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1 NEW GUINEA ENERGY LTD Half Year Financial Report for the period ending 30 June 2014 ABN

2 CONTENTS Page Corporate Directory 1 Review of Operations 2 Directors Report 7 Auditor s Independence Declaration 8 Independent Auditor s Review Report 9 Directors Declaration 11 Consolidated Statement of Profit or Loss and Other Comprehensive Income 12 Consolidated Statement of Financial Position 13 Consolidated Statement of Changes in Equity 14 Consolidated Statement of Cash Flows 15 Notes to Consolidated Financial Statements 16

3 CORPORATE DIRECTORY Directors Michael N Arnett Sir Michael R Bromley Andrew L Martin Andrew A Young Executive Chairman Non-Executive Non-Executive Non-Executive Company Secretary Lucy N Rowe Registered Office Sydney office Ground Floor, Boundary Court Suite 401, Level 4 55 Little Edward Street 2-10 Loftus Street Spring Hill QLD 4004 Sydney NSW 2000 Telephone: Facsimile: office@ngenergy.com.au Website Stock Exchange Listings ASX Limited Port Moresby Stock Exchange OTC International 20 Bridge St Level 4, Defens Haus 304 Hudson Street, 3 rd Floor Sydney NSW 2000 Corner Champion Parade and Hunter St New York, NY Port Moresby, PAPUA NEW GUINEA USA ASX Code: NGE POMSoX code : NGE OTC code: NGELY Share Registries Boardroom Pty Limited GPO Box 3993 Sydney NSW 2001 PNG Registries Limited Level 2 AON Haus, McGregor Street PO Box 1265, Port Moresby NCD Papua New Guinea Telephone: Facsimile: Website: Auditors Grant Thornton Audit Pty Ltd Level Kent Street Sydney NSW 2000 Solicitors Norton Rose Fulbright Grosvenor Place, 225 George Street Sydney NSW

4 REVIEW OF OPERATIONS OPERATIONS OVERVIEW During early 2014, NGE pursued two objectives: 1) obtaining PNG Government approval to vary the exploration commitments in PPL 269 whilst progressing the sale of this licence to a subsidiary of Santos Limited, Barracuda Limited (STO); and 2) contracting for a third-party drilling program for NGE s 50% owned Western Drilling Ltd s (WDL) Rig 1. The Company is pleased at the progress of the PPL 269 Sale Agreement (Agreement), in particular the recent announcement on 27 June 27, 2014 of the grant of PNG Ministerial approval to vary the PPL 269 licence conditions which fulfilled another Condition Precedent to the sale process and on 12 August 2014, the further announcement that all the Initial Conditions under this Agreement have now been satisfied. Operationally, a substantial portion of the Company s resources have been directed to support efforts to mobilise WDL Rig 1. NGE expects improvements to its cash flow and results as a result of ongoing contract drilling operations during 2H The Department of Petroleum and Energy (DPE) is still considering the licence variation and extension requests lodged for PPL 265 in 2012 and the Company will advise shareholders of the outcome of these requests when it is notified. However, at 30 June 2014, impairment charges were recognised for deferred exploration expenditure on this licence given that no significant exploration work is being undertaken until outcome of the variation application is known. DRILLING RIG In March 2011, NGE entered into an incorporated joint venture with Maps Tuna Limited (MAPS), a company incorporated in Papua New Guinea and 100% owned by Sir Michael Bromley, a Non Executive Director of NGE. NGE and Maps Tuna have a 50% interest in the joint venture entity, WDL. On 28 February 2014, WDL received the required DPE approval to operate its Rig in PNG. The Company announced the award of a new contract in May 2014 for the drilling rig and camp. WDL equipment has also been rented to third parties providing an additional revenue stream. There have been significant upgrades to WDL Rig 1 in preparation for the drilling program, including client-sponsored enhancements to the mud handling and electrical systems and an upgrade to the substructure capacity enabling the rig to drill deeper wells. WDL entered into a contract with Tesco Singapore Pte Ltd to provide a hydraulic top drive for the duration of the contract, further enhancing the rig s capabilities. The rig mobilised to the field in late June and is currently preparing to spud the well. 2

5 Figure 1. Western Drilling Limited Rig 1 on site. LICENCE SCHEDULE LICENCE LOCATION COUNTRY AREA km 2 NGE INTEREST PPL 265 Onshore Papuan Papua New Guinea 15, % Basin PPL 266 Onshore Papuan Papua New Guinea 4, % Basin PPL 267 Onshore Papuan Papua New Guinea 3, % Basin PPL 268 Onshore Papuan Papua New Guinea 2,109 50% Basin * PPL 269 Onshore Papuan Papua New Guinea 4,358 50% Basin TOTAL 29,509 * Subject to Sale Agreement signed on 13 February 2014 to a subsidiary of Santos Limited 3

6 EXPLORATION STATUS OF EACH LICENCE PPL 265 (100% NGE) - subsurface mapping of permit completed - 14 leads identified - 94 km seismic program acquired 4Q 2011/1Q 2012 Applications to vary the current licence terms and extend the licence period for this PPL were lodged with the DPE on 31 August A surface geochemical survey over the Jerai North Prospect will be considered once the outcome of applications above is known.. However, at 30 June 2014, impairment charges were recognised for deferred exploration expenditure on this licence given that no significant exploration work is being undertaken until outcome of the variation application is known. PPL 266 (100% NGE) - one drillable prospect and 5 leads identified - 5 year licence extension until August 2016 approved by the DPE - 48 km seismic program completed in 1Q 2012 The Macadamia Prospect, a faulted basement drape feature was identified along depositional strike from the Puk Puk 1 area to the east. NGE calculates a mean prospective resource estimate of 209 bcf gas in place. A proposed well site lies only 1 km from a navigable river. On 25 October 2012, NGE announced that it had accepted an offer by the Minister of Petroleum and Energy to extend the licence period and exploration expenditure program in PPL 266 for a further five (5) years. PPL 267 (100% NGE) - 10 leads identified - licence extension until August 2016 approved by DPE - seismic reprocessing of 1970 s vintage seismic data completed During 2013, an independent technical review of NGE s prospective resources by Gaffney, Cline & Associates (GCA), a qualified reserves evaluator, declared that PPL 267 is most likely an oil play. GCA identified a lead with structural closure at the Alene and Toro reservoir levels with unrisked P50 (Best Case) Prospective Resources* in excess of 20 mmbl of (recoverable) oil. Additional technical work is required before the leads are considered mature to be classified as prospects and considered ready for drilling. A seismic program planned for 4Q 2014 (Figure 1) aims to link the seismic grid near the Panakawa-1 well acquired by NGE in 2006 and 2009 with a seismic grid in the vicinity of the Kaisy Lead. This program is contingent upon the completion of a farmin agreement. The Kaisy structure is imaged by 6 seismic lines, but requires additional seismic to constrain updip closure to the northwest. Reservoir in the area is excellent with >65 metres of reservoir quality sands averaging over 22% porosity logged in the nearby Panakawa-1 well. The Company believes this coastal area of PPL 267 has the potential to host multiple accumulations of > mmbls oil in-place. The proximity to navigable rivers high-grades the commercial potential of any discovery in PPL 267. A 5 year licence extension was approved by the DPE on 26 October, *The resource estimates from GCA are prepared using the Petroleum Resources Management System Definitions and Guidelines published by the Society of Petroleum Engineers / World Petroleum Council / American Association of Petroleum Geologists / Society of Petroleum Evaluation Engineers (SPE/WPC/AAPG/SPEE) in March, 2007 ("SPE PRMS"). 4

7 Figure 2. Map of PPL 267 showing location of proposed seismic lines (red). Leads as currently mapped are outlined in white. PPL 268 (50% NGE) - 6 prospects and leads identified - regional aerogravity-aeromagnetics interpretation completed km Talisman-operated seismic program completed The current mapped mean closure area of the top-ranked Prospect is 28 km2 corresponding to a prospective resource of 209 bcf gas and condensate in place. Each of the joint venture partners within PPL 268 have completed an assessment of the finding and development costs and likely options for commercialising the top-ranked prospect within PPL 268. Based on this analysis the view is that targets within this licence are insufficient in size and quality to be economically developed. PPL 269 (50% NGE) - 32 prospects and leads identified - seismic reprocessing and remapping of western PPL 269 completed - a second round of satellite-based LIDAR mapping of a number of proposed seismic traverses was completed Talisman (Operator) has proposed a work program and budget for On 13 February 2014 the Company was pleased to announce that NGE and its wholly owned subsidiary, Kirkland Limited (Kirkland) had signed a Sale Agreement with a subsidiary of Santos Limited (STO), regarding the proposed sale of Kirkland s 50% participating interest in PPL 269 to Santos for a maximum total consideration of up to US$40 million. NGE has guaranteed Kirkland s obligations under the Sale Agreement. 5

8 The consideration for the sale of the 50% interest in PPL 269 includes: payment of US$32 million cash on Completion; and payment of US$2 million cash if a Petroleum Retention Licence (PRL) is granted over any area of PPL 269; and payment of a further US$6 million cash if a Petroleum Development Licence (PDL) is granted over any area of PPL 269. (However, if a PDL is granted prior to a PRL, a one off payment of US$8 million cash will be payable instead). Completion of the sale of Kirkland s 50% interest in PPL 269 under the Sale Agreement is conditional on receipt of certain government approvals, some of which were to have been satisfied within 6 months of the execution date. These were satisfied on 12 August Completion of the sale of Kirkland s participating interest to Santos is conditional on all of the conditions under the On-Sale Agreement being satisfied. Under the Sale Agreement, Santos has agreed to fund Kirkland s participating share of expenditure under certain pre-approved Work Programs and Budgets. Kirkland will not be liable to repay any funds advanced by Santos in relation to this expenditure other than in very limited circumstances. PPL 277 In December 2012, NGE completed the Sale and Royalty Agreement (Sale Agreement) for PPL 277 with Esso PNG Exploration Ltd a subsidiary of ExxonMobil Corporation and Oil Search. This links part of NGE s growth to the expansion of the ExxonMobil led US$19B PNG LNG project without taking the risks nor having the capital obligations of a direct interest in the licence. Under the terms for the sale of PPL 277, NGE received an upfront cash fee of US$15 Million and will receive an additional US$20 Million upon the issue of a Petroleum Development Licence, as well future royalty payments on future production. Qualified Petroleum Reserves and Resources Evaluator Statement: The information in this announcement that relates to petroleum volumes is based on information compiled by Mr Dan Kendrick (Ph D, Geology), an employee of New Guinea Energy with over 15 years experience as a practising geologist, and a member of the American Association of Petroleum Geologists (AAPG). Mr Dan Kendrick consents to the inclusion of the information in this announcement in the form and context in which it appears. 6

9 DIRECTORS REPORT The Directors of New Guinea Energy Ltd submit the financial report of the consolidated group for the half-year ended 30 June Directors The names of Directors who held office during or since the end of the half-year are: M N Arnett Sir M R Bromley A L Kent (resigned 19 February 2014) A L Martin A A Young Operating Results Net loss of the Group for the half-year ended 30 June 2014 was $9,048,000 (2013: $1,638,000). This included non-cash finance costs arising from fair value accounting of liabilities of $951,000 (2013: $847,000) and impairment charges on exploration and evaluation expenditure and fixed assets of $7,242,000 (2013: $127,000). Review of Operations A review of operations for the half-year ended 30 June 2014 is set out on pages 2 to 6. Rounding of Amounts The consolidated group is an entity to which ASIC Class Order 98/100 applies and, accordingly, certain amounts in the financial report and Directors Report have been rounded to the nearest $1,000. Auditor s Independence Declaration The auditor s independence declaration under section 307C of the Corporations Act 2001 is set out on page 8, and forms part of this report. This report is signed in accordance with a resolution of the Board of Directors. M N Arnett Executive Chairman Dated this 11 th day of September

10 Level 17, 383 Kent Street Sydney NSW 2000 Correspondence to: Locked Bag Q800 QVB Post Office Sydney NSW 1230 T F E info.nsw@au.gt.com W Auditor s Independence Declaration To the Directors of New Guinea Energy Ltd In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the review of New Guinea Energy Ltd for the half year ended 30 June 2014, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the review; and no contraventions of any applicable code of professional conduct in relation to the review. GRANT THORNTON AUDIT PTY LTD Chartered Accountants C F Farley Partner - Audit & Assurance Sydney, 11 September 2014 Grant Thornton Audit Pty Ltd ACN a subsidiary or related entity of Grant Thornton Australia Ltd ABN Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another s acts or omissions. In the Australian context only, the use of the term Grant Thornton may refer to Grant Thornton Australia Limited ABN and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies.

11 Level 17, 383 Kent Street Sydney NSW 2000 Correspondence to: Locked Bag Q800 QVB Post Office Sydney NSW 1230 T F E info.nsw@au.gt.com W Independent Auditor s Review Report To the Members of New Guinea Energy Ltd We have reviewed the accompanying half-year financial report of New Guinea Energy Ltd ( Company ), which comprises the consolidated financial statements being the statement of financial position as at 30 June 2014, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the half-year ended on that date, notes comprising a statement of accounting policies, other explanatory information and the directors declaration of the consolidated entity, comprising both the Company and the entities it controlled at the half-year s end or from time to time during the half-year. Directors responsibility for the half-year financial report The directors of New Guinea Energy Ltd are responsible for the preparation of the halfyear financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such controls 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 consolidated half-year financial report based on our review. We conducted our review in accordance with the 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 half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the New Guinea Energy Ltd consolidated entity s financial position as at 30 June 2014 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Grant Thornton Audit Pty Ltd ACN a subsidiary or related entity of Grant Thornton Australia Ltd ABN Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another s acts or omissions. In the Australian context only, the use of the term Grant Thornton may refer to Grant Thornton Australia Limited ABN and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies.

12 Regulations As the auditor of New Guinea Energy Ltd, 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 complied with the independence requirements of the Corporations Act 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 New Guinea Energy Ltd is not in accordance with the Corporations Act 2001, including: a b giving a true and fair view of the consolidated entity s financial position as at 30 June 2014 and of its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and Corporations Regulations Material uncertainty regarding continuation going concern Without qualifying our conclusion, we draw attention to Note 2 in the half-year financial report which indicates that the company incurred a net loss of $9,048,000 and negative cash flows from operations of $331,000 during the period ended 30 June 2014, and has work commitments under the petroleum prospecting licences granted to the consolidated entity. In addition, we note the company had net current liabilities of $20,721,000 at 30 June These conditions, along with other matters as set forth in Note 2, indicate the existence of a material uncertainty which may cast significant doubt about the company s ability to continue as a going concern and therefore, the company may be unable to realise its assets and discharge its liabilities in the normal course of business, and at the amounts stated in the financial report. GRANT THORNTON AUDIT PTY LTD Chartered Accountants C F Farley Partner - Audit & Assurance Sydney, 11 September 2014

13 DIRECTORS DECLARATION The Directors of the Company declare that: 1. The financial statements and notes, as set out on pages 12 to 21 are in accordance with the Corporations Act 2001, including: a) complying with Accounting Standards AASB 134: Interim Financial Reporting; and b) giving a true and fair view of the consolidated entity s financial position as at 30 June 2014 and of its performance for the half-year ended on that date. 2. In the Directors opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. M N Arnett Executive Chairman Dated this 11 th day of September

14 Consolidated Statement of Profit or Loss and Other Comprehensive Income For The Half-Year Ended 30 June 2014 Note Half-Year Ended 30 June 2014 Half-Year Ended 30 June 2013 $ 000 $ 000 Revenue Other income 4-1,344 Depreciation expense (5) (16) Employee benefits expense (418) (201) Finance costs (1,008) (901) Impairment of exploration and evaluation expenditure (7,162) - Impairment of fixed assets (80) (127) Other expenses 5 (783) (2,010) Share of losses from equity accounted investments (119) (269) Loss before income tax expense (9,048) (1,638) Income tax expense - - Loss after income tax (9,048) (1,638) Other comprehensive income Other comprehensive income for the period, net of tax - - Total other comprehensive income for the period - - Total comprehensive loss for the period attributable to members of the Parent Entity (9,048) (1,638) Earnings per share attributable to the ordinary equity holders of the Company From continuing operations: Basic and diluted loss per share (cents) (1.06) (0.19) This financial report should be read in conjunction with the accompanying notes. 12

15 Consolidated Statement of Financial Position As At 30 June 2014 Note 30 June December 2013 $ 000 $ 000 ASSETS CURRENT ASSETS Cash and cash equivalents 1,051 3,653 Trade and other receivables Financial assets Other current assets TOTAL CURRENT ASSETS 1,503 4,169 NON-CURRENT ASSETS Plant and equipment Exploration and evaluation expenditure 60,304 66,292 Investments accounted for using the equity method 7 11,557 12,373 Other long term assets 2,312 1,920 TOTAL NON-CURRENT ASSETS 74,741 81,265 TOTAL ASSETS 76,244 85,434 CURRENT LIABILITIES Trade and other payables Borrowings 8 21,720 20,808 Provisions 63 1,023 TOTAL CURRENT LIABILITIES 22,224 22,392 NON-CURRENT LIABILITIES Provisions TOTAL NON-CURRENT LIABILITES TOTAL LIABILITIES 22,364 22,546 NET ASSETS 53,880 62,888 EQUITY Share capital 80,303 80,303 Reserves 11,232 11,192 Accumulated losses (37,655) (28,607) TOTAL EQUITY 53,880 62,888 This financial report should be read in conjunction with the accompanying notes. 13

16 Consolidated Statement of Changes In Equity For The Half-Year Ended 30 June 2014 Share capital Option reserve Equity portion of convertible instrument Accumulated losses Total $ 000 $ 000 $ 000 $ 000 $ 000 Balance at 1 January ,303 7,780 3,310 (16,780) 74,613 Total comprehensive (loss) for the period (1,638) (1,638) Transactions with owners in their capacity as owners: Convertible bonds issued Balance at 30 June ,303 7,780 3,365 (18,418) 73,030 Balance at 1 January ,303 7,780 3,412 (28,607) 62,888 Total comprehensive (loss) for the period (9,048) (9,048) Transactions with owners in their capacity as owners: Convertible bonds issued Balance at 30 June ,303 7,780 3,452 (37,655) 53,880 This financial report should be read in conjunction with the accompanying notes. 14

17 Consolidated Statement of Cash Flows For the Half-Year Ended 30 June 2014 Half-Year Ended 30 June 2014 Half-Year Ended 30 June 2013 $ 000 $ 000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 2 24 Payments to suppliers and employees (348) (1,983) Interest received Net cash used in operating activities (331) (1,912) CASH FLOWS FROM INVESTING ACTIVITIES Payments for plant and equipment - (18) Payments for exploration and evaluation expenditure (2,130) (3,132) Proceeds from sale of fixed assets - 93 Loan to joint venture entity (23) (743) Payments for security deposits - (6) Net cash used in investing activities (2,153) (3,806) CASH FLOWS FROM FINANCING ACTIVITIES Interest paid (57) (54) Net cash used in financing activities (57) (54) Net decrease in cash held (2,541) (5,772) Cash and cash equivalents at the beginning of period 3,653 13,356 Effect of exchange rates on cash holding in foreign currencies (61) (209) Cash and cash equivalents at the end of period 1,051 7,375 This financial report should be read in conjunction with the accompanying notes. 15

18 Notes to Financial Statements For the Half-Year Ended 30 June 2014 Note 1 Nature of operations New Guinea Energy Ltd and subsidiaries (the Group) principal activities consisted of exploration for oil and gas in Papua New Guinea. Note 2 - Basis of preparation These general purpose financial statements for the interim half-year reporting period ended 30 June 2014 have been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standard AASB 134: Interim Financial Reporting. The interim financial statements have been approved and authorised for issue by the Board of Directors on 11 September This interim financial report is intended to provide users with an update on the latest annual financial statements of New Guinea Energy Ltd and its controlled entities (the Group). As such it does not contain information that represents relatively insignificant changes occurring during the half-year within the Group. It is therefore recommended that this financial report be read in conjunction with the annual financial statements of the Group for the year ended 31 December 2013, together with any public announcements made during the half-year. Going concern basis of accounting The financial report has been prepared on the going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Group incurred operating losses of $9,048,000, of which $8,250,000 related to non-cash finance costs arising from fair value accounting of liabilities, impairment charges of evaluation and exploration expenditure and fixed assets, and negative cash flows from operations of $331,000 during the period and has work commitments under the petroleum prospecting licences granted to the controlled entities. However, the Group had sufficient cash to fund its activities during the period without raising additional equity or debt. The ability of the Group to continue to pay its debts as and when they fall due is principally dependent upon the Company successfully raising additional share capital or debt funding, partial divestment of assets and containing expenditure in line with available funding. The Directors believe it is appropriate to prepare these accounts on a going concern basis because: - on 13 February 2014, the Group signed an agreement to sell its 50% participating interest in PPL 269 subject to initial conditions precedent and remaining conditions being satisfied or waived. On completion, the Group will receive USD32 million in cash with further potential payments of up to USD8 million; - on 12 August 2014, the Company announced the initial conditions precedent have been satisfied with completion of sale conditional on receipt of certain PNG governmental approvals by 13 August 2015; - the holders of the convertible bonds have consented to the above sale of PPL 269 with all outstanding monies in relation to the convertible bonds being repaid following receipt of the sale consideration; 16

19 Notes to Financial Statements For the Half-Year Ended 30 June 2014 (continued) - the Company has access to an equity subscription facility of $40 million up to July 2015; - Group is continuing its pursuit of joint venture transactions for its other Petroleum Prospecting licences which would provide funding for its exploration expenditure; and - with its joint-venture company, Western Drilling Limited, having signed a drilling contract in May 2014, the Company expects to receive cash inflows from loan repayment and dividends during the 2014 and 2015 financial years. The Directors consider that the Group has sufficient funds to settle its debts as and when they become due and payable. On that basis, whilst there is material uncertainty, the Directors have prepared the financial report on a going concern basis. Accordingly, no adjustments have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. Note 3 Significant accounting policies The interim financial statements have been prepared in accordance with the accounting policies adopted in the Group s last annual financial statements for the year ended 31 December The accounting policies have been adopted consistently throughout the Group for purposes of preparation of these interim financial statements. Note 4 Other Income 2014 $ $ 000 Foreign exchange gains - 1,329 Gain on disposal of fixed assets ,344 Note 5 Other Expenses Audit fees Corporate promotion expenses Directors fees Foreign exchange losses Listing fees Operating leases Professional fees (386) 1,460 Other ,010 17

20 Notes to Financial Statements For the Half-Year Ended 30 June 2014 (continued) Note 6 Operating Segments The reportable operating segment is exploration for oil and gas in Papua New Guinea which is the Group s principal activity. The Group is still in the exploration stage and does not generate any revenue from sales. Corporate office activities are not allocated to operating segments and form part of the balance of unallocated revenue, expenses, assets and liabilities. Segment assets Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location. Segment liabilities Liabilities are allocated to segments where there is direct nexus between the incurrence of the liability and the operations of the segment. Segment liabilities include trade and other payables. CONSOLIDATED GROUP PROFIT AND LOSS Six months ended 30 June 2014 Six months ended 30 June 2013 Total Exploration Unallocated Exploration Unallocated Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Revenue Other income ,329 1,344 Depreciation expenses - (5) (5) - (16) (16) Employee costs - (418) (418) - (201) (201) Finance costs - (1,008) (1,008) - (901) (901) Impairment of exploration expenditure (7,162) - (7,162) Impairment of fixed assets (80) - (80) (127) - (127) Other expenses - (783) (783) - (2,010) (2,010) Share of losses from equity accounted investments - (119) (119) - (269) (269) Loss before income tax (7,242) (1,806) (9,048) (112) (1,526) (1,638) Income tax expense Loss after tax (7,242) (1,806) (9,048) (112) (1,526) (1,638) 30 June December 2013 BALANCE SHEET Assets and liabilities Segment assets 61,158 15,086 76,244 67,280 18,154 85,434 Segment liabilities ,165 22,364 1,204 21,342 22,546 18

21 Notes to Financial Statements For the Half-Year Ended 30 June 2014 (continued) Note 7 Investments accounted for using the equity method 30 June December 2013 $ 000 $ 000 Investment in shares in Western Drilling Limited (WDL) - - Loans to WDL group 12,408 13,105 Share of losses accounted for using the equity method (851) (732) At end of period 11,557 12,373 As at balance date, WDL has started earning revenue. Note 8 Borrowings Equity Bonds 2016 Current Balance at beginning of period 20,808 - Reclassified from non-current - 19,986 Movement during the period Balance at end of period 21,720 19,986 Non-current Balance at beginning of period - 19,193 Movement during the period Reclassified to current - (19,986) Balance at end of period - - On 30 May 2011, the Company issued $20 million of unlisted, unsecured, transferrable convertible Equity Bonds due 5 years from the date of issue. The convertible Equity Bonds are convertible into fully paid ordinary shares of New Guinea Energy Ltd at $0.20 per convertible Equity Bond and the underlying shares will rank equally with existing fully paid shares of the Company once issued. The coupon rate is 5% per annum payable semi-annually with the issue of additional convertible Equity Bonds due 30 May 2016 with a face value equal to the coupon payments. On the third anniversary of the date of issue of the convertible Equity Bonds, being 30 May 2014, and on each semi-annual date thereafter until maturity on 30 May 2016, a holder of Equity Bonds will have the option to require the Company to redeem the Equity Bonds (in full or in part) at a price equal to the principal amount of the Equity Bonds plus any accrued unpaid interest. Since 30 June 2013 the discounted redemption amount of bonds issued has been reclassified to current borrowings given the early redemption option above. On 30 May 2014, the Company issued $565,704 of unlisted, unsecured, transferrable convertible Equity bonds representing the second semi-annual interest payable on the Equity Bonds. The redemption amount of the Equity Bonds and interest have been discounted to net present value using a market interest rate of 9% over the period to maturity. The equity component of the fair value of convertible Equity Bonds has been credited to reserves. 19

22 Notes to Financial Statements For the Half-Year Ended 30 June 2014 (continued) 30 June 2014 $ June 2013 $ 000 Note 9 Commitments Petroleum Prospecting Licences The Group has been granted five petroleum prospecting licences in Papua New Guinea. A condition of the licences is that the Group is required to satisfy work commitments to maintain current rights of tenure. These commitments may be subject to renegotiation, may be farmed out or may be relinquished and have not been provided for in the financial statements and are due as follows from balance date: Within twelve months 2,122 8,734 Twelve months or longer and not longer than 5 years 29,107 31,078 31,229 39,812 The Group has obligations to restore and rehabilitate areas disturbed during exploration. Bank guarantees of $263,000 (2013: $293,000) collateralised by cash deposits have been provided as security for compliance with the conditions of the licences. Operating Leases Minimum payment under non-cancellable operating leases according to the time expected to elapse to the expected date of payment: Not later than 1 year Later than 1 year and not later than 5 years Bank guarantees for $22,000 (2013: $22,000) collateralised by cash deposits have been provided for fulfilment of the obligations under the operating leases. Note 10 - Contingent assets and liabilities Under the Sale Agreement of PPL 269 announced by the Company on 13 February 2014, Barracuda Limited (Santos), a subsidiary of Santos Limited, has agreed to fund the Group s participating share of expenditure under certain pre-approved Work Programs and Budgets (WPB). The Group will not be liable to repay any funds advanced by Santos in relation to this expenditure other than in very limited circumstances. If the Sale Agreement is terminated in 2014 other than by the Group, the Group will be required to refund USD485,000 to Santos towards the 2014 WPB costs. 20

23 Notes to Financial Statements For the Half-Year Ended 30 June 2014 (continued) Note 11 Events subsequent to Reporting Date There has not arisen in the interval since 30 June 2014 and up to the date of this report, any matter that, in the opinion of the Directors, has significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years other than the following: - on 12 August 2014 the Group announced that the Initial Conditions Precedent, under the Sale Agreement of its 50% interest in PPL 269 announced on 13 February 2014, have been satisfied and completion remains conditional on receipt of certain PNG governmental approval by 13 August