3 Uncovering hidden value - SalvaRx · 2017-07-10 · Gdansk Poznan Warsaw Katowice Krakow Wroclaw munich Stuttgart Ravensburg Poland/ Lane Energy Exploration Sp. z o.o. • Three

3legs resources plc Annual Report & Accounts 2012

Uncovering hidden value

3legs r

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3Legs is listed on the Alternative Investment Market of the London Stock Exchange.

Overview01 Highlights 201202 Business and Asset Overview04 Our Markets

Business Review06 Chairman’s Statement08 Business Model10 CEO’s Strategic Review14 Financial Review16 Risk Management

Governance18 Board of Directors20 Senior Management21 Health, Safety, Environmental and Social Responsibility22 Directors’ Report25 Corporate Governance Statement28 Directors’ Remuneration Report30 Statement of Directors’ Responsibilities31 Independent Auditor’s Report

Financial Statements32 Consolidated Income Statement32 Consolidated Statement of Comprehensive Income33 Consolidated Balance Sheet34 Consolidated Cash Flow Statement35 Consolidated Statement of Changes in Equity36 Notes to the Consolidated Financial Statements

gas import pipelines & lNg

www.3legsresources.com

VISItwww.3LEGSRESOuRCES.COM

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Business Model

Page 06

Chairman’s Statement

Business and Asset Overview

Our Markets CEO’s Strategic Review

Financial Review

01Business Review

3Legs ResourcesAnnual Report & Accounts 2012

Highlights 2012

Operational highlights•ExercisebyConocoPhillipsofitsoptionovertheGroup’sthreewesternBalticBasinconcessionscompletedinSeptember2012,whenConocoPhillipsacquireda70%interestinandbecameoperatorofthewesternconcessions

•FurthertestingofLebienLE-2Hhorizontalwellyieldedsignificantlyimprovedflowrate:21daynaturalflowtestonLebienLE-2Hhorizontalwellresultedinunassistedaveragerateof550mscf/doverthe21dayperiod,beforeplannedshut-in

•Drilling,coringandloggingofStrzeszewoLE-1verticalwellonLeborkconcession

•PolandSPANregional2DseismicsurveyovertheGroup’swesternBalticBasinconcessionsnowcompleted,withprocessingtocommenceshortly

•2Dand3DseismicsurveyonsouthernPolandconcessionscompletedinJanuary2012;followinginterpretationofnewly-acquiredseismicandotherdata,decisiontakentorelinquishtheDabie-Laskieconcession,oneoftheGroup’sthreesouthernPolandconcessions

Financial highlights•Cashbalancesof£39.5millionatyearend2012,against£50.9millionatyearend2011,andnodebt;fullyfundedforcurrentexplorationandappraisalprogrammeonitsBalticBasinconcessions

•Netlossfortheyearof£6.0million(2011:£2.3million),reflectinglowerotherincomefollowingtheendoftheConocoPhillipscarryundertheJointEvaluationAgreement,theimpairmentoftheGroup’ssouthernPolandconcessionsandtheneteffectsofexchangeratemovements

Outlook•Followingdiscussionswithshareholders,thegeographicalfocusof theGroup’sactivitiestobelimitedtoPoland,alreadytheGroup’scoreareaofactivity

•2013explorationandappraisalprogrammeagreedwithConocoPhillipsandnowunderway,comprisingaprogrammeoftestingoftheStrzeszewoLE-1verticalwell,plusthedrillingandtestingofafurthertwoormoreverticalwellsontheGroup’swesternBalticBasinconcessions

•PlanningunderwayforstimulationandtestoftheStrzeszewoLE-1verticalwellandforfurthertestingoftheLebienLE-2Hhorizontalwellinthenearfuture

•TotalvalueofGroup’scommitmentsunderits2013explorationandappraisalprogrammeisapproximately£9millionnettotheGroup

•Workingtowardsadecision,in2014,onthedrillingofoneormorehorizontalwellsasthefirststageofapotentialpilotdevelopmentprogrammeontheGroup’swesternBalticBasinconcessions

£39.5mcashbalancesatyearend,withnodebt

Fullyfundedforcurrentexplorationandappraisalprogrammeinoneofthemost prospectivepartsofPoland’sleadingshalebasin

3Legs Resources plc (the “Company” and, together with its subsidiaries, the “Group”), an independent oil and gas group focused on the exploration and development of unconventional oil and gas, is pleased to announce its financial results for the year ended 31 December 2012.

02Business Review


Business and Asset Overview

OurrelationshipwithConocoPhillips

We have been working with ConocoPhillips in the exploration and appraisal of our Baltic Basin concessions since 2009. We have collaborated closely with ConocoPhillips throughout this period, both in field operations, where we acted as operator until September 2012, and in the planning and analysis phases.

ConocoPhillips brings outstanding shale expertise, acquired through its positions in North American shale plays including the Bakken, Barnett and Eagle Ford. We view their decision to exercise their option to take a 70% interest in our three western Baltic Basin concessions, completed in September 2012, as an excellent vote of confidence in the commercial potential of these concessions.

1 Focus on unconventional oil and gas3LegsResourcesisanindependentoilandgasgroupfocusedontheexplorationandproductionofunconventionaloilandgasresourcesinPoland,wheretheDirectorsbelievetheGroupiswellpositionedtobenefitfromtheemergenceofaregionalunconventionaloilandgassector.

2 Continue to progress our Baltic Basin assetsTheGroup’sprincipalexplorationassetisitsinterestinsixBalticBasinconcessionsinnorthernPoland.WorkinginconjunctionwithConocoPhillips,wewillcontinuetoprogressourunderstandingofthethreewesternconcessionsinparticular,throughanactivedrillingandtestingprogramme,backedupbydetailedtechnicalanalysis.

3 Seek to monetise other licences OutsidenorthernPoland,wewillcontinuetoprogresstheexplorationofourotherunconventionaloilandgaslicenceswithaviewtomonetisingtheseassetsifpossible.Nosignificantcapitaloroperationalexpenditureisplannedfortheselicences.

Ourstrategy

Leveraging its highly experienced US-based technical team, 3Legs seeks to capture the benefits of North American innovations in unconventional oil and gas exploration and production and deploy these in the Polish market, which offers a stable macro-economic environment and excellent infrastructure.

ViSiTWWW.3LEGSRESOuRCES.COm

70%ConocoPhillips interest in our three western Baltic Basin concessions, following exercise of its option in September 2013

03Business Review


DuringtheyearwehavemadegoodprogressinevaluatingourwesternBalticBasinconcessions,whereweactedasoperatoruntilSeptember2012.

FocusonPoland-Successfulappraisal

Germany/ParkynEnergy(Germany)Ltd.• Two concessions, 630,000 acres gross and net• Concessions currently undergoing renewal process

Hamburg

Hanover Berlin

Dusseldorf

Frankfurt

Gdansk

Poznan

Warsaw

Katowice

Krakow

Wroclaw

munich

Stuttgart

Ravensburg

Poland/LaneEnergyExplorationSp.zo.o.• Three concessions, 578,000 acres gross and net• 50 sq km of 3D seismic acquired to date• One vertical well drilled to date

/01

Poland/LaneResourcesPolandSp.zo.o.• Two concessions, 440,000 acres gross and net• 50 sq km of 3D and 70 km of 2D seismic acquired

to date

/02

Poland/LaneEnergyPolandSp.zo.o.• Three concessions, 506,000 acres gross, 152,000

acres net• Operated by 3Legs until September 2012, now operated

by ConocoPhillips• 175 sq km of 3D seismic acquired to date• Two vertical and two horizontal wells drilled to date• Further testing of horizontal wells carried out in 2012• Two or more vertical wells planned for 2013• Decision on drilling of one or more horizontal wells in 2014,

as first stage of a potential pilot development programme

/01

/03

Lane EnergyPoland

Lane EnergyExploration

Gdansk

/01

Parkyn Energy(Germany)

Tuttlingen

Biberach

/03

Lane Resources Poland

Krakow

Czestochowa

/02

Ravensburg

04Business Review


Our Markets


What is unconventional oil and gas?

• unconventionaloilandgastypicallyincludesshaleoilandshalegas,tightoil andtightgas,andcoalbedmethane.

• Shaleoilandgasandtightoilandgasoccurinveryfinegrainedsedimentaryrockswithlowpermeability,suchthatthehydrocarbonscannotbeextractedincommercialquantitiesusingconventionalmethodsalone.

• Toflowoilorgascommerciallyfromshalenormallyrequiresthedrillingofextendedhorizontalsections,toobtainthemaximumpossiblecontactbetweenthewellcasingandtheshalesourcerock.Sectionsoftheshalearethenfracturedtocreateartificialexitpathways,toencouragethehydrocarbonstoescapetothewellcasingandfromtheretosurface.

The case for shale oil and gas

• Withmoderndrillingtechniques,anincreasingnumberofhorizontalwells–asmanyas10ormore–canbedrilledfromthesamelocation,thusenablinganincreasinglylargearea–uptoseveralhundredhectares–tobedrainedfromasinglewellpad.Locationscan increasinglybesitedawayfromurbanorothersensitiveareas,to minimisedisturbance.

• Whileaconsiderableamountofwaterisrequiredfordrillingandfracturingshalewells,electricitygeneratedfromshalegasrequiresonlyasmallproportionoftheamountofwaterrequiredtoproducethesameamountofenergyfromcoaloroil,andevenlesstoproducethesameamountofenergyfromethanol,or biodiesel.

• Hydraulicfracturingfluidistypically98-99%waterandsand,withasmallamountofotheradditives.mostoftheseadditivesarefoundineverydayitemssuchascosmetics,shampooandhouseholdcleaningproducts.useoftheseadditivesinPolandisregulatedundertheEuREACHregulations.

• Theoilandgasindustryhasastrongtrackrecordofinnovationinunconventionaloilandgas,resultingincontinuingimprovementsinwellproductivityandcostreductions.Othermethodsofwellfracturingwhichdonotinvolvetheuseofwaterareeitherunderdevelopmentoralreadybeingtrialled.

The case for shale gas in Europe

The supply gap • GlobaldemandfornaturalgasisforecastbytheiEA1togrowsteadilyovertheperiod2010to2035–theonlyfossilfuelforwhichthisisthecase–atratesof1.6-1.9%perannum.intheEu,demandfornaturalgasisforecasttogrowatapproximately0.7%perannum.

Natural gas price in US, Europe & Japan

15

12

9

6

3

0

US

$ pe

r milli

on b

tu

94 9695 9897 0099 0201 0403 0605 07 08 09 10 11

JAPAN LNG cifUK NBP

Average German Import Price cifUS Henry Hub

05Business Review


Gas import pipelines & LNG

Existing LNG Planned LNG

Major feilds Shale exploration regionsLN

G

Pipelines from Russia, Norway, North Africa, LNG from Africa and Middle east

• ConventionalgasproductionintheEuisexpectedtocontinueitslongtermdownwardtrend,decliningatanannualrateof 1.4%.

• NetgasimportsintotheEuareforecasttorisefrom302bcm(11tcf)in2011to525bcm(19tcf)in2035,representinganincreasefrom63%to85%oftotalEuconsumptionofnaturalgas.ThelargestshareoftheseimportsislikelytobeaccountedforbyRussia.

• Eumembercountrieshaveastrongincentivetodevelopalternativesourcesofsupplyofnaturalgas,includingLNGand unconventionalgas,toreducetheirdependenceonanyonesupplier.

• TheEumarketfornaturalgasfurtherbenefitsfromtheprevailingtrendforlongtermgassupplycontractslinkedtotheoilprice,incontrasttotheuSwherealarge proportionofgassalesareatspotprices,whichhaveinrecentyearsbeensignificantlylowerthantheoil-linkedprice.

Environmental benefits • Naturalgasemissionsareapproximatelyhalfthoseofcoal.Naturalgasleavesnoashresiduerequiringdisposal,itsmainby-productsbeingwatervapourandcarbondioxide.

• intheuS,thetransitionfromcoaltonaturalgashasresultedin carbonemissionsdecliningby12%since2007,morethanin anyEumemberstate2.

• Generatingcapacitypoweredfromnaturalgascanbebroughtonstreamquicklyandcheaply,ascomparedtootherfossilfuelsornuclearpower,andthusrepresentstheidealback-upcapacitytomeetfluctuationsinrenewablepower.

• Followingarecentreviewofshalegasexploration,the uKgovernmenthasdeclaredthatimpactsonwaterandlocalairpollutionwerealreadycoveredbytheuK’s existingstringentrulesonoilandgasexplorationandproduction.

Economic benefits – the US experience• AccordingtoarecentreportbyiHS-CERA3,theshareofuSnaturalgasproducedfromunconventionalsourceswillincreaseto67%by2015and,by2035,willreach79%.increasedunconventionalgasactivitywillcontributetocapitalinvestment,employmentandgovernmentrevenueacrossthecountry,thus:o NearlyuS$3.2trillionininvestmentsinthedevelopmentofunconventionalgasareexpectedtofueltheincreaseinproductionbetween2010and2035.o in2010,unconventionalgasactivitysupported1millionjobs;thisisexpectedtogrowtonearly1.5millionjobsin2015andtoover2.4millionin2035.o By2015,unconventionalgasactivitieswillcontributeanestimateduS$50billioninfederal,stateandlocalgovernmenttaxandfederalroyaltyrevenue;between2010and2035,continueddevelopmentofunconventionalgaswillgenerateacumulativeestimatedtotalofnearlyuS$1.5trillioninfederal,state,andlocaltaxandroyaltyrevenue.

1 IEA, World Energy Outlook 20122 EIA3 The Economic and Employment Contributions of Unconventional Gas Development in State Economies, prepared for America’s Natural Gas Alliance, June 2012

06Business Review


Chairman’s Statement

In 2012 3Legs has continued to build on its pioneering achievements in Poland, where it remains one of the leaders in the exploration and appraisal of the country’s shale gas potential.

IntroductionIn 2012 3Legs continued to build on its pioneering achievements in Poland, where it remains one of the leaders in the exploration and appraisal of the country’s shale gas potential. We successfully implemented our work programme for the year, and continued to play an active role in the debate on the future development of the shale gas sector in Poland. We closed the year with a strong cash position, ready to implement our exciting 2013 work programme which we have agreed with ConocoPhillips, as previously announced.

Strategic reviewOur Group strategy continues to focus primarily on the further de-risking and appraisal of our core Baltic Basin asset. In this, we were extremely encouraged by the decision by ConocoPhillips to exercise its option to acquire a 70% interest in our three western Baltic Basin licences, first announced in March 2012 and completed in September 2012. We believe the decision represents an excellent vote of confidence by ConocoPhillips in the future potential of these concessions; and we continue to work actively in progressing our understanding of the basin geology, both with ConocoPhillips and through cooperation with other operators in the basin.

We have continued to high-grade our assets as part of a continual process of portfolio appraisal. In the Polish Baltic Basin this has resulted in our identifying a high-graded area, which we consider not only presents the lowest-risk part of our acreage for future

exploration and appraisal activities, but also offers a higher probability of success than was attributed to our Baltic Basin acreage at the time of our initial public offering in June 2011. It is this area which represents the focus of our 2013 exploration programme.

The last quarter of the year was marked by the issue, in October 2012, of a requisition notice by a minority shareholder, calling for the convening of an Extraordinary General Meeting to propose changes to the Board composition and Group strategy. The requisitioning shareholder was supported by a small number of other shareholders, including Damille Investments II Limited (“Damille”). However, we announced shortly afterwards, following discussions with the requisitioning shareholder, that the notice calling for the convening of an EGM had been withdrawn. The Company was able to demonstrate the considerable progress that had already been made on its Baltic Basin concessions, and also reaffirmed its existing strategy in northern Poland and elsewhere. At the same time, the Chief Executive Officer of the Group stepped down and Kamlesh Parmar was appointed as the new Chief Executive Officer. The Company subsequently convened an EGM in December, where it sought and obtained the discretionary power to buy back its shares.

Since the year-end, there have been some large movements in the Company’s shares, including a disposal of a significant shareholding by Caithness Limited, as trustee for Robert Jeffcock (at that time one of our


Vote of confidence:thedecisionbyConocoPhillipstoexerciseitsoptionoverourthreewesternBalticBasinconcessions

Tim EggarChairman

07Business Review


Progress since IPO Focus has been on de‑risking and high‑grading asset portfolio on best available terms In Baltic Basin: • 2 horizontal wells drilled and tested, Lebien LE‑ 2H and Warblino LE‑1H• Data exchanged on a further 7 wells in the basin• Further testing of 2

horizontal wells in 2012 yielded valuable additional data

• 2013 exploration programme ongoing It has enabled 3Legs to attribute a higher probability of success to the high‑graded part of its Baltic Basin acreage than at the time of its IPO

Directors), and the acquisition of further shares by Damille. On 27 February 2013, the Group received a second requisition notice, this time from Damille, now holding 14.2% of the Company’s issued share capital, calling for the convening of an EGM. The requisition notice proposes a number of ordinary resolutions which include: the removal of the majority of the Directors (being all of the Directors except for Kamlesh Parmar and Richard Hills); the appointment of certain new Directors being Brett Lance Miller and Rhys Cathan Davies (who the Board understands are both representatives of Damille); and the proposal that the Company adopt a new investment strategy as follows “The investment objective of the Company is to manage the realisation of the Company’s existing asset portfolio and to maximise the return of invested capital to shareholders during the period ending on 30 June 2015. During this period the Company shall not make any new investments other than to support its existing assets.”

The Company intends to post with its annual report and accounts a notice to all shareholders convening a general meeting, together with a shareholder circular in which the Board will unanimously advise shareholders to reject the proposed resolutions.

In recent weeks, we have been in discussions with a number of our major shareholders with a view to determining an appropriate strategy for the Group which reflects our current licence portfolio and available cash resources. Following those discussions, the Board has determined that we should limit the geographical focus of our activities to Poland, which is already the Group’s core area of activity in any case.

Board ChangesA number of Board changes were implemented before the end of the year and subsequently.

Peter Clutterbuck decided to step down as Chief Executive Officer in October 2012, in order to pursue other business interests. Peter joined the Company before its initial public offering on AIM in June 2011. He helped steer the Company through its very successful IPO and through the period following the IPO, as 3Legs settled into its new life as a public company. We are grateful to Peter for the skill and experience which he brought to bear during a time of significant change for the Group.

In Peter’s place, the Board appointed Kamlesh Parmar as Chief Executive Officer. Kamlesh has been with the 3Legs Group since its establishment in 2007 and has played an instrumental role in the Group’s development since inception. In his previous position with the Group, as Poland Country Manager and Group Commercial Director, he was responsible for overseeing the Group’s pioneering activities in Poland, as well as managing the very successful relationship with ConocoPhillips. Kamlesh brings huge energy and excellent judgment to his new position and I am sure that he will continue to have a very positive impact on the business in his new leadership role.

We also announced the appointment of Richard Hills to the Board as a Non-Executive Director, in December 2012. Richard brings over 30 years of experience in investment management and financial services. He is also a Non-Executive Director of JP Morgan Income & Capital Investment Trust plc, Phaunos Timber Ltd., Cinven Ltd. and the Aztec Group Ltd. In addition to joining the Board, Richard joined the Group’s Audit Committee and Remuneration Committee.

Robert Jeffcock and Clive Needham announced their resignations from the Board on 22 February 2013, although Clive Needham continues to sit on the board of a number of the Group’s subsidiary companies. Barry Rourke will be retiring by rotation at our forthcoming Annual General Meeting and has decided not to present himself for re-election. Robert was the original moving force behind the founding of 3Legs, and he and Barry have both been Directors of the Company since 2007. The Board would like to record its appreciation of the very valuable contributions to the Company’s development made by both Robert and Barry since inception.

ConclusionWe thank our shareholders for their continued support throughout the year and we look forward to sharing with them the results of our forthcoming exploration and appraisal programme.

Tim EggarChairman22 March 2013

08Business Review


Su

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Technical leadership

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Business Model

Our business model

Our business model is built around five core elements: technical leadership; industry partnerships; government and community relationships; financial viability; and sustainability. By meeting our goals in these five key areas, we aim to deliver on our business strategy and create significant value for our shareholders.

Core strengthOur location and positioning is key to our success. As a first mover in Poland, we have six exploration licences concessions covering approximately 1,084,000 acres (4,387 sq. km) gross in the onshore Baltic Basin region of northern Poland.

09Business Review


01 Technical leadershipDeploying our US-based unconventional resources exploration team, we aim to apply innovative but proven North American exploration techniques to our asset portfolio, with a view to enabling value to be created from pay zones which up until now have been either overlooked or non-commercial. Our technical team has experience of exploration and appraisal in numerous frontier unconventional resource plays and is strongly placed to apply its acquired skills in our Polish operations.

02 Industry partnershipsWe work with leading oilfield service companies from Poland and elsewhere, including Schlumberger, MND Drilling Services, MI Swaco, Geofysika Torun, NOV, Acoustic Geophysical Services and Geokrak. The oilfield services market in Poland is undergoing rapid change, as it adapts to the increased level of activity in the country, creating excellent opportunities for innovation and cost control. We expect to develop relationships with an increasing number of industry partners as we go forward.

03 Government and community relationshipsWe enjoy excellent working relationships with a number of Polish government agencies, including the State Treasury, the Ministry of Environment, the Polish Geological Institute, the Mining Authority and the local regional authorities in the areas where we carry on activities. As a member of the Board of OPPPW, the Polish Exploration and Production Industry Organisation, we are currently engaged in an active dialogue with Polish government departments regarding the future development of the oil and gas sector in Poland. In conjunction with the local regional authorities, we maintain a dialogue with local communities in order to ensure that the impact of our operations is understood and any concerns are listened to.

04 Financial viabilityWe manage our balance sheet in a conservative fashion, with no debt. We aim to ensure that our core Baltic Basin asset is funded through to the next key milestone and beyond, leaving sufficient headroom to enable us to determine how best to maximise value for our shareholders in a timely fashion.

05 Sustainability3Legs Resources is committed to sustainability in the management of its operations. Principles which the Group adheres to in order to promote sustainability include: • Ensuring that future work programmes, including

decommissioning and site restoration commitments, are sufficiently funded and that safety and environmental concerns are not compromised by funding considerations

• Involving joint venture operators and partner companies that are international leaders in their field, and employing experienced senior technical staff and consultants to assist in the evaluation of its assets

• Enforcing a strict health, safety and environmental policy which ensures as a priority that operations are carried on in a safe and environmentally sound manner

• Employing and training local staff where possible and engaging local communities in planning processes

The Group aims at all times to act as a responsible operator in the field and elsewhere.

Our business explained

10Business Review


CEO’s StrategicReview

Visitwww.3legsresources.com

In the Baltic Basinin the Baltic Basin, we have initiated a vertical well programme scheduled to run through 2013 and beyond

Decision in 2014 on the drilling of one or more horizontal wells as the first stage of a potential pilot development programmeKamlesh Parmar

Chief Executive Officer

As in preceding years, our main focus in 2012 has continued to be on the further de-risking of our Baltic Basin concessions in northern Poland, building on our ground-breaking activity of the previous year when we successfully drilled, stimulated and tested the first two horizontal shale gas wells in the country.

During 2012, we further improved our understanding of our Lebien LE-2H and Warblino LE-1H horizontal wells, through the successful further testing of both wells. At the same time we initiated a vertical well programme scheduled to run through 2013 and beyond, designed to enhance further our understanding of the basin and its productive potential with a view to a decision, in 2014, on the drilling of one or more horizontal wells as the first stage of a potential pilot development programme.

Baltic Basin concessions, northern PolandOn 14 September 2012, following exercise of its option to farm in to our western Baltic Basin concessions, ConocoPhillips acquired a 70% equity interest in these concessions, becoming operator at the same time. ConocoPhillips had already been actively involved in operations for some time, and the transfer of operatorship was completed smoothly.

11Business Review


Since the transfer of operatorship, we continue to participate actively in all material technical and commercial decisions relating to the ongoing work programme on the concessions, through our participation in the Lane Energy Poland operating and technical committees and in relevant working groups. We see the option exercise by ConocoPhillips as a significant affirmation of the potential of our western concessions and we look forward to continuing our highly successful collaboration as we continue to focus on de-risking our concessions.

In the case of our three eastern Baltic Basin concessions, which we consider to be more liquids-prone, ConocoPhillips did not exercise its farm-in option prior to its expiry on 30 September 2012, with the result that 3Legs remains 100% owner and operator of those concessions. Group activity during 2012 has focused on our western concessions and will continue to do so throughout 2013, while we consider our options in relation to our eastern concessions.

Exploration and appraisal activity during 2012 has continued to focus on further refining our basin model and high-grading our significant acreage position, so as to identify that part of our acreage which offers the highest probability of success, based on the depth and thickness of the target horizons and their reservoir properties. We have had access to well data from a significant number of other operators in the basin through data trades, as is common practice in our industry.

We continue to be encouraged that our original acreage selection is validated by our updated basin model, reinforcing our long-held view that our acreage is in the most prospective part of the Baltic Basin. Moreover, by de-risking our acreage through the data we have acquired, we are, in our view, able to attribute a higher probability of success to this high graded area than was possible at the time of our initial public offering in June 2011.

Further testing of existing horizontal wellsAfter concluding initial testing of the Lebien LE-2H and Warblino LE-1H wells in late 2011, these two wells were shut in for an extended period in order to monitor pressure build-up and to be able to evaluate how the wells would perform following the shut-in.

We conducted further testing of the Warblino LE-1H well in August and September 2012, using a jet pump to provide artificial lift to remove more of the fluid that had been left on the formation from the original stimulation and test programme. To the best of our knowledge, this was the first time that a jet pump assembly has been used in Poland for an operation of this kind. The principal objectives of the further testing were to gather additional data on reservoir performance and gas composition in the Cambrian section.

After 20 days of testing, the Warblino LE-1H well achieved a flow rate of some five times the rate achieved when the well was first tested in 2011, flowing natural gas at a rate of 90 mscf/d, with the assistance of the jet pump, as against 18 mscf/d in 2011 using a nitrogen lift. At the conclusion of the further testing, some 36% of the fluid originally injected had been recovered from the formation. The well was then suspended and gauges inserted to monitor pressure build-up, while the results were evaluated.

We have continued to analyse possible explanations for the poor performance of the Warblino LE-1H well when it was first drilled and tested in 2011 since, on the basis of the porosity and gas shows recorded while drilling, the well was expected to flow at a significantly higher rate. It seems likely that well performance was affected by a mechanical issue arising from the cementing of the horizontal section, rather than by formation reservoir issues, and also that further drilling and testing of the Cambrian section will be needed in order fully to investigate this issue. However, the Cambrian section remains our secondary target, the primary target being the Ordovician.

Following conclusion of the further testing on the Warblino LE-1H well, further testing was then conducted on the Ordovician interval in the Lebien LE-2H well, and was completed in December 2012. At the conclusion of the testing, we were very pleased to announce that the well had flowed unassisted for a 21-day natural flow test, flowing natural gas at an average rate of 550 mscf/d through 3½ inch tubing. The well was continuing to flow naturally at a rate of 470 mscf/d when it was agreed to suspend the test, in order to commence a planned shut-in period and conduct a pressure build-up test. The well was also continuing to clean up throughout the test, and by the end of the test period

approximately 29% of the fluid used during the original well stimulation had been recovered, up from 15% at the beginning of the test period.

The results from the Lebien LE-2H well represent a significant improvement on the results achieved when the well was first tested in 2011. On that occasion, the well flowed with the assistance of a nitrogen lift at a rate of 450-520 mscf/d, over an 8-day period before being shut in. Most importantly, the well has now demonstrated its ability to flow for a 3-week period, without artificial assistance. We view this as a very positive step-up in well productivity, and an encouraging starting point when considering possible means for achieving further improvements in well performance, for example through a different design of the lateral section or the well stimulation programme. The lateral section on the Lebien LE-2H well is no more than 1,000 metres in length and involved a 13 stage hydraulic fracturing stimulation, whereas it is quite possible to envisage future horizontal wells with significantly longer lateral sections and more stages, as is common in the US.

In December 2012, the Lebien LE-2H well was shut in at the end of the 21-day test for a planned shut-in period to record pressure build-up using surface and down hole pressure gauges. The pressure gauges have now been removed from the wellbore for analysis and a third phase of flow-testing on the well is planned to commence shortly, as described below.

2012 drilling programmeThe drilling of our fifth well in the Baltic Basin, Strzeszewo LE-1, was completed in December 2012. This vertical test well was drilled to 3,060 metres true vertical depth into the Middle Cambrian interval. Some 220 metres of whole core were recovered from the Lower Silurian, Ordovician and Cambrian intervals, and a full suite of logs was run. Preliminary log analysis indicates that the well encountered a thicker Ordovician section as compared with the Lebien LE-1 and Warblino LE-1 vertical wells, and that the thickness of the Upper Cambrian interval is similar to that encountered at the Warblino LE-1 vertical well. A first DFIT test was performed on the Cambrian section in the well in January 2013 and preparations are now being made for a well stimulation to be carried out on this Cambrian interval.

12Business Review


3Legs’ western Baltic Basin concessions

Karwia

WarblinoLE-1H

LeborkDamnica

3Legs’ high-graded area

StrzeszewoLE-1LebienLE1&LE-2H

Wejherowo

Slupsk

CEO’s StrategicReviewContinued

The first DFIT test on the Strzeszewo LE-1 well was completed in the first quarter of 2013, and preparations are under way for a well stimulation and test to be conducted on the Cambrian section in this well, to begin in the near future. After completion of a testing phase, including a shut-in period, a further DFIT and/or well stimulation and test will be considered for our primary target, the Ordovician section.

Third phase of testing of Lebien LE-2H horizontal wellFollowing a technical review of the 2012 testing of the Lebien LE-2H well, we expect to conduct a further phase of testing of this well, using a narrower velocity string assembly. Pressure data retrieved following the last test also indicated that the down-hole pressure gauges may have become dislodged, creating an additional choking effect. As a result, we are confident that the next phase of testing, due to commence in the second quarter, will yield further improved flow data.

Seismic acquisitionIn addition to our drilling programme, a 3D seismic survey is planned on our Karwia concession, in fulfilment of our licence obligations. This survey is expected to measure approximately 32 sq km and is due to commence in the second quarter. We are also discussing with ConocoPhillips the acquisition of 70 km of 2D seismic data on our Lebork concession. This will assist in the placement of future horizontal wells in the area, following conclusion of our vertical well programme.

Southern Poland; other regions In southern Poland we acquired and processed approximately 50 sq km of 3D data on the Bytom-Gliwice and Glinica-Psary concessions and approximately 70 km of 2D data on the Dabie-Laski concession, concluding this process in the first quarter of 2012. Following interpretation of the new data, which showed the eastern part of the concession area to be more structurally complex than previously understood, we concluded that there was insufficient justification for drilling a vertical test well on the Dabie-Laski concession. We have now surrendered this concession.

Seismic acquisitionPhase I of the PolandSPAN geological and geophysical research project, involving the acquisition of 1,090 km of new 2D seismic data extending across the Baltic Basin region, has now been completed. Processing of the new data is due to take place in the second quarter of 2013 and will further inform our understanding of the basin geology in our acreage.

2013 exploration programmeDrilling and testing of vertical wellsThe programme we have announced for the remainder of 2013, which we have agreed with ConocoPhillips, involves the continuation of the testing programme on the Strzeszewo LE-1 well, comprising DFIT and/or well stimulation and flow testing. We have also announced plans to drill two or more additional vertical wells on our western Baltic Basin concessions, within the high-graded area which we have already identified. As with previous vertical wells, these two wells will be extensively cored and logged, to be followed by a programme of DFIT and/or well stimulation and flow testing, which will run on into 2014. The programme is designed to enable us to evaluate further the flow-rate potential of our high-graded area, with a view to a decision, in 2014, on the drilling of one or more horizontal wells as the first stage of a potential pilot development programme. Being vertical wells, each will offer the option to test multiple pay zones. The wells will also be designed to allow for lateral sections to be drilled and tested at a later date.

Planned activity to end Q2 2014 Western Baltic Basin concessions

2013 2014Activity Q1 Q2 Q3 Q4 Q1 Q2Strzeszewo LE-1DrillingDFIT, testing

First wellDrillingDFIT, testing

Second wellDrillingDFIT, testing

Optional wellDrilling

Drilling DFIT/frac/testing

13Business Review


We continue to consider our options for our remaining Bytom-Gliwice and Glinica-Psary concessions, including monetising these concessions if possible. We have the option to drill one vertical well on each of these two concessions by August 2013, or to relinquish the concessions. However, we do not currently plan to incur any further expenditure on these concessions, and we have therefore decided to record an impairment against them on our balance sheet.

Our southern German concessions fell due for renewal in the second quarter of 2012 and we have submitted applications for extensions. Given that our geographical focus is now confined to Poland, we will investigate options for monetising these concessions if possible.

We have had licence applications in process in France since 2010 and in late 2010 we had received indications that these applications would be granted in whole or in part. In December 2012 and January 2013, we received notices of rejection of these two applications, citing the legal moratorium on hydraulic fracturing which was recently introduced in France. We have filed notices of appeal against both decisions, although we are currently considering whether it is appropriate to continue this process.

Throughout the year we also reviewed a number of potential new opportunities for possible inclusion in our portfolio. However, none of these were pursued as they were not seen to meet our criteria.

Evolution of the Polish oil and gas sectorWe continue to participate actively in discussions regarding the future development of the oil and gas sector in Poland, particularly through our membership of OPPPW, the Polish Exploration and Production Industry Organisation. I sit as one of the four members of the Board of OPPPW.

The Polish government has for some time been considering possible modifications to the fiscal and licensing regime relating to the oil and gas sector in Poland, resulting in the publication of two draft laws in February 2013. The draft legislation contemplates a number of changes to the existing regime, including: the creation of a new state-owned entity which would have the right to participate in exploration and production activities by private sector companies;

increases in the tax rates applicable to oil and gas production; and modifications to the procedures for granting and transferring licences.

3Legs, together with other members of OPPPW, is actively engaged in dialogue with the government in order to ensure that the industry’s voice is heard, and that any new fiscal and regulatory regime that emerges does not act as an unnecessary deterrent to the development of a successful shale hydrocarbons sector in Poland.

Personnel; planned organisational changesDuring the year we announced the hiring of two new technical personnel, John Blair as Exploration Manager and Christie Schultz as Engineering Manager. John Blair was most recently employed by Knowledge Reservoir LLC, a technical consultancy based in Denver, where he was responsible for both the firm’s unconventional resource practice and its acquisition and divestiture practice worldwide. While at Knowledge Reservoir LLC, John led multi-disciplinary teams that assessed more than 100 unconventional resource plays around the world.

Christie Schultz is an unconventional reservoir and completions specialist, and was most recently employed by Anadarko as a lead reservoir engineer and a production engineer, where she worked on shale plays including the Marcellus and Haynesville. John and Christie will provide technical leadership as we continue to improve our understanding of the Baltic Basin geology.

Following the adoption of a more narrowly-defined geographic focus for the Group’s activities, as described in the Chairman’s Statement, we have reviewed our existing overhead expenditure to see what reductions may be made. During the next quarter we expect to implement a number of changes in the way the Group is organised and staffed which, with effect from 1 July 2013, will result in a reduction in our cash administrative expenses, before foreign exchange movements, of approximately 50% as compared with 2012.

Conclusion In 2012 we were able to build on our already significant progress in Poland’s Baltic Basin, carrying out further testing on the first two

horizontal shale gas wells to be drilled anywhere in Poland, and achieving a materially improved performance from our primary target, namely the Ordovician section, in our Lebien LE-2H well. While there remains more to be done in the appraisal of the Baltic Basin shale play, we believe we have taken a significant step forward in the direction of commerciality. We have also shown a continued readiness to trial innovative techniques in Poland, and to introduce best-in-class practices to a new market.

Our primary focus will continue to be on our western Baltic Basin concessions, where 3Legs Resources together with ConocoPhillips will continue to work throughout 2013 on further delineating and understanding the geology of the target Ordovician section and demonstrating its improved flow rate potential. Following our planned programme of DFIT and/or single-stage well stimulation and testing, we expect to have sufficient data on the likely potential of our high-graded area to enable us to reach a decision, in 2014, on the drilling of one or more horizontal wells as the first stage of a potential pilot development programme. Across the rest of our portfolio, we will continue to high-grade our assets with a view to deciding which licence interests to maintain and pursue and/or monetise and which to relinquish. With £39.5 million of cash resources at year end, we will continue to manage our cash reserves prudently so as to ensure that sufficient funding is available for the further de-risking of our core Baltic Basin asset.

We look forward to an exciting year ahead.

Kamlesh ParmarChief Executive Officer22 March 2013

14Business Review


Financial Review

3Legs continues to enjoy a strong balance sheet, ensuring that it is excellently positioned to meet its ongoing commitments in Poland’s Baltic Basin.

Financial highlights• Cash balances of £39.5 million at year

end 2012, against £50.9 million at year end 2011, and no debt; fully funded for current exploration and appraisal programme on the Group’s Baltic Basin concessions

• Investment in non-current assets of £17.7 million (2011: £14.9 million), reflecting the continuing work programme on the Group’s Baltic Basin concessions

• Net loss for the year of £6.0 million (2011: £2.3 million), reflecting lower other income following the end of the ConocoPhillips carry under the Joint Evaluation Agreement, the impairment of the Group’s southern Poland concessions and the net effects of exchange rate movements


£39.5mcashbalancesatyearend,withnodebt

Alexander FraserChief Financial Officer

15Business Review


Balance sheet3Legs continues to enjoy a strong balance sheet, ensuring that it is excellently positioned to meet its ongoing commitments in Poland’s Baltic Basin.

Investment in the Group’s oil and gas assets at year end stood at £17.7 million (2011: £14.9 million). Following the exercise by ConocoPhillips of its option to acquire a 70% interest in the three western Baltic Basin concessions and the resulting transfer of operatorship, completed in September 2012, the Group has elected to account for its interest in these concessions using the equity accounting method, in accordance with IAS 31 Interest in Joint Ventures, as opposed to applying proportionate consolidation which it had done up until completion of the option exercise.

The additional investment in 2012 represents primarily the Group’s share of costs incurred in connection with exploration and appraisal activities on the Group’s western Baltic Basin concessions, as described in the CEO’s Srategic Review. This additional investment has been partially offset by the impairment of the Group’s southern Poland licences, to the value of £2.1 million (2011: £nil), discussed below.

Cash and cash equivalents at year end were £39.5 million (2011: £50.9 million). Foreign exchange rate movements during the year reduced the sterling equivalent of cash and cash equivalents at year end by £1.1 million (2011: £0.5 million).

Current liabilities at year end stood at £1.6 million against £7.0 million at year end 2011, reflecting the lower level of activity around the year end in 2012 as compared with 2011. The Group has no debt, having redeemed a £1.2 million convertible loan facility in June 2012.

Income statementThe Group recorded a net loss after tax of £6.0 million (2011: £2.3 million). This loss is attributable principally to: a reduction in other income in 2012, following the conclusion of the carry arrangements agreed with ConocoPhillips under the Joint Evaluation Agreement; the impairment of the Group’s southern Poland concessions as a result of its reduced activity on those licences; and net exchange losses on the translation of foreign currency cash balances.

Other income of £1.1 million (2011: £2.7 million) arises from the Group’s contractual arrangements with ConocoPhillips under the Joint Evaluation Agreement and reflects principally the release of the call option premium of £0.3 million and the receipt of a final milestone payment of £0.3 million (2011: £0.6 million). Both of these receipts became due as a result of the exercise by ConocoPhillips, completed in September 2012, of its option to acquire a 70% interest in the Group’s three western Baltic Basin concessions pursuant to the Joint Evaluation Agreement.

ConocoPhillips largely completed its carry commitments under the Joint Evaluation Agreement in 2011, with the result that in 2012 it made substantially no further payments in respect of seismic and drilling costs incurred by the Group (2011: £2.1 million).

The Group has no plans to carry out any further activity on its two southern Poland concessions and accordingly has made an impairment for the full carrying cost of these concessions, to the value of £2.1 million (2011: £nil).

Aggregate administrative expenses of £5.2 million (2011: £5.3 million) were slightly lower than in 2011. In 2012, administrative expenses were affected by higher foreign exchange losses of £1.6 million (2011: £1.3 million), reflecting the impact of foreign exchange movements on certain of the Group’s foreign currency cash balances and intra-Group balances over the year, as well as by share-based payments of £0.3 million (2011: £0.2 million), reflecting options outstanding at year end. Administrative costs in 2011 were increased by costs incurred in connection with the Company‘s initial public offering on AIM, as a result of which £1.1 million was charged to the income statement in 2011.

Before foreign exchange losses and share-based payments, administrative expenses in 2012 were £3.4 million (2011: £3.8 million). Aggregate staff costs including termination payments and share-based payments represented £2.0 million (2011: £1.1 million), as the Group continued to strengthen its management and technical teams. Staff costs included £0.3 million

(2011: £0.2 million) which were capitalised to intangible exploration and evaluation assets. A proportion of the personnel overhead was recoverable under the Joint Evaluation Agreement in 2012, equal to £0.3 million (2011: £0.3 million), which were chargeable 70% to ConocoPhillips and 30% to the Group.

OutlookThe Group looks forward to a continuing and successful cooperation with ConocoPhillips in northern Poland. The Group’s strong balance sheet means that it is well positioned to fund its current Baltic Basin exploration programme throughout 2013 and into 2014, when it expects to reach a decision on the drilling of one or more horizontal wells as the first stage of a potential pilot development programme. The Group intends to manage its cash resources in a conservative manner so as to ensure that it has sufficient funding to meet its near-term objectives in the Baltic Basin.

Going concernThe Directors have reviewed the Group’s budgets and forecast cash flows through to June 2014. Taking into consideration the risks outlined in this financial review, the Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future. It is therefore appropriate to adopt the going concern basis in the preparation of its financial statements.

Alexander FraserChief Financial Officer 22 March 2013

16Business Review


Risk ManagementRisk Detail Likelihood Impact MitigationAppraisal risk There is still no certainty that the Group will be

able to recover any hydrocarbons, on its Baltic Basin concessions or elsewhere, at a commercially feasible cost.

High High The Group accepts that the decision to focus its activities exclusively on its Baltic Basin concessions makes it impossible to mitigate this risk by pursuing opportunities in other basins.

Concentration risk The decision to eliminate diversification in its portfolio renders the Group highly exposed to the success or otherwise of its principal asset.

High High The Group accepts that currently a majority of its shareholders prefer it to concentrate its exposure on a single opportunity, namely its Baltic Basin concessions.

ConocoPhillips ConocoPhillips’ controlling position in the Group’s principal asset in northern Poland exposes the Group to ConocoPhillips’ global strategy for the allocation of resources to exploration.

Medium High The Group has a track record of working closely and successfully with ConocoPhillips in the Baltic Basin.

Risk of restrictions on hydraulic fracturing or other environmental controls

Although the technique has been used safely for many years, hydraulic fracturing has recently come under intense scrutiny. If increased environmental controls were imposed in countries where the Group carries on business, this could restrict its ability to evaluate its licences.

High High The Group aims to mitigate this risk through its choice of countries where it seeks licences and by engaging in an active communications strategy to present the positive case for the use of modern exploration techniques.

Availability of oilfield services and supplies

The availability of oilfield services including drilling, completion and ancillary services, and of oilfield supplies, is more limited than in North America. These bottlenecks may limit the Group’s ability to carry on oilfield operations within its chosen timeframe.

Medium High The Group expects that the availability of oilfield services and supplies will improve over time, and in the meantime will seek to mitigate any supply bottlenecks by leveraging partner relationships and by careful operations planning.

Quality of oilfield services

The limited availability of oilfield services in Europe may result in greater variations in the quality of services provided. The Group is dependent on the use of external contractors and consultants.

Medium Medium The Group will ensure that it has sufficient in-house expertise to ensure that external contractors and service providers maintain sufficiently high standards.

Gas transportation infrastructure

The Group may be restricted from selling any gas produced by delays or obstacles encountered in constructing an adequate connection to the local gas market infrastructure.

Medium High The Group will seek to mitigate by investigating all possible options for monetising any gas produced and by maintaining an early and active dialogue with gas infrastructure operators.

Dependence on key personnel

The Group operates with a small management team and has a total staff, including consultants, of approximately 10. The loss or unavailability of key personnel could adversely impact the Group’s business.

Medium Medium The Group will ensure that appropriate retention and incentivisation policies are in place; and also that corporate knowledge is widely shared within the Group.

17Business Review


The Group’s business is exposed to a broad range of risks which are capable of having a material effect on the results of its operations. The Group seeks to manage these risks through a regular review, by the Audit Committee, of risks to which the Group is exposed, and possible means of mitigating them. The Audit Committee in turn reports back to the Board. A summary of the key risks identified by the Group is set out below.

Risk Detail Likelihood Impact MitigationPolish fiscal and regulatory regime

The fiscal regime in Poland relating to oil and gas exploration and production is subject to change and may be at particular risk of change if the shale gas industry in Poland becomes successfully established.

Medium High The Group will seek to mitigate by prioritising higher-return opportunities and through an active communications strategy designed to ensure that the commercial risks and rewards of the shale gas industry are adequately understood. The Group will continue to be actively involved in discussions regarding the future development of the Polish oil and gas sector through its participation in OPPPW.

Access to funding The Group currently finances its operations out of its existing cash reserves. If the Group’s access to third party funding becomes restricted then this could have an adverse effect on the Group’s future prospects.

High High The Group will adopt a conservative approach when considering its capital requirements and spending commitments.

Oil price The economic value of the Group’s projects is highly dependent on prevailing oil and gas prices, particularly prevailing European gas prices.

Medium Medium The Group uses conservative assumptions where appropriate for evaluating projects.

Currency risk The Group currently reports its financial results in sterling. A significant proportion of the Group’s expenditure is, however, incurred in euro and US dollars and the Group is consequently exposed to currency fluctuations when valuing its euro and US dollar assets and liabilities.

Medium Medium The Group seeks to mitigate this exposure by holding its reserves primarily in a combination of US dollars, sterling and euros.

Financial risk management policies are set out in note 31 to the financial statements.


18Governance


02

03

0604

05

01

Board of Directors


19Governance

01/ Tim Eggar, Non-Executive ChairmanTim Eggar was appointed Chairman in December 2010. He has over 35 years’ experience in the oil and gas industry ranging from management to industry regulation to strategic and financial advice. He is currently chairman of the board of Cape plc, MyCelx Technologies Corporation, and Haulfryn Limited. He was a member of Parliament in the United Kingdom from 1979 to 1997 and served in a number of ministerial positions including Minister for Industry and Energy from 1994 to 1996. Tim graduated from Magdalene College, Cambridge and the College of Law and is a barrister.

02/ Kamlesh Parmar,Chief Executive OfficerKamlesh Parmar was appointed as Chief Executive Officer on 18 October 2012. He has been with 3Legs since its activities commenced in 2007 and has previously held the position of Group Commercial Director and Poland Country Manager. He has overseen all aspects of the Group’s operations in Poland since inception including, in particular, managing the successful relationship with ConocoPhillips.He has achieved recognition both for the Group’s achievements in Poland and for his own contribution to the development of the shale industry in Poland, being awarded the title of “Professional of the Year” at Poland’s inaugural Shale Gas Awards gala in 2011. He is also one of the four members of the Management Board of OPPPW, the Polish Exploration and Production Industry Organisation.

03/ Barry Rourke, Non-Executive Director, Senior Independent Director and Chairman of the Audit CommitteeBarry Rourke is currently an independent non-executive director of New World Resources plc, Avocet Mining Plc and OJSC RusRailLeasing. Barry was a partner with PricewaterhouseCoopers from 1984 until his retirement in 2001. Barry Rourke is a Fellow of the Institute of Chartered Accountants in England and Wales, having qualified as a Chartered Accountant in 1973. Barry Rourke will be retiring by rotation at the Company’s forthcoming Annual General Meeting and has decided not to present himself for re-election.

04/ David Bremner, Non-Executive Director and Chairman of the Technical CommitteeDavid Bremner joined the Board in January 2011, having been involved in the international oil and gas business for 33 years. He was on the board of Indago Petroleum from 2005 to 2009, becoming Chief Executive Officer in 2007. From 1999 to 2007 he was engaged in international petroleum consultancy, with a particular emphasis on new business development. From 1995 to 1999 he worked for Monument Oil and Gas, initially as exploration manager and subsequently as exploration director. He holds an honours degree and a Ph.D. in geology from the University of Glasgow, Scotland.

05/ Richard Hills, Non-Executive Director and Chairman-designate of the Audit CommitteeRichard Hills was appointed to the Board as a non-executive director in December 2012. Richard has over 30 years of experience in investment management and financial services. Richard has worked at a variety of large UK based investment management companies, including Aberdeen Asset Management Plc, as Head of UK equities and Chairman of the Investment Policy Committee, and Henderson Global Investors Plc, as a Director of Henderson Administration Ltd, Henderson Pension Fund Management Ltd, Henderson International Inc. and a member of the Group Investment Policy Committee. Richard is currently the Senior Independent Director of both Aberdeen New Dawn Investment Trust plc and of Henderson Global Trust plc. He is also a non-executive director of JP Morgan Income & Capital Investment Trust plc, Phaunos Timber Ltd, Cinven Ltd and the Aztec Group Ltd.

06/ Rod Perry, Non-Executive Director, Chairman of the Remuneration Committee and designated as the new Senior Independent DirectorRod Perry joined the Board in February 2011. He is currently deputy chairman and senior independent director of Bwin.Party Digital Entertainment Plc. Previously he was the chairman of Party Gaming Plc and had been a non-executive director of Party Gaming Plc since 2005. He is also a non-executive director of Ithmar Capital (Dubai), a US$250 million private equity fund. Rod served as a non-executive director of Gulf of Guinea Energy, which merged with Seven Energy in 2009. He is a chartered electrical engineer and holds a BSc Hons Physics (First Class) from the University of Salford and a diploma in Management Studies from Bristol Polytechnic.


20Governance

0201

Senior Management

01/ Alexander Fraser, Chief Financial OfficerAlexander Fraser joined the Group when it was established in January 2007. From 2003 to 2006 he was an independent corporate finance consultant. From 1994 to 2003 he was an investment banker in emerging markets corporate finance and M&A at Brunswick-UBS in Moscow and then Deutsche Bank and JP Morgan in London, advising government and corporate clients in a range of sectors including oil and gas. From 1988 to 1994 he was a lawyer at Freshfields Bruckhaus Deringer LLP advising on general corporate law, banking and corporate finance from their London, Paris and Moscow offices. He graduated from Magdalen College, Oxford and is a qualified barrister.

02/ Frances Morris-Jones, Business Development DirectorFrances Morris-Jones joined the Group in November 2011. She was previously employed by ConocoPhillips as global business development manager for unconventional resources, where she was responsible for prioritising, selecting and accessing unconventional opportunities beyond North America, and delivered deals in Asia-Pacific and Europe. Frances has over 25 years’ experience in the industry, originally with BP where, as vice-president, renewal (2005-2008) she led a multi-disciplinary team mandated to screen, rank and access unconventional gas opportunities. Prior to that, as commercial director, she spent 7 years (1999-2005) in business development in Russia and the Caspian, where she led a cross-discipline evaluation of entry options to Russia, resulting in the establishment of TNK-BP. Frances has also been a non-executive director on the Board of DNV (Det Norske Veritas) since 2009. She has an MA (Hons) First Class degree from Oxford University.


21Governance

Health, Safety, Environmental and Social Responsibility

The Group maintains a health and safety code of conduct which is focused on improving health and safety performance and enhancing environmental stewardship.

During the year, the Group together with ConocoPhillips conducted further testing of the Warblino LE-1H and Lebien LE-2H horizontal wells and drilled one vertical well, the Strzeszewo LE-1, on the Lebork concession. A full risk assessment was performed as part of the planning process for each operation.

The Strzeszewo LE-1 well was cased and cemented in line with customary industry standards, thus isolating the wellbore from the surrounding formation, including aquifers. Waste fluids and solids generated or recovered at all three well locations were removed and disposed of in accordance with applicable Polish and EU regulations, and industry best practice.

In October 2012, a lost time incident (“LTI”) occurred on the Lebien location during further testing of the Lebien LE-2H well, as a result of which an employee suffered a fractured metatarsal bone in his foot. A detailed inquiry was conducted by ConocoPhillips, by then acting as operator, to determine any lessons to be learned. No other significant HSE incidents arose during operations at any of the three wells.

Employee, social and community managementThe Group seeks to ensure that all activities in the countries where it operates are undertaken in an open and ethical manner. The Group also recognises that it has a responsibility to the communities in the areas where it carries on activities. Where possible it aims to:

• Recruit local staff and ensure procedures are in place such that all recruitment is undertaken on a fair basis with no discrimination between applicants

• Inform the community about the Group’s activities through dialogue and regular town hall meetings

• Provide funding to support agreed local projects

• Provide appropriate training for locally employed staff

• Limit the visual impact of the Group’s activities by appropriate site location and screening

Health, safety andEnvironmental (“HSE”)The Group maintains a health and safety code of conduct which is focused on improving health and safety performance and enhancing environmental stewardship. These objectives are achieved through:

• Ensuring staff are fully aware of their responsibility regarding health and safety issues and providing adequate training where necessary

• Carrying out risk assessments which aim to identify HSE risk areas and possible consequences

• Establishing reporting routines for hazards and incidents, maintenance of risk registers and assigning responsibilities to senior management

• Using only contractors which comply with the Group’s stringent HSE standards and providing adequate supervision and management

• Complying with relevant local legislation and following industry recommendations

• Communicating policy and expected standards with third parties, joint venture partners and other external associates involved in the Group’s operations

• Continued development and improvement of health and safety performance


22Governance


Directors’ Report

IntroductionThe Directors present their report and financial statements for the Group for the year ended 31 December 2012.

Principal activityThe Group’s principal activity is the exploration and development of unconventional oil and gas resources in Poland, where the Directors believe the Group is well positioned to benefit from the emergence of a regional unconventional oil and gas sector.

Business and financial review and future developmentsDetails of the Group’s 2012 operations are included in the Chairman’s Statement and CEO’s Strategic Review. A review of the current year’s financial activities is set out in the Financial Review.

Results and dividendsThe Group’s loss for the year after taxation was £6.0 million (2011: loss of £2.3 million). The Directors do not recommend the payment of a dividend for the year.

Key performance indicatorsGiven the early stage of development of the Group’s operations, the key measures used by management for monitoring the Group’s progress and achievement of its strategic objectives for the business relate to:• Seismic and drilling operations completed within scope

and budget• Selectively strengthening the management team• Cash balance management

Details of the Group’s operational performance during the year are covered in the CEO’s Strategic Review. The Group has maintained a healthy cash balance to cover its immediate work programme. The appointment of a new Chief Executive Officer, Exploration Manager and Engineering Manager has further strengthened the management and technical teams. The Group will continue to monitor the management and technical expertise required to enable the Group successfully to carry on its activities, as the Group evolves.

DirectorsThe Directors of the Group that served during the year and subsequently were as follows:Tim Eggar, Non-Executive ChairmanKamlesh Parmar, Chief Executive Officer (appointed 18 October 2012)Peter Clutterbuck, Chief Executive Officer (resigned 17 October 2012)Barry Rourke, Non-Executive Director and Senior Independent DirectorDavid Bremner, Independent Non-Executive Director Rod Perry, Independent Non-Executive Director Richard Hills, Independent Non-Executive Director (appointed 1 December 2012)Robert Jeffcock, Non-Executive Director (resigned 22 February 2013)Clive Needham, Independent Non-Executive Director (resigned 22 February 2013)

Biographical details of serving Directors can be found in the Board of Directors and Senior Management section.

The interests of the Directors in office at year end in the share capital of the Company (including under the 2011 Restricted Share Award Plan) are set out in the table below.

Director31 December

201231 December

2011

Tim Eggar 420,000 420,000Kamlesh Parmar 3,411,916 3,411,916David Bremner 60,000 60,000Richard Hills – –Robert Jeffcock1,2 12,816,560 17,116,560Clive Needham3 7,000 7,000Rod Perry 60,000 60,000Barry Rourke 443,860 443,860

Note: 1. This figure included: 7,402,008 Ordinary Shares held by or on behalf of Caithness Limited as trustee for Robert Jeffcock (2011: 7,402,008); 2,409,352 (2011: 8,709,352) Ordinary Shares

held in the name of Lynchwood Nominees Limited on behalf of Robert Jeffcock’s son, William Jeffcock; 2,000,000 (2011: 0) Ordinary Shares held in the name of Forest Nominees Limited on behalf of Robert Jeffcock’s son, William Jeffcock; 900,000 (2011: 900,000) Ordinary Shares held by Robert Jeffcock’s children; and 105,200 Ordinary Shares (2011: 105,000) held by CM Skye Trustees Limited in favour of members of Robert Jeffcock’s family.

2. On 22 February 2013, Robert Jeffcock resigned as a Director of the Company. 3. On 22 February 2013, Clive Needham resigned as a Director of the Company.

23Governance


2011 Restricted Share Award PlanThe interests of the Directors in office at year end under the 2011 Restricted Share Award Plan of the Company are set out in the table below.

Director31 December

201231 December

2011

Tim Eggar 40,000 60,000Kamlesh Parmar – –David Bremner 40,000 60,000Richard Hills – –Robert Jeffcock – –Clive Needham – –Rod Perry 40,000 60,000Barry Rourke 13,333 20,000

During the year, one third of each of the original awards made under the Plan vested and thus became free from restrictions under the Plan.

Directors share optionsDetails of share options granted to the Directors in office at year end are as set out in the table below.

2007 Share Option PlanDirector At 1 Jan 2012

Granted in year

Exercised in year

At 31 Dec 2012 Exercise price Expiry date

Kamlesh Parmar 800,000 – – 800,000 25p N/A

Long Term Incentive PlanDirector At 1 Jan 2012

Granted in year

Exercised in year

At 31 Dec 2012 Exercise price Expiry date

Kamlesh Parmar 94,736 – – 94,736 Nil 7 Jun 2021

Kamlesh Parmar – 500,000 – 500,000 41.1p17 Oct 2022

Details of the Restricted Share Award Plan, Share Option Plans, LTIP and Directors’ remuneration can be found in the Directors’ Remuneration Report.

Annual General Meeting and re-election of DirectorsThe Annual General Meeting will be held on 19 April 2013. Kamlesh Parmar, Richard Hills and Barry Rourke will retire at the Annual General Meeting, following which Kamlesh Parmar and Richard Hills will offer themselves for election.

Transactions involving DirectorsDuring the year, David Bremner and Robert Jeffcock had consultancy agreements with the Company to provide technical and advisory services. During the year David Bremner charged fees of £101,500 (2011: £71,000) and Robert Jeffcock charged no fees (2011: £nil). As at 31 December 2012, the amount outstanding to David Bremner under his consultancy agreement was £32,218 (2011: £27,337).

Directors’ insurance and indemnity provisionsSubject to the conditions set out in the Companies Act 2006 and the Company’s Articles of Association, the Company has arranged appropriate Directors’ insurance to indemnify the Directors against liability in respect of proceedings brought by third parties. The annual cost of the cover is not material to the Group.

24Governance


Significant shareholdersAs at 19 March 2013, the Company had been notified that the following were holders of 3% or more of the Company’s issued Ordinary Share capital:

Number of Shares %

Damille Investments II Limited 12,000,000 14.15Morgan Stanley Securities Limited 11,398,440 13.44Weiss Asset Management LP 11,010,000 12.99BlackRock, Inc. 9,302,348 10.97JP Morgan Chase & Co 4,600,848 5.43Kamlesh Parmar1 3,411,916 4.02

1. Includes 3,398,916 Ordinary Shares held by Ferlim Nominees Limited on behalf of Kamlesh Parmar.

Except for the holdings of Ordinary Shares listed above, the Directors are not aware of any person holding 3% or more of the issued share capital at the date of this Report.

Share capitalDetails of the issued share capital, together with details of the movements in issued share capital during the year, are shown in note 25 to the financial statements.

Political donationsThere were no political donations made by the Group in the current or prior year.

Payment of suppliersIt is the Group’s policy that payments to suppliers are made in accordance with terms and conditions agreed between the Group and its suppliers. The average payment period for creditors for the year was 35 days (2011: 33 days).

Post balance sheet eventsEvents after the balance sheet date have been disclosed in note 33 to the financial statements.

Statement as to disclosure of information to the auditorEach Director in office at the date of this report has confirmed, as far as he is aware, that there is no relevant audit information of which the auditor is unaware. Each such Director has confirmed that he has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information.

Corporate governanceThe Company’s policy on corporate governance can be found in the Corporate Governance Statement. The Corporate Governance Statement forms part of this Directors’ report and is incorporated into it by cross-reference.

AuditorA resolution to reappoint Baker Tilly UK Audit LLP as auditor at a fee to be agreed by the Company will be proposed by the Board.

The Directors’ Report was approved by the Board of Directors and signed on its behalf by:

Rod Perry22 March 2013

Directors’ Report continued

25Governance


Corporate Governance Statement

The Board’s corporate governance policy is to apply best practice and materially to comply with the UK Corporate Governance Code (the “Code”) applicable to FTSE 350 companies to the extent that the Board considers is appropriate for a company of the size, nature and stage of development of the Company. The Company is an AIM-listed company and is not required to comply with any provision in those codes for so long as it remains listed on AIM. In addition, the Company proposes to follow, to the extent practicable, the recommendations on corporate governance in the Quoted Companies Alliance guidelines.

The Board considers that the Company has been in compliance with the Code since its IPO with the exception of the following Code provisions where it has either not complied or has complied only in part:

Provision of the Code Company positionB 2.3 Non-Executive Directors should be appointed for specified terms

The Non-Executive Directors are not appointed for specified terms but are subject to three months’ notice.

B 4.1 The Chairman should regularly review and agree with each Director their training and development needs

There is no formal process for reviewing and agreeing Director training and development but Directors are offered the opportunity to receive training if they wish.

E 1.1 The Senior Independent Director should attend sufficient meetings with a range of shareholders to understand the issues and their concerns

The Senior Independent Director has not attended any meetings with shareholders.

E 1.1 The Chairman should discuss governance and strategy with major shareholders

The Chairman is available to major shareholders who wish to discuss any matters regarding the Company’s strategy and matters of governance.

Further details are given below of how the Company addresses the principles set out in the Code.

The BoardSince the Company’s listing on AIM, the Board’s structure and composition has complied with the provisions of the Code which recommends that at least half the Board of Directors of a listed company (excluding the Chairman) should comprise independent Non-Executive Directors. The Board of the Company currently consists of one Executive and five Non-Executive Directors, all of whom are considered by the Board to be independent. The Company is therefore compliant with the recommendation, as a smaller company, for at least two members of the Board to be independent Non-Executive Directors. In determining whether these Directors should be considered to be independent, whilst the Board noted that certain Directors had shareholdings, those were not considered sufficiently material to affect the independence of the Directors concerned. The Board also noted that David Bremner had entered into a consultancy agreement with the Company but considered that, notwithstanding this agreement, David Bremner was and remains independent in character and judgment.

The Board has appointed a qualified Company Secretary, and Barry Rourke acts as Senior Independent Director pursuant to the Code’s recommendations. In addition to the Board, the Company has an experienced senior management team ensuring that it has the appropriate expertise and experience for the management of its business. Alexander Fraser is Chief Financial Officer (CFO) and Frances Morris-Jones is Business Development Director.

There is a clearly defined organisational structure with lines of responsibility and delegation of authority to executive management.

The Board meets regularly throughout each financial year and there is a schedule of matters reserved for its approval, ensuring that it exercises control over the Group’s strategy, performance, key financial and compliance issues, approval of any major capital expenditure and the framework of internal controls. The matters reserved for the Board include, amongst others, approval of the Group’s long term objectives, policies and budgets, changes relating to the Group’s management structure, approval of the Group’s financial statements and ensuring maintenance of sound systems of internal control. The Company Secretary ensures that the Board and its Committees are supplied with comprehensive papers of sufficient quality to enable them to consider matters in good time for meetings and to discharge their duties properly.

26Governance


Corporate Governance Statement continued

Since the year end, an evaluation of the performance of the Board, its Committees and the Chairman has been conducted. The Board performance appraisal consisted of a questionnaire and discussions between individual Directors and the Chairman. The results of the appraisal were considered at a Board meeting and a number of actions were agreed. The appraisal of the Chairman’s performance was conducted by the Senior Independent Director.

Directors are permitted to undertake ongoing training and education relating to their duties and access is given to independent legal advice at the Company’s expense if a Director considers that this is required.

Audit, Remuneration and Nomination CommitteesThe terms of reference of the Committees have been approved by the Board and are available to view on the Company’s website.

1. Audit CommitteeThe Audit Committee comprises Barry Rourke, Rod Perry and Richard Hill and is chaired by Barry Rourke. David Bremner stood down on the appointment of Richard Hill to the Audit Committee on 6 December 2012. The Board considers the members of the Audit Committee to be independent and is satisfied that all three members of the Audit Committee have recent and relevant financial experience. The external auditor and the Chief Financial Officer are invited to meetings where appropriate. The composition of the Audit Committee complies with the Code.

The main responsibilities of the Audit Committee are to review and report to the Board on matters relating to:

(i) the integrity of the financial statements of the Group, including its annual and interim accounts;

(ii) the effectiveness of the Group’s internal controls and risk management systems;

(iii) the accounting policies and practices of the Group; (iv) audit plans and auditors’ reports; and(v) the terms of appointment and remuneration of the auditor.

The Audit Committee is responsible for notifying the Board of any significant concerns that the external auditor may have arising from their audit work, any matters that may materially affect or impair the independence of the external auditor, any significant deficiencies or material weaknesses in the design or operation of the Group’s internal controls and any serious issues of non-compliance. No such concerns were identified during the year.

The Audit Committee reviews the scope of all audit services and permitted non-audit services undertaken by the external auditor, the principal purpose of which is to ensure that the independence of the external auditor is not impaired. In general, the external auditor will only be used for audit, audit related and tax services. Other services need specific authorisation from the Audit Committee. During the

year, no non-audit-related services, apart from tax advice, were provided. The Chief Financial Officer monitors the status of all services being provided by the external auditor and is satisfied that there were no conflicts during the year. The Audit Committee was satisfied throughout the year that the objectivity and independence of the external auditor were not in any way impaired by the nature of the non-audit work undertaken, the level of non-audit fees charged for such work or any other factors.

The Audit Committee has considered whether it is appropriate for the Group to have an internal audit function. The Audit Committee took account of the fact that an external company is used to provide accounting services and concluded that, in the light of this and the size of the Group, there is no need at present for a dedicated internal audit resource.

The Audit Committee has held four formal meetings during the year and other informal discussions were also held both with, and without, management present. Following each meeting, the Chairman of the Audit Committee reports to the Board on the principal matters covered at the meeting. The Audit Committee intends to review its performance and the appropriateness of its terms of reference following the conclusion of the 2012 audit.

2. Remuneration Committee The Remuneration Committee comprises Rod Perry, Tim Eggar, David Bremner and Richard Hills and is chaired by Rod Perry. Richard Hills joined the Remuneration Committee on 6 December 2012. The Chief Executive Officer is invited to attend from time to time. All the members of the Remuneration Committee are considered to be independent.

The principal role of the Remuneration Committee is to consider, on behalf of the Board, the remuneration of the Chairman, Chief Executive Officer and certain senior executives. The remuneration of the Non-Executive Directors is a matter for the Board. No Director or manager is involved in any decision relating to his or her own remuneration. The Remuneration Committee is responsible for awards under share option and other equity incentive plans and other bonus plans. The Remuneration Committee has agreed a remuneration structure for the various levels of management and set parameters for the annual salary review.

The Remuneration Committee takes independent advice from remuneration specialists as deemed necessary. The Remuneration Committee had four formal meetings during the year. The Remuneration Committee reviewed its performance and the appropriateness of its terms of reference during the year and confirmed these both to be satisfactory.

27Governance


3. Nomination CommitteeThe Nomination Committee comprises Tim Eggar and David Bremner. Robert Jeffcock resigned from the Nomination Committee on 22 February 2013. Both members are considered to be independent. The Nomination Committee’s remit is to prepare selection criteria and appointment procedures for members of the Board and to review on a regular basis the structure, size and composition of the Board. In undertaking this role, the Nomination Committee will refer to the skills, knowledge and experience required of the Board given the Group’s stage of development and will make recommendations to the Board as to any changes. The Nomination Committee will also make recommendations regarding the membership of the Audit and Remuneration Committees.

The Nomination Committee will meet at least once a year. It met prior to the Company’s 2012 Annual General Meeting in May 2012 and for the purposes of the appointment of the new Chief Executive Officer in October 2012.

Internal controls and risk managementThe Board is responsible for establishing and maintaining the Group’s system of internal controls and importance is placed on maintaining a robust control environment. Procedures which the Board maintains with a view to ensuring effective internal controls include:- a management reporting process to enable the Board to monitor

the performance of the Group on a regular basis; - preparation, adoption and monitoring of an annual budget for

the Group;- maintaining appropriate treasury management policies;- reviewing the major business risks faced by the Group and

determining the appropriate courses of action to manage those risks;

- preparation of consolidated management information on a regular basis.

The Board monitors the effectiveness of the system of internal controls operated by the Group to ensure that they remain appropriate as the Group develops.

Share dealingThe Company complies with Rule 21 of the AIM Rules for companies regarding dealings in the Company’s shares and has adopted a code on dealing in securities to ensure compliance by the Directors, employees and certain consultants.

Shareholder relationshipsDuring the year the Chairman, Chief Executive Officer and members of the senior management team met with shareholders and analysts. This included formal presentations, one-to-one meetings, analyst briefings and press interviews. The Board receives regular briefings on feedback from meetings with investors and trading activity from the Chief Executive Officer and the Company’s NOMAD. In addition, copies of analysts’ research reports and other relevant material are circulated to all Directors.

Directors’ attendanceThe Directors’ attendance at scheduled Board meetings and Board Committees for the period is detailed in the table below:Director Board Audit Remuneration Nomination

T.J.C. Eggar 5* 1+ 4 2*

P.R. Clutterbuck1 4 1+ 3+ –K. Parmar2 1 – 1+ –D.L. Bremner 5 4 4 2R. Hills3 1 1+ 1 –R.P. Jeffcock 5 – – 2C. Needham 4 – – –R.W. Perry 5 4 4* –B. Rourke 5 4* – –

Total meetings held 5 4 4 2

* Chairman + InviteeNotes:1. Peter Clutterbuck resigned as a member of the Board on 17 October 2012.2. Kamlesh Parmar was appointed as a member of the Board on 18 October 2012.3. Richard Hills was appointed as a member of the Board on 1 December 2012 and

his appointment ratified at the Board meeting held on 6 December 2012.

28Governance


Directors’ Remuneration Report

The remuneration policy for the Chief Executive Officer and senior management is determined by the Remuneration Committee with input from the Chief Executive Officer as appropriate in relation to individual performance. The performance of the Chief Executive Officer is assessed by the Chairman of the Company and approved by the Remuneration Committee.

The Remuneration Committee aims to provide the Chief Executive Officer and senior management team with remuneration packages which are sufficiently competitive to attract, retain and motivate individuals of the quality required to achieve the objectives of the Group and thereby enhance shareholder value. In the case of the Chief Executive Officer and senior management, the remuneration package consists of:

• a basic salary;• eligibility for an annual bonus of up to 100% of salary payable two

thirds in cash and one third in deferred shares, subject to achievement of personal and corporate targets; the deferred share portion of the bonus is subject to certain share price performance conditions and is deferred for a period of one year;

• eligibility to participate in the Long-Term Incentive Plan; • contribution to a personal pension plan; and• private health insurance.

During 2013, the Remuneration Committee plans to engage external remuneration consultants to carry out a complete and comparative review of salary, bonus terms and long term incentive plans for the Chief Executive Officer and senior management.

The Directors’ remuneration for the year ended 31 December 2012 was as follows:

Non-Executive DirectorsFees

£Bonus

£Pension

£

Total 2012

£

Total 2011

£

Tim Eggar 60,000 – – 60,000 60,000David Bremner 134,795 – – 134,795 104,000Richard Hills (appointed 1 Dec 2012) 2,292 – – 2,292 –Robert Jeffcock 27,500 – – 27,500 45,000Clive Needham1 – – – – –Rod Perry 32,500 – – 32,500 29,000Barry Rourke 32,500 – – 32,500 31,000

Total 289,587 – – 289,587 269,000

Notes: 1. The Company paid CM Management Limited (of which Clive Needham is a director) a fixed annual fee of £10,000 for certain services including his services as a Director.

The fees of the Non-Executive Directors excluding the Chairman have been set at £27,500 per annum plus an additional £5,000 per annum for Directors chairing the Audit Committee, Remuneration Committee or Technical Committee.

Executive DirectorSalary/fees

£Bonus

£Pension

£ Health-care

Total 2012

£

Total 2011

£

Peter Clutterbuck1 192,000 63,316 19,000 4,000 278,316 360,000Kamlesh Parmar2 50,000 23,048 5,000 1,000 79,048 N/A

Notes:1. For the period up to Peter Clutterbuck’s resignation on 17 October 20122. For the period since Kamlesh Parmar’s appointment on 18 October 2012

29Governance


In addition to the remuneration set out above, Peter Clutterbuck received a payment of £184,600 upon his resignation, including £120,000 by way of payment in lieu of notice. These payments were determined in accordance with the provisions of his Service Agreement and legal advice received by the Remuneration Committee.

The level of bonus paid to both the outgoing and incoming Chief Executive Officers for the year ended 31 December 2012 was determined according to achievement of corporate targets and individual performance. The Remuneration Committee determined the extent to which the corporate targets had been achieved and considered the individual’s performance.

The Remuneration Committee agreed that a final cash bonus of £63,316 (2011: £106,000) would be paid to Peter Clutterbuck upon his resignation, which represented 26% (2011: 46%) of the maximum bonus potential. The Remuneration Committee further agreed that a final cash bonus of £88,504 would be paid to Kamlesh Parmar (including £23,048 in respect of the period since his appointment as Chief Executive Officer), which represented 46% of the maximum bonus potential.

In consultation with the Board, the Remuneration Committee sets the corporate targets which will be used to assess the bonus payable to the Chief Executive Officer, senior managers and other employees and consultants. The Remuneration Committee has determined that the proportion of the Chief Executive Officer’s potential bonus allocated to corporate targets for 2013 will be 60% (2012 - 60%).

The notice period for the Chief Executive Officer is six months and for the Non-Executive Directors is three months, which is in line with other companies of a similar size and is considered to be appropriate for the size of the Group.

Share schemesThe Company has a number of share schemes in place.

a) 2007 Share Option Plan The 3Legs Resources plc 2007 Share Option Plan (the “2007 SOP”) was adopted by the Company on 23 May 2007. The Board has determined that no further grants will be made under the 2007 SOP.

b) 2009 Share Option Plan The 3Legs Resources plc 2009 Share Option Plan (the “2009 SOP”) was adopted by the Company on 7 December 2009. In all material respects the terms and conditions of the 2009 SOP are the same as those of the 2007 SOP. The Board has determined that no further grants will be made under the 2009 SOP. Outstanding options under the 2007 SOP and the 2009 SOP will only be exercisable on the attainment of specified conditions and to the extent that they have vested in accordance with any vesting schedule.

c) Long-Term Incentive Plan The primary long-term incentive arrangement for the Chief Executive Officer and members of senior management of the Company is the Long-Term Incentive Plan (the “LTIP”). The LTIP is intended to drive the performance of the management team and awards have been made to the Chief Executive Officer, senior managers, other employees and certain consultants providing services to the Group. Under the LTIP, participants are granted options over the Company’s issued share capital exercisable at nil cost, in the case of options granted at the time of the IPO, or at the most recent publicly quoted price, in the case of options granted after the IPO. In the case of the Chief Executive Officer and other senior managers, the proportion of the award which vests is subject to the Company’s share price performance exceeding the Retail Price Index by various bands over a performance period of three years. The Remuneration Committee considers annually whether to make additional awards under the LTIP and what performance conditions should attach to those awards. During 2012, awards totalling 1,822,408 shares were made to 11 persons, exercisable between 2015 and 2022.

d) 2011 Restricted Share Award Plan The 2011 Restricted Share Award Plan is a restricted share plan which was used to make one off awards to five Non-Executive Directors prior to the IPO. The shares are subject to restrictions on dealing until the awards vest, which occurs in equal tranches of one third on each of 31 July 2012, 31 July 2013 and 31 July 2014. Vesting may occur early, and award holders may also be required to transfer their award shares back to the Company, in certain defined circumstances.


30Governance

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations.

The Directors have elected to prepare Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”).

In preparing the Group financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;• make judgements and accounting estimates that are reasonable and prudent;• state whether they have been prepared in accordance with IFRS as adopted by the EU;• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue

in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Isle of Man Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.


31Governance

Independent Auditor’s Report to the Members of 3Legs Resources plcWe have audited the Group financial statements of 3Legs Resources plc for the year ended 31 December 2012 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely in accordance with section 80C of the Isle of Man Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and auditorAs more fully explained in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements within them.

Scope of the audit A description of the scope of an audit of financial statements arising from the requirements of International Standards on Auditing (UK and Ireland) is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on the financial statementsIn our opinion the financial statements:

• give a true and fair view of the state of the Group’s affairs as at 31 December 2012 and of the Group’s loss for the year then ended;• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; and• the Group financial statements have been prepared in accordance with the requirements of the Isle of Man Companies Act 2006.

BAKER TILLY UK AUDIT LLP, Auditor Chartered Accountants and Registered Auditors2 Whitehall QuayLeedsLS1 4HG

32Financial Statements


Consolidated Income StatementFor the year ended 31 December 2012

Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2012

Notes2012

£’0002011

£’000

Continuing operationsRevenue – –

Other income 6 1,067 2,747Administrative expenses (5,192) (5,285)Impairment of intangible exploration and evaluation assets 7 (2,077) –

Operating loss (6,202) (2,538)Share of results of joint venture 8 (123) –Investment income 9 296 210

Loss before tax (6,029) (2,328)Tax 13 (1) –

Loss for the year 10 (6,030) (2,328)

Attributable to:Equity holders of the parent (6,030) (2,328)

(6,030) (2,328)

Loss per Ordinary ShareBasic and diluted, pence per share 14 (0.07p) (0.03p)

2012£’000

2011£’000

Loss for the year (6,030) (2,328)Other comprehensive incomeExchange differences arising on translation of foreign operations 805 (657)

Total comprehensive income for the year attributable to owners of the parent company (5,225) (2,985)



Consolidated Balance Sheet As at 31 December 2012

Notes2012

£’0002011

£’000

AssetsNon-current assetsIntangible exploration and evaluation assets 15 2,839 14,850Investment accounted for using the equity method 16 14,905 –

17,744 14,850

Current assetsTrade and other receivables 18 977 3,400Cash and cash equivalents 19 39,531 50,930

40,508 54,330

Total assets 58,252 69,180

LiabilitiesCurrent liabilitiesTrade and other payables 20 (986) (5,499)Shareholder borrowings 21 – (1,165)Financial instruments 22 – (324)Provisions 23 (573) –

(1,559) (6,988)

Non-current liabilitiesProvisions 23 – (528)Total liabilities (1,559) (7,516)

Net assets 56,693 61,664

EquityShare capital 25 21 21Share premium account 68,330 68,330Share-based payment reserves 26 790 652Accumulated deficit (12,055) (6,141)Cumulative translation reserves (393) (1,198)

Total equity 56,693 61,664

The financial statements of 3Legs Resources plc were approved by the Board of Directors and authorised for issue on 22 March 2013. They were signed on its behalf by:

Rod Perry22 March 2013

Notes 1 to 33 form part of these financial statements.



Consolidated Cash Flow StatementFor the year ended 31 December 2012

Notes2012

£’0002011

£’000

Net cash outflow from operating activities 28 (4,863) (1,185)

Investing activitiesInterest received 296 210Purchases of intangible exploration and evaluation assets (1,807) (8,477)Investment in joint venture (2,742) –

Net cash used in investing activities (4,253) (8,267)

Financing activitiesIssue of share capital – 59,296Repayment of shareholder borrowings (1,171) –

Net cash (outflow)/inflow from financing activities (1,171) 59,296

Net (decrease)/increase in cash and cash equivalents (10,287) 49,844Effect of foreign exchange rate changes on cash and cash equivalents (1,060) (511)Effect of equity accounting (52) –Cash and cash equivalents at beginning of year 50,930 1,597

Cash and cash equivalents at end of year 39,531 50,930



Consolidated Statement of Changes in Equity For the year ended 31 December 2012

Sharecapital£’000

Sharepremiumaccount

£’000

Share-based payment reserves

£’000

Accumulated deficit£’000

Cumulative translation

reserves£’000

Total£’000

As at 1 January 2011 12 8,662 461 (3,829) (541) 4,765Transactions with owners in their capacity as owners:Issue of equity shares 9 62,934 – – – 62,943Expenses of issue of equity shares – (3,266) – – – (3,266)

Total transactions with owners in their capacity as owners 9 59,668 – – – 59,677

Loss for the year (2,328) (2,328)Other comprehensive income:Currency translation differences (657) (657)

Total comprehensive income for the year – – – (2,328) (657) (2,985)

Share-based payments – – 207 – – 207Transfer to retained earnings in respect of exercised share options – – (16) 16 – –

As at 1 January 2012 21 68,330 652 (6,141) (1,198) 61,664

Loss for the year (6,030) (6,030)Other comprehensive income:Currency translation differences 805 805

Total comprehensive income for the year – – – (6,030) 805 (5,225)

Share-based payments – – 254 – – 254Transfer to retained earnings in respect of lapsed warrants – – (116) 116 – –

As at 31 December 2012 21 68,330 790 (12,055) (393) 56,693



Notes to the Consolidated Financial Statements For the year ended 31 December 20121 General information3Legs Resources plc (the “Company” and, together with its subsidiaries, the “Group”) is incorporated in the Isle of Man, British Isles under the Isle of Man Companies Act 2006. The address of the registered office is Commerce House, 1 Bowring Road, Ramsey, Isle of Man, British Isles, IM8 2LQ.

The nature of the Group’s operations and its principal activities are the exploration, evaluation and development of oil and gas targets, primarily from unconventional resource plays.

These financial statements are presented in pounds sterling. Foreign operations are included in accordance with the policies set out in note 3.

2 Adoption of new and revised StandardsStandards affecting presentation and disclosureIn the current year, the following new and revised Standards have been adopted but have not had any material impact on the amounts reported in these financial statements.

IFRS 7 (amended 2011) Financial instruments disclosures: transfers of financial assetsIAS 12 (amended 2011) Income taxes: deferred tax: recovery of underlying assets

At the date of authorisation of the financial statements, the following Standards and Interpretations which have not been applied in the financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

IFRS 7 (amended 2011) Financial instruments disclosure: offsetting financial assets and financial liabilitiesIFRS 9 Financial instrumentsIFRS 10 Consolidated financial statementsIFRS 11 Joint arrangementsIFRS 12 Disclosure of interests in other entitiesIFRS 13 Fair value measurementIAS 1 (amended 2011) Presentation of items of other comprehensive incomeIAS 19 (amended 2011) Employee benefitsIAS 27 (amended 2011) Separate financial statementsIAS 27 (amended 2012) Separate financial statements: Investment EntitiesIAS 28 (amended 2011) Investments in associates and joint venturesIAS 32 (amended 2011) Financial instruments presentation: offsetting financial assets and financial liabilities

Improvements to IFRS (May 2012)The Directors do not expect that the adoption of these Standards or Interpretations in future periods will have a material impact on the financial statements of the Group. In particular there will be no material impact arising from the adoption of IFRS 11 Joint arrangements due to the events which have occurred during year ended 31 December 2012. All subsidiary companies of the Group are 100% owned and the Group’s only joint venture is accounted for using the equity method, which is consistent with the required treatment under IFRS 11.

3 Significant accounting policiesBasis of accountingThe financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”) and as adopted by the European Union (“EU”), and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation.

The financial statements have been prepared on the historical cost convention basis. Historic cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below.

Going concernThe Group’s business activities, together with the factors likely to affect its future development and position, are set out in the Chief Executive Officer’s Review.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Directors therefore consider it appropriate to prepare the financial statements on a going concern basis.



Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

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 accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other venturers under a contractual arrangement.

Prior to the exercise by ConocoPhillips of its option to acquire a 70% interest in the Group’s three western Baltic Basin concessions, completed in September 2012, the Group recognised its interest in its joint venture activities using proportionate consolidation. With effect from this date and the resulting transfer of operatorship to ConocoPhillips, the Group has elected to recognise its interest using the equity method in accordance with IAS31 Interest in Joint Ventures. The Group recognises its investment in joint ventures at cost, with subsequent adjustments for its share of any profits or losses incurred by the joint venture since acquisition.

LeasingRentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease.

Benefits received and receivable under operating leases are charged to income on a straight-line basis over the lease term.

Foreign currenciesThe individual financial statements of each Group company are presented in the currency of the primary economic environment in which it operates (its functional currency).

For the purpose of the consolidated financial statements, the results and financial position of each Group company are expressed in pounds sterling, which is the functional currency of the Company, and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual companies, transactions in currencies other than the functional currency of each Group company (“foreign currencies”) are recorded in the functional currency 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 into the functional currency 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. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Foreign exchange differences are recognised in the income statement in the period in which they arise except for foreign exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in the income statement on disposal of the net investment.

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used.

Foreign 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.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Operating lossOperating loss is stated after charging impairment of intangible exploration and evaluation assets but before share of results of joint venture activities accounted for using the equity method, investment income and other gains and losses.

3 Significant accounting policies continued



Investment IncomeInvestment income comprises bank interest income on funds invested. Interest income is recognised on an accrual basis.

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

The tax currently payable is based on taxable profit for the year. 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 using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill, or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

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

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

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

Intangible exploration and evaluation assetsThe Group applies the full cost method of accounting for Exploration and Evaluation (“E&E”) costs, having regard to the requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources. Under the full cost method of accounting, costs of exploring for and evaluating mineral resources are accumulated by reference to appropriate cost centres being the appropriate licence area, but are tested for impairment on a cost pool basis as described below.

E&E assets comprise costs of (i) E&E activities that are on-going at the balance sheet date, pending determination of whether or not commercial reserves exist and (ii) costs of E&E that, whilst representing part of the E&E activities associated with adding to the commercial reserves of an established cost pool, did not result in the discovery of commercial reserves.

Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and evaluation costsAll costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets.

Intangible costs include directly attributable overheads together with the cost of other materials consumed during the exploration and evaluation phases.

E&E costs are not amortised prior to the conclusion of appraisal activities.

Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 20123 Significant accounting policies continued



Treatment of E&E assets at conclusion of appraisal activitiesIntangible E&E assets related to each exploration licence/prospect are carried forward, until the existence (or otherwise) of commercial reserves has been determined. If commercial reserves have been discovered, the related E&E assets are assessed for impairment on a cost pool basis as set out below and any impairment loss is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets.

Intangible E&E assets that relate to E&E activities that are determined not to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets at cost less accumulated amortisation, subject to meeting a pool-wide impairment test in accordance with the accounting policy for impairment of E&E assets set out below. Such E&E assets are amortised on a unit-of-production basis over the life of the commercial reserves of the pool to which they relate.

Impairment of E&E assetsE&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include, but are not limited to, those situations outlined in paragraph 20 of IFRS 6 Exploration for and Evaluation of Mineral Resources and include the point at which a determination is made as to whether or not commercial reserves exist.

Where there are indications of impairment, the E&E assets concerned are tested for impairment. Where the E&E assets concerned fall within the scope of an established full cost pool, the E&E assets are tested for impairment together with all development and production assets associated with that cost pool, as a single cash generating unit.

The aggregate carrying value is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flows expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any established cost pool, there will generally be no commercial reserves and the E&E assets concerned will generally be written off in full.

Any impairment loss is recognised in the income statement as additional depreciation and amortisation, and separately disclosed.

The Group considers each set of licences (Baltic Basin, southern Poland and southern Germany), to be a separate cost pool and therefore aggregates all location specific assets for the purposes of determining whether impairment of E&E assets has occurred.

Financial instrumentsRecognition of financial assets and financial liabilitiesFinancial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument.

Derecognition of financial assets and financial liabilitiesThe Group derecognises a financial asset only when the contractual rights to cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for the amount it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

The Group derecognises financial liabilities when the Group’s obligations are discharged, cancelled or expired.

Trade and other receivablesTrade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost less any provision for impairment.

Cash and cash equivalentsCash and cash equivalents comprise cash in hand and on-demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash with three months or less remaining to maturity and are subject to an insignificant risk of changes in value.

Trade and other payablesTrade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

3 Significant accounting policies continued



ProvisionsProvisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic resources will result and that outflow can be reliably measured.

Financial assets and liabilities at fair value through profit or lossFinancial assets are classified as at fair value through profit or loss (“FVTPL”) where the financial asset is either held for trading or it is designated as at FVTPL.

A financial asset is classified as held for trading where:

• It has been acquired principally for the purposes of selling in the near future;• It is a part of an identified portfolio of financial instruments that the Group manages together and has a recent pattern of

short-term profit-taking; or• It is a derivative that is not designated and effective as a hedging instrument.

A financial asset or liability other than a financial asset or liability held for trading may be designated as at FVTPL upon initial recognition if:

• Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or• The financial asset or liability forms part of a group of financial assets or financial liabilities or both, which is managed and the

performance of which is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about such group is provided internally on that basis; or

• It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

DecommissioningProvision for decommissioning is recognised in full when the related facilities are installed. The decommissioning provision is calculated as the net present value of the Group’s share of the expenditure expected to be incurred at the end of the producing life of each field in the removal and decommissioning of the production, storage and transportation facilities currently in place. The cost of recognising the decommissioning provision is included as part of the cost of the relevant asset and is thus charged to the income statement on a unit-of-production basis in accordance with the Group’s policy for depletion and depreciation of tangible non-current assets.

Share-based paymentsThe Group has applied the requirements of IFRS 2 Share-based Payment for all grants of equity instruments.

The Group operates an equity-settled share option plan and also issued warrants to certain shareholders (which have since lapsed). The fair value of the service received in exchange for the grant of options and warrants is recognised as an expense. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value determined at the grant date of equity-settled share-based payment is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.

Fair value is measured by use of the Black-Scholes model and the Monte-Carlo model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each balance sheet date for cash-settled share-based payments.

Segmental reportingOperating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments and making strategic decision, has been identified as the Board of Directors.

4 Critical accounting judgements and key sources of estimation and uncertaintyIn the application of the Group’s accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 20123 Significant accounting policies continued





The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both the current and future periods.

The following are the critical judgements and estimations that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

Recoverability of exploration and evaluation assetsDetermining whether an exploration and evaluation asset is impaired requires an assessment of whether there are any indicators of impairment, including by reference to specific impairment indicators prescribed in IFRS 6 Exploration for and Evaluation of Mineral Resources. If there is any indication of potential impairment, an impairment test is required based on value in use of the asset. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of exploration and evaluation assets at the balance sheet date was £2.8 million (2011: £14.9 million) and impairments of £2.1 million (2011: £nil) were identified and recognised in the period.

Provisions for liabilitiesAs a result of exploration activities the Group is required to make provision for decommissioning. Significant uncertainty exists as to the amount of decommissioning obligations which may be incurred due to the impact of possible changes in environmental legislation. A provision of £0.6 million has been recognised at 31 December 2012 (2011: £0.5 million).

Share-based paymentsThe Group has an equity-settled share option scheme available to certain Directors, employees and consultants. In accordance with IFRS 2 Share-based payment, in determining the fair value of options granted, the Group has applied the Black-Scholes and the Monte Carlo model. As a result, the Group makes assumptions for expected volatility and expected life. The fair value of options granted in the years reported is shown in note 27.

Joint VentureIn March 2012, ConocoPhillips gave notice of exercise of its option, under the Joint Evaluation Agreement, to acquire 70% of the issued share capital of Lane Energy Poland Sp. z o.o. Completion of the option exercise occurred in September 2012.

Following exercise of the option, the Group retains joint control of the venture under the terms of a Shareholders Agreement entered into with ConocoPhillips. In accordance with IAS27 Consolidated and Separate Financial Statements, the Group has continued to recognise its interest in Lane Energy Poland Sp. z o.o. as a 30% interest in a joint venture for purposes of consolidation.

Prior to the exercise of the option, the Group recognised its interest in joint venture activities using proportionate consolidation. With effect from this date and the resulting transfer of operatorship to ConocoPhillips, the Group has elected to recognise its interest using the equity method, in accordance with IAS31 Interest in Joint Ventures. The Group recognises its investment in joint ventures at cost, with subsequent adjustments for its share of any profits or losses incurred by the joint venture since acquisition.

5 Business and geographical segmentsThe Directors consider there to be only one business segment, namely the exploration and development of oil and gas resources. The Directors consider there to be one material operating segment, being Poland.

6 Other income 2012

£’0002011

£’000

30% funding of exploration programme 27 2,123Completion payment 798 624Net foreign exchange gain on equity accounting for joint venture 235 –External rent recharged 7 –

1,067 2,747

Under the terms of the Joint Evaluation Agreement, ConocoPhillips committed to fund an exploration programme on the Group’s concessions in the Baltic Basin in northern Poland, in exchange for an option to acquire a 70% interest in Lane Energy Poland Sp. z o.o. Other income includes ConocoPhillips’ funding of the Group’s 30% interest in that exploration programme up to the date of option exercise.

4 Critical accounting judgements and key sources of estimation and uncertainty continued




The completion payment includes the final retention of US$0.5 million due under the terms of the Joint Evaluation Agreement upon exercise of the call option. In addition, the call option premium of US$0.5 million, previously classified as a designated financial instrument held at FVTPL, was released through the profit and loss during the year.

Following exercise of the option, a foreign exchange gain has arisen as a result of the transfer of operatorship to ConocoPhillips and the subsequent use of the equity accounting method to recognise the Group’s interest in Lane Energy Poland Sp. z o.o.

7 Impairment of intangible exploration and evaluation assets2012

£’0002011

£’000

Southern Poland (Krakow) 2,077 –

During the year, the Group relinquished one of its three concessions in southern Poland, held by Lane Resources Poland Sp. z o.o. The Group currently has no plans to incur any further expenditure on the remaining two concessions and consequently the related exploration and evaluation cost has been impaired in full.

8 Share of results of joint venture2012

£’0002011

£’000

Lane Energy Poland Sp z o.o. 123 –

9 Investment income2012

£’0002011

£’000

Interest on bank deposits 296 210

10 Operating loss The operating loss for the year has been arrived at after charging:

2012£’000

2011£’000

Property lease payments 89 104Staff costs (note 12) 1,712 838IPO costs – 1,149Share-based payments (note 27) 254 207Impairment of intangible exploration and evaluation assets 2,077 –Audit fees 76 90Net foreign exchange losses 1,587 1,257

11 Auditor’s remuneration Amounts payable to Baker Tilly UK Audit LLP and its associates in respect of both audit and non-audit services:

2012£’000

2011£’000

Audit feesFees payable to the Group’s auditor for the non-statutory audit of the subsidiaries’ annual accounts – 42Fees payable to the Group’s auditor for the statutory audit of the Group’s annual accounts 76 48

Total audit fees 76 90

Amounts payable to associates of Baker Tilly UK Audit LLPNon-audit feesTax services 22 67Other services 11 12Corporate finance – initial public offering – 210

Total non-audit fees 33 289

Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 20126 Other income continued





12 Staff costs The average monthly number of employees (including Executive Directors) was:

2012Number

2011Number

Executive Directors (of 3Legs Resources plc) 1 1Executive Directors (of 3Legs Management Services Limited) 2 2Other employees 4 2

7 5

Their aggregate remuneration comprised:2012

£’0002011

£’000

Wages and salaries 1,436 899Termination payments 185 –Social security costs 204 132Benefits in kind 103 56Share-based payments 105 56

2,033 1,143

Included within wages and salaries is £0.3 million (2011: £0.2 million) capitalised to intangible exploration and evaluation assets.

13 TaxThe tax assessed for the year is at the standard rate of corporation tax in the Isle of Man of 0% (2011: 0%) and is calculated as follows:

2012£’000

2011£’000

Loss on ordinary activities before tax (6,029) (2,328)

Loss on ordinary activities by the standard rate of tax – –Foreign tax (1) –

Tax charge for the year (1) –

14 Loss per Ordinary Share Basic loss per Ordinary Share is calculated by dividing the net loss for the year attributable to Ordinary equity holders of the parent by the weighted average number of Ordinary Shares outstanding during the year. The calculation of the basic and diluted loss per Ordinary Share is based on the following data:Losses

2012£’000

2011£’000

Loss for the purposes of basic loss per share being net loss attributable to equity holders of the parent (6,030) (2,328)

Number of shares2012

Number2011

Number

Weighted average number of Ordinary Shares for the purposes of basic loss per share 84,782,544 69,657,716

Loss per Ordinary Share 2012

£2011

£

Basic and diluted pence per share (0.07)p (0.03)p

Diluted loss per Ordinary Share equals basic loss per Ordinary Share as, due to the losses incurred in 2011 and 2012, there is no dilutive effect from the subsisting share options.





15 Intangible exploration and evaluation assets£’000

CostAt 1 January 2011 4,830Additions 10,076Provision for decommissioning 488Exchange differences (544)

At 1 January 2012 14,850Additions 1,807Impairment (Note 7) (2,077)Equity accounting adjustment (12,337)Exchange differences 596

At 31 December 2012 2,839

16 Investment accounted for using the equity methodThe Group had an interest in the joint venture listed below as at 31 December 2012, which it has accounted for using the equity method. The joint venture has a share capital consisting solely of ordinary shares, which are held as to 70% by ConocoPhillips and as to 30% by a wholly-owned subsidiary of the Group. The country of incorporation or registration is also its principal place of business.

Name

Country of incorporation and operation

Proportion of ownership

and voting interest %

Measurement method

Lane Energy Poland Sp. z o.o. Poland 30 Equity

Lane Energy Poland Sp. z o.o. is a private company and there is no quoted market price for its shares.

In March 2012 ConocoPhillips gave notice of exercise of its option to acquire a 70% interest in the Group’s three western Baltic Basin concessions, pursuant to the Joint Evaluation Agreement and ancillary documents. Completion of the option exercise took place in September 2012. The Group retains a net 30% interest in the three western Baltic Basin concessions, as a non-operating partner.

Prior to the exercise by ConocoPhillips of its option to acquire a 70% interest in the Group’s three western Baltic Basin concessions, completed in September 2012, the Group recognised its interest in its joint venture activities using proportionate consolidation. With effect from this date and the resulting transfer of operatorship to ConocoPhillips, the Group has elected to recognise its interest using the equity method in accordance with IAS31 Interest in Joint Ventures. The Group recognises its investment in joint ventures at cost, with subsequent adjustments for its share of any profits or losses incurred by the joint venture since acquisition.

The aggregate amounts related to the joint venture included within the consolidated accounts are:2012

£’0002011

£’000

Current assets n/a 732Long-term assets 14,905 12,803Current liabilities n/a (438)Long-term liabilities n/a (528)Expenses (123) (230)

Investment in joint venture2012

£’0002011

£’000

Lane Energy Poland Sp. z o.o. 14,905 –

The Group has the following commitments relating to its joint ventures.

Commitments and contingent liabilities in respect of joint ventures2012

£’0002011

£’000

Commitment to provide funding if called 8,943 –

The Group has entered into commitments to fund its 30% share of the 2013 exploration and appraisal programme planned by Lane Energy Poland Sp. z o.o.

Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 2012





17 Subsidiaries The Company had investments in the following subsidiary undertakings as at 31 December 2012, which principally affected the losses and net assets of the Group:

Name Country of incorporation and operationProportion of ownership and voting interest % Activity

Directly held3Legs Management Services Ltd England and Wales 100 Service company3Legs Management Services US LLC United States of America 100 Service company3Legs Oil and Gas plc Isle of Man 100 Holding companyIndirectly heldDiell Trading Ltd Cyprus 100 Holding companyLane Energy Holdings plc Isle of Man 100 Holding companyLane Resources Holdings plc Isle of Man 100 Holding companyLane Resources Poland Sp. z o.o. Poland 100 ExplorationLane Energy Exploration Sp. z o.o. Poland 100 ExplorationMoorfoot Trading Ltd Cyprus 100 Holding companyParkyn Energy (Germany) Ltd Republic of Ireland 100 ExplorationParkyn Energy Holdings plc Isle of Man 100 Holding company

Joint ventureOn 4 August 2009, the Group entered into a Joint Evaluation Agreement (the “JEA”) with ConocoPhillips. Under the JEA and ancillary documents, ConocoPhillips committed to fund an exploration programme on the Group’s six concessions in the Baltic Basin in northern Poland, in exchange for an option to acquire a 70% interest in Lane Energy Poland Sp. z o.o. ConocoPhillips gave notice of exercise of its option on 20 March 2012 and completion of the option exercise occurred on 17 September 2012. Under IAS 27 Consolidated and Separate Financial Statements, the Group now recognises Lane Energy Poland Sp. z o.o. as a 30% interest in a joint venture for purposes of consolidation (see note 16).

In order to enable the development of a separate strategy for the three eastern Baltic Basin concessions, these concessions were divested by Lane Energy Poland Sp. z o.o. into a separate Polish legal entity, Lane Energy Exploration Sp. z o.o., prior to completion of the option exercise in September 2012. Lane Energy Exploration Sp. z o.o. is a wholly-owned subsidiary of the Group. ConocoPhillips initially retained an option to acquire a 70% interest in the three eastern Baltic Basin concessions, but this lapsed on 30 September 2012.

18 Trade and other receivables2012

£’0002011

£’000

Trade receivables 2 1,754Other receivables 801 227Amounts due from joint venture 12 –VAT recoverable 35 859Prepayments and accrued income 127 560

977 3,400

The average credit period for trade receivables is 6 days (2011: 11 days).

Other receivables represents an amount due from ConocoPhillips of £0.6 million (2011: £nil) in respect of payment for certain decommissioning operations under the terms of the JEA and an amount of £0.2 million (2011: £0.2 million) due in respect of a loan to Cowley Mining plc, a related party (see further note 32).

The Directors consider that the carrying amount of the other receivables approximates their fair value. None of the other receivables are past due or impaired.

19 Cash and cash equivalentsCash and cash equivalents as at 31 December 2012 of £39.5 million (2011: £50.9 million) comprise cash held by the Group. The Directors consider that the carrying amount of these assets approximates to their fair value.





20 Trade and other payables2012

£’0002011

£’000

Trade payables 235 1,150Other taxes and social security 30 43Other payables – 3,487Accruals 721 819

986 5,499

Trade payables and accruals principally comprise amounts outstanding for trade purchases and on-going costs. The average credit period taken for trade purchases is 35 days (2011: 33 days). The Group has financial risk management policies to ensure that all payables are paid within the credit timeframe.

The Directors consider that the carrying amount of trade and other payables approximates to their fair value. No interest is generally charged on balances outstanding.

21 Shareholder borrowings2012

£’0002011

£’000

Convertible loan notes – 1,165

On 2 July 2010, the Company completed a placing of convertible loan notes for a value of US$2,418,000. The notes were non-interest bearing and convertible into Ordinary Shares in the Company at any time within two years of the issue date at a price of US$6.00 per share, adjusted to US$1.50 per Ordinary Share following the share split referred to in note 25. On 21 February 2011, US$618,000 of the convertible loan notes was converted into 412,000 Ordinary Shares in the Company. On 30 June 2012, the outstanding balance was repaid in full.

22 Financial instruments2012

£’0002011

£’000

Fair value through profit and loss (FVTPL)Call option premium – 324

On 4 August 2009, Moorfoot Trading Ltd and ConocoPhillips Poland BV entered into a call option agreement pursuant to the JEA. In consideration of an option premium of US$500,000, Moorfoot Trading Ltd granted ConocoPhillips an option to purchase 70% of the issued share capital of Lane Energy Poland Sp. z o.o. ConocoPhillips gave notice of exercise of its option on 20 March 2012 and completion of the option exercise occurred on 17 September 2012.

Under IAS 39 Financial Instruments: Recognition and Measurement, the call option agreement was classified as a designated financial instrument held at fair value through profit and loss. The call option premium was recognised through the profit and loss in the year ended 31 December 2012 as part of the completion payment due on exercise of the call option.

23 ProvisionsDecommissioning

Current£’000

Non-current£’000

At 1 January 2011 – 40Additions – 488

At 1 January 2012 – 528Foreign exchange – 28Transfer from non-current 109 –Transfer to current (109)Additions 230 –Equity accounting adjustment – (447)

Equity accounting adjustment 234 –

As at 31 December 2012 573 –

In accordance with the Group’s environmental policy and applicable legal requirements, the Group expects to restore sites where it has carried on activities, following final conclusion of those activities.




The provision for decommissioning recognised by management reflects management’s estimate of the net present value to the Group of its expected expenditure on decommissioning. These estimates are based on established oilfield decommissioning methods and technology at prices forecast to exist at the time of decommissioning. The current provision for decommissioning will be covered in full by the remaining receivable due from ConocoPhillips.

24 Deferred taxDifferences between IFRS and statutory tax rules (in the Isle of Man, the United Kingdom or elsewhere) give rise to temporary differences between the carrying values of certain assets and liabilities for financial reporting purposes and for income tax purposes.

At 31 December 2012, the Group has additional deferred tax assets of £0.4 million (2011: £0.5 million) in respect of tax losses. No deferred tax asset has been recognised in respect of this amount due to the unpredictability of future profit streams.

25 Share capitalAuthorised and issued equity share capital

2012Number

’000 £’000

2011Number

’000 £’000

AuthorisedOrdinary Shares of £0.00025 each 440,000 110 440,000 110

Issued and fully paidOrdinary Shares of £0.00025 each 84,783 21 84,783 21

The Company has one class of Ordinary Shares, which carry no right to fixed income.

Issued equity share capitalOrdinary Shares of £0.00025

Number

At 1 January 2011 12,639,991Exercise of convertible loan notes 103,000Restricted share award plan 155,000Exercise of share options 73,961

Balance before sub-division 12,971,952Share sub-division – see below 38,915,856

Balance after sub-division 51,887,808Initial public offering 32,894,736

At 1 January 2012 and 31 December 2012 84,782,544

On 30 May 2011, each Ordinary Share of £0.001 each in the capital of the Company was subdivided into four Ordinary Shares of £0.00025 each.

The information shown above has been restated to reflect the share subdivision which took place on 30 May 2011.

26 Share-based payment reservesWarrants

£’000Options

£’000Total

£’000

At 1 January 2011 116 345 461Share-based payments – 207 207Exercise of share options – (16) (16)

At 1 January 2012 116 536 652Share-based payments – 254 254Lapse of warrants (116) – (116)

At 31 December 2012 – 790 790

23 Provisions continued



27 Share-based paymentsEquity settled share option plans The Directors recognise the need to attract, incentivise and retain key employees. Accordingly the Group has Share Option Plans in place under which options to subscribe for the Company’s shares have been granted to certain Directors, employees and consultants.

2007 and 2009 Share Option PlansThe 3Legs Resources plc 2007 Share Option Plan was adopted by the Company on 23 May 2007. The 3Legs Resources plc 2009 Share Option Plan was adopted by the Company on 7 December 2009.

The Group has no legal or constructive obligation to repurchase or settle the options in cash. The options are forfeited if the employee or consultant leaves the Group before the options vest.

Details of the share options under these plans outstanding at the end of the year were as follows:

2012 2011

Number

Weighted average exercise

price£ Number

Weighted average

exercise price£

Outstanding at 1 January 3,543,388 0.37 3,839,232 0.36Granted during the year – – – –Lapsed during the year – – – –Exercised during the year – – (295,844) 0.22Outstanding at 31 December 3,543,388 0.37 3,543,388 0.37Exercisable at 31 December 3,143,424 1.48 2,671,463 0.20

The information shown above has been restated to reflect the share subdivision which took place on 30 May 2011.

The options outstanding at 31 December 2012 had an exercise price ranging between £0.12 and £1.00 (2011: £0.12 and £1.00), and an estimated weighted average remaining contractual life of 1.5 years (2011: 2.5 years). The Board has determined that no further options will be granted under either of these plans.

The Board has determined that no further options will be granted under either of these plans.

Long-Term Incentive PlanDuring 2011 the Group adopted a new Long-Term Incentive Share Option Plan (the “LTIP”) under which certain Directors, members of senior management, employees and consultants have been granted options to subscribe for the Company’s shares. Under the LTIP, participants are granted options over the issued share capital of the Company. The LTIP has a three year performance period and, in the case of the CEO and other senior managers, the proportion of an option award vesting is dependent on the amount by which the Company’s share price outperforms the Retail Price Index over the vesting period. If the performance conditions are not satisfied, then the award will immediately lapse.

Awards under, and pursuant to the terms of, the LTIP have been made to the Chief Executive Officer, senior managers, other employees and certain consultants providing services to the group. Awards were made in January, June and October 2012.

Details of the share options outstanding under the LTIP at the end of the year were as follows:

2012 2011

Number

Weighted average exercise

price£ Number

Weighted average

exercise price£

Outstanding at 1 January 708,348 0.48 – –Granted during the year 2,204,643 – 708,348 0.48Lapsed during the year (142,538) – –Exercised during the year – – – –Outstanding at 31 December 2,770,453 0.37 708,348 0.48Exercisable at 31 December – – – –




The options outstanding at 31 December 2012 had an exercise price ranging between £nil and £1.54, and an estimated weighted average remaining contractual life of 3.5 years. The fair value of the options has been calculated using the Monte Carlo model. The significant inputs into the model for the IFRS 2 valuation were as follows:

Grants

Jan 2012 Jun 2012 8 Oct 2012 18 Oct 2012

Exercise price £0.71 £0.37 £0.40 £0.41Expected volatility (%) 50 50 51 – 52 50Expected life (years) 6 6 6 6.5Risk free rates (%) 0.93 – 1.11 0.78 – 0.86 0.72 – 0.95 1.14Expected dividends – – – –RPI growth n/a n/a n/a 2.7%

Performance condition None None None

Share price growth over RPI

Expected volatility is normally determined by calculating the historic volatility of the share price over the most recent period that is commensurate with the expected award term. As the Company’s shares had not been publically traded for a sufficiently long period at any of the grant dates, it is not possible to estimate volatility by considering historical price movements. Therefore volatility has been determined using the average share price volatility of 12 listed oil and gas exploration companies. Expected term has been determined by estimating that the participants will on average exercise at the mid-point between vesting and the last date possible to exercise.

WarrantsIn July 2010, the Company issued 120,900 warrants which were convertible into Ordinary Shares of the Company. The warrants were convertible at any time within two years of the issue date at a price of US$2.50 per Ordinary Share. The warrants lapsed without exercise in June 2012.

Valuation of share-based paymentsIn the year ended 31 December 2012 the Group recognised a total expense of £0.3 million (2011: £0.2 million) related to equity-settled share-based payment transactions. Of this expense, £0.1 million (2011: £0.1 million) relates to the 2007 and 2009 share option plans and £0.2 million (2011: £0.1 million) relates to the LTIP.

28 Notes to the cash flow statement2012

£’0002011

£’000

Loss before tax (6,029) (2,328)Adjustments for:Effect of foreign exchange rate changes 901 380Impairment of E&E assets 2,077 –Investment income (296) (210)Share-based payments 254 207Share of results of joint venture 123Fair value gains on financial instrument (316) –

Operating cash flows before movements in working capital (3,286) (1,951)Decrease in receivables 2,837 368(Decrease)increase in payables (4,413) 397Increase in financial instruments – 1Cash used in operations (4,862) (1,185)Taxation paid (1) –

Net cash outflow from operating activities (4,863) (1,185)

Cash and cash equivalents (which are presented as a single class of assets on the balance sheet) comprise cash at bank and short term bank deposits with an original maturity of three months or less. The carrying value of these assets is approximately equal to their fair value.

27 Share-based payments continued



29 Operating lease arrangementsAt 31 December 2012, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

2012£’000

2011£’000

Within one year 20 12

Operating lease payments represent rentals payable by the Group for properties located in London, UK and Warsaw, Poland.

30 Capital CommitmentsCapital expenditure contracted for at the end of the reporting period but not yet incurred is as follows:

2012£’000

2011£’000

Capital expenditure contracted for but not provided for in the financial statements 8,943 –

The full amount of the above commitment is in relation to the Group’s joint venture obligations.

31 Financial instruments Capital risk managementThe Group manages its capital resources so as to ensure that entities in the Group will be able to continue as a going concern, while maximising the return to shareholders. Until it achieves positive cash-flow, the Group expects to fund its operations through a combination of equity capital raised from the market, asset disposals and, where appropriate, debt finance.

The capital resources of the Group consists of cash and cash equivalents arising from equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in the Consolidated Statement of Changes in Equity.

Externally imposed capital requirementThe Group is not subject to externally imposed capital requirements.

Significant accounting policiesDetails of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement, the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3.

Categories of financial instruments2012

£’0002011

£’000

Financial assetsCash and cash equivalents 39,531 50,930Trade receivables 2 1,754Other receivables 813 227

40,346 52,911

Financial liabilitiesTrade payables 235 1,150Other payables – 1,975Shareholder borrowings – 1,165Financial instruments (FVTPL) – 324

235 4,614

Financial risk management objectivesManagement provides services to the business, co-ordinates access to domestic and international financial markets, and monitors and manages the financial risks relating to the operations of the Group. These risks include foreign currency risk, credit risk, liquidity risk and cash flow interest rate risk. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

As the Group has no committed borrowings, the Group is not exposed to any risks associated with fluctuations in interest rates on loans. A two per cent increase in interest rates applied to cash balances held at the balance sheet date would result in an increase in interest earned by the Group of approximately £0.8 million over a twelve month period.




Foreign exchange risk and foreign currency risk managementThe Group undertakes certain transactions denominated in foreign currencies, with the result that exposures to exchange rate fluctuations arise.

The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:

Liabilities Assets

2012£’000

2011£’000

2012£’000

2011£’000

Sterling (“GBP”) – – 1 20Euros (“EUR“) – 101 7,855 21,179Polish zloty (“PLN“) 107 – 7 55US dollars (“USD“) – 1,501 19,962 13,827

Foreign currency sensitivity analysisThe functional currencies of the Group companies are Pounds Sterling (GBP), US dollars (USD), Polish Zloty (PLN) and Euros (EUR). The financial statements of the Group’s foreign subsidiaries are denominated in foreign currencies.

The Group’s joint venture is funded in USD, PLN and EUR. Funding commitments are generally settled on a monthly basis following cash calls prepared using rates of exchange published by the National Bank of Poland. The Group considers this arrangement helps to mitigate its exposure to exchange rate movements on foreign currency transactions, since the rates obtained are likely to be materially in line with the expected currency purchase rates on the date of settlement.

The Group is exposed to foreign currency risk arising from recognised assets and liabilities as well as commitments arising from future trading transactions.

Sensitivity analyses have been performed to indicate how the profit or loss would have been affected by changes in the exchange rate between GBP, EUR, PLN and USD. The analysis is based on a weakening and strengthening of GBP by ten per cent against EUR, PLN and USD, in which the Group has significant assets and liabilities at the end of each respective period. A movement of ten per cent reflects a reasonably possible sensitivity when compared to historical movements over a three to five year timeframe. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a ten per cent change in foreign currency rates.

The table below details the Group’s sensitivity to a 10 per cent decrease in GBP against USD, EUR and PLN. A positive number below indicates an increase in profit where GBP weakens ten per cent against USD, EUR and PLN. For a ten per cent strengthening of GBP against the three currencies, there would be an equal and opposite impact on the profit, and the balance below would be negative.

2012£’000

2011£’000

Increase in profit 3,964 4,636

Credit risk managementCredit risk refers to the risk that a counterparty will default on its contractual obligations, resulting in financial loss to the Group. The Group has minimal trade receivables at the year end, and other receivables are mostly amounts due under the terms of the Joint Evaluation Agreement from ConocoPhillips. The Directors do not consider that this poses a significant credit risk given that ConocoPhillips has an investment grade credit rating, based on information as supplied by an independent rating agent.

The Group makes allowances for impairment of receivables where there is an identified event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows.

The credit risk on liquid funds (cash) is considered to be limited because the counterparties are financial institutions with good credit ratings assigned by international credit-rating agencies in the Isle of Man, UK and Poland, respectively. The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk.

31 Financial instruments continued



Liquidity risk managementUltimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate cash reserves and by continuously monitoring forecast and actual cash flows.

All financial liabilities held by the Group are non-interest bearing. Further information relevant to liquidity risk management is included in note 3.

32 Related party transactionsTransactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Trading transactionsDuring the year, Group companies entered into the following transactions with related parties who are not members of the Group:

Recharge of costs and services Amounts owing

2012£’000

2011£’000

2012£’000

2011£’000

Lane Energy Poland Sp. z o.o. 938 2,930 9 1,567

Lane Energy Poland Sp. z o.o. is a related party of the Group as it is a joint venture, in which the Group holds 30% of the issued share capital.

Sale of consultancy services Amounts owing

2012£’000

2011£’000

2012£’000

2011£’000

Darley Energy plc – – – 55

Darley Energy plc is a related party of the Group because it has Directors and shareholders in common with the Company. As at 31 December 2011, Darley Energy had no means of repaying its outstanding debt to the Company, which was unsecured. On 19 March 2012, the Company agreed to assign the outstanding debt to one of the Directors for 20% of its face value. The transaction was approved by the Board, the Director concerned absenting himself from the Board discussion and decision.

Payment for services Amounts owing

2012£’000

2011£’000

2012£’000

2011£’000

CM Management (IOM) Limited 50 90 – 46

CM Management (IOM) Limited is a related party of the Group because a Director of that company was during the year ended 31 December 2012 also a Director of the Company and he remains a Director of a number of subsidiaries of the Company.

Payment for services Amounts owing

2012£’000

2011£’000

2012£’000

2011£’000

David Bremner 102 71 32 28

David Bremner is a Director of the Group and thus a related party.

Notes to the Consolidated Financial Statements continuedFor the year ended 31 December 201231 Financial instruments continued





Amounts owing

2012£’000

2011£’000

Cowley Mining plc 227 227

Cowley Mining plc is a related party of the Group because it has Directors and shareholders in common with the Company.

On 23 November 2012, the Company entered into a Deed of Variation with Cowley Mining. The Company agreed to vary its right to a partial repayment of its loan to Cowley Mining, in exchange for an improved right to the repayment of the loan in full and an issue of warrants by Cowley Mining. The transaction was approved by a committee of independent Directors on behalf of the Board.

Shareholder borrowingsDuring 2010 the Company placed US$2,418,000 of convertible loan notes to a syndicate led by certain shareholders of the Company. On 21 February 2011, US$618,000 of these loan notes was converted into 412,000 Ordinary Shares in the Company. The outstanding balance of US$1,800,000 was repaid prior to the balance sheet date. Please see note 21 for further detail.

Remuneration of key management personnelThe remuneration of the Non-Executive Directors, Executive Directors and senior management, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

2012£’000

2011£’000

Short-term employee benefits 1,608 1,349Termination benefits 185 –Share based payments 68 61

1,861 1,410

33 Events after the balance sheet date On 22 February 2013, Caithness Limited as trustee for Robert Jeffcock notified the Company that it had disposed of 5,000,000 Ordinary Shares in the Company. On the same date, Robert Jeffcock and Clive Needham resigned as Directors of the Company. Clive Needham remains a Director of a number of the Group’s subsidiaries.

On 27 February 2013, the Company received a notice on behalf of Damille Investments II Limited (“Damille”), a shareholder in the Company holding 14.2% of the Company’s issued share capital, requisitioning a meeting of the Company’s shareholders pursuant to section 67(2) of the Isle of Man Companies Act 2006 (the “Requisition”). The Requisition proposes a number of ordinary resolutions which include: the removal of the majority of the Board of Directors (being all of the Directors except for Kamlesh Parmar and Richard Hills); the appointment of certain new Directors to the Board being Brett Lance Miller and Rhys Cathan Davies (who the Board understands are both representatives of Damille); and the proposal that the Company adopt a new investment strategy as follows “The investment objective of the Company is to manage the realisation of the Company’s existing asset portfolio and to maximise the return of invested capital to shareholders during the period ending on 30 June 2015. During this period the Company shall not make any new investments other than to support its existing assets.” On the basis that the Requisition is not withdrawn, the Company intends to post, with its annual report and accounts, a notice to all shareholders convening a general meeting.

32 Related party transactions continued



Notes

www.3legsresources.com

3legs resources plcCommerce House,1 Bowring Road,Isle of Man, IM8 2LQ

+44 1624 811 [email protected]

3legs r

esources p

lc Annual R

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rt & A

ccounts 2012

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3 Uncovering hidden value - SalvaRx · 2017-07-10 · Gdansk Poznan Warsaw Katowice Krakow Wroclaw munich Stuttgart Ravensburg Poland/ Lane Energy Exploration Sp. z o.o. • Three