindbaek was previously Chairman of the Norwegian international oil and gas company, Statoil ASA, prior to its merger with Norsk Hydro in 2007. A further announcement will be made regarding Mr Lindbaek's appointment in due course. Additional Information An updated corporate presentation is available on the Company's website, www.ithacaenergy.com . A short film summarising the Company's GSA strategy and development execution plan is also available on the website. Notes: In accordance with AIM Guidelines, John Horsburgh, BSc (Hons) Geophysics (Edinburgh), MSc Petroleum Geology (Aberdeen) and Subsurface Manager at Ithaca is the qualified person that has reviewed the technical information contained in this press release. Mr Horsburgh has over 15 years operating experience in the upstream oil industry. This press release contains non-International Financial Reporting Standards ("IFRS") industry benchmarks and terms, such as "netbacks" and "cashflow from operations". Netbacks are calculated on a per unit basis as oil, gas and natural gas liquids revenues less royalties and transportation and operating costs. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities. The non-IFRS financial measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures presented by other companies. The Company uses the foregoing measures to help evaluate its performance. As an indicator of the Company's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Company considers cashflow from operations to be a key measure as it demonstrates the Company's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Further details on the above are provided in the unaudited interim consolidated financial statements of Ithaca for the quarter ended March 31, 2013, which have been filed with the securities regulatory authorities in Canada. These financial statements are available on the System for Electronic Document Analysis and Retrieval at www.sedar.com and on the Company's website: www.ithacaenergy.com . Enquiries: Ithaca Energy Inc. Iain McKendrick, imckendrick@ithacaenergy.com +44 (0) 1224 650 261 CEO Graham Forbes, CFO gforbes@ithacaenergy.com +44 (0) 1224 652 151 Cenkos Securities plc Jon Fitzpatrick jfitzpatrick@cenkos.com +44 (0) 207 397 8900 Neil McDonald nmcdonald@cenkos.com +44 (0) 131 220 6939 RBC Capital Markets Tim Chapman tim.chapman@rbccm.com +44 (0) 207 653 4641 Matthew Coakes matthew.coakes@rbccm.com +44 (0) 207 653 4871 FTI Consulting Billy Clegg billy.clegg@fticonsulting.com +44 (0) 207 269 7157 Edward Westropp edward.westropp@fticonsulting.com +44 (0) 207 269 7230 Georgia Mann georgia.mann@fticonsulting.com +44 (0) 207 269 7212 About Ithaca Energy: Ithaca Energy Inc. (TSX VENTURE :IAE ), (LSE :IAE ),is an oil and gas operator focused on North Sea production, appraisal and development activities. The Company's strategy is centred on building a highly profitable North Sea oil and gas company by maximising production and cashflow from its existing assets, the appraisal and development of existing discoveries on properties held by the Company and the delivery of additional growth via acquisitions and licence round participation. Forward-looking statements Some of the statements and information in this press release are forward-looking. Forward-looking statements and forward-looking information (collectively, "forward-looking statements") are based on the Company's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. When used in this press release, the words "anticipate", "continue", "estimate", "expect","may", "will", "project", "plan", "should", "believe", "could","target" and similar expressions, and the negatives thereof., whether used in connection with operational activities, production forecasts, budgetary figures contained in the corporate presentation, potential developments or otherwise, are intended to identify forward-looking statements. Such statements are not promises or guarantees, and are subject to known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes that the expectations reflected in those forward-looking statements and are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and included in this press release should not be unduly relied upon. These forward-looking statements speak only as of the date of this announcement. Ithaca Energy Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based except as required by applicable securities laws. Notes Regarding Oil and Gas Disclosure: References herein to "boe" mean barrel of oil equivalent derived by converting gas to oil in the ratio of six thousand cubic feet ("Mcf") of gas to one barrel ("bbl") of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. The reserve estimates set forth in this press release are estimates only and the actual reserves and realized revenue may be greater or less than those calculated. The estimates of reserves for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. With respect to Ithaca's reserves, the figures are derived from a report prepared by Sproule International Limited ("Sproule"), an independent qualified reserves evaluator, evaluating the reserves of Ithaca as of December 31, 2012 and forming the basis for the Statement of Reserves Data and Other Oil and Gas Information of Ithaca dated March 19, 2013 (the "Statement"). The reserves for the South West Heather Field included in the Statement are those estimated by Ithaca and reviewed by Sproule. With respect to Valiant reserves acquired by Ithaca, the figures are derived from an Audit of Certain Reserves as at December 31, 2012 prepared by RPS Energy Consultants Limited, an independent qualified reserves evaluator, dated January 24, 2013. The reserves estimates of Ithaca are based on the Canadian Oil and Gas Evaluation Handbook ("COGEH") pursuant to National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities. The reserves estimates of Valiant are based on the 2007 SPE/AAPG/WPC/SPEE Petroleum Resource Management System which is not materially different from COGEH. The Valiant reserves have been adjusted to reflect the increased Fionn field interest being transferred to Valiant by Antrim Resources (N.I.) Limited. Not for Distribution to U.S. Newswire Services or for Dissemination in the United States -ENDS- HIGHLIGHTS FIRST QUARTER 2013 Strong cashflow - Cashflow from operations increased over from operations 20% to $34.8 million (Q1 2012: $28.4 million) - cashflow per share $0.13 (Q1 2012: $0.11) - Adjusted earnings of $14.6 million* excluding unrealised revaluation loss on financial instruments (Q1 2012: $12.1 million) o Unadjusted earnings of $3.5 million (Q1 2012: $12.9 million) - Q1 2013 average realized oil price of $114 / bbl (Q1 2012: $116 / bbl), including a realized hedging gain of $8 / bbl - Cash balance of $10.6 million net of drawn debt (Q4 2012: $31.4 million) - UK tax allowances pool of $424 million at quarter end - Approximately 2.6 million barrels of future 2013-14 oil production hedged at a weighted average price of around $106 / bbl (approximately 25% puts / 75% swaps) Q1 production in - Export production increased 51% to line with forecast approximately 6,475 barrels of oil equivalent per day ("boepd") (Q1 2012: 4,299 boepd), including production from the Cook field interest acquired from Noble Energy Capital Limited ("Noble"), effective January 1, 2012 Greater Stella - "FPF-1" floating production unit Area hub - major transferred to dry dock milestones being achieved - Contract signed with Applied Drilling Technology International ("ADTI") in April 2013 to manage development drilling and completion operations on the Greater Stella Area ("GSA") under"turnkey" contract arrangements - Ensco 100 drilling rig has now completed operations on the wells being drilled prior to commencement of the GSA development drilling programme - rig scheduled to be on location at Stella field in Q2 2013 - Fabrication of all the required subsea infrastructure that is to be installed by Technip in 2013 is progressing according to plan Step-change in - Acquisition of Valiant Petroleum plc growth of the ("Valiant") for a total enterprise value of Corporation approximately $459 million completed on April 19, 2013 - Completion of the acquisition of an additional 12.885% interest in the Cook field ("the Cook Acquisition") *Adjusted earnings removes the unrealised (non-cash) losses arising from revaluation of hedges at the quarter end. Revaluation at the end of April 2013 would have resulted in a gain as opposed to the loss of $11.1 million reported. SUMMARY STATEMENT OF INCOME Q1 2013 Q1 2012 % Average Brent Oil Price $/bbl 113 119 -5% Average Realised Oil Price(1) $/bbl 106 116 -9% Revenue M$ 59.8 40.6 47% Cost of Sales - excluding DD&A M$ (27.0) (12.6) 114% G&A etc M$ (1.9) 0.6 N/A Realised Derivatives Gain / (Loss) M$ 3.9 (0.2) N/A Cashflow From Operations M$ 34.8 28.4 23% DD&A M$ (19.5) (13.4) 46% Unrealised Derivatives Gain / (Loss) M$ (11.1) 0.8 N/A Other M$ (1.9) (2.0) -5% Profit Before Tax M$ 2.3 13.8 -83% Deferred Tax Credit / (Charge) M$ 1.2 (0.9) N/A Profit After Tax M$ 3.5 12.9 -73% Earnings Per Share(2) $/Sh. 0.01 0.05 -80% Cashflow Per Share(2) $/Sh. 0.13 0.11 18% (1) Average realized price before hedging (2 Weighted average number of shares of 259.9 million pre Valiant Acquisition SUMMARY BALANCE SHEET M$ Q1 2013 Q4 2012 Cash & Equivalents 66 31 Other Current Assets 173 198 PP&E 749 663 Other Non-Current Assets 41 41 Total Assets 1,029 934 Current Liabilities (197) (206) Asset Retirement Obligations (57) (53) Deferred Tax Liabilities (103) (62) Other Non-Current Liabilities (62) (7) Total Liabilities (420) (328) Net Assets 609 606 Share Capital 431 431 Other Reserves 21 20 Surplus / (Deficit) 157 154 Shareholders Equity 609 606 CORPORATE STRATEGY Ithaca Energy Inc. (the "Corporation" or "Ithaca" or the "Company") is an oil and gas operator focused on North Sea production, appraisal and development activities. Ithaca's strategy is to grow shareholder value by building a highly profitable 25kboepd North Sea oil and gas company. The execution of this plan is centred on: - Maximising production and cashflow from its existing assets - Delivering material growth by appraising and developing existing hydrocarbon discoveries - Continuing to increase and diversify the Company's portfolio and cashflows through acquisitions CONSOLIDATION The consolidated financial statements of the Corporation and the financial data contained in this management's discussion and analysis ("MD&A") are prepared in accordance with international financial reporting standards ("IFRS"). The consolidated financial statements include the accounts of Ithaca and its wholly-owned subsidiaries Ithaca Energy (Holdings) Limited ("Ithaca Holdings"), Ithaca Energy (UK) Limited ("Ithaca UK"), Ithaca Minerals North Sea Limited ("Ithaca Minerals") and Ithaca Energy Holdings (UK) Limited ("Ithaca Holdings UK") and its associates FPU Services Limited ("FPU") and FPF-1 Limited ("FPF-1"). All inter-company transactions and balances have been eliminated on consolidation. A significant portion of the Corporation's North Sea oil and gas activities are carried out jointly with others. The consolidated financial statements reflect only the Corporation's proportionate interest in such activities. PRODUCTION & OPERATIONS UPDATE 51% increase in Q1 2013 PRODUCTION production compared to Q1 2012, with Ithaca's total net export production in Q1 2013 production in line was 6,475 boepd, approximately 90% oil, with forecast representing an increase of approximately 51% on performance Q1 2012 production (Q1 2012: 4,299 boepd). The production performance was in the upper range of that anticipated by the Corporation as part of the 2013 annual production guidance range of 6,000 to 6,700 boepd. Production in the period was derived from the operated Athena, Beatrice, Jacky and Anglia fields and the non-operated Cook, Broom and Topaz fields. The total Q1 2013 production of 6,475 boepd includes the contribution from the additional 12.885% Cook field interest acquired from Noble. The material increase in production delivered in Q1 2013 compared to the same quarter in 2012 was primarily attributable to the contribution from the Athena field (first oil May 2012) and the acquisition of the additional Cook field interest from Noble. The two primary fields contributing approximately 70% of total net production during the quarter were Athena and Cook, with each contributing broadly equally. The Ithaca operated Athena field had another strong quarter, with the stable gross daily production potential of field remaining at between 10,000 and 11,000 bopd, 2,250 to 2,475 bopd net to Ithaca. Consistent daily delivery of the field potential over the period has been achievable as a result of the solid performance of the BW Athena floating, production, storage and offloading vessel ("FPSO"). The field continues to produce "dry" oil. GREATER STELLA AREA DEVELOPMENT UPDATE GSA: Significant FPF-1 Modification Works progress being made, with commencement of Following the transfer in late 2012 of the FPF-1 drilling campaign floating production facility to the Remontowa set for Q2-2013 shipyard in Gdansk, Poland, the modifications work programme being performed by Petrofac in the yard has been focused on preparation for the dry dock. Inspection, repair and coating of the hull tanks is progressing well and the vessel has now been transferred to the yard's dry dock barge to enable completion of the marine system works. This milestone marks the start of the installation of additional buoyancy on the FPF-1 as part of the marine upgrade works, with steel cutting, rolling and welding operations in progress. Installation of the new topsides processing plant will commence upon completion of the dry dock works. The vessel preparatory works have largely been completed and delivery to the yard of the equipment and materials required for the construction and fabrication work programme has commenced. The gas export compressors, which represent the key processing plant package with the longest lead time (having being order at the start of 2012), have now been delivered to the yard. The FPF-1 is being modified and upgraded by Petrofac under the terms of a lump sum incentivised contract that was awarded by the GSA joint venture partners in October 2011. Drilling Programme The high-spec Ensco 100 heavy duty jack-up drilling rig that has been contracted for the GSA development drilling campaign has now completed operations on the wells being drilled for the North Sea operator that has being using the rig immediately prior to commencement of the GSA programme. The rig is being prepared for demobilisation from its current location and will shortly commence its transit to the Able shipyard in Hartlepool, UK, where Ensco will complete a scheduled routine inspection of the unit and certain minor upgrade works to improve the well construction capabilities of the rig specifically designed to improve the efficiency of GSA drilling operations. The unit is expected to arrive on location at the Stella field in Q2-2013. The initial development drilling campaign involves the completion of four wells on the Stella field prior to start-up of production. As previously announced, Advanced Drilling Technology International ("ADTI"), a subsidiary of Transocean, has been contracted to manage the drilling and completion operations under"turnkey" contract arrangements. The turnkey contract locks in the expenditure and performance requirements of the core drilling operations, with each well anticipated to take approximately 80-90 days to drill, complete and clean-up test. Subsea Infrastructure Works Significant progress is being made by Technip UK Limited ("Technip") with preparation for the main subsea infrastructure installation activities that are scheduled to take place offshore in 2013. The subsea programme is being performed under the terms of an Engineering, Procurement, Installation and Construction ("EPIC") contract, thereby ensuring a fully integrated execution plan covering all aspects of this key element of the GSA development. - Manufacturing, coating and delivery to Technip's Evanton spool base in NE Scotland of all the required 10-inch export infrastructure linepipe has been completed and the welding of 12 metre pipes into 1000 metre pipe stalks has commenced. The pipe stalks are scheduled to be reeled on to Technip's Apache II pipelay vessel in Q3-2013 for subsequent installation offshore. - Manufacture of the static flexible flowlines that will connect the drill centres to the FPF-1 is nearing completion at Technip's manufacturing facility in Le Trey, France. These are scheduled to be installed by the Skandi Arctic construction and dive support vessel, commencing in Q3-2013. - The first pipeline trenches to be cut in advance of installation of the flexible flowlines will commence in Q2-2013, marking the start of the offshore installation campaign. - Fabrication of the subsea structures that will connect the drill centres with the FPF-1 has been completed at Global Energy Group's facilities in NE Scotland. Installation and testing of the pipework spools, valves and control systems being fitted within the structures is nearing completion. The structures are scheduled to be installed by the Skandi Arctic in Q3-2013. Q1 2013 CORPORATE ACTIVITIES Acquisition of Cook Field Interest Completed, Lapse of MacCulloch Field Interest Acquisition Further broadening of the producing In October 2012, the Corporation announced that asset portfolio - it had entered into agreements with Noble Energy acquisition of Capital Limited (a subsidiary of Noble Energy additional Cook Inc.) to acquire a 12.885% interest in the Cook field interest field and a 14% interest in the MacCulloch field. The acquisition of the Cook field interest was completed in February 2013, increasing the Corporation's overall interest in the field to 41.345%.The consideration paid at completion was $37.7 million, with approximately $14 million of this payment being offset by the transfer of oil inventory awaiting offload from the Anasuria floating production, storage and offloading vessel (the host facility for the Cook field) to the Corporation. The agreement for acquisition of the MacCulloch field interest from Noble has now lapsed and the Corporation has decided not to further pursue this acquisition given the field has remained shut-in since late December 2012.The MacCulloch field was only anticipated to contribute approximately 5% of the Corporation's total forecast 2013 production guidance of 6,000 to 6,700 boepd and represented 1.4MMbbl or less than 3% of the total 51.9MMbbl proved and probable ("2P") reserves at the end of 2012. ACQUISITION OF VALIANT PETROLEUM PLC Highly accretive acquisition - materially On March 1, 2013, it was announced that the increasing Boards of Ithaca and of Valiant reached production, reserves agreement on the terms of a recommended and cashflow acquisition (the "Acquisition") under which Ithaca would acquire all the shares of Valiant. The Acquisition was completed on April 19, 2013, with the cessation of trading of Valiant shares. The total Acquisition price was approximately $309 million. The Corporation also repaid approximately $150 million of Valiant debt / working capital, implying a total enterprise value of approximately $459 million. The Acquisition is financed by a low interest (London Inter Bank Offered Rate plus 1.0 - 1.6%) $350 million bridge loan and the issue of new Ithaca shares. The bridge facility, which has been agreed with BNP Paribas, the Bank of Nova Scotia and Bank of America Merrill Lynch, is available for 12 months. The intention is to fold the borrowing secured against the Valiant assets into an enlarged borrowing base facility during 2013. A total of 56,952,321 new Ithaca common shares have been issued and allotted to holders of Valiant shares, immediately following which issue and allotment Ithaca had a total of 316,905,657 common shares outstanding. Admission of the new shares to trading on the Alternative Investment Market ("AIM") and the Toronto Stock Exchange occurred by April 22, 2013. The Acquisition has resulted in: - The establishment of Ithaca as a mid cap North Sea oil and gas operator, with 2P reserves of approximately 70MMboe, of which approximately 50% relates to currently producing assets; - A more than doubling of Ithaca's current forecast 2013 production to 14-16kboepd (90% oil), forecast to rise to approximately 27kboepd in 2015; and - Anticipated four fold increase in Ithaca's anticipated 2013 cash flow from operations to $400 million, rising to over $700 million in 2015. COMMODITY HEDGING At the start of Q1 2013 approximately 3 million barrels of 2013-14 oil production had been hedged at a weighted average price of $109 / bbl (approximately 25% puts / 75% swaps). In the quarter, the Corporation received $4.2 million through the settlement of commodity hedges relating to approximately 0.4 million barrels of oil. In April 2013, the Corporation exercised an option to swap 1 million barrels of production at $107/bbl. On the day of exercise, the Brent forward curve, for the period to which the hedge related, was at $101 / bbl resulting in the swaption being converted to a cash settlement of $6 million and a forward swap of 1 million barrels of production at $101 / bbl. Following the above transactions, 2.6 million barrels of future 2013-14 oil production are hedged at a weighted average price of ~ $106 / bbl (approximately 25% puts / 75% swaps). The unrealised losses of $11.1 million from the revaluation of financial instruments included a loss of $9.1 million driven by the revaluation of oil swaps and put options. The hedging instruments are measured at March 31, 2013 and a valuation attributed based on the Brent oil forward curve on that date (spot Brent was trading at $108.46/bbl on March 31, 2013). The losses relate to movement in the Brent oil forward curve, a reduction in the implied volatility and the elapsing of time. Whilst significant, these marked-to-market movements represent non-cash revaluations which are highly sensitive to the oil price on the day of valuation and do not affect underlying cashflow from operations. For example, had the revaluation taken place at the end of April 2013, the revaluation would have resulted in a gain rather than a loss. Q1 2013 RESULTS OF OPERATIONS REVENUE Record quarterly revenue of Revenue increased by $19.2 million in Q1 2013 to $59.8 $59.8 million (Q1 2012: $40.6 million). This was mainly driven million by an increase in oil sales volumes, partially offset by a reduction in oil price. Oil sales volumes increased primarily due to the inclusion of sales from the Athena field and the Cook Acquisition in Q1 2013 (Athena commenced production in May 2012) offset by natural declines in the Beatrice and Jacky fields. Of the reported 6,475 boepd production, 6,148 boepd flows through the statement of income with the additional 327 boepd reflecting production from the Cook Acquisition prior to completion. The value of the pre-completion production is captured as part of the acquisition accounting on the balance sheet. Q1 2013 gas sales are in line with Q1 2012 despite a reduction in Anglia and Topaz gas volumes, which was offset by the addition of Cook gas sales as well as an increase in realized gas prices. Average realized oil prices decreased quarter on quarter from $116/bbl in Q1 2012 to $106/bbl in Q1 2013. The average Brent price for the quarter was $113/bbl compared to $119/bbl for Q1 2012. The Corporation's realized oil prices do not strictly follow the Brent price pattern given the various oil sales' contracts in place, with certain field sales sold at a discount or premium to Brent. This decrease in average realized oil price was nonetheless offset by a realized hedging gain of $8/bbl in Q1 2013. Average Realized Price Q1 2013 Q1 2012 Oil Pre-Hedging $/bbl 106 116 Oil Post-Hedging $/bbl 114 116 Gas $/boe 47 41 COST OF SALES Q1 2013 Q1 2012 Q1 2013 Q1 2012 $'000 $'000 $/boe $/boe Operating Expenditure 23,227 15,721 42 40 DD&A 19,498 13,385 35 34 Movement in Oil & Gas Inventory 3,576 (3,100) - - Oil purchases 157 - - - Total 46,458 26,006 84 66. Cost of sales increased in Q1 2013 to $46.5 million (Q1 2012: $26.0 million) due to increases in operating costs, depletion, depreciation and amortization ("DD&A") and movement in oil and gas inventory. Operating costs increased in the quarter to $23.2 million (Q1 2012: $15.7 million) primarily due to the inclusion of Athena operating costs (nil Q1 2012) and the additional acquired interest in Cook. Operating costs/boe increased to $42/boe in the period (Q1 2012: $40) mainly as a result of the phasing of Cook costs in 2012 with lower costs in the first quarter 2012 compared to the comparative period 2013. Although operating costs per boe are up compared to Q1 2012, a combined rate of $42/boe for Q1 is in line with the Corporation's forecast to reduce operating costs for its current portfolio (excluding Valiant assets) for the full year to under $40 /boe. The absence of production from other fields sharing the FPSO through which Cook oil is exported gives rise to the higher allocation of costs in the quarter. The other main field producing across the FPSO (in which Ithaca has no equity interest) recommenced production at the start of May, ahead of forecast, supporting the expectation of a lower operating cost per barrel over the year. DD&A expense for the quarter increased to $19.5 million (Q1 2012: $13.4 million). This was primarily due to higher production volumes in Q1 2013 with the addition of the Athena field as well as the recently acquired additional interest in Cook. The blended rate for the quarter was relatively unchanged at $35/boe (Q1 2012: $34/ boe). As the below "Changes in Accounting Policies" section outlines, the adoption of IFRS and accounting for acquisitions as business combinations has led to increased DD&A rates. It should be noted that this increase in DD&A and hence Cost of Sales is offset by a credit in the Deferred Tax charged through the Statement of Income. An oil and gas inventory movement of $3.6 million was charged to cost of sales in Q1 2013 (Q1 2012 credit of $3.1 million). Movements in oil inventory arise due to differences between barrels produced and sold with production being recorded as a credit to movement in oil inventory through cost of sales until oil has been sold. In Q1 2013 more barrels of oil were sold (528k bbls) than produced (495k bbls), as a result of timings of Cook liftings and Athena shuttle tankers. Volumes account for $3.8 million of the movement, partially offset by a credit of $0.2 million due to the change in valuation of the opening inventory barrels. Movement in oil & gas inventory Oil Gas Total kbbls kboes kboes Operating inventory 149 13 162 Production 496 57 553 Liftings/sales (527) (59) (586) Acquired volumes 124 - 124 Closing volumes 241 11 253 ADMINISTRATION & EXPLORATION & EVALUATION EXPENSES $'000 Q1 2013 Q1 2012 General & Administration 2,476 1,071 Share Based Payments 295 135 Total Administration Expenses 2,771 1,206 Exploration & Evaluation 312 75 Total 3,083 1,281 Total administrative expenses increased in the quarter to $2.8 million (Q1 2012: $1.2 million) primarily due to an increase in general and administrative expenses as a result of higher levels of corporate activity ongoing in the quarter, particularly in relation to the Acquisition of Valiant. Share based payment expenses increased as a result of options being granted towards the end of 2012 (none end 2011), therefore higher amortisation expense has been reflected through Q1 2013. Exploration and evaluation expenses of $0.3 million were recorded in the quarter (Q1 2012: $0.1 million) primarily due to the expensing of previously capitalized costs relating to areas where exploration and evaluation activities have ceased. FOREIGN EXCHANGE & FINANCIAL INSTRUMENTS A foreign exchange gain of $0.6 million was recorded in Q1 2013 (Q1 2012: $1.6 million). The majority of the Corporation's revenue is US dollar driven while operating expenditures a re primarily incurred in British pounds. As such, general volatility in the USD:GBP exchange rate is the driver behind the foreign exchange gains and losses, particularly on the revaluation of the GBP bank accounts (USD:GBP at January 1, 2013: 1.62. USD:GBP at March 31, 2013: 1.52 with fluctuation between 1.48 and 1.64 during the quarter). This volatility was partially offset by foreign exchange hedges as described in the"Risks and Uncertainties" section below. The Corporation recorded a $7.2 million loss on financial instruments for the quarter ended March 31, 2013 (Q1 2012: $0.7 million loss). The loss was predominantly due to a $9.1 million reduction in value of oil swaps and put options, due to a relatively strong Brent oil price at quarter end together with a reduction in implied volatility in the period and the elapsing of time. In addition, the Corporation recorded a $2.1 million loss on the revaluation of foreign exchange instruments. The Corporation's exposure to fluctuations in the USD:GBP exchange rate has nonetheless been limited due to the forward contracts entered into to hedge GBP120 million of capital expenditure on the GSA development at a rate of $1.52:GBP1.00. The revaluation losses were partially offset by a $4.2 million realized gain on commodity hedges. TAXATION No UK tax anticipated A deferred tax credit of $1.2 million was recognized in to be the quarter ended March 31, 2013 (Q1 2012: $0.9 million payable in charge). This credit is a product of adjustments to the the tax charge primarily relating to the UK Ring Fence mid-term Expenditure Supplement and share based payments. As noted in the Cost Of Sales section the deferred tax credit is increased by the use of accounting for acquisitions as business combinations. As a result of the above factors, profit after tax increased to $3.5 million (Q1 2012: $12.9 million). No taxes are expected to be paid in the mid-term relating to upstream oil and gas activities as a result of the $424 million tax losses available to the Corporation. CAPITAL INVESTMENTS $'000 Q1 2013 Q1 2012 Development & Production ("D&P") 103,070 26,539 Exploration & Evaluation ("E&E") 2,108 1,254 Other Fixed Assets 31 26 Total 105,209 27,819 $70.9 million of the total $103.1 million capital additions to D&P assets in Q1 2013 was attributable to the acquisition of the additional interest in the Cook field, of which $37.7 million represents cash paid with the remainder being due to business combination accounting. The remaining D&P additions were primarily focused on execution of the GSA development, with the main areas of expenditure being on the manufacture and fabrication of subsea infrastructure and the FPF-1 modification works (as described above). Capital expenditure on E&E assets in Q1 2013 was $2.1 million with spending primarily focused on Hurricane and development projects. LIQUIDITY AND CAPITAL RESOURCES Significant investment in $'000 Q1 2013 Q4 2012 Increase / development (Decrease) projects Cash & Cash Equivalents 65,636 31,376 34,260 Trade & Other 139,915 173,949 (34,034) Receivables Inventory 26,131 15,878 10,253 Trade & Other Payables (194,278) (205,635) 11,357 Net Working Capital 37,404 15,568 21,836 As at March 31, 2013, Ithaca had working capital of $37.4 million including a cash balance of $65.6 million. Available cash has been, and is currently, invested in money market deposit accounts with BNP Paribas. Management has received confirmation from the financial institution that these funds are available on demand. Cash and cash equivalents increased as a result of $55 million of bank debt drawings towards the end of the quarter offsetting the continued cash investment in the Stella development. The funds were required for substantial payments due for imminent release post March 31, 2013 on the Stella project together with funds required to be held over as part of the Valiant Acquisition. Other working capital movements are driven by the timing of receipts and payments of balances. A significant proportion of Ithaca's accounts receivable balance is with customers in the oil and gas industry and is subject to normal joint venture/industry credit risks. The Corporation assesses partners' credit worthiness before entering into joint venture agreements. The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at March 31, 2013, substantially all of the accounts receivable is current, being defined as less than 90 days. In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. At March 31, 2013, Ithaca had unused credit facilities totalling $375 million (Q4 2012: $430 million). $55 million was drawn down under this facility in Q1 2013. During the quarter ended March 31, 2013, there was a net cash inflow of approximately $34.8 million (Q1 2012: outflow of $5.6 million). Cashflow from operations Cash generated from operating activities was $34.8 million primarily due to cash generated from Athena, Beatrice, Jacky, Anglia, Cook and Broom operations, augmented in Q1 2013 primarily due to the inclusion of Athena. Cashflow from financing activities Cash generated from financing activities was $46.0 million primarily due to the draw down of the existing debt facility in Q1 2013 ($55 million), partially offset by oil hedging premiums paid. Cashflow from investing activities Cash used in investing activities was $59.4 million primarily due to capital expenditure on the Cook Acquisition and the GSA development, including modification of the FPF-1, subsea design and fabrication works. The Corporation continues to be fully funded, with more than sufficient financial resources to cover the anticipated level of development capital expenditure commitments and to continue the pursuit of additional asset acquisition opportunities and exploration and appraisal activities on existing and newly acquired licenses through its existing cash balance, forecast cashflow from operations and its debt facility. No unusual trends or fluctuations are expected outside the ordinary course of business. COMMITMENTS $'000 1 Year 2-5 Years 5+ Years Office Leases 423 1,421 - Other Operating Leases 12,319 14,300 - Exploration Licence Fees 583 - - Engineering 53,550 - - Rig Commitments 37,305 - - Total 104,180 15,721 - The engineering financial commitments relate to pre-development committed capital expenditure on the Stella and Harrier fields, as well as ongoing capital and operating expenditure on existing producing fields. Rig commitments reflect rig hire costs committed in relation to the anticipated Stella wells. As stated above, these commitments are expected to be funded through the Corporation's existing cash balance, forecast cashflow from operations and its debt facility. OUTSTANDING SHARE INFORMATION The Corporation's common shares are traded on the Toronto Stock Exchange ("TSX") in Canada under the symbol "IAE" and on the Alternative Investment Market ("AIM") in the United Kingdom under the symbol "IAE". As at March 31, 2013, Ithaca had 259,953,336 common shares outstanding along with 20,344,631 options outstanding to employees and directors to acquire common shares. In Q1 2013, the Corporation's Board of Directors granted 90,000 options at a weighted average exercise price of C$1.79. Each of the options granted may be exercised over a period of four years from the grant date. One third of the options will vest at the end of each of the first, second and third years from the effective date of grant. As at May 10, 2013, following completion of the Valiant Acquisition, Ithaca had 317,088,991 common shares outstanding along with 20,011,297 options outstanding to employees and directors to acquire common shares. March 31, 2013 Common Shares Outstanding 259,953,336 Share Price(1) $1.70 / Share Total Market Capitalisation $441,920,671 (1) Represents the TSX close price (CAD$1.73 on last trading day of March, 2013. US$:CAD$ 0.9825 on March 31, 2013 SUMMARY OF QUARTERLY RESULTS Restated $'000 31 Mar 31 Dec 30 Sep 30 Jun 31 Mar 31 Dec 30 Sep 30 Jun 2013 2012 2012 2012 2012 2011 2011 2011 Revenue 59,769 52,566 41,579 35,779 40,553 54,870 26,415 16,724 Profit 3,472 45,347 4,894 30,238 12,916 13,318 16,016 2,743 After Tax EPS - 0.01 0.17 0.02 0.12 0.05 0.05 0.06 0.01 Basic EPS - 0.01 0.17 0.02 0.11 0.05 0.05 0.06 0.01 Diluted The most significant factors to have affected the Corporation's results during the above quarters are fluctuation in underlying commodity prices and movement in production volumes. The Corporation has utilized forward sales contracts and foreign exchange contracts to take advantage of higher commodity prices while reducing the exposure to price volatility. These contracts can cause volatility in profit after tax as a result of unrealized gains and losses due to movements in the oil price and USD : GBP exchange rate. Each of the quarters from Q4 2010 to Q3 2011 was restated following the Corporation's election to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. Refer to the"Changes in Accounting Policies" below for more details. FINANCIAL INSTRUMENTS All financial instruments are initially measured in the balance sheet at fair value. Subsequent measurement of the financial instruments is based on their classification. The Corporation has classified each financial instrument into one of these categories: held-for-trading, held-to-maturity investments, loans and receivables, or other financial liabilities. Loans and receivables, held-to-maturity investments and other financial liabilities are measured at amortized cost using the effective interest rate method. For all financial assets and financial liabilities that are not classified as held-for-trading, the transaction costs that are directly attributable to the acquisition or issue of a financial asset or financial liability are adjusted to the fair value initially recognized for that financial instrument. These costs are expensed using the effective interest rate method and are recorded within interest expense. Held-for-trading financial assets are measured at fair value and changes in fair value are recognized in net income. All derivative instruments are recorded in the balance sheet at fair value unless they qualify for the expected purchase, sale and usage exemption. All changes in their fair value are recorded in income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in other comprehensive income until the hedged transaction is recognized in net earnings. The Corporation has classified its cash and cash equivalents, restricted cash, derivatives, commodity hedges and long term liability as held-for-trading, which are measured at fair value with changes being recognized in net income. Accounts receivable are classified as loans and receivables; operating bank loans, accounts payable and accrued liabilities are classified as other liabilities, all of which are measured at amortized cost. The classification of all financial instruments is the same at inception and at March 31, 2013. The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of comprehensive income. $'000 Q1 2013 Q1 2012 Revaluation Forex Forward Contracts (2,055) 969 Revaluation of Gas Contract - (114) Revaluation of Other Long Term Liability 57 (90) Revaluation of Commodity Hedges (9,067) - Total Revaluation Gain / (Loss) (11,065) 765 Realised Loss on Forex Contracts (293) - Realised Gain/(Loss) on Commodity Hedges 4,186 (199) Total Realised Gain/(Loss) 3,893 (199) Total Realised / Revaluation Gain / (Loss) (7,172) 566 Contingent Consideration - (1,294) Total (Loss) on Financial Instruments (7,172) (728) The following table summarises the commodity hedges in place at the beginning of the quarter. Derivative Term Volume Average Price bbl $/bbl Oil Swaps* January 2013 2,297,753 108.0 - September 2014 Put Options January 2013 779,299 110.4 - March 2014 Derivative Term Volume Average Price Therms p/therm Gas Swaps January 2013 3,066,000 66.45 - December 2014 *Includes swaption of 1 million bbls which was exercised in April 2013 The table below summarises the foreign exchange financial instruments in place during Q1 2013. Derivative Forward Plus Forward contract Term Jan 13 - Dec 13 Apr 13 - Jan 14 Value GBP4million / month GBP120 million Protection Rate $1.59/GBP1.00 $1.52/GBP1.00 Trigger Rate $1.50/GBP1.00 N/A CRITICAL ACCOUNTING ESTIMATES Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting policies are discussed below and are included to aid the reader in assessing the critical accounting policies and practices of the Corporation and the likelihood of materially different results being reported. Ithaca's management reviews these estimates regularly. The emergence of new information and changed circumstances may result in actual results or changes to estimated amounts that differ materially from current estimates. The following assessment of significant accounting policies and associated estimates is not meant to be exhaustive. The Corporation might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies. Capitalized costs relating to the exploration and development of oil and gas reserves, along with estimated future capital expenditures required in order to develop proved and probable reserves are depreciated on a unit-of-production basis, by asset, using estimated proved and probable reserves as adjusted for production. A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the Cash Generating Unit ("CGU"). Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the Statement of Income. Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized in the Statement of Income. Impairment losses relating to goodwill cannot be reversed in future periods. Recognition of decommissioning liabilities associated with oil and gas wells are determined using estimated costs discounted based on the estimated life of the asset. In periods following recognition, the liability and associated asset are adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The liability is accreted up to the actual expected cash outlay to perform the abandonment and reclamation. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. All financial instruments, other than those designated as effective hedging instruments, are initially recognized at fair value on the balance sheet. The Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities and the long term liability on the Beatrice acquisition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. In order to recognize share based payment expense, the Corporation estimates the fair value of stock options granted using assumptions related to interest rates, expected life of the option, volatility of the underlying security and expected dividend yields. These assumptions may vary over time. The determination of the Corporation's income and other tax liabilities / assets requires interpretation of complex laws and regulations. Tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded on the financial statements. The accrual method of accounting will require management to incorporate certain estimates of revenues, production costs and other costs as at a specific reporting date. In addition, the Corporation must estimate capital expenditures on capital projects that are in progress or recently completed where actual costs have not been received as of the reporting date. CONTROL ENVIRONMENT Ithaca has established disclosure controls, procedures and corporate policies so that its consolidated financial results are presented accurately, fairly and on a timely basis. The Chief Executive Officer and Chief Financial Officer have designed, or have caused such internal controls over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Corporation's financial statements in accordance with IFRS with no material weaknesses identified. Based on their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements and even those options determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As of March 31, 2013, there were no changes in Ithaca's internal control over financial reporting that occurred during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. CHANGES IN ACCOUNTING POLICIES On January 1, 2011, the Corporation adopted IFRS using a transition date of January 1, 2010. The financial statements for the quarter ended March 31, 2013, including required comparative information, have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB"). The Corporation elected to present all acquisitions since the IFRS transition date as business combinations in accordance with IFRS 3®. One impact of accounting for acquisitions as business combinations is the recognition of asset values, upon which the DD&A rate is calculated as pre-tax fair values and the recognition of a deferred tax liability on estimated future cash flows. With current tax rates at 62% this increases the DD&A charge for such assets. An offsetting reduction is recognized in the deferred tax charged through the consolidated statement of income. In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after 1 January 2013. There has been no material impact from the adoption of the new and amended standards on the Corporation's financial statements. OTHER Non-IFRS Measures'Cashflow from operations' referred to in this MD&A is not prescribed by IFRS. This non-IFRS financial measure does not have any standardized meaning and therefore is unlikely to be comparable to similar measures presented by other companies. The Corporation uses this measure to help evaluate its performance. As an indicator of the Corporation's performance, cashflow from operations should not be considered as an alternative to, or more meaningful than, net cash from operating activities as determined in accordance with IFRS. The Corporation considers Cashflow from operations to be a key measure as it demonstrates the Corporation's underlying ability to generate the cash necessary to fund operations and support activities related to its major assets. Cashflow from operations is determined by adding back changes in non-cash operating working capital to cash from operating activities. BOE Presentation The calculation of boe is based on a conversion rate of six thousand cubic feet of natural gas ("mcf") to one barrel of crude oil ("bbl"). The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 mcf: 1 bbl, utilizing a conversion ratio at 6 mcf: 1 bbl may be misleading as an indication of value. Off Balance Sheet Arrangements The Corporation has certain lease agreements and rig commitments which were entered into in the normal course of operations, all of which are disclosed under the heading "Commitments", above. Leases are treated as either operating leases or finance leases based on the extent to which risks and rewards incidental to ownership lie with the lessor or the lessee under IAS 17. No asset or liability value has been assigned to any leases on the balance sheet as at March 31, 2013. Related Party Transactions A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. The amount of fees paid to Burstall Winger LLP in Q1 2013 was $0.1 million (Q1 2012: $Nil). These transactions are in the normal course of business and are conducted on normal commercial terms with consideration comparable to those charged by third parties. As at March 31, 2013 the Corporation had a loan receivable from FPF-1 Ltd, an associate of the Corporation, for $21.6 million (Q1 2012: $Nil) as a result of the completion of the GSA transactions in 2012. RISKS AND UNCERTAINTIES The business of exploring for, developing and producing oil and natural gas reserves is inherently risky. There is substantial risk that the manpower and capital employed will not result in the finding of new reserves in economic quantities. There is a risk that the sale of reserves may be delayed due to processing constraints, lack of pipeline capacity or lack of markets. The Corporation is dependent upon the production rates and oil price to fund the current development program. For additional detail regarding the Corporation's risks and uncertainties, refer to the Corporation's Annual Information Form dated March 25, 2013, (the "AIF") filed on SEDAR at www.sedar.com . RISK MITIGATIONS Commodity The Corporation's performance In order to mitigate the Price is significantly impacted by risk of fluctuations in oil Volatility prevailing oil and natural gas and gas prices, the prices, which are primarily Corporation routinely driven by supply and demand as executes commodity price well as economic and political derivatives, predominantly factors. in relation to oil production, as a means of establishing a floor in realised prices. Foreign The Corporation is exposed to Given the increasing Exchange financial risks including proportion of development Risk financial market volatility, capital expenditure and fluctuation in interest rates operating costs incurred in and various foreign exchange currencies other than the rates. United States dollar, the Corporation routinely executes hedges to mitigate foreign exchange rate risk on committed expenditure. Debt The Corporation is exposed to The Corporation believes Facility borrowing risks relating to that there are no Risk drawdown of its senior secured circumstances at present borrowing base facility (the that result in its failure"Facility"). The ability to to meet the financial tests drawdown the Facility is based and it can therefore draw on the Corporation meeting down upon its Facility. certain covenants including coverage ratio tests, liquidity tests and development funding tests The Corporation routinely which are determined by a produces detailed cashflow detailed economic model of the forecasts to monitor its Corporation. There can be no compliance with the assurance that the Corporation financial tests and will satisfy such tests in the liquidity requirements of future in order to have access the Facility. to the full amount of the Facility. The Facility includes covenants which restrict, among other things, the Corporation's ability to incur additional debt or dispose of assets. As is standard to a credit facility, the Corporation's and Ithaca Energy (UK) Limited's ("Ithaca UK") assets have been pledged as collateral and are subject to foreclosure in the event the Corporation or Ithaca UK defaults. Financing To the extent cashflow from The Corporation has Risk operations and Facility established a fully funded resources are ever deemed not business plan and routinely adequate to fund Ithaca's cash monitors its detailed requirements, external cashflow forecasts and financing may be required. liquidity requirements to Lack of timely access to such maintain its funding additional financing, or requirements. The access on unfavourable terms, Corporation believes that could limit the future growth there are no circumstances of the business of Ithaca. To at present that would lead the extent that external to selected divestment, sources of capital, including delays to existing programs public and private markets, or a default relating to the become limited or unavailable, Facility. Ithaca's ability to make the necessary capital investments to maintain or expand its current business and to make necessary principal payments under the Facility may be impaired. A failure to access adequate capital to continue its expenditure program may require that the Corporation meet any liquidity shortfalls through the selected divestment of its portfolio or delays to existing development programs. Third Party The Corporation is and may in The Corporation believes Credit Risk the future be exposed to third this risk is mitigated by party credit risk through its the financial position of contractual arrangements with the parties. All of the its current and future joint Corporation's oil production venture partners, marketers of from the Beatrice, Jacky and its petroleum production and Athena fields is sold to BP other parties. The Corporation Oil International Limited. extends unsecured credit to Oil production from Cook and these parties, and therefore, Broom is sold to Shell the collection of any Trading International Ltd. receivables may be affected by Anglia and Topaz gas changes in the economic production is sold through environment or other contracts to RWE NPower PLC conditions. and Hess Energy Gas Power(UK) Ltd. Cook gas is sold to Shell UK Ltd. and Esso Exploration & Production UK Ltd. The Corporation has not experienced any material credit loss in the collection of accounts receivable to date. The joint venture partners in those assets operated by the Corporation are largely well financed international companies. Where appropriate, a cash call process has been implemented with the GSA partners to cover high levels of anticipated capital expenditure thereby reducing any third party credit risk. Property The Corporation's properties The Corporation has routine Risk will be generally held in the ongoing communications with form of licenses, concessions, the UK oil and gas permits and regulatory regulatory body, the consents ("Authorizations"). Department of Energy and The Corporation's activities Climate Change ("DECC"). are dependent upon the grant Regular communication allows and maintenance of appropriate all parties to an Authorizations, which may not Authorization to be fully be granted; may be made informed as to the status of subject to limitations which, any Authorization and if not met, will result in the ensures the Corporation termination or withdrawal of remains updated regarding the Authorization; or may be fulfilment of any applicable otherwise withdrawn. Also, in requirements. the majority of its licenses, the Corporation is often a joint interest-holder with another third party over which it has no control. An Authorization may be revoked by the relevant regulatory authority if the other interest-holder is no longer deemed to be financially credible. There can be no assurance that any of the obligations required to maintain each Authorization will be met. Although the Corporation believes that the Authorizations will be renewed following expiry or granted (as the case may be), there can be no assurance that such Authorizations will be renewed or granted or as to the terms of such renewals or grants. The termination or expiration of the Corporation's Authorizations may have a material adverse effect on the Corporation's results of operations and business. The areas covered by the Authorizations are or may be subject to agreements with the proprietors of the land. If such agreements are terminated, found void or otherwise challenged, the Corporation may suffer significant damage through the loss of opportunity to identify and extract oil or gas. Operational The Corporation is subject to The Corporation acts at all Risk the risks associated with times as a reasonable and owning oil and natural gas prudent operator. The properties, including Corporation takes out market environmental risks associated insurance to mitigate many with air, land and water. All of these operational, of the Corporation's construction and operations are conducted environmental risks. offshore in the United Kingdom Continental Shelf; as such Ithaca is exposed to operational risk associated The Corporation uses the with weather delays that can services of Sproule result in a material delay in International Limited project execution. Third ("Sproule") to independently parties operate some of the assess the Corporation's assets in which the reserves on an annual basis. Corporation has interests. As a result, the Corporation may have limited ability to exercise influence over the operations of these assets and their associated costs. The success and timing of these activities may be outside the Corporation's control. There are numerous uncertainties in estimating the Corporation's reserve base due to the complexities in estimating the magnitude and timing of future production, revenue, expenses and capital. Competition In all areas of the The Corporation places Risk Corporation's business, there appropriate emphasis on is competition with entities ensuring it attracts and that may have greater retains high quality technical and financial resources to enable it to resources. maintain its competitive position. FORWARD-LOOKING INFORMATION This MD&A and any documents incorporated by reference herein contain certain forward-looking statements and forward-looking information which are based on the Corporation's internal expectations, estimates, projections, assumptions and beliefs as at the date of such statements or information, including, among other things, assumptions with respect to production, future capital expenditures, future acquisitions and cash flow. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The use of any of the words "anticipate","continue", "estimate", "expect", "may", "will","project", "plan", "should", "believe", "could","scheduled", "targeted", "approximately" and similar expressions are intended to identify forward-looking statements and forward-looking information. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements or information. The Corporation believes that the expectations reflected in those forward-looking statements and information are reasonable but no assurance can be given that these expectations, or the assumptions underlying these expectations, will prove to be correct and such forward-looking statements and information included in this MD&A and any documents incorporated by reference herein should not be unduly relied upon. Such forward-looking statements and information speak only as of the date of this MD&A and any documents incorporated by reference herein and the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or information, except as required by applicable laws. In particular, this MD&A and any documents incorporated by reference herein, contains specific forward-looking statements and information pertaining to the following: - the quality of and future net revenues from the Corporation's reserves; - oil, natural gas liquids ("NGLs") and natural gas production levels; - commodity prices, foreign currency exchange rates and interest rates; - capital expenditure programs and other expenditures; - the sale, farming in, farming out or development of certain exploration properties using third party resources; - supply and demand for oil, NGLs and natural gas; - the Corporation's ability to raise capital; - the continued availability of the Facility; - the Corporation's acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom; - the realization of anticipated benefits from acquisitions and dispositions; - the Corporation's ability to continually add to reserves; - schedules and timing of certain projects and the Corporation's strategy for growth; - the Corporation's future operating and financial results; - the ability of the Corporation to optimize operations and reduce operational expenditures; - treatment under governmental and other regulatory regimes and tax, environmental and other laws; - production rates; - targeted production levels; and - timing and cost of the development of the Corporation's reserves. With respect to forward-looking statements contained in this MD&A and any documents incorporated by reference herein, the Corporation has made assumptions regarding, among other things: - Ithaca's ability to obtain additional drilling rigs and other equipment in a timely manner, as required; - access to third party hosts and associated pipelines can be negotiated and accessed within the expected timeframe; - FDP approval and operational construction and development is obtained within expected timeframes; - the Corporation's development plan for the Stella and Harrier discoveries will be implemented as planned; - the effect of the Valiant Acquisition on Ithaca; - reserves volumes assigned to Ithaca's properties; - ability to recover reserves volumes assigned to Ithaca's properties; - revenues do not decrease below anticipated levels and operating costs do not increase significantly above anticipated levels; - future oil, NGLs and natural gas production levels from Ithaca's properties and the prices obtained from the sales of such production; - the level of future capital expenditure required to exploit and develop reserves; - Ithaca's ability to obtain financing on acceptable terms, in particular, the Corporation's ability to access the Facility; - the continued ability of the Corporation to collect from third parties who Ithaca has provided credit to; - Ithaca's reliance on partners and their ability to meet commitments under relevant agreements; and - the state of the debt and equity markets in the current economic environment. The Corporation's actual results could differ materially from those anticipated in these forward-looking statements and information as a result of assumptions proving inaccurate and of both known and unknown risks, including the risk factors set forth in this MD&A and under the heading "Risk Factors" in the AIF and the documents incorporated by reference herein, and those set forth below: - risks associated with the exploration for and development of oil and natural gas reserves in the North Sea; - risks associated with the integration of Valiant into Ithaca's existing operations; - risks associated with offshore development and production including transport facilities; - operational risks and liabilities that are not covered by insurance; - volatility in market prices for oil, NGLs and natural gas; - the ability of the Corporation to fund its substantial capital requirements and operations; - risks associated with ensuring title to the Corporation's properties; - changes in environmental, health and safety or other legislation applicable to the Corporation's operations, and the Corporation's ability to comply with current and future environmental, health and safety and other laws; - the accuracy of oil and gas reserve estimates and estimated production levels as they are affected by the Corporation's exploration and development drilling and estimated decline rates; - the Corporation's success at acquisition, exploration, exploitation and development of reserves; - risks associated with realisation of anticipated benefits of acquisitions; - risks related to changes to government policy with regard to offshore drilling; - the Corporation's reliance on key operational and management personnel; - the ability of the Corporation to obtain and maintain all of its required permits and licenses; - competition for, among other things, capital, drilling equipment, acquisitions of reserves, undeveloped lands and skilled personnel; - changes in general economic, market and business conditions in Canada, North America, the United Kingdom, Europe and worldwide; - actions by governmental or regulatory authorities including changes in income tax laws or changes in tax laws, royalty rates and incentive programs relating to the oil and gas industry including any increase in UK taxes; - adverse regulatory rulings, orders and decisions; and - risks associated with the nature of the common shares. Additional Reader Advisories The information in this MD&A is provided as of May 10, 2013. The Q1 2013 results have been compared to the results of the comparative period in 2012. This MD&A should be read in conjunction with the Corporation's unaudited consolidated financial statements as at March 31, 2013 and 2012 and with the Corporation's audited consolidated financial statements as at December 31, 2012 together with the accompanying notes and MD&A, and AIF for the 2012 fiscal year. Copies of these documents are available without charge from Ithaca or electronically on the internet on Ithaca's SEDAR profile at www.sedar.com . With respect to Ithaca's reserves disclosure, the figures are derived from a report prepared by Sproule, an independent qualified reserves evaluator, evaluating the reserves of Ithaca as of December 31, 2012 and forming the basis for the Statement of Reserves Data and Other Oil and Gas information of Ithaca dated March 19, 2013 (the"Statement"). The reserves for the South West Heather field included in the Statement are those estimated by the Corporation and reviewed by Sproule. With respect to Valiant reserves, the figures are derived from an Audit of Certain Reserves as at December 31, 2012 prepared by RPS Energy Consultants Limited, an independent qualified reserves evaluator, dated January 24, 2013. The reserves estimates of Ithaca are based on the Canadian Oil and Gas Evaluation Handbook ("COGEH") pursuant to Canadian National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities, with references to oil referring to medium quality oil. The Ithaca reserves correspond to those in the Statement adjusted to reflect the increased Carna and Cook field equities acquired following the date of issue of the Statement. The reserves estimates of Valiant are based on the 2007 SPE/AAPG/WPC/ SPEE Petroleum Resource Management System which is not materially different from COGEH. The Valiant reserves have been adjusted to reflect the increased Fionn field interest being transferred to Valiant by Antrim Resources (N.I.) Limited. If a discovery is made, there is no certainty that it will be developed, or if it is developed, there is no certainty as to the timing of such development or the benefits (if any) which may flow to the Corporation. Cashflow from operations includes the impact of executed hedges and does not include non-cash items such as DD&A, revaluation of financial instruments, impairments of fixed assets and movements in goodwill, which may have a significant impact on the Corporation's results. The reserve estimates set forth in this MD&A are estimates only and the actual reserves and realized revenue may be greater or less than those calculated. The estimates of reserves for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. Statements relating to reserves are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future. Consolidated Statement of Income For the three months ended 31 March 2013 and 2012 (unaudited) 2013 2012 Note US$'000 US$'000 Revenue 4 59,769 40,553 Cost of Sales 5 (46,458) (26,006) Gross Profit 13,311 14,547 Exploration and evaluation expenses 9 (312) (75) Administrative expenses 6 (2,771) (1,206) Operating Profit 10,228 13,266 Foreign exchange 563 1,648 (Loss) on financial instruments 23 (7,172) (728) Negative goodwill 11 914 - Profit on ordinary activities Before Interest and 4,533 14,186 Tax Finance costs 7 (2,276) (469) Interest income 20 65 Profit Before Tax 2,277 13,782 Taxation - Deferred tax 21 1,195 (866) Profit After Tax 3,472 12,916 Earnings per share Basic 20 0.01 0.05 Diluted 20 0.01 0.05 The accompanying notes on pages 7 to 22 are an integral part of the financial statements. Consolidated Statement of Comprehensive Income For the three months ended 31 March 2013 and 2012 (unaudited) 2013 2012 US$'000 US$'000 Profit for the period 3,472 12,916 Net (loss) on oil price hedge - (376) Other comprehensive income - (376) Total comprehensive income 3,472 12,540 The accompanying notes on pages 7 to 22 are an integral part of the financial statements. Consolidated Statement of Financial Position (unaudited) 31 March 2013 31 Dec 2012 US$'000 US$'000 ASSETS Current assets Cash and cash equivalents 65,634 31,374 Restricted cash 2 2 Accounts receivable 126,303 159,195 Deposits, prepaid expenses and other 5,925 14,754 Inventory 8 26,131 15,878 Derivative financial instruments 24 7,368 8,251 231,363 229,454 Non-current assets Long-term receivable 21,551 21,551 Investment in associate 18,337 18,337 Exploration and evaluation assets 9 49,186 47,390 Property, plant & equipment 10 699,391 615,788 Goodwill 12 985 985 789,450 704,051 Total assets 1,020,813 933,505 LIABILITIES AND EQUITY Current liabilities Trade and other payables 194,278 205,635 Derivative financial instruments 24 2,296 - 196,574 205,635 Non-current liabilities Bank debt 14 47,312 - Decommissioning liabilities 15 57,494 52,834 Other long term liabilities 16 2,961 3,018 Contingent consideration 17 4,000 4,000 Deferred tax liabilities 21 102,329 62,370 214,096 122,222 Net assets 610,143 605,648 Shareholders' equity Share capital 18 431,365 431,318 Share based payment reserve 19 21,316 20,340 Retained earnings 157,462 153,990 Total equity 610,143 605,648 The financial statements were approved by the Board of Directors on 10 May 2013 and signed on its behalf by:"John Summers" Director"Jay Zammit" Director The accompanying notes on pages 7 to 22 are an integral part of the financial statements. Consolidated Statement of Changes in Equity (unaudited) Share Share Retained Other comp. Total capital based E'ings income payment reserve US$'000 US$'000 US$'000 US$'000 US$'000 Balance, 1 Jan 2012 429,502 17,318 60,591 - 507,411 Share based payment - 862 - - 862 Unrealised hedging - - - (376) (376) loss Net income for the - - 12,916 - 12,916 period Balance, 31 March 429,502 18,180 73,507 (376) 520,813 2012 Balance, 1 Jan 2013 431,318 20,340 153,990 - 605,648 Share based payment - 994 - - 994 Options exercised 47 (18) - - 29 Net income for the - - 3,472 - 3,472 period Balance, 31 March 431,365 21,316 157,462 - 610,143 2013 The accompanying notes on pages 7 to 22 are an integral part of the financial statements. Consolidated Statement of Cash Flow For the three months ended 31 March 2013 and 2012 (unaudited) Note 2013 2012 US$'000 US$'000 Operating activities Profit Before Tax 2,277 13,782 Adjustments for: Depletion, depreciation and 10 19,498 13,385 amortisation Exploration and evaluation 9 312 75 write off Share based payment 6 295 135 Loan fee amortisation 592 78 Unrealised (gain)/loss on 23 11,065 (765) financial instruments Revaluation of contingent 17 - 1,294 consideration Movement in goodwill 11 (914) - Accretion 7 502 384 Bank charges 1,159 - Cashflow from operations 34,786 28,368 Changes in inventory, debtors 882 (820) and creditors relating to operating activities Net cash from operating 35,668 27,548 activities Investing activities Acquisition of Cook (33,370) - Capital expenditure (25,384) (22,508) Changes in debtors and creditors relating to investing activities 12,439 (7,810) Net cash (used in) investing (46,315) (30,318) activities Financing activities Proceeds from issuance of 29 - shares (Increase) in restricted cash - (4,167) Derivatives (7,947) - Loan draw down 55,000 - Bank charges (1,110) - Net cash from/(used in) 45,972 (4,167) financing activities Currency translation (1,065) 1,336 differences relating to cash and cash equivalents Increase/(decrease) in cash and 34,260 (5,601) cash equivalents Cash and cash equivalents, 31,374 95,545 beginning of period Cash and cash equivalents, end 65,634 89,944 of period The accompanying notes on pages 7 to 22 are an integral part of the financial statements. 1. NATURE OF OPERATIONS Ithaca Energy Inc. (the "Corporation" or "Ithaca"), incorporated and domiciled in Alberta, Canada on 27 April 2004, is a publicly traded company involved in the exploration, development and production of oil and gas in the North Sea. The Corporation's registered office is 1600, 333 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P 2Z1. The Corporation's shares trade on the Toronto Stock Exchange in Canada and the London Stock Exchange's Alternative Investment Market in the United Kingdom under the symbol "IAE". Ithaca has four wholly-owned subsidiaries, Ithaca Energy (UK) Limited ("Ithaca UK"), Ithaca Minerals (North Sea) Limited ("Ithaca Minerals"), Ithaca Energy Holdings (UK) Limited ("Ithaca Holdings UK"), all incorporated in Scotland, and Ithaca Energy (Holdings) Limited ("Ithaca Holdings"), incorporated in Bermuda. Ithaca also has two associates, FPU Services Limited ("FPU Services") and FPF-1 Limited ("FPF-1"), both incorporated in Jersey. 2. BASIS OF PREPARATION These interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) applicable to the preparation of interim financial statements, including IAS 34 Interim Financial Reporting. These interim consolidated financial statements do not include all the necessary annual disclosures in accordance with IFRS. The policies applied in these condensed interim consolidated financial statements are based on IFRS issued and outstanding as of 10 May 2012, the date the Board of Directors approved the statements. Any subsequent changes to IFRS that are given effect in the Corporation's annual consolidated financial statements for the year ending 31 December 2013 could result in restatement of these interim consolidated financial statements. The condensed interim consolidated financial statements should be read in conjunction with the Corporation's annual financial statements for the year ended 31 December 2012. 3. SIGNIFICANT ACCOUNTING POLICIES, JUDGEMENTS AND ESTIMATION UNCERTAINTY Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities (under IFRS) to fair value, including derivative instruments. Basis of consolidation The consolidated financial statements of the Corporation include the accounts of Ithaca Energy Inc. and the wholly-owned subsidiaries Ithaca Energy (UK) Limited, Ithaca Minerals (North Sea) Limited, Ithaca Energy (Holdings) Limited and Ithaca Energy Holdings (UK) Limited. All inter-company transactions and balances have been eliminated on consolidation. A subsidiary is an entity which the Corporation controls by having the power to govern the financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether Ithaca controls another entity. A subsidiary is fully consolidated from the date on which control is obtained by Ithaca and is de-consolidated from the date that control ceases. Investments in associates Interests in entities over which Ithaca has significant influence, but not control or joint control, are accounted for using the equity method. Ithaca's share of equity investments' results are recorded in the consolidated statement of income Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at the date of completion of the acquisition. Acquisition costs incurred are expensed and included in administrative expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Corporation's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the Corporation's share of the net assets required, the difference is recognised directly in the statement of income. Goodwill Capitalisation Goodwill acquired through business combinations is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised as the fair value of the Corporation's share of the identifiable net assets acquired and liabilities assumed. If this consideration is lower than the fair value of the identifiable assets acquired, the difference is recognised in the statement of income. Impairment Goodwill is tested annually for impairment and also when circumstances indicate that the carrying value may be at risk of being impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash generating unit ("CGU") to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised in the statement of income. Impairment losses relating to goodwill cannot be reversed in future periods. Foreign currency translation Items included in the financial statements are measured using the currency of the primary economic environment in which the Corporation and its subsidiaries operate (the 'functional currency'). The consolidated financial statements are presented in United States Dollars, which is the Corporation's functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of income. Share based payments The Corporation has a share based payment plan as described in note 18 (c). The expense is recorded in the statement of income or capitalised for all options granted in the year, with the gross increase recorded in the share based payment reserve. Compensation costs are based on the estimated fair values at the time of the grant and the expense or capitalised amount is recognised over the vesting period of the options. Upon the exercise of the stock options, consideration paid together with the amount previously recognised in share based payment reserve is recorded as an increase in share capital. In the event that vested options expire unexercised, previously recognised compensation expense associated with such stock options is not reversed. In the event that unvested options are forfeited or expired, previously recognised compensation expense associated with the unvested portion of such stock options is reversed. Cash and cash equivalents For the purpose of the statement of cash flow, cash and cash equivalents include investments with an original maturity of three months or less. Restricted cash Cash that is held for security for bank guarantees is reported in the statement of financial position and statement of cash flow separately. If the expected duration of the restriction is less than twelve months then it is shown in current assets. Financial instruments All financial instruments, other than those designated as effective hedging instruments, are initially recognised at fair value in the statement of financial position. The Corporation's financial instruments consist of cash, restricted cash, accounts receivable, deposits, derivatives, accounts payable, accrued liabilities, contingent consideration and the long term liability on the Beatrice acquisition. The Corporation classifies its financial instruments into one of the following categories: held-for-trading financial assets and financial liabilities; held-to-maturity investments; loans and receivables; and other financial liabilities. All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods is dependent on the classification of the respective financial instrument. Held-for-trading financial instruments are subsequently measured at fair value with changes in fair value recognised in net earnings. All other categories of financial instruments are measured at amortised cost using the effective interest method. Cash and cash equivalents are classified as held-for-trading and are measured at fair value. Accounts receivable are classified as loans and receivables. Accounts payable, accrued liabilities, certain other long-term liabilities, and long-term debt are classified as other financial liabilities. Although the Corporation does not intend to trade its derivative financial instruments, they are classified as held-for-trading for accounting purposes. Transaction costs that are directly attributable to the acquisition or issue of a financial asset or liability and original issue discounts on long-term debt have been included in the carrying value of the related financial asset or liability and are amortised to consolidated net earnings over the life of the financial instrument using the effective interest method. The Corporation may designate financial instruments as a hedging instrument for accounting purposes. Hedge accounting requires the designation of a hedging relationship, including a hedged and a hedging item, identification of the risk exposure being hedged and an expectation that the hedging relationship will be highly effective throughout its term. The Corporation assesses, both at the hedge's inception and on an ongoing basis, whether the derivative financial instruments designated as hedges are highly effective in offsetting changes in cash flows of the hedged items. The effective portion of the gains and losses on cash flow hedges is recorded in Other Comprehensive Income until the hedged transaction is recognised in net earnings. Any hedge ineffectiveness is immediately recognised in net earnings. When the hedged transaction is recognised in net earnings, the fair value of the associated cash flow hedging item is reclassified from other reserves into net earnings. Hedge accounting is discontinued on a prospective basis when the hedging relationship no longer qualifies for hedge accounting. Analyses of the fair values of financial instruments and further details as to how they are measured are provided in notes 23 to 25. Inventory Inventories of materials and product inventory supplies, other than oil and gas inventories, are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out method. Oil and gas inventories are stated at fair value less cost to sell. Property, plant and equipment Oil and gas expenditure - exploration and evaluation assets Capitalisation Pre-acquisition costs on oil and gas assets are recognised in the statement of income when incurred. Costs incurred after rights to explore have been obtained, such as geological and geophysical surveys, drilling and commercial appraisal costs and other directly attributable costs of exploration and evaluation including technical, administrative and share based payment expenses are capitalised as intangible exploration and evaluation ("E&E") assets. E&E costs are not amortised prior to the conclusion of evaluation activities. At completion of evaluation activities, if technical feasibility is demonstrated and commercial reserves are discovered then, following development sanction, the carrying value of the E&E asset is reclassified as a development and production ("D&P") asset, but only after the carrying value is assessed for impairment and where appropriate its carrying value adjusted. If after completion of evaluation activities in an area, it is not possible to determine technical feasibility and commercial viability or if the legal right to explore expires or if the Corporation decides not to continue exploration and evaluation activity, then the costs of such unsuccessful exploration and evaluation are written off to the statement of income in the period the relevant events occur. Impairment The Corporation's oil and gas assets are analysed into CGU for impairment review purposes, with E&E asset impairment testing being performed at a grouped CGU level. The current E&E CGU consists of the Corporation's whole E&E portfolio. E&E assets are reviewed for impairment when circumstances arise which indicate that the carrying value of an E&E asset exceeds the recoverable amount. When reviewing E&E assets for impairment, the combined carrying value of the grouped CGU is compared with the grouped CGU's recoverable amount. The recoverable amount of a grouped CGU is determined as the higher of its fair value less costs to sell and value in use. Impairment losses resulting from an impairment review are written off to the statement of income. Oil and gas expenditure - development and production assets Capitalisation Costs of bringing a field into production, including the cost of facilities, wells and sub-sea equipment, direct costs including staff costs and share based payment expense together with E&E assets reclassified in accordance with the above policy, are capitalised as a D&P asset. Normally each individual field development will form an individual D&P asset but there may be cases, such as phased developments, or multiple fields around a single production facility when fields are grouped together to form a single D&P asset. Depreciation All costs relating to a development are accumulated and not depreciated until the commencement of production. Depreciation is calculated on a unit of production basis based on the proved and probable reserves of the asset. Any re-assessment of reserves affects the depreciation rate prospectively. Significant items of plant and equipment will normally be fully depreciated over the life of the field. However, these items are assessed to consider if their useful lives differ from the expected life of the D&P asset and should this occur a different depreciation rate would be charged. Impairment A review is carried out each reporting date for any indication that the carrying value of the Corporation's D&P assets may be impaired. For D&P assets where there are such indications, an impairment test is carried out on the CGU. Each CGU is identified in accordance with IAS 36. The Corporation's CGUs are those assets which generate largely independent cash flows and are normally, but not always, single developments or production areas. The impairment test involves comparing the carrying value with the recoverable value of an asset. The recoverable amount of an asset is determined as the higher of its fair value less costs to sell and value in use, where the value in use is determined from estimated future net cash flows. Any additional depreciation resulting from the impairment testing is charged to the statement of income. Non oil and natural gas operations Computer and office equipment is recorded at cost and depreciated over its estimated useful life on a straight-line basis over three years. Furniture and fixtures are recorded at cost and depreciated over their estimated useful lives on a straight-line basis over five years. Decommissioning liabilities The Corporation records the present value of legal obligations associated with the retirement of long-term tangible assets, such as producing well sites and processing plants, in the period in which they are incurred with a corresponding increase in the carrying amount of the related long-term asset. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the field location. In subsequent periods, the asset is adjusted for any changes in the estimated amount or timing of the settlement of the obligations. The carrying amounts of the associated assets are depleted using the unit of production method, in accordance with the depreciation policy for development and production assets. Actual costs to retire tangible assets are deducted from the liability as incurred. Contingent consideration Contingent consideration is accounted for as a financial liability and measured at fair value at the date of acquisition with any subsequent remeasurements recognised either in profit or loss or in other comprehensive income in accordance with IAS 39. Taxation Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or substantively enacted by the reporting date. Deferred income tax Deferred tax is recognised for all deductible temporary differences and the carry-forward of unused tax losses. Deferred tax assets and liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in rates is included in earnings in the period of the enactment date. Deferred tax assets are recorded in the consolidated financial statements if realisation is considered more likely than not. Recent accounting pronouncements In May 2011, the IASB issued the following standards: IFRS 10, Consolidated Financial Statements ("IFRS 10"), IFRS 11, Joint Arrangements ("IFRS 11"), IFRS 12, Disclosure of Interests in Other Entities ("IFRS 12"), IAS 27, Separate Financial Statements ("IAS 27"), IFRS 13, Fair Value Measurement ("IFRS 13") and amended IAS 28, Investments in Associates and Joint Ventures ("IAS 28"). Each of the new standards is effective for annual periods beginning on or after 1 January 2013. There has been no material impact from the adoption of the new and amended standards on the Corporation's financial statements. Significant accounting judgements and estimation uncertainties The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions regarding certain assets, liabilities, revenues and expenses. Such estimates must often be made based on unsettled transactions and other events and a precise determination of many assets and liabilities is dependent upon future events. Actual results may differ from estimated amounts. The amounts recorded for depletion, depreciation of property and equipment, long-term liability, share based payment, contingent consideration, decommissioning liabilities, derivatives, and deferred taxes are based on estimates. The depreciation charge and any impairment tests are based on estimates of proved and probable reserves, production rates, prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material. Further information on each of these estimates is included within the notes to the financial statements. 4. REVENUE Three months ended 31 March 2013 2012 US$'000 US$'000 Oil sales 56,153 35,808 Gas sales 2,771 2,821 Condensate sales 137 170 Other income 708 1,754 Total 59,769 40,553 5. COST OF SALES Three months ended 31 March 2013 2012 US$'000 US$'000 Operating costs (23,227) (15,721) Oil purchases (157) - Movement in oil and gas inventory (3,576) 3,100 Depletion, depreciation and amortisation 10 (19,498) (13,385) (46,458) (26,006) 6. ADMINISTRATIVE EXPENSES Three months ended 31 March 2013 2012 US$'000 US$'000 General & administrative (2,476) (1,071) Share based payment (295) (135) (2,771) (1,206) 7. FINANCE COSTS Three months ended 31 March 2013 2012 US$'000 US$'000 Accretion (502) (384) Bank charges & interest (1,164) (6) Loan fee amortisation (592) (78) Non-operated asset finance fees (18) (1) (2,276) (469) 8. INVENTORY 31 March 31 Dec 2013 2012 US$'000 US$'000 Crude oil inventory 26,118 15,865 Materials inventory 13 13 26,131 15,878 9. EXPLORATION AND EVALUATION ASSETS US$'000 At 1 January 2012 22,689 Additions 38,188 Write offs/relinquishments (4,261) Disposals (9,226) At 31 December 2012 47,390 Additions 2,108 Write offs/relinquishments (312) At 31 March 2013 49,186 Following completion of geotechnical evaluation activity, certain licences were declared unsuccessful and certain prospects were declared non-commercial and therefore the related expenditures of $0.3 million were expensed in the three months to 31 March 2013. 10. PROPERY, PLANT AND EQUIPMENT Development & Production Other fixed Oil and Gas Assets assets Total US$'000 US$'000 US$'000 Cost At 1 January 2012 623,549 2,292 625,841 Additions 139,383 133 139,516 Disposals (37,912) - (37,912) At 31 December 2012 725,020 2,425 727,445 Additions 103,070 31 103,101 At 31 March 2013 828,090 2,456 830,546 DD&A At 1 January 2012 (53,988) (1,497) (55,485) Charge for the period (55,770) (402) (56,172) At 31 December 2012 (109,758) (1,899) (111,657) Charge for the quarter (19,397) (101) (19,498) At 31 March 2013 (129,155) (2,000) (131,155) NBV at 1 January 2012 569,561 795 570,356 NBV at 1 January 2013 615,262 526 615,788 NBV at 31 March 2013 698,935 456 699,391 11. BUSINESS COMBINATION On 5 February 2013 the Company completed the acquisition of wholly-owned UK subsidiary of Noble Energy Capital Limited, which owns a 12.885% non-operated interest in the Cook field (increasing the Company's field interest in Cook to 41.345%). The total acquisition consideration was $37.7 million. The fair values of the identifiable assets and liabilities of Cook as at the acquisition date were: Fair value US$'000 Oil and gas properties 70,533 Inventories 14,014 Trade receivables 142 Trade and other payables (734) Deferred tax liabilities (41,153) Provisions (4,158) Total identifiable net assets at fair value 38,644 Negative goodwill arising on acquisition (914) Total consideration 37,730 The cash outflow on acquisition is as follows: Cash paid (37,730) Net consolidated cash flow (37,730) 12. GOODWILL US$'000 Cost At 1 January 2012, 31 December 2012 & 31 March 2013 985 $1.0 million represents goodwill recognised on the acquisition of gas assets from GDF in December 2010. As at 31 March 2013, the recoverable amount of assets acquired from GDF was sufficiently high to support the carrying value of this goodwill. 13. INVESTMENT IN ASSOCIATES 31 March 31 Dec 2013 2012 US$'000 US$'000 Investments in FPF-1 and FPU services 18,337 18,337 Investment in associates comprises shares, acquired by Ithaca Holdings, in FPF-1 and FPU services as part of the completion of the Greater Stella Area transactions in 2012. There has been no change in value during the period with the above investment reflecting the Company's share of the associates' results. 14. LOAN FACILITY On 29 June 2012, the Corporation executed a Senior Secured Borrowing Base Facility agreement (the "Facility") for up to $430 million, being provided by BNPP as Lead Arranger. The loan term is up to five years and will attract interest at LIBOR plus 3-4.5%. This Facility replaces the previous undrawn $140 million debt facility with Lloyds Banking Group. The Corporation is subject to financial and operating covenants related to the Facility. Failure to meet the terms of one or more of these covenants may constitute an event of default as defined in the Facility agreement, potentially resulting in accelerated repayment of the debt obligations. Security provided against the loan Security provided against the loan is in the form of a floating charge over all assets. The Corporation is in compliance with its financial and operating covenants. As at 31 March 2013, $55 million was drawn down under the Facility. The $47 million in the balance sheet represents amounts drawn down net of unamortised loan fees. 15. DECOMMISSIONING LIABILITIES 31 March 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 52,834 39,3832 Additions 4,158 9,613 Accretion 502 1,777 Revision to estimates - 2,062 Balance, end of period 57,494 52,834 The total future decommissioning liability was calculated by management based on its net ownership interest in all wells and facilities, estimated costs to reclaim and abandon wells and facilities and the estimated timing of the costs to be incurred in future periods. The Corporation uses a risk free rate of 3.8 percent (31 December 2012: 3.8 percent) and an inflation rate of 2.1 percent (31 December 2012: 2.1 percent) over the varying lives of the assets to calculate the present value of the decommissioning liabilities. These costs are expected to be incurred at various intervals over the next 10 years. The economic life and the timing of the obligations are dependent on Government legislation, commodity price and the future production profiles of the respective production and development facilities. Note that upon the acquisition of the Beatrice Field in November 2008, the Corporation did not assume the decommissioning liabilities. 16. OTHER LONG-TERM LIABILITIES 31 March 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 3,018 2,785 Revaluation in the period (57) 233 Balance, end of period 2,961 3,018 On completion of the acquisition of the Beatrice Facilities on 10 November 2008 there were 75,000 barrels of oil in an oil storage tank at the Nigg Terminal. This volume of oil is required to be in the storage tank when the Beatrice Facilities are retransferred. This volume of oil is valued at the price on the forward oil price curve at the expected date of re-transfer and discounted. The liability is subject to revaluation at each financial period end. The expected date of re-transfer is likely to be between 2 and 5 years in the future. 17. CONTINGENT CONSIDERATION 31 March 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 4,000 24,580 Revision to estimates - 1,295 Release - (21,875) Balance, end of period 4,000 4,000 The contingent consideration at the end of the period relates to the acquisition of the Stella field and is payable upon first oil. 18. SHARE CAPITAL No. of ordinary Amount Authorised share capital 000 US$'000 At 31 December 2012 and 31 March 2013 Unlimited - (a) Issued The issued share capital is as follows: Issued Number of common Amount shares US$'000 Balance 1 January 2012 259,164,461 429,502 Issued for cash - options exercised 755,542 1,020 Transfer from Share based payment reserve on - 796 options exercised Balance 1 January 2013 259,920,003 431,318 Issued for cash - options exercised 33,333 29 Transfer from Share based payment reserve on - 18 options exercised Balance 31 March 2013 259,953,336 431,365 (b) Stock options In the quarter ended 31 March 2013, the Corporation's Board of Directors granted 90,000 options at a weighted average exercise price of $2.00 (C$1.97). The Corporation's stock options and exercise prices are denominated in Canadian Dollars when granted. As at 31 March 2013, 20,344,631 stock options to purchase common shares were outstanding, having an exercise price range of $0.20 to $2.73 (C$0.25 to C$2.31) per share and a vesting period of up to 3 years in the future. Changes to the Corporation's stock options are summarised as follows: 31 March 2013 31 December 2012 Wt. Avg Wt. Avg No. of Exercise No. of Exercise Options Price* Options Price* Balance, beginning of 20,347,964 $1.63 17,506,839 $1.66 period Granted 90,000 $2.00 6,045,000 $2.05 Forfeited / expired (60,000) $2.70 (2,448,333) $3.42 Exercised (33,333) $1.79 (755,542) $1.26 Options 20,344,631 $1.64 20,347,964 $1.63 * The weighted average exercise price has been converted into U.S. dollars based on the foreign exchange rate in effect at the date of issuance. The following is a summary of stock options as at 31 March 2013 Options Outstanding Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.73 5,290,000 1.8 $2.24 (C$2.25-C$2.31) $1.49-$1.79 10,421,667 2.4 $1.81 (C$1.54-C$1.99) $0.20-$0.81 4,632,964 0.5 $0.56 (C$0.25-C$0.87) 20,344,631 1.8 $1.64 Options Exercisable Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.73 3,393,336 1.8 $2.24 (C$2.25-C$2.31) $1.49-$1.79 4,500,001 0.9 $1.52 (C$1.54-C$1.99) $0.20-$0.81 4,632,964 0.5 $0.56 (C$0.25-C$0.87) 12,526,301 1.0 $1.36 The following is a summary of stock options as at 31 December 2012 Options Outstanding Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.70 5,350,000 2.0 $2.22 (C$2.25-C$2.69) $1.49-$2.03 10,331,667 2.6 $1.81 (C$1.54-C$1.99) $0.20-$0.81 4,666,297 0.8 $0.56 (C$0.25-C$0.87) 20,347,964 2.0 $1.63 Options Exercisable Wt. Avg Wt. Avg Range of No. of Life Exercise Exercise Price Options (Years) Price* $2.22-$2.70 3,280,003 2.0 $2.22 (C$2.25-C$2.69) $1.49-$2.03 3,113,338 1.2 $1.53 (C$1.54-C$1.99) $0.20-$0.81 4,666,297 0.8 $0.80 (C$0.25-C$0.87) 11,059,638 1.3 $1.43 (c) Share based payments Options granted are accounted for using the fair value method. The cost during the three months ended 31 March 2013 for total stock options granted was $0.9 million (Q1 2012: $1.6 million). $0.3 million was charged through the statement of income for stock based compensation for the three months ended 31 March 2013, being the Corporation's share of stock based compensation chargeable through the statement of income. The remainder of the Corporation's share of stock based compensation has been capitalised. The fair value of each stock option granted was estimated at the date of grant, using the Black-Scholes option pricing model with the following assumptions: For the three months For the year ended ended 31 March 2013 31 December 2012 Risk free interest rate 1.3% 0.4% Expected stock volatility 63% 74% Expected life of options 3 years 3 years Weighted Average Fair Value $0.91 $1.08 19. SHARE BASED PAYMENT RESERVE 31 March 31 Dec 2013 2012 US$'000 US$'000 Balance, beginning of period 20,340 17,318 Share based payment cost 994 3,817 Transfer to share capital on exercise of options (18) (795) Balance, end of period 21,316 20,340 20. EARNINGS PER SHARE The calculation of basic earnings per share is based on the profit after tax and the weighted average number of common shares in issue during the period. The calculation of diluted earnings per share is based on the profit after tax and the weighted average number of potential common shares in issue during the period. Three months ended 31 March 2013 2012 Weighted av. number of common shares (basic) 259,944,818 259,164,461 Weighted av. number of common shares (diluted) 264,926,389 265,009,444 21. TAXATION Three months ended 31 March 2013 2012 US$'000 US$'000 Deferred tax 1,195 866 2012 deferred tax includes the tax effect of $614,000 on the loss of oil price hedging shown through the Statement of Other Comprehensive Income. 22. COMMITMENTS 31 March 31 Dec 2013 2012 US$'000 US$'000 Operating lease commitments Within one year 12,742 12,759 Two to five years 15,722 18,756 More than five years - 65 31 March 31 Dec 2013 2012 Capital commitments US$'000 US$'000 Capital commitments incurred jointly with other 91,438 111,747 ventures (Ithaca's share) 23. FINANCIAL INSTRUMENTS To estimate fair value of financial instruments, the Corporation uses quoted market prices when available, or industry accepted third-party models and valuation methodologies that utilise observable market data. In addition to market information, the Corporation incorporates transaction specific details that market participants would utilise in a fair value measurement, including the impact of non-performance risk. The Corporation characterises inputs used in determining fair value using a hierarchy that prioritises inputs depending on the degree to which they are observable. However, these fair value estimates may not necessarily be indicative of the amounts that could be realised or settled in a current market transaction. The three levels of the fair value hierarchy are as follows: - Level 1 - inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. - Level 2 - inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates, and volatility factors, which can be observed or corroborated in the marketplace. The Corporation obtains information from sources such as the New York Mercantile Exchange and independent price publications. - Level 3 - inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument's fair value. In forming estimates, the Corporation utilises the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorised based upon the lowest level of input that is significant to the fair value measurement. The valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorised as Level 2. The following table presents the Corporation's material financial instruments measured at fair value for each hierarchy level as of 31 March 2013: Total Fair Level 1 Level 2 Level 3 Value US$'000 US$'000 US$'000 US$'000 Derivative financial instrument - 7,368 - 7,368 asset Long term liability on Beatrice - - (2,961) (2,961) acquisition Contingent consideration - (4,000) - (4,000) Derivative financial instrument - (2,296) - (2,296) liability The table below presents the total gain / (loss) on financial instruments that has been disclosed through the statement of comprehensive income: Three months ended 31 March 2013 2012 US$'000 US$'000 Revaluation of forex forward contracts (2,055) 969 Revaluation of gas contract - (114) Revaluation of other long term liability 57 (90) Revaluation of commodity hedges (9,067) - (11,065) 765 Realised loss on forex contracts (293) - Realised gain/(loss) on commodity hedges 4,186 (199) (7,172) 566 Contingent consideration - (1,294) Total (loss) on financial instruments (7,172) (728) The Corporation has identified that it is exposed principally to these areas of market risk. i) Commodity Risk The table below presents the total (loss)/gain on commodity hedges that has been disclosed through the statement of comprehensive income: Three months ended 31 March 2013 2012 US$'000 US$'000 Revaluation of commodity hedges (9,067) - Realised gain/(loss) on commodity hedges 4,186 (199) Total (loss) on commodity hedges (4,881) (199) Commodity price risk related to crude oil prices is the Corporation's most significant market risk exposure. Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. The Corporation is also exposed to natural gas price movements on uncontracted gas sales. Natural gas prices, in addition to the worldwide factors noted above, can also be influenced by local market conditions. The Corporation's expenditures are subject to the effects of inflation, and prices received for the product sold are not readily adjustable to cover any increase in expenses from inflation. The Corporation may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows. The below represents commodity hedges in place: Derivative Term Volume Average price Oil puts Jan 13 - Mar 14 779,299 bbls $110/bbl Oil swaps (including Jan 13 - Sep 14 2,297,753 bbls $108/bbl swaption) Gas swaps Jan 13 - Dec 14 3,066,000 therms 66.45p/ therm ii) Interest Risk Calculation of interest payments for the Senior Secured Borrowing Base Facility agreement with BNP Paribas that was signed on 29 June 2012 incorporates LIBOR. The Corporation will therefore be exposed to interest rate risk to the extent that LIBOR may fluctuate. The Corporation will evaluate its annual forward cash flow requirements on a rolling monthly basis. iii) Foreign Exchange Rate Risk The table below presents the total (loss) on foreign exchange financial instruments that has been disclosed through the statement of income: Three months ended 31 March 2013 2012 US$'000 US$'000 Revaluation of forex forward contracts (2,055) 969 Realised loss on forex forward contracts (293) - Total (loss)/gain on forex forward contracts (2,348) 969 The Corporation is exposed to foreign exchange risks to the extent it transacts in various currencies, while measuring and reporting its results in US Dollars. Since time passes between the recording of a receivable or payable transaction and its collection or payment, the Corporation is exposed to gains or losses on non-USD amounts and on statement of financial position translation of monetary accounts denominated in non-USD amounts upon spot rate fluctuations from quarter to quarter. The below represents foreign exchange financial instruments in place: Derivative Term Value Protection rate Trigger rate Forward Jan 13 - Dec 13 GBP4 million/ $1.59/GBP1.00 $1.50/GBP1.00 plus month Forward Apr 13 - Jan 14 GBP120 million $1.52/GBP1.00 N/A iv) Credit Risk The Corporation's accounts receivable with customers in the oil and gas industry are subject to normal industry credit risks and are unsecured. All of its oil production from the Beatrice, Jacky and Athena fields is sold to BP Oil International Limited. Oil production from Cook and Broom is sold to Shell Trading International Ltd. Anglia and Topaz gas production is currently sold through three contracts to RWE NPower PLC and Hess Energy Gas Power (UK) Ltd. Cook gas is sold to Shell UK Ltd and Esso Exploration & Production UK Ltd. The Corporation assesses partners' credit worthiness before entering into farm-in or joint venture agreements. In the past, the Corporation has not experienced credit loss in the collection of accounts receivable. As the Corporation's exploration, drilling and development activities expand with existing and new joint venture partners, the Corporation will assess and continuously update its management of associated credit risk and related procedures. The Corporation regularly monitors all customer receivable balances outstanding in excess of 90 days. As at 31 March 2013, substantially all accounts receivables are current, being defined as less than 90 days. The Corporation has no allowance for doubtful accounts as at 31 March 2013 (31 December 2012: $Nil). The Corporation may be exposed to certain losses in the event that counterparties to derivative financial instruments are unable to meet the terms of the contracts. The Corporation's exposure is limited to those counterparties holding derivative contracts with positive fair values at the reporting date. As at 31 March 2013, exposure is $7.4 million (31 December 2012: $8.3 million). The Corporation also has credit risk arising from cash and cash equivalents held with banks and financial institutions. The maximum credit exposure associated with financial assets is the carrying values. v) Liquidity Risk Liquidity risk includes the risk that as a result of its operational liquidity requirements the Corporation will not have sufficient funds to settle a transaction on the due date. The Corporation manages liquidity risk by maintaining adequate cash reserves, banking facilities, and by considering medium and future requirements by continuously monitoring forecast and actual cash flows. The Corporation considers the maturity profiles of its financial assets and liabilities. As at 31 March 2013, substantially all accounts payable are current. The following table shows the timing of contractual cash outflows relating to trade and other payables. Within 1 year 1 to 5 years US$'000 US$'000 Accounts payable and accrued liabilities 194,278 - Other long term liabilities - 2,961 194,278 2,961 24. DERIVATIVE FINANCIAL INSTRUMENTS 31 March 31 December 2013 2012 US$'000 US$'000 Oil swaps 4,013 2,497 Oil put options 3,257 5,667 Gas swaps (143) 87 Foreign exchange forward contract (2,055) - 5,072 8,251 Refer to note 23 for further details of derivative financial instruments. 25. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES Financial instruments of the Corporation consist mainly of cash and cash equivalents, receivables, payables, loans and financial derivative contracts, all of which are included in these financial statements. At 31 March 2013, the classification of financial instruments and the carrying amounts reported on the balance sheet and their estimated fair values are as follows: 31 March 2013 31 December 2012 US$'000 US$'000 Classification Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents (Held 65,634 65,634 31,374 31,374 for trading) Restricted cash 2 2 2 2 Accounts receivable (Loans and 126,303 126,303 159,195 159,195 Receivables) Deposits 243 243 247 247 Contingent consideration (4,000) (4,000) (4,000) (4,000) Derivative financial (2,296) (2,296) - - instruments (Held for trading) Other long term liabilities (2,961) (2,961) (3,018) (3,018) Accounts payable (Other (194,278) (194,278) (205,635) (205,635) financial liabilities) 26. RELATED PARTY TRANSACTIONS The consolidated financial statements include the financial statements of Ithaca Energy Inc and the subsidiaries listed in the following table: Country of % equity interest at 31 incorporation March 2013 2012 Ithaca Energy (UK) Limited Scotland 100% 100% Ithaca Minerals (North Sea) Scotland 100% 100% Limited Ithaca Energy (Holdings) Bermuda 100% N/A Limited Ithaca Energy Holdings (UK) Scotland 100% N/A Limited Transactions between subsidiaries are eliminated on consolidation. The following table provides the total amount of transactions that have been entered into with related parties during the quarter ending 31 March 2013 and 31 March 2012, as well as balances with related parties as of 31 March 2013 and 31 December 2012: Sales Purchases Accounts Accounts receivable payable US$'000 US$'000 US$'000 US$'000 Burstall Winger LLP 2013 - 57 - - 2012 - - - - A director of the Corporation is a partner of Burstall Winger LLP who acts as counsel for the Corporation. Loans to related parties Amounts owed from related parties 2013 2012 US$'000 US$'000 FPF-1 Limited 21,551 21,551 27. SEASONALITY The effect of seasonality on the Corporation's financial results for any individual quarter is not material. 28. POST BALANCE SHEET EVENTS Acquisition of Valiant Petroleum plc In March 2013, the Boards of Ithaca and Valiant announced that they had reached agreement on the terms of a recommended acquisition (the"Acquisition"). The Acquisition became effective on 19 April 2013 with Ithaca Energy Holdings (UK) Limited acquiring the entire issued and to be issued share capital of Valiant. The total acquisition price was approximately $309 million, which equated to approximately GBP4.75 per Valiant share. Approximately $200 million of the consideration was payable in cash (being approximately GBP3.07/ Valiant share) and approximately $109 million in new Ithaca shares ("Consideration Shares" equating to 1.33 Ithaca shares per Valiant share). The Company also repaid ~$150 million Valiant debt/ working capital bringing the total enterprise value to $459 million. Given the proximity of the Acquisition to the quarter end, no provisional fair values have yet been determined. This information is provided by RNS The company news service from the London Stock Exchange END
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