33 St James’s Square London SW1Y 4JS United Kingdom Telephone: +44 (0)20 7661 9348 Fax: +44 (0)20 7661 8055 info@bordersandsouthern.com www.bordersandsouthern.com B o r d e r s & S o u t h e r n P c l a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 9 Borders & Southern Plc annual report and accounts 2009 Exploration for oil and gas Welcome to the 2009 borders&southern annual report, let us tell you a little more about what we do... Borders & Southern is focused on exploring frontier or emerging hydrocarbon systems, seeking to identify high value prospects. The Company’s first project is located to the south of the Falkland Islands within a completely untested basin. Borders & Southern’s acreage comprising five Production Licences Falkland Islands Argentina Chile Falkland Islands South Falkland Basin 100% (operator) interest 01 PL018 (Quad 61, 02 PL019 (Quad 62, 03 PL020 (Quad 63, blocks 16 to 30) 3,668 sq km blocks 16 to 30) 3,668 sq km blocks 16 to 30) 3,668 sq km 04 PL021 (Quad 64, blocks 1 to 30) 7,381 sq km 05 PL022 (Quad 73, blocks 1 to 5) 1,213 sq km go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 01 highlights of our year Consolidated the prospect inventory and submitted Environmental Impact Statement Completed initial well designs and cost estimation study Received a three year extension to the first Phase Exploration Term with an obligation to drill one exploration well Raised $184 million (net of expenses) through the placement of 234,234,234 Ordinary Shares Cash balance as at 31 December 2009 was $206.3 million our operations Borders & Southern holds a 100% equity interest and operatorship in five Production Licences covering an area of nearly 20,000 sq km in the South Falkland Basin. We have acquired and evaluated 2,862 km of 2D seismic data and 1,492 sq km of 3D seismic data. Our objective is to test the hydrocarbon potential of our acreage and we have selected the Stebbing and Darwin prospects as the first targets. For up-to-date information on our share price and all the latest news please visit our website www.bordersandsouthern.com cash balance $206.3m net funds raised $184m market capitalisation $421m at 31 December 2009 Contents 01 Highlights of our year Our operations 19 02 Chairman’s statement 04 Chief executive’s review 06 Financial review 08 Board of directors 10 Directors’ report 14 Audit committee report 15 Remuneration committee report Independent auditor’s report 16 Consolidated statement 18 of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Company statement of financial position Company statement of changes in equity Consolidated statement of cash flows Company statement of cash flows Notes to the financial statements 23 24 25 40 Corporate directory 20 21 22 02 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com chairman’s statement During the course of 2009 there was a notable change in sentiment within the oil sector. At the start of the year the oil price was around $35 per barrel, global exploration had been scaled back and share prices of oil companies had fallen. However, the oil price progressively increased towards $80 per barrel by the end of the year and this rise was accompanied by a noticeable change in appetite for exploration risk, including frontier exploration. This was partly to do with success stories in places such as Ghana, Uganda, Kurdistan and Sierra Leone. In the first half of 2010 the oil price has stabilised around the $80 to $85 per barrel mark. Against this background, our activity during the year involved consolidating our prospect inventory and initiating preliminary well planning. We have also focused on ensuring sufficient funds are available for the initial drilling programme. Deep water wells are expensive and having commissioned a well cost analysis, the board considered that it required around $185 million to fund 2 to 3 wells with contingency, assuming 100% funding of the wells along with all the mobilisation and demobilisation costs of the rig and equipment. In November 2009 the Board decided that the market conditions were right to support a major fundraising and the company successfully raised $190 million (before expenses) at a price equivalent to the then market price. The response was incredible and we were delighted with the quality of the new institutional shareholders. We believe that the positive response from major funds reflects the quality of the technical case and the quality of the work undertaken to date but most importantly, the quality of the initial prospects that have been prioritised for drilling. I would like to welcome our new shareholders and thank them for their support. I would also like to thank our new joint-brokers Mirabaud, along with existing joint-brokers Panmure Gordon and Ocean Equities, for their help in making the issue such a success. View of Stanley from Mount Tumbledown. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 03 Harry Dobson Non-Executive Chairman “ The fund raising in November was a tremendous success. Our forward programme is now fully funded which allows us to control our own destiny.” Borders & Southern’s cash balance of $206.3 million at year end allows us to move forward independently to fund the wells that we would like to drill and to set our own time line. In this regard, we are currently trying to source a deep water rig to be active in the next summer season in the Falklands (the back end of 2010 and the first quarter of 2011). There are rigs available in this time frame but it is a competitive environment with others competing for the same rigs. However, we are optimistic that we can meet our objectives and will inform shareholders once we have secured a suitable rig. As we look forward, the next twelve months should prove the most exciting in our short history as we source a rig, finalise the well planning and begin drilling the acreage. Harry Dobson Non-Executive Chairman our aims... apply industry leading technology and petroleum systems analysis We operate from the Falkland Islands Borders & Southern’s objective is to test the hydrocarbon potential of the east-west trending fold belt, located approximately 150 km to the south of the Falkland Islands. This fold belt trend contains numerous large simple structures (up to 150 sq km in area), including thrust cored anticlines and tilted fault blocks. The clear definition of these structures has been achieved through the acquisition of 2,862 km of 2D seismic and 1,492 sq km of 3D seismic. Our corporate offices. Borders & Southern Petroleum plc, are based in London, UK. Drilling sites located here 04 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com chief executive’s review In November 2009 the first Exploration phase of our Production Licences reached a conclusion. As Borders & Southern had fulfilled all of its work programme obligations and had worked up an impressive prospect inventory, we requested a three year extension to this first phase from the Falkland Islands Government. This was subsequently granted so long as we commit to drill one exploration well during that period. During the year we continued to work our seismic data and continued to refine our prospect inventory. In addition, we purchased more 2D non-exclusive regional seismic data covering areas outside our licensed acreage. The purpose of this was to improve our knowledge of the basin as a whole, which could be fed back into the evaluation of our prospects. We also progressed our Environmental Impact Assessment. This led to the submission of our Environmental Impact Statement in February 2010. A public consultation was subsequently held in the Falkland Islands allowing feedback on the document and having responded to questions, we now await approval from the Falkland Islands Government. Prior to our fundraising in November 2009, consultants AGR completed initial well designs for our Darwin and Stebbing wells along with some initial cost estimates. Darwin and Stebbing have been high graded as the best first tests of our acreage as they are robust structural traps and have impressive geophysical attributes that help to reduce risk. Also, in the case of Darwin, there are good success case analogues in the contiguous Malvinas and Magellanes basins to the west. Although exploration risk can never be eliminated, we are particularly excited about drilling these prospects. The two prospects are completely independent of each other except that they require the same source rock to be working. We will therefore be learning as much as we can about the geology and petroleum systems of our acreage. As I write this review, operations in the North Falkland Basin are underway. As reported previously, the geology in the North Falklands Basin is completely different from that in the South. The prime difference is that the sediments in the North were deposited in lakes whilst the sediments in the South were deposited in a marine environment. Consequently, the outcomes in the north, both positive and negative have absolutely no impact on the prospectivity of our acreage. Schematic cross section illustrating the Stebbing and Darwin prospects. Stebbing Darwin go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 05 Howard Obee Chief Executive “ Exploration risks can never be eliminated, but we are particularly excited about the drilling of the Darwin and Stebbing prospects.” Shortly, the first well in the South Falkland Basin will be drilled, operated by BHP Billiton. Our understanding is that their prospect is a structural/stratigraphic trap. This contrasts with the structural traps, defined by 3D seismic, that we will be drilling. So whilst their well will be drilling similar geology, in detail the prospects are considered significantly different. The key differences are the age of reservoir and seal, the source kitchen and migration pathways and importantly, the trapping mechanism. Technical work on our acreage will continue. For instance we have recently kicked off a pre-stack depth migration study of the Stebbing prospect and a pore pressure prediction study for both prospects. However, the majority of the technical activity will be focused on detailed well engineering. Currently our energies are directed towards accessing a deep water rig. We are fully funded to cover all of the drilling and mobilisation costs. Hopefully, we will be able to share some of the mobilisation and demobilisation costs with other operators in the region. Howard Obee Chief Executive what’s next... drilling two of our key prospects Darwin and Stebbing have been selected as the first targets in our acreage. They are completely independent other than requiring the same source rock. This means that they have different aged reservoirs and seals, different source kitchens and migration pathways and different structural styles. Darwin in a robust tilted fault block with a Lower Cretaceous aged reservoir interval. The prospect has a flat spot, amplitude conformance to structure and an AVO anomaly. P50 resource estimates for the anomaly alone are 300 million barrels of recoverable oil. P50 resource estimates for the entire structure down to the mapped spill point are 760 million barrels of recoverable oil. Stebbing is a robust simple fold with reservoir intervals in the Tertiary and Upper Cretaceous. The prospect has AVO anomalies in the Tertiary. P50 resource estimates for the combined reservoir intervals are 1,280 million barrels of recoverable oil. If either or both of the prospects are successful then there is plenty of follow up potential in the 3D area. Similar folds and tilted fault blocks have been mapped and evaluated along with many interesting structural/ stratigraphic traps. The 3D area represents 7.6% of the total area under licence. Success would also lead to an expansion of the area covered by 3D seismic. 06 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com financial review In the 2008 Annual Report, I wrote that we were looking at different options to fund the cost of drilling at least two exploration wells in the Falkland Islands, including the introduction of a partner. In the latter part of last year, higher oil prices, the return of an appetite for risk in the natural resources sector by investors and the broad recognition of the quality of the company’s prospects, all combined to make the raising of the funds through a private placement possible and the preferred option. This placement, at 50p/share, raised $184 million after costs from existing and new shareholders. It was a fantastic outcome for the company greatly assisted by the high quality of our brokers and advisors. the time we announced the capital raising and the receipt of the funds post the Extraordinary General Meeting, we took out a forward contract for most of the proceeds. As it happens, the £:$ rate declined during that period so we made a gain on this transaction and this largely accounts for the profit made during the year. We have placed the company’s cash funds with high quality large banks so, whilst we do not get a high interest rate, we are not talking excessive risk with the funds. As you will have read elsewhere in this report, we are currently seeking to contract a drilling rig to drill at least two exploration wells either later in 2010 or, more likely, early in 2011. Based on a third party review of drilling costs, we have sufficient funds to drill these two wells with the possibility of drilling a third well under certain circumstances including sharing of mobilisation and demobilisation costs. Whilst we raised the monies in pounds sterling, we decided to move the bulk of the monies into US$ to reflect both the currency we expect to be invoiced in and our presentational currency. To avoid a currency risk from Peter Fleming Finance Director go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 07 Peter Fleming Finance Director Pence/Share BOR.L Index to 100 BOR.L AIM Oil & Gas WTI Oil �� �� �� �� �� �� �� �� � �������� �������� �������� �������� �������� �������� �������� �������� �������� ��� ��� ��� ��� ��� ��� ��� ��� �� � �������� �������� �������� �������� �������� �������� �������� �������� �������� we are now one of the largest AIM companies The company’s share price has performed well over the last two years relative to other AIM listed oil and gas companies and the oil price. The market capitalisation places the company in the top 40 of the total AIM listed companies across all sectors. The company was ranked 15th in Deloitte’s UK upstream independents league table 2009. The company’s annual overhead is one of the lowest for a company of it’s size. 08 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com board of directors 01. David Harry Williamson Dobson (Non-executive Chairman) age 62 02. Howard Kevin Obee (Chief Executive) age 50 Harry Dobson is a former investment banker and senior partner of Yorkton Securities. He currently engages in various merchant banking and venture capital activities in North America and Europe, and has acted as Chairman of a number of resource companies (including American Pacific Mining Company Inc. and Lytton Minerals Limited). He is currently the Chairman of Kirkland Lake Gold Inc. (a Toronto Stock Exchange and AIM quoted Company) and Rambler Metals and Mining plc (an AIM quoted Company). He is experienced in the organisation and funding of resource projects, including those located in inaccessible locations. Harry is Chairman of the Remuneration Committee and sits on the Audit Committee. Howard Obee was appointed Chief Executive when the company was incorporated in June 2004. He has a PhD in structural geology from Imperial College, and has spent 20 years in the oil industry, initially with BP (1985–1992), and subsequently with BHP Billiton (1992–2004). He trained as an exploration geologist, but has been appointed to various technical and commercial roles, incorporating exploration, new ventures, strategic planning, and business development. His most recent roles for BHP Billiton were West Africa Asset Team Leader, and Exploration Manager, London. He has experience of executing seismic and drilling programmes in frontier basins, including those in deep water. 03. Peter William Fleming (Finance Director) age 48 Peter Fleming has over 15 years of upstream oil and gas experience, the majority of which was gained at BHP Billiton, both in London and Melbourne. Whilst at BHP Billiton, Peter held senior positions in exploration and business development, investment evaluation, acquisitions and disposals and strategic planning. Prior to joining BHP Billiton, he worked for Bridge Oil and Banque Indosuez. He holds Master’s degrees in Business Administration and Finance. 04. Stephen James Douglas Posford (Non-executive Director) age 63 Stephen Posford was a partner of stockbrokers W.Greenwell and Co. In 1986, he became Managing Director of Greenwell Montagu Gilt Edged, and in 1989 moved to Salomon Brothers to head up their proprietary trading department in London. He then became Salomon Brothers European CEO before retiring in 1996. Stephen sits on the Audit and Remuneration Committees. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 09 05. Christopher Nigel Hurst-Brown (Non-executive Director) age 58 Number of board meetings Attendance Since qualifying as a Chartered Accountant, Nigel Hurst-Brown has pursued a career in fund management. From 1986–1990 he was Chairman of Lloyd’s Investment Managers. In 1990 he moved to Mercury Asset Management as a main board Director and following Mercury’s acquisition by Merrill Lynch in 1997 became a Managing Director of Merrill Lynch Investment Managers. Currently he is Chief Executive of Hotchkis and Wiley (UK) Limited and a member of the Executive Committee of its US parent Hotchkis and Wiley Capital Management LLC. Nigel is Chairman of the Audit Committee and sits on the Remuneration Committee. Harry Dobson Howard Obee Peter Fleming Stephen Posford Nigel Hurst-Brown Remuneration Committee Board Audit Committee 4 4 4 4 4 1 — — 1 1 2 2 2 2 2 10 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com directors’ report for the year ended 31 December 2009 The directors present their report and the audited consolidated financial statements for the year ended 31 December 2009. Domicile The parent company of the group (which is also the ultimate parent), Borders & Southern Petroleum Plc, is a public limited company and is registered and domiciled in England. Principal activity The principal activity of the group is the exploration for oil and gas. Results and dividends The group statement of comprehensive income is set out on page 18 and shows the result for the year. The directors do not recommend the payment of a dividend. Review of business and future developments A review on the operations of the group is contained in the Chief Executive’s Review and Financial Review on pages 4 and 6. Principal risks and uncertainties and financial risk management Exploration risk The exploration for and development of hydrocarbons is speculative and involves a high degree of risk. These risks include the uncertainty that the group will discover sufficient oil or gas to exploit commercially. Financial risk management The company’s operations are such that it has exposure to a variety of financial risks. These may, from time to time, include the effects of changes in price risk, liquidity risk and a foreign exchange risk. Given the size of the company, the directors have not delegated the responsibility of monitoring financial risk management to a sub‑committee of the board. The company’s management implements the policies set by the board of directors. Price risk The company is exposed to price risk due to normal inflationary increases in the purchase price of goods and services. The company has no exposure to equity securities price risk, as it holds no listed or other equity investments. Liquidity risk The company has no long term commitments and is able to satisfy any current liability from cash reserves. Foreign exchange risk The company has potential exposure due to some of its purchases being invoiced in UK sterling. To mitigate the risk, the company retains funds on UK sterling bank accounts to settle these liabilities. The company also has potential exposure to cash being raised in UK Sterling but planned future expenditure being in US Dollars. To mitigate against this risk the company may take out forward exchange contracts when necessary. Key performance indicators The company’s key performance indicators (discussed in the Chief Executive’s Review and Finance Review on pages 4 to 7) are on the management of its cash position ($206.3m at year end, 2008: $19.5m including UK Government bond) and the fulfilment of the exploration program. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 11 Post balance sheet events All events that have occurred since the year end which require reporting have been disclosed in note 21. Charitable and political donations There were no political or charitable contributions made by the company or the group during the year. Health, safety and environment The group has an overriding commitment to health, safety and environmental responsibility. The group works closely with host governments and communities in the countries in which it operates, together with its contractors and partners, to ensure internationally recognised standards are implemented and maintained along with compliance to local legislation. The group’s exploration activities are subject to the relevant environmental protection acts. The group closely monitors its activities to ensure to the best of its knowledge there is no potential for the breach of such regulations. There have been no convictions in relation to breaches of these Acts recorded against the group during the reporting period. Creditor payment policy It is the group’s policy to settle the terms of payment with suppliers when agreeing the terms of the transaction, to ensure that suppliers are aware of these terms and to abide by them. The amounts owed to the company and group’s trade creditors at the year end represented 14 days (2008: 5 days) as a proportion of the total amounts invoiced by suppliers during the year. Financial instruments Details of the use of financial instruments by the company and its subsidiary undertaking are contained in note 22 of the financial statements. Directors and their interests The beneficial and other interests of the directors and their families in the share capital at the beginning of the year or the date of their appointment to the board, whichever is later, and at 31 December 2009, were as follows: David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Christopher Nigel Hurst‑Brown Peter William Fleming At 31 December 2009 Number 26,670,000 27,500,000 10,000,000 1,530,000 2,200,000 At 31 December 2008 Number 26,670,000 26,695,000 10,000,000 1,330,000 2,200,000 The ordinary shares in which Mr D H W Dobson is interested are held by the Zila Corporation, a company owned by the Whitmill Trust Company Limited, as trustee of The Lotus Trust of which he is a beneficiary. The group has provided the directors with qualifying third party indemnity insurance. 12 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com directors’ report continued for the year ended 31 December 2009 Share options Howard Kevin Obee Peter William Fleming Christopher Nigel Hurst‑Brown Number of options held at the beginning of the year Number of options held at the end of the year 50,000 50,000 — 300,000 300,000 250,000 Exercise price 56p 56p 58p Substantial shareholders At 19 May 2010 the following had notified the company of disclosable interests in 3% or more of the nominal value of the company’s shares carrying voting rights: Landsdowne Partners Limited Partnership Stephen James Douglas Posford Zila Corporation Blackrock Investment Management (UK) Limited Henderson Global Investors Ltd Allianz SE Number of ordinary shares % of share capital 67,979,000 27,500,000 26,670,000 25,920,085 22,248,512 18,460,000 15.86% 6.40% 6.22% 6.05% 5.19% 4.30% Directors’ responsibilities The directors are responsible for preparing the directors’ report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements and have elected to prepare the parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group and company for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these 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 IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 13 Website publication The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company’s website is the responsibility of the directors. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Auditors All of the current directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the company’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The directors are not aware of any relevant audit information of which the auditors are unaware. BDO LLP have expressed their willingness to continue in office and a resolution to reappoint them will be proposed at the Annual General Meeting. By order of the board William John Walton Slack Company Secretary 19 May 2010 14 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com audit committee report The board has established an Audit Committee comprising Mr Hurst‑Brown (Chairman), Mr Dobson and Mr Posford, all independent, non‑executive directors. The Audit Committee meets at least biannually and is responsible for: reviewing the integrity of the financial statements and related disclosures, based on adequate books, records and internal controls and selection and consistent application of appropriate accounting policies; the appropriateness of the internal financial controls; the independent auditors’ qualifications, independence, and performance; and the compliance with legal and regulatory requirements. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 15 remuneration committee report The board has established a Remuneration Committee comprising Mr Dobson (Chairman), Mr Hurst‑Brown and Mr Posford, all independent non‑executive directors. The Remuneration Committee meets at least annually and is responsible for: reviewing the performance of the CEO and other executive directors and senior management of the company and determines their remuneration and the basis of their service agreements with due regard to the interests of shareholders; the payment of any bonuses to the CEO, other executive directors and senior management; and making recommendations to the board with respect to equity‑based incentive plans and to act as a preparatory body for the board of directors in the management of any company award and option plans. Directors’ remuneration and service contracts On 18 May 2005, all of the company’s directors entered into a service agreement with the company. The remuneration of the directors for the year ended 31 December 2009 was as follows: David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Christopher Nigel Hurst‑Brown Peter William Fleming Pensions The group does not operate a pension scheme for its directors or employees. Basic salary $ — — 148,365 — 39,417 Share‑based payment $ — — 11,428 8,321 11,428 Total 2008 Total 2009 $ $ — — — — 159,793 8,321 50,845 176,305 — 51,218 16 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com independent auditor’s report to the members of Borders and Southern Petroleum Plc We have audited the financial statements of Borders and Southern Petroleum Plc for the year ended 31 December 2009 which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the company statement of financial position, the company statement of changes in equity, the consolidated statement of cash flows, the company statement of cash flows 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 and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the 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 auditors As explained more fully 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 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. Opinion on financial statements In our opinion: the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 31 December 2009 and of the group’s profit for the year then ended; the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company’s financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 17 Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Scott Knight (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London United Kingdom 19 May 2010 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 18 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com consolidated statement of comprehensive income for the year ended 31 December 2009 Administrative expenses Loss from operations Finance income Finance expense Profit/(loss) before tax Income tax expense Note 2009 $ $ 2008 (1,209,977) (1,287,544) 2 8 8 (1,209,977) (1,287,544) 4,587,604 986,177 (226,891) (4,426,533) 3,150,736 (4,727,900) 9 — — Profit/(loss) for the year and total comprehensive income/(loss) for the year attributable to owners of the parent 3,150,736 (4,727,900) Earnings/(loss) per share – basic and diluted 3 1.54 cents (2.43) cents The notes on page 25 to 39 form part of these financial statements. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 19 consolidated statement of financial position at 31 December 2009 Assets Non‑current assets Property, plant and equipment Intangible assets Total non‑current assets Current assets Trade and other receivables Other financial assets Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Total net assets Equity Share capital Share premium reserve Other reserves Retained deficit Foreign currency reserve Total equity Note 10 11 13 14 15 16 2009 $ $ 2008 $ $ 19,516 36,619,040 36,638,556 100,191 — 206,321,177 251,788 9,950,668 9,522,035 206,421,368 243,059,924 (244,680) 242,815,244 7,675,453 238,034,095 353,286 (3,231,194) (16,396) 242,815,244 14,929 36,040,860 36,055,789 19,724,491 55,780,280 (194,770) 55,585,510 3,867,741 57,906,686 209,409 (6,381,930) (16,396) 55,585,510 The notes on page 25 to 39 form part of these financial statements. The financial statements were approved by the board of directors and authorised for issue on 19 May 2010. Howard Kevin Obee Director Peter William Fleming Director Company number: 5147938 20 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com consolidated statement of changes in equity for the year ended 31 December 2009 Share capital $ Share premium reserve $ Other reserves $ Foreign currency reserve $ Retained deficit $ Total $ Balance at 1 January 2008 3,867,741 57,906,686 108,032 3,719 (1,654,030) 60,232,148 Total comprehensive loss for the year Recognition of share based payments Foreign exchange on change in presentation currency — — — — — — — 101,377 — — — (20,115) (4,727,900) (4,727,900) — — 101,377 (20,115) Balance at 31 December 2008 3,867,741 57,906,686 209,409 (16,396) (6,381,930) 55,585,510 Total comprehensive income for the year — — Issue of share capital 3,807,712 180,127,409 — — Recognition of share based payments — — 143,877 — — — 3,150,736 3,150,736 — — 183,935,121 143,877 Balance at 31 December 2009 7,675,453 238,034,095 353,286 (16,396) (3,231,194) 242,815,244 The following describes the nature and purpose of each reserve within owners’ equity: Reserve Share capital Description and purpose This represents the nominal value of shares issued. Share premium reserve Amount subscribed for share capital in excess of nominal value. Other reserves Fair value of options issued. Foreign currency reserve Differences arising on the change of subsidiaries functional currency to a presentational currency of $. Retained deficit Cumulative net gains and losses recognised in the consolidated statement of comprehensive income. The notes on page 25 to 39 form part of these financial statements. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 21 company statement of financial position as at 31 December 2009 Assets Non‑current assets Property, plant and equipment Investments Current assets Trade and other receivables Other financial assets Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Total net assets Equity Called up share capital Share premium reserve Other reserves Retained deficit Foreign currency reserve Total equity Note 10 12 13 14 15 16 2009 $ $ 19,516 2 19,518 2008 $ 2 $ 14,929 14,931 36,845,926 — 206,321,177 36,388,685 9,950,668 9,522,035 243,167,103 243,186,621 (237,495) 242,949,126 7,675,453 238,034,095 353,286 (3,095,023) (18,685) 242,949,126 55,861,388 55,876,319 (187,583) 55,688,736 3,867,741 57,906,686 209,409 (6,276,415) (18,685) 55,688,736 The notes on page 25 to 39 form part of these financial statements. The financial statements were approved by the board of directors and authorised for issue on 19 May 2010. Howard Kevin Obee Director Peter William Fleming Director 22 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com company statement of changes in equity for the year ended 31 December 2009 Share capital $ Share premium reserve $ Other reserves $ Foreign currency reserve $ Retained deficit $ Total $ Balance at 1 January 2008 3,867,741 57,906,686 108,032 3,965 (1,562,643) 60,323,781 Total comprehensive loss for the year Recognition of share‑based payments Foreign exchange on change in presentation currency — — — — — — — 101,377 — — — (22,650) (4,713,772) (4,713,772) — — 101,377 (22,650) Balance at 31 December 2008 3,867,741 57,906,686 209,409 (18,685) (6,276,415) 55,688,736 Total comprehensive income for the year — — Issue of share capital 3,807,712 180,127,409 — — Recognition of share based payments — — 143,877 — — — 3,181,392 3,181,392 — — 183,935,121 143,877 Balance at 31 December 2009 7,675,453 238,034,095 353,286 (18,685) (3,095,023) 242,949,126 The following describes the nature and purpose of each reserve within owners’ equity: Reserve Share capital Description and purpose This represents the nominal value of shares issued. Share premium reserve Amount subscribed for share capital in excess of nominal value. Other reserves Fair value of options issued. Foreign currency reserve Differences arising on the change of subsidiaries functional currency to a presentational currency of $. Retained deficit Cumulative net gains and losses recognised in the statement of comprehensive income. The notes on page 25 to 39 form part of these financial statements. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 23 consolidated statement of cash flows for the year ended 31 December 2009 Cash flow from operating activities Profit/(loss) before tax Adjustments for: Depreciation Share‑based payment Finance income Finance expense Foreign exchange differences Cash flows from operating activities before changes in working capital Decrease in trade and other receivables Increase/(decrease) in trade and other payables Net cash outflow from operating activities Cash flows used in investing activities Interest received Redemption/(purchase) of other financial assets Purchase of intangible assets Purchase of property, plant and equipment Net cash used in investing activities Cash flows from financing activities Gain on forward contract Proceeds from issue of shares and share options (net of issue costs) 2009 $ $ 2008 $ $ 3,150,736 (4,727,900) 9,206 143,877 (4,587,604) 226,891 — (1,056,894) 12,841 49,910 (994,143) 9,850 101,377 (986,177) 4,426,533 (20,115) (1,196,432) 65,881 (2,114,975) (3,245,526) 359,490 9,950,668 (578,180) (13,793) 981,912 (9,950,668) (12,885,058) (17,030) 9,718,185 8,724,042 (21,870,844) (25,116,370) 4,366,870 183,935,121 — — Net cash from financing activities 188,301,991 — Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Exchange (loss on cash and cash equivalents) Cash and cash equivalents at the end of the year – see note 17 The notes on page 25 to 39 form part of these financial statements. 197,026,033 9,522,035 (226,891) 206,321,177 (25,116,370) 39,064,938 (4,426,533) 9,522,035 24 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com company statement of cash flows for the year ended 31 December 2009 Cash flow from operating activities Profit/(loss) before tax Adjustments for: Depreciation Share‑based payment Finance income Finance expense Foreign exchange differences Cash flows from operating activities before changes in working capital Decrease in trade and other receivables Increase/(decrease) in trade and other payables Net cash outflow from operating activities Cash flows from investing activities Interest received Redemption/(purchase) of other financial assets Increase in amounts due from group undertaking Purchase of intangible assets Net cash from investing activities Cash flows from financing activities Gain on forward contract 2009 $ $ 2008 $ $ 3,181,392 (4,713,772) 9,206 143,877 (4,587,604) 226,891 — (1,026,238) 12,840 49,912 (963,486) 9,850 101,377 (986,177) 4,426,533 (22,651) (1,184,840) 74,879 (2,110,676) (3,220,637) 359,491 9,950,668 (608,838) (13,793) 981,913 (9,950,668) (12,909,948) (17,030) 9,687,528 8,724,042 (21,895,733) (25,116,370) 4,366,870 — Proceeds from issue of shares and share options (net of issue costs) 183,935,121 Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Exchange loss on cash and cash equivalents Cash and cash equivalents at the end of the year – see note 17 The notes on page 25 to 39 form part of these financial statements. 188,301,991 197,026,033 9,522,035 (226,891) 206,321,177 — — (25,116,370) 39,064,938 (4,426,533) 9,522,035 go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 25 notes to the financial statements for the year ended 31 December 2009 1 Accounting policies Basis of preparation The principal accounting policies adopted in the preparation of the financial statements are set out below and have been consistently applied to all years presented. These consolidated and parent company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs and IFRIC interpretations) issued by the International Accounting Standards Board (IASB) as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies preparing their accounts under IFRS. The consolidated financial statements have been prepared on a historical cost basis, as modified by the revaluation of available for sale financial assets. Effective 1 July 2008, the Company’s functional currency changed from Pounds sterling (£) to the US dollar ($). This change was made as, due to significant balances being denominated in $, the directors considered the $ to most faithfully represent the economic effects of the underlying transactions, events and conditions in the Company. Concurrent with this change in functional currency, the Group adopted the $ as its presentation currency. In accordance with International Accounting Standards, this change in functional currency has been accounted for prospectively by translating all items using the $:£ exchange spot rate on that date, being $1.9902:£1. In the parent company accounts the resulting translated amounts for non‑monetary items at this date have been treated as their historic cost. New and revised Standards effective for 31 December 2009 year ends that are not currently relevant to the Group Amendments IAS 23: Borrowing costs (effective for accounting periods commencing on or after 1 January 2009). This is not considered relevant to the group’s operations. IFRS 1: First time adoption of IFRS (effective for accounting periods commencing on or after 1 January 2009). This is not considered relevant to the group’s operations. IAS 32 & IAS 1: Puttable financial instruments and obligations arising on liquidation (effective for accounting periods commencing on or after 1 January 2009). This is not considered relevant to the group’s operations. Interpretations IFRIC 15: Agreements for the construction of real estate (effective for accounting periods commencing on or after 1 January 2009). This is not considered relevant to the group’s operations. New and revised Standards effective for 31 December 2009 year ends which are currently relevant to the group The IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year to 31 December 2008. The following standards, interpretations and amendments to existing standards have been adopted for the first time in 2009. New Standards IFRS 8: Operating segments (effective for accounting periods commencing on or after 1 January 2009). Amendments IAS 1: Presentation of financial statements: a revised presentation (effective for accounting periods commencing on or after 1 January 2009). IFRS 2: Share based payment: vesting conditions and cancellations (effective for accounting periods commencing on or after 1 January 2009). IFRS 1 & IAS 27: Cost of an investment in a subsidiary, jointly‑controlled entity or associate (effective for accounting periods commencing on or after 1 January 2009). IFRS 7: Improving disclosures about financial Instruments (effective for accounting periods commencing on or after 1 January 2009). The adoption of these standards, interpretations and amendments did not affect the Group statement of comprehensive income or financial positions. The presentation of these financial statements incorporates changes arising from adoption of these standards, interpretations and amendments. 26 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 1 Accounting policies continued New and revised Standards issued but not effective for 31 December 2009 year ends The IASB and IFRIC have issued the following standards and interpretations which are effective for reporting periods beginning after the date of these financial statements, and which the group is not early adopting. New Standards IFRS 9*: New standard replacing IAS 39 (effective for accounting periods commencing on or after 1 January 2013). This is not considered relevant to the group’s operations. Amendments IAS 27: Consolidated and separate financial statements (effective for accounting periods commencing on or after 1 July 2009). The group will apply this amendment in the accounting period commencing 1 January 2010. IFRS 3: Business combinations (effective for accounting periods commencing on or after 1 July 2009). This is not considered relevant to the group’s operations. IAS 39: Financial instruments: recognition and measurement: eligible hedged Items (effective for accounting periods commencing on or after 1 July 2009). This is not considered relevant to the group’s operations. IAS 39: Reclassification of financial assets: effective date and transition (effective for accounting periods commencing on or after 1 July 2009). The group will apply this amendment in the accounting period commencing 1 January 2010. IFRIC 9 & IAS 39: Embedded derivatives (effective for accounting periods commencing on or after 1 June 2009). This is not considered relevant to the group’s operations. Improvements to IFRSs (2010): Amendments to various standards issued 16 April 2009 (effective for accounting periods commencing on or after 1 January 2010). The group will apply these improvements in the accounting period commencing 1 January 2010. IFRS 2*: Group cash‑settled share‑based payment transactions (effective for accounting periods commencing on or after 1 January 2010). This is not considered relevant to the group’s operations. IFRS 1*: Additional exemptions for first‑time adopters (effective for accounting periods commencing on or after 1 February 2010). This is not considered relevant to the group’s operations. IAS 32*: Classification of Rights Issues (effective for accounting periods commencing on or after 1 February 2010). This is not considered relevant to the group’s operations. IAS 24 (revised)*: Revised definition of related party (effective for accounting periods commencing on or after 1 January 2011). The group will apply this amendment in the accounting period commencing 1 January 2011. IAS 19 and IFRIC 14*: Limit of a defined benefit asset, minimum funding requirements and their interaction (effective for accounting periods commencing on or after 1 January 2011). This is not considered relevant to the group’s operations. Interpretations IFRIC 17: Distributions of non‑cash assets to owners (effective for accounting periods commencing on or after 1 July 2009). This is not considered relevant to the group’s operations. IFRIC 18: Transfers of assets from customers (effective for accounting periods commencing on or after 1 July 2009). This is not considered relevant to the group’s operations. IFRIC 19*: Extinguishing financial liabilities with equity instruments (effective for accounting periods commencing on or after 1 July 2010). This is not considered relevant to the group’s operations. The group is evaluating the impact of the above pronouncements but they are not expected to have a material impact on the group’s earnings or to shareholders’ funds. Basis of consolidation Where the company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial statements present the results of the company and its subsidiaries (“the group”) as if they formed a single entity. Intercompany transactions and balances between group companies are therefore eliminated in full. * These standards, interpretations and amendments have not been endorsed by the EU. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 27 1 Accounting policies continued Profit/(loss) for the financial year The company has taken advantage of the exemption allowed under section 408 of the Companies Act 2006 and has not presented its own income statement in these financial statements. The group profit for the year includes a profit after tax of $3,181,392 (2008: loss of $4,713,772) which is dealt with in the financial statements of the parent company. The company’s investments in subsidiaries In the parent company’s accounts subsidiaries are carried at cost less amounts provided for impairment. Income At the end of the year the group had not commenced commercial production from its exploration sites and therefore has no revenue in the year. Finance income Finance income consists of interest on cash deposits, treasury stock interest and foreign exchange gains. The treatment of foreign exchange gains on derivatives is discussed under financial instruments. Segment reporting Operating 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 segment and that make strategic decisions, has been identified as the Board of Directors. Property, plant and equipment Office equipment is initially recorded at cost. Depreciation is provided on office equipment so as to write off the cost, less any estimated residual value, over their expected useful economic life as follows: Office equipment 331/3% Assets are depreciated from the date of acquisition, and on a straight line basis. Exploration and evaluation expenditure As permitted under IFRS 6, the group has accounted for exploration and evaluation expenditure using the full cost method, whereby all costs associated with oil exploration are capitalised as intangible assets on a project‑by‑project basis, pending determination of feasibility of the project. Costs incurred include appropriate technical and administrative expenses but not general overheads. Where a licence is relinquished, a project is abandoned, or is considered to be of no further value to the group the related costs are written off. All capitalised costs are reviewed annually against the underlying value of oil and gas reserves. Impairment Exploration assets are reviewed regularly for indication of impairment, if any, where circumstances indicate that the carrying value may not be recoverable. If an indication of impairment exists, the asset is tested for impairment in accordance with IAS36 Impairment of assets. The carrying value is compared against the expected recoverable amount, generally by reference to the present value of future net cash flows expected to be generated from the production of commercial reserves. The cash generating unit (CGU) applied for impairment testing is usually the individual field, except that a number of fields may be grouped together to form a single CGU where the cash flows are interdependent. Any impairment loss arising from the review is charged to the statement of comprehensive income whenever the carrying amount of the asset exceeds its recoverable amount. Provisions A provision is recognised in the statement of financial position when the group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. Foreign currencies Transactions in foreign currencies are translated into dollars at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into dollars at the closing rates at the statement of financial position date and the exchange differences are included in the statement of comprehensive income. The functional and presentational currency of the parent and all group companies is in dollars. Operating leases Rentals payable under operating leases are charged in the statement of comprehensive income on a straight line basis over the lease term. 28 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 1 Accounting policies continued Share based payments The fair value of employee share option plans is calculated using the Black‑Scholes pricing model. Non‑employee options granted as part of consideration for services rendered are valued at the fair value of those services. Where information on the fair value of services rendered is not readily available, the fair value of is calculated using the Black‑Scholes pricing model. In accordance with IFRS 2 ‘Share‑based Payments’ the resulting cost is charged to the income statement over the vesting period of the options. The amount of charge is adjusted each year to reflect expected and actual levels of options vesting. Where equity settled share options are awarded, the fair value of the options at the date of grant is charged to the income statement over the vesting period. Non‑market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the consolidated income statement over the remaining vesting period. Financial instruments Financial instruments are initially recorded at fair value. Subsequent measurement depends on the designation of the instrument, as follows: Trade and other receivables are initially recognised at fair value and subsequently at amortised cost using the effective rate of interest, net of allowances for impairment. Trade and other payables are initially recognised at fair value and subsequently at amortised cost using the effective rate of interest. The group may use derivative financial instruments such as currency forward contracts to manage the risks associated with foreign exchange. They are carried in the statement of financial position at fair value with changes in fair value recognised in the consolidated statement of comprehensive income in the finance income or expense line. Financial instruments issued by group companies are treated as equity only to the extent that they do not meet the definition of a financial liability. The group’s and company’s ordinary shares are all classified as equity instruments. Cash and cash equivalents consist of cash at bank on demand and balances on deposit with an original maturity of three months or less. Assets available for sale comprise of government treasury stock. They are carried at fair value with changes in fair value recognised directly in equity. Where there is a significant or prolonged decline in the fair value of an available for sale financial asset, the full amount of the impairment, including any amount previously charged to equity, is recognised in the income statement. Taxes The major components of income tax on the profit or loss include current and deferred tax. Current tax is based upon the profit or loss for the year adjusted for items that are non‑assessable or disallowed and is calculated using tax rates that have been enacted, or substantively enacted, by the balance sheet date. Income tax is charged or credited to the income statement, except where the tax relates to items credited or charged directly to equity, in which case the tax is also dealt within equity. Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs to its tax base. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the assets can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when deferred tax liabilities and assets are settled or recovered. Critical accounting estimates and judgements and key sources of estimation uncertainty The preparation of the financial statements requires Management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities at the date of the financial statements. If in the future such estimates and assumptions, which are based on Management’s best judgement at the date of the financial statements, deviate from the actual circumstances, the original estimates and assumptions with be modified as appropriate in the year in which the circumstances change. Where necessary, the comparatives will be reclassified from the previously reported results to take into account presentational changes. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 29 1 Accounting policies continued Management has made the following judgements which have the most significant effects on the amounts recognised in the financial statements: Recoverability of exploration and evaluation costs The group uses the full cost method of accounting, whereby exploration and evaluation costs are capitalised as intangible assets if the associated project is commercially viable, and reviewed for impairment. This requires judgemental assessment as to (a) the likely future commerciality of the asset, and (b) future revenues and costs relating to the project in order to determine the recoverable value of the asset. The key sources of estimation uncertainty at the balance sheet date, which have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are as follows: Share options The group’s share based payments were recognised at fair value, as in the prior period, using a 70% volatility rate. See note 7. 2 Loss from operations Staff costs (note 5) Share‑based payment‑equity settled Auditors remuneration: Audit: fees payable to the company’s auditors for the audit of the parent company and consolidated financial statements Fees payable to the company’s auditor: Tax services Other services Exchange differences Depreciation of office equipment Operating lease expenses‑property Sundry items 2009 $ $ 375,968 143,877 2008 431,120 101,377 32,146 31,517 4,442 6,902 — 9,206 185,200 452,236 58,257 — 21,627 9,850 256,834 376,963 1,209,977 1,287,545 3 Earnings per share The calculation of the basic earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year. The profit for the financial year for the group was $3,150,736 (2008: loss of $4,727,900) and the weighted average number of shares in issue for the year was 204,611,972 (2008: 194,344,170). Potentially dilutive share options At 31 December 2009 there were options over 2,250,000 shares outstanding which are potentially dilutive (2008: 1,000,000). These options are described in note 7. For the majority of the options their exercise price is greater than the weighted average share price during the year and it would not be advantageous of the holders to exercise these, therefore these options have been excluded from the calculation of diluted EPS. As a result the diluted earnings per share is not materially different to the basic earnings per share. 30 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 4 Segment analysis The company operates in one operating segment (exploration and gas) and in substantially one geographical market (the Falkland Islands); therefore no additional segmental information is presented. Of the Group’s total non‑current assets, the property, plant and equipment is based in the UK, all other non‑current assets are located in the Falkland Islands. 5 Staff costs Company and group Staff costs (including directors) comprise: Wages and salaries Employers national insurance contribution Share based payment‑equity settled 2009 $ $ 336,203 39,765 134,996 510,964 2008 385,581 45,539 101,377 532,497 The average number of employees (including directors) employed during the year by the company was six (2008: six) and for the group was six (2008: six). All employees and directors of the group and the company were involved in management. In 2009 the group granted to staff (including directors) of Borders and Southern Petroleum Plc, for nil consideration, share options with a total fair value of $490,362 (2008: $208,635), of which $37,666 (2008: $27,532) has been expensed during the year. In addition $8,881 has been charged during the year in respect of share options granted to external parties and $97,330 (2008: $73,846) has been charged during the year in respect of share options granted in prior years to staff (including directors). 6 Directors’ emoluments The directors’ emoluments for the period are as follows: Directors’ fees Share based payments – equity settled 2009 $ $ 187,782 31,176 218,958 2008 215,358 12,165 227,523 The fees and share‑based payments made to each director are disclosed in the Remuneration Committee report. In 2009, the group granted to three directors of Borders and Southern Petroleum Plc, for nil consideration, 250,000 share options each, with a total fair value of $374,446. Of this amount $24,963 has been expensed during the year. In 2006, the group granted to two directors of Borders and Southern Petroleum Plc, for nil consideration, 50,000 share options each, with a total fair value of $42,214. Of this amount $6,213 has been expensed during the year (2008: $12,165). The directors are the key management personnel. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 31 7 Share‑based payment On 2 September, 10 September and 19 October 2009, the group granted a total of 1,250,000 share options to an employee and three directors of Borders and Southern Petroleum Plc and to an external party, for nil consideration. The options vest after three years and expire after ten years. Unvested options will be cancelled if the employee/director leaves the group. Outstanding at the beginning of the year Granted during the year Outstanding at the end of the year 31 December 2009 Weighted average exercise price 50p 53p 52p 31 December 2009 Number 1,000,000 1,250,000 2,250,000 31 December 2008 Weighted average exercise price 42p 70p 50p 31 December 2008 Number 700,000 300,000 1,000,000 The weighted average contractual life of the options outstanding at the year end was four years (2008: four years). The following information is relevant in the determination of the fair value of the options granted during the year under the equity‑settled share based remuneration scheme operated by the company. Equity‑settled scheme Option pricing model used Weighted average share price at grant date Exercise price Weighted average contractual life (days) Expected volatility Risk‑free interest rate Fair value of options 31 December 2009 Black‑Scholes 31 December 2008 Black‑Scholes 53p 53p 1,460 70% 4% 30p 70p 70p 1,460 65% 1.5% 35p The expected volatility used to calculate the share‑based remuneration expense was based on the standard deviation of the Company’s monthly close share prices since inception. Share‑based remuneration expense for the year in respect of the equity‑settled scheme for options granted during the year Share‑based remuneration expense for the year in respect of the equity‑settled scheme for options granted during 2006 Share‑based remuneration expense for the year in respect of the equity‑settled scheme for options granted during 2007 Share‑based remuneration expense for the year in respect of the equity‑settled scheme for options granted during 2008 Total share‑based remuneration expense for the year $46,547 — $31,066 $13,016 $11,483 $60,829 $54,781 $27,532 $143,877 $101,377 32 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 8 Finance income and expense Finance income Bank interest receivable Fin Treasury stock interest Foreign exchange gain 2009 $ 171,075 49,659 4,366,870 2008 $ 951,024 35,153 — 4,587,604 986,177 The foreign exchange gain includes a gain of $4,366,870 in respect of a forward contract. See note 22 for further details. Finance expense Exchange loss on cash and other financial assets 9 Tax expense Current tax expense UK corporation tax on profit/(loss) for the year 2009 $ $ 2008 226,891 4,426,533 2008 2009 $ $ — — Factors affecting current period tax charge The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the UK applied to profits/(losses) for the year are as follows: Profit/(loss) before and after taxation Standard rate corporation tax charge (28%) Expenses not deductible for tax purposes Capital allowances in excess of depreciation Unutilised tax losses carried forward Tax losses brought forward utilised Total current tax for the year 2009 $ $ 2008 3,150,736 (4,727,900) 882,206 158,500 (1,970) 8,585 (1,347,452) 134,289 (2,988) 1,216,151 (1,047,321) — — — Factors that may affect future tax charges The group has a deferred tax asset of approximately $192,000 (2008: $1,205,000) in respect of unrelieved tax losses of approximately $686,000 at 31 December 2009 (2008: $4,305,000). The rate of tax used in the calculation of the deferred tax asset is 28% (2008: 28%). The deferred tax asset has not been recognised in the financial statements as the timing of the utilisation of the economic benefit is uncertain. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 33 10 Property, plant and equipment Group and company Office equipment Cost As at 1 January 2008 Additions As at 31 December 2008 Depreciation As at 1 January 2008 Charge for the year As at 31 December 2008 Net book value As at 31 December 2008 As at 31 December 2007 Cost As at 1 January 2009 Additions As at 31 December 2009 Depreciation As at 1 January 2009 Charge for the year As at 31 December 2009 Net book value As at 31 December 2009 $ 52,434 17,030 69,464 44,685 9,850 54,535 14,929 7,749 $ 69,464 13,793 83,257 54,535 9,206 63,741 19,516 34 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 11 Intangible assets Group Cost As at 1 January 2008 Additions As at 31 December 2008 Net book value As at 31 December 2008 As at 31 December 2007 Group Cost As at 1 January 2009 Additions As at 31 December 2009 Net book value As at 31 December 2009 12 Investments in subsidiary Company Cost As at 1 January and 31 December Net book value As at 31 December Exploration and evaluation costs $ 23,155,801 12,885,059 36,040,860 36,040,860 23,155,802 Exploration and evaluation costs $ 36,040,860 578,180 36,619,040 36,619,040 2009 $ $ 2008 2 2 2 2 The company owns the one ordinary £1 subscriber share, being 100% of the issued share capital, in Borders and Southern Falkland Islands Limited. The company was registered in England & Wales and its principal activity is oil and gas exploration. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 35 13 Trade and other receivables Amounts owed by group undertakings Other receivables Prepayments and accrued income All amounts shown under receivables fall due for payment within one year. 14 Other financial assets Available for sale investments Available for sale investments consisted of treasury stock denominated in £. 15 Trade and other payables Trade payables Other taxes and social security costs Other payables Accruals and deferred income 16 Share capital Authorised Group 2009 $ — 52,980 47,211 2008 $ Company 2009 $ $ 2008 — 36,745,735 36,136,897 66,492 185,296 52,980 47,211 66,492 185,296 100,191 251,788 36,845,926 36,388,685 Group 2009 $ — Group 2009 $ 47,566 13,588 23,396 160,130 244,680 2008 $ Company 2009 $ $ 2008 9,950,668 — 9,950,668 2008 $ 124,649 12,281 11,831 46,009 194,770 Company 2009 $ $ 47,566 13,588 23,396 152,945 237,495 2008 124,649 12,281 11,831 38,822 187,583 2009 $ $ 2008 750,000,000 ordinary shares of 1 pence each (2008: 750,000,000) 14,926,125 14,926,125 Allotted, called up and fully paid 428,578,404 ordinary shares of 1 pence each (2008: 194,344,170) 7,645,453 3,867,741 During the year the company issued 234,234,234 ordinary shares of 1 pence for a total of $190,385,588, from which costs of $6,450,467 were deducted for share issue costs. 36 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 17 Cash and cash equivalents Group and company Cash available on demand Cash on deposit Total 2009 $ $ 2008 950,774 205,370,403 584,285 8,937,750 206,321,177 9,522,035 Cash and cash equivalents consist of cash at bank on demand and balances on deposit with a maturity date of three months or less. 18 Related party transactions Company During the year Borders & Southern Petroleum Plc paid expenses of $608,838 (2008: $11,359,028) on behalf of Borders & Southern Falkland Islands Limited. At the year end $36,745,735 (2008: $36,136,897) was due from the subsidiary. There have been no transactions with directors during the year. The remuneration paid to each director is disclosed in the Remuneration Committee Report. The directors are considered to be the key management of the Group. Director’s remuneration is disclosed in note 6. 19 Operating leases The total future value of minimum lease payments on office property is due as follows: Not later than one year Later than one year but not later than five years Land and Buildings 2009 $ $ 224,470 112,230 336,700 2008 202,700 304,100 506,800 20 Contingent liabilities The group and company had no contingent liabilities at 31 December 2009 or 31 December 2008. 21 Post balance sheet events The exploration licenses expired on 31 December 2009. On 19 January 2010 it was confirmed by the Acting Governor of the Falkland Islands that it consented to extend the licences to 1 November 2012 with a commitment to drill one well prior to 1 November 2012. The Directors anticipate receiving a Deed of Variation reflecting the changes to the licenses shortly. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 37 22 Financial instruments The main risks arising from the group’s operations are cash flow interest rate risk, foreign currency translation risk and credit risk. The group monitors risk on a regular basis and takes appropriate measures to ensure risks are managed in a controlled manner. Liquidity is not considered a risk due to the sufficient cash funds readily available to the group at the year end. The group is exposed to risks that arise from its use of financial instruments. This note describes the group’s objectives, policies and processes for managing those risks and the methods used to measure them. There have been no substantive changes in the group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the group from which financial instrument risk arises, held by category, are as follows: Trade and other receivables Cash and cash equivalents Trade and other payables The treasury stock classified as available for sale is measured at a fair value by reference to quoted prices in active markets. The fair values of the group’s financial assets and liabilities at 31 December 2009 and at 31 December 2008 are materially equivalent to their carrying value as disclosed in the balance sheet and related notes. a) Cash flow interest rate risk The group is exposed to cash flow interest rate risk from monies held at bank and on deposit at variable rates. The group’s financial assets and liabilities accrue interest at prevailing floating rates in the United Kingdom or at pre‑arranged fixed rates, as described further below. The group does not currently use derivative instruments to manage its interest rate risk. At 31 December 2009 the group and company held cash at bank and in deposits under its control of $206,321,177 (2008: $9,522,035). It also held treasury stock of $9,950,668 in 2008, which matured in March 2009. This forms the majority of the group’s working capital. Of the cash at bank and in deposit, $950,774 (2008: $584,285) relates to deposits placed with banking institutions that are available on demand which carry interest at prevailing United Kingdom deposit floating rates. The balance represents restricted deposits of $205,370,403 (2008: $8,937,750) with a weighted average fixed interest rate of 0.5% (2008: 1.7%) for three months. If there was 1% change in interest rates the impact on the statement of comprehensive income would be $441,500 (2008: $580,000). 38 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com notes to the financial statements continued for the year ended 31 December 2009 22 Financial instruments continued b) Foreign currency translation risk The operational currency of the oil and gas exploration and evaluation activities of the group is US$ and the group’s functional and presentational currency is US$. Foreign exchange risk arises because the group’s services and treasury function is UK sterling, which results in gains or losses on retranslation into US$. To minimise this foreign currency risk cash balances are held in both £ sterling and US$. In general the group does not enter into derivatives to manage currency risks, however during the year the group entered into a forward contract for the purchase of US$ for a period of 21 days. This was taken out in order to mitigate the foreign exchange risk of receiving the sales proceeds from the share issue during the year in UK £. There were no forward contracts outstanding at the year end. The foreign currency profile of financial assets and liabilities of the group and the company are as follows: Current financial assets Held in UK £: Trade and other receivables Other financial assets Cash and cash equivalents Total current financial assets held in UK £ Held in US$: Cash and cash equivalents Total financial assets Current financial assets Held in UK £: Trade and other receivables Other financial assets Cash and cash equivalents Total current financial assets held in UK £ Held in US$: Trade and other receivables Cash and cash equivalents Total financial assets Group Group Assets available for sale 2009 $ Loans and receivables 2009 $ Assets available for sale 2008 $ Loans and receivables 2008 $ — — — — — — 52,980 — — 9,950,668 66,492 — 17,297,060 — 1,668,280 17,350,040 9,950,668 1,734,772 189,024,117 — 7,853,755 206,374,157 9,950,668 9,588,527 Company Company Assets available for sale 2009 $ Loans and receivables 2009 $ Assets available for sale 2008 $ Loans and receivables 2008 $ — — — — — — — 52,980 — — 9,950,668 66,492 — 17,297,060 — 1,668,280 17,350,040 9,950,668 1,734,772 36,745,735 189,024,117 — — 36,136,897 7,853,755 243,119,892 9,950,668 45,725,424 If there was a 10% change in the year end exchange rate there would be a movement in the US$ equivalent of financial assets held in UK£ of $1,735,004 (2008: $1,168,544) for the group and the company. go online www.bordersandsouthern.com Borders & Southern Petroleum Plc annual report and accounts 2009 39 22 Financial instruments continued b) Foreign currency translation risk continued Group Company Current financial liabilities Held in UK £: Trade and other payables Held in US$: Trade and other payables Total financial liabilities Financial liabilities measured at amortised cost 2009 $ Financial liabilities Financial liabilities measured at amortised cost 2009 measured at amortised cost 2008 $ $ $ Financial liabilities measured at amortised cost 2008 231,092 103,242 223,907 96,055 — 231,092 79,247 182,489 — 223,907 79,247 175,302 If there was a 10% change in the year end exchange rate there would be a movement in the US$ equivalent of financial liabilities held in the UK£ of $23,109 for the group and $22,391 for the company (2008: $10,324 for the group and $9,605 for the company). c) Credit risk The group has no customers so formal credit procedures are in the process of being established. Credit risk on cash balances and treasury stock is managed by only banking with reputable financial institutions with a high credit rating. The only significant concentration of credit risk is cash held at bank and treasury stock and the maximum credit risk exposure for the group and company is detailed in the table below: Cash and cash equivalents Assets available for sale: treasury stock 2009 2008 Carrying value Maximum exposure $ $ Carrying value Maximum exposure $ $ 206,321,177 206,321,177 — — 9,522,035 9,950,668 9,522,035 9,950,668 Maximum credit risk exposure 206,321,177 206,321,177 19,472,703 19,472,308 Capital The objective of the directors is to maximise shareholder return and minimise risk by keeping a reasonable balance between debt and equity. To date the group has minimised risk by being purely equity financed. The group considers its capital to comprise its ordinary share capital, share premium, accumulated retained deficit and other reserves. 40 Borders & Southern Petroleum Plc annual report and accounts 2009 go online www.bordersandsouthern.com corporate directory Directors Secretary Registered office Business address Nominated advisor and joint broker Joint broker Joint broker Solicitors to the company as to English Law Solicitors to the company as to Falkland Islands Law Registrars Bankers Independent auditors David Harry Williamson Dobson Stephen James Douglas Posford Howard Kevin Obee Christopher Nigel Hurst‑Brown Peter William Fleming William John Walton Slack 3 Copthall Avenue London EC2R 7BH 33 St James’s Square London SW1Y 4JS Panmure Gordon & Co Moorgate Hall 155 Moorgate London EC2M 6XB Mirabaud Securities LLP 21 St James’s Square London SW1Y 4JP Ocean Equities Limited 3 Copthall Avenue London EC2R 7BH Denton Wilde Spate 1 Fleet Place London EC4M 7WS McGrigors LLP 56 John Street Stanley Falkland Islands Capita Registrars Northern House Woodsome Park Fenay Bridge Huddersfield HD8 0LA Lloyds TSB Bank plc 19–21 The Quadrant Richmond Surrey PW9 1BP HSBC Bank plc 70 Pall Mall London SW1Y 5EZ BDO LLP Chartered Accountants & Registered Auditors 55 Baker Street London W1U 7EU Welcome to the 2009 borders&southern annual report, let us tell you a little more about what we do... Borders & Southern is focused on exploring frontier or emerging hydrocarbon systems, seeking to identify high value prospects. The Company’s first project is located to the south of the Falkland Islands within a completely untested basin. Borders & Southern’s acreage comprising five Production Licences Falkland Islands Argentina Chile Falkland Islands South Falkland Basin 100% (operator) interest 01 PL018 (Quad 61, 02 PL019 (Quad 62, 03 PL020 (Quad 63, blocks 16 to 30) 3,668 sq km blocks 16 to 30) 3,668 sq km blocks 16 to 30) 3,668 sq km 04 PL021 (Quad 64, blocks 1 to 30) 7,381 sq km 05 PL022 (Quad 73, blocks 1 to 5) 1,213 sq km 33 St James’s Square London SW1Y 4JS United Kingdom Telephone: +44 (0)20 7661 9348 Fax: +44 (0)20 7661 8055 info@bordersandsouthern.com www.bordersandsouthern.com B o r d e r s & S o u t h e r n P c l a n n u a l r e p o r t a n d a c c o u n t s 2 0 0 9 Borders & Southern Plc annual report and accounts 2009 Exploration for oil and gas