Final Results

Gulf Keystone Petroleum Ld 12 June 2006 12th June, 2006 GULF KEYSTONE PETROLEUM LTD ("Gulf Keystone" or the "Company") PRELIMINARY RESULTS ANNOUNCEMENT Gulf Keystone Petroleum Limited, an independent oil and gas exploration company operating in the Republic of Algeria, today announces its preliminary results for the period ending 31 December, 2005. Highlights • Drilling and workover operations on Block 126a resulted in a highly successful well test on the GKS oil discovery and a potential oil discovery on the GRJ structure. • Commerciality formally declared on both the GKS and GKN oil discoveries, development approval and a production licence expected shortly. SONATRACH supporting exploration licence extension to allow completion of GRJ-2. Extension subject to formal approval and gazetting. • Award of eight new blocks onshore in Algeria, as Operator with 75% Working Interest. • Independent estimates of recoverable Resources within the new Hassi Ba Bamou Perimeter and Block 129 contract areas total some 200 mmboe, with further exploration potential of some 450 mmboe. • Full review of strategic options for Algerian portfolio ongoing in conjunction with the Algerian Authorities. • Management team strengthened. Todd Kozel, Chief Executive Officer of Gulf Keystone said: "The key challenges for Gulf Keystone during 2006 are very clearly to secure production and cash flow from the discoveries on Block 126a and to significantly advance the exploration and appraisal of the newly acquired licences. Also Gulf Keystone is now well positioned to focus on the further development of its business and the expansion of its portfolio, exploiting what it considers to be its particular competitive edge at the point of access for new opportunities in both Algeria and selected areas of the Middle East and North Africa. We approach this next phase in the company's development with considerable optimism." Enquiries Gulf Keystone Petroleum: 020 7514 1400 Todd Kozel, CEO Bill Guest, President Jon Cooper, Finance Director Hoare Govett Limited: 020 7678 8000 Andrew Foster Tristone Capital Limited: 020 7399 2470 Simon Ashby Rudd Citigate Dewe Rogerson: 020 7638 9571 Media enquiries: Martin Jackson / George Cazenove Analyst enquiries: Nina Soon or visit: www.gulfkeystone.com CHAIRMAN'S STATEMENT The year has been one of strong operational focus as we have continued with the drilling and testing of prospects and existing discoveries on Block 126a and have begun a comprehensive programme of technical and commercial studies on the major new acreage holdings acquired by Gulf Keystone Petroleum Limited ("the Company" or "Gulf Keystone") in Algeria during 2005. These varied activities have now confirmed that the Company has a portfolio of assets with very significant oil and gas potential. A recent independent assessment of the Company's reserves and resources carried out by RPS Energy Limited (RPS), and discussed further in the Chief Executive's report, has confirmed that the Company's newly expanded portfolio of assets contains significant oil and gas exploration and development potential. While the results of operational activities on Block 126a have been mixed, they have added immeasurably to our understanding of the significant hydrocarbon potential that exists in this geologically complex area. Commerciality has been formally declared on the two oil discoveries, GKN and GKS, and a third potential oil discovery has resulted from the drilling of well GRJ-2, which encountered three potentially hydrocarbon bearing intervals, and a test programme is being developed for this well. Having fulfilled its work commitments on Block 126a, and following conclusion of the Second Exploration and Evaluation Period of the licence in April of this year, Gulf Keystone has decided to focus exclusively on bringing the GKS and GKN oil fields into production, and on unlocking the productive potential of the GRJ oil bearing structure. SONATRACH has notified the Company of its support for the extension to the Block 126a exploration licence, which is necessary to enable the Company to pursue further work on the GRJ field, however, the extension to the contract still needs to be formally gazetted. The Company has relinquished the remaining exploration acreage on the block. In April 2005, Gulf Keystone was a highly successful bidder in the 6th Algerian International Licencing Round, acquiring exploration and appraisal rights to six additional onshore blocks under two separate contracts. A third contract, covering the Ben Guecha Perimeter (Blocks 108 and 128b), also adjacent to the Company's other Constantine Basin interests, was secured as a result of direct negotiation with SONATRACH and the Algerian Ministry of Energy and Mines. This contract has been signed by all relevant parties and we now await the formal gazetting of this award. These awards have increased Gulf Keystone's acreage holdings from one block covering 5,830 sq km to nine blocks now covering some 27,400 sq km. The Company has been awarded Operatorship of all eight new blocks and holds 75% of the working interest with its partner SONATRACH holding the remaining 25% working interest. The Company has already commenced detailed technical and commercial studies on these new blocks with the intention of acquiring further 2D and 3D seismic data, and commencing appraisal and workover activities on discoveries already made on the licences, as soon as practicable. I am delighted to report that Gulf Keystone has continued to strengthen radically its management team by recently recruiting individuals onto the Board and the Executive team with very significant international upstream experience in the financial, commercial and technical areas in particular. In this regard, Bill Guest took on the position of President of the Company in November 2005 while in March 2006 Jon Cooper joined as Finance Director for Gulf Keystone Petroleum Limited and Iain Patrick joined as Director of Commercial and Legal Affairs for Gulf Keystone Petroleum (UK) Limited. We very much welcome them on board. As the team expands and continues to build its reputation within Algeria as a skilled and technically competent Operator and Partner, Gulf Keystone is now increasingly well placed to concentrate on expanding its business development strategy. Such a strategy will inevitably be focused, first and foremost, on building its competitive position in Algeria. The Company is however, also beginning to focus actively, in parallel, on other selected areas within the North Africa and Middle East region where it considers that it has a competitive edge at the point of access as a result of its existing regional relationships. Finally, I am delighted to acknowledge the strong and highly collaborative working relationship that the Company continues to enjoy in Algeria with its host, the Ministry of Energy and Mines, and partner SONATRACH and we look forward to building and developing these relationships further to our mutual benefit. I remain however acutely aware of the need for us to continue to be able to translate these excellent relationships into specific deliverables. We are also conscious of the need to demonstrate the viability of, and growth potential associated with the Company's strategy. One of the key challenges that Gulf Keystone and other operators in Algeria have faced during 2005 has been the increasing cost of and access to goods and services. This obviously reflects the current state of the global service market particularly in Algeria and has for example hindered the Company from considering some of the more radical reservoir stimulation activities on Block 126a that it contemplated at the time of licence acquisition. The Company is however taking important steps to ensure that those services required in support of its future programme of activities within its expanded portfolio can be accessed on a timely and cost effective basis. I would like to thank all those employed by the Company, whether in Bermuda, Algeria, London or elsewhere, for their significant efforts over the past year, and I now very much look forward to being able to report progress towards demonstrating the potential of, and crystallising the value from, the Company's diverse portfolio of assets. Roger Parsons Non-executive Chairman CHIEF EXECUTIVE OFFICER'S STATEMENT I am pleased to be able to report on the activities of Gulf Keystone over the past year. On the operational side, significant focus has been placed on the drilling and testing of prospects and existing discoveries on Block 126a and on the maturation and finalisation of development plans for the GKS and GKN oil discoveries. In parallel, a major technical and commercial effort has been undertaken to increase our understanding of the hydrocarbon resource potential, and economic potential, of the three further contract areas awarded in 2005, and to progress plans for the further exploration and appraisal of these areas. The Block 126a 2005 drilling campaign consisted of the drilling of two wells, exploration well RTBW-1 and appraisal well GRJ-2, and the drilling of a sidetrack to an existing well, GKS-3. The well workover campaign consisted of the re-entry and stimulation of wells GKS-2 and GRJ-1. The results, which are discussed in more detail below, were mixed but have enabled the Company to progress its plans for the commercialisation of oil discoveries on the Block 126a and have added immeasurably to our understanding of this geologically complex area. The above programme marks the completion of all work obligations on Block 126a. One of the key achievements of 2005 was the award of three additional contract areas in Algeria. The areas awarded to Gulf Keystone include the Hassi Ba Hamou (HBH) perimeter, containing 5 blocks and located in the Eastern Timimoun Basin to the north of BP's In Salah field, and Blocks 108, 128b and 129, located in the Constantine Basin. Preparation of exploration and appraisal plans for these licences are well underway. Gulf Keystone is Operator of, and holds 100% of the interest available to foreign partners in, all of its Algerian licence interests. Given the rapid expansion of its portfolio during the year, and ahead of the next round of exploration and appraisal activity, the Company's recent focus has been firstly on the full technical review and inventorisation of its portfolio of discoveries, prospects and leads, secondly the potential introduction of strategic partners to complement and accelerate its exploration and appraisal efforts, and thirdly the expansion of its management team. I'm pleased to be able to report good progress on a number of fronts. With regard to the technical review of the portfolio, and of the newly awarded licences in particular, RPS Energy Limited recently and independently estimated that for the HBH perimeter and Block 129 alone, gross recoverable hydrocarbon volumes for the licences total 201.7 million barrels of oil equivalent ("Best Estimate" or Mean case). These resources include a significant gas discovery in the HBH licence and certain oil discoveries in Block 129. Under the new AIM guidelines, these volumes are categorised as "Contingent Resources" (being existing discoveries of oil and gas that require further technical or commercial evaluation). In addition, RPS confirm in these two contract areas, and in the retained area of Block 126a, the presence of 23 undrilled prospects and leads which, at the " Best Estimate" (Mean) unrisked level, contain potential gross recoverable reserves for the licences ("Prospective Resources") of 473.1 million barrels of oil equivalent. On a risked basis, this equates to 70.8 mmboe. Further discoveries and prospectivity have been recognised by SONATRACH and Gulf Keystone in Blocks 108 and 128b and these are currently under review. Block 126a GKN/GKS development Operational activity on the GKN and GKS discoveries included the workover of well GKS-2 and the drilling of a sidetrack on well GKS-3. Well GKS-2, was re-entered and stimulated. Production testing of the well resulted in a measured flow rate of 4,586bopd and 4.61 million cubic feet of gas per day. Well GKS-3 was originally drilled in 2003 and completed with a perforated liner. The GKS-3 sidetrack, drilled in 2005, allowed further testing and acid stimulation of the Ras Toumb and Cenomanian intervals. These intervals proved to be tight and non-productive. The well was suspended pending evaluation of further stimulation techniques. Gulf Keystone has submitted a "Final Discovery Report" with a development plan for the GKN field and has made an "Early Production Licence" application for the GKS field. These discoveries are located in a geologically complex area, hence the development of reserves will be phased - data from each phase being utilised to optimise, and confirm the economic viability of, the subsequent phase. The GKN field is already linked by a pipeline to production facilities at Ras Toumb, and the GKS discovery well, GKS-2, is situated within 2.4 km of this pipeline. Gulf Keystone is proposing to tie GKS-2 into the GKN pipeline, following a capacity upgrade, and carry out extended well testing in order to assess the ultimate recovery of the well and provide insight to the optimum mechanism for accessing the remaining GKS field reserves. The oil recovered during the extended well test will be marketed with the GKN production. The drilling of a second development well on the GKN discovery, GKN-4, is planned as part of the first phase of the GKN development, following receipt of a production licence, as is the acquisition of a small (c. 150 sq km) 3D seismic survey. Approval for the GKN/GKS development project was temporarily delayed due to the recent introduction of legislation limiting the flaring of gas. However, the Company has now submitted to SONATRACH a viable plan to utilise the associated gas produced with the oil from both fields which is presently under active review. The Company believes that development approval and a production licence will be granted shortly. GRJ Oil Discovery Well GRJ-1, drilled in 2003, was re-entered and tested during 2005. However, only small quantities of oil were recovered under test with no sustainable production being achieved. This further illustrates the challenges that have been experienced in Block 126a where widespread oil has been encountered but sufficient connectivity between the wellbore and fractures within the reservoir has not always been achievable from initial operations. The well was suspended pending evaluation of various options for stimulating the reservoir and achieving the necessary connectivity. Data from well GRJ-2, drilled in 2005, which was analysed by third party consultants, indicated that there are three separate potential reservoir intervals which may have the potential to contain hydrocarbons. Given the poor productivity of some previous wells, it was decided to defer testing of this well until the optimal test programme could be designed and agreed between SONATRACH and Gulf Keystone and suitable equipment could be made available in Algeria. Progress is being made towards finalising a testing strategy. The Company has applied for an 8 month licence extension from the Algerian authorities in respect of the GRJ discovery in order to complete the testing of well GRJ-2 which, in the case of success, the Company expects would be the subject of a production licence application. Hassi Ba Hamou perimeter (Blocks 317b, 322b, 347b, 348, 349b) The HBH perimeter, covering an area of 18,380 sq km, contains one existing gas field, HBH, confirmed by the drilling of three wells by SONATRACH and a number of undrilled leads and prospects. The initial seismic and well data set acquired by the Company in connection with the licence award included data relating to the HBH-1 discovery well and a portion of the 4,069 km of 2D seismic data previously acquired by SONATRACH. Since then, the Company has acquired from SONATRACH a substantially enhanced data set, including important log and well test data from a successful appraisal well HBH-3 and a substantial quantity of additional seismic data. This has enabled the Company to carry out a full technical and economic review of the contract area and identify a potential gas resource base which is materially larger than was identifiable at the time of licence award. RPS, as part of their recent independent review of Gulf Keystone's reserves and resources, estimate that the HBH Field contains recoverable gas reserves of 995 bcf. (These are classified as "Contingent Resources", pending commercialization of gas, and represent the "Best Estimate" or Mean case). RPS also confirmed a minimum of four undrilled leads and prospects containing a further potential 1,935 bcf in place Mean unrisked case). The Company's ongoing technical analysis of the HBH perimeter is continuing to identify significant additional hydrocarbon prospectively. Gulf Keystone intends to appraise the existing HBH discovery and drill two exploration wells during the first three year phase of the contract. It had, in addition, intended to acquire 100 sq km of 3D seismic and 400 km of 2D seismic as part of this initial programme. However, given the significantly enhanced prospectivity of the HBH perimeter, a potential increase in that programme to some 2,000 km of 2D seismic and 500 sq km of 3D seismic during this initial phase, is under consideration. Ben Guecha (Blocks 108/128b) The primary focus of SONATRACH and Gulf Keystone (the "JV partners") on the Ben Guecha permit will be the further development of the existing Ras Toumb oil field and the exploration for additional oil and gas reserves. SONATRACH's interpretation of its previously acquired 4,457 km of 2D seismic on the permit identified 7 additional prospects and leads, one of which, OSD, SONATRACH completed the drilling and logging of an exploration well and temporarily abandoned the well awaiting testing equipment. The JV partners committed to drill 2 wells on the permit during the initial 3 year phase of the licence, as a minimum work program. The Company acquired 156 sq km of 3D data over the greater Ras Toumb area in 2005 and this, together with an enhanced seismic and well data base since received from SONATRACH, has formed the basis of an ongoing full technical review of the contract area, the initial results of which have confirmed the prospectivity of the area. Further to the signing of the Production Sharing contract in 2005, these licences are yet to be ratified by being published in the Algerian official gazette. While the Company has already commenced a comprehensive work programme on the licence, the first official three year phase of the licence will not commence until the contract is ratified. Bottena perimeter (Block 129) Covering an area of 4,368 sq km, the Bottena perimeter is in the South Constantine Basin, adjacent to Block 126a and extending towards the Tunisian border. The licence area contains the Hassi El Kerma (HEK) oil discovery and Djebel Foua gas discovery. SONATRACH recently drilled two additional structures on the permit area, Djebel Darmoun (DDN) (2000) and Hanchir Baaziz (HCZ) (2002) both of which confirmed the presence of oil. Gulf Keystone currently intends to appraise the discoveries HEK and DDN, drill one exploration well and acquire additional 2D and 3D seismic data on the Bottena Perimeter. In addition, Gulf Keystone is considering processing and interpreting the 412 sq km 3D seismic survey that was acquired by SONATRACH over the DDN discovery in July 2005. It is presently undertaking a full technical review of the licence to firm up the prospectivity. Financial Results The Company reports a loss after taxation of $40.8 million (2004: $2.4 million) for the period. This loss is after an impairment charge for Block 126a of $35.1 million. The impairment under IFRS 6 was triggered for the Block 126a's group of cash generating units by the transfer of $24.8 million relating to the GKN and GKS fields from intangible fixed assets to tangible fixed assets, and reflects the decision of the Company not to apply for an extension to the Block 126a licence area outside of GKN, GKS and GRJ-2. Capital Expenditure on exploration and evaluation activities was $47 million. At the end of the year the Company had $51.4 million in cash of which $34.7 million was pledged against the issue of bank guarantees to SONATRACH. Outlook The key challenges for Gulf Keystone during 2006 are very clearly to secure production and cash flow from Block 126a and to radically advance the exploration and appraisal of its newly acquired licences. The Company is now in position to focus efforts on the further development of its business and the expansion of its portfolio, exploiting what it considers to be its particular competitive edge at the point of access for new opportunities in both Algeria and other selected areas of the Middle East and North Africa. We approach this next phase in the Company's development with considerable optimism. Todd Kozel Chief Executive Officer CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Restated NOTES 2005 2004 $'000 $'000 Continuing Operations Revenue - - Impairment provision 3 (35,145) - General and administrative expenses (7,325) (4,197) Share option expense (394) (108) Loss from operations (42,864) (4,305) Investment income 2,213 1,928 Loss before tax (40,651) (2,377) Tax expense (135) - Loss after tax for the year (40,786) (2,377) Loss per share (cents) Basic and diluted 1 (16.08) (1.72) CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2005 NOTES 2005 Restated 2004 $'000 $'000 ASSETS Non-current assets Property, plant and equipment 2 25,594 83 Intangible assets 3 28,651 41,708 54,245 41,791 Current assets Inventories 3,472 2,485 Trade and other receivables 3,386 425 Cash and cash equivalents 51,439 89,882 58,297 92,792 Total assets 112,542 134,583 LIABILITIES Current liabilities Trade and other payables 20,291 4,068 Tax liabilities 135 - Provisions 2,050 Total liabilities 22,476 4,068 Net assets 90,066 130,515 EQUITY Share capital 1,638 1,626 Share premium account 135,349 135,349 Convertible warrants - 12 Share option charge reserve 502 108 Exchange translation reserve (57) - Accumulated losses (47,366) (6,580) Total equity 90,066 130,515 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2005 Attributable to equity holders of the Group Exchange Share Share Share option Convertible Accumulated Translation Total Capital premium reserve warrants Deficit Reserve Equity $'000 $'000 $'000 $'000 $'000 $'000 $'000 Balance at 1 January 2004 24,493 - - - (5,578) - 18,915 24,493 - - - (5,578) - 18,915 - Prior year adjustment re - - - - 1,375 - 1,375 overheads capitalised (see note 7) - as restated 24,493 - - - (4,203) - 20,290 Preferred shares private 13,072 - - - - - 13,072 placement Share conversion and issue (35,939) 135,349 - - - - 99,410 Warrants subscribed - - - 12 - - 12 Net loss for the year - - - - (2,377) - (2,377) Balance at 1 January 2005 1,626 135,349 - 12 (7,837) - 129,151 - Prior year adjustment re - - - - 1,363 - 1,363 overheads capitalised (see note 7) - Prior period adjustment re - - 108 - (108) - - share option expense - as restated 1,626 135,349 108 12 (6,580) - 130,515 Employee share option expense - - 394 - - - 394 Exchange differences arising on - - - - - (57) (57) translation of overseas operations Exercise of warrants 12 - - (12) - - - Net loss for the year - - - - (40,786) - (40,786) Balance at 31 December 2005 1,638 135,349 502 - (47,366) (57) 90,066 The exchange rate used in the currency revaluation at year end was British Pound = 1.7361 US Dollar. CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005 Restated NOTES 2005 2004 £'000 £'000 OPERATING ACTIVITIES Cash used in operations 4 (2,132) (5,852) Interest received 2,213 1,928 NET CASH GENERATED/(USED) IN OPERATING ACTIVITIES 81 (3,923) INVESTING ACTIVITIES Purchase of intangible assets (37,663) (25,620) Purchase of property, plant and equipment (804) (43) NET CASH USED IN INVESTING ACTIVITIES (38,467) (25,663) FINANCING ACTIVITIES Proceeds on issue of share capital - 112,494 NET CASH USED IN FINANCING ACTIVITIES - 112,494 NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (38,386) 82,907 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 89,882 6,975 Effect of foreign exchange rate changes (57) - CASH AND CASH EQUIVALENTS AT END OF YEAR Bank balances and cash 51,439 89,882 CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The financial information for the year ended 31 December 2005 has not been audited and does not constitute the Company's statutory financial statements. The preliminary report was approved by the Board on 12 June 2006. The statutory accounts for the year ended 31 December 2005 have not been reported on by the Company's auditors. They will be circulated to the shareholders in June 2006 and the Annual General Meeting is arranged to take place on 15 July 2006. The comparative results for the year ended 31 December 2004 are based on the audited financial statements which contained an unqualified audit opinion. Basis of accounting The company is incorporated in Bermuda and it is quoted on the Alternative Investment Market of the London Stock Exchange. The financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") for the first time. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in note 6. The financial statements have been prepared under the historical cost accounting rules and on a going concern basis. In common with many exploration companies, the Group raises finance for its exploration and appraisal activities in discrete tranches to finance its activities for limited periods. Further funding is raised as and when required. When any of the Group's projects move to the development stage, specific financing may be required to enable development to take place. The principal accounting policies adopted are set out below. At the date of authorisation of these financial statements the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective: IFRS 7 Financial instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interest Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 8 Scope of IFRS 2 Share -based Payment IFRIC 9 Reassessment of Embedded Derivatives The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group when the relevant standards come into effect for periods commencing on or after 1 January 2007. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and enterprises controlled by the Company (its subsidiaries) made up to 31 December each year. The Group uses the purchase method of accounting for the acquisition of subsidiaries. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by other members of the Group. All intra-Group transactions, balances, and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Leasing Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the shorter of the period to the next rent review date and the lease term. Foreign currencies Transactions in currencies other than US Dollars are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in the income statement for the period. On consolidation, the assets and liabilities of the Group's overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for each month in the period. Exchange differences arising, if any, are classified as equity and transferred to the Group's translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. The functional and presentation currency of the company is dollars as the majority of the Group's transactions are transacted in this currency. Taxation Under current Bermuda laws, the Group is not required to pay taxes in Bermuda on either income or capital gains. The Group has received an undertaking from the Minister of Finance in Bermuda exempting it from any such taxes at least until the year 2016. Algeria currently imposes no taxes on corporate income or capital gains The tax currently payable is based on taxable profit for the year earned in the United Kingdom by the Group's subsidiary. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated by using tax rates that have been enacted or substantively enacted by the balance sheet date. There is no deferred tax provided as there are no material timing differences which give rise to such a balance. Property, plant and equipment other than oil and gas interests Property, plant and equipment are stated at historical cost. Depreciation is provided at rates calculated to write each asset down to its estimated residual value evenly over its expected useful life as follows:- Fixtures and equipment - 20% straight line Intangible assets other than oil and gas Intangible assets, other than oil and gas assets, have finite useful lives and are measured at cost and amortised over their expected useful economic lives as follows:- Computer software - 33% straight line Intangible and tangible non current assets - oil and gas interests The Group adopts the full cost method of accounting for its oil and gas interests. Under the full cost method of accounting all costs relating to the exploration for and development of oil and gas interests, whether productive or not, are accumulated and capitalised as non-current assets. These costs, which are initially classified as intangible non-current assets during the exploration and evaluation phase, are only carried forward to the extent that they are expected to be recouped through the successful development of an area or where activities in an area have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves. Costs dealt with in this way include seismic data, licence acquisition costs, technical work, exploration and appraisal drilling, general technical support and directly attributable administrative and overhead costs. In 2003 and 2004 not all of the directly attributable administrative and overhead costs were capitalised in line with the Group's policy. In order to rectify this, these costs have been capitalised and the opening balances restated. These adjustments are set out in note 7. Costs are transferred to depreciable pools within property, plant and equipment upon declaration of commerciality or upon cessation of exploration on each license and amortised over the life of the area according to the rate of depletion of the economically recoverable costs. Any proceeds arising from the sale or farm-out of assets are deducted from the relevant cost pool. Depreciation and depletion of costs in depreciable pools is provided under the unit of production method which uses the estimated commercial reserves in the cost pool and the sum of the total costs in the pool and any further anticipated costs to develop such reserves. Impairment of tangible and intangible non-current assets At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Inventories Inventories relates to materials acquired for use in exploration activities. These are valued at the lower of cost and net realisable value. Warrants Proceeds in respect of convertible warrants subscribed are shown as a reserve and upon issue of the shares, the proceeds are transferred to share capital. Financial instruments The Group's financial instruments comprise cash together with various items such as other receivables and trade payables etc, which arise directly from its operations. The main purpose of these financial instruments is to provide working capital Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group has become a party to the contractual provisions of the instrument. Trade receivables Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption, are accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Equity instruments Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event which it is probable will result in an outflow of economic benefits that can be reliably estimated. Decommissioning provision The decommissioning provision represents management's best estimate of the Group's discounted liability when restoring the sites of drilled wells to their original status. Share-based payments The Group has applied the requirements of IFRS 2 to share option schemes allowing certain employees within the Group to acquire shares of the company. For all grants of share options, the fair value as at the date of grant is calculated using an appropriate option pricing model and the corresponding expense is recognised over the expected life of the option. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Abandonment The Group has estimated that abandonment costs for wells will be $410,000 per well. It has provided for this amount for GKS-3, RDL-1, GRJ-1, GRJ-2 and GKS-3. The carrying amount in the balance sheet as at 31 December 2005 is $2,050,000. Impairment Review of GKN and GKS The Group employed a modelling specialist, PWX LTD, to calculate the net present value of GKN and GKS based on, and with sensitivities around, a gross production profile of 4 mbpd, an oil price of $60bbl and a discount rate of 10%. The positive net present value from this model exceeded the carrying value as at 31 December 2005 of $24.8 million which was, therefore, transferred from intangible to tangible assets. NOTES 1 LOSS PER SHARE The calculation of the basic and diluted earnings per share is based on the following data: Earnings 2005 2004 $'000 $'000 Loss for the purposes of basic and diluted loss per share (40,786) (2,377) Number of shares Weighted average number of ordinary shares for the purposes of 253,677,757 138,101,276 basic and diluted loss per share There is no dilutive effect from the options or warrants issued by the company. 2 PROPERTY, PLANT AND EQUIPMENT Restated Restated Oil & Gas Fixtures & Properties Equipment Total $'000 $'000 $'000 At 1 January 2004 Cost - 73 73 - Prior year adjustment re overheads 3 3 capitalised (see note 7) - - As restated - 76 76 Accumulated depreciation - (24) (24) Net book value - 52 52 Year ended 31 December 2004 Opening net book value - 52 52 Additions - 43 43 Depreciation charge - (12) (12) Closing net book value - 83 83 At 31 December 2004 Cost - 119 119 Accumulated depreciation - (36) (36) Net book value - 83 83 Year ended 31 December 2005 Opening net book value - 83 83 Additions - 804 804 Transfer from intangible assets 24,849 - 24,849 Depreciation charge - (142) (142) Closing net book value 24,849 745 25,594 At 31 December 2005 Cost 24,849 923 25,772 Accumulated depreciation - (178) (178) Net book value 24,849 745 25,594 3 INTANGIBLE ASSETS Restated Exploration & Computer Restated evaluation costs software Total $'000 $'000 $'000 At 1 January 2004 Cost and net book value 22,393 - 22,393 - Prior year adjustment re overheads 1,375 - 1,375 capitalised (see note 7) - As restated 23,768 - 23,768 Year ended 31 December 2004 Opening net book value 23,768 - 23,768 Additions 17,940 - 17,940 Closing net book value 41,708 - 41,708 At 31 December 2004 Cost and net book value 41,708 - 41,708 Year ended 31 December 2005 Opening net book value 41,708 - 41,708 Additions 46,808 156 46,964 Transferred to tangible assets (24,849) - (24,849) Impairment write off (35,145) - (35,145) Amortisation charge - (27) (27) Closing net book value 28,522 129 28,651 At 31 December 2005 Cost 63,667 156 63,823 Accumulated amortisation (35,145) (27) (35,172) Net book value 28,522 129 28,651 $24.8 million was transferred from oil & gas exploration and evaluation costs to oil & gas properties within property, plant and equipment during the year. This transfer was triggered by the SONATRACH and Gulf Keystone Petroleum Limited joint venture management committee i) declaring commerciality of the GKN field and sending a recommendation via SONATRACH to the Ministry of Energy and Mining in Algeria endorsing a production license; ii) the anticipated declaration of commerciality of GKS and subsequent recommendation via SONATRACH to the Ministry of Energy and Mining in Algeria for the award of an early production license. This transfer, together with the expiry of the exploration license from Block 126a and the Groups decision only to focus on GKN, GKS and GRJ fields within Block 126a has triggered an impairment test under IFRS 6 and IAS 36 for Block 126a's Group of cash generating units. $35.1million has been written off intangible fixed assets as a result of this impairment test in relation to the exploration activities on OGZ, RDL and RTBW. The amortisation charge of $27,000 has been included in general and administrative expenses. RECONCILIATION OF LOSS FROM OPERATIONS TO NET CASH USED IN 2005 2004 OPERATING ACTIVITIES 4 $'000 $'000 Loss from operations (42,864) (4,305) Adjustments for Depreciation of property, plant & equipment 142 12 Amortisation of intangibles 27 Impairment of intangibles 35,145 Share based payment expense 394 108 Increase in inventories (987) (1,616) Increase in provision 2,050 Increase in receivables (2,961) (361) Increase in payables 6,922 310 Cash used in operations (2,132) (5,852) 5 BANK GUARANTEES As part of the contractual terms of the Algerian contracts, the Group has given bank guarantees to SONATRACH of $34.7 million. These are cash backed guarantees which effectively reduce the free cash available that the Group has on its balance sheet. That is $6 million for the Bottena ("129 Contract") work programme, $15.6 million for the Ben Guecha ("108/128b Contract") work programme and $13.1 million for the Hassi Be Hamou (Blocks 317b, 322b3, 347b, 348 and 349b) work programme. These guarantees are against the exploration and evaluation programmes stipulated in the contracts and are reduced as the work programmes are completed. 6 EXPLANATION OF TRANSITION TO IFRS As required by IFRS 1, the impact of the transition from UK GAAP to IFRS is explained below. The accounting policies set out above have been applied consistently to all periods presented in this financial information and in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of the transition to IFRS. IAS 1 - Presentation of Financial Statements The form and presentation of the UK GAAP financial statements has been changed to be in compliance with IAS 1. IFRS 2 - Share Based Payments Under IFRS 2, share awards are measured at fair value at grant date and recognised as an expense to the income statement over the expected term. The fair value of the incentives granted is measured using a stochastic model. The impact of this standard on the financial statements of the Group is a $108,000 charge to the year ended 31 December 2004 income statement and an equivalent increase in share option reserve. IAS 7 - Cash Flow Statements The IFRS Cash Flow Statement, prepared under IAS 7, presents cash flows in three categories; cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Other than the reclassification of cash flow into the new disclosure categories, there are no significant differences between the Group's Cash Flow Statement under UK GAAP and IFRS. Consequently, no cash flow reconciliations are provided. Purchases of tangible fixed assets under UK GAAP have been reclassified to purchases of intangible assets and purchases of property, plant and equipment under IFRS. Details of the adjustments to the Group's financial performance for the year ended 31 December 2004 are set out in the following tables: Restated IFRS 2 Share Restated UK GAAP based payment under IFRS $'000 $'000 $'000 Administrative expenses (4,197) - (4,197) Share option expense - (108) (108) Loss from operations (4,197) (108) (4,305) Investment income 1,928 - 1,928 Loss before tax (2,269) (108) (2,377) Tax expense - - - Loss after tax for the year (2,269) (108) (2,377) Basic and diluted loss per share 1.6c 1.7c Restated IFRS 2 Share Restated UK GAAP based payment under IFRS $'000 $'000 $'000 ASSETS Non-current assets Property, plant and equipment 83 - 83 Intangible assets 41,708 - 41,708 41,791 - 41,791 Current assets Inventories 2,485 - 2,485 Trade and other receivables 425 - 425 Cash and cash equivalents 89,882 - 89,882 92,792 - 92,792 Total ASSETS 134,583 - 134,583 LIABILITIES Current liabilities Trade and other payables 4,068 - 4,068 TOTAL LIABILITIES 4,068 - 4,068 Net assets 130,515 - 130,515 EQUITY Share capital 1,626 - 1,626 Share premium 135,349 - 135,349 Other reserves 12 - 12 Share options charge reserve - 108 108 Accumulated losses (6,472) (108) (6,580) Total equity 130,515 - 130,515 The transition to IFRS has had no effect on cash flow. The UK GAAP figures have been restated for the prior year adjustment per note 7. 7 EXPLANATION OF RETROSPECTIVE CHANGES UNDER IAS 8 In 2003 and 2004 not all attributable administrative and overhead costs were capitalised according to the Group's policy. The 2004 financial statements have been restated to correct this. The effect of the restatement on those financial statements is summarised below. Effect on 2004 $'000 Increase in intangibles 1,360 Increase in tangibles 3 Decrease in general and administration expense 1,363 Decrease in loss before tax 1,363 Decrease in loss per share 0.98 Effect on period prior to 2004 $'000 Increase in intangibles 1,375 Decrease in general and administration expense 1,375 Decrease in loss before tax 1,375 Decrease in loss per share 1.53 8 POST BALANCE SHEET EVENT On 9 June 2006 the Group signed loan agreements with GIBCA Limited and Falcon Partners Trust, both related parties, to provide an unsecured debt facility in aggregate of $5 million at an interest rate of 7% and for a term of 12 months. Full accounts are due to be posted to Shareholders on Friday 16th June, 2006 and will be available at the Company's registered office Canon's Court, 22 Victoria Street, Hamilton, HM12, Bermuda and on the Company's website (www.gulfkeystone.com) The Annual General Meeting is due to be held at the Company's Algerian office on 15th July, 2006 at 12 noon. This information is provided by RNS The company news service from the London Stock Exchange

Companies

Gulf Keystone Petroleum Ltd Com Shs (DI) (GKP)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today