Annual Report and Accounts

Results for the year ended 31 July 2008 Europa Oil & Gas (Holdings) plc (EOG) the independent oil & gas exploration and production group with assets in Europe and North Africa, today announces its results for the 12 months ended 31 July 2008. Operational highlights * Crude Oil sales totaled 88,710 barrels an increase of 15% on 2007 * Drilled and completed Crosby Warren-2Y as an oil producer * Awarded 3 new licences in the UK East Midlands * Secured planning permission for 2 onshore wells in the UK East Midlands * Drilled and tested Boistea-1, currently shut-in for commercial evaluation * Completed the Costisa-2 well, which flowed gas at non-commercial rates * Awarded a second licence in the French Aquitaine Basin * Entered into a letter of intent with Swedish E&P company to sell Ukraine asset Financial Highlights * Revenue of £4.4 million (2007: £2.5 million) * Profit before tax of £2.1 million (2007: £0.3 million) * Profit after tax from continuing operation of £0.4 million (2007: £0.1 million loss) * Basic earnings per share from continuing operations 0.71 pence (2007: loss of 0.10 pence) Post balance sheet events * Spudded the Lilieci-1 exploration well * Agreed to reduce equity interest in Brates Block East to 20% * Share finance facility terminated * Holmwood-1 planning application submitted * Commenced constuction at Hykeham-1 wellsite For further information, please contact: Paul Barrett Europa Oil & Gas (Holdings) plc 07971 528754 Jonathan Wright Seymour Pierce 0207 107 8050 Chairman's statement I am very pleased to report a 76% increase in revenues during the reporting period to £4.4 million, a result of higher oil prices and increased production volumes. With continued tight control of costs, this generated a pre tax profit of £2.1 million and basic earnings from continuing operations of 0.71 pence per share. The Group has made the transition to IFRS and this is the first full year that financial statements are presented under IFRS. During the year, your company completed the Crosby Warren-2Y well, in the UK, which was put into full-time production in January. This boosted Group production, resulting in an overall 15% increase in volumes over the previous period. In total, the company produced 88,710 barrels of crude oil during the year from its UK East Midlands properties. We participated in two wells in Romania. Boistea-1 is awaiting a gas commerciality test and Costisa-2 is to be plugged and abandoned after showing sub-commercial gas. Subsequently, the Lilieci-1 well was spudded and at the time of writing is operating at TD. In the UK, a major licence award covering an area of some 600km2 was made to Europa in 2008 to the east of Crosby Warren in the main part of the Humber Basin. Previous exploration effort in the area has been surprisingly light with only 3 wells in this area, making it one of the least explored proven petroleum provinces in the UK. In France, we acquired a second highly prospective licence in the Aquitaine Basin. The Tarbes Val d'Adour licence contains two oil fields abandoned in 1986, during a time of very low oil price. Europa is currently undertaking a re-evaluation of this licence, along with our other acreage in the basin. The Aquitaine Basin has produced 2.8 billion barrels of oil equivalent to date but has not seen modern exploration or development technology applied for over 20 years. Progress is being made in our Egyptian North African assets, with the award of a seismic reprocessing contract for the data in the West Darag concession. In regard to current and future drilling plans, rig availability has affected the worldwide oil industry and the UK onshore is no exception. With this in mind, the company has focused on obtaining planning for all its drillable prospects. The company has obtained planning permission to drill Hykeham-1 (formerly Gravel Pits-1, renamed by the Department of Energy and Climate Change) and West Firsby-9 and is submitting applications for Holmwood-1 and West Whisby-1. Site construction work has commenced for Hykeham-1. A drilling rig has been secured for the remainder of the 2008 Romanian exploration programme, which includes the Lilieci Prospect and the high impact Voitinel Prospect. The Voitinel Prospect, with 16 mmbo potential reserves net to Europa, is anticipated to spud in early 2009. The dramatic fall in the oil price from its summer highs has had an immediate effect on Europa’s cash flow. While we await the bank’s confirmation of renewal of financing there is a degree of uncertainty over the Group’s ability to fund its 2009 drilling programme. This leads to an “Emphasis of Matter – going concern” comment in the auditors’ report. Based on latest income projections, efforts being made to reduce liabilities through trade arrangements, and the expected outcome of the discussions with the bank, the directors consider that the Company and Group will be going concerns for the foreseeable future. Over the last several months the company has been concentrating its efforts on increasing production. This work has indicated that a significant increase is possible with the current well stock. The company is in the process of redesigning the sites to increase production and it is anticipated that benefits will be seen within a relatively short time. Operational and Financial review The Group currently holds interests in 19 licences and part-licences (see table). Of these 16 are in Europe and 3 in North Africa. Country Project Equity Operator Status UK Crosby Warren 100% Europa Production UK West Firsby 100% Europa Production UK Whisby (W4) 65% BPEL Production UK PEDL143 40% Europa Holmwood-1 well planned 09 UK PEDL150 50% * Europa Hykeham-1 well planned 09 UK PEDL180/181 50% Europa New licence UK PEDL222 50% Valhalla New licence UK (CS) 109/5 & 112/30 50% Europa Exploration Romania Brodina 28.75% Aurelian Voitinel-1 well planned 09 Romania Brates West 20% MND Proposal to drill 2 wells 09/10 Romania Brates East 80% MND Combine with West at 20% Romania Cuedjiu 17.5% Aurelian Boistea-1 commercial study Romania Bacau 19% Aurelian Lilieci-1 well drilling Q4 08 France Béarn des Gaves 100% Europa Possible field development France Tarbes val d'Adour 100% Europa New licence Egypt West Darag 60% Europa Exploration Western Sahara Hagounia 100% Europa Inactive - force majeure Western Sahara Bir Lehlou 100% Europa Inactive - force majeure Ukraine Horodok 70% Europa Planned asset sale * assumes full take up of farm in options Rig availability and local planning issues have led to a delayed start for Europa's 2008/09 drilling programme. The campaign is now underway and the directors eagerly await the outcome. Significant additional licence interests have been acquired in France and the UK and at the date of this report, the Group held interests with a total of 26 undrilled leads and prospects across its portfolio. Work planned in the coming months will high-grade these, and form the basis of the Group's exploration effort following the completion of the current drilling campaign. United Kingdom The company has interest in both the UK offshore and UK onshore. Onshore, the company has built a balanced exploration and production portfolio. These assets include three producing oilfields and a wide range of exploration leads and prospects across the highly petroliferous East Midlands Basin and a key exploration prospect in the Weald Basin of southern England, the Holmwood Prospect. Offshore, Europa has a 50% interest in a very large Carboniferous prospect in the East Irish Sea on which there is a 1.5 tcf prospect (250mmboe). This prospect, although high risk, if successful would clearly take the company to a different level. United Kingdom production Europa's East Midlands fields continue to produce strongly, with an overall 15% increase in volumes over the previous year. There are further increases targeted at both West Firsby and Crosby Warren. At West Firsby, where the wells are produced using jet pumps, additional perforations have been made in the WF6 well, resulting in an increase in field oil production. A study of the operation of the jet pump system has highlighted the potential for a further increase in oil production by upgrading the facilities. In addition, a production well location is being finalized utilising a newly reprocessed seismic dataset. The field, which has produced only 10.9% of the oil-in-place to date, requires an additional production well to optimize recovery. The WF9 well is being considered for drilling in 2009, the exact timing being dependent on rig availability and financing. At Crosby Warren, the new production well, CW-2Y, was put on stream but is currently shut in due to technical problems. The well is capable of good oil production but the oil flow rates are being affected by interference from produced gas. This phenomenon also occurs in the CW-1 well. A detailed study is being undertaken on the wells to determine the best completion for these high gas production oil wells. This should increase oil production from the Crosby Warren site. The company's production at Whisby has continued to perform strongly. The performance is testament to the geological understanding of the field by the Europa directors back in 2003, leading to the drilling of a well which has an estimated remaining recoverable reserve of 0.2 mmbo. United Kingdom exploration In PEDL143, we progress towards obtaining planning permission for the Holmwood-1 well, a robust prospect situated in the northern part of the Weald Basin, close to the Albury and Brockham fields. Good progress has been made with the local authorities in respect of the planning application for this well and it is expected that the submission will be finalised in the near future. In PEDL150, planning permission was granted for the Hykeham-1 (formerly Gravel Pits-1) prospect and this is the next UK well scheduled to be drilled. It is a 4-way dip closed structure, confirmed by seismic data acquired in 2007, some 2km from Europa's existing production at Whisby. Thick reservoir development at the nearby Caledonian Farm-1 well indicates the potential for significantly thicker oil pay at Hykeham than at Whisby. A delay in securing a drilling rig has led a later start to this well. The allowable period for drilling, under the planning restrictions, will reopen in August 2009. In the meantime, work has started on the site construction for the well. Several other prospects are present on the licence, including a Caledonian Farm re-drill which becomes a 'must drill' prospect in the event of success at Hykeham. Close by, the West Whisby structure is also well defined, with an additional deep 4-way dip closed target. Several further leads may require additional seismic acquisition, but it is clear that this licence is highly prospective. The exploration portfolio has been significantly enhanced with three awards in the UK 13th onshore round in 2008. PEDL222, situated to the north of Whisby, contains several exploration leads which are to be evaluated with new seismic data. The largest and most exciting award was that in NE Lincolnshire, comprising approx 600km2 across two licences (PEDL180/181). The PEDL180/181 licences lie in the underexplored Humber Basin. Whilst there has been little drilling in this basin, success has been demonstrated by the Saltfleetby Gasfield, the largest onshore UK gasfield, which is now being prepared for gas storage. Commercial oil is proven at Keddington and Crosby Warren and the initial evaluation of the area undertaken for the licence application highlighted a surprisingly large number of undrilled features. At the time of the application, Europa had identified a total of 10 leads and prospects from existing data with total unrisked prospective resource of 25 million barrels net to Europa. Not all of these structures will survive scrutiny with the incorporation of additional seismic data, but it is apparent that this region represents one of the most prospective under-explored onshore areas in the UK for both gas and oil. PEDL222 contains the undeveloped Torksey oil discovery. The petroleum system is proven on-block and 3 leads have been identified which will be matured using existing, newly available, seismic data. The acreage is a perfect adjunct to the Group's existing acreage, bridging two `stranded' areas of PEDL150 that, without the additional acreage, could not be properly evaluated. Offshore, the 109/5 East Irish Sea block, contains mid-range prospective resources of 0.75 tcf (125 million boe) net to Europa. This is a classic high risk - high reward prospect. The play is a large Carboniferous fault-block with potential in Namurian sandstones for significant gas volumes. The decision to commit to drilling this well or relinquish the acreage must be made by June 2009. Romania The Voitinel Prospect in the Brodina block is scheduled to spud in January 2009, This is a robust four-way dip-closed feature confirmed by several modern seismic surveys as well as gravity data. The company has continued to explore elsewhere in its Romanian portfolio, including the gas discovery at Boistea-1 and the current Lilieci-1 well. At Boistea, a 3m perforated section of sandstone, flowed 350 mcfpd, despite wellbore damage induced by the drilling and completion process. The operator is undertaking a study to identify commercial solutions for development of the discovery, including gas-to-power options. At the time of writing, Lilieci-1, an exploration well in the Bacau licence, was operating at TD. This is an exploration prospect much deeper than Europa's previous gas tests in the area and is in close proximity to the giant Roman Gasfield. The Costisa-2 well, which flowed gas at sub-commercial rates, is to be plugged and abandoned. The operator of the Brates block, MND, has identified two possible well locations to take the licence forward into the next phase. The first of these is a step-out well from the Geamana Oilfield in the western part of the licence. The second is a well probing the potential underneath the Tazlual Mare Gasfield. For both of these wells it is anticipated that both Europa and MND will seek a risk-sharing industry partner. France The Group was awarded a second permit in the Aquitaine Basin of southwest France in early 2008. This permit, the Tarbes Val d'Adour (TVd'A), complements the company's existing permit of Béarn des Gaves (BdG). The TVd'A permit is surrounded by existing producing oilfields and contains the Jacque and Osmets Oilfields, both of which were put into production briefly before being shut-in during the oil price crash of 1986. Both Jacque and Osmets produced medium gravity oil from Cretaceous reef carbonates. The most promising candidate for a field redevelopment pilot project is a re-drill of the Osmets-2 well, where a sequence of porous beds was only partly exploited. The upper part of these units, up to 9m of net pay, has never been produced. A well to target these horizons at a high angle would provide an excellent test of the long-term productivity of these units. It is hoped this well can be drilled in 2009. Elsewhere in Europa's French portfolio, the reprocessing of seismic in the BdG permit has identified an area with amplitude anomalies in the northwest of the licence, suggestive of gas accumulations. Trials are begin undertaken with the data to quantify these possible gas effects on the seismic, though it is likely that new seismic data will be required prior to any drilling. The BdG permit has the deep high pressure Berenx-1 gas discovery, drilled by Elf in 1975. The appraisal and development of this discovery, or any further drilling along trend, is an expensive, specialised operation and the company will be seeking a competent HPHT partner to achieve this goal in due course. Egypt An evaluation of the existing database on the West Darag concession has led to a concentration of effort on the rift margin triangle in the Sukhna area. In this area, Gulf of Suez rifting overprints earlier Mesozoic carbonate systems and the overall effect is a confluence of Mesozoic (Western Desert) style source rock systems and younger, Gulf of Suez, reservoir systems. The existing seismic database has highlighted undrilled structures which will require new infill data to be acquired before a drilling location can be chosen. It is anticipated these data will be acquired in early 2009. Western Sahara These two highly prospective licences remain under force majeure. Ukraine A letter of intent was signed between the company and a Swedish-listed oil and gas company in anticipation of an outright sale of the Ukraine assets. Results for the year Group revenue for the year was £4,418,000 (2007: £2,504,000). UK oil revenues during the year ended 31 July 2008 were 88,710 barrels or 242 barrels per day (2007: 77,150 barrels or 211 barrels per day). The 15% increase in sales volume arose from production enhancement projects and a full year of production from the Crosby Warren oilfield (2007: 8 months) The selling price for Europa's UK production is contracted at a small discount to Brent crude price. Average price achieved in the year to 31 July 2008 was $99.45 per barrel (2007: $62.98). A weaker US Dollar in the year to 2008 meant that some of the increased Dollar revenue was lost as the sales were translated to Sterling at an average rate of $2.0050 (2007: $1.9464) The Crosby Warren field sells a very small quantity of gas. Cost of sales increased 7% due to inflation and the higher volumes. For the calculation of the depletion charge included in cost of sales, the Group adopted the findings of the reserves report issued by Energy Resource Consultants Limited dated 31 July 2007. Administrative expenses reduced as a result of an increased recharge of Company administrative expenses into cost of sales. Finance income was lower as a result of exchange gains made in 2007 not recurring in 2008. Finance costs rose due to exchange losses which offset lower borrowing costs. The results for 2008 show a profit before taxation of £2,054,000 (2007: £348,000). Taxation The total tax charge (current and deferred) for the year was £1,609,000 (2007: £408,000). All of the charge related to UK activities. A deferred tax asset held in the Company at 31 July 2007 of £205,000 was considered as not recoverable in the near term and was derecognised in 2008. Profit after tax The results for 2008 show a profit from continuing activities after taxation of £445,000 (2007: loss of £60,000). Discontinued operations As announced on 24 July 2008, Europa has entered into discussions with a third party to divest the Group's remaining assets in Ukraine. Assets in Ukraine were substantially written down in 2007 and are presented as a discontinued activity, with a full provision in 2008. There was a further charge relating to the disposal of the Bilca gas field in Romania recorded in the year. Cashflow Net cash inflow from operating activities was £2,798,000 (2007: £1,535,000). Investment in non current assets required cash of £5,093,000 (2007: £ 2,700,000). This related principally to expenditure on intangible assets in Romania and the UK, and payments for completion of the Crosby Warren-2Y well. The receipt of £1,000,000 (2007: £1,000,000) from the sale of the Bilca gas field in Romania partially offset this expenditure. The net overdraft at the end of the year was £1,019,000 (2007: net cash £ 149,000). The Company maintains a £2 million uncommitted multi-option facility with its bankers which can be utilised in either Sterling or foreign currency via an overdraft or the issue of bonds, guarantees, indemnities or letters of credit. Included within short term borrowings is an overdraft of £1,022,000 (2007: £ 481,000) which has been utilised under this facility. The Company has a guarantee in place for $1,150,000 (2007: $1,150,000) in favour of a third party relating to a licence concession in an overseas jurisdiction. The facility is being renegotiated and is expected to be renewed at a similar level, pending the outcome of an independent review of oil reserves. Accounting policies Accounting policies have changed from the previous year when the financial statements were prepared under applicable United Kingdom Generally Accepted Accounting Practice (UK GAAP). The comparative information has been restated in accordance with IFRS. Consolidated income statement for the year ended 31 July 2008 2008 2007 £000 £000 Continuing operations Revenue 4,418 2,504 Cost of sales (1,548) (1,444) -------- -------- Gross profit 2,870 1,060 Administrative expenses (373) (399) Other operating expenses (3) (79) Exploration expenses (1) - Finance income 12 148 Finance costs (451) (382) -------- -------- Profit / (loss) before taxation 2,054 348 Taxation (1,609) (408) -------- -------- Profit / (loss) for the period from continuing operations 445 (60) Discontinued operations Loss for the period from discontinued operations (296) (2,171) -------- -------- Profit / (loss) for the period 149 (2,231) ======== ======== 2008 2007 Pence Pence per per share share Earnings / (loss) per share (eps) Basic eps from continuing operations 0.71p (0.10)p Basic eps from discontinued operations (0.47)p (3.52)p Basic eps from continuing and discontinued operations 0.24p (3.62)p Diluted eps from continuing operations 0.70p (0.10)p Diluted eps from discontinued operations (0.47)p (3.52)p Diluted eps from continuing and discontinued operations 0.24p (3.62)p Consolidated balance sheet as at 31 July 2008 2008 2007 £000 £000 Assets Non-current assets Intangible assets 7,241 4,514 Property, plant and equipment 5,996 4,693 -------- -------- Total non-current assets 13,237 9,207 Current Assets Inventories 16 36 Current tax assets - 73 Trade and other receivables 656 2,003 Cash and cash equivalents 3 630 -------- -------- Total current assets 675 2,742 -------- -------- Total assets 13,912 11,949 Liabilities Current liabilities Trade and other payables (1,752) (2,845) Current tax liabilities (380) (20) Short-term borrowings (1,548) (533) -------- -------- Total current liabilities (3,680) (3,398) Non-current liabilities Long-term borrowings (302) (316) Deferred tax liabilities (2,701) (1,847) Long-term provisions (1,058) (438) -------- -------- Total non-current liabilities (4,061) (2,601) Total liabilities (7,741) (5,999) -------- -------- Net assets 6,171 5,950 ======== ======== Equity Share capital 626 620 Share premium account 4,692 4,597 Merger reserve 2,868 2,868 Forex reserve (21) 5 Retained earnings (1,994) (2,140) -------- -------- Total equity 6,171 5,950 ======== ======== Consolidated statement of changes in equity for the years ended 31 July 2007 and 2008 Share Share Merger Forex Retained Total capital premium reserve reserve earnings equity £000 £000 £000 £000 £000 £000 Balance at 1 August 2006 611 4,406 2,868 - 50 7,935 Changes in equity for year Exchange difference on trans lation of foreign operations - - - 5 - 5 Loss for the year - - - - (2,231) (2,231) ------- ------- ------- ------- ------- ------- Total recognised income and expense for the year - - - 5 (2,231) (2,226) Share based payment - - - - 41 41 Issue of share capital 9 191 - - - 200 ------- ------- ------- ------- ------- ------- Balance at 31 July 2007 620 4,597 2,868 5 (2,140) 5,950 ======= ======= ======= ======= ======= ======= Share Share Merger Forex Retained Total capital premium reserve reserve earnings equity £000 £000 £000 £000 £000 £000 Balance at 1 August 2007 620 4,597 2,868 5 (2,140) 5,950 Changes in equity for year Exchange difference on trans lation of foreign operations - - - (26) - (26) Profit for the year - - - - 149 149 ------- ------- ------- ------- ------- ------- Total recognised income and expense for the year - - - (26) 149 123 Share based payment - - - - (3) (3) Issue of share capital 6 95 - - - 101 ------- ------- ------- ------- ------- ------- Balance at 31 July 2008 626 4,692 2,868 (21) (1,994) 6,171 ======= ======= ======= ======= ======= ======= Consolidated cashflow statement for the year ended 31 July 2008 2008 2007 £000 £000 Cash flows from operating activities Profit / (loss) after taxation 445 (60) Adjustments for: Share based payments (3) 41 Exchange difference on translation (26) 5 Depreciation including exploration and appraisal write off 590 544 Loss on sale of non-current assets 2 - Finance income (12) (150) Finance expense 451 395 Taxation expense recognised in profit and loss 1,609 408 Decrease / (increase) in trade and other receivables 352 (598) Decrease / (increase) in inventories 20 (20) (Decrease) / (increase) in trade and other payables (164) 846 ------- -------- Cash generated from continuing operations 3,264 1,411 Loss after taxation from discontinued operations (296) (2,171) Adjustments for: Depreciation including exploration and appraisal write off 296 2,043 Loss on sale of non-current assets - 594 ------- -------- Cash generated from discontinued operations - 466 Interest paid (144) (252) Income taxes paid (322) (90) ------- -------- Net cash from operating activities 2,798 1,535 ------- -------- Cash flows used in investing activities Purchase of property, plant and equipment and intangible assets (5,093) (2,700) Proceeds from sale of property, plant and equipment 23 - Proceeds from sale of discontinued operations (1,000) (1,000) Interest received 12 14 -------- -------- Net cash used in investing activities (4,058) (1,686) -------- -------- Cash flows from financing activities Proceeds from issue of share capital 100 200 Underwriting fee (5) (10) Proceeds from long-term borrowings 496 790 Repayment of borrowings (452) (828) -------- -------- Net cash from financing activities 139 152 -------- -------- Net increase /(decrease) in cash and cash equivalents (1,121) 1 Exchange gain / (loss) on cash (47) - Cash and cash equivalents at beginning of period 149 148 -------- -------- Cash and cash equivalents at end of period (1,019) 149 ======== ======== Notes 1. The financial information here presented is extracted from the audited accounts of the Group for the 12 months to 31 July 2008. 2. Basic earnings per share is calculated based on an average number of shares in issue of 62,401,492 (2007: 61,709,613). 3. Diluted earnings per share includes the effect of stock options and uses an average number of shares of 63,180,482 (2007: 61,709,613). 4. The accounts were approved by the Board on 16 December 2008. They will be posted to shareholders on 19 December 2008 and available on the company website www.europaoil.com later today.

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