ORION PETROLEUM LIMITED - ASX · The Directors of Petrel Energy Limited (“Petrel”) (formerly Orion Petroleum Limited ), present the interim financial report for the half year

PETREL ENERGY LIMITED (formerly Orion Petroleum Limited)

ACN 125 394 667

Interim Financial Report

For the Half Year ended 31 December 2011

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Half Year Financial Report

31 December 2011

Contents

Directors’ Report 1-6

Auditors’ Independence Declaration 7

Directors’ Declaration 8

Statement of Comprehensive Income 9

Statement of Financial Position 10

Statement of Cash Flows 11

Statement of Changes in Equity 12

Notes to the Interim Financial Report 13-16

Independent Review Report to the Members 17-18

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Directors’ Report

Petrel Energy Limited - Half-Year Financial Report: 31 December 2011 1

The Directors of Petrel Energy Limited (“Petrel”) (formerly Orion Petroleum Limited), present the interim financial report for the half year ended 31 December 2011. DIRECTORS The Directors in office at any time during the half year and up to the date of this report are: Stephen Mitchell Executive Chairman (appointed 17 January 2012) Russell Langusch Executive Director and Chief Executive Officer (appointed 7 June 2011) David Hobday Non-executive Director (appointed 17 January 2012) Alexander Sundich Chairman (appointed 7 June 2011 - ceased 17 January 2012) Non-executive Director (from 17 January 2012) Andrew Bursill Non-executive Director (appointed 7 June 2011 - ceased 17 January 2012) PRINCIPAL ACTIVITY The principal activity of the Company during the period was oil and gas exploration. OPERATING RESULTS

The net loss of the Company for the period was $556,807 (2010:$633,554). Deferred exploration expenditure written off during the period totalled $62,940 (2010:$137,971). FINANCIAL POSITION

The total assets decreased by $600,336 and total liabilities decreased by $43,529 resulting in the decrease of net assets of $556,807 at 31 December 2011. The decrease in net assets arose from the trading loss for the period, $556,807. REVIEW OF OPERATIONS

• Successful merger with Petrel Energy Pty Ltd effective 17 January 2012;

• Listed company renamed Petrel Energy Limited;

• Post-merger board comprises Stephen Mitchell (Chairman), Russell Langusch, David Hobday and Alex Sundich;

• Three gas development wells and saltwater disposal well drilled in Petrel’s Barnett Shale joint venture project prior to completion, stimulation and initial production in first half of 2012;

• Field activities in NSW licences remain stalled pending the government’s review of statewide CSG operations.

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Directors’ Report


CORPORATE Petrel Energy Merger On 23 November 2011 Orion Petroleum (“Orion” or the “Company”) announced that it had executed a binding transaction agreement to merge with Petrel Energy Pty Limited (“Petrel”), subject to shareholder approval. The merged group is pursuing a strategic focus on high quality energy assets at the advanced exploration/appraisal stage and create value by advancing these projects to development. The group’s first project is participation in an emerging onshore shale gas development in the proven Barnett Shale region of Texas. The transaction has subsequently been approved by an overwhelming majority of Orion shareholders who voted at a General Meeting held on 10 January 2012 and successfully closed one week later. The Petrel merger is a direct outcome from an exhaustive strategic review conducted by the Company and its advisers since the board was reconstituted in June 2011. Petrel is an unlisted company established for the purpose of conventional and unconventional oil and gas development. Under the terms of the transaction, Orion has acquired 100% of Petrel for the issue of 115,135,535 new Orion shares and 9,325,695 options to the previous shareholders of Petrel. Following the share issue, existing Orion shareholders now account for 57% of the enlarged group and Petrel shareholders represent 43% of the register. A name change was also approved by shareholders and Orion has been renamed Petrel Energy Limited. The new ASX ticker code is PRL. The accounts forming part of this Financial Report for the Half Year ended 31 December 2011 do not include the impact of the Petrel merger. The Company believes that the Petrel merger offers many attractions including:

• The merged group will benefit from a highly experienced management team with a proven track record of creating substantial shareholder value in the energy sector and with particular expertise in building successful energy businesses in North America and Australia;

• The Petrel team have developed a first class technical network in North America, generating major successes in their previous endeavours;

• The initial project provides access to highly prospective acreage in the Barnett Shale region of Texas and shareholders of the merged group will gain exposure to an immediate shale gas drilling campaign with three development wells drilled;

• The Barnett Shale area provides a range of additional gas and liquids opportunities that can be readily monetised given the region’s maturity and extensive infrastructure;

• Over time, shareholders will benefit from further diversification of activities as the management team and board evaluate several existing investment opportunities; and

• Most importantly Petrel provides the capacity for near-term growth and a scaleable business model.

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Directors’ Report


Petrel Background and First Project Petrel was established in mid-2011 as a private upstream petroleum company targeting conventional and unconventional opportunities primarily in North America but with the potential to expand globally. Its founders, Stephen Mitchell and David Hobday, most recently built a very successful North American business whilst at Molopo (ASX: MPO). As Molopo’s Managing Director for over ten years, Mr Mitchell grew Molopo from a market capitalisation of less than $1 million to a diversified energy company that gained ASX 200 recognition and generated returns of over 800% during his tenure. Both Messrs Mitchell and Hobday possess a wide and vastly experienced network of senior industry personnel including recognised experts and successful pioneers in the Barnett Shale. Following the closing of the merger transaction on 17 January 2012, Mr Mitchell and Mr Hobday have been appointed to the Company board with Mr Mitchell assuming the role of Chairman. Onshore USA is being targeted initially to leverage off their successful track record and invaluable industry contact base. A shale gas project in the Barnett Shale region of the Fort Worth Basin, North Texas, has been selected as Petrel’s first US venture. The project is located to the southwest of Dallas/Fort Worth in an emerging new extension of the mature Barnett Shale province. The Barnett Shale was the first major shale gas development in North America, which witnessed explosive growth from about 2002 onwards. After production was first established in three core Texas counties, the producing footprint has now expanded to encompass 25 counties. Moreover, as activity spreads westwards the producing wells are tending to be more liquids-rich, which attracts a significant price premium over dry gas. Leases have been secured over the first 6,600 acres in a joint venture with an established local company, The Cumming Co. Inc., which is operating the project. An initial phase of development drilling commenced in November with one saltwater disposal well and three gas development wells drilled by year-end 2011. The producers are currently being completed and surface infrastructure installed leading to first production in the second quarter of 2012. Petrel has a 25% stake in this initial acreage package, but has signed an Area of Mutual Interest agreement covering a further 10,000 acres in which the Company can take up to a 73% interest. Several other projects in both conventional and unconventional petroleum are also under assessment. The Barnett Shale project is considered an excellent foundation venture demonstrating attractive economics for investment. It offers relatively stable long-life production, low well costs, and high calorific value gas due to associated condensate and oil. AUSTRALIAN OPERATIONS Surat-Bowen & Gunnedah Basins, NSW Field programs including seismic acquisition and corehole drilling have been planned for three of the Company’s Surat- Bowen Basin licences since the beginning of 2011. Eastern Star Gas as the previous operator of coal seam gas (CSG) activities in these licences received government approval for 2D seismic surveys within PEL’s 6, 427 and 428 before a government moratorium halted all activity. The proposed program is intended to incorporate:

• 44km of new seismic data acquired in PEL 6 to investigate the potential for Early Permian Maules Creek formation coals in the south of the licence;

• 80km of seismic data in PEL 427 to investigate the potential for attractive development of Early Permian Maules Creek coals in the Bellata Trough extending northward from the Edgeroi area in neighbouring PEL 238; and

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Directors’ Report


• 65km of reconnaissance seismic data in PEL 428 to investigate the potential for Permian coal

development in the Pilliga Trough.

Ministerial submissions by various NSW government departments administering CSG operations were due to be completed by year-end 2011. Revised regulations and stricter operating requirements are expected to be announced in coming months which hopefully will then allow much-delayed work programs to resume. PEL 6 (Conventional: 97.5%-95%; CSG: 22.5%-20%) The previous two year renewal term of PEL 6 expired in December 2011. The first element of the CSG work program, reprocessing 120 line-km of vintage seismic, was completed within the period. However the remaining program consisting of acquisition of new 2D seismic and drilling one corehole were scheduled to commence during the June 2011 quarter, but have yet to start. A renewal application was submitted for PEL 6 which includes the outstanding work program commitments being carried-over from the previous term and additional CSG activities. The renewal remains pending the outcome of the NSW government review.

Figure 1: Petrel’s Surat-Bowen/Gunnedah Basin Licences

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Directors’ Report


PEL 427 (Conventional: 75%; CSG: 25%) & PEL 428 (Conventional: 60%; CSG: 20%) PEL 427 reached the end of its current licence term in May 2011 with outstanding work commitments of seismic acquisition and drilling one CSG corehole. PEL 428 is not due to reach the end of its current licence term before September 2012 with seismic work commitments outstanding. Activities planned to commence earlier in 2011 in each of these permits have been stalled as discussed above. A six month suspension was granted for PEL 427 and a two year renewal application was submitted within the requisite time to the relevant government department. The first suspension period expired in mid-November and a further six month suspension was granted. The joint venture is hopeful of an eventual licence renewal on acceptable work commitment terms when the current NSW CSG industry review is completed. PEL 455 (100% working interest) The current licence term of PEL 455 expired on 4 July 2011. A renewal application has been submitted and is awaiting Department approval. A variation to the work program has been requested to swap an outstanding corehole commitment for acquisition of new seismic data. Darling Basin, NSW

PELs 422, 424 & 471 (100% interest) These frontier Darling Basin exploration licences have work program commitments which primarily include seismic acquisition and drilling activity. An international farm-out campaign has been conducted with the objective of attracting farm-in partners to the area for both the seismic and drilling phases. Each licence hosts at least one ready-to-drill prospect targeting mid-Devonian sandstones. However given their high risk, frontier-style prospectivity, the permits have failed to attract meaningful interest to date.

Figure 2: Darling Basin Licence Location Map

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Directors’ Report


Auditor’s Declaration

The lead Auditor’s Independence Declaration under section 307C of the Corporations Act 2001 is set out on page 7 for the half year ended 31 December 2011. This report is signed in accordance with a resolution of the Board of Directors.

Russell Langusch Executive Director and Chief Executive Officer 13 March 2012

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Auditor’s Independence Declaration


Lead auditor’s independence declaration under Section 307C of the Corporations Act 2001 To: the Directors of Petrel Energy Limited (formerly Orion Petroleum Limited) I declare to the best of my knowledge and belief, in relation to the review of the financial half-year ended 31 December 2011 there have been:

• no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the review, and

• no contraventions of any applicable code of professional conduct in relation to the review. PKF Grant Saxon 13 March 2012 Partner Sydney

Tel: 61 2 9251 4100 | Fax: 61 2 9240 9821 | www.pkf.com.au PKF | ABN 83 236 985 726 Level 10, 1 Margaret Street | Sydney | New South Wales 2000 | Australia

The PKF East Coast Practice is a member of the PKF International Limited network of legally independent member firms. The PKF East Coast Practice is also a member of the PKF Australia Limited national network of legally independent firms each trading as PKF. PKF East Coast Practice has offices in NSW, Victoria and Brisbane. PKF East Coast Practice does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.

Liability limited by a scheme approved under Professional Standards Legislation.

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Directors’ Declaration


In the directors' opinion:

• the attached financial statements and notes thereto comply with the Corporations Act 2001, Australian Accounting Standard AASB 134 'Interim Financial Reporting', the Corporations Regulations 2001 and other mandatory professional reporting requirements;

• the attached financial statements and notes thereto give a true and fair view of the company's financial

position as at 31 December 2011 and of its performance for the financial half-year ended on that date; and

• there are reasonable grounds to believe that the company will be able to pay its debts as and when

they become due and payable. Signed in accordance with a resolution of directors made pursuant to section 303(5) of the Corporations Act 2001. On behalf of the directors

Russell D Langusch

Executive Director and Chief Executive Officer

13 March 2012

Sydney

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Statement of Comprehensive Income for the Half Year ended 31 December 2011


Half year 31 December

2011

Half year 31 December

2010

Interest income 177,296 219,453

Exploration and evaluation expenditure written off (62,940) (137,971)

Directors fees (43,750) (35,000)

Employee benefit expenses (294,728) (252,791)

Professional and consulting fees (50,040) (98,601)

Auditors remuneration (23,520) (22,620)

Depreciation and amortisation (21,879) (29,298)

Legal fees (18,704) (12,577)

General insurance expenses (18,420) (17,128)

Lease of office (net) (69,315) (58,816)

New venture expenses (84,002) (107,680)

Other operating expenses (56,806) (80,525)

Loss from operations before income tax (556,807) (633,554)

Income tax expense - -

Loss from operations after income tax (556,807) (633,554)

Other comprehensive income

Other comprehensive income for the period, net of tax - -

Total comprehensive income for the period (556,807) (633,554)

Loss per share attributable to shareholders

Basic and diluted loss per share (cents per share) (0.36) (0.39)

The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.

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Statement of Financial Position as at 31 December 2011


Note

31 December 2011

30 June 2011

ASSETS

Current Assets

Cash and cash equivalents 2 5,909,450 6,531,578

Sundry debtors - 9,905

Inventories 175,257 175,257

Other current assets 110,481 143,853

Total Current Assets 6,195,188 6,860,593

Non-Current Assets

Property, plant and equipment 56,340 75,688

Exploration and evaluation expenditure 3 884,210 799,793

Total Non-Current Assets 940,550 875,481 Total Assets 7,135,738 7,736,074

LIABILITIES

Current Liabilities

Trade and other payables 151,905 195,950

Provisions 5,044 4,528

Total Current Liabilities 156,949 200,478 Total Liabilities 156,949 200,478

Net Assets 6,978,789 7,535,596

EQUITY

Contributed equity 4 21,282,361 21,282,361

Option reserve 5 79,862 79,862

Accumulated losses (14,383,434) (13,826,627)

Total Equity 6,978,789 7,535,596

The above Statement of Financial Position should be read in conjunction with the accompanying notes.

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Statement of Cash Flows for the Half Year ended 31 December 2011


Half year ended

31 December 2011

Half year ended 31 December

2010

Cash Flows From Operating Activities

Payments for exploration and evaluation (149,357) (2,092,642)

Payments to suppliers and employees (inclusive of goods and services tax)

(650,805)

(638,601)

Interest received 180,565 201,523

Net cash used in Operating Activities (619,597) (2,529,720)

Cash Flows From Investing Activities

Purchase of plant and equipment (2,531) -

Net cash generated from Investing Activities (2,531) -

Net decrease in cash held (622,128) (2,529,720)

Cash at the beginning of the Period 6,531,578 9,850,653

Cash at the end of the Period 5,909,450 7,320,933

The above Statement of Cash Flows should be read in conjunction with the accompanying notes.

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Statement of Changes in Equity for the Half Year ended 31 December 2011


Issued Capital

Options Reserve

Accumulated Losses

Total

Balance at 1 July 2011 21,282,361 79,862 (13,826,627) 7,535,596

Loss from continuing operations (556,807) (556,807)

Other comprehensive income - - - -

Total comprehensive income for the period - - (556,807) (556,807)

Transactions with owners in their capacity as owners

Share based payments - - - -

Balance at 31 December 2011 21,282,361 79,862 (14,383,434) 6,978,789

Balance at 1 July 2010 21,282,361 110,355 (11,237,317) 10,155,399

Loss from continuing operations (633,554) (633,554)

Other comprehensive income - - - -

Total comprehensive income for the period - - (633,554) (633,554)

Transactions with owners in their capacity as owners

Share based payments - employee options - 46,249 - 46,249

Balance at 31 December 2010 21,282,361 156,604 (11,870,871) 9,568,094

The above Statement of Changes in Equity should be read in conjunction with the accompanying notes.

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Notes comprising a summary of significant accounting policies and other explanatory notes for the Half Year ended 31 December 2011


1. Summary of significant accounting policies The interim financial report is a general purpose financial report which has been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act 2001. This financial report covers Petrel Energy Limited (formerly Orion Petroleum Limited) as an individual entity and was authorised for issue in accordance with a resolution of Directors on 13 March 2012. Petrel Energy Limited is a public company, listed on the Australian Stock Exchange, incorporated and domiciled in Australia. Petrel Energy Limited’s operations comprise exploration for oil and gas resources. As at 31 December 2011 all exploration licences issued to the Company were located in Northern New South Wales.

a) Basis of preparation The financial report has been prepared on the historical cost basis except as disclosed in the notes to the financial report. Cost is based on the fair value of the consideration given in the exchange for assets. b) Significant accounting policies The half-year financial report has been prepared using the same accounting policies as used in the annual financial report for the year ended 30 June 2011.

2. Cash and cash equivalents Cash and cash equivalents include deposits totalling $435,301 pledged as security for bank guarantees issued by the Commonwealth Bank on behalf of the Company (see note 6 Contingent liabilities). 3. Exploration and evaluation expenditure

31 December 2011

30 June 2011

Movement During the Period / Year

At beginning of period / year 799,793 1,578,271

Additions at cost period / year 147,357 713,297

Amount written off during the period / year (62,940) (1,491,775)

At end of period / year 884,210 799,793 NSW exploration licences are considered to be in good standing despite the delay in application renewals affecting the industry as a result of the Moratorium on gas exploration enacted by the NSW Government. Petrel has not received any notice indicating that its applications for renewal will be unsuccessful and as such it is appropriate to carry the exploration costs in the Statement of Financial Position in accordance with AASB 6 Exploration for and Evaluation of Mineral Resources. The Directors have reviewed Capitalised Exploration costs for impairment in accordance with the Company’s accounting policies and appropriate provisions have been made where appropriate.

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4. Contributed equity

(a) Share capital

31 December

2011 Shares

30 June 2011

Shares

31 December 2011

30 June 2011

Ordinary shares 155,000,000 161,000,000 21,282,361 21,282,361 2

(b) Movements in equity

Date Details Number of Shares

Issue Price $

1 July 2011 Opening balance 161,000,000 21,282,361

16 September 2011 Buy-back ordinary shares under employee incentive plan

(6,000,000) $0.13 (780,000)

Cancellation of Treasury shares held under employee incentive plan

780,000

31 December 2011 155,000,000 21,282,361

Treasury shares were shares held by the Company under the Employee Loan Plan.

5. Options

Number of Options 2011

Number of Options 2010

Unlisted options 4,250,000 4,250,000

Employee options 350,000 800,000

Balance at end of the period 4,600,000 5,050,000 Unlisted options are each exercisable at $0.30 per share on or before 30 September 2012. Employee options are each exercisable at $0.12 per share on or before 20 March 2012 (250,000 options) and at $0.15 per share on or before 23 July 2012 (100,000 options). All these options are vested. Options totalling 450,000 at $0.13 per share lapsed on 4 July 2011.

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Options Reserve The options reserve comprises the fair value of options issued over ordinary shares of the Company. No options were issued in the six months to 31 December 2011 and there were no transfers to Options Reserve (2010: $46,249 transferred to Options Reserve). 6. Contingent liabilities

31 December 2011

30 June 2011

Bankers’ guarantees issued for the fulfilment of obligations under exploration licences

330,000

330,000

Obligations under a bank corporate credit card facility with the Commonwealth Bank

25,000

25,000

Bankers’ guarantee issued as security for the performance by the Company of its obligations under a lease of office premises at Suite 303, 10 Bridge Street, Sydney

80,301

80,301

Totals 435,301 435,301

The above are all secured by a charge over term deposits lodged with bankers of a like amount.

7. Commitments for expenditure The expenditure commitments to maintain or earn interests in exploration licences have not been provided in the interim financial report, the commitments below represent amounts authorised by the Directors.

31 December

2011

30 June 2011

Within twelve months 1,758,000 1,758,000

Twelve months or longer and not longer than 5 years 1,012,000 1,012,000

Longer than 5 years - -

Totals 2,770,000 2,770,000

These amounts have not varied as a consequence of the Moratorium on gas exploration enacted by the NSW Government.

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8. Segment information Identification of reportable segments The Company has identified its operating segment based on the internal reports that are reviewed and used by the executive management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources. The operating segment is identified by Management as an area of interest, discrete financial information about this operating segment is reported to the executive management team on at least a monthly basis. Management have identified Northern New South Wales as the Company’s operating segment. As all exploration licences issued to the Company as at 31 December 2011 lie within this area of interest the Company has one operating segment. 9. Events occurring after the reporting date On 17 January 2012, the Company issued 115,135,535 ordinary shares and 9,325,695 options as consideration to acquire 100% of the shares in Petrel Energy Pty Limited. At the date of this report, management are in the process of finalising the fair value of the assets acquired and the liabilities assumed. This exercise will be completed for the 30 June 2012 reporting. Other than those disclosed above, the Directors are not aware of any matters or circumstances that have arisen since the end of the period that has significantly affected or may significantly affect the operations of the Company, the results of its operations or the state of its affairs, other than those matters detailed in the Directors’ Report on pages1 to 6.

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Independent Auditor’s Review Report


INDEPENDENT AUDITOR’S REVIEW REPORT TO THE MEMBERS OF PETREL ENERGY LIMITED (FORMERLY ORION PETROLEUM LIMITED) Report on the Half-Year Financial Report We have reviewed the accompanying half-year financial report of Petrel Energy Limited (formerly Orion Petroleum Limited), which comprises the statement of financial position as at 31 December 2011, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration. Directors’ Responsibility for the Half-Year Financial Report The directors of the company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such control as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity, in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the company’s financial position as at 31 December 2011 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001. As the auditor of Petrel Energy Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report. A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Independence In conducting our review, we have complied with the independence requirements of the Corporations Act 2001.

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Independent Auditor’s Review Report


Conclusion Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Petrel Energy Limited is not in accordance with the Corporations Act 2001 including: (a) giving a true and fair view of the company’s financial position as at 31 December 2011 and of

its performance for the half-year ended on that date; and (b) complying with Accounting Standard AASB 134 Interim Financial Reporting and Corporations

Regulations 2001. PKF Grant Saxon 13 March 2012 Partner Sydney

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Documents

ORION PETROLEUM LIMITED - ASX · The Directors of Petrel Energy Limited (“Petrel”) (formerly Orion Petroleum Limited ), present the interim financial report for the half year